<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON SEPTEMBER 30, 1998
SECURITIES ACT FILE NO. 33-64502
INVESTMENT COMPANY ACT FILE NO. 811-4375
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
---------------
FORM N-1A
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 [X]
PRE-EFFECTIVE AMENDMENT NO. [_]
POST-EFFECTIVE AMENDMENT NO. 7 [X]
AND/OR
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940 [X]
AMENDMENT NO. 163 [X]
(CHECK APPROPRIATE BOX OR BOXES)
---------------
MERRILL LYNCH OREGON MUNICIPAL BOND FUND
OF MERRILL LYNCH MULTI-STATE MUNICIPAL SERIES TRUST
(EXACT NAME OF REGISTRANT AS SPECIFIED IN CHARTER)
800 SCUDDERS MILL ROAD, PLAINSBORO, NEW JERSEY 08536
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE (609) 282-2800
ARTHUR ZEIKEL
MERRILL LYNCH MULTI-STATE MUNICIPAL SERIES TRUST
800 SCUDDERS MILL ROAD
PLAINSBORO, NEW JERSEY
MAILING ADDRESS: P.O. BOX 9011, PRINCETON, NEW JERSEY 08543-9011
(NAME AND ADDRESS OF AGENT FOR SERVICE)
---------------
COPIES TO:
COUNSEL FOR THE TRUST: MICHAEL J. HENNEWINKEL, ESQ.
BROWN & WOOD LLP MERRILL LYNCH ASSET MANAGEMENT
ONE WORLD TRADE CENTER P.O. BOX 9011
NEW YORK, NEW YORK 10048-0557 PRINCETON, NEW JERSEY 08543-9011
ATTENTION: THOMAS R. SMITH, JR., ESQ.
BRIAN M. KAPLOWITZ, ESQ.
---------------
It is proposed that this filing will become effective (check appropriate box)
[_] immediately upon filing pursuant to paragraph (b)
[_] on (date) pursuant to paragraph (b)
[X] 60 days after filing pursuant to paragraph (a)(1)
[_] on (date) pursuant to paragraph (a)(1)
[_] 75 days after filing pursuant to paragraph (a)(2)
[_] on (date) pursuant to paragraph (a)(2) of Rule 485.
If appropriate, check the following box:
[_] This post-effective amendment designates a new effective date for a
previously filed post-effective amendment.
---------------
Title of Securities Being Registered: Shares of Beneficial Interest, par value
$.10 per share.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
LOGO Merrill Lynch
Merrill Lynch Oregon Municipal Bond Fund
of Merrill Lynch Multi-State Municipal Series Trust
PROSPECTUS . , 1998
(ART)
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.
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.
<PAGE>
Table of Contents
<TABLE>
<CAPTION>
PAGE
<S> <C>
LOGO KEY FACTS
- -------------------------------------------------------------------------------
The Merrill Lynch Oregon Municipal Bond Fund at a Glance......................3
Risk/Return Bar Chart.........................................................4
Fees and Expenses.............................................................5
LOGO DETAILS ABOUT THE FUND
- -------------------------------------------------------------------------------
How the Fund Invests..........................................................7
Investment Risks..............................................................8
LOGO YOUR ACCOUNT
- -------------------------------------------------------------------------------
Merrill Lynch Select PricingSM System........................................12
How to Buy, Sell, Transfer and Exchange Shares...............................17
Participation in Merrill Lynch Fee-Based Programs........................... 21
LOGO MANAGEMENT OF THE FUND
- -------------------------------------------------------------------------------
Fund Asset Management........................................................24
Financial Highlights.........................................................25
LOGO FOR MORE INFORMATION
- -------------------------------------------------------------------------------
Shareholder Reports................................................. Back Cover
Statement of Additional Information................................. Back Cover
</TABLE>
MERRILL LYNCH OREGON MUNICIPAL BOND FUND
<PAGE>
LOGO Key Facts
In an effort to help you better understand the many concepts involved in making
an investment decision, we have defined the highlighted terms in this
prospectus in the sidebar.
INVESTMENT GRADE -- 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.
OREGON MUNICIPAL BOND -- a debt obligation issued by or on behalf of a
governmental entity in Oregon or other qualifying issuer that pays interest
exempt from Oregon personal income tax as well as from Federal income tax.
THE MERRILL LYNCH OREGON MUNICIPAL BOND FUND AT A GLANCE
- --------------------------------------------------------------------------------
WHAT ARE THE FUND'S GOALS?
The Fund's main goal is to provide a high level of income that is exempt from
Federal income taxes and Oregon personal income taxes. The Fund tries to accom-
plish this goal by investing primarily in long-term INVESTMENT GRADE Oregon mu-
nicipal bonds. The Fund cannot guarantee that it will achieve its goal.
WHAT ARE THE FUND'S MAIN INVESTMENT STRATEGIES?
The Fund invests primarily in a portfolio of long-term investment grade OREGON
MUNICIPAL BONDS. These may be obligations of a variety of issuers including
governmental entities in Oregon and issuers located in Puerto Rico, the U.S.
Virgin Islands and Guam. Generally, the Fund will invest at least 80% of its
assets in municipal bonds, with at least 65% of its assets in Oregon municipal
bonds.
WHAT ARE THE MAIN RISKS OF INVESTING IN THE FUND?
As with any mutual fund, the value of the Fund's investments, and therefore the
value of your Fund shares, may go up or down. The value of the Fund's invest-
ments may change 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.
In addition to these risks, the investment of at least 65% of its assets in Or-
egon municipal bonds makes the Fund more susceptible to negative political or
economic factors that affect Oregon than Funds investing in municipal bonds of
more than one state.
WHO SHOULD INVEST?
The Fund may be an appropriate investment for you if you:
. Are looking for income that is exempt from Federal income tax and Oregon
personal income tax;
. Want a professionally managed portfolio without the administrative bur-
dens of direct investments in municipal bonds;
. Are looking for liquidity;
. Can tolerate the risk of loss caused by negative political or economic
developments in Oregon or adverse changes in the price of bonds in gen-
eral.
MERRILL LYNCH OREGON MUNICIPAL BOND FUND 3
<PAGE>
LOGO Key Facts
RISK/RETURN BAR CHART
- --------------------------------------------------------------------------------
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 from year to year since the Fund's inception. Sales loads
and account fees 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 one year
and five years and since the Fund's inception 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.
[BAR CHART]
<TABLE>
<CAPTION>
1993+ 1994 1995 1996 1997
<S> <C> <C> <C> <C>
5% -10% 17% 4% 9%
</TABLE>
During the period shown in the bar chart, the highest return for a quarter was
10.18% (quarter ended February 28, 1995) and the lowest return for a quarter
was - 8.81% (quarter ended April 30, 1994). The Fund's year-to-date return as
of August 31, 1998 was 4.15%.
+ Inception date is August 27, 1993.
<TABLE>
<CAPTION>
AVERAGE ANNUAL TOTAL
RETURNS (AS OF THE
CALENDAR YEAR ENDED PAST SINCE
DECEMBER 31, 1997) ONE YEAR INCEPTION
- --------------------------------------------------------------
<S> <C> <C>
Merrill Lynch Oregon Municipal Bond Fund*A 5.06% 4.58%+
- --------------------------------------------------------------
B 4.88% 5.03%+
- --------------------------------------------------------------
C 7.78% 8.40%++
- --------------------------------------------------------------
D 4.96% 7.55%++
- --------------------------------------------------------------
Lehman Brothers Municipal Bond Index** 7.35% 6.29%#
- --------------------------------------------------------------
</TABLE>
* Includes sales charge.
** 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.
+ Inception date is August 27, 1993.
++ Inception date is October 21, 1994.
# Inception date is August 30, 1993.
4 MERRILL LYNCH OREGON MUNICIPAL BOND FUND
<PAGE>
UNDERSTANDING EXPENSES
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:
EXPENSES PAID DIRECTLY BY THE SHAREHOLDER:
SHAREHOLDER FEES -- fees paid directly from your investment. These include
sales charges which you may pay when you buy or sell shares of the Fund.
EXPENSES PAID INDIRECTLY BY THE SHAREHOLDER. (These costs are deducted from the
Fund's total assets.):
ANNUAL FUND OPERATING EXPENSES -- expenses that cover the costs of operating
the Fund.
MANAGEMENT FEE -- a fee paid to the investment adviser for managing the Fund.
DISTRIBUTION FEES -- fees used to support the Fund's marketing and distribu-
tion efforts, such as advertising and promotion.
ACCOUNT MAINTENANCE FEES -- fees used to compensate securities dealers for ac-
count maintenance activities.
FEES AND EXPENSES
- -------------------------------------------------------------------------------
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.
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.
<TABLE>
<CAPTION>
SHAREHOLDER FEES: CLASS A CLASS B(A) CLASS C CLASS D
- -------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Maximum Sales Charge (Load) imposed on
purchases
(as a percentage of offering price) 4.00%(b) None None 4.00%(b)
- -------------------------------------------------------------------------------
Maximum Deferred Sales Charge (Load) (as
a percentage of original purchase price
or redemption proceeds, whichever is
lower) None(c) 4.0%(b) 1.0%(b) None(c)
- -------------------------------------------------------------------------------
Maximum Sales Charge (Load) imposed on
Dividend Reinvestments None None None None
- -------------------------------------------------------------------------------
Redemption Fee None None None None
- -------------------------------------------------------------------------------
Exchange Fee None None None None
- -------------------------------------------------------------------------------
Maximum Account Fee None None None None
- -------------------------------------------------------------------------------
ANNUAL FUND OPERATING EXPENSES:
- -------------------------------------------------------------------------------
Management Fee(d) 0.55% 0.55% 0.55% 0.55%
- -------------------------------------------------------------------------------
Distribution and/or Account Maintenance
(12b-1) Fees(e) None 0.50% 0.60% 0.10%
- -------------------------------------------------------------------------------
Other Expenses (including transfer agency
fees)(f) 0.69% 0.70% 0.70% 0.69%
- -------------------------------------------------------------------------------
TOTAL ANNUAL FUND OPERATING EXPENSES 1.24% 1.75% 1.85% 1.34%
- -------------------------------------------------------------------------------
</TABLE>
(a) 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.
(b) Some investors may qualify for reductions in the sales charge (load).
(c) You may pay a deferred sales charge if you purchase $1 million or more and
you redeem within one year.
(d) 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 net
assets from $500 million to $1 billion; and 0.50% of net assets above $1
billion. For the fiscal year ended July 31, 1998, the Manager received a
fee equal to 0.55% of the Fund's average daily net assets. For the fiscal
year ended July 31, 1998, the fee payable to the Manager from the Fund was
equal to 0.55% of the Fund's average daily net assets, but the Manager
voluntarily waived $77,763 of the management fee due. Total Fund Operating
Expenses in the fee table have been restated to assume the absence of the
waiver because it may be discontinued or reduced by the Manager at any time
without notice. For the fiscal year ended July 31, 1998, the Manager waived
management fees totaling 0.35% for Class A shares, 0.35% for Class B
shares, 0.35% for Class C shares and 0.35% for Class D shares, after which
the Fund's total expense ratio was 0.89% for Class A shares, 1.40% for
Class B shares, 1.50% for Class C shares and 0.99% for Class D shares. The
Manager provides accounting services to the Fund at its cost. For the
fiscal year ended July 31, 1998, the Fund reimbursed the Manager $42,243
for these services.
(e) 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.
(f) 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, 1998, the Fund paid the Transfer Agent fees totaling
$10,231.
MERRILL LYNCH OREGON MUNICIPAL BOND FUND 5
<PAGE>
LOGO Key Facts
EXAMPLES:
These examples are intended to help you compare the cost of investing in the
Fund with the cost of investing in other mutual funds.
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:
EXPENSES IF YOU DID REDEEM YOUR SHARES:
---
<TABLE>
<CAPTION>
1 YEAR 3 YEARS 5 YEARS 10 YEARS
- -------------------------------------------
<S> <C> <C> <C> <C>
Class A $521 $778 $1,054 $1,840
- -------------------------------------------
Class B $578 $751 $ 949 $2,062
- -------------------------------------------
Class C $288 $582 $1,001 $2,169
- -------------------------------------------
Class D $531 $808 $1,105 $1,948
- -------------------------------------------
EXPENSES IF YOU DID NOT REDEEM YOUR SHARES:
-------
<CAPTION>
1 YEAR 3 YEARS 5 YEARS 10 YEARS
- -------------------------------------------
<S> <C> <C> <C> <C>
Class A $521 $778 $1,054 $1,840
- -------------------------------------------
Class B $178 $551 $ 949 $2,062
- -------------------------------------------
Class C $188 $582 $1,001 $2,169
- -------------------------------------------
Class D $531 $808 $1,105 $1,948
- -------------------------------------------
</TABLE>
In addition, Merrill Lynch may charge clients a processing fee (currently
$5.35) when a client buys or redeems shares.
6 MERRILL LYNCH OREGON MUNICIPAL BOND FUND
<PAGE>
LOGO Details About the Fund
ABOUT THE PORTFOLIO MANAGER
Theodore R. Jaeckel, Jr. is the portfolio manager of the Fund. Mr. Jaeckel has
been a Director of Merrill Lynch Asset Management since 1997 and was a Vice
President of Merrill Lynch Asset Management from 1991 to 1997.
ABOUT THE MANAGER
The Fund is managed by Fund Asset Management.
HOW THE FUND INVESTS
- --------------------------------------------------------------------------------
The Fund's main goal is to seek a high level of income that is exempt from Fed-
eral income taxes and Oregon personal income taxes. The Fund invests primarily
in long-term investment grade Oregon municipal bonds. These may be obligations
of a variety of issuers including governmental entities or other qualifying is-
suers. Issuers may be located in Oregon or in other qualifying jurisdictions
such as Puerto Rico, the U.S. Virgin Islands and Guam.
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 will limit its investment in high yield or junk bonds to no more than
20% of its total assets. These bonds are generally more speculative and involve
greater price fluctuations than investment grade securities.
The Fund generally will invest at least 65% of its total assets in Oregon mu-
nicipal bonds. 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.
No more than 20% of the Fund's net assets will be invested in taxable money
market obligations. However, during unusual market conditions, the Fund may in-
vest a larger percentage of its assets in short-term obligations. Short-term
investments may limit the potential for growth in the value of your shares.
The Fund's investments may include private activity bonds that may subject cer-
tain shareholders to an alternative minimum tax.
The Manager considers a variety of factors when choosing investments, such as:
CREDIT QUALITY OF ISSUERS -- based on bond ratings and other factors including
economic and financial conditions.
YIELD ANALYSIS -- takes into account factors such as different yields available
on different types of obligations. This analysis also considers the shape of
the yield curve (longer term obligations typically have higher yields).
MATURITY ANALYSIS -- the 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 considerations.
In addition, the Manager considers the availability of features that protect
against an early call of the bond by the issuers.
MERRILL LYNCH OREGON MUNICIPAL BOND FUND 7
<PAGE>
LOGO Details About the Fund
INVESTMENT RISKS
- --------------------------------------------------------------------------------
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.
MARKET AND SELECTION RISK -- Market risk is the risk that the bond market will
suffer a general decline, 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.
CREDIT RISK -- The risk that the issuer will be unable to pay the interest or
principal when due is generally referred to as "credit risk." The degree of
credit risk will depend not only on the financial condition of the issuer but
on the terms of the specific bonds.
INTEREST RATE RISK -- Prices of municipal bonds generally increase when inter-
est rates decline and decrease when interest rates increase. This risk is known
as interest rate risk. Prices of longer term securities generally fluctuate
more in response to interest rate changes than do prices of shorter term secu-
rities.
STATE SPECIFIC RISK -- The Fund will invest primarily in Oregon municipal
bonds. Therefore, an investment in the Fund may be riskier than an investment
in a fund that does not concentrate its portfolio in municipal bonds relating
to a single state.
CALL AND REDEMPTION RISKS -- Investments in bonds carry the risk that a bond's
issuer will call the bond for redemption prior to the bond's maturity. If there
is an early call of a bond, the Fund may lose income and may have to invest
proceeds of the redemption in bonds with lower yields than the called bond.
Risks associated with certain types of obligations in which the Fund may invest
include:
GENERAL OBLIGATION BONDS -- The faith, credit and taxing power of the municipal
entity that issues a general obligation bond secures the payment of interest
and repayment of principal on such bond. Timely payments depend on the issuer's
credit quality, its ability to raise tax revenues and its ability to maintain
an adequate tax base.
8 MERRILL LYNCH OREGON MUNICIPAL BOND FUND
<PAGE>
REVENUE BONDS -- Bonds on which the payments of interest and principal are made
only from the revenues generated from a particular facility or class of facili-
ties or, in some cases, the proceeds of a special tax or other revenue source.
Payments on the Fund's investment in a revenue bond depend on the money earned
by the particular facility or group of facilities. Industrial development
bonds, which are discussed below, are, usually revenue bonds.
INDUSTRIAL DEVELOPMENT BONDS -- Municipalities and other public authorities is-
sue industrial development bonds to finance development of industrial facili-
ties for use by a private enterprise. The private enterprise pays the principal
and interest on the bond, and the issuer does not pledge its 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.
MORAL OBLIGATION BONDS -- Moral obligation bonds generally are issued by spe-
cial purpose public authorities. If the issuer is unable to meet its obliga-
tions, the repayment of such bond becomes a moral commitment, but not a legal
obligation, of the relevant state or municipality.
MUNICIPAL NOTES -- Municipal notes include notes issued as interim financing in
anticipation of tax collection, bond sales or revenue receipts. A shortfall in
the anticipated tax, bond or revenue proceeds securing the notes presents some
risk to the Fund.
MUNICIPAL COMMERCIAL PAPER -- Municipal commercial paper is generally unsecured
and issued to meet short-term financing needs. The lack of security presents
some risk to the Fund.
MUNICIPAL LEASE OBLIGATIONS -- In a municipal lease obligation, the issuer
agrees to budget for and appropriate municipal funds to make payments due on
the lease obligation, but this does not ensure that funds will actually be ap-
propriated in future years. The issuer does not pledge its unlimited taxing
power for payment of the lease obligation. The obligation may be secured by the
leased property, but it may be difficult to sell this property after foreclo-
sure. In addition, there is no guarantee that proceeds received would cover the
loss of the Fund's investment.
MERRILL LYNCH OREGON MUNICIPAL BOND FUND 9
<PAGE>
LOGO Details About the Fund
INSURED MUNICIPAL BONDS -- Bonds purchased by the Fund may be covered by insur-
ance that guarantees timely interest payments and repayment of principal on ma-
turity. If a bond's insurer fails to fulfill its obligations or loses its
credit rating, the value of the bond could drop.
JUNK BONDS -- The Fund may invest in junk bonds. Junk bonds are debt securities
rated below investment grade by the major rating agencies or unrated securities
of comparable quality. Although junk bonds generally pay higher rates of inter-
est 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 obligations. The issuers
of junk bonds may be highly leveraged (i.e., have a large amount of outstanding
debt) and may be less creditworthy than other debt issuers. Junk bonds fre-
quently are ranked junior to claims by other creditors and are more subject to
call and redemption risk than higher rated obligations.
WHEN-ISSUED SECURITIES, DELAYED-DELIVERY SECURITIES AND FORWARD
COMMITMENTS -- When-issued, 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 is-
sued 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.
VARIABLE RATE DEMAND OBLIGATIONS -- Variable rate demand obligations are float-
ing rate securities that consist of an interest in a long-term municipal bond
and the conditional right to demand payment prior to the bond's maturity from a
bank or other financial institution. If the bank or other financial institution
is unable to pay on demand, the Fund may be adversely affected. In addition,
these securities are subject to credit risk.
ILLIQUID INVESTMENTS -- The Fund may invest up to 15% of the assets in illiquid
securities that it cannot easily resell within seven days at market value or
that have contractual or legal restrictions on resale. If the Fund buys illiq-
uid securities it may be unable to quickly resell them or may be able to sell
them only at a price below fair market value.
DERIVATIVES -- The Fund may use instruments referred to as "derivatives." De-
rivatives are financial instruments the value of which is derived from another
security, a commodity (such as gold or oil) or an index (a measure of
10 MERRILL LYNCH OREGON MUNICIPAL BOND FUND
<PAGE>
value or rates, such as the S&P 500 or the prime lending rate). Types of de-
rivatives that the Fund may use include futures, options, indexed securities
and inverse securities.
Derivatives allow the Fund to increase or decrease the level of risk to
which the Fund is exposed more quickly and efficiently than transactions in
other types of instruments. Derivatives, however, are volatile and involve
significant risks, including credit risk, leverage risk, liquidity risk and
index risk.
. CREDIT RISK -- The risk that the counterparty on a derivative transaction
will be unable to honor its financial obligation to the Fund.
. LEVERAGE RISK -- 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 trad-
ing strategies that involve leverage can result in losses that greatly ex-
ceed the amount originally invested.
. LIQUIDITY RISK -- The risk that certain securities may be difficult or im-
possible to sell at the time that the seller would like or at the price
that the seller believes the security is currently worth.
. INDEX RISK -- If the derivative is linked to the performance of an index,
it will be subject to the risks associated with changes in that index. If
the index changes, the Fund could receive lower interest payments or expe-
rience a reduction in the value of the derivative to below what the Fund
paid. Certain indexed securities, including inverse securities (which move
in an opposite direction to the index), may create leverage, to the extent
that they increase or decrease in value at a rate that is a multiple of
the changes in the applicable index.
Please see the Statement of Additional Information for detailed information re-
garding the types of derivatives used by the Fund and the risks associated with
these instruments.
MERRILL LYNCH OREGON MUNICIPAL BOND FUND 11
<PAGE>
LOGO Your Account
MERRILL LYNCH SELECT PRICING SM SYSTEM
- --------------------------------------------------------------------------------
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 in-
vestment and how long you plan to hold your shares. Your Merrill Lynch Finan-
cial Consultant can help you determine which share class is best suited to your
personal financial goals.
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 on-
going account maintenance fee of 0.10%. You may be eligible for a sales charge
waiver.
If you select Class B or Class 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 Class C shares.
The Fund's shares are distributed by Merrill Lynch Funds Distributor, a divi-
sion of Princeton Funds Distributor, Inc., an affiliate of Merrill Lynch. The
Fund is a series of the Merrill Lynch Multi-State Municipal Series Trust.
12 MERRILL LYNCH OREGON MUNICIPAL BOND FUND
<PAGE>
The table below summarizes key features of the Merrill Lynch Select Pricing SM
System.
<TABLE>
<CAPTION>
CLASS A CLASS B CLASS C CLASS D
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Availability Limited to certain Generally available Generally available Generally available
investors through Merrill through Merrill through Merrill
including: Lynch. Limited Lynch. Limited Lynch. Limited
. Current Class A availability through availability through availability
shareholders other securities other securities through other
. Participants in dealers. dealers. securities dealers.
certain Merrill
Lynch sponsored
programs
. Certain
affiliates of
Merrill Lynch.
- -----------------------------------------------------------------------------------------------------------
Initial Sales Yes. Payable at No. Entire purchase No. Entire purchase Yes. Payable at
Charge? time of purchase. price is invested price is invested time of purchase.
Lower sales charges in shares of the in shares of the Lower sales charges
available for Fund. Fund. available for
larger investments. larger investments.
- -----------------------------------------------------------------------------------------------------------
Deferred Sales No. (May be charged Yes. Payable if you Yes. Payable if you No. (May be charged
Charge? for purchases over redeem within four redeem within one for purchases over
$1 million that are years of purchase. year of purchase. $1 million that are
redeemed within redeemed within one
one year.) year.)
- -----------------------------------------------------------------------------------------------------------
Account No. 0.25% Account 0.25% Account 0.10% Account
Maintenance and Maintenance Fee Maintenance Fee Maintenance Fee
Distribution Fees? 0.25% Distribution 0.35% Distribution No Distribution
Fee. Fee. Fee.
- -----------------------------------------------------------------------------------------------------------
Conversion to No. Yes, automatically No. No.
Class D shares? after approximately
ten years.
- -----------------------------------------------------------------------------------------------------------
</TABLE>
MERRILL LYNCH OREGON MUNICIPAL BOND FUND 13
<PAGE>
LOGO Your Account
RIGHT OF ACCUMULATION -- 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.
LETTER OF INTENT -- 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.
CLASS A AND CLASS D SHARES -- INITIAL SALES CHARGE OPTIONS
If you select Class A or Class D shares, you will pay a sales charge at the
time of purchase.
<TABLE>
<CAPTION>
DEALER
COMPENSATION
AS A % OF AS A % OF AS A % OF
YOUR INVESTMENT OFFERING PRICE YOUR INVESTMENT* OFFERING PRICE
- -------------------------------------------------------------------------------
<S> <C> <C> <C>
Less than $25,000 4.00% 4.17% 3.75%
- -------------------------------------------------------------------------------
$25,000 but less than $50,000 3.75% 3.90% 3.50%
- -------------------------------------------------------------------------------
$50,000 but less than
$100,000 3.25% 3.36% 3.00%
- -------------------------------------------------------------------------------
$100,000 but less than
$250,000 2.50% 2.56% 2.25%
- -------------------------------------------------------------------------------
$250,000 but less than
$1,000,000 1.50% 1.52% 1.25%
- -------------------------------------------------------------------------------
$1,000,000 and over** 0.00% 0.00% 0.00%
- -------------------------------------------------------------------------------
</TABLE>
* Rounded to the nearest one-hundredth percent.
** 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.
No initial sales charge applies to Class A or Class D shares that you buy
through reinvestment of dividends or distributions.
A reduced or waived sales charge on a purchase of Class A or Class D shares may
apply for:
. Purchases under a RIGHT OF ACCUMULATION or LETTER OF INTENT.
. TMA SM Managed Trusts.
. Certain Merrill Lynch investment or central asset accounts.
. Purchases using proceeds from the sale of certain Merrill Lynch closed-
end funds under certain circumstances.
. Certain investors, including directors or trustees of Merrill Lynch mu-
tual funds and Merrill Lynch employees.
. Certain Merrill Lynch fee-based programs.
14 MERRILL LYNCH OREGON MUNICIPAL BOND FUND
<PAGE>
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.
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.
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.
CLASS B AND CLASS C SHARES -- DEFERRED SALES CHARGE OPTIONS
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 main-
tenance fees of 0.25% for Class B and Class C shares each year. 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 market-
ing, advertising and compensating the Merrill Lynch Financial Consultant or
other securities dealer who assists you in purchasing Fund shares.
CLASS B SHARES
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 decreases
as you hold your shares over time, according to the following schedule:
MERRILL LYNCH OREGON MUNICIPAL BOND FUND 15
<PAGE>
LOGO Your Account
<TABLE>
<CAPTION>
YEARS SINCE
PURCHASE SALES CHARGE*
---------------------------------
<S> <C>
0 - 1 4.00%
---------------------------------
1 - 2 3.00%
---------------------------------
2 - 3 2.00%
---------------------------------
3 - 4 1.00%
---------------------------------
4 and thereafter 0.00%
---------------------------------
</TABLE>
* 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 or distributions 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.
The deferred sales charge relating to Class B shares will be reduced or waived
in certain circumstances, such as:
. Redemption in connection with participation in certain Merrill Lynch
fee-based programs.
. Withdrawals resulting from shareholder death or disability as long as
the waiver request is made within one year of death or disability.
. 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 es-
tablished.
Your Class B shares convert automatically into Class D shares approximately ten
years after purchase. Any Class B shares received through reinvestment of divi-
dends or distributions 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.
Different conversion schedules apply to Class B shares of different Merrill
Lynch mutual funds. For example, Class B shares of a fixed-income fund convert
approximately ten years after purchase compared to approximately eight years
for equity funds. If you acquire your Class B shares in an exchange from an-
other 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 conver-
sion schedule will apply. The length of time that you hold
16 MERRILL LYNCH OREGON MUNICIPAL BOND FUND
<PAGE>
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.
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 or distributions.
Class C shares do not offer a conversion privilege.
HOW TO BUY, SELL, TRANSFER AND EXCHANGE SHARES
- --------------------------------------------------------------------------------
The chart beginning on page 18 summarizes how to buy, sell, transfer and ex-
change 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 mu-
tual fund involves many considerations, your Merrill Lynch Financial Consultant
may help you with this decision.
MERRILL LYNCH OREGON MUNICIPAL BOND FUND 17
<PAGE>
LOGO Your Account
<TABLE>
<CAPTION>
INFORMATION IMPORTANT FOR YOU TO
IF YOU WANT TO YOUR CHOICES KNOW
- -------------------------------------------------------------------------------
<C> <C> <S>
Buy Shares First, select the share Refer to the Merrill Lynch Select
class appropriate for Pricing table on page 13. Be sure to
you read this prospectus carefully.
--------------------------------------------------------------------
Next, determine the The minimum initial investment for
amount of your the Fund is $1,000 for all accounts
investment except that certain Merrill Lynch
fee-based programs have an initial
minimum investment of $250.
(The minimums for initial
investments may be waived or reduced
under certain circumstances.)
--------------------------------------------------------------------
Have your Merrill Lynch Any purchase orders received by
Financial Consultant or Merrill Lynch from a securities
securities dealer submit dealer within thirty minutes after
your purchase order the close of business on the New
York Stock Exchange will be priced
at the net asset value determined
that day.
Purchase orders received 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.
--------------------------------------------------------------------
Or contact the Transfer You can purchase shares of the Fund
Agent directly by mailing a purchase order
to the Transfer Agent at the address
on the
inside back cover of this
prospectus.
- -------------------------------------------------------------------------------
Add to Your Purchase additional The minimum investment for
Investment shares additional purchases is $50.
(The minimum for additional
purchases may be waived under
certain circumstances.)
--------------------------------------------------------------------
Acquire additional All dividends and capital gains
shares through the distributions are automatically
automatic dividend reinvested without a sales charge.
reinvestment plan
--------------------------------------------------------------------
Participate in the You may invest a specific amount on
automatic investment a periodic basis through certain
plan Merrill Lynch investment or central
asset accounts.
- -------------------------------------------------------------------------------
Transfer Shares Transfer to a You may transfer your Fund shares
to Another participating securities only to another securities dealer
Securities dealer that has entered into an agreement
Dealer with Merrill Lynch. All shareholder
services will be available for the
transferred shares. You may only
purchase additional shares of funds
previously owned before the
transfer. All future trading of
these assets must be coordinated by
the receiving firm.
--------------------------------------------------------------------
Transfer to a non- You must either:
participating securities .Transfer your shares to an account
dealer with the Transfer Agent; or
.Sell your shares.
</TABLE>
- --------------------------------------------------------------------------------
18 MERRILL LYNCH OREGON MUNICIPAL BOND FUND
<PAGE>
<TABLE>
<CAPTION>
INFORMATION IMPORTANT FOR YOU TO
IF YOU WANT TO YOUR CHOICES KNOW
- -------------------------------------------------------------------------------
<C> <C> <S>
Sell Your Have your Merrill Lynch To ensure that your redemption
Shares Financial Consultant or request will be priced at the net
securities dealer submit asset value on the day of your
your sales order request, you must submit your
request to your dealer before that
day's close of business on the New
York Stock Exchange (generally 4:00
p.m. Eastern time). The Fund accepts
redemption requests from dealers on
any business day until thirty
minutes after the close of business
on the New York Stock Exchange. Any
redemption request received from a
dealer after that time will be
priced at the net asset value at the
close of business on the next
business day.
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.
The Fund may reject an order to sell
shares under certain circumstances.
--------------------------------------------------------------------
Sell through the You may sell shares held at the
Transfer Agent 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 and
signatures must be guaranteed. 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.
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.
- -------------------------------------------------------------------------------
Sell Shares Participate in the You can choose to receive systematic
Systematically Fund's Systematic payments from your Fund account
Withdrawal Plan either by check or through direct
deposit to your bank account on a
monthly or quarterly basis. If you
have a Merrill Lynch CMA(R), CBA(R)
or Retirement 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 and
other distributions 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.
</TABLE>
- --------------------------------------------------------------------------------
MERRILL LYNCH OREGON MUNICIPAL BOND FUND 19
<PAGE>
LOGO Your Account
<TABLE>
<CAPTION>
INFORMATION IMPORTANT FOR YOU TO
IF YOU WANT TO YOUR CHOICES KNOW
- -------------------------------------------------------------------------------
<C> <C> <S>
Exchange Your Select the fund into You can exchange your shares of the
Shares which you want to Fund for shares of many other
exchange. Be sure to Merrill Lynch mutual funds. You must
read that fund's have held the shares used in the
prospectus exchange for at least 15 calendar
days (including money funds) before
you can exchange to another fund.
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, you will
exchange into Class D shares.
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.
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.
</TABLE>
- --------------------------------------------------------------------------------
20 MERRILL LYNCH OREGON MUNICIPAL BOND FUND
<PAGE>
NET ASSET VALUE -- the market value of the Fund's total assets after deducting
liabilities, divided by the number of shares outstanding.
HOW SHARES ARE PRICED
- --------------------------------------------------------------------------------
When you buy shares, you pay the NET ASSET VALUE, 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, fifteen minutes 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 one calculated after your purchase or re-
demption order is received.
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. 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.
PARTICIPATION IN MERRILL LYNCH FEE-BASED PROGRAMS
- --------------------------------------------------------------------------------
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.
You generally cannot transfer shares held through a fee-based program into an-
other account. Instead, you will have to redeem your shares held through the
program and purchase shares of another class, which may be subject to distribu-
tion and account maintenance fees. This may be a taxable event and you will pay
any applicable sales charges.
If you leave one of these programs, your shares may be redeemed or automati-
cally 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 period, you may be
charged a fee in accordance with the terms of the program.
MERRILL LYNCH OREGON MUNICIPAL BOND FUND 21
<PAGE>
LOGO Your Account
DIVIDENDS --income paid to shareholders. Dividends may be reinvested in
additional Fund shares as they are paid.
DISTRIBUTIONS --capital gains paid to shareholders. Distributions may be
reinvested in additional Fund shares as they are paid.
"BUYING A DIVIDEND"
You may want to avoid buying shares shortly before the Fund pays a dividend or
distribution, 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
bought shares when the Fund had realized but not yet distributed taxable income
(if any) or capital gains, you would pay the full price for the shares and then
could receive a portion of the price back in the form of a distribution, all or,
more likely, part of which could be taxable. Before investing you may want to
consult your tax adviser.
Details about these features and the relevant charges are included in the cli-
ent agreement for each fee-based program and are available from your Merrill
Lynch Financial Consultant.
DIVIDENDS, CAPITAL GAINS AND TAXES
- --------------------------------------------------------------------------------
The Fund will distribute any net investment income monthly, and any net real-
ized 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 and DISTRIBUTIONS in cash, contact your Merrill Lynch Finan-
cial Consultant. If your account is with the Transfer Agent and you would like
to receive dividends and distributions in cash, contact the Transfer Agent.
Taxes
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 alternative minimum tax on dividends received from
the Fund. To the extent that the dividends distributed by the Fund are derived
from Oregon municipal bond interest income, they are also exempt from Oregon
personal income tax. Interest income from other investments may produce taxable
distributions. If you are subject to income tax in a state other than Oregon,
the dividends derived from Oregon municipal bonds will not be exempt from in-
come tax in that state. Dividends, or portions thereof, that are derived from
capital gains may fall into different categories of capital gain that are tax-
able at different rates for Federal income tax purposes. Capital gain dividends
are taxed at the same rates as ordinary income for Oregon personal income tax
purposes.
Generally, within 60 days after the end of the Fund's taxable year, the Fund
will tell you the amount of exempt-interest dividends, ordinary income divi-
dends or capital gain dividends, including the different categories of capital
gains, you received that year. The capital gains rate or rates applicable to
capital gain dividends depends on how long the Fund held an asset before sell-
ing it for a gain; it is not related to how long you have held your shares. The
tax treatment of distributions from the Fund is the same whether you choose to
receive distributions in cash or to have them reinvested in shares of the Fund.
22 MERRILL LYNCH OREGON MUNICIPAL BOND FUND
<PAGE>
If you cannot provide a taxpayer identification number or social security num-
ber, Fund distributions of capital gains, certain ordinary income dividends and
redemptions will have a 31% withholding tax deduction.
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.
This section summarizes some of the consequences of an investment in the Fund
under current Federal and Oregon tax laws. It is not a substitute for personal
tax advice. Consult your personal tax adviser about the potential tax conse-
quences to you of an investment in the Fund under all applicable tax laws. The
Fund's Statement of Additional Information has more information about taxes.
MERRILL LYNCH OREGON MUNICIPAL BOND FUND 23
<PAGE>
LOGO Management of the Fund
FUND ASSET MANAGEMENT
- --------------------------------------------------------------------------------
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 deci-
sions 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 net assets from $500 million to $1 billion; and 0.50% of net assets above $1
billion. For the fiscal year ended July 31, 1998, the fee payable to the Man-
ager from the Fund was equal to 0.55% of the Fund's average daily net assets,
but the Manager voluntarily waived a portion of the management fee due for the
fiscal year. See the Fees and Expenses table on page 5.
Fund Asset Management is a part of the Merrill Lynch Asset Management Group.
The Asset Management Group had approximately $473 billion in investment company
and other portfolio assets under management as of August 1998. This amount in-
cludes assets managed for Merrill Lynch affiliates.
24 MERRILL LYNCH OREGON MUNICIPAL BOND FUND
<PAGE>
FINANCIAL HIGHLIGHTS
- --------------------------------------------------------------------------------
The financial information in the table below has been audited in conjunction
with the annual audits of the financial statements of the Fund by Deloitte &
Touche LLP, independent auditors.
The following per share data and ratios have been derived from information pro-
vided in the Fund's audited financial statements.
<TABLE>
<CAPTION>
CLASS A CLASS B
--------------------------------------------- -------------------------------------------------
FOR THE YEAR ENDED FOR THE FOR THE YEAR ENDED FOR THE
JULY 31, PERIOD AUGUST JUNE 30, PERIOD AUGUST
INCREASE (DECREASE) IN ------------------------------ 27, 1993+ TO ---------------------------------- 27, 1993+ TO
NET ASSET VALUE: 1998+ 1997 1996 1995 JULY 31, 1994 1998+ 1997 1996 1995 JULY 31, 1994
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE:
- -------------------------------------------------------------------------------------------------------------------------
Net asset value,
beginning of period $10.00 $ 9.52 $ 9.40 $ 9.41 $10.00 $ 10.00 $ 9.52 $ 9.40 $ 9.41 $ 10.00
- -------------------------------------------------------------------------------------------------------------------------
Investment income -- net .47 .47 .48 .50 .48 .42 .42 .44 .45 .43
- -------------------------------------------------------------------------------------------------------------------------
Realized and unrealized
gain (loss) on
investments -- net .11 .48 .12 (.01) (.58) .11 .48 .12 (.01) (.58)
- -------------------------------------------------------------------------------------------------------------------------
Total from investment
operations .58 .95 .60 .49 (.10) .53 .90 .56 .44 (.15)
- -------------------------------------------------------------------------------------------------------------------------
Less dividends and
distributions:
Investment income --
net (.47) (.47) (.48) (.50) (.48) (.42) (.42) (.44) (.45) (.43)
In excess of realized
gain on investments --
net -- ++ -- -- -- (.01) -- ++ -- -- -- (.01)
- -------------------------------------------------------------------------------------------------------------------------
Total dividends and
distributions (.47) (.47) (.48) (.50) (.49) (.42) (.42) (.44) (.45) (.44)
- -------------------------------------------------------------------------------------------------------------------------
Net asset value, end of
period $10.11 $10.00 $ 9.52 $ 9.40 $ 9.41 $ 10.11 $ 10.00 $ 9.52 $ 9.40 $ 9.41
- -------------------------------------------------------------------------------------------------------------------------
TOTAL INVESTMENT RETURN:*
- -------------------------------------------------------------------------------------------------------------------------
Based on net asset value
per share 5.93% 10.27% 6.52% 5.54% (1.13)%# 5.39% 9.72% 5.99% 4.98% (1.59)%#
- -------------------------------------------------------------------------------------------------------------------------
RATIOS TO AVERAGE NET ASSETS:
- -------------------------------------------------------------------------------------------------------------------------
Expenses, net of
reimbursement .89% .78% .53% .31% .08%** 1.40% 1.29% 1.04% .84% .58%**
- -------------------------------------------------------------------------------------------------------------------------
Expenses 1.24% 1.22% 1.17% 1.23% 1.30%** 1.75% 1.73% 1.68% 1.75% 1.80%**
- -------------------------------------------------------------------------------------------------------------------------
Investment income -- net 4.62% 4.88% 5.06% 5.51% 5.26%** 4.11% 4.37% 4.55% 4.99% 4.75%**
- -------------------------------------------------------------------------------------------------------------------------
SUPPLEMENTAL DATA:
- -------------------------------------------------------------------------------------------------------------------------
Net assets, end period
(in thousands) $3,103 $3,232 $3,904 $4,332 $6,712 $14,965 $17,888 $21,542 $25,861 $25,943
- -------------------------------------------------------------------------------------------------------------------------
Portfolio turnover 36.31% 40.62% 103.61% 142.77% 52.88% 36.31% 40.62% 103.61% 142.77% 52.88%
- -------------------------------------------------------------------------------------------------------------------------
</TABLE>
* Total investment returns exclude the effects of sales loads.
** Annualized.
+ Commencement of operations.
++ Amount is less than $.01 per share.
# Aggregate total investment return.
MERRILL LYNCH OREGON MUNICIPAL BOND FUND 25
<PAGE>
LOGO Management of the Fund
FINANCIAL HIGHLIGHTS (concluded)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
CLASS C CLASS D
----------------------------------------- --------------------------------------------
FOR THE PERIOD FOR THE PERIOD
FOR OCT. 21, FOR OCT. 21,
THE YEAR ENDED JULY 31, 1994+ THE YEAR ENDED JULY 31, 1994+
INCREASE (DECREASE) IN ----------------------- TO JULY 31, ----------------------- TO JULY 31,
NET ASSET VALUE: 1998 1997 1996 1995 1998 1997 1996 1995
- ---------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
PER SHARE OPERATING
PERFORMANCE:
- ---------------------------------------------------------------------------------------------------------------
Net asset value,
beginning of period $ 10.00 $ 9.53 $ 9.40 $ 9.02 $ 10.00 $ 9.52 $ 9.39 $ 9.02
- ---------------------------------------------------------------------------------------------------------------
Investment income --
net .41 .41 .43 .34 .46 .46 .47 .38
- ---------------------------------------------------------------------------------------------------------------
Realized and unrealized
gain
on investments -- net .12 .47 .13 .38 .11 .48 .13 .37
- ---------------------------------------------------------------------------------------------------------------
Total from investment
operations .53 .88 .56 .72 .57 .94 .60 .75
- ---------------------------------------------------------------------------------------------------------------
Less dividends and
distributions:
Investment income --
net (.41) (.41) (.43) (.34) (.46) (.46) (.47) (.38)
In excess of realized
gain on
investments -- net -- ++ -- -- -- -- ++ -- -- --
- ---------------------------------------------------------------------------------------------------------------
Total dividends and
distributions (.41) (.41) (.43) (.34) (.46) (.46) (.47) (.38)
- ---------------------------------------------------------------------------------------------------------------
Net asset value, end of
period $ 10.12 $ 10.00 $ 9.53 $ 9.40 $ 10.11 $ 10.00 $ 9.52 $ 9.39
- ---------------------------------------------------------------------------------------------------------------
TOTAL INVESTMENT
RETURN:*
- ---------------------------------------------------------------------------------------------------------------
Based on net asset
value per share 5.39% 9.50% 5.97% 8.19%# 5.82% 10.17% 6.52% 8.55%#
- ---------------------------------------------------------------------------------------------------------------
RATIOS TO AVERAGE NET
ASSETS:
- ---------------------------------------------------------------------------------------------------------------
Expenses, net of
reimbursement 1.50% 1.39% 1.16% 1.00%** .99% .90% .63% .51%**
- ---------------------------------------------------------------------------------------------------------------
Expenses 1.85% 1.83% 1.79% 1.88%** 1.34% 1.32% 1.28% 1.39%**
- ---------------------------------------------------------------------------------------------------------------
Investment income --
net 4.01% 4.28% 4.45% 4.68%** 4.52% 4.76% 4.97% 5.12%**
- ---------------------------------------------------------------------------------------------------------------
SUPPLEMENTAL DATA:
- ---------------------------------------------------------------------------------------------------------------
Net assets, end of
period (in thousands) $2,549 $2,063 $ 1,555 $ 853 $806 $ 399 $ 173 $ 188
- ---------------------------------------------------------------------------------------------------------------
Portfolio turnover 36.31% 40.62% 103.61% 142.77% 36.31% 40.62% 103.61% 142.77%
- ---------------------------------------------------------------------------------------------------------------
</TABLE>
* Total investment returns exclude the effects of sales loads.
** Annualized
+ Commencement of operations.
++ Amount is less than $.01 per share
# Aggregate total investment return.
26 MERRILL LYNCH OREGON MUNICIPAL BOND FUND
<PAGE>
LOGO Management of the Fund
A NOTE ABOUT YEAR 2000
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 af-
fected if the computer systems used by the Fund's management or other Fund
service providers do not properly address this problem before January 1, 2000.
The Fund's 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 the Fund management that they also
expect to resolve the Year 2000 Problem, and the 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.
MERRILL LYNCH OREGON MUNICIPAL BOND FUND 27
<PAGE>
POTENTIAL
INVESTORS
Open an account (two options).
MERRILL LYNCH TRANSFER AGENT
FINANCIAL CONSULTANT
or SECURITIES DEALER Financial Data Services, Inc.
P.O. Box 45289
Advises shareholders on their Jacksonville, FL 32232-5289
Fund investments.
Performs recordkeeping and
reporting services.
DISTRIBUTOR
Merrill Lynch Funds Distributor,
a division of Princeton Funds Distributor, Inc.
P.O. Box 9081
Princeton, New Jersey 08543-9081
Arranges for the sale of Fund shares.
COUNSEL CUSTODIAN
THE FUND
Brown & Wood LLP The Board of State Street Bank and Trust
One World Trade Center Directors Company
New York, New York 10048-0557 oversees the P.O. Box 351
Fund Boston, Massachusetts 02101
Provides legal advice to the
Fund Holds the Fund's assets for
safekeeping.
INDEPENDENT AUDITORS INVESTMENT ADVISER
Deloitte & Touche LLP Fund Asset Management, L.P.
117 Campus Drive
Princeton, New Jersey 08540-6400 ADMINISTRATIVE OFFICES
800 Scudders Mill Road
Audits the financial Plainsboro, New Jersey 08536
statements of the Fund on behalf of
the shareholders MAILING ADDRESS
P.O. Box 9011
Princeton, New Jersey 08543-9011
TELEPHONE NUMBER
1-800-MER-FUND
Manages the Fund's day-to-day
activities
28 MERRILL LYNCH OREGON MUNICIPAL BOND FUND
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LOGO For More Information
SHAREHOLDER REPORTS
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 1-800-MER-FUND.
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.
STATEMENT OF ADDITIONAL INFORMATION
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 or calling the Fund
at the address and telephone number indicated on the inside back cover of this
prospectus.
Contact your Merrill Lynch Financial Consultant or the Fund at the telephone
number or address indicated on the inside back cover of this prospectus if you
have any questions.
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.
YOU SHOULD RELY ONLY ON THE INFORMATION CONTAINED IN THIS PROSPECTUS. NO ONE IS
AUTHORIZED TO PROVIDE YOU WITH INFORMATION THAT IS DIFFERENT.
Investment Company Act file #811-4375
Code #16760-11-98
(C)Fund Asset Management, L.P.
LOGO Merrill Lynch
Merrill Lynch Oregon Municipal Bond Fund
of Merrill Lynch Multi-State Municipal Series
Trust
- -------------------------
PROSPECTUS SEPTEMBER 30, 1998
<PAGE>
STATEMENT OF ADDITIONAL INFORMATION
MERRILL LYNCH OREGON MUNICIPAL BOND FUND
OF MERRILL LYNCH MULTI-STATE MUNICIPAL SERIES TRUST
P.O. Box 9011, Princeton, New Jersey 08543-9011 . Phone No. (609) 282-2800
----------------
Merrill Lynch Oregon Municipal Bond Fund (the "Fund") is a series of Merrill
Lynch Multi-State Municipal Series Trust (the "Trust"), a non-diversified,
open-end investment company organized as a Massachusetts business trust. The
investment objective of the Fund is to provide shareholders with as high a
level of income exempt from Federal and Oregon income taxes as is consistent
with prudent investment management. With respect to state taxes, such income
is expected to be exempt only from Oregon personal income taxes. The Fund
seeks to achieve its objective while providing investors with the opportunity
to invest primarily in a diversified portfolio of long-term obligations issued
by or on behalf of Oregon, its political subdivisions, agencies and
instrumentalities and obligations of other qualifying issuers, such as issuers
located in Puerto Rico, the U.S. Virgin Islands and Guam, which pay interest
exempt, in the opinion of bond counsel to the issuer, from Federal income
taxes and Oregon personal income taxes. The Fund may invest in certain tax-
exempt securities classified as "private activity bonds" that may subject
certain investors in the Fund to an alternative minimum tax. At times, the
Fund may seek to hedge its portfolio through the use of futures transactions
and options. There can be no assurance that the investment objective of the
Fund will be realized. For more information on the Fund's investment objective
and policies, see "Investment Objective and Policies."
Pursuant to the Merrill Lynch Select Pricing SM System, the Fund offers four
classes of shares, each with a different combination of sales charges, ongoing
fees and other features. The Merrill Lynch Select Pricing SM System permits an
investor to choose the method of purchasing shares that the investor believes
is most beneficial given the amount of the purchase, the length of time the
investor expects to hold the shares and other relevant circumstances. See
"Purchase of Shares."
----------------
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 September
30, 1998 (the "Prospectus"), which has been filed with the Securities and
Exchange Commission (the "Commission") and can be obtained, without charge, by
calling (800) 637-3863 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.
----------------
FUND ASSET MANAGEMENT -- MANAGER
MERRILL LYNCH FUNDS DISTRIBUTOR -- DISTRIBUTOR
----------------
The date of this Statement of Additional Information is September 30, 1998.
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Investment Objective and Policies.......................................... 2
General................................................................... 2
Risk Factors and Special Considerations Relating to Municipal Bonds....... 3
Description of Municipal Bonds............................................ 4
Financial Futures Transactions and Options................................ 8
Description of Temporary Investments...................................... 12
Investment Restrictions................................................... 13
Portfolio Turnover........................................................ 15
Management of the Trust.................................................... 16
Trustees and Officers..................................................... 16
Compensation of Trustees.................................................. 17
Management and Advisory Arrangements...................................... 18
Code of Ethics............................................................ 19
Purchase of Shares......................................................... 19
Initial Sales Charge Alternatives -- Class A and Class D Shares........... 20
Deferred Sales Charge Alternatives -- Class B and Class C Shares.......... 24
Distribution Plans........................................................ 27
Limitations on the Payment of Deferred Sales Charges...................... 28
Redemption of Shares....................................................... 29
Redemption................................................................ 29
Repurchase................................................................ 30
Reinstatement Privilege -- Class A and Class D Shares..................... 30
Pricing of Shares.......................................................... 31
Determination of Net Asset Value.......................................... 31
Computation of Offering Price Per Share................................... 32
Portfolio Transactions..................................................... 32
Transactions in Portfolio Securities...................................... 32
Shareholder Services....................................................... 33
Investment Account........................................................ 34
Exchange Privilege........................................................ 34
Fee-Based Programs........................................................ 36
Automated Investment Plans................................................ 36
Automatic Dividend Program................................................ 36
Systematic Redemption Program............................................. 36
Distributions and Taxes.................................................... 38
Dividends and Distributions............................................... 38
Taxes..................................................................... 38
Tax Treatment of Options and Futures Transactions......................... 41
Performance Data........................................................... 41
General Information........................................................ 43
Description of Shares..................................................... 43
Independent Auditors...................................................... 45
Custodian................................................................. 45
Transfer Agent............................................................ 45
Legal Counsel............................................................. 45
Reports to Shareholders................................................... 45
Shareholder Inquiries..................................................... 45
Additional Information.................................................... 45
Financial Statements....................................................... 45
Appendix I -- Economic Conditions in Oregon ............................... I-1
Appendix II -- Ratings of Municipal Bonds.................................. II-1
</TABLE>
<PAGE>
INVESTMENT OBJECTIVE AND POLICIES
The investment objective of the Fund is to provide shareholders with as high
a level of income exempt from Federal income taxes and Oregon personal income
taxes as is consistent with prudent investment management. The Fund seeks to
achieve its objective by investing primarily in a portfolio of long-term
obligations issued by or on behalf of the State of Oregon, its political
subdivisions, agencies and instrumentalities and obligations of other
qualifying issuers, such as issuers located in Puerto Rico, the U.S. Virgin
Islands and Guam, which pay interest exempt, in the opinion of bond counsel to
the issuer, from Federal income taxes and Oregon personal income taxes.
Obligations exempt from Federal income taxes are referred to herein as
"Municipal Bonds," and obligations exempt from both Federal income taxes and
Oregon personal income taxes are referred to as "Oregon Municipal Bonds."
Unless otherwise indicated, references to Municipal Bonds shall be deemed to
include Oregon Municipal Bonds. The Fund anticipates that at all times, except
during temporary defensive periods, it will maintain at least 65% of the
Fund's total assets invested in Oregon 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.
GENERAL
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, the Fund will invest at least 65% of its total
assets in Oregon 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.
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.
At least 80% of the Municipal Bonds purchased by the Fund will be what are
commonly referred to as "investment grade" securities, which are obligations
rated at the time of purchase within the four highest quality ratings as
determined by either Moody's Investors Service, Inc. ("Moody's") (currently
Aaa, Aa, A and Baa), Standard & Poor's ("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.
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. 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 which the
Manager believes will be in default.
Certain Municipal Bonds may be entitled to the benefits of letters of credit
or similar credit enhancements issued by financial institutions. In such
instances, the Trustees and the Manager will take into account in assessing
the quality of such bonds not only the creditworthiness of the issuer of such
bonds but also the creditworthiness of the financial institution that provides
the credit enhancement.
2
<PAGE>
The Fund ordinarily does not intend to realize investment income not exempt
from Federal income tax and Oregon personal income taxes. However, to the
extent that suitable Oregon Municipal Bonds are not available for investment
by the Fund, the Fund may purchase Municipal Bonds issued by other states,
their agencies and instrumentalities, the interest income on which is exempt,
in the opinion of bond counsel to the issuer, from Federal income taxation,
but not Oregon personal 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 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 "Distributions
and Taxes -- Taxes."
RISK FACTORS AND SPECIAL CONSIDERATIONS RELATING TO MUNICIPAL BONDS
The risks and special considerations involved in investment in Municipal
Bonds vary with the types of instruments being acquired. Investments in Non-
Municipal Tax-Exempt Securities may present similar risks, depending on the
particular 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."
The Fund ordinarily will invest at least 65% of its assets in Oregon
Municipal Bonds, and therefore it is more susceptible to factors and
conditions adversely affecting issuers of Oregon Municipal Bonds than is a
municipal bond mutual fund that is not concentrated in issuers of Oregon
Municipal Bonds to this degree.
Oregon's economy has outperformed the nation's economy in recent years,
although evidence now points to a slowing of Oregon's economy. Weakness in
Asia is slowing the demand for Oregon products. The high tech job sector is in
the process of consolidating gains brought about by rapid growth over the past
four years. The forecast is for a slowdown in high tech sector job growth, not
a decline, although any national recession would almost certainly bring
outright job reductions to this sector. Service producing sectors now make up
a larger portion of the State's economy than goods producing sectors. Because
of a shift in Oregon from a business investment led expansion to one fueled
primarily by consumer spending, the slowdown will be more pronounced in the
manufacturing and construction sectors than in the service producing sectors
which are expected to see only moderately slower growth between 1998 and 2000.
Oregon's growth is projected to slow from 3.4 percent in 1997 to 2.8 percent
in 1998 and 1.7 percent in 1999. Personal income is forecast to increase 5.8
percent in 1998 and 5.0 percent in 1999. After adjustment for inflation,
personal income is projected to rise 4.4 percent in 1998 and 2.7 percent in
1999. However, the outlook is still for employment and income growth exceeding
that of the nation. The long-term outlook is for an acceleration of growth
starting in 2002 as long-term investment plans in the semiconductor industry
are carried out and Asian economies recover.
In 1990, Oregon voters approved a constitutional amendment to the Oregon
Constitution (commonly known as Measure 5) that imposed certain limits on
property tax rates. In 1997, Oregon voters approved a constitutional amendment
to the Oregon Constitution (commonly known as Measure 50) that repealed a
previously approved property tax reduction measure known as Measure 47 and
replaced Measure 47 with ad valorem property tax limitations, including a
reduction of property taxes and a limit on the growth in annual assessed
valuation. Measure 50 supplements but does not repeal Measure 5. Additionally,
Measure 50 requires that all new property taxes be
3
<PAGE>
approved by a majority of the voters in an election where at least 50% of
registered voters participate, except in the instance of a general election.
Measure 50 also requires voter approval of the use of fees, taxes, assessments
or other charges as alternative funding sources to make up for revenue
reductions caused by the amended property tax limits. However, Measure 50
allows voters to approve certain local option levies outside the Measure 50
limits. Payments of principal and interest on general obligation bonds issued
before the passage of Measure 50 and on certain other obligations secured by
property taxes and issued before the passage of Measure 50 are exempt from the
limitations imposed by Measure 50.
Units of local government that levy and collect property taxes are most
directly affected by Measure 50. The Oregon Legislative Revenue Office has
estimated that the total reduction in property tax revenues collected by local
governments under Measure 50 will be approximately $389 million for the tax
year 1997-98 and approximately $379 million for the tax year 1998-99. As the
State of Oregon relies on state income taxes as the main source of revenue for
its general fund, there may be increased pressure on the Oregon legislature to
use State funds to replace revenues lost by local governments as a result of
Measure 50. Measure 50 also requires that the Oregon Legislative Assembly
replace revenues lost to the public school system (including community
colleges) because of Measure 50. This is estimated to amount to $428 million
in the 1997-1999 biennium. It is possible the Oregon courts will be required
to interpret Measure 50 and its implementing legislation. Therefore, the true
impact of Measure 50 is not yet known. See "Appendix I--Economic Conditions in
Oregon."
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 Oregon Municipal Bonds in which the Fund invests.
The Manager does not believe that the current economic conditions in Oregon
or other factors described above will have a significant adverse effect on the
Fund's ability to invest in high quality Oregon 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 Oregon Municipal Bonds. For a
discussion of economic and other conditions in Oregon, see Appendix I --
"Economic Conditions in Oregon."
The suitability for any particular investor of a purchase of shares of the
Fund will depend upon, among other things, such investor's investment
objectives and such investor's ability to accept the risks of investing in
such markets, including the loss of principal.
DESCRIPTION OF MUNICIPAL BONDS
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. See "How
the Fund Invests" in the Prospectus.
Municipal Bonds include debt obligations issued to obtain funds for various
public purposes, including the construction of a wide range of public
facilities (including water, sewer, gas, electricity, solid waste, health
care, transportation, education and housing facilities), refunding of
outstanding obligations and obtaining funds for general operating expenses and
loans to other public institutions and facilities. In addition, certain types
of bonds are issued by or on behalf of public authorities to finance various
privately 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
Oregon Municipal Bonds, excluded from taxable income for purposes of Oregon
personal income taxes. Other types of industrial development bonds or private
activity bonds, the proceeds of which are used for the construction, equipment
or
4
<PAGE>
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.
General Obligation Bonds. General obligation bonds are secured by the
issuer's pledge of its faith, credit and taxing power for the payment of
principal and interest. The taxing power of any governmental entity may be
limited, however, by provisions of its state constitution or laws, and an
entity's creditworthiness will depend on many factors, including potential
erosion of its tax base due to population declines, natural disasters,
declines in the state's industrial base or inability to attract new
industries, economic limits on the ability to tax without eroding the tax
base, state legislative proposals or voter initiatives to limit ad valorem
real property taxes and the extent to which the entity relies on Federal or
state aid, access to capital markets or other factors beyond the state's or
entity's control. Accordingly, the capacity of the issuer of a general
obligation bond as to the timely payment of interest and the repayment of
principal when due is affected by the issuer's maintenance of its tax base.
Revenue Bonds. 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.
IDBs and Private Activity Bonds. 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. The Fund
may invest more than 25% of its total assets in IDBs or private activity
bonds.
"Moral Obligation" Bonds. 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.
Lease Obligations. 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
5
<PAGE>
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 municipality obligated to make
payment under the lease obligation and make certain specified determinations
based on such factors as the existence of a rating or credit enhancement such
as insurance, the frequency of trades or quotes for the obligation and the
willingness of dealers to make a market in the obligation.
Index and Inverse Floating Obligations. The Fund may invest in Municipal
Bonds (and Non-Municipal Tax-Exempt Securities) the return on which is based
on a particular index of value or interest rates. For example, the Fund may
invest in Municipal Bonds that pay interest based on an index of Municipal
Bond interest rates or based on the value of gold or some other commodity. The
principal amount payable upon maturity of certain Municipal Bonds also may be
based on the value of the index. To the extent the Fund invests in these types
of Municipal Bonds, the Fund's return on such Municipal Bonds will be subject
to risk with respect to the value of the particular index. Interest and
principal payable on the Municipal Bonds may also be based on relative changes
among particular indices. Also, the Fund may invest in so-called "inverse
floating obligations" or "residual interest bonds" on which variable long-term
interest rates typically decline as short-term market rates increase and
increase as short-term market rates decline. The Fund's return on such
Municipal Bonds (and Non-Municipal Tax-Exempt Securities) will be subject to
risk with respect to the value of the particular index, which may include
reduced or limited interest payments and losses of invested principal. Such
securities have the effect of providing a degree of investment leverage, since
they may increase or decrease in value in response to changes, as an
illustration, in market interest rates at a rate which is a multiple
(typically two) of the rate at which fixed high 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.
When-Issued Securities and Delayed Delivery Transactions. Municipal Bonds
may at times be purchased or sold on a delayed delivery basis or a when-issued
basis. These transactions arise when securities are purchased or sold by the
Fund with payment and delivery taking place in the future, often a month or
more after the purchase. The purchase will be recorded on the date the Fund
enters into the commitment and the value of the obligation will thereafter be
reflected in the calculation of the Fund's net asset value. The value of the
obligation on the delivery date may be more or less than its purchase price.
The payment obligation and the interest rate are each fixed at the time the
buyer enters into the commitment. The Fund will make only commitments to
purchase such securities with the intention of actually acquiring the
securities, but the Fund may sell these securities prior to the settlement
date if it is deemed advisable. Purchasing Municipal Bonds on a when-issued
basis involves the risk that the yields available in the market when the
delivery takes place may actually be higher than those obtained in the
transaction itself; if yields so increase, the value of the when-issued
obligation generally will decrease. The Fund will maintain a separate account
at its custodian bank consisting of cash, cash equivalents or liquid
securities (valued on a daily basis) equal at all times to the amount of the
when-issued commitment.
Call Rights. The Fund may purchase a Municipal Bond issuer's right to call
all or a portion of such Municipal Bond for mandatory tender for purchase (a
"Call Right"). A holder of a Call Right may exercise such right to require a
mandatory tender for the purchase of related Municipal Bonds, subject to
certain conditions. A Call Right that is not exercised prior to 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
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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.
"High Yield" or "Junk" Bonds. 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. In purchasing
such securities, the Fund will rely on the Manager's judgment, analysis and
experience in evaluating the creditworthiness of the issuer of such
securities. The Manager will take into consideration, among other things, the
ratings assigned by S&P, Moody's or Fitch, the issuer's financial resources,
its sensitivity to economic conditions and trends, its operating history, the
quality of its management and regulatory matters.
High yield securities are considered by S&P, Moody's and Fitch to have
varying degrees of speculative characteristics. Consequently, although high
yield securities can be expected to provide higher yields, such securities may
be subject to greater market price fluctuations and risk of loss of principal
than lower yielding, higher rated debt securities. The market prices of high-
yielding, lower-rated securities may fluctuate more than higher-rated
securities and may decline significantly in periods of general economic
difficulty, which may follow periods of rising interest rates. Investments in
high yield securities will be made only when, in the judgment of the Manager,
such securities provide attractive total return potential relative to the risk
of such securities, as compared to higher quality debt securities. The Fund
generally will not invest in debt securities in the lowest rating categories
(those rated CC or lower by S&P or Fitch or Ca or lower by Moody's) unless the
Manager believes that the financial condition of the issuer or the protection
afforded the particular securities is stronger than would otherwise be
indicated by such low ratings. The Fund does not intend to purchase debt
securities that are in default or which the Manager believes will be in
default.
Issuers or obligors of high yield securities may be highly leveraged and may
not have available to them more traditional methods of financing. Therefore,
the risks associated with acquiring the securities of such issuers generally
are greater than is the case with higher rated securities. For example, during
an economic downturn or a sustained period of rising interest rates, issuers
or obligors of high yield securities may be more likely to experience
financial stress, especially if such issuers or obligors are highly leveraged.
During such periods, such issuers may not have sufficient revenues to meet
their interest payment obligations. The issuer's ability to service its debt
obligations also may be adversely affected by specific issuer developments, or
the issuer's inability to meet specific projected business forecasts, or the
unavailability of additional financing. The risk of loss due to default by the
issuer is significantly greater for the holders of high yield securities
because such securities may be unsecured and may be subordinated to other
creditors of the issuer.
High yield securities frequently have call or redemption features that would
permit an issuer to repurchase the security from the Fund. If a call were
exercised by the issuer during a period of declining interest rates, the Fund
likely would have to replace such called security with a lower yielding
security, thus decreasing the net investment income to the Fund and dividends
to shareholders.
The Fund may have difficulty disposing of certain high yield securities
because there may be a thin trading market for such securities. Because not
all dealers maintain markets in all high yield securities, there is no
established secondary market for many of these securities, and the Fund
anticipates that such securities could be sold only to a limited number of
dealers or institutional investors. To the extent that a secondary trading
market for high yield securities does exist, it generally is not as liquid as
the secondary market for higher rated securities. Reduced secondary market
liquidity may have an adverse impact on market price and the Fund's ability to
dispose of particular issues when necessary to meet the Fund's liquidity needs
or in response to a specific economic event such as a deterioration in the
creditworthiness of the issuer. Reduced secondary market liquidity for certain
securities also may make it more difficult for the Fund to obtain accurate
market quotations for purposes of valuing the Fund's portfolio. Market
quotations are generally available on many high yield securities only from a
limited number of dealers and may not necessarily represent firm bids of such
dealers or prices for actual sales.
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It is expected that a significant portion of the high yield securities
acquired by the Fund will be purchased upon issuance, which may involve
special risks because the securities so acquired are new issues. In such
instances the Fund may be a substantial purchaser of the issue and therefore
have the opportunity to participate in structuring the terms of the offering.
Although this may enable the Fund to seek to protect itself against certain of
such risks, the considerations discussed herein would nevertheless remain
applicable.
Adverse publicity and investor perceptions, which may not be based on
fundamental analysis, also may decrease the value and liquidity of high yield
securities, particularly in a thinly traded market. Factors adversely
affecting the market value of high yield securities are likely to adversely
affect the Fund's net asset value. In addition, the Fund may incur additional
expenses to the extent that it is required to seek recovery upon a default on
a portfolio holding or participate in the restructuring of the obligation.
Yields. 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.
FINANCIAL FUTURES TRANSACTIONS AND OPTIONS
Reference is made to "How the Fund Invests" in the Prospectus. Set forth
below is additional information concerning these transactions.
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. While the
Fund's use of hedging strategies is intended to moderate capital changes in
portfolio holdings and thereby reduce the volatility of the net asset value of
Fund shares, the Fund anticipates that its net asset value will fluctuate.
Distributions, if any, of net long-term capital gains from certain
transactions in futures or options are taxable at long-term capital gains
rates for Federal income tax purposes, regardless of the length of time the
shareholder has owned Fund shares. Recent legislation has created new
categories of capital gains taxable at different rates, which the Fund may
pass through to shareholders. See "Distributions and Taxes -- Taxes."
Description of Futures Contracts. A futures contract is an agreement between
two parties to buy and sell a security or, in the case of an index-based
futures contract, to make and accept a cash settlement for a set price on a
future date. A majority of transactions in futures contracts, however, do not
result in the actual delivery of the underlying instrument or cash settlement,
but are settled through liquidation, i.e., by entering into an offsetting
transaction. Futures contracts have been designed by boards of trade which
have been designated "contracts markets" by the Commodity Futures Trading
Commission ("CFTC").
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The purchase or sale of a futures contract differs from the purchase or sale
of a security in that no price or premium is paid or received. Instead, an
amount of cash or securities acceptable to the broker and the relevant
contract market, which varies, but is generally about 5% of the contract
amount, must be deposited with the broker. This amount is known as "initial
margin" and represents a "good faith" deposit assuring the performance of both
the purchaser and seller under the futures contract. Subsequent payments to
and from the broker, called "variation margin," are required to be made on a
daily basis as the price of the futures contract fluctuates making the long
and short positions in the futures contract more or less valuable, a process
known as "marking to 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.
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.
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.
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.
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.
Futures Strategies. The Fund may sell a financial futures contract (i.e.,
assume a short position) in anticipation of a decline in the value of its
investments in Municipal Bonds resulting from an increase in interest rates or
otherwise. The risk of decline could be reduced without employing futures as a
hedge by selling such Municipal Bonds and either reinvesting the proceeds in
securities with shorter maturities or by holding assets in cash. This
strategy, however, entails increased transaction costs in the form of dealer
spreads and typically would reduce the average yield of the Fund's portfolio
securities as a result of the shortening of maturities. The sale of futures
contracts provides an alternative means of hedging against declines in the
value of its investments in Municipal Bonds. As such values decline, the value
of the Fund's positions in the futures contracts will tend to increase, thus
offsetting all or a portion of the depreciation in the market value of the
Fund's Municipal Bond investments 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.
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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 the Municipal Bonds and the futures contracts, subsequent
increases in the cost of Municipal Bonds should be reflected in the value of
the futures held by the Fund. As such purchases are made, an equivalent amount
of futures contracts will be closed out. Due to changing market conditions and
interest rate forecasts, however, a futures position may be terminated without
a corresponding purchase of portfolio securities.
Call Options on Futures Contracts. The Fund 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.
The writing of a call option on a futures contract constitutes a partial
hedge against declining prices of the securities which are deliverable upon
exercise of the futures contract. If the futures price at expiration is below
the exercise price, the Fund will retain the full amount of the option premium
which provides a partial hedge against any decline that may have occurred in
the Fund's portfolio holdings.
Put Options on Futures Contracts. The purchase of 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.
The writing of a put option on a futures contract constitutes a partial
hedge against increasing prices of the securities which are deliverable upon
exercise of the futures contract. If the futures price at expiration is higher
than the exercise price, the Fund will retain the full amount of the option
premium which provides a partial hedge against any increase in the price of
Municipal Bonds which the Fund intends to purchase.
The writer of an option on a futures contract is required to deposit initial
and variation margin pursuant to requirements similar to those applicable to
futures contracts. Premiums received from the writing of an option will be
included in initial margin. The writing of an option on a futures contract
involves risks similar to those relating to futures contracts
The Trust has received an order from the Commission exempting it from the
provisions of Section 17(f) and Section 18(f) of the Investment Company Act of
1940, as amended (the "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.
Restrictions on Use of Futures Transactions. Regulations of the CFTC
applicable to the Fund require that all of the Fund's futures transactions
constitute bona fide hedging transactions and that the Fund purchase and sell
futures contracts and options thereon (i) for bona fide hedging purposes, and
(ii) for non-hedging purposes, if the aggregate initial margin and premiums
required to establish positions in such contracts and options does not exceed
5% of the liquidation value of the Fund's portfolio assets after taking into
account unrealized profits and unrealized losses on any such contracts and
options. (However, the Fund intends to engage in options and futures
transactions only for hedging purposes.) Margin deposits may consist of cash
or securities acceptable to the broker and the relevant contract market.
When the Fund purchases a futures contract, or writes a put option or
purchases a call option thereon, it will maintain an amount of cash, cash
equivalents (e.g., high grade commercial paper and daily tender adjustable
notes) or liquid securities in a segregated account with the Fund's custodian,
so that the amount so segregated plus the
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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.
Risk Factors in Futures Transactions and Options. Investment in futures
contracts involves the risk of imperfect correlation between movements in the
price of the futures contract and the price of the security being hedged. The
hedge will not be fully effective when there is imperfect correlation between
the movements in the prices of two financial instruments. For example, if the
price of the futures contract moves more than the price of the hedged
security, the Fund will experience either a loss or gain on the futures
contract which is not completely offset by movements in the price of the
hedged securities. To compensate for imperfect correlations, the Fund may
purchase or sell futures contracts in a greater dollar amount than the hedged
securities if the volatility of the hedged securities is historically greater
than the volatility of the futures contracts. Conversely, the Fund may
purchase or sell fewer futures contracts if the volatility of the price of the
hedged securities is historically less than that of the futures contracts.
The particular municipal bonds comprising the index underlying the Municipal
Bond Index financial futures 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.
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.
The successful use of transactions in futures and related options also
depends on the ability of the Manager to forecast correctly the direction and
extent of interest rate movements within a given time frame. To the extent
interest rates remain stable during the period in which a futures contract or
option is held by the Fund or such rates move in a direction opposite to that
anticipated, the Fund may realize a loss on the hedging transaction which is
not fully or partially offset by an increase in the value of portfolio
securities. As a result, the Fund's total return for such period may be less
than if it had not engaged in the hedging transaction.
Because of low initial margin deposits made 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
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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, however, any losses incurred in connection therewith should,
if the hedging strategy is successful, be offset in whole or in part by
increases in the value of securities held by the Fund or decreases in the
price of securities the Fund intends to acquire.
The amount of risk the Fund assumes when it purchases an option on a futures
contract is the premium paid for the option plus related transaction costs. In
addition to the correlation risks discussed above, the purchase of an option
on a futures contract also entails the risk that changes in the value of the
underlying futures contract will not be fully reflected in the value of the
option purchased.
DESCRIPTION OF TEMPORARY INVESTMENTS
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 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.
VRDOs and Participating VRDOs. VRDOs are tax-exempt obligations which
contain a floating or variable interest rate adjustment formula and an
unconditional right of demand on the part of the holder thereof to receive
payment of the unpaid principal balance plus accrued interest upon a short
notice period not to exceed seven days. There is, however, the possibility
that because of default or insolvency the demand feature of VRDOs and
Participating VRDOs 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.
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.
VRDOs that contain an unconditional right of demand to receive payment of
the unpaid principal balance plus accrued interest on a notice period
exceeding seven days may be deemed to be illiquid securities. A VRDO with a
demand notice period exceeding seven days will therefore be subject to the
Fund's restriction on illiquid investments unless, in the judgment of the
Trustees, such VRDO is liquid. The Trustees may adopt guidelines and
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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.
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-4/VMIG-4 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.
Repurchase Agreements. The Fund may invest in securities pursuant to
repurchase agreements. Repurchase agreements may be entered into only with a
member bank of the Federal Reserve System or primary dealer 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 total assets.
In general, for Federal income tax purposes, repurchase agreements are
treated as collateralized loans secured by the securities "sold." Therefore,
amounts earned under such agreements will not be considered tax-exempt
interest. The treatment of purchase and sales contracts is less certain.
INVESTMENT RESTRICTIONS
The Fund has adopted a number of fundamental and non-fundamental investment
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 meeting at which
more than 50% of the outstanding shares of the Fund are represented or (ii)
more than 50% of the Fund's outstanding shares). The Fund may not:
(1) Invest more than 25% of its assets, taken at market value at the time
of each investment, in the securities of issuers in any particular industry
(excluding the U.S. Government and its agencies and instrumentalities).
(2) Make investments for the purpose of exercising control or management.
(3) Purchase or sell real estate, except that, to the extent permitted by
applicable law, the Fund may invest in securities directly or indirectly
secured by real estate or interests therein or issued by companies that
invest in real estate or interests therein.
13
<PAGE>
(4) Make loans to other persons, except that the acquisition of bonds,
debentures or other corporate debt securities and investment in government
obligations, commercial paper, pass-through instruments, certificates of
deposit, bankers acceptances, repurchase agreements or any similar
instruments shall not be deemed to be the making of a loan, and except
further that the Fund may lend its portfolio securities, provided that the
lending of portfolio securities may be made only in accordance with
applicable law and the guidelines set forth in the Fund's Prospectus and
Statement of Additional Information, as they may be amended from time to
time.
(5) Issue senior securities to the extent such issuance would violate
applicable law.
(6) Borrow money, except that (i) the Fund may borrow from banks (as
defined in the Investment Company Act) in amounts up to 33 1/3% of its
total assets (including the amount borrowed), (ii) the Fund may, to the
extent permitted by applicable law, borrow up to an additional 5% of its
total assets for temporary purposes, (iii) the Fund may obtain such short-
term credit as may be necessary for the clearance of purchases and sales of
portfolio securities and (iv) the Fund may purchase securities on margin to
the extent permitted by applicable law. The Fund may not pledge its assets
other than to secure such borrowings or, to the extent permitted by the
Fund's investment policies as set forth in its Prospectus and Statement of
Additional Information, as they may be amended from time to time, in
connection with hedging transactions, short sales, when-issued and forward
commitment transactions and similar investment strategies.
(7) Underwrite securities of other issuers, except insofar as the Fund
technically may be deemed an underwriter under the Securities Act in
selling portfolio securities.
(8) Purchase or sell commodities or contracts on commodities, except to
the extent that the Fund may do so in accordance with applicable law and
the Fund's Prospectus and Statement of Additional Information, as they may
be amended from time to time, and without registering as a commodity pool
operator under the Commodity Exchange Act.
In addition, the Fund has adopted non-fundamental investment restrictions
that may be changed by the Board of Trustees without a vote of the Fund's
shareholders. Under the non-fundamental investment restrictions, the Fund may
not:
(a) Purchase securities of other investment companies, except to the
extent such purchases are permitted by applicable law. As a matter of
policy, however, the Fund will not purchase shares of any registered open-
end investment company or registered unit investment trust, in reliance on
Section 12(d)(1)(F) or (G) (the "fund of funds" provisions) of the
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.
(b) Make short sales of securities or maintain a short position, except
to the extent permitted by applicable law. The Fund currently does not
intend to engage in short sales, except short sales "against the box."
(c) Invest in securities that cannot be readily resold because of legal
or contractual restrictions or that 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 that mature within seven days or
securities that the Board of Trustees of the Trust has otherwise determined
to be liquid pursuant to applicable law.
(d) Notwithstanding fundamental investment restriction (6) above, borrow
amounts in excess of 20% of its total assets taken at market value
(including the amount borrowed), and then only from banks as a temporary
measure for extraordinary or emergency purposes.
In addition, to comply with tax requirements for qualification as a
"regulated investment company," the Fund's investments will be limited in a
manner such that, at the close of each quarter of each fiscal year, (a) no
more than 25% of the Fund's total assets are invested in the securities of a
single issuer, and (b) with regard to at least 50% of the Fund's total assets,
no more than 5% of its total assets are invested in the securities of a single
issuer. For purposes of this restriction, the Fund will regard each state and
each political subdivision, agency or
14
<PAGE>
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.
Because of the affiliation of 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.
PORTFOLIO TURNOVER
Generally, the Fund does not purchase securities for short-term trading
profits. However, the Fund may dispose of securities without regard to the
time they have been held when such action, for defensive or other reasons,
appears advisable to the Manager. As a result of the investment policies
described herein, the Fund's portfolio turnover rate may be higher than that
of other investment companies; however, it is extremely difficult to predict
portfolio turnover rates with any degree of accuracy. Higher portfolio
turnover may contribute to higher transaction costs in the form of dealer
spreads and brokerage commissions which are borne directly by the Fund. High
portfolio turnover may also result in negative tax consequences, such as an
increase in capital gains dividends or in ordinary income dividends of accrued
market discount. See "Distributions and Taxes -- Taxes." The portfolio
turnover rate is calculated by dividing the lesser of purchases or sales of
portfolio securities for the particular fiscal year by the monthly average of
the value of the portfolio securities owned by the Fund during the particular
fiscal year. For purposes of determining this rate, all securities whose
maturities at the time of acquisition are one year or less are excluded.
15
<PAGE>
MANAGEMENT OF THE TRUST
TRUSTEES AND OFFICERS
The Trustees of the Trust consist of six 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 and the portfolio manager
of the Trust, including their ages and their principal occupations for at
least the last five years, is set forth below. Unless otherwise noted, the
address of each Trustee, executive officer and the portfolio manager is P.O.
Box 9011, Princeton, New Jersey 08543-9011.
Arthur Zeikel (66) -- President and Trustee(1)(2) -- Chairman of the Manager
and Merrill Lynch Asset Management, L.P. ("MLAM") (which terms as used herein
include their corporate predecessors) since 1997; President of the Manager and
MLAM from 1977 to 1997; Chairman of Princeton Services, Inc. ("Princeton
Services") since 1997 and Director thereof since 1993; President of Princeton
Services from 1993 to 1997; Executive Vice President of Merrill Lynch & Co.,
Inc. ("ML & Co.") since 1990.
James H. Bodurtha (54) -- Trustee(2)(3) -- 36 Popponesset Road, Cotuit,
Massachusetts 02635. Director and Executive Vice President, The China Business
Group, Inc. since 1996; Chairman and Chief Executive Officer, China Enterprise
Management Corporation from 1993 to 1996; Chairman, Berkshire Corporation
since 1980; Partner, Squire, Sanders & Dempsey from 1980 to 1993.
Herbert I. London (59) -- Trustee(2)(3) -- 113-115 University Place, New
York, New York 10003. John M. Olin Professor of Humanities, New York
University since 1993 and Professor thereof since 1980; President, Hudson
Institute since 1997 and Trustee 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.
Robert R. Martin (71) -- Trustee(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.
Joseph L. May (69) -- Trustee(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.
Andre F. Perold (46) -- Trustee(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 since 1991 and TIBCO from 1994 to 1996.
Terry K. Glenn (58) -- Executive Vice President(1)(2) -- Executive Vice
President of the Manager and MLAM since 1983; Executive Vice President and
Director of Princeton Services since 1993; President of Princeton Funds
Distributor, Inc. ("PFD") since 1986 and Director thereof since 1991;
President of Princeton Administrators, L.P. since 1988.
Vincent R. Giordano (54) -- Senior Vice President(1)(2) -- Senior Vice
President of the Manager and MLAM since 1984; Vice President of MLAM from 1980
to 1984; Senior Vice President of Princeton Services since 1993.
Kenneth A. Jacob (47) -- Vice President(1)(2) -- First Vice President of
MLAM since 1997; Vice President of MLAM from 1984 to 1997; Vice President of
the Manager since 1984.
16
<PAGE>
Theodore R. Jaeckel, Jr. (38) -- Vice President and Portfolio Manager of the
Fund(1)(2) -- Director (Municipal Tax-Exempt Fund Management) of MLAM since
1997; Vice President of MLAM from 1991 to 1997.
Donald C. Burke (38) -- Vice President(1)(2) -- First Vice President of MLAM
since 1997; Vice President of MLAM from 1990 to 1997; Director of Taxation of
MLAM since 1990.
Gerald M. Richard (49) -- Treasurer(1)(2) -- Senior Vice President and
Treasurer of the Manager and MLAM since 1984; Senior Vice President and
Treasurer of Princeton Services since 1993; Treasurer of PFD since 1984 and
Vice President thereof since 1981.
Robert E. Putney, III (38) -- Secretary(1)(2) -- Director (Legal Advisory)
of MLAM and Princeton Administrators, L.P. since 1997; Vice President of MLAM
from 1994 to 1997; Vice President of Princeton Administrators, L.P. from 1996
to 1997; Attorney with MLAM from 1991 to 1994.
- ----------
(1) Interested person, as defined in the Investment Company Act, of the Trust.
(2) Such Trustee or officer is a director, trustee or officer of certain other
investment companies for which FAM or MLAM acts as the investment adviser
or manager.
(3) 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.
As of the date of this Statement of Additional Information, the Trustees and
officers of the Trust as a group (13 persons) owned an aggregate of less than
1% of the outstanding shares of the Fund. At such date, Mr. Zeikel, a Trustee
and officer of the Trust, and the other officers of the Trust owned an
aggregate of less than 1% of the outstanding shares of common stock of ML &
Co.
COMPENSATION OF TRUSTEES
The Trust pays each non-interested Trustee a fee of $10,000 per year plus
$1,000 per 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.
The following table shows the compensation earned by the non-interested
Trustees for the fiscal year ended July 31, 1998 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, 1997.
<TABLE>
<CAPTION>
AGGREGATE
PENSION OR ESTIMATED COMPENSATION FROM
RETIREMENT BENEFITS ANNUAL TRUST AND OTHER
POSITION WITH COMPENSATION ACCRUED AS PART OF BENEFITS UPON MLAM/FAM-
NAME TRUST FROM FUND FUND EXPENSE RETIREMENT ADVISED FUNDS(1)
- ---- ------------- ------------ ------------------- ------------- -----------------
<S> <C> <C> <C> <C> <C>
James H. Bodurtha....... Trustee $257 None None $148,500
Herbert I. London....... Trustee $257 None None $148,500
Robert R. Martin........ Trustee $257 None None $148,500
Joseph L. May........... Trustee $257 None None $148,500
Andre F. Perold......... Trustee $257 None None $148,500
</TABLE>
- ----------
(1) The Trustees serve on the boards of MLAM/FAM-advised funds as follows: Mr.
Bodurtha (23 registered investment companies consisting of 41 portfolios);
Mr. London (23 registered investment companies consisting of 41
portfolios); Mr. Martin (23 registered investment companies consisting of
41 portfolios); Mr. May (23 registered investment companies consisting of
41 portfolios); and Mr. Perold (23 registered investment companies
consisting of 41 portfolios).
Trustees of the Trust, members of the Boards of other MLAM-advised
investment companies, ML & Co. and its subsidiaries (the term "subsidiaries,"
when used herein with respect to ML & Co., includes MLAM, the Manager and
certain other entities directly or indirectly wholly owned and controlled by
ML & Co.) and their directors and employees, and any trust, pension, profit-
sharing or other benefit plan for such persons, may purchase Class A shares of
the Fund at net asset value.
17
<PAGE>
MANAGEMENT AND ADVISORY ARRANGEMENTS
Management Services. 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.
Management Fee. 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
following annual rates: 0.55% of the average daily net assets not exceeding
$500 million; 0.525% of the average daily net assets exceeding $500 million
but not exceeding $1.0 billion and 0.50% of the average daily net assets
exceeding $1.0 billion. The table below sets forth information about the total
management fees paid by the Fund to the Manager for the periods indicated.
<TABLE>
<CAPTION>
FISCAL YEAR ENDED JULY 31, MANAGEMENT FEE
-------------------------- -------------------------------
<S> <C>
1998............................. $122,200 (of which $77,763 was
voluntarily waived)
1997............................. $139,867 (of which $111,756 was
voluntarily waived)
1996............................. $165,072 (of which $163,931 was
voluntarily waived)
</TABLE>
Payment of Fund Expenses. 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.
Organization of the Manager. 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.
18
<PAGE>
Duration and Termination. Unless earlier terminated as described herein, the
Management Agreement will remain in effect from year to year if approved
annually (a) by the Trustees of the Trust or by a majority of the outstanding
shares of the Fund and (b) by a majority of the Trustees who are not parties
to such contract or interested persons (as defined in the 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.
Transfer Agency Services. 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 up to $11.00 per Class A or Class D account and up to $14.00
per Class B or Class C account and is entitled to reimbursement for certain
transaction charges and out-of-pocket expenses incurred by the Transfer Agent
under the Transfer Agency Agreement. Additionally, a $.20 monthly closed
account charge will be assessed on all accounts which close during the
calendar year. Application of this fee will commence the month following the
month the account is closed. At the end of the calendar year, no further fees
will be due. For purposes of the Transfer Agency Agreement, the term "account"
includes a shareholder account maintained directly by the Transfer Agent and
any other account representing the beneficial interest of a person in the
relevant share class on a recordkeeping system, provided the recordkeeping
system is maintained by a subsidiary of ML & Co.
Distribution Expenses. 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.
CODE OF ETHICS
The Board of Trustees of the Trust has adopted a Code of Ethics under Rule
17j-1 of the Investment Company Act which incorporates the Code of Ethics of
the Manager (together, the "Codes"). The Codes significantly restrict the
personal investing activities of all employees of the Manager and, as
described below, impose additional, more onerous, restrictions on fund
investment personnel.
The Codes require that all employees of the Manager 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).
PURCHASE OF SHARES
Reference is made to "How to Buy, Sell, Transfer and Exchange Shares" in the
Prospectus.
The Fund offers four classes of shares under the Merrill Lynch Select
Pricing SM System: shares of Class A and Class D are sold to investors
choosing the initial sales charge alternatives and shares of Class B and Class
C are sold to investors choosing the deferred sales charge alternatives. Each
Class A, Class B, Class C or Class D
19
<PAGE>
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."
Investors should understand that the purpose and function of the initial
sales charges with respect to the Class A and Class D shares are the same as
those of the CDSCs and distribution fees with respect to the Class B and Class
C shares in that the sales charges and distribution fees applicable to each
class provide for the financing of the distribution of the shares of the Fund.
The distribution-related revenues paid with respect to a class will not be
used to finance the distribution expenditures of another class. Sales
personnel may receive different compensation for selling different classes of
shares.
The Merrill Lynch Select Pricing SM 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 SM System are referred to
herein as "Select Pricing Funds."
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. 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.
INITIAL SALES CHARGE ALTERNATIVES -- CLASS A AND CLASS D SHARES
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 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.
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
20
<PAGE>
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.
Eligible Class A Investors
Class A shares are offered to a limited group of investors and also will be
issued upon reinvestment of dividends on outstanding Class A shares. Investors
who currently own Class A shares 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 at net asset value are participants
in certain investment programs including TMASM 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.
Investors are advised that only Class A and Class D shares may be available
for purchase through securities dealers, other than Merrill Lynch, that are
eligible to sell shares.
Class A and Class D Sales Charge Information
<TABLE>
<CAPTION>
CLASS A SHARES
---------------------------------------------------------------------------------
For the Fiscal Year Gross Sales Sales Charges Sales Charges CDSCs Received on
Ended Charges Retained by Paid to Redemption of
July 31, Collected Distributor Merrill Lynch Load-Waived Shares
------------------- ----------- ------------- ------------- ------------------
<S> <C> <C> <C> <C>
1998 $ 0 $ 0 $ 0 0
1997 $ 19 $ 1 $ 18 0
1996 $1,752 $202 $1,550 0
<CAPTION>
CLASS D SHARES
---------------------------------------------------------------------------------
For the Fiscal Year Gross Sales Sales Charges Sales Charges CDSCs Received on
Ended Charges Retained by Paid to Redemption of
July 31, Collected Distributor Merrill Lynch Load-Waived Shares
------------------- ----------- ------------- ------------- ------------------
<S> <C> <C> <C> <C>
1998 $6,587 $635 $5,952 0
1997 $1,511 $261 $1,250 0
1996 $1,532 $126 $1,406 0
</TABLE>
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.
21
<PAGE>
Reduced Initial Sales Charges
Reinvested Dividends and Capital Gains. No initial sales charges are imposed
upon Class A and Class D shares issued as a result of the automatic
reinvestment of dividends or capital gains distributions.
Right of Accumulation. Reduced sales charges are applicable through a right
of accumulation under which eligible investors are permitted to purchase
shares of the Fund subject to an initial sales charge at the offering price
applicable to the total of (a) the public offering price of the shares then
being purchased plus (b) an amount equal to the then current net asset value
or cost, whichever is higher, of the purchaser's combined holdings of all
classes of shares of the Fund and of any other Select Pricing Funds. For any
such right of accumulation to be made available, the Distributor must be
provided at the time of purchase, by the purchaser or the purchaser's
securities dealer, with sufficient information to permit confirmation of
qualification. Acceptance of the purchase order is subject to such
confirmation. The right of accumulation may be amended or terminated at any
time. Shares held in the name of a nominee or custodian under pension, profit-
sharing or other employee benefit plans may not be combined with other shares
to qualify for the right of accumulation.
Letter of Intent. 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 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.
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.
TMASM Managed Trusts. Class A shares are offered at net asset value to TMASM
Managed Trusts to which Merrill Lynch Trust Company provides discretionary
trustee services.
Employee AccessSM Accounts. Provided applicable threshold requirements are
met, either Class A or Class D shares are offered at net asset value to
Employee AccessSM Accounts available through authorized employers. 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.
Purchase Privilege of Certain Persons. 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
22
<PAGE>
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.
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.
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.
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.
Closed-End Fund Investment Option. 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 SM 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 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.
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
23
<PAGE>
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.
Acquisition of Certain Investment Companies. The public offering price of
Class D shares may be reduced to the net asset value per Class D share in
connection with the acquisition of the assets of or merger or consolidation
with a personal holding company or a public or private investment company. The
value of the assets or company acquired in a tax-free transaction may be
adjusted in appropriate cases to reduce possible adverse tax consequences to
the Fund that might result from an acquisition of assets having net unrealized
appreciation that is disproportionately higher at the time of acquisition than
the realized or unrealized appreciation of the Fund. The issuance of Class D
shares for consideration other than cash is limited to bona fide
reorganizations, statutory mergers or other acquisitions of portfolio
securities that (i) meet the investment objectives and policies of the Fund;
(ii) are acquired for investment and not for resale (subject to the
understanding that the disposition of the Fund's portfolio securities shall at
all times remain within its control); and (iii) are liquid securities, the
value of which is readily ascertainable, which are not restricted as to
transfer either by law or liquidity of market (except that the Fund may
acquire through such transactions restricted or illiquid securities to the
extent the Fund does not exceed the applicable limits on acquisition of such
securities set forth under "Investment Objective and Policies" herein).
Reductions in or exemptions from the imposition of a sales load are due to
the nature of the investors and/or the reduced sales efforts that will be
needed in obtaining such investments.
DEFERRED SALES CHARGE ALTERNATIVES -- CLASS B AND CLASS C SHARES
Investors choosing the deferred sales charge alternatives should consider
Class B shares if they intend to hold their shares for an extended period of
time and Class C shares if they are uncertain as to the length of time they
intend to hold their assets in Select Pricing Funds.
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.
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.
Contingent Deferred Sales Charges -- Class B Shares
Class B shares that are redeemed within four years of purchase may be
subject to a CDSC at the rates set forth below charged as a percentage of the
dollar amount subject thereto. In determining whether a CDSC is applicable to
a redemption, the calculation will be determined in the manner that results in
the lowest applicable rate being charged. 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
or distributions and then of shares held longest
24
<PAGE>
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.
The following table sets forth the Class B CDSC:
<TABLE>
<CAPTION>
CDSC AS A PERCENTAGE
OF DOLLAR AMOUNT
YEAR SINCE PURCHASE PAYMENT MADE SUBJECT TO CHARGE
-------------------------------- --------------------
<S> <C>
0-1............................................... 4.0%
1-2............................................... 3.0%
2-3............................................... 2.0%
3-4............................................... 1.0%
4 and thereafter.................................. None
</TABLE>
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).
The Class B CDSC is 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. The Class B CDSC also is waived for any Class B shares that are
purchased within qualifying Employee Access SM Accounts. The terms of the CDSC
may be modified in connection with certain fee-based programs. See
"Shareholder Services -- Fee-Based Programs."
Conversion of Class B Shares to Class D Shares. After approximately ten
years (the "Conversion Period"), Class B shares will be converted
automatically into Class D shares of the Fund. Class D shares are subject to
an ongoing account maintenance fee of 0.10% of net assets but are not subject
to the distribution fee that is borne by Class B shares. Automatic conversion
of Class B shares into Class D shares will occur at least once each month (on
the "Conversion Date") on the basis of the relative net asset 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.
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.
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 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."
25
<PAGE>
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.
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.
Contingent Deferred Sales Charges -- Class C Shares
Class C shares that are redeemed within one year of purchase may be subject
to a 1.0% CDSC charged as a percentage of the dollar amount subject thereto.
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 or capital
gains distributions. It will be assumed that the redemption is first of shares
held for over one year or shares acquired pursuant to reinvestment of
dividends or distributions and then of shares held longest during the one-year
period. The charge will not be applied to dollar amounts representing an
increase in the net asset value since the time of purchase. A transfer of
shares from a shareholder's account to another account will be assumed to be
made in the same order as a redemption. The Class C CDSC may be waived in
connection with certain fee-based programs. See "Shareholder Services -- Fee-
Based Programs."
Class B and Class C Sales Charge Information
<TABLE>
<CAPTION>
CLASS B SHARES*
----------------------------------------------------------------------------
For the Fiscal Year CDSCs Received CDSCs Paid to
Ended July 31, by Distributor Merrill Lynch
------------------- -------------- -------------
<S> <C> <C>
1998 $ 22,138 $ 22,138
1997 $ 68,190 $ 68,190
1996 $131,678 $131,678
* Additional Class B CDSCs payable to the Distributor
with respect to the fiscal years ended July 31, 1997
and 1998 may have been waived or converted to a
contingent obligation in connection with a
shareholder's participation in certain fee-based
programs.
<CAPTION>
CLASS C SHARES
----------------------------------------------------------------------------
For the Fiscal Year CDSCs Received CDSCs Paid to
Ended July 31, by Distributor Merrill Lynch
------------------- -------------- -------------
<S> <C> <C>
1998 $ 202 $ 202
1997 $ 3,156 $ 3,156
1996 $ 483 $ 483
</TABLE>
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.
26
<PAGE>
DISTRIBUTION PLANS
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.
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).
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 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.
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.
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
27
<PAGE>
revenue/cash basis, revenues consist of the account maintenance fees,
distribution fees and CDSCs and the expenses consist of financial consultant
compensation.
As of December 31, 1997, the last date for which fully allocated accrual
data is available, the fully allocated accrual revenues incurred by the
Distributor and Merrill Lynch for the period since the commencement of
operations of Class B shares exceeded fully allocated accrual expenses by
approximately $402,000 (2.47% of Class B net assets at that date). As of July
31, 1998, direct cash revenues for the period since the commencement of
operations of Class B shares exceeded direct cash expenses by $296,372 (1.98%
of Class B net assets at that date). As of December 31, 1997, the fully
allocated accrual expenses incurred by the Distributor and Merrill Lynch for
the period since the commencement of operations of Class C shares exceeded the
fully allocated revenues by approximately $8,000 (.39% of Class C net assets
at that date). As of July 31, 1998, direct cash revenues for the period since
the commencement of operations of Class C shares exceeded direct cash expenses
by $21,918 (.86% of Class C net assets at that date).
For the fiscal year ended July 31, 1998, the Fund paid the Distributor
$80,946 pursuant to the Class B Distribution Plan (based on average daily net
assets subject to such Class B Distribution Plan of approximately $16.1
million), all of which was paid to Merrill Lynch for providing account
maintenance and distribution-related activities and services in connection
with Class B shares. For the fiscal year ended July 31, 1998, the Fund paid
the Distributor $13,001 pursuant to the Class C Distribution Plan (based on
average daily net assets subject to such Class C Distribution Plan of
approximately $2.2 million), all of which was paid to Merrill Lynch for
providing account maintenance and distribution-related activities and services
in connection with Class C shares. For the fiscal year ended July 31, 1998,
the Fund paid the Distributor $622 pursuant to the Class D Distribution Plan
(based on average daily net assets subject to such Class D Distribution Plan
of approximately $0.6 million), all of which was paid to Merrill Lynch for
providing account maintenance activities in connection with Class D shares.
LIMITATIONS ON THE PAYMENT OF DEFERRED SALES CHARGES
The maximum sales charge rule in the Conduct Rules of the NASD imposes a
limitation on certain asset-based sales charges such as the distribution fee
and the CDSC borne by the Class B and Class C shares but not the account
maintenance fee. The maximum sales charge rule is applied separately to each
class. As applicable to the Fund, the maximum sales charge rule limits the
aggregate of distribution fee payments and CDSCs payable by the Fund to (1)
6.25% of eligible gross sales of Class B shares and Class C shares, computed
separately (defined to exclude shares issued pursuant to dividend
reinvestments and exchanges), plus (2) interest on the unpaid balance for the
respective class, computed separately, at the prime rate plus 1% (the unpaid
balance being the maximum amount payable minus amounts received from the
payment of the distribution fee and the CDSC). In connection with the Class B
shares, the Distributor has voluntarily agreed to waive interest charges on
the unpaid balance in excess of 0.50% of eligible gross sales. Consequently,
the maximum amount payable to the Distributor (referred to as the "voluntary
maximum") in connection with the Class B shares is 6.75% of eligible gross
sales. The Distributor retains the right to stop waiving the interest charges
at any time. To the extent payments would exceed the voluntary maximum, the
Fund will not make further payments of the distribution fee with respect to
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.
28
<PAGE>
The following table sets forth comparative information as of July 31, 1998
with respect to the Class B and Class C shares of the Fund indicating the
maximum allowable payments that can be made under the NASD maximum sales
charge rule and, with respect to the Class B shares, the Distributor's
voluntary maximum.
<TABLE>
<CAPTION>
DATA CALCULATED AS OF JULY 31, 1998
-------------------------------------------------------------------------------
(IN THOUSANDS)
ANNUAL
DISTRIBUTION
ALLOWABLE AMOUNTS FEE AT
ELIGIBLE ALLOWABLE INTEREST ON MAXIMUM PREVIOUSLY AGGREGATE CURRENT NET
GROSS AGGREGATE UNPAID AMOUNT PAID TO UNPAID ASSET
SALES(1) SALES CHARGE BALANCE(2) PAYABLE DISTRIBUTOR(3) BALANCE LEVEL(4)
-------- ------------ ----------- ------- -------------- --------- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
CLASS B SHARES FOR THE
PERIOD AUGUST 27, 1993
(COMMENCEMENT OF
OPERATIONS) TO JULY 31,
1998
Under NASD Rule as
Adopted................ $35,997 $2,250 $878 $3,128 $605 $2,253 $37
Under Distributor's
Voluntary Waiver....... $35,997 $2,250 $180 $2,430 $605 $1,825 $37
CLASS C SHARES, FOR THE
PERIOD OCTOBER 21, 1994
(COMMENCEMENT OF
OPERATIONS) TO JULY 31,
1998
Under NASD Rule as
Adopted................ $ 3,630 $ 227 $ 44 $ 271 $ 24 $ 247 $ 9
</TABLE>
- ----------
(1) Purchase price of all eligible Class B or Class C shares sold during the
periods indicated other than shares acquired through dividend reinvestment
and the exchange privilege.
(2) Interest is computed on a monthly basis based upon the prime rate, as
reported in The Wall Street Journal, plus 1.0%, as permitted under the
NASD Rule.
(3) Consists of CDSC payments, distribution fee payments and accruals. See
"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 MFASM) Program (the "MFA Program"). The
CDSC is booked as a contingent obligation that may be payable if the
shareholder terminates participation in the MFA Program.
(4) Provided to illustrate the extent to which the current level of
distribution fee payments (not including any CDSC payments) is amortizing
the unpaid balance. No assurance can be given that payments of the
distribution fee will reach either the voluntary maximum (with respect to
Class B shares) or the NASD maximum (with respect to Class B and Class C
shares).
REDEMPTION OF SHARES
Reference is made to "How to Buy, Sell, Transfer and Exchange Shares" in the
Prospectus.
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. 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.
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.
REDEMPTION
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
29
<PAGE>
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 signature(s) on the redemption requests
must be guaranteed by an "eligible guarantor institution" as such is defined
in Rule 17Ad-15 under the Securities Exchange Act of 1934, as amended (the
"Exchange Act"), the existence and validity of which may be verified by the
Transfer Agent through the use of industry publications. Notarized signatures
are not sufficient. In certain instances, the Transfer Agent may require
additional documents such as, but not limited to, trust instruments, death
certificates, appointments as executor or administrator, or certificates of
corporate authority. For shareholders redeeming directly with the Transfer
Agent, payments will be mailed within seven days of receipt of a proper notice
of redemption.
At various times the Fund may be requested to redeem shares for which it has
not yet received good payment (e.g., cash, Federal funds or certified check
drawn on a United States bank). The 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 (e.g., cash, Federal funds or certified check drawn on a United
States bank) has been collected for the purchase of such Fund shares, which
will not exceed 10 days.
REPURCHASE
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 receipt of the order by the dealer, provided that
the request for repurchase is received by the dealer prior to the regular
close of business on the NYSE (generally, 4:00 p.m., Eastern time) on the day
received, 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.
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.
REINSTATEMENT PRIVILEGE -- CLASS A AND CLASS D SHARES
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.
30
<PAGE>
PRICING OF SHARES
DETERMINATION OF NET ASSET VALUE
Reference is made to "How Shares are Priced" in the Prospectus.
The net asset value of the shares of all classes of the Fund is determined
by the Manager once daily Monday through Friday as of 15 minutes after the
close of business on the NYSE on each day the NYSE is open for trading (a
"Pricing Day"). 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. The 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 accrued expenses) by the total number of shares
outstanding at such time, rounded to the nearest cent. Expenses, including the
fees payable to the Manager and Distributor, are accrued daily.
The per share net asset value of Class B, Class C and Class D shares
generally will be lower than the per share net asset value of Class A shares,
reflecting the daily expense accruals of the account maintenance, 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. 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.
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.
31
<PAGE>
COMPUTATION OF OFFERING PRICE PER SHARE
An illustration of the computation of the offering price for Class A, Class
B, Class C and Class D shares of the Fund based on the value of the Fund's net
assets and number of shares outstanding on July 31, 1998 is set forth below.
<TABLE>
<CAPTION>
CLASS A CLASS B CLASS C CLASS D
---------- ----------- ---------- --------
<S> <C> <C> <C> <C>
Net Assets.......................... $3,102,662 $14,965,380 $2,548,733 $806,270
========== =========== ========== ========
Number of Shares Outstanding........ 306,810 1,479,728 251,823 79,733
========== =========== ========== ========
Net Asset Value Per Share (net
assets divided by number of shares
outstanding)....................... $ 10.11 $ 10.11 $ 10.12 $ 10.11
Sales Charge (for Class A and Class
D shares: 4.00% of offering price;
4.17% of net asset value per
share)* ........................... 0.42 ** ** 0.42
---------- ----------- ---------- --------
Offering Price...................... $ 10.53 $ 10.11 $ 10.12 $ 10.53
========== =========== ========== ========
</TABLE>
- ----------
* Rounded to the nearest one-hundredth percent; assumes maximum sales charge
is applicable.
** Class B and Class C shares are not subject to an initial sales charge but
may be subject to a CDSC on redemption of shares. See "Purchase of
Shares -- Merrill Lynch Select Pricing SM System" and "-- Deferred Sales
Charge Alternatives -- Contingent Deferred Sales Charges -- Class B Shares"
and "-- Contingent Deferred Sales Charges -- Class C Shares" herein.
PORTFOLIO TRANSACTIONS
TRANSACTIONS IN PORTFOLIO SECURITIES
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.
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.
32
<PAGE>
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. Information regarding transactions
executed pursuant to the exemptive order is set forth in the following table:
<TABLE>
<CAPTION>
FOR THE FISCAL YEAR NUMBER OF APPROXIMATE AGGREGATE
ENDED JULY 31, TRANSACTIONS MARKET VALUE OF TRANSACTIONS
------------------- ------------- ----------------------------
<S> <C> <C>
1998............................ 3 $2,000,000
1997............................ 0 --
1996............................ 1 $1,000,000
</TABLE>
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.
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.
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.
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.
SHAREHOLDER SERVICES
The Trust offers a number of shareholder services and investment plans
described below that are designed to facilitate investment in shares of the
Fund. Full details as to each of such services, copies of the various plans
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.
33
<PAGE>
INVESTMENT ACCOUNT
Each shareholder whose account is maintained at the Transfer Agent has an
Investment Account and will receive statements, at least quarterly, from the
Transfer Agent. These statements will serve as transaction confirmations for
automatic investment purchases and the reinvestment of ordinary income
dividends and capital gain distributions. 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 ordinary
income dividends and capital gains distributions. 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.
Share certificates are issued only for full shares and only upon the
specific request of a shareholder who has an Investment Account. Issuance of
certificates representing all or only part of the full shares in an Investment
Account may be requested by a shareholder directly from the Transfer Agent.
Shareholders considering transferring their Class A or Class D shares from
Merrill Lynch to another brokerage firm or financial institution should be
aware that, if the firm to which the Class A or Class D shares are to be
transferred will not take delivery of shares of the Fund, a shareholder either
must redeem the Class A or Class D shares (paying any applicable CDSC) so that
the cash proceeds can be transferred to the account at the new firm or
continue to maintain an Investment Account at the Transfer Agent for those
Class A or Class D shares. Shareholders interested in transferring their Class
B or Class C shares from Merrill Lynch who do not wish to have an Investment
Account maintained for such shares at the Transfer Agent may request their new
brokerage firm to maintain such shares in an account registered in the name of
the brokerage firm for the benefit of the shareholder at the Transfer Agent.
If the new brokerage firm is willing to accommodate the shareholder in this
manner, the shareholder must request that he or she be issued certificates for
his or her shares and then must turn the certificates over to the new firm for
re-registration in the new brokerage firm's name.
EXCHANGE PRIVILEGE
U.S. shareholders of each class of shares of the Fund have an exchange
privilege with certain other Select Pricing Funds and Summit Cash Reserves
Fund ("Summit"), a Merrill Lynch sponsored money market mutual fund
specifically designated as available for exchange by holders of Class A, Class
B, Class C and Class D shares of Select Pricing Funds. Shares with a net asset
value of at least $100 are required to qualify for the exchange privilege and
any shares utilized in an exchange must have been held by the shareholder for
at least 15 days. Before effecting an exchange, shareholders should obtain a
currently effective prospectus of the fund into which the exchange is to be
made. Exercise of the exchange privilege is treated as a sale of the exchanged
shares and a purchase of the acquired shares for Federal income tax purposes.
Exchanges of Class A and Class D Shares. Class A shareholders may exchange
Class A shares of the Fund for Class A shares of a second Select Pricing Fund
if the shareholder holds any Class A shares of the second fund in his or her
account in which the exchange is made at the time of the exchange or is
otherwise eligible to purchase Class A shares of the second fund. If the Class
A shareholder wants to exchange Class A shares for shares of a second Select
Pricing Fund, but does not hold Class A shares of the second fund in his or
her account at the time of the exchange and is not otherwise eligible to
acquire Class A shares of the second fund, the shareholder will receive Class
D shares of the second fund as a result of the exchange. Class D shares also
may be exchanged for Class A shares of a second Select Pricing Fund at any
time as long as, at the time of the exchange, the shareholder holds Class A
shares of the second fund in the account in which the exchange is made or is
otherwise eligible to purchase Class A shares of the second fund. Class D
shares are exchangeable with shares of the same class of other Select Pricing
Funds.
Exchanges of Class A or Class D shares outstanding ("outstanding Class A or
Class D shares") for Class A or Class D shares of other Select Pricing Funds
or Class A shares of Summit ("new Class A or Class D shares") are transacted
on the basis of relative net asset value per Class A or Class D share,
respectively, plus an amount
34
<PAGE>
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.
Exchanges of Class B and Class C Shares. Each Select Pricing Fund with Class
B or Class C shares outstanding ("outstanding Class B or Class C shares")
offers to exchange its Class B or Class C shares for Class B or Class C
shares, respectively, of another Select Pricing Fund or for Class B shares of
Summit ("new Class B or Class C shares") on the basis of relative net asset
value per Class B or Class C share, without the payment of any CDSC that might
otherwise be due on redemption of the outstanding shares. Class B shareholders
of the Fund exercising the exchange privilege will continue to be subject to
the Fund's CDSC schedule if such schedule is higher than the CDSC schedule
relating to the new Class B shares acquired through use of the exchange
privilege. In addition, Class B shares of the Fund acquired through use of the
exchange privilege will be subject to the Fund's CDSC schedule if such
schedule is higher than the CDSC schedule relating to the Class B or Class C
shares of the fund from which the exchange has been made. For purposes of
computing the CDSC that may be payable on a disposition of the new Class B or
Class C shares, the holding period for the outstanding Class B or Class C
shares is "tacked" to the holding period of the new Class B or Class C shares.
For example, an investor may exchange Class B or Class C shares of the Fund
for those of Merrill Lynch Special Value Fund, Inc. ("Special Value Fund")
after having held the Fund's Class B shares for two and a half years. The 2%
CDSC that generally would apply to a redemption would not apply to the
exchange. Three years later the investor may decide to redeem the Class B
shares of Special Value Fund and receive cash. There will be no CDSC due on
this redemption, since by "tacking" the two and a half year holding period of
Fund Class B shares to the three-year holding period for the Special Value
Fund Class B shares, the investor will be deemed to have held the Special
Value Fund Class B shares for more than five years.
Exchanges for Shares of a Money Market Fund. Class A and Class D shares will
be exchangeable for Class A shares of Summit and Class B and Class C shares
will be 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. 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.
Exercise of the Exchange Privilege. To exercise the exchange privilege, a
shareholder should contact his or her Merrill Lynch Financial Consultant, who
will advise the Fund of the exchange. Shareholders of the Fund, and
shareholders of the other Select Pricing Funds with shares for which
certificates have not been issued, may exercise the exchange privilege by wire
through their securities dealers. The Fund reserves the right to require a
properly completed Exchange Application. This exchange privilege may be
modified or terminated in accordance with the rules of the Commission. The
Fund reserves the right to limit the number of times an investor may exercise
the exchange privilege. Certain funds may suspend the continuous offering of
their shares to the general public at any time and may thereafter resume such
offering from time to time. The exchange privilege is available only to U.S.
shareholders in states where the exchange legally may be made. It is
contemplated that the exchange privilege may be applicable to other new mutual
funds whose shares may be distributed by the Distributor.
35
<PAGE>
FEE-BASED PROGRAMS
Certain Merrill Lynch fee-based programs, including pricing alternatives for
securities transactions (each referred to in this paragraph as a "Program"),
may permit the purchase of Class A shares at net asset value. Under specified
circumstances, participants in certain Programs may deposit other classes of
shares which will be exchanged for Class A shares. Initial or deferred sales
charges otherwise due in connection with such exchanges may be waived or
modified, as may the Conversion Period applicable to the deposited shares.
Termination of participation in a Program may result in the redemption of
shares held therein or the automatic exchange thereof to another class at net
asset value, which may be shares of a money market fund. In addition, upon
termination of participation in a Program, shares that have been held for less
than specified periods within such Program may be subject to a fee based upon
the current value of such shares. These Programs also generally prohibit such
shares from being transferred to another account at Merrill Lynch, to another
broker-dealer or to the Transfer Agent. Except in limited circumstances (which
may also involve an exchange as described above), such shares must be redeemed
and another class of shares purchased (which may involve the imposition of
initial or deferred sales charges and distribution and account maintenance
fees) in order for the investment not to be subject to Program fees.
Additional information regarding a specific Program (including charges and
limitations on transferability applicable to shares that may be held in such
Program) is available in such Program's client agreement and from the Transfer
Agent at 1-800-MER-FUND or 1-800-637-3863.
AUTOMATED INVESTMENT PLANS
A shareholder may make additions to an Investment Account at any time by
purchasing Class A shares (if he or she is an eligible Class A investor) 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. Alternatively, an investor that maintains a CMA(R) or CBA(R) account
may arrange to have periodic investments, of amounts of $100 or more made in
the Fund through the CMA(R) or CBA(R) Automated Investment Program from his or
her CMA(R) or CBA(R) account or from certain related accounts.
AUTOMATIC DIVIDEND PROGRAM
Unless specific instructions are given as to the method of payment,
dividends and capital gains distributions 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 of
the close of business on the NYSE on the monthly payment date for such
dividends and distributions. No CDSC will be imposed upon redemption of shares
issued as a result of the automatic reinvestment of dividends or capital gains
distributions.
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.
SYSTEMATIC REDEMPTION PROGRAM
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
36
<PAGE>
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.
At the time of each withdrawal payment, sufficient Class A, Class B, Class C
or Class D shares are redeemed from those on deposit in the shareholder's
account to provide the withdrawal payment specified by the shareholder. The
shareholder may specify the dollar amount and the class of shares to be
redeemed. With respect to shareholders who hold accounts directly at the
Transfer Agent, redemptions will be made at net asset value as determined 15
minutes after the close of business on the NYSE (generally, 4:00 p.m., Eastern
time) on the 24th day of each month or the 24th day of the last month of each
quarter, whichever is applicable. With respect to shareholders who hold
accounts with their broker-dealer, redemptions will be made at net asset value
as determined 15 minutes after the close of business on the NYSE on the first,
second, third or fourth Monday of each month or the first, second, third or
fourth Monday of the last month of each quarter, whichever is applicable. If
the NYSE is not open for business on such date, the shares will be redeemed at
the close of business on the following business day. The check for the
withdrawal payment will be made, on the next business day following
redemption. When a shareholder is making systematic withdrawals, dividends and
distributions on all shares in the Investment Account are reinvested
automatically in Fund shares. A shareholder's Systematic Withdrawal Plan may
be terminated at any time, without charge or penalty, by the shareholder, the
Fund, the Transfer Agent or the Distributor.
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 automatically be applied thereafter to Class D
shares. If an investor wishes to change the amount being withdrawn in a
systematic withdrawal plan the investor should contact his or her Financial
Consultant.
Withdrawal payments should not be considered as dividends. 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.
Alternatively, a shareholder whose shares are held within a CMA(R) or CBA(R)
Account may elect to have shares redeemed on a monthly, bimonthly, quarterly,
semiannual or annual basis through the CMA(R) or CBA(R) Systematic Redemption
Program. The minimum fixed dollar amount redeemable is $50. The proceeds of
systematic redemptions will be posted to the shareholder's account three
business days after the date the shares are redeemed. All redemptions are made
at net asset value. A shareholder may elect to have his or her shares redeemed
on the first, second, third or fourth Monday of each month, in the case of
monthly redemptions, or of every other month, in the case of bimonthly
redemptions. For quarterly, semiannual or annual redemptions, the shareholder
may select the month in which the shares are to be redeemed and may designate
whether the redemption is to be made on the first, second, third or fourth
Monday of the month. If the Monday selected is not a business day, the
redemption will be processed at net asset value on the next business day. The
CMA(R) or CBA(R) Systematic Redemption Program is not available if Fund shares
are being purchased within the account pursuant to the Automated Investment
Program. For more information on the CMA(R) or CBA(R) Systematic Redemption
Program, eligible shareholders should contact their Financial Consultant.
37
<PAGE>
DISTRIBUTIONS AND TAXES
DIVIDENDS AND DISTRIBUTIONS
The net investment income of the Fund is declared as dividends daily prior
to the determination of the net asset value which is calculated 15 minutes
after the close of business on the NYSE (generally, the NYSE closes at 4:00
p.m., Eastern time) on that day. The net investment income of the Fund for
dividend purposes consists of interest earned on portfolio securities, less
expenses, in each case computed since the most recent determination of net
asset value. Expenses of the Fund, including the management fees and the
account maintenance and distribution fees, are accrued daily. Dividends of net
investment income are declared daily and reinvested monthly in the form of
additional full and fractional shares of the Fund at net asset value as of the
close of business on the "payment date" unless the shareholder elects to
receive such dividends in cash. Shares will accrue dividends as long as they
are issued and outstanding. Shares are issued and outstanding from the
settlement date of a purchase order to the day prior to settlement date of a
redemption order.
All net realized capital gains, if any, are declared and distributed to the
Fund's shareholders at least annually. Capital gains distributions will be
reinvested automatically in shares of the Fund unless the shareholder elects
to receive such distributions in cash.
The per share dividends and distributions on each class of shares will be
reduced as a result of any account maintenance, distribution and transfer
agency fees applicable to that class. See "Pricing of Shares--Determination of
Net Asset Value."
See "Shareholder Services" for information as to how to elect either
dividend reinvestment or cash payments. Portions of dividends and
distributions which are taxable to shareholders as described below are subject
to income tax whether they are reinvested in shares of the Fund or received in
cash.
TAXES
The Trust intends to continue to qualify the Fund for the special tax
treatment afforded regulated investment companies ("RICs") under the Code. As
long as it so qualifies, the Fund (but not its shareholders) will not be
subject to Federal income tax to the extent that it distributes its net
investment income and net realized capital gains. The Trust intends to cause
the Fund to distribute substantially all of such income.
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.
The Code requires a RIC to pay a nondeductible 4% excise tax to the extent
the RIC does not distribute, during each calendar year, 98% of its ordinary
income, determined on a calendar year basis, and 98% of its capital gains,
determined, in general, on an October 31 year end, plus certain undistributed
amounts from previous years. The required distributions, however, are based
only on the taxable income of a RIC. The excise tax, therefore, generally will
not apply to the tax-exempt income of a RIC, such as the Fund, that pays
exempt-interest dividends.
The Trust intends to qualify the Fund to pay "exempt-interest dividends" as
defined in Section 852(b)(5) of the Code. Under such section if, at the close
of each quarter of the Fund's taxable year, at least 50% of the value of the
Fund's total assets consists of obligations exempt from Federal income tax
("tax-exempt obligations") under Section 103(a) of the Code (relating
generally to obligations of a state or local governmental unit), the Fund
shall be qualified to pay exempt-interest dividends to its Class A, Class B,
Class C and Class D shareholders (together the "shareholders"). Exempt-
interest dividends are dividends or any part thereof paid by the Fund that are
attributable to interest on tax-exempt obligations and designated by the Trust
as exempt-interest dividends in a written notice mailed to the Fund's
shareholders within 60 days after the close of the Fund's taxable year. The
Fund will allocate interest from tax-exempt obligations (as well as ordinary
income, capital gains, including new
38
<PAGE>
categories of capital gains and tax preference items discussed below) among
the Class A, Class B, Class C and Class D shareholders according to a method
(which it believes is consistent with the Commission rule permitting the
issuance and sale of multiple classes of shares) that is based 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.
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 Oregon
personal 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.
The portion of the Fund's exempt-interest dividends paid from interest
received by the Fund from Oregon Municipal Bonds also will be exempt from
Oregon personal income taxes. Shareholders subject to income taxation by
states other than Oregon will realize a lower after-tax rate of return than
Oregon 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 Oregon personal income taxes. The Trust will
allocate exempt-interest dividends among Class A, Class B, Class C and Class D
shareholders for Oregon personal income tax purposes based on a method similar
to that described above for Federal income tax purposes.
Shares of the Fund will not be subject to the Oregon personal property tax.
Holders should consult their own tax advisors regarding collateral Oregon
income tax consequences relating to the ownership of shares of the Fund,
including, but not limited to, the inclusion of tax-exempt income attributable
to ownership of shares in "adjusted gross income," as that term is used in the
Oregon income tax statutes, as amended, for purposes of determining
eligibility for and the amount of various Oregon credits and rebates.
Distributions from investment income and capital gains, including exempt-
interest dividends, will be subject to Oregon corporate excise tax and
corporate income tax and may also be subject to state taxes in states other
than Oregon and may be subject to local taxes in other states. Accordingly,
investors in the Fund, in particular, corporate investors which may be subject
to Oregon corporate excise and income tax, should consult their tax advisors
with respect to the application of such taxes to an investment in the Fund, to
the receipt of Fund dividends and as to their Oregon tax situation in general.
To the extent the Fund's distributions are derived from interest on its
taxable investments or from an excess of net short-term capital gains over net
long-term capital losses ("ordinary income dividends"), such distributions are
considered ordinary income for Federal income tax purposes and Oregon personal
income tax purposes. 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, and for Oregon personal income tax purposes, are treated as capital
gains which are taxed at ordinary income tax rates. Recent federal legislation
created additional categories of capital gains taxable at different rates.
Additional legislation eliminates the highest 28% category for most sales of
capital assets occurring after December 31, 1997. Generally not later than 60
days after the close of its taxable year, the Fund will provide its
shareholders with a written notice designating the amounts of any exempt-
interest dividends, ordinary income dividends or capital gain dividends, as
well as the amount of capital gain dividends in the different categories of
capital gain referred to above. Distributions by the Fund, whether from
exempt-interest income, ordinary income or capital gains, will not be eligible
for the dividends received deduction allowed to corporations under the Code.
39
<PAGE>
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.
The Code subjects interest received on certain otherwise tax-exempt
securities to an alternative minimum tax. The alternative minimum tax applies
to interest received on certain "private activity bonds" issued after August
7, 1986. Private activity bonds are bonds which, although tax-exempt, are used
for purposes other than those generally performed by governmental units and
which benefit non-governmental entities (e.g., bonds used for industrial
development or housing purposes). Income received on such bonds is classified
as an item of "tax preference," which could subject certain investors in such
bonds, including shareholders of the Fund, to an alternative minimum tax. The
Fund will purchase such "private activity bonds," and the Trust will report to
shareholders within 60 days after the Fund's taxable year-end the portion of
the Fund's dividends declared during the year which constitute an item of tax
preference for alternative minimum tax purposes. The Code further provides
that corporations are subject to an alternative minimum tax based, in part, on
certain differences between taxable income as adjusted for other tax
preferences and the corporation's "adjusted current earnings," which more
closely reflect a corporation's economic income. Because an exempt-interest
dividend paid by the Fund will be included in adjusted current earnings, a
corporate shareholder may be required to pay alternative minimum tax on
exempt-interest dividends paid by the Fund.
The 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.
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.
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.
A loss realized on a sale or exchange of shares of the Fund will be
disallowed if other Fund shares are acquired (whether through the automatic
reinvestment of dividends or otherwise) within a 61-day period beginning 30
days before and ending 30 days after the date that the shares are disposed of.
In such a case, the basis of the shares acquired will be adjusted to reflect
the disallowed loss.
Ordinary income dividends paid to shareholders 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
40
<PAGE>
law. Nonresident shareholders are urged to consult their own tax advisors
concerning the applicability of the United States withholding tax.
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 or perjury that such number is
correct and that such shareholder is not otherwise subject to backup
withholding.
The Code provides that every person required to file a tax return must
include for information purposes on such return the amount of exempt-interest
dividends received from all sources (including the Fund) during the taxable
year.
TAX TREATMENT OF OPTIONS AND FUTURES TRANSACTIONS
The Fund may purchase 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.e., each such
option or financial futures contract will be treated as sold for its fair
market value on the last day of the taxable year, and any gain or loss
attributable to Section 1256 contracts will be 60% long-term and 40% short-
term capital gain or loss. Application of these rules to Section 1256
contracts held by the Fund may alter the timing and character of distributions
to shareholders. The mark-to market rules outlined above, however, will not
apply to certain transactions entered into by the Fund solely to reduce the
risk of changes in price or interest rates with respect to its investments.
Code Section 1092, which applies to certain "straddles," may affect the
taxation of the Fund's sales of securities and transactions in financial
futures contacts and related options. Under Section 1092, the Fund may be
required to postpone recognition for tax purposes of losses incurred in
certain sales of securities and certain closing transactions in financial
futures contracts or the related options.
The foregoing is a general and abbreviated summary of the applicable
provisions of the Code, Treasury regulations and Oregon tax laws presently in
effect. For the complete provisions, reference should be made to the pertinent
Code sections, the Treasury regulations promulgated thereunder and Oregon tax
laws. The Code and the Treasury regulations, as well as the Oregon tax laws,
are subject to change by legislative, judicial or administrative action either
prospectively or retroactively.
Shareholders are urged to consult their tax advisers regarding the
availability of any exemptions from state or local taxes and with specific
questions as to Federal, foreign, state or local taxes.
PERFORMANCE DATA
From time to time the Fund may include its average annual total return and
other total return data, as well as yield and tax-equivalent yield, in
advertisements or information furnished to present or prospective
shareholders. Total return, yield and tax-equivalent yield figures are based
on the Fund's historical performance and are not intended to indicate future
performance. Average annual total return, yield and tax-equivalent yield are
determined separately for Class A, Class B, Class C and Class D shares in
accordance with formulas specified by the Commission.
Average annual total return quotations for the specified periods are
computed by finding the average annual compounded rates of return (based on
net investment income and any realized and unrealized capital gains or losses
on portfolio investments over such periods) that would equate the initial
amount invested to the redeemable value of such investment at the end of each
period. Average annual total return is computed assuming all dividends and
distributions are reinvested and taking into account all applicable recurring
and nonrecurring expenses,
41
<PAGE>
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.
Yield quotations will be computed based on a 30-day period by dividing (a)
the net income based on the yield of each security earned during the period by
(b) the average daily number of shares outstanding during the period that were
entitled to receive dividends multiplied by the maximum offering price per
share on the last day of the period. Tax equivalent yield quotations will be
computed by dividing (a) the part of the Fund's yield that is tax-exempt by
(b) one minus a stated tax rate and (c) adding the result to that part, if
any, of the Fund's yield that is not tax-exempt.
The Fund also may quote annual, average annual and annualized total return
and aggregate total return performance data, both as a percentage and as a
dollar amount based on a hypothetical $1,000 investment, for various periods
other than those noted below. Such data will be computed as described above,
except that (1) as required by the periods of the quotations, actual annual,
annualized or aggregate data, rather than average annual data, may be quoted
and (2) the maximum applicable sales charges will not be included with respect
to annual or annualized rates of return calculations. Aside from the impact on
the performance data calculations of including or excluding the maximum
applicable sales charges, actual annual or annualized total return data
generally will be lower than average annual total return data since the
average rates of return reflect compounding of return; aggregate total return
data generally will be higher than average annual total return data since the
aggregate rates of return reflect compounding over a longer period of time.
Set forth below is 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.
<TABLE>
<CAPTION>
CLASS A SHARES CLASS B SHARES
----------------------------------- -----------------------------------
EXPRESSED AS REDEEMABLE VALUE EXPRESSED AS REDEEMABLE VALUE
A PERCENTAGE OF A HYPOTHETICAL A PERCENTAGE OF A HYPOTHETICAL
BASED ON A $1,000 INVESTMENT BASED ON A $1,000 INVESTMENT
HYPOTHETICAL AT THE END OF HYPOTHETICAL AT THE END OF
PERIOD $1,000 INVESTMENT THE PERIOD $1,000 INVESTMENT THE PERIOD
- ------ ----------------- ----------------- ----------------- -----------------
AVERAGE ANNUAL TOTAL RETURN
(INCLUDING MAXIMUM APPLICABLE SALES CHARGE)
<S> <C> <C> <C> <C>
One year ended July 31,
1998................... 1.69% $1,016.90 1.39% $1,013.90
Inception (May 6, 1994)
to
July 31, 1998.......... 4.57% $1,246.40 4.91% $1,266.20
<CAPTION>
ANNUAL TOTAL RETURN
(EXCLUDING MAXIMUM APPLICABLE SALES CHARGE)
<S> <C> <C> <C> <C>
Year ended July 31,
1998................... 5.93% $1,059.30 5.39% $1,053.90
Year ended July 31,
1997................... 10.27% $1,102.70 9.72% $1,099.20
Year ended July 31,
1996................... 6.52% $1,065.20 5.97% $1,059.70
Year ended July 31,
1995................... 5.54% $1,055.40 5.00% $1,050.00
Inception (May 6, 1994)
to
July 31, 1994.......... (1.13)% $ 988.70 (1.59)% $ 984.10
<CAPTION>
AGGREGATE TOTAL RETURN
(INCLUDING MAXIMUM APPLICABLE SALES CHARGE)
<S> <C> <C> <C> <C>
Inception (May 6, 1994)
to
July 31, 1998.......... 24.64% $1,246.40 26.62% $1,266.20
<CAPTION>
YIELD
<S> <C> <C> <C> <C>
30 days ended July 31,
1998................... 3.75% -- 3.40% --
<CAPTION>
TAX EQUIVALENT YIELD*
<S> <C> <C> <C> <C>
30 days ended July 31,
1998................... 5.21% -- 4.72% --
</TABLE>
- ----------
*Based on a Federal income tax rate of 28%.
42
<PAGE>
<TABLE>
<CAPTION>
CLASS C SHARES CLASS D SHARES
----------------------------------- -----------------------------------
EXPRESSED AS REDEEMABLE VALUE EXPRESSED AS REDEEMABLE VALUE
A PERCENTAGE OF A HYPOTHETICAL A PERCENTAGE OF A HYPOTHETICAL
BASED ON A $1,000 INVESTMENT BASED ON A $1,000 INVESTMENT
HYPOTHETICAL AT THE END OF HYPOTHETICAL AT THE END OF
PERIOD $1,000 INVESTMENT THE PERIOD $1,000 INVESTMENT THE PERIOD
- ------ ----------------- ----------------- ----------------- -----------------
AVERAGE ANNUAL TOTAL RETURN
(INCLUDING MAXIMUM APPLICABLE SALES CHARGE)
<S> <C> <C> <C> <C>
One year ended July 31,
1998................... 4.39% $1,043.90 1.59% $1,015.90
Inception (October 21,
1994) to
July 31, 1998.......... 7.70% $1,323.10 7.07% $1,294.10
<CAPTION>
ANNUAL TOTAL RETURN
(EXCLUDING MAXIMUM APPLICABLE SALES CHARGE)
<S> <C> <C> <C> <C>
Year ended July 31,
1998................... 5.39% $1,053.90 5.82% $1,058.20
Year ended July 31,
1997................... 9.50% $1,095.00 10.17% $1,101.70
Year ended July 31,
1996................... 5.97% $1,059.70 6.52% $1,065.20
Inception (October 21,
1994) to
July 31, 1995.......... 8.19% $1,081.90 8.55% $1,085.50
<CAPTION>
AGGREGATE TOTAL RETURN
(INCLUDING MAXIMUM APPLICABLE SALES CHARGE)
<S> <C> <C> <C> <C>
Inception (October 21,
1994) to
July 31, 1998.......... 32.31% $1,323.10 29.41% $1,294.10
<CAPTION>
YIELD
<S> <C> <C> <C> <C>
30 days ended July 31,
1998................... 3.30% -- 3.65% --
<CAPTION>
TAX EQUIVALENT YIELD*
<S> <C> <C> <C> <C>
30 days ended July 31,
1998................... 4.58% -- 5.07% --
</TABLE>
- ----------
*Based on a Federal income tax rate of 28%.
In order to reflect the reduced sales charges in the case of Class A or
Class D shares, or the waiver of the CDSC in the case of Class B or Class C
shares applicable to certain investors, as described under "Purchase of
Shares" 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.
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.
GENERAL INFORMATION
DESCRIPTION OF SHARES
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 as
discussed in "Distributions and Taxes -- Taxes," each of which is a separate
portfolio offering shares to selected groups of purchasers. Each of the Series
is managed independently in order to provide to shareholders who are residents
of the state to which such Series relates as high a level of income exempt
from Federal, and in certain cases state and local, income taxes as is
consistent with prudent investment management. The Trustees are authorized to
create an unlimited number of Series and, with respect to each Series, to
issue an unlimited number of full and fractional shares of beneficial
interest, $.10 par value per share, of different classes and to divide or
combine the shares into a
43
<PAGE>
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 North Carolina Municipal Bond Fund, Merrill Lynch
Ohio 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.
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.
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 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.
The obligations and liabilities of a particular Series are restricted to the
assets of that Series and do not extend to the assets of the Trust generally.
The shares of each Series, when issued, will be fully paid and nonassessable,
have no preference, preemptive, conversion, exchange or similar rights and
will be freely transferable. Holders of shares of any Series are entitled to
redeem their shares as set forth elsewhere herein and in the Prospectus.
Shares do not have cumulative voting rights and the holders of more than 50%
of the shares of the Trust voting for the election of Trustees can elect all
of the Trustees if they choose to do so and in such event the holders of the
remaining shares would not be able to elect any Trustees. No amendments may be
made to the Declaration of Trust, other than amendments necessary to conform
the Declaration to certain laws or regulations, to change the name of the
Trust, or to make certain non-material changes, without the affirmative vote
of a majority of the outstanding shares of the Trust, or of the affected
Series or class, as applicable.
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.
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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.
INDEPENDENT AUDITORS
Deloitte & Touche LLP, 117 Campus Drive, Princeton, New Jersey 08540-6400,
has been selected as the independent auditors of the Trust. The selection of
independent auditors is subject to approval by the non-interested Trustees of
the Trust. The independent auditors are responsible for auditing the annual
financial statements of the Fund.
CUSTODIAN
State Street Bank and Trust Company, P. O. Box 351, Boston, Massachusetts
02101, acts as the Custodian of the Fund's assets. The Custodian is
responsible for safeguarding and controlling the Fund's cash and securities,
handling the receipt and delivery of securities and collecting interest on the
Fund's investments.
TRANSFER AGENT
Financial Data Services, Inc., 4800 Deer Lake Drive East, Jacksonville,
Florida 32246-6484, acts as the Trust's Transfer Agent. The Transfer Agent is
responsible for the issuance, transfer and redemption of shares and the
opening, maintenance and servicing of shareholder accounts. See "How to Buy,
Sell, Transfer and Exchange Shares -- Through the Transfer Agent" in the
Prospectus.
LEGAL COUNSEL
Brown & Wood LLP, One World Trade Center, New York, New York 10048-0557, is
counsel for the Trust.
REPORTS TO SHAREHOLDERS
The fiscal year of the Fund ends on July 31 of each year. The Trust sends to
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.
SHAREHOLDER INQUIRIES
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.
ADDITIONAL INFORMATION
The Prospectus and this Statement of Additional Information do not contain
all the information set forth in the Registration Statement and the exhibits
relating thereto, which the Trust has filed with the Securities and Exchange
Commission, Washington, D.C., under the Securities Act and the Investment
Company Act, to which reference is hereby made.
To the knowledge of the Trust, no person or entity owned beneficially 5% or
more of the Fund's shares as of November , 1998.
FINANCIAL STATEMENTS
The Fund's audited financial statements are included in its 1998 annual
report to shareholders, which is incorporated by reference in this Statement
of Additional Information. 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.
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APPENDIX I
ECONOMIC CONDITIONS IN OREGON
The information set forth below is derived from the official statements
prepared in connection with the issuance of the State of Oregon municipal
bonds. The information was prepared as of September 1, 1998, and obtained from
the June 1, 1998 quarterly Oregon Economic and Revenue Forecasts which is
prepared by the Oregon Department of Administrative Services. The information
is provided as general information and intended to indicate future or
continuing trends in the financial or economic conditions of the State of
Oregon (the "State"). The Fund has not independently verified this
information.
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.
RECENT TRENDS
Oregon's economy has outperformed the nation's economy in recent years,
although evidence now points to a slowing of Oregon's economy. Weakness in
Asia is slowing the demand for Oregon products, but the outlook is still for
employment and income growth exceeding that of the nation. In every year since
1987, Oregon's employment growth rate has outstripped the nation's. Between
1987 and 1997, Oregon employment increased by 38.7 percent while U.S.
employment grew by 19.8 percent. From 1990 to 1991, total employment remained
relatively flat and the unemployment rate increased in Oregon. In 1992
employment resumed its upward trend.
As the economy has grown, it has diversified. Oregon's economy has become
less dependent on the forest products industry while expanding into high
technology industries. By 1996, 12,800 fewer Oregonians worked in lumber and
products manufacturing than had in 1990. Over the same period, employment in
the high technology sectors of electrical and non-electrical machinery
increased by over 23,000 jobs. Oregon's other basic industries, agriculture
and tourism, continue to provide strong, diversified support for the State's
economy.
Most of the recent job gains in Oregon have come from nonmanufacturing
sectors. Since 1986, high technology jobs now out number timber jobs. In each
of 1995 and 1996, high technology jobs grew by over 10%.
Factors that have fueled growth in the Oregon economy in the 1990s include
low cost, abundant natural resources and a high quality of life that attracted
both people and firms to Oregon. Numerous semiconductor firms have located in
Oregon creating high paying construction and high technology jobs. The service
sector has grown rapidly to meet the demands of the increased population and
industries. The demand for housing fueled a high level of home construction
and pushed up housing prices in Oregon. Growth in exports, especially to Asia
opened new markets to Oregon products.
Many of the same factors that fueled the rapid growth in the state in the
early 1990s are also contributing to slowing its growth rate in the late
1990s. Tight labor markets are pushing up wages. This increases the cost of
doing business. Since 1989 housing prices increased three times faster than
the nation. Housing prices in Portland are now rapidly approaching those in
many high cost metropolitan areas. More people increase congestion and place
higher demands on infrastructure. California and Washington's economies are
growing rapidly, which is slowing the population flow into the state. Weakness
in Asia is slowing demand for Oregon products. While these factors are slowing
the rate of growth, the outlook is still for employment and income growth
exceeding that of the nation. The long-term outlook is for an acceleration of
growth starting in 2002 as long-term investment plans in the semiconductor
industry are carried out and Asian economies recover.
ECONOMIC HISTORY
Oregon's economy grew moderately in the two decades immediately following
World War II. From 1950 to 1970, nonagricultural employment growth averaged
2.7% per year. In the 1970's however, Oregon experienced
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rapid growth as population increased and economic diversification continued.
Oregon's growth significantly outpaced the national average; from 1975 to
1980, nonagricultural employment rose 25% in Oregon versus 17% nationwide.
In 1979, soaring inflation led to dramatically higher interest rates which
severely hurt credit-sensitive industries such as construction and lumber and
wood products. As the nation plunged into the worst recession since the
1930's, Oregon's housing dependent economy was especially hard hit. Between
1979 and 1982, wage and salary employment in Oregon plummeted by 9 percent to
960,800, a loss of 95,400 jobs. Goods-producing jobs (i.e., manufacturing,
construction and mining) declined by 67,500 (24%) while service-producing jobs
fell by only 27,900 (4%).
The early 1980's recession hit Oregon hard. Between 1979 and 1982,
nonagricultural employment fell by 9 percent with over half of the losses from
the construction/wood products industry. However, this was the only post-war
recession in which Oregon experienced greater declines than the rest of the
United States. In the 1991 recession, Oregon's employment growth paused and no
jobs overall were lost, while for the nation as a whole employment dropped 1.1
percent.
The expansion beginning in 1980, though the longest ever during peacetime,
differed during previous recovery periods. During the 1982-90 period,
manufacturing employment increased by 34,600 jobs but was still about 8,000
below its 1979 pre-recession peak of 228,500. This partial rate of recovery
largely reflects increased competition, both domestic and foreign, automation,
and much higher labor productivity. In the first half of the 1980's, the
rising foreign exchange value of the dollar made U.S. exported goods more
expensive overseas, while foreign imports became cheaper to U.S. consumers.
Although the dollar's exchange value fell between 1985 and 1988, imports have
captured a greater share of U.S. markets. Manufacturing firms in Oregon and
the nation have responded by reducing their costs, restructuring their
operations and automating production processes wherever possible. In many
cases, these efficiencies have resulted in fewer jobs even though production
volumes recovered and reached new highs.
About 93% of the 350,000 new wage and salary jobs added in the 1982-93
period came in the nonmanufacturing sectors. Although virtually every
nonmanufacturing industrial category except mining, railroad transportation
and communications increased employment, service and trade industries
accounted for over 70% of all new nonmanufacturing jobs during the 1982-93
period. Between 1988 and 1997, total nonagricultural wage and salary
employment in Oregon rose from 1,156,000 to 1,524,900, an increase of nearly
32 percent.
POPULATION
The Portland State University Population Research Center estimated Oregon's
population at 3,181,000 on July 1, 1996. Since 1960, the State's population
has increased by almost 80%. Compared to the 1980 federal census, Oregon's
population in 1990, as of the official Census Bureau date of April 1,
increased approximately 7.7 percent.
There are four major urban population areas in Oregon. The City of Portland,
located at the north end of the Willamette Valley in Multnomah County, is the
largest city in Oregon with a population estimated at 508,500 as of July 1,
1997. The Oregon portion of the Vancouver Primary Metropolitan Statistical
Area ("PMSA"), which is comprised of Clackamas, Columbia, Multnomah,
Washington, and Yamhill counties in Oregon (but not Clark County in
Washington), had a population of 1,462,400 at that time.
The second largest urban area is the Eugene metropolitan area located in
Lane County at the southern end of the Willamette Valley. As of July 1, 1997,
Eugene's population was estimated at 129,300. As of the same date, the Eugene-
Springfield metropolitan statistical area had a population estimated at
308,500. Salem, the state capital, located in Marion and Polk counties and in
the middle of the Willamette Valley, is the state's third largest city with a
population estimated at 124,190 on July 1, 1997. The Salem metropolitan
statistical area (Marion and Polk counties) on the same date had a population
estimated at 325,100. Due to the rapid increase in population, the Census
Bureau has declared Marion/Polk counties to be the 2nd PMSA in Oregon. Both
PMSAs are combined to form the Portland-Salem Consolidated Metropolitan
Statistical Area (CMSA), totaling 1,787,500. The population
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of the State's fourth metropolitan statistical area, Jackson County, was
169,300 as of July 1, 1997 and Jackson County's largest city, Medford, was
57,610 as of the same date.
As can be seen from this distribution, most Oregon residents (approximately
70%) live in the Willamette Valley.
PERSONAL INCOME
The increase in per capita income in Oregon for 1988 through 1997 at 62
percent compares favorably with the 66 percent increase for the United States.
Per capita income as a percentage of the national average has risen from 90
percent in 1988 to over 96 percent in 1997.
FOREST PRODUCTS, SERVICE, HIGH-TECH, AGRICULTURAL, HOUSING, INTERNATIONAL, AND
TOURISM
A number of small, timber dependent communities throughout the State have
been particularly adversely affected by the recent reductions in timber and
forest products employment. Local economies in Oregon vary substantially
responding to different factors. Statistical data on economic activity in the
State as a whole may mask significant differences in local economies.
A significant risk to the state economy is a sudden reversal in the
construction sector. Construction activity is closely tied to the rate of
population growth. If the rate of in-migration drops off suddenly,
construction employment could begin falling quickly.
In 1993, one quarter of the State's total manufacturing employment was in
the lumber and wood industry. However, lumber and wood products, once Oregon's
manufacturing mainstay, have experienced massive and probably permanent
reductions in employment, with jobs declining from about 68,800 to about
54,700 during the period from 1988 to 1992. During this same time, employment
in high-technology has been increasing. By 1996, approximately 12,800 fewer
Oregonians worked in lumber and products manufacturing than had in 1990. Over
the same period, employment in the high technology sectors of electrical and
non-electrical machinery increased by over 17,000 jobs.
Service producing sectors now make up a larger portion of the economy than
goods producing sectors. In 1996, the top payroll contributing industry in
Oregon (at the 4 digit SIC code level) was semiconductors. It contributed over
$1.1 billion in payroll to the economy. However, medical service industries
are the second and third largest industries in terms of payroll. Combined,
they added over $2.1 billion in payroll to the Oregon economy. Help supply
services is now the sixth largest industry in Oregon. It grew over 1,100
percent in terms of payroll in the last 16 years. This is very different from
the 1980s when timber related sectors dominated the payroll rankings.
Numerous semiconductor firms have located in Oregon, creating high paying
construction and high technology jobs, although deteriorating Asian markets
will slow this sector's growth. This sector is in the process of consolidating
gains brought about by rapid growth over the past four years. High tech job
growth averaged 10.1 percent from 1994 to 1996. It slowed to 6.7 percent in
1997. High tech employment is forecast to increase 3.1 percent in 1998 before
bottoming out at 1.7 percent growth in 1999. The forecast is for a slowdown in
high tech sector job growth, not a decline. The development of a national
recession would almost certainly bring outright job reductions to this sector.
Oregon also has a highly diversified agricultural base, with gross farm
sales of over $3.3 billion in 1997. Oregon's agricultural base reported 88
commodities with sales of $1 million or more in 1997. Forty-one commodities
had gross sales of $10 million or more. The top ten cash commodities for 1996
were: cattle and calves, $395 million; farm forest products, $332 million;
nursery crops, $323 million; wheat, $227 million; dairy, $207 million;
potatoes, $135 million; perennial ryegrass seed, $129 million; alfalfa hay,
$104 million; Christmas trees, $97 million; and greenhouse crops, $90 million.
Oregon's residential housing starts have outperformed the rest of the nation
over the past ten years. National housing starts declined by 7 percent from
1988 to 1989, total units permitted in Oregon increased from 13,968 in
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1988 to 22,724 in 1989, a 63 percent increase. This percentage increase was
higher than for any other state. From 1989 to 1990, national housing starts
declined another 12.8 percent, while Oregon's permits declined by less than
one percent. In line with the rest of the nation, 1991 building permits
declined, although most of this change was in the more volatile multi-family
dwellings sector. The strong in-migration into Oregon plus low vacancy rates
in many parts of the State helped to stabilize Oregon's residential
construction levels. In contrast to the nation as a whole, Oregon residential
building permit activity has remained strong over the past three years.
International trade and exports are an important part of Oregon's economy,
with much trade occurring in Oregon's 23 port districts. The Port of Portland
is most active, having developed an efficient system for dealing with a large
number of vessels, including modern grain elevators, cranes, brake-bulk and
containerized-cargo facilities, and ship repair and dry-dock facilities.
The value of foreign exports through the Oregon Columbia-Snake River Customs
District, which includes the Port of Portland, exceeded $10 billion for 1995
and 1996, before falling below $9 billion in 1997. This District ranked 17th
in exports for all customs districts nationally. This Port also enjoys the
reputation as the fourth largest district for exports of water borne cargo.
1993 recorded over 28 billion kilograms in vessel weight. The chief export
items include food (primarily cereals, fruits, vegetables and nuts), and live
animals and high technology products totaling over $5.9 billion in 1996. The
principal import through the Port of Portland continues to be vehicles, far
surpassing all other imports, and totaling $3 billion for 1996. Although there
was a trade deficit during 1997, there have been trade surpluses in exports
from the District from each year from 1989 through 1996. However, District
data do not necessarily represent Oregon products for exports or have Oregon
for a final destination for imports.
Tourism is a rapidly growing segment of the Oregon economy. The State has
major mountain ranges, vast coastal and desert regions, and multi-use and
wilderness and forest areas. There are more than 400 miles of seacoast, 47,000
miles of streams, 1,400 lakes and reservoirs, 225 state parks and a national
park in Oregon. In 1997, it is estimated that there were 11 million out-of-
state visitors to Oregon and 17 million in-state visits by Oregon residents.
As Oregon's economy continues to diversify, tourism plays a vital role in
creating new job opportunities and strengthening local and regional economies.
In 1997, an estimated $4.7 billion was generated in Oregon by visitor
expenditures. This represents a 42 percent increase since 1991. Such
significant growth in Oregon's visitor industry confirms that tourism is an
important component of the state's economy. While Oregon's visitor industry
contributed an average of $12.8 million a day to the State's economy, fewer
visitors came to Oregon in 1997. Travelers logged 28.5 million visits last
year, up 2.9 percent from 27.7 million visits in 1996.
Oregon's visitor industry provides important entry-level jobs as well as
increasing opportunities in managerial and professional positions. It also
provides important transferable skills and employment for women and minorities
entering the job market. Interestingly, tourism employment has growth at a
slower rate than payroll and travel spending, which in part reflects rising
average wage rates in the industry. As the Oregon visitor industry matures, so
do the quantity and quality of jobs.
The overall economic impact of tourism is difficult to determine, as this
industry consists of segments of many other business sectors. Eating and
drinking establishments receive the largest portion of travel-generated
expenditures; retail sales and accommodations follow closely; and business
related to automobiles and transportation receive the next largest portion.
TAX RELIEF MEASURES
In 1990, Oregon voters approved a constitutional amendment to the Oregon
Constitution (commonly known as Measure 5) that imposed certain limits on
property tax rates. The 1997 Legislative Assembly referred to Oregon voters,
and on May 20, 1997, the voters approved at a special election, a
constitutional amendment (Measure 50) that replaced the property tax
limitations imposed by a former constitutional amendment (Measure 47). Measure
50 repealed Measure 47 and replaced it with new ad valorem property tax
limitations similar to those enacted under Measure 47. Measure 50 supplements
but does not repeal Measure 5. Measure 50 reduces the total ad
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valorem property taxes collected in the state by approximately 17 percent,
compared to the taxes which would have been levied for operating purposes in
fiscal year 1997-1998 if neither Measure 47 nor Measure 50 had been enacted
(which amounts vary by government entity) and limits a property's assessed
value for the tax year 1997-98 to its 1995-96 "real market value," less ten
percent. Thereafter, Measure 50 limits the valuation growth of property
assessments on each unit of property to three percent per year for future tax
years. Measure 50 also requires voter approval of the use of fees, taxes,
assessments or other charges as alternative funding sources to make up for
revenue reductions caused by the amended property tax limits. This approval is
not subject to the new, special voter participation requirements of Measure 50
(see "Special Voting Requirements" below). It is possible the Oregon courts
will be required to interpret Measure 50 and its implementing legislation.
Therefore, the true impact of Measure 50 is not yet known.
Each local taxing district which imposes operating ad valorem taxes in
fiscal year 1997-98 will receive a permanent tax rate. The permanent tax rate
will be calculated by dividing the total operating ad valorem taxes imposed by
a local taxing district in fiscal year 1997-98 (reduced by 17% pursuant to
Measure 50) by the assessed value of that property. Measure 50 prohibits
increases in permanent tax rates. Permanent tax rates are also subject to
Article 11, Section 11b of the Oregon Constitution's $5/$1,000 and $10/$1,000
limits. However, Measure 50 allows voters to approve local option levies. A
local option levy is a levy for up to five years for any purpose, or up to ten
years for capital construction or capital improvement purposes. Local option
levies may only be approved at an election that meets the new, special voter
participation requirements of Measure 50 (see "Special Voting Requirements"
below).
Measure 50 does not limit taxes for previously issued general obligation
bonds and some other obligations which were issued before November 6, 1996 and
were secured by property taxes. Measure 50 requires general obligation bonds
which are submitted to the voters after December 4, 1996, to be approved at an
election that meets the new, special voter participation requirements of
Measure 50 (see "Special Voting Requirements" below). General obligation bond
proceeds may only be spent for costs of "capital construction or capital
improvements." The definition of these terms were narrowed by Measure 50. The
limitations of Measure 50 also do not apply to certain pension levies.
Units of local government that levy and collect property taxes are most
directly affected by Measure 50. The State does not levy or collect property
taxes, but relies instead on state income taxes as the main source of revenue
for the State's general fund. Therefore, Measure 50's main impact on the State
will likely be to increase pressure on the Legislative Assembly to use State
funds to replace revenues lost by local governments. Measure 50 requires the
Legislative Assembly to replace the estimated $428 million in revenues that
the public school system, including community colleges, would lose in the
1997-99 biennium because of the property tax limitation. In this manner,
Measure 50 may influence the State budgeting process. The Oregon Legislative
Revenue Office has estimated that the total reduction in property tax revenues
collected by local governments under Measure 50 will be approximately $389
million for the tax year 1997-98 and approximately $379 million for the tax
year 1998-99.
Special Voting Requirements
Measure 50 requires that all new property taxes be approved by a majority of
the voters in an election where at least 50% of registered voters participate,
except in the instance of a general election.
TWO PERCENT KICKER
The 1979 Legislature approved a mechanism by which a refunding process would
be set in motion if certain conditions occurred after the close of the
session. If the estimated revenues from either of the two General Fund revenue
categories of corporate tax or all other revenues (which includes the personal
income tax) is exceeded by more than 2 percent, a tax credit for corporations
or a tax refund for individuals would be extended to all taxpayers in that
category (also known as the "2% Kicker"). For corporations, the credit is
based on the tax liability for the calendar year containing the end of the
biennium (for example, 1997 liability for the 1995-97 kicker). For
individuals, the refund is based on the previous calendar year's tax liability
(for example, 1996 for the 1995-97 kicker). Revenues from the 1995-97 biennium
exceeded the estimate by more than two percent for corporate taxes
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and "all other" revenue sources. Accordingly, corporations will take a tax
credit of $202.7 million or 42.2 percent of 1997 tax liability on tax returns
filed in 1998. Individual taxpayers were refunded $415 million or 14.4 percent
of 1996 tax liability in early December 1997.
YEAR 2000 ISSUE
The State and its agencies make extensive use of computers. With the
approach of the year 2000, the State has begun a review of its own computer
systems, and surveying third-party vendors, suppliers and customers, for Year
2000 compliance. (The year 2000 could be problematic for older computer
systems, which identify the current year with only two digits, rather than
four; such systems could mistake the year 2000 for the year 1900.)
The State is, however, still in the process of requesting from material
third-party vendors, suppliers, and customers information regarding the status
of their Year 2000 compliance efforts and representations to the State that
their most important functions will be Year 2000 compliant before January 1,
2000. It is not known at this time what effect, if any, external non-
compliance would have on the State's ability to make timely payments of
principal and interest on its bonds starting January 1, 2000. As a precaution,
the State has identified its mission critical functions and is developing
contingency plans for dealing with internal and external non-compliance. The
most recent estimate of remediation costs for all general fund agencies is
$30.7 million.
The Office of the State Treasurer, which handles investments and transfers
of State funds, also makes extensive use of computers. So, too, do many of its
third-party service providers. Like the Department, the Office of the State
Treasurer is in the process of reviewing its computer systems and material
third-party vendors, suppliers, and customers for Year 2000 compliance.
As a result of its review, the Office of the State Treasurer has begun a
major computer system conversion. This conversion is expected to be completed
later this year and should minimize internal Year 2000 problems. The costs of
the Year 2000 remediation are part of a Treasury-wide open-systems computer
migration project. The Office of the State Treasurer is, however, still in the
process of evaluating material third-party vendor, supplier and customer
information regarding the status of their Year 2000 compliance efforts and
representations to the Office of the State Treasurer that their most important
functions will be Year 2000 compliant before January 1, 2000. It is not known
at this time what effect, if any, external non-compliance would have on the
timely payments of State obligations. As a precaution, the Office of the State
Treasurer has identified its mission critical functions and is developing
contingency plans for dealing with internal and external non-compliance.
RECENT DEVELOPMENTS AND ECONOMIC FORECASTING
The 1997 Legislature also referred a constitutional amendment to the
electorate to appear on the November 1998 ballot to authorize the State to
guaranty general obligation bonds issued by school districts. Moneys to fund
the guaranty could come from an off-set of amounts otherwise paid by the State
to the district on whose behalf payment was made, other moneys of the district
or the levy of a state-wide ad valorem property tax.
Evidence continues to point to a slowing Oregon economy. Construction and
manufacturing, the engines of the 1994-96 state economic boom, have clearly
entered a period of slower growth. However, income growth remains strong. This
suggests that Oregon's consumers are supplanting business investment as the
primary force behind the state's continued economic expansion.
The Oregon Office of Economic Analysis expects Oregon's economy to slow
further as Asian exports decline and the state's high technology investment
boom winds down. In-migration should remain relatively subdued as California's
job growth surpasses Oregon's. Oregon will likely continue shifting from a
business investment led expansion to one fueled primarily by consumer
spending. Because of this shift, the slowdown will be more pronounced in the
manufacturing and construction sectors. The service-producing sectors are
expected to see only moderately slower growth over the next two years.
Oregon's job growth is projected to slow from 3.4 percent in 1997 to 2.8
percent in the 1998 and 1.7 percent in 1999. Personal income is forecast to
increase 5.8 percent in 1998 and 5.0 percent in 1999. After adjustment for
inflation, personal income is projected to rise 4.4 percent in 1998 and 2.7
percent in 1999.
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A reduction in exports to Asia is an important factor slowing the state
economy. Asia is overwhelmingly the most important export market for Oregon's
forest and agriculture products. These sectors will slow further as Asian
demand weakens.
Deteriorating Asian markets will also slow the high technology manufacturing
sector. Moreover, this sector is in the process of consolidating gains brought
about by rapid growth over the past four years. High tech job growth averaged
10.1 percent from 1994 to 1996. It slowed to 6.7 percent in 1997. High tech
employment is forecast to increase 3.1 percent in 1998 before bottoming out at
1.7 percent growth in 1999. The forecast is for a slowdown in the tech sector
job growth, not a decline. The development of a national recession would
almost certainly bring outright job reductions to this sector.
Oregon consumers have benefited greatly from the state's economic boom of
the past four years. Household balance sheets appear to be in relatively good
shape. Evidence for this is the state's low consumer loan delinquency rate,
which is well below the national average. Not only have Oregonian's enjoyed a
25.3 percent increase in per capita income over the past four years but they
have also experienced a 41.5 percent increase in average home values over the
same period. Home price appreciation, which inhibits the ability of some
individuals to afford new homes, nevertheless means a large jump in wealth for
homeowners. Combining Oregon's rapid income growth, home value appreciation
and low inflation is almost certain to result in high levels of consumer
spending over the next year.
Total population in Oregon is forecast to increase to 3.615 million by 2005.
This is 398,000 above the 1997 level. The strongest growth will occur in young
adults (ages 18-24), older wage earners (ages 45-64), and the oldest of the
elderly (ages 85 and over).
I-7
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<PAGE>
APPENDIX II
RATINGS OF MUNICIPAL BONDS
DESCRIPTION OF MOODY'S INVESTORS SERVICE, INC.'S ("MOODY'S") LONG-TERM DEBT
RATINGS
Aaa Bonds which are rated Aaa are judged to be of the best quality. They
carry the smallest degree of investment risk and are generally
referred to as "gilt 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.
Aa Bonds which are rated Aa are judged to be of high quality by all
standards. Together with the Aaa group they comprise what are
generally known as high grade bonds. They are rated lower than the
best bonds because margins of protection may not be as large as in Aaa
securities or fluctuation of protective elements may be of greater
amplitude or there may be other elements present which make the long-
term risk appear somewhat larger than in Aaa securities.
A Bonds which are rated A possess many favorable investment attributes
and are to be considered as upper-medium-grade obligations. Factors
giving security to principal and interest are considered adequate, but
elements may be present which suggest a susceptibility to impairment
sometime in the future.
Baa Bonds which are rated Baa are considered as medium-grade obligations,
i.e., they are neither highly protected nor poorly secured. Interest
payment and principal security appear adequate for the present but
certain protective elements may be lacking or may be
characteristically unreliable over any great length of time. Such
bonds lack outstanding investment characteristics and in fact have
speculative characteristics as well.
Ba Bonds which are rated Ba are judged to have speculative elements;
their future cannot be considered as well-assured. Often the
protection of interest and principal payments may be very moderate and
thereby not well safeguarded during both good and bad times over the
future. Uncertainty of position characterizes bonds in this class.
B Bonds which are rated B generally lack characteristics of the
desirable investment. Assurance of interest and principal payments or
of maintenance of other terms of the contract over any long period of
time may be small.
Caa Bonds which are rated Caa are of poor standing. Such issues may be in
default or there may be present elements of danger with respect to
principal or interest.
Ca Bonds which are rated Ca represent obligations which are speculative
in a high degree. Such issues are often in default or have other
marked shortcomings.
C Bonds which are rated C are the lowest rated class of bonds, and
issues so rated can be regarded as having extremely poor prospects of
ever attaining any real investment standing.
Note: Those bonds in the Aa, A, Baa, Ba and B groups which Moody's believes
possess the strongest investment attributes are designated by the symbols Aa1,
A1, Baa1, Ba1 and B1.
Short-term Notes: The four ratings of Moody's for short-term notes are
MIG1/VMIG1, MIG2/ VMIG2, MIG3/VMIG3 and MIG4/VMIG4; MIG1/VMIG1 denotes "best
quality . . . strong protection by established cash flows"; MIG2/VMIG2 denotes
"high quality" with ample margins of protection; MIG3/VMIG3 notes are of
"favorable quality . . . but . . . lacking the undeniable strength of the
preceding grades"; MIG4/VMIG4 notes are of "adequate quality . . .
[p]rotection commonly regarded as required of an investment security is
present . . . there is specific risk."
II-1
<PAGE>
DESCRIPTION OF MOODY'S SHORT-TERM DEBT RATINGS
Moody's employs the following three designations, all judged to be
investment grade, to indicate the relative repayment ability of rated issuers:
Issuers rated Prime-1 (or supporting institutions) have a superior ability
for repayment of senior short-term debt obligations. Prime-1 repayment ability
will often be evidenced by many of the following characteristics: leading
market positions in well established industries; high rates of return on funds
employed; conservative capitalization structure with moderate reliance on debt
and ample asset protection; broad margins in earnings coverage of fixed
financial charges and high internal cash generation; and well established
access to a range of financial markets and assured sources of alternate
liquidity.
Issuers rated Prime-2 (or supporting institutions) have a strong ability for
repayment of senior short-term debt obligations. This will normally be
evidenced by many of the characteristics cited above but to a lesser degree.
Earnings trends and coverage ratios, while sound, may be more subject to
variation. Capitalization characteristics, while still appropriate, may be
more affected by external conditions. Ample alternate liquidity is maintained.
Issuers rated Prime-3 (or supporting institutions) have an acceptable
ability for repayment of senior short-term debt obligations. The effect of
industry characteristics and market composition may be more pronounced.
Variability in earnings and profitability may result in changes in the level
of debt protection measurements and may require relatively high financial
leverage. Adequate alternate liquidity is maintained.
Issuers rated Not Prime do not fall within any of the Prime rating
categories.
DESCRIPTION OF STANDARD & POOR'S ("STANDARD & POOR'S") ISSUE CREDIT RATING
DEFINITIONS
A Standard & Poor's issue credit rating is a current opinion of the
creditworthiness of an obligor with respect to a specific financial
obligation, a specific class of financial obligations, or a specific financial
program (including ratings on medium term note programs and commercial paper
programs). It takes into consideration the creditworthiness of guarantors,
insurers, or other forms of credit enhancement on the obligation and takes
into account the currency in which the obligation is denominated.
The issue credit rating is not a recommendation to purchase, sell, or hold a
financial obligation, inasmuch as it does not comment as to market price or
suitability for a particular investor.
Issue credit ratings are based on current information furnished by the
obligors or obtained by Standard & Poor's from other sources it considers
reliable. Standard & Poor's does not perform an audit in connection with any
credit rating and may, on occasion, rely on unaudited financial information.
Credit ratings may be changed, suspended, or withdrawn as a result of changes
in, or unavailability of, such information, or based on other circumstances.
The ratings are based, in varying degrees, on the following considerations:
I. Likelihood of payment capacity and willingness of the obligor to meet
its financial commitment on an obligation in accordance with the terms
of obligation;
II. Nature of and provisions of the obligation; and
III. Protection afforded by, and relative position of, the obligation in
the event of bankruptcy, reorganization, or other arrangement under the
laws of bankruptcy and other laws affecting creditors' rights.
II-2
<PAGE>
LONG-TERM ISSUE CREDIT RATINGS
<TABLE>
<C> <S>
AAA An obligation rated "AAA" has the highest rating assigned by Standard &
Poor's. The obligor's capacity to meet its financial commitment on the
obligation is extremely strong.
AA An obligation rated "AA" differs from the highest rated obligations only
in small degree. The obligor's capacity to meet its financial commitment
on the obligation is very strong.
A An obligation rated "A" is somewhat more susceptible to the adverse
effects of changes in circumstances and economic conditions than
obligations in higher-rated categories. However, the obligor's capacity
to meet its financial commitment on the obligation is still strong.
BBB An obligation rated "BBB" exhibits adequate protection parameters.
However, adverse economic conditions or changing circumstances are more
likely to lead to a weakened capacity of the obligor to meet its
financial commitment on the obligation.
BB An obligation rated "BB," "B," "CCC," "CC" and "C" is regarded as having
B significant speculative characteristics. "BB" indicates the least degree
CCC of speculation and "C" the highest degree of speculation. While such
CC bonds will likely have some quality and protective characteristics,
C these may be outweighed by large uncertainties or major exposures to
adverse conditions.
D An obligation rated "D" is in payment default. The "D" rating category
is used when payments on an obligation are not made on the date due even
if the applicable grace period has not expired, unless Standard & Poor's
believes that such payments will be made during such grace period. The
"D" rating also will be used upon the filing of a bankruptcy petition or
the taking of a similar action if payments on an obligation are
jeopardized.
</TABLE>
Plus (+) or Minus (-): The ratings from "AA" to "CCC" may be modified by the
addition of a plus or minus sign to show relative standing within the major
rating categories.
SHORT-TERM ISSUE CREDIT RATINGS
<TABLE>
<C> <S>
A-1 A short-term obligation rated "A-1" is rated in the highest category by
Standard & Poor's. The obligor's capacity to meet its financial commitment
on the obligation is strong. Within this category, certain obligations are
designated with a plus sign (+). This indicates that the obligor's
capacity to meet its financial commitment on these obligations is
extremely strong.
A-2 A short-term obligation rated "A-2" is somewhat more susceptible to the
adverse effects of changes in circumstances and economic conditions than
obligations in higher rating categories. However, the obligor's capacity
to meet its financial commitment on the obligation is satisfactory.
A-3 A short-term obligation rated "A-3" exhibits adequate protection
parameters. However, adverse economic conditions or changing circumstances
are more likely to lead to a weakened capacity of the obligor to meet its
financial commitment on the obligation.
B A short-term obligation rated "B" is regarded as having significant
speculative characteristics. The obligor currently has the capacity to
meet its financial commitment on the obligation; however, it faces major
ongoing uncertainties which could lead to the obligor's inadequate
capacity to meet its financial commitment on the obligation.
C A short-term obligation rated "C" is currently vulnerable to nonpayment
and is dependent upon favorable business, financial, and economic
conditions for the obligor to meet its financial commitment on the
obligation.
D A short-term obligation rated "D" is in payment default. The "D" rating
category is used when payments on an obligation are not made on the date
due even if the applicable grace period has not expired, unless Standard &
Poor's believes that such payments will be made during such grace period.
The "D" rating also will be used upon the filing of a bankruptcy petition
or the taking of a similar action if payments on an obligation are
jeopardized.
</TABLE>
II-3
<PAGE>
DESCRIPTION OF FITCH IBCA, INC. ("FITCH") RATINGS
Fitch credit ratings are an opinion on the ability of an entity or of a
securities issue to meet financial commitments, such as interest, preferred
dividends, or repayment of principal, on a timely basis.
Credit ratings are used by investors as indications of the likelihood of
getting their money back in accordance with the terms on which they invested.
Thus, the use of credit ratings defines their function: "investment-grade"
ratings (international long-term "AAA"--"BBB" categories; short-term "F1"--
"F3") indicate a relatively low probability of default, while those in the
"speculative" or "non-investment grade" categories (international long-term
"BB"--"D") either signal a higher probability of default or that a default has
already occurred. Ratings imply no specific prediction of default probability.
Entities or issues carrying the same rating are of similar but not
necessarily identical credit quality since the rating categories do not fully
reflect small differences in the degrees of credit risk.
Fitch credit and other ratings are not recommendations to buy, sell, or hold
any security. Ratings do not comment on the adequacy of market price, the
suitability of any security for a particular investor, or the tax-exempt
nature or taxability of any payments of any security. The ratings are based on
information obtained from issuers, other obligors, underwriters, their
experts, and other sources Fitch believes to be reliable. Fitch does not audit
or verify the truth or accuracy of such information. Ratings may be changed or
withdrawn as a result of changes in, or the unavailability of, information or
for other reasons.
INTERNATIONAL CREDIT RATINGS
Fitch's international credit ratings are applied to the spectrum of
corporate, structured, and public finance. They cover sovereign (including
supranational and subnational), financial, bank, insurance, and other
corporate entities and the securities they issue, as well as municipal and
other public finance entities, and securities backed by receivables or other
financial assets, and counterparties. When applied to an entity, these long-
and short-term ratings assess its general creditworthiness on a senior basis.
When applied to specific issues and programs, these ratings take into account
the relative preferential position of the holder of the security and reflect
the terms, conditions, and covenants attaching to that security.
ANALYTICAL CONSIDERATIONS
When assigning ratings, Fitch considers the historical and prospective
financial condition, quality of management, and operating performance of the
issuer and of any guarantor, any special features of a specific issue or
guarantee, the issue's relationship to other obligations of the issuer, as
well as developments in the economic and political environment that might
affect the issuer's financial strength and credit quality.
Investment-grade ratings reflect expectations of timeliness of payment.
However, ratings of different classes of obligations of the same issuer may
vary based on expectations of recoveries in the event of a default or
liquidation. Recovery expectations, which are the amounts expected to be
received by investors after a security defaults, are a relatively minor
consideration in investment-grade ratings, but Fitch does use "notching" of
particular issues to reflect their degree of preference in a winding up,
liquidation, or reorganization as well as other factors. Recoveries do,
however, gain in importance at lower rating levels, because of the greater
likelihood of default, and become the major consideration at the "DDD"
category. Factors that affect recovery expectations include collateral and
seniority relative to other obligations in the capital structure.
Variable rate demand obligations and other securities which contain a demand
feature will have a dual rating, such as "AAA/F1+." The first rating denotes
long-term ability to make principal and interest payments. The second rating
denotes ability to meet a demand feature in full and on time.
INTERNATIONAL LONG-TERM CREDIT RATINGS
Investment Grade
AAA Highest credit quality. "AAA" ratings denote the lowest expectation of
credit risk. They are assigned only in case of exceptionally strong
capacity for timely payment of financial commitments. This capacity is
highly unlikely to be adversely affected by foreseeable events.
II-4
<PAGE>
AA Very high credit quality. "AA" ratings denote a very low expectation of
credit risk. They indicate strong capacity for timely payment of
financial commitments. This capacity is not significantly vulnerable to
foreseeable events.
A High credit quality. "A" ratings denote a low expectation of credit
risk. The capacity for timely payment of financial commitments is
considered strong. This capacity may, nevertheless, be more vulnerable
to changes in circumstances or in economic conditions than is the case
for higher ratings.
BBB Good credit quality. "BBB" ratings indicate that there is currently a
low expectation of credit risk. The capacity for timely payment of
financial commitments is considered adequate, but adverse changes in
circumstances and in economic conditions are more likely to impair this
capacity. This is the lowest investment-grade category.
Speculative Grade
BB Speculative. "BB" ratings indicate that there is a possibility of
credit risk developing, particularly as the result of adverse economic
change over time; however, business or financial alternatives may be
available to allow financial commitments to be met. Securities rated in
this category are not investment grade.
B Highly speculative. "B" ratings indicate that significant credit risk
is present, but a limited margin of safety remains. Financial
commitments are currently being met; however, capacity for continued
payment is contingent upon a sustained, favorable business and economic
environment.
High default risk. Default is a real possibility. Capacity for meeting
CCC financial commitments is solely reliant upon sustained, favorable
CC business or economic developments. A "CC" rating indicates that default
C of some kind appears probable. "C" ratings signal imminent default.
DDD Default. Securities are not meeting current obligations and are
DD extremely speculative. "DDD" designates the highest potential for
D recovery of amounts outstanding on any securities involved. For U.S.
corporates, for example, "DD" indicates expected recovery of 50%-90% of
such outstandings, and "D," the lowest recovery potential, i.e., below
50%.
INTERNATIONAL SHORT-TERM CREDIT RATINGS
A short-term rating has a time horizon of less than 12 months for most
obligations, or up to three years for U.S. public finance securities, and thus
places greater emphasis on the liquidity necessary to meet financial
commitments in a timely manner.
F1 Highest credit quality. Indicates the strongest capacity for timely
payment of financial commitments; may have an added "+" to denote any
exceptionally strong credit feature.
F2 Good credit quality. A satisfactory capacity for timely payment of
financial commitments, but the margin of safety is not as great as in
the case of the higher ratings.
F3 Fair credit quality. The capacity for timely payment of financial
commitments is adequate; however, near-term adverse changes could
result in a reduction to non-investment grade.
B Speculative. Minimal capacity for timely payment of financial
commitments, plus vulnerability to near-term adverse changes in
financial and economic conditions.
C High default risk. Default is a real possibility. Capacity for meeting
financial commitments is solely reliant upon a sustained, favorable
business and economic environment.
D Default. Denotes actual or imminent payment default.
- ---------
Notes:
"+" or "-" may be appended to a rating to denote relative status within
major rating categories. Such suffixes are not added to the "AAA" long-term
rating category, to categories below "CCC," or to short-term ratings other
than "F1."
"NR" indicates that Fitch does not rate the issuer or issue in question.
"Withdrawn": A rating is withdrawn when Fitch deems the amount of
information available to be inadequate for rating purposes, or when an
obligation matures, is called, or refinanced.
RatingAlert: Ratings are placed on RatingAlert to notify investors that
there is a reasonable probability of a rating change and the likely direction
of such change. These are designated as "Positive," indicating a potential
upgrade, "Negative," for a potential downgrade, or "Evolving," if ratings may
be raised, lowered or maintained. RatingAlert is typically resolved over a
relatively short period.
II-5
<PAGE>
PART C. OTHER INFORMATION
ITEM 23. EXHIBITS.
<TABLE>
<CAPTION>
EXHIBIT
NUMBER
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<C> <S>
1(a) --Declaration of Trust of the Registrant, dated August 2, 1985.(a)
(b) --Amendment to Declaration of Trust, dated September 18, 1987.(a)
(c) --Amendment to Declaration of Trust, dated December 21, 1987.(a)
(d) --Amendment to Declaration of Trust, dated October 3, 1988.(a)
(e) --Amendment to Declaration of Trust, dated October 17, 1994 and
instrument establishing Class C and Class D shares of beneficial
interest.(a)
(f) --Instrument establishing Merrill Lynch Oregon Municipal Bond Fund
(the "Fund") as a series of the Registrant.(a)
(g) --Instrument establishing Class A and Class B shares of beneficial
interest of the Fund.(a)
2 --By-Laws of the Registrant.(a)
3 --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)
4 --Management Agreement between the Registrant and Fund Asset
Management, L.P.(c)
5(a) --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)
(b) --Form of Class B Distribution Agreement between the Registrant and
the Distributor.(a)
(c) --Form of Class C Distribution Agreement between the Registrant and
the Distributor (including Form of Selected Dealers Agreement).(e)
(d) --Form of Class D Distribution Agreement between the Registrant and
the Distributor (including Form of Selected Dealers Agreement).(e)
(e) --Letter Agreement between the Fund and the Distributor, dated
September 15, 1993, in connection with the Merrill Lynch Mutual Funds
Adviser Program.(c)
6 --None.
7 --Form of Custody Agreement between the Registrant and State Street
Bank and Trust Company.(d)
8 --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.)(c)
9 --Opinion of Brown & Wood LLP, counsel to the Registrant.(g)
10 --Consent of Deloitte & Touche LLP, independent auditors for the
Registrant.
11 --None.
12 --Certificate of Fund Asset Management, L.P.(c)
13(a) --Class B Distribution Plan of the Registrant and Class B Distribution
Plan Sub-Agreement.(c)
(b) --Form of Class C Distribution Plan of the Registrant and Class C
Distribution Plan Sub-Agreement.(e)
(c) --Form of Class D Distribution Plan of the Registrant and Class D
Distribution Plan Sub-Agreement.(e)
14(a) --Financial Data Schedule for Class A Shares.
(b) --Financial Data Schedule for Class B Shares.
(c) --Financial Data Schedule for Class C Shares.
(d) --Financial Data Schedule for Class D Shares.
15 --Merrill Lynch Select PricingSM System Plan pursuant to Rule 18f-
3.(f)
</TABLE>
- ----------
(a) Filed on November 15, 1995 as an Exhibit to Post-Effective Amendment No. 3
to the Registrant's Registration Statement on Form N-1A (File No. 33-
64502) under the Securities Act of 1933, as amended, relating to shares of
the Fund (the "Registration Statement").
(b) Reference is made to Article II, Section 2.3 and Articles V, VI, VIII, IX,
X and XI of the Registrant's Declaration of Trust, as amended, filed as
Exhibits 1(a), 1(b), 1(c), 1(d) and 1(e) with Post-Effective Amendment No.
2 to the Registration Statement; to the Certificates of Establishment and
Designation establishing the Fund as a series of the Registrant and
establishing Class A and Class B shares of beneficial
C-1
<PAGE>
interest of the Fund, filed as Exhibits 1(f) and 1(g), respectively, with
Post-Effective Amendment No. 5 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. 5 to the Registration Statement.
(c) Filed on January 14, 1994 as an Exhibit to Pre-Effective Amendment No. 1
to the Registration Statement.
(d) Incorporated by reference to Exhibit 8 to Post-Effective Amendment No. 3
to Registrant's Registration Statement on Form N-1A under the Securities
Act of 1933, as amended, filed on October 14, 1994, relating to shares of
the Merrill Lynch Minnesota Municipal Bond Fund series of the Registrant
(File No. 33-44734).
(e) Filed on October 18, 1994 as an Exhibit to Post-Effective Amendment No. 2
to the Registration Statement.
(f) Incorporated by reference to Exhibit 18 to Post-Effective Amendment No. 13
to the Registrant's Registration Statement filed on January 25, 1996,
relating to shares of the Merrill Lynch New York Municipal Bond Fund
series of the Registrant (File No. 2-99473).
(g) Previously filed as an exhibit to the Registration Statement.
ITEM 24. PERSONS CONTROLLED BY OR UNDER COMMON CONTROL WITH REGISTRANT.
The Registrant is not controlled by or under common control with any other
person.
ITEM 25. INDEMNIFICATION.
Section 5.3 of the Registrant's Declaration of Trust provides as follows:
"The Trust shall indemnify each of its Trustees, officers, employees and
agents (including persons who serve at its request as directors, officers or
trustees of another organization in which it has any interest as a
shareholder, creditor or otherwise) against all liabilities and expenses
(including amounts paid in satisfaction of judgments, in compromise, as fines
and penalties and as counsel fees) reasonably incurred by him in connection
with the defense or disposition of any action, suit or other proceeding,
whether civil or criminal, in which he may be involved or with which he may be
threatened, while in office or thereafter, by reason of his being or having
been such a trustee, officer, employee or agent, except with respect to any
matter as to which he shall have been adjudicated to have acted in bad faith,
willful misfeasance, gross negligence or reckless disregard of his duties;
provided, however, that as to any matter disposed of by a compromise payment
by such person, pursuant to a consent decree or otherwise, no indemnification
either for said payment or for any other expenses shall be provided unless the
Trust shall have received a written opinion from independent legal counsel
approved by the Trustees to the effect that if either the matter of willful
misfeasance, gross negligence or reckless disregard of duty, or the matter of
good faith and reasonable belief as to the best interests of the Trust, had
been adjudicated, it would have been adjudicated in favor of such person. The
rights accruing to any Person under these provisions shall not exclude any
other right to which he may be lawfully entitled; provided that no person may
satisfy any right in indemnity or reimbursement granted herein or in Section
5.1 or to which he may be otherwise entitled except out of the property of the
Trust, and no Shareholder shall be personally liable to any Person with
respect to any claim for indemnity or reimbursement or otherwise. The Trustees
may make advance payments in connection with indemnification under this
Section 5.3, provided that the indemnified person shall have given a written
undertaking to reimburse the Trust in the event it is subsequently determined
that he is not entitled to such indemnification."
Insofar as the conditional advancing of indemnification monies for actions
based upon the Investment Company Act of 1940, as amended may be concerned,
such payments will be made only on the following conditions: (i) the advances
must be limited to amounts used, or to be used, for the preparation or
presentation of a defense to the action, including costs connected with the
preparation of a settlement; (ii) advances may be made only upon receipt of a
written promise by, or on behalf of, the recipient to repay that amount of the
advance which exceeds the amount which it is ultimately determined he is
entitled to receive from the Registrant by reason of indemnification; and
(iii)(a) such promise must be secured by a surety bond, other suitable
insurance or an equivalent form of security which assures that any repayments
may be obtained by the Registrant without delay or litigation, which bond,
insurance or other form of security must be provided by the recipient of the
advance, or (b) a majority of a quorum of the Registrant's disinterested, non-
party Trustees, or an independent legal counsel in a written opinion, shall
determine, based upon a review of readily available facts that the recipient
of the advance ultimately will be found entitled to indemnification.
C-2
<PAGE>
In Section 9 of the Distribution Agreements relating to the securities being
offered hereby, the Registrant agrees to indemnify the Distributor and each
person, if any, who controls the Distributor within the meaning of the
Securities Act of 1933, as amended ("1933 Act"), against certain types of
civil liabilities arising in connection with the Registration Statement or
Prospectus and Statement of Additional Information.
Insofar as indemnification for liabilities arising under the 1933 Act may be
permitted to Trustees, officers and controlling persons of the Registrant and
the principal underwriter pursuant to the foregoing provisions or otherwise,
the Registrant has been advised that in the opinion of the Securities and
Exchange Commission such indemnification is against public policy as expressed
in the 1933 Act and is, therefore, unenforceable. In the event that a claim
for indemnification against such liabilities (other than the payment by the
Registrant of expenses incurred or paid by a Trustee, officer, or controlling
person of the Registrant and the principal underwriter in connection with the
successful defense of any action, suit or proceeding) is asserted by such
Trustee, officer or controlling person or the principal underwriter in
connection with the shares being registered, the Registrant will, unless in
the opinion of its counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question whether
such indemnification by it is against public policy as expressed in the 1933
Act and will be governed by the final adjudication of such issue.
ITEM 26. BUSINESS AND OTHER CONNECTIONS OF INVESTMENT ADVISER.
Fund Asset Management, L.P. ("FAM" or the "Investment Adviser") 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 Yield Fund III, Inc.,
Debt Strategies Fund, Inc., Debt Strategies Fund II, Inc., Debt Strategies
Fund III, Inc., Income Opportunities Fund 1999, Inc., Income Opportunities
Fund 2000, Inc., Merrill Lynch Municipal Strategy Fund, Inc., MuniAssets Fund,
Inc., MuniEnhanced Fund, Inc., MuniHoldings Fund, Inc., MuniHoldings Fund II,
Inc., MuniHoldings California Insured Fund, Inc., MuniHoldings California
Insured Fund II, Inc., MuniHoldings California Insured Fund III, Inc.,
MuniHoldings Florida Insured Fund, MuniHoldings Florida Insured Fund II,
MuniHoldings Insured Fund, Inc., MuniHoldings New Jersey Insured Fund, Inc.,
MuniHoldings New Jersey Insured Fund II, Inc., MuniHoldings New York Fund,
Inc., MuniHoldings New York Insured Fund, Inc., 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.
Merrill Lynch Asset Management, L.P. ("MLAM"), an affiliate of the
Investment Adviser, acts as the investment adviser for the following open-end
registered investment companies: Merrill Lynch Adjustable Rate Securities
Fund, Inc., Merrill Lynch Americas Income Fund, Inc., Merrill Lynch Asset
Builder Program, Inc., Merrill Lynch Asset Growth Fund, Inc., Merrill Lynch
Asset Income Fund, Inc., Merrill Lynch Capital Fund, Inc., Merrill Lynch
Convertible Fund, Inc., Merrill Lynch Developing Capital Markets Fund, Inc.,
Merrill Lynch Dragon Fund, Inc., Merrill Lynch EuroFund, Merrill Lynch
Fundamental Growth Fund, Inc., Merrill Lynch Fund For Tomorrow, Inc., Merrill
Lynch Global Allocation Fund, Inc., Merrill Lynch Global Bond Fund for
Investment and Retirement, Merrill Lynch Global 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.,
C-3
<PAGE>
Merrill Lynch Global Utility Fund, Inc., Merrill Lynch Global Value Fund,
Inc., Merrill Lynch Growth Fund, Merrill Lynch Healthcare Fund, Inc., Merrill
Lynch Intermediate Government Bond Fund, Merrill Lynch International Equity
Fund, Merrill Lynch Latin America Fund, Inc., Merrill Lynch Middle East/Africa
Fund, Inc., Merrill Lynch Municipal Series Trust, Merrill Lynch Pacific Fund,
Inc., Merrill Lynch Ready Assets Trust, Merrill Lynch Real Estate Fund, Inc.,
Merrill Lynch Retirement Series Trust, Merrill Lynch Series Fund, Inc.,
Merrill Lynch Short-Term Global Income Fund, Inc., Merrill Lynch Strategic
Dividend Fund, Merrill Lynch Technology Fund, Inc., Merrill Lynch U.S.
Treasury Money Fund, Merrill Lynch U.S.A. Government Reserves, Merrill Lynch
Utility Income Fund, Inc. and 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. and Merrill Lynch Senior Floating
Rate Fund, Inc. MLAM also acts as sub-adviser to Merrill Lynch World Strategy
Portfolio and Merrill Lynch Basic Value Equity Portfolio, two investment
portfolios of EQ Advisors Trust.
The address of each of these registered investment companies is P.O. Box
9011, Princeton, New Jersey 08543-9011, except that the address of Merrill
Lynch Funds for Institutions Series and Merrill Lynch Intermediate Government
Bond Fund is One Financial Center, 23rd Floor, Boston, Massachusetts 02111-
2665. The address of FAM, 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.
Set forth below is a list of each executive officer and partner of the
Investment Adviser indicating each business, profession, vocation or
employment of a substantial nature in which each such person or entity has
been engaged since August 1, 1996 for his, her or its own account or in the
capacity of director, officer, partner or trustee. In addition, Mr. Zeikel is
President, Mr. Richard is Treasurer and Mr. Glenn is Executive Vice President
of substantially all of the investment companies described in the first two
paragraphs of this Item 26, and Messrs. Giordano, Harvey, Kirstein and Monagle
are directors, trustees or officers of one or more of such companies.
<TABLE>
<CAPTION>
POSITION(S) WITH THE OTHER SUBSTANTIAL BUSINESS,
INVESTMENT ADVISER PROFESSION, VOCATION OR
NAME ------------------------ EMPLOYMENT
---- ----------------------------
<C> <C> <S>
ML & Co............... Limited Partner Financial Services Holding
Company;
Limited Partner of MLAM
Princeton Services.... General Partner General Partner of MLAM
Arthur Zeikel......... Chairman Chairman of MLAM; President
of FAM and MLAM from 1977 to
1997; Chairman and Director
of Princeton Services;
President of Princeton
Services from 1993 to 1997;
Executive Vice President of
ML & Co.
Jeffrey M. Peek....... President President of MLAM; President
and Director of Princeton
Services; Executive Vice
President of ML & Co.;
Managing Director and Co-
Head of the Investment
Banking Division of Merrill
Lynch in 1997; Senior Vice
President and Director of
the Global Securities and
Economics Division of
Merrill Lynch from 1995 to
1997.
Terry K. Glenn........ Executive Vice President Executive Vice President of
MLAM; Executive Vice
President and Director of
Princeton Services;
President and Director of
PFD; Director of FDS;
President of Princeton
Administrators
Linda L. Federici..... Senior Vice President Senior Vice President of
MLAM; Senior Vice President
of Princeton Services
Vincent R. Giordano... Senior Vice President Senior Vice President of
MLAM; Senior Vice President
of Princeton Services
Elizabeth A. Griffin.. Senior Vice President Senior Vice President of
MLAM; Senior Vice President
of Princeton Services
</TABLE>
C-4
<PAGE>
<TABLE>
<CAPTION>
POSITION(S) WITH THE OTHER SUBSTANTIAL
INVESTMENT ADVISER BUSINESS,
---------------------------- PROFESSION, VOCATION OR
NAME EMPLOYMENT
---- ------------------------
<C> <C> <S>
Norman R. Harvey......... Senior Vice President Senior Vice President of
MLAM; Senior Vice
President of Princeton
Services
Michael J. Hennewinkel... Senior Vice President, Senior Vice President,
Secetary and General Counsel Secetary and General
Counsel of MLAM; Senior
Vice President of
Princeton Services
Philip L. Kirstein....... Senior Vice President Senior Vice President of
MLAM; Senior Vice
President of Princeton
Services
Ronald M. Kloss.......... Senior Vice President Senior Vice President of
MLAM; Senior Vice
President of Princeton
Services
Debra Landsman-Yaros..... Senior Vice President Senior Vice President of
MLAM; Senior Vice
President of Princeton
Services; Vice President
of PFD
Stephen M. M. Miller..... Senior Vice President Executive Vice President
of Princeton
Administrators; Senior
Vice President of
Princeton Services
Joseph T. Monagle, Jr. .. Senior Vice President Senior Vice President of
MLAM; Senior Vice
President of Princeton
Services
Brian A. Murdock......... Senior Vice President Senior Vice President of
MLAM; Senior Vice
President of Princeton
Services; Director of
PFD
Michael L. Quinn......... Senior Vice President Senior Vice President of
MLAM; Senior Vice
President of Princeton
Services; Managing
Director and First Vice
President of Merrill
Lynch from 1989 to 1995
Gerald M. Richard........ Senior Vice President Senior Vice President
and Treasurer and Treasurer of MLAM;
Senior Vice President
and Treasurer of
Princeton Services; Vice
President and Treasurer
of PFD
Gregory D. Upah.......... Senior Vice President Senior Vice President of
MLAM; Senior Vice
President of Princeton
Services
Ronald L. Welburn........ Senior Vice President Senior Vice President of
MLAM; Senior Vice
President of Princeton
Services
</TABLE>
ITEM 27. PRINCIPAL UNDERWRITERS.
(a) MLFD, a division of PFD, acts as the principal underwriter for the
Registrant and for each of the open-end registered investment companies
referred to in the first two paragraphs of Item 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. and The Municipal Fund Accumulation Program, Inc.; and MLFD also
acts as the principal underwriter for the following closed-end registered
investment companies: Merrill Lynch High Income Municipal Bond Fund, Inc.,
Merrill Lynch Municipal Strategy Fund, Inc. and Merrill Lynch Senior Floating
Rate Fund, Inc. A separate division of PFD acts as the principal underwriter
of a number of other investment companies.
(b) Set forth below is information concerning each director and officer of
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.
<TABLE>
<CAPTION>
POSITION(S) AND
POSITION(S) AND OFFICE(S) WITH
NAME OFFICE(S) WITH PFD REGISTRANT
- ---- ---------------------- ------------------------
<S> <C> <C>
Terry K. Glenn............... President and Director Executive Vice President
Brian A. Murdock............. Director None
Thomas J. Verage............. Director None
Robert W. Cook............... Senior Vice President None
Michael J. Brady............. Vice President None
William M. Breen............. Vice President None
Michael G. Clark............. Vice President None
James T. Fatseas............. Vice President None
Debra W. Landsman-Yaros...... Vice President None
</TABLE>
C-5
<PAGE>
<TABLE>
<CAPTION>
POSITION(S)
AND
OFFICE(S)
POSITION(S) AND OFFICE(S) WITH
NAME WITH PFD REGISTRANT
- ---- ---------------------------- -----------
<S> <C> <C>
Michelle T. Lau..................... Vice President None
Gerald M. Richard................... Vice President and Treasurer Treasurer
Salvatore Venezia................... Vice President None
William Wasel....................... Vice President None
Robert Harris....................... Secretary None
</TABLE>
(c) Not applicable.
ITEM 28. LOCATION OF ACCOUNTS AND RECORDS.
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).
ITEM 29. MANAGEMENT SERVICES.
Other than as set forth under the caption "Management of the Trust -- Fund
Asset Management" in the Prospectus constituting Part A of the Registration
Statement and under "Management of the Trust -- Management Advisory
Arrangements" in the Statement of Additional Information constituting Part B
of the Registration Statement, the Registrant is not a party to any
management-related service contract.
ITEM 30. UNDERTAKINGS.
Not applicable.
C-6
<PAGE>
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933 AND THE
INVESTMENT COMPANY ACT OF 1940, THE REGISTRANT HAS DULY CAUSED THIS POST-
EFFECTIVE AMENDMENT TO ITS REGISTRATION STATEMENT TO BE SIGNED ON ITS BEHALF
BY THE UNDESIGNED, THEREUNTO DULY AUTHORIZED, IN THE TOWNSHIP OF PLAINSBORO,
AND THE STATE OF NEW JERSEY, ON THE 29TH DAY OF SEPTEMBER, 1998.
Merrill Lynch Multi-state Municipal
Series Trust
(Registrant)
/s/ Gerald M. Richard
By: ____________________________________
GERALD M. RICHARD
TREASURER
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.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<S> <C> <C>
Arthur Zeikel* President and Trustee
______________________________________ (Principal Executive
(ARTHUR ZEIKEL) Officer)
Gerald M. Richard* Treasurer (Principal
______________________________________ Financial
(GERALD M. RICHARD) and Accounting Officer)
James H. Bodurtha* Trustee
______________________________________
(JAMES H. BODURTHA)
Herbert I. London* Trustee
______________________________________
(HERBERT I. LONDON)
Robert R. Martin* Trustee
______________________________________
(ROBERT R. MARTIN)
Joseph L. May* Trustee
______________________________________
(JOSEPH L. MAY)
Andre F. Perold* Trustee
______________________________________
(ANDRE F. PEROLD)
/s/ Gerald M. Richard September 29, 1998
*By: _________________________________
(GERALD M. RICHARD, ATTORNEY-IN-FACT)
</TABLE>
C-7
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<C> <S>
10 Consent of Deloitte & Touche LLP, independent auditors for the
Registrant
14(a) Financial Data Schedule for Class A Shares
(b) Financial Data Schedule for Class B Shares
(c) Financial Data Schedule for Class C Shares
(d) Financial Data Schedule for Class D Shares
</TABLE>
<PAGE>
EXHIBIT 99.10
INDEPENDENT AUDITORS' CONSENT
Merrill Lynch Oregon Municipal Bond Fund of
Merrill Lynch Multi-State Municipal Series Trust:
We consent to the incorporation by reference in this Post-Effective Amendment
No. 7 to Registration Statement No. 33-64502 of our report dated September 11,
1998 appearing in the annual report to shareholders of the Merrill Lynch Oregon
Municipal Bond Fund for the year ended July 31, 1998, and to the reference to us
under the caption "Financial Highlights" in the Prospectus, which is a part of
such Registration Statement.
/s/ Deloitte & Touche LLP
Deloitte & Touche LLP
Princeton, New Jersey
September 28, 1998
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 6
<SERIES>
<NUMBER> 001
<NAME> MERRILL LYNCH OREGON MUNICIPAL BOND FUND
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<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> JUL-31-1998
<PERIOD-START> AUG-01-1997
<PERIOD-END> JUL-31-1998
<INVESTMENTS-AT-COST> 19257855
<INVESTMENTS-AT-VALUE> 21209201
<RECEIVABLES> 264205
<ASSETS-OTHER> 44629
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 21518035
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 94990
<TOTAL-LIABILITIES> 94990
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 22005176
<SHARES-COMMON-STOCK> 306810
<SHARES-COMMON-PRIOR> 323277
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> (2526931)
<OVERDISTRIBUTION-GAINS> (6546)
<ACCUM-APPREC-OR-DEPREC> 1951346
<NET-ASSETS> 3102662
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 1224384
<OTHER-INCOME> 0
<EXPENSES-NET> (293402)
<NET-INVESTMENT-INCOME> 930982
<REALIZED-GAINS-CURRENT> 156351
<APPREC-INCREASE-CURRENT> 108099
<NET-CHANGE-FROM-OPS> 1195432
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> (149827)
<DISTRIBUTIONS-OF-GAINS> (966)
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 21542
<NUMBER-OF-SHARES-REDEEMED> (48474)
<SHARES-REINVESTED> 10465
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<GROSS-EXPENSE> 371165
<AVERAGE-NET-ASSETS> 3222606
<PER-SHARE-NAV-BEGIN> 10.00
<PER-SHARE-NII> .47
<PER-SHARE-GAIN-APPREC> .11
<PER-SHARE-DIVIDEND> (.47)
<PER-SHARE-DISTRIBUTIONS> 0
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 10.11
<EXPENSE-RATIO> 1.24
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
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<TABLE> <S> <C>
<PAGE>
<ARTICLE> 6
<SERIES>
<NUMBER> 002
<NAME> MERRILL LYNCH OREGON MUNICIPAL BOND FUND
<S> <C>
<PERIOD-TYPE> 12-MOS
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<PERIOD-START> AUG-01-1997
<PERIOD-END> JUL-31-1998
<INVESTMENTS-AT-COST> 19257855
<INVESTMENTS-AT-VALUE> 21209201
<RECEIVABLES> 264205
<ASSETS-OTHER> 44629
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 21518035
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 94990
<TOTAL-LIABILITIES> 94990
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 22005176
<SHARES-COMMON-STOCK> 1479728
<SHARES-COMMON-PRIOR> 1789338
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> (2526931)
<OVERDISTRIBUTION-GAINS> (6546)
<ACCUM-APPREC-OR-DEPREC> 1951346
<NET-ASSETS> 14965380
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 1224384
<OTHER-INCOME> 0
<EXPENSES-NET> (293402)
<NET-INVESTMENT-INCOME> 930982
<REALIZED-GAINS-CURRENT> 156351
<APPREC-INCREASE-CURRENT> 108099
<NET-CHANGE-FROM-OPS> 1195432
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> (666069)
<DISTRIBUTIONS-OF-GAINS> (4806)
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 243304
<NUMBER-OF-SHARES-REDEEMED> (582183)
<SHARES-REINVESTED> 29269
<NET-CHANGE-IN-ASSETS> (2158615)
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> (2683282)
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 122200
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 371165
<AVERAGE-NET-ASSETS> 16100968
<PER-SHARE-NAV-BEGIN> 10.00
<PER-SHARE-NII> .42
<PER-SHARE-GAIN-APPREC> .11
<PER-SHARE-DIVIDEND> (.42)
<PER-SHARE-DISTRIBUTIONS> 0
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 10.11
<EXPENSE-RATIO> 1.75
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 6
<SERIES>
<NUMBER> 003
<NAME> MERRILL LYNCH OREGON MUNICIPAL BOND FUND
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> JUL-31-1998
<PERIOD-START> AUG-01-1997
<PERIOD-END> JUL-31-1998
<INVESTMENTS-AT-COST> 19257855
<INVESTMENTS-AT-VALUE> 21209201
<RECEIVABLES> 264205
<ASSETS-OTHER> 44629
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 21518035
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 94990
<TOTAL-LIABILITIES> 94990
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 22005176
<SHARES-COMMON-STOCK> 251823
<SHARES-COMMON-PRIOR> 206183
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> (2526931)
<OVERDISTRIBUTION-GAINS> (6546)
<ACCUM-APPREC-OR-DEPREC> 1951346
<NET-ASSETS> 2548733
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 1224384
<OTHER-INCOME> 0
<EXPENSES-NET> (293402)
<NET-INVESTMENT-INCOME> 930982
<REALIZED-GAINS-CURRENT> 156351
<APPREC-INCREASE-CURRENT> 108099
<NET-CHANGE-FROM-OPS> 1195432
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> (86976)
<DISTRIBUTIONS-OF-GAINS> (593)
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 84837
<NUMBER-OF-SHARES-REDEEMED> (45627)
<SHARES-REINVESTED> 6430
<NET-CHANGE-IN-ASSETS> (2158615)
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> (2683282)
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 122200
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 371165
<AVERAGE-NET-ASSETS> 2155032
<PER-SHARE-NAV-BEGIN> 10.00
<PER-SHARE-NII> .41
<PER-SHARE-GAIN-APPREC> .12
<PER-SHARE-DIVIDEND> (.41)
<PER-SHARE-DISTRIBUTIONS> 0
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 10.12
<EXPENSE-RATIO> 1.85
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 6
<SERIES>
<NUMBER> 004
<NAME> MERRILL LYNCH OREGON MUNICIPAL BOND FUND
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> JUL-31-1998
<PERIOD-START> AUG-01-1997
<PERIOD-END> JUL-31-1998
<INVESTMENTS-AT-COST> 19257855
<INVESTMENTS-AT-VALUE> 21209201
<RECEIVABLES> 264205
<ASSETS-OTHER> 44629
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 21518035
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 94990
<TOTAL-LIABILITIES> 94990
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 22005176
<SHARES-COMMON-STOCK> 79733
<SHARES-COMMON-PRIOR> 39957
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> (2526931)
<OVERDISTRIBUTION-GAINS> (6546)
<ACCUM-APPREC-OR-DEPREC> 1951346
<NET-ASSETS> 806270
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 1224384
<OTHER-INCOME> 0
<EXPENSES-NET> (293402)
<NET-INVESTMENT-INCOME> 930982
<REALIZED-GAINS-CURRENT> 156351
<APPREC-INCREASE-CURRENT> 108099
<NET-CHANGE-FROM-OPS> 1195432
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> (28110)
<DISTRIBUTIONS-OF-GAINS> (181)
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 43887
<NUMBER-OF-SHARES-REDEEMED> (5310)
<SHARES-REINVESTED> 1199
<NET-CHANGE-IN-ASSETS> (2158615)
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> (2683282)
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 122200
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 371165
<AVERAGE-NET-ASSETS> 618450
<PER-SHARE-NAV-BEGIN> 10.00
<PER-SHARE-NII> .46
<PER-SHARE-GAIN-APPREC> .11
<PER-SHARE-DIVIDEND> (.46)
<PER-SHARE-DISTRIBUTIONS> 0
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 10.11
<EXPENSE-RATIO> 1.34
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
