<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON OCTOBER 30, 1997
SECURITIES ACT FILE NO. 33-49873
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. [_]
[X]
POST-EFFECTIVE AMENDMENT NO. 5
AND/OR
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940 [X]
[X]
AMENDMENT NO. 147
(CHECK APPROPRIATE BOX OR BOXES)
----------------
MERRILL LYNCH MARYLAND 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 (ZIP CODE)
OFFICE)
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 9081, PRINCETON, NEW JERSEY 08543-9081
(NAME AND ADDRESS OF AGENT FOR SERVICE)
----------------
COPIES TO:
COUNSEL FOR THE TRUST: PHILIP L. KIRSTEIN, ESQ.
FUND ASSET MANAGEMENT
BROWN & WOOD LLP
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)
[X] immediately upon filing pursuant to paragraph (b)
[_] on (date) pursuant to paragraph (b)
[_] 60 days after filing pursuant to paragraph (a)(1)
[_] on (date) pursuant to paragraph (a)(1)
[_] 75 days after filing pursuant to paragraph (a)(2)
[_] on (date) pursuant to paragraph (a)(2) of Rule 485.
IF APPROPRIATE, CHECK THE FOLLOWING BOX:
[_] this post-effective amendment designates a new
effective date for a previously filed post-effective
amendment.
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
<PAGE>
MERRILL LYNCH MARYLAND MUNICIPAL BOND FUND OF
MERRILL LYNCH MULTI-STATE MUNICIPAL SERIES TRUST
REGISTRATION STATEMENT ON FORM N-1A
CROSS REFERENCE SHEET
<TABLE>
<CAPTION>
N-1A
ITEM NO. LOCATION
-------- --------
<C> <S> <C>
PART A
Item 1. Cover Page................. Cover Page
Item 2. Synopsis................... Fee Table
Item 3. Condensed Financial
Information............... Financial Highlights; Performance Data
Item 4. General Description of Investment Objective and Policies;
Registrant................ Additional Information
Item 5. Management of the Fund..... Fee Table; Management of the Trust;
Inside Back Cover Page
Item 5A. Management's Discussion of
Fund Performance.......... Not Applicable
Item 6. Capital Stock and Other Cover Page; Merrill Lynch Select
Securities................ PricingSM System; Additional
Information
Item 7. Purchase of Securities Cover Page; Fee Table; Merrill Lynch
Being Offered............. Select PricingSM System; Purchase of
Shares; Shareholder Services;
Additional Information; Inside Back
Cover Page
Item 8. Redemption or Repurchase... Fee Table; Merrill Lynch Select
PricingSM System; Purchase of Shares;
Redemption of Shares
Item 9. Pending Legal Proceedings.. Not Applicable
PART B
Item 10. Cover Page................. Cover Page
Item 11. Table of Contents.......... Back Cover Page
Item 12. General Information and
History................... Additional Information
Item 13. Investment Objective and
Policies.................. Investment Objective and Policies
Item 14. Management of the Fund..... Management of the Trust
Item 15. Control Persons and
Principal Holders of Management of the Trust; General
Securities................ Information--Additional Information
Item 16. Investment Advisory and Management of the Trust; Purchase of
Other Services............ Shares; General Information
Item 17. Brokerage Allocation and
Other Practices........... Portfolio Transactions
Item 18. Capital Stock and Other General Information--Description of
Securities................ Shares
Item 19. Purchase, Redemption and
Pricing of Securities Purchase of Shares; Redemption of
Being Offered............. Shares; Determination of Net Asset
Value; Shareholder Services
Item 20. Tax Status................. Distributions and Taxes
Item 21. Underwriters............... Purchase of Shares
Item 22 Calculation of Performance
Data...................... Performance Data
Item 23. Financial Statements....... Financial Statements
PART C
</TABLE>
Information required to be included in Part C is set forth under the
appropriate Item, so numbered, in Part C to this Registration Statement.
<PAGE>
PROSPECTUS
OCTOBER 30, 1997
MERRILL LYNCH MARYLAND MUNICIPAL BOND FUND
MERRILL LYNCH MULTI-STATE MUNICIPAL SERIES TRUST
P.O. BOX 9011, PRINCETON, NEW JERSEY 08543-9011 . PHONE NO. (609) 282-2800
----------------
Merrill Lynch Maryland Municipal Bond Fund (the "Fund") is a mutual fund
that seeks to provide shareholders with as high a level of income exempt from
Federal and Maryland income taxes as is consistent with prudent investment
management. The Fund invests primarily in a non-diversified portfolio of long-
term, investment grade obligations issued by or on behalf of the State of
Maryland, its political subdivisions, agencies and instrumentalities and
obligations of other qualifying issuers, such as issuers located in Puerto
Rico, the U.S. Virgin Islands and Guam, which pay interest exempt from Federal
and Maryland income taxes ("Maryland Municipal Bonds"). Dividends paid by the
Fund are exempt from Federal and Maryland income taxes to the extent they are
paid from interest on Maryland Municipal Bonds. The Fund may invest in certain
tax-exempt securities classified as "private activity bonds" that may subject
certain investors in the Fund to an alternative minimum tax. At times, the
Fund may seek to hedge its portfolio through the use of futures transactions
and options. There can be no assurance that the investment objective of the
Fund will be realized. For more information on the Fund's investment objective
and policies, please see "Investment Objective and Policies" on page 10.
----------------
Pursuant to the Merrill Lynch Select PricingSM System, the Fund offers four
classes of shares, each with a different combination of sales charges, ongoing
fees and other features. The Merrill Lynch Select PricingSM System permits an
investor to choose the method of purchasing shares that the investor believes
is most beneficial given the amount of the purchase, the length of time the
investor expects to hold the shares and other relevant circumstances. See
"Merrill Lynch Select PricingSM System" on page 4.
Shares may be purchased directly from Merrill Lynch Funds Distributor, Inc.
(the "Distributor"), P.O. Box 9081, Princeton, New Jersey 08543-9081 [(609)
282-2800], or from securities dealers which have entered into selected dealer
agreements with the Distributor, including Merrill Lynch, Pierce, Fenner &
Smith Incorporated ("Merrill Lynch"). The minimum initial purchase is $1,000
and the minimum subsequent purchase is $50 except that for participants in
certain fee-based programs the minimum initial purchase is $500 and the
minimum subsequent purchase is $50. Merrill Lynch may charge its customers a
processing fee (presently $5.35) for confirming purchases and repurchases.
Purchases and redemptions made directly through Merrill Lynch Financial Data
Services, Inc. (the "Transfer Agent") are not subject to the processing fee.
See "Purchase of Shares" and "Redemption of Shares."
----------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES
AND EXCHANGE COMMISSION NOR HAS THE COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO
THE CONTRARY IS A CRIMINAL OFFENSE.
----------------
This Prospectus is a concise statement of information about the Fund that is
relevant to making an investment in the Fund. This Prospectus should be
retained for future reference. A statement containing additional information
about the Fund, dated October 30, 1997 (the "Statement of Additional
Information"), has been filed with the Securities and Exchange Commission (the
"Commission") and is available, without charge, by calling or by writing
Merrill Lynch Multi-State Municipal Series Trust (the "Trust") at the above
telephone number or address. The Commission maintains a Web site
(http://www.sec.gov) that contains the Statement of Additional Information,
material incorporated by reference and other information regarding the Fund.
The Statement of Additional Information is hereby incorporated by reference
into this Prospectus. The Fund is a separate series of the Trust, an open-end
management investment company organized as a Massachusetts business trust.
----------------
FUND ASSET MANAGEMENT -- MANAGER
MERRILL LYNCH FUNDS DISTRIBUTOR, INC. -- DISTRIBUTOR
<PAGE>
FEE TABLE
A general comparison of the sales arrangements and other nonrecurring and
recurring expenses applicable to shares of the Fund follows:
<TABLE>
<CAPTION>
CLASS A(a) CLASS B(b) CLASS C CLASS D
---------- ---------- -------- --------
<S> <C> <C> <C> <C>
SHAREHOLDER TRANSACTION
EXPENSES:
Maximum Sales Charge
Imposed on Purchases
(as a percentage of
offering price)....... 4.00%(c) None None 4.00%(c)
Sales Charge Imposed on
Dividend
Reinvestments......... None None None None
Deferred Sales Charge
(as a percentage of
original purchase
price or redemption
proceeds, whichever is None(d) 4.0% during the first year, 1.0% for None(d)
lower)................ decreasing 1.0% annually one
thereafter to 0.0% after the year(f)
fourth year
Exchange Fee........... None None(e) None None
ANNUAL FUND OPERATING
EXPENSES (AS A
PERCENTAGE OF AVERAGE
NET ASSETS):
Management Fees(g)..... 0.55% 0.55% 0.55% 0.55%
Rule 12b-1 Fees(h)
Account Maintenance
Fees.................. None 0.25% 0.25% 0.10%
Distribution Fees...... None 0.25% 0.35% None
(Class B shares convert to
Class D shares automatically
after approximately ten years
and cease being subject to
distribution fees and are
subject to lower account
maintenance fees)
OTHER EXPENSES:
Custodian Fees......... 0.01% 0.01% 0.01% 0.01%
Shareholder Servicing
Costs(i).............. 0.06% 0.07% 0.07% 0.06%
Miscellaneous.......... 0.70% 0.69% 0.69% 0.69%
----- ----- ----- -----
Total Other Expenses.. 0.77% 0.77% 0.77% 0.76%
----- ----- ----- -----
Total Fund Operating 1.32% 1.82% 1.92% 1.41%
Expenses(j)........... ===== ===== ===== =====
</TABLE>
- --------
(a) Class A shares are sold to a limited group of investors including existing
Class A shareholders and certain participants in fee-based programs. See
"Purchase of Shares--Initial Sales Charge Alternatives--Class A and Class
D Shares"--page 25 and "Shareholder Services--Fee-Based Programs"--page
36.
(b) Class B shares convert to Class D shares automatically approximately ten
years after initial purchase. See "Purchase of Shares--Deferred Sales
Charge Alternatives--Class B and Class C Shares"--page 26.
(c) Reduced for purchases of $25,000 and over and waived for purchases of
Class A shares by participants in connection with certain fee-based
programs. Class A and Class D purchases of $1,000,000 or more may not be
subject to an initial sales charge. See "Purchase of Shares--Initial Sales
Charge Alternatives--Class A and Class D Shares"--page 25.
(d) Class A and Class D shares are not subject to a contingent deferred sales
charge ("CDSC"), except that purchases of $1,000,000 or more that are not
subject to an initial sales charge may instead be subject to a CDSC of
1.0% of amounts redeemed within the first year after purchase. Such CDSC
may be waived in connection with certain fee-based programs. See
"Shareholder Services--Fee-Based Programs"--page 36.
(e) The CDSC may be modified in connection with certain fee-based programs.
See "Shareholder Services--Fee-Based Programs"--page 36.
(f) The CDSC may be waived in connection with certain fee-based programs. See
"Shareholder Services--Fee-Based Programs"--page 36.
(g) See "Management of the Trust--Management and Advisory Arrangements"--page
21.
(h) See "Purchase of Shares--Distribution Plans"--page 29.
(i) See "Management of the Trust--Transfer Agency Services"--page 22.
(j) For the fiscal year ended July 31, 1997, Fund Asset Management, L.P., (the
"Manager") voluntarily waived all of the management fees due from the Fund
and voluntarily reimbursed the Fund for a portion of other expenses
(excluding Rule 12b-1 fees). Total Fund Operating Expenses in the fee
table above have been restated to assume the absence of any such waiver or
reimbursement because the Manager may discontinue or reduce such waiver of
fees and/or assumption of expenses at any time without notice. For the
fiscal year ended July 31, 1997 the Manager waived management fees and
reimbursed expenses totaling 0.85% for Class A shares, 0.85% for Class B
shares, 0.85% for Class C shares and 0.85% for Class D shares after which
the Fund's total expense ratio was 0.47% for Class A shares, 0.97% for
Class B shares, 1.07% for Class C shares and 0.56% for Class D shares.
2
<PAGE>
EXAMPLE:
<TABLE>
<CAPTION>
CUMULATIVE EXPENSES
PAID FOR THE PERIOD OF:
-------------------------------
1 YEAR 3 YEARS 5 YEARS 10 YEARS
------ ------- ------- --------
<S> <C> <C> <C> <C>
An investor would pay the following expenses
on a $1,000 investment including the maximum
$40 initial sales charge (Class A and Class D
shares only) and assuming (1) the Total Fund
Operating Expenses for each class set forth
on page 2, (2) a 5% annual return throughout
the periods and (3) redemption at the end of
the period (including any applicable CDSC for
Class B and Class C shares):
Class A..................................... $53 $80 $109 $193
Class B..................................... $58 $77 $ 99 $214
Class C..................................... $30 $60 $104 $224
Class D..................................... $54 $83 $114 $202
An investor would pay the following expenses
on the same $1,000 investment assuming no
redemption at the end of the period:
Class A..................................... $53 $80 $109 $193
Class B..................................... $18 $57 $ 99 $214
Class C..................................... $20 $60 $104 $224
Class D..................................... $54 $83 $114 $202
</TABLE>
- --------
The foregoing Fee Table is intended to assist investors in understanding the
costs and expenses that a shareholder in the Fund will bear directly or
indirectly. The Example set forth above assumes reinvestment of all dividends
and distributions and utilizes a 5% annual rate of return as mandated by
Commission regulations. THE EXAMPLE SHOULD NOT BE CONSIDERED A REPRESENTATION
OF PAST OR FUTURE EXPENSES OR ANNUAL RATES OF RETURN, AND ACTUAL EXPENSES OR
ANNUAL RATES OF RETURN MAY BE MORE OR LESS THAN THOSE ASSUMED FOR PURPOSES OF
THE EXAMPLE. Class B and Class C shareholders who hold their shares for an
extended period of time may pay more in Rule 12b-1 distribution fees than the
economic equivalent of the maximum front-end sales charges permitted under the
Conduct Rules of the National Association of Securities Dealers, Inc. (the
"NASD"). Merrill Lynch may charge its customers a processing fee (presently
$5.35) for confirming purchases and repurchases. Purchases and redemptions
made directly through the Fund's Transfer Agent are not subject to the
processing fee. See "Purchase of Shares" and "Redemption of Shares."
3
<PAGE>
MERRILL LYNCH SELECT PRICINGSM SYSTEM
The Fund offers four classes of shares under the Merrill Lynch Select
PricingSM System. The shares of each class may be purchased at a price equal
to the next determined net asset value per share subject to the sales charges
and ongoing fee arrangements described below. Shares of Class A and Class D
are sold to investors choosing the initial sales charge alternatives, and
shares of Class B and Class C are sold to investors choosing the deferred
sales charge alternatives. The Merrill Lynch Select PricingSM System is used
by more than 50 registered investment companies advised by Merrill Lynch Asset
Management, L.P. ("MLAM") or Fund Asset Management, L.P. ("FAM" or the
"Manager"), an affiliate of MLAM. Funds advised by MLAM or FAM that utilize
the Merrill Lynch Select PricingSM System are referred to herein as "MLAM-
advised mutual funds."
Each Class A, Class B, Class C or Class D share of the Fund represents an
identical interest in the investment portfolio of the Fund and has the same
rights, except that Class B, Class C and Class D shares bear the expenses of
the ongoing account maintenance fees and Class B and Class C shares bear the
expenses of the ongoing distribution fees and the additional incremental
transfer agency costs resulting from the deferred sales charge arrangements.
The CDSCs, distribution and account maintenance fees that are imposed on Class
B and Class C shares, as well as the account maintenance fees that are imposed
on Class D shares, are imposed directly against those classes and not against
all assets of the Fund and, accordingly, such charges will not affect the net
asset value of any other class or have any impact on investors choosing
another sales charge option. Dividends paid by the Fund for each class of
shares will be calculated in the same manner at the same time and will differ
only to the extent that account maintenance and distribution fees and any
incremental transfer agency costs relating to a particular class are borne
exclusively by that class. Each class has different exchange privileges. See
"Shareholder Services--Exchange Privilege."
Investors should understand that the purpose and function of the initial
sales charges with respect to the Class A and Class D shares are the same as
those of the CDSCs and distribution fees with respect to the Class B and Class
C shares in that the sales charges and distribution fees applicable to each
class provide for the financing of the distribution of the shares of the Fund.
The distribution-related revenues paid with respect to a class will not be
used to finance the distribution expenditures of another class. Sales
personnel may receive different compensation for selling different classes of
shares.
4
<PAGE>
The following table sets forth a summary of the distribution arrangements
for each class of shares under the Merrill Lynch Select Pricing SM System,
followed by a more detailed description of each class and a discussion of the
factors that investors should consider in determining the method of purchasing
shares under the Merrill Lynch Select Pricing SM System that the investor
believes is most beneficial under his particular circumstances. More detailed
information as to each class of shares is set forth under "Purchase of
Shares."
<TABLE>
<CAPTION>
ACCOUNT
MAINTENANCE DISTRIBUTION
CLASS SALES CHARGE(/1/) FEE FEE CONVERSION FEATURE
- ---------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
A Maximum 4.00% initial No No No
sales charge(/2/)(/3/)
- ---------------------------------------------------------------------------------------
B CDSC for a period of four years, 0.25% 0.25% B shares convert to
at a rate of 4.0% during the D shares automatically
first year, decreasing after approximately
1.0% annually to 0.0%(/4/) ten years(/5/)
- ---------------------------------------------------------------------------------------
C 1.0% CDSC for one year(/6/) 0.25% 0.35% No
- ---------------------------------------------------------------------------------------
D Maximum 4.00% initial 0.10% No No
sales charge(/3/)
</TABLE>
- --------
(1) Initial sales charges are imposed at the time of purchase as a percentage
of the offering price. CDSCs are imposed if the redemption occurs within
the applicable CDSC time period. The charge will be assessed on an amount
equal to the lesser of the proceeds of redemption or the cost of the
shares being redeemed.
(2) Offered only to eligible investors. See "Purchase of Shares--Initial Sales
Charge Alternatives--Class A and Class D Shares--Eligible Class A
Investors."
(3) Reduced for purchases of $25,000 or more and waived for purchases of Class
A shares by participants in connection with certain fee-based programs.
Class A and Class D share purchases of $1,000,000 or more may not be
subject to an initial sales charge but instead may be subject to a 1.0%
CDSC if redeemed within one year. Such CDSC may be waived in connection
with certain fee-based programs. See "Class A" and "Class D" below.
(4) The CDSC may be modified in connection with certain fee-based programs.
(5) The conversion period for dividend reinvestment shares and certain fee-
based programs was modified. Also, Class B shares of certain other MLAM-
advised mutual funds into which exchanges may be made have an eight-year
conversion period. If Class B shares of the Fund are exchanged for Class B
shares of another MLAM-advised mutual fund, the conversion period
applicable to the Class B shares acquired in the exchange will apply, and
the holding period for the shares exchanged will be tacked on to the
holding period for the shares acquired.
(6) The CDSC may be waived in connection with certain fee-based programs.
Class A: Class A shares incur an initial sales charge when they are purchased
and bear no ongoing distribution or account maintenance fees. Class A
shares are offered to a limited group of investors and also will be
issued upon reinvestment of dividends on outstanding Class A shares.
Investors that currently own Class A shares of the Fund in a
shareholder account are entitled to purchase additional Class A
shares of the Fund in that account. Other eligible investors include
participants in certain fee-based programs. In addition, Class A
shares will be offered at net asset value to Merrill Lynch & Co.,
Inc. ("ML&Co.") and its subsidiaries (the term "subsidiaries," when
used herein with respect to ML&Co. includes MLAM, the Manager and
certain other entities directly or indirectly wholly owned and
controlled by ML&Co.), and their directors and employees, and to
members of the Boards of MLAM-
5
<PAGE>
advised mutual funds. The maximum initial sales charge of 4.00% is
reduced for purchases of $25,000 and over and waived for purchases by
participants in connection with certain fee-based programs. Purchases
of $1,000,000 or more may not be subject to an initial sales charge but
if the initial sales charge is waived, such purchases may be subject to
a 1.0% CDSC if the shares are redeemed within one year after purchase.
Such CDSC may be waived in connection with redemptions to fund
participation in certain fee-based programs. Sales charges also are
reduced under a right of accumulation that takes into account the
investor's holdings of all classes of all MLAM-advised mutual funds.
See "Purchase of Shares--Initial Sales Charge Alternatives--Class A and
Class D Shares."
Class B: Class B shares do not incur a sales charge when they are purchased,
but they are subject to an ongoing account maintenance fee of 0.25%
and an ongoing distribution fee of 0.25% of the Fund's average net
assets attributable to Class B shares, as well as a CDSC if they are
redeemed within four years of purchase. Such CDSC may be modified in
connection with certain fee-based programs. Approximately ten years
after issuance, Class B shares will convert automatically into Class
D shares of the Fund, which are subject to a lower account
maintenance fee of 0.10% and no distribution fee; Class B shares of
certain other MLAM-advised mutual funds into which exchanges may be
made convert into Class D shares automatically after approximately
eight years. If Class B shares of the Fund are exchanged for Class B
shares of another MLAM-advised mutual fund, the conversion period
applicable to the Class B shares acquired in the exchange will apply,
as will the Class D account maintenance fee of the acquired fund upon
the conversion, and the holding period for the shares exchanged will
be tacked on to the holding period for the shares acquired. Automatic
conversion of Class B shares into Class D shares will occur at least
once each month on the basis of the relative net asset values of the
shares of the two classes on the conversion date, without the
imposition of any sales load, fee or other charge. Conversion of
Class B shares to Class D shares will not be deemed a purchase or
sale of the shares for Federal income tax purposes. Shares purchased
through reinvestment of dividends on Class B shares also will convert
automatically to Class D shares. The conversion period for dividend
reinvestment shares is modified as described under "Purchase of
Shares--Deferred Sales Charge Alternatives--Class B and Class C
Shares--Conversion of Class B Shares to Class D Shares."
Class C: Class C shares do not incur a sales charge when they are purchased,
but they are subject to an ongoing account maintenance fee of 0.25%
and an ongoing distribution fee of 0.35% of the Fund's average net
assets attributable to Class C shares. Class C shares are also
subject to a CDSC of 1.0% if they are redeemed within one year of
purchase. Such CDSC may be waived in connection with certain fee-
based programs. Although Class C shares are subject to a CDSC for
only one year (as compared to four years for Class B), Class C shares
have no conversion feature and, accordingly, an investor who
purchases Class C shares will be subject to account maintenance fees
and higher distribution fees that will be imposed on Class C shares
for an indefinite period subject to annual approval by the Trust's
Board of Trustees and regulatory limitations.
Class D: Class D shares incur an initial sales charge when they are purchased
and are subject to an ongoing account maintenance fee of 0.10% of the
Fund's average net assets attributable to Class D shares. Class D
shares are not subject to an ongoing distribution fee or any CDSC
when they are redeemed. The maximum initial sales charge of 4.00% is
reduced for purchases of $25,000 and over. Purchases
6
<PAGE>
of $1,000,000 or more may not be subject to an initial sales charge but
if the initial sales charge is waived such purchases may be subject to a
CDSC of 1.0% if the shares are redeemed within one year after purchase.
Such CDSC may be waived in connection with certain fee-based programs.
The schedule of initial sales charges and reductions for the Class D
shares is the same as the schedule for Class A shares, except that there
is no waiver for purchases of Class D shares in connection with certain
fee-based programs. Class D shares also will be issued upon conversion
of Class B shares as described above under "Class B." See "Purchase of
Shares--Initial Sales Charge Alternatives--Class A and Class D Shares."
The following is a discussion of the factors that investors should consider
in determining the method of purchasing shares under the Merrill Lynch Select
Pricing SM System that the investor believes is most beneficial under his
particular circumstances.
Initial Sales Charge Alternatives. Investors who prefer an initial sales
charge alternative may elect to purchase Class D shares or, if an eligible
investor, Class A shares. Investors choosing the initial sales charge
alternative who are eligible to purchase Class A shares should purchase Class
A shares rather than Class D shares because there is an account maintenance
fee imposed on Class D shares. Investors qualifying for significantly reduced
initial sales charges may find the initial sales charge alternative
particularly attractive because similar sales charge reductions are not
available with respect to the CDSCs imposed in connection with purchases of
Class B or Class C shares. Investors not qualifying for reduced initial sales
charges who expect to maintain their investment for an extended period of time
also may elect to purchase Class A or Class D shares, because over time the
accumulated ongoing account maintenance and distribution fees on Class B or
Class C shares may exceed the initial sales charge and, in the case of Class D
shares, the account maintenance fee. Although some investors that previously
purchased Class A shares may no longer be eligible to purchase Class A shares
of other MLAM-advised mutual funds, those previously purchased Class A shares,
together with Class B, Class C and Class D share holdings, will count toward a
right of accumulation that may qualify the investor for reduced initial sales
charges on new initial sales charge purchases. In addition, the ongoing Class
B and Class C account maintenance and distribution fees will cause Class B and
Class C shares to have higher expense ratios, pay lower dividends and have
lower total returns than the initial sales charge shares. The ongoing Class D
account maintenance fees will cause Class D shares to have a higher expense
ratio, pay lower dividends and have a lower total return than Class A shares.
Deferred Sales Charge Alternatives. Because no initial sales charges are
deducted at the time of purchase, Class B and Class C shares provide the
benefit of putting all of the investor's dollars to work from the time the
investment is made. The deferred sales charge alternatives may be particularly
appealing to investors who do not qualify for a reduction in initial sales
charges. Both Class B and Class C shares are subject to ongoing account
maintenance fees and distribution fees; however, the ongoing account
maintenance and distribution fees potentially may be offset to the extent any
return is realized on the additional funds initially invested in Class B or
Class C shares. In addition, Class B shares will be converted into Class D
shares of the Fund after a conversion period of approximately ten years, and
thereafter investors will be subject to lower ongoing fees.
Certain investors may elect to purchase Class B shares if they determine it
to be most advantageous to have all their funds invested initially and intend
to hold their shares for an extended period of time. Investors in Class B
shares should take into account whether they intend to redeem their shares
within the CDSC period and, if
7
<PAGE>
not, whether they intend to remain invested until the end of the conversion
period and thereby take advantage of the reduction in ongoing fees resulting
from the conversion into Class D shares. Other investors, however, may elect
to purchase Class C shares if they determine that it is advantageous to have
all their assets invested initially and they are uncertain as to the length of
time they intend to hold their assets in MLAM-advised mutual funds. Although
Class C shareholders are subject to a shorter CDSC period at a lower rate,
they are subject to higher distribution fees and forgo the Class B conversion
feature, making their investment subject to account maintenance and
distribution fees for an indefinite period of time. In addition, while both
Class B and Class C distribution fees are subject to the limitations on asset-
based sales charges imposed by the NASD, the Class B distribution fees are
further limited under a voluntary waiver of asset-based sales charges. See
"Purchase of Shares--Limitations on the Payment of Deferred Sales Charges."
8
<PAGE>
FINANCIAL HIGHLIGHTS
The financial information in the table below has been audited in connection
with the annual audits of the financial statements of the Fund by Deloitte &
Touche llp, independent auditors. Financial statements for the year ended July
31, 1997 and the independent auditors' report thereon are included in the
Statement of Additional Information. The following per share data and ratios
have been derived from information provided in the Fund's audited financial
statements. Further information about the performance of the Fund is contained
in the Fund's most recent annual report to shareholders which may be obtained,
without charge, by calling or by writing the Trust at the telephone number or
address on the front cover of this Prospectus.
<TABLE>
<CAPTION>
CLASS A CLASS B CLASS C
----------------------------------- -------------------------------------- ---------------------------
FOR THE FOR THE FOR THE FOR THE FOR THE FOR THE
YEAR PERIOD YEAR PERIOD YEAR PERIOD
ENDED OCTOBER 29, ENDED OCTOBER 29, ENDED OCTOBER 21,
JULY 31, 1993+ JULY 31, 1993+ JULY 31, 1994+
---------------------- TO JULY 31, ------------------------- TO JULY 31, -------------- TO JULY 31,
1997 1996 1995 1994 1997 1996 1995 1994 1997 1996 1995
------ ------ ------ ----------- ------- ------- ------- ----------- ------ ------ -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Increase
(Decrease) in Net
Asset Value:
PER SHARE
OPERATING
PERFORMANCE:
Net asset value,
beginning of
period........... $ 9.21 $ 9.15 $ 9.20 $10.00 $ 9.21 $ 9.16 $ 9.20 $ 10.00 $ 9.22 $ 9.16 $ 8.79
------ ------ ------ ------ ------- ------- ------- ------- ------ ------ ------
Investment
income--net..... .48 .47 .52 .37 .43 .42 .47 .33 .42 .41 .36
Realized and
unrealized gain
(loss) on
investments--
net............. .45 .06 (.05) (.80) .45 .05 (.04) (.80) .45 .06 .37
------ ------ ------ ------ ------- ------- ------- ------- ------ ------ ------
Total from
investment
operations....... .93 .53 .47 (.43) .88 .47 .43 (.47) .87 .47 .73
------ ------ ------ ------ ------- ------- ------- ------- ------ ------ ------
Less dividends
from investment
income--net...... (.48) (.47) (.52) (.37) (.43) (.42) (.47) (.33) (.42) (.41) (.36)
------ ------ ------ ------ ------- ------- ------- ------- ------ ------ ------
Net asset value,
end of period.... $ 9.66 $ 9.21 $ 9.15 $ 9.20 $ 9.66 $ 9.21 $ 9.16 $ 9.20 $ 9.67 $ 9.22 $ 9.16
====== ====== ====== ====== ======= ======= ======= ======= ====== ====== ======
TOTAL INVESTMENT
RETURN:**
Based on net
asset value per
share............ 10.35% 5.85% 5.39% (4.32)%# 9.79% 5.19% 4.96% (4.68)%# 9.67% 5.18% 8.51%#
====== ====== ====== ====== ======= ======= ======= ======= ====== ====== ======
RATIOS TO AVERAGE
NET ASSETS:
Expenses, net of
reimbursement.... .47% .37% .13% .03%* .97% .88% .65% .53%* 1.07% 1.00% .82%*
====== ====== ====== ====== ======= ======= ======= ======= ====== ====== ======
Expenses......... 1.32% 1.26% 1.57% 1.76%* 1.82% 1.77% 2.08% 2.27%* 1.92% 1.88% 2.08%*
====== ====== ====== ====== ======= ======= ======= ======= ====== ====== ======
Investment
income--net...... 5.11% 5.04% 5.80% 5.30%* 4.59% 4.52% 5.29% 4.74%* 4.47% 4.39% 5.08%*
====== ====== ====== ====== ======= ======= ======= ======= ====== ====== ======
SUPPLEMENTAL
DATA:
Net assets, end
of period (in
thousands)....... $1,928 $1,252 $1,362 $1,589 $21,851 $22,053 $18,371 $14,484 $2,038 $2,229 $1,013
====== ====== ====== ====== ======= ======= ======= ======= ====== ====== ======
Portfolio
turnover......... 94.90% 81.87% 73.99% 29.40% 94.90% 81.87% 73.99% 29.40% 94.90% 81.87% 73.99%
====== ====== ====== ====== ======= ======= ======= ======= ====== ====== ======
<CAPTION>
CLASS D
-------------------------
FOR THE FOR THE
YEAR PERIOD
ENDED OCTOBER 21,
JULY 31, 1994+
------------- TO JULY 31,
1997 1996 1995
------ ------ -----------
<S> <C> <C> <C>
Increase
(Decrease) in Net
Asset Value:
PER SHARE
OPERATING
PERFORMANCE:
Net asset value,
beginning of
period........... $9.21 $9.16 $8.79
------ ------ -----------
Investment
income--net..... .47 .46 .40
Realized and
unrealized gain
(loss) on
investments--
net............. .45 .05 .37
------ ------ -----------
Total from
investment
operations....... .92 .51 .77
------ ------ -----------
Less dividends
from investment
income--net...... (.47) (.46) (.40)
------ ------ -----------
Net asset value,
end of period.... $9.66 $9.21 $9.16
====== ====== ===========
TOTAL INVESTMENT
RETURN:**
Based on net
asset value per
share............ 10.24% 5.63% 8.94%#
====== ====== ===========
RATIOS TO AVERAGE
NET ASSETS:
Expenses, net of
reimbursement.... .56% .47% .31%*
====== ====== ===========
Expenses......... 1.41% 1.36% 1.55%*
====== ====== ===========
Investment
income--net...... 5.00% 4.91% 5.57%*
====== ====== ===========
SUPPLEMENTAL
DATA:
Net assets, end
of period (in
thousands)....... $ 883 $ 647 $ 517
====== ====== ===========
Portfolio
turnover......... 94.90% 81.87% 73.99%
====== ====== ===========
</TABLE>
- ----
+ Commencement of operations.
* Annualized.
** Total investment returns exclude the effects of sales loads.
# Aggregate total investment return.
9
<PAGE>
INVESTMENT OBJECTIVE AND POLICIES
The investment objective of the Fund is to provide shareholders with as high
a level of income exempt from Federal and Maryland income taxes as is
consistent with prudent investment management. The Fund seeks to achieve its
objective while providing investors with the opportunity to invest in a
portfolio of securities consisting primarily of long-term obligations issued
by or on behalf of the State of Maryland, its political subdivisions, agencies
and instrumentalities and obligations of other qualifying issuers, such as
issuers located in Puerto Rico, the U.S. Virgin Islands and Guam, which pay
interest exempt, in the opinion of bond counsel to the issuer, from Federal
and Maryland income taxes. Obligations exempt from Federal income taxes are
referred to herein as "Municipal Bonds" and obligations exempt from both
Federal and Maryland income taxes are referred to as "Maryland Municipal
Bonds." Unless otherwise indicated, references to Municipal Bonds shall be
deemed to include Maryland Municipal Bonds. The Fund at all times, except
during temporary defensive periods, will maintain at least 65% of its total
assets invested in Maryland Municipal Bonds. The investment objective of the
Fund as set forth in the first sentence of this paragraph is a fundamental
policy and may not be changed without shareholder approval. At times, the Fund
may seek to hedge its portfolio through the use of futures transactions to
reduce volatility in the net asset value of Fund shares.
Municipal Bonds may include several types of bonds. The Fund may also invest
in variable rate demand obligations ("VRDOs"). The interest on Municipal Bonds
may bear a fixed rate or be payable at a variable or floating rate. At least
80% of the Municipal Bonds purchased by the Fund primarily will be what are
commonly referred to as "investment grade" securities, which are obligations
rated at the time of purchase within the four highest quality ratings as
determined by either Moody's Investors Service, Inc. ("Moody's") (currently
Aaa, Aa, A and Baa), Standard & Poor's Ratings Services ("Standard & Poor's")
(currently AAA, AA, A and BBB) or Fitch Investors Service, Inc. ("Fitch")
(currently AAA, AA, A and BBB). If Municipal Bonds are unrated, such
securities will possess creditworthiness comparable, in the opinion of the
Manager, to obligations in which the Fund may invest. Municipal Bonds rated in
the fourth highest rating category, while considered "investment grade," have
certain speculative characteristics and are more likely to be downgraded to
non-investment grade than obligations rated in one of the top three rating
categories. See Appendix II--"Ratings of Municipal Bonds" in the Statement of
Additional Information for more information regarding ratings of debt
securities. An issue of rated Municipal Bonds may cease to be rated or its
rating may be reduced below "investment grade" subsequent to its purchase by
the Fund. If an obligation is downgraded below investment grade, the Manager
will consider factors such as price, credit risk, market conditions, financial
condition of the issuer and interest rates to determine whether to continue to
hold the obligation in the Fund's portfolio.
The Fund may invest up to 20% of its total assets in Municipal Bonds that
are rated below Baa by Moody's or below BBB by Standard & Poor's or Fitch, or
which in the Manager's judgment, possess similar credit characteristics. Such
securities, sometimes referred to as "high yield" or "junk" bonds, are
predominantly speculative with respect to the capacity to pay interest and
repay principal in accordance with the terms of the security and generally
involve a greater volatility of price than securities in higher rating
categories. The market prices of high-yielding, lower-rated securities may
fluctuate more than higher-rated securities and may decline significantly in
periods of general economic difficulty, which may follow periods of rising
interest rates. In purchasing such securities, the Fund will rely on the
Manager's judgment, analysis and experience in evaluating the creditworthiness
of the issuer of such securities. The Manager will take into consideration,
among other things, the issuer's financial resources, its sensitivity to
economic conditions and trends, its operating history, the
10
<PAGE>
quality of its management and regulatory matters. See "Investment Objective
and Policies" in the Statement of Additional Information for a more detailed
discussion of the pertinent risk factors involved in investing in "high yield"
or "junk" bonds and Appendix II--"Ratings of Municipal Bonds" in the Statement
of Additional Information for additional information regarding ratings of debt
securities. The Fund does not intend to purchase debt securities that are in
default or which the Manager believes will be in default.
Certain Municipal Bonds may be entitled to the benefits of letters of credit
or similar credit enhancements issued by financial institutions. In such
instances, the Trustees and the Manager will take into account in assessing
the quality of such bonds not only the creditworthiness of the issuer of such
bonds but also the creditworthiness of the financial institution.
The Fund's investments may also include VRDOs and VRDOs in the form of
participation interests ("Participating VRDOs") in variable rate tax-exempt
obligations held by a financial institution. The VRDOs in which the Fund will
invest are tax-exempt obligations which contain a floating or variable
interest rate adjustment formula and an unconditional right of demand on the
part of the holder thereof to receive payment of the unpaid principal balance
plus accrued interest on a short notice period not to exceed seven days.
Participating VRDOs provide the Fund with a specified undivided interest (up
to 100%) of the underlying obligation and the right to demand payment of the
unpaid principal balance plus accrued interest on the Participating VRDOs from
the financial institution on a specified number of days' notice, not to exceed
seven days. There is, however, the possibility that because of a default or
insolvency, the demand feature of VRDOs or Participating VRDOs may not be
honored. The Fund has been advised by its counsel that the Fund should be
entitled to treat the income received on Participating VRDOs as interest from
tax-exempt obligations.
VRDOs that contain an unconditional right of demand to receive payment of
the unpaid principal balance plus accrued interest on a notice period
exceeding seven days may be deemed illiquid securities. A VRDO with a demand
notice period exceeding seven days will therefore be subject to the Fund's
restriction on illiquid investments unless, in the judgment of the Trustees,
such VRDO is liquid. The Trustees may adopt guidelines and delegate to the
Manager the daily function of determining and monitoring liquidity of such
VRDOs. The Trustees, however, will retain sufficient oversight and be
ultimately responsible for such determinations.
The Fund ordinarily does not intend to realize investment income not exempt
from Federal and Maryland income taxes. However, to the extent that suitable
Maryland Municipal Bonds are not available for investment by the Fund, the
Fund may purchase Municipal Bonds issued by other states, their agencies and
instrumentalities, the interest income on which is exempt, in the opinion of
bond counsel, from Federal, but not Maryland, taxation. The Fund also may
invest in securities not issued by or on behalf of a state or territory or by
an agency or instrumentality thereof, if the Fund nevertheless believes such
securities to be exempt from Federal income taxation ("Non-Municipal Tax-
Exempt Securities"). Non-Municipal Tax-Exempt Securities may include
securities issued by other investment companies that invest in municipal
bonds, to the extent such investments are permitted by the Investment Company
Act of 1940, as amended (the "1940 Act"). Other Non-Municipal Tax-Exempt
Securities could include trust certificates or other instruments evidencing
interests in one or more long-term municipal securities.
Under normal circumstances, except when acceptable securities are
unavailable as determined by the Manager, the Fund will invest at least 65% of
its total assets in Maryland Municipal Bonds. For temporary defensive periods
or to provide liquidity, the Fund has the authority to invest as much as 35%
of its total assets
11
<PAGE>
in tax-exempt or taxable money market obligations with a maturity of one year
or less (such short-term obligations being referred to herein as "Temporary
Investments"), except that taxable Temporary Investments shall not exceed 20%
of the Fund's net assets. The Temporary Investments, VRDOs and Participating
VRDOs in which the Fund may invest also will be in the following rating
categories at the time of purchase: MIG-1/VMIG-1 through MIG-4/VMIG-4 for
notes and VRDOs and Prime-1 through Prime-3 for commercial paper (as
determined by Moody's), SP-1 through SP-2 for notes and A-1 through A-3 for
VRDOs and commercial paper (as determined by Standard & Poor's), or F-1
through F-3 for notes, VRDOs and commercial paper (as determined by Fitch) or,
if unrated, of comparable quality in the opinion of the Manager. The Fund at
all times will have at least 80% of its net assets invested in securities the
interest on which is exempt from Federal taxation. However, interest received
on certain otherwise tax-exempt securities which are classified as "private
activity bonds" (in general, bonds that benefit non-governmental entities),
may be subject to a Federal alternative minimum tax. The percentage of the
Fund's net assets invested in "private activity bonds" will vary during the
year. See "Distributions and Taxes." In addition, the Fund reserves the right
to invest temporarily a greater portion of its assets in Temporary Investments
for defensive purposes, when, in the judgment of the Manager, market
conditions warrant. The Fund's hedging strategies, which are described in more
detail under "Financial Futures Transactions and Options," are not fundamental
policies and may be modified by the Trustees of the Trust without the approval
of the Fund's shareholders.
POTENTIAL BENEFITS
Investment in shares of the Fund offers several benefits. The Fund offers
investors the opportunity to receive income exempt from Federal and Maryland
income taxes by investing in a professionally managed portfolio consisting
primarily of long-term Maryland Municipal Bonds. The Fund also provides
liquidity because of its redemption features and relieves the investor of the
burdensome administrative details involved in managing a portfolio of tax-
exempt securities. The benefits of investing in the Fund are at least
partially offset by the expenses involved in operating an investment company.
Such expenses primarily consist of the management fee and operational costs,
and in the case of certain classes of shares, the account maintenance and
distribution costs.
SPECIAL AND RISK CONSIDERATIONS RELATING TO MUNICIPAL BONDS
The risks and special considerations involved in investments in Municipal
Bonds vary with the types of instruments being acquired. Investments in Non-
Municipal Tax-Exempt Securities may present similar risks, depending on the
particular product. Certain instruments in which the Fund may invest may be
characterized as derivative instruments. See "Description of Municipal Bonds"
and "Financial Futures Transactions and Options."
Moreover, the Fund ordinarily will invest at least 65% of its total assets
in Maryland Municipal Bonds, and therefore it is more susceptible to factors
adversely affecting issuers of Maryland Municipal Bonds than is a tax-exempt
mutual fund that is not concentrated in issuers of Maryland Municipal Bonds to
this degree.
After enjoying rapid economic growth in the 1980's, Maryland has experienced
declining rates of growth in the 1990's. Despite this trend, per capita income
for residents of Maryland exceeds per capita income in the United States.
12
<PAGE>
On June 30, 1994, the State of Maryland's General Fund, representing
approximately 55% of each year's total budget, had a surplus on a budgetary
basis of $60 million in the Revenue Stabilization Account of the State Reserve
Fund. On June 30, 1995, the General Fund contained a surplus on a budgetary
basis of $26.5 million (after reservation of $106 million for fiscal year 1996
expenses) and the Revenue Stabilization Account of the State Reserve Fund
contained $286.1 million. In April 1995 the State's General Assembly approved
a $14.4 billion budget for fiscal year 1996, which budget did not include any
expenditures based upon additional revenue from new or broad-based taxes, but
included a $270 million appropriation to the State Reserve Fund, including
$200 million to the Revenue Stabilization Account. When the fiscal year 1996
budget was enacted, the State projected that it would end the fiscal year with
a General Fund surplus of $3.1 million. In December 1995 and March 1996 the
State lowered its estimates of General Fund revenues by a total of $148
million. To address this reduction in revenues the State, among other things,
reduced General Fund appropriations and transferred $57 million from the
Revenue Stabilization Account. The balance in the Revenue Stabilization
Account on June 30, 1996, taking into account this transfer, was $461.2
million. In April, 1996, the General Assembly approved a $14.6 billion 1997
fiscal year budget. The budget as enacted includes funds sufficient to meet
all fiscal year 1996 deficiencies and to meet all specific statutory funding
requirements; the budget incorporates $29 million in savings from revisions to
the State personnel system and reform to the welfare and Medicare programs.
When this budget was enacted, the State estimated that the General Fund
surplus on a budgetary basis at June 30, 1996 would be approximately $22.5
million, in addition to which the State projected that there would be $490.4
million in the Revenue Stabilization Account of the State Reserve Fund. The
State currently projects a General Fund balance on a budgetary basis of $144.5
million.
In April, 1997 the General Assembly approved a $15.4 billion 1998 fiscal
year budget. This budget (i) includes funds sufficient to meet all specific
statutory funding requirements; (ii) incorporates the first year of a five-
year phase-in of a 10% reduction in personal income taxes (estimated to reduce
revenues by $38.5 million in fiscal year 1998 and $450 million when fully
phased in) and certain reductions in sales taxes on certain manufacturing
equipment (estimated to reduce revenues by $38.6 million when the reductions
are fully phased-in during fiscal year 2001); and (iii) includes the first
year's $30 million funding under an agreement to provide additional funds
totaling $230 million over a five-year period to schools in the City of
Baltimore and related grants to other subdivisions totaling $32 million. When
this budget was enacted, the State estimated the General Fund surplus on a
budgetary basis would be $28.2 million, in addition to which the State
projected that there would be a balance of $554 million in the Revenue
Stabilization Account of the State Reserve Fund.
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 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 Maryland
Municipal Bonds or Municipal Bonds in which the Fund invests.
The Manager does not believe that the current economic conditions in
Maryland or other factors described above will have a significant adverse
effect on the Fund's ability to invest in high quality Maryland 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 Maryland
13
<PAGE>
Municipal Bonds. See "Description of Municipal Bonds" in the Statement of
Additional Information and see also Appendix I--"Economic and Financial
Conditions in Maryland" in the Statement of Additional Information.
DESCRIPTION OF MUNICIPAL BONDS
Municipal Bonds include debt obligations issued to obtain funds for various
public purposes, including construction and equipping of a wide range of
public facilities (including water, sewer, gas, electricity, solid waste,
health care, transportation, education and housing facilities), refunding of
outstanding obligations and obtaining funds for general operating expenses and
loans to other public institutions and facilities. In addition, certain types
of bonds are issued by or on behalf of public authorities to finance various
privately operated facilities, including certain facilities for the local
furnishing of electric energy or gas, sewage facilities, solid waste disposal
facilities and other specialized facilities. For purposes of this Prospectus,
such obligations are referred to as Municipal Bonds if the interest paid
thereon is excluded from gross income for purposes of Federal income taxation
and, as Maryland Municipal Bonds if the interest thereon is exempt from
Federal and Maryland income taxes, even though such bonds may be "private
activity bonds" as discussed below.
The two principal classifications of Municipal Bonds are "general
obligation" and "revenue" bonds which latter category includes industrial
development bonds ("IDBs") and, for bonds issued after August 15, 1986,
private activity bonds. General obligation bonds are secured by the issuer's
pledge of its faith, credit and taxing power for the payment of principal and
interest. The taxing power of any governmental entity may be limited, however,
by provisions of its state constitution or laws, and an entity's
creditworthiness will depend on many factors, including potential erosion of
its tax base due to population declines, natural disasters, declines in the
state's industrial base or inability to attract new industries, economic
limits on the ability to tax without eroding the tax base, state legislative
proposals or voter initiatives to limit ad valorem real property taxes and the
extent to which the entity relies on Federal or state aid, access to capital
markets or other factors beyond the state's or entity's control. Accordingly,
the capacity of the issuer of a general obligation bond as to the timely
payment of interest and the repayment of principal when due is affected by the
issuer's maintenance of its tax base.
Revenue bonds are payable only from the revenues derived from a particular
facility or class of facilities or, in some cases, from the proceeds of a
special excise tax or other specific revenue source such as payments from the
user of the facility being financed; accordingly, the timely payment of
interest and the repayment of principal in accordance with the terms of the
revenue or special obligation bond is a function of the economic viability of
such facility or such revenue source.
The Fund may purchase IDBs and private activity bonds. IDBs and private
activity bonds are, in most cases, tax-exempt securities issued by states,
municipalities or public authorities to provide funds, usually through a loan
or lease arrangement, to a private entity for the purpose of financing
construction or improvement of a facility to be used by the entity. Such bonds
are secured primarily by revenues derived from loan repayments or lease
payments due from the entity which may or may not be guaranteed by a parent
company or otherwise secured. IDBs and private activity bonds are generally
not secured by a pledge of the taxing power of the issuer of such bonds.
Therefore, an investor should be aware that repayment of such bonds generally
depends on the revenues of a private entity and be aware of the risks that
such an investment may entail. Continued ability of an
14
<PAGE>
entity to generate sufficient revenues for the payment of principal and
interest on such bonds will be affected by many factors including the size of
the entity, capital structure, demand for its products or services,
competition, general economic conditions, governmental regulation and the
entity's dependence on revenues for the operation of the particular facility
being financed. The Fund may also invest in so-called "moral obligation"
bonds, which are normally issued by special purpose authorities. If an issuer
of moral obligation bonds is unable to meet its obligations, repayment of such
bonds becomes a moral commitment, but not a legal obligation of the state or
municipality in question.
The Fund may invest in Municipal Bonds (and Non-Municipal Tax-Exempt
Securities) the return on which is based on a particular index of value or
interest rates. For example, the Fund may invest in Municipal Bonds that pay
interest based on an index of Municipal Bond interest rates or based on the
value of gold or some other commodity. The principal amount payable upon
maturity of certain Municipal Bonds also may be based on the value of an
index. To the extent the Fund invests in these types of Municipal Bonds, the
Fund's return on such Municipal Bonds will be subject to risk with respect to
the value of the particular index. Interest and principal payable on the
Municipal Bonds may also be based on relative changes among particular
indices. Also, the Fund may invest in so-called "inverse floating obligations"
or "residual interest bonds" on which the interest rates typically decline as
short-term market rates increase and increase as short-term market rates
decline. The Fund's return on such types of Municipal Bonds (and Non-Municipal
Tax-Exempt Securities) will be subject to risk with respect to the value of
the particular index, which may include reduced or eliminated interest
payments and losses of invested principal. Such securities have the effect of
providing a degree of investment leverage, since they may increase or decrease
in value in response to changes, as an illustration, in market interest rates
at a rate which is a multiple (typically two) of the rate at which fixed-rate
long-term tax-exempt securities increase or decrease in response to such
changes. As a result, the market values of such securities will generally be
more volatile than the market values of fixed-rate tax-exempt securities. To
seek to limit the volatility of these securities, the Fund may purchase
inverse floating obligations with shorter-term maturities or which contain
limitations on the extent to which the interest rate may vary. Certain
investments in such obligations may be illiquid. The Fund may not invest in
such illiquid obligations if such investments, together with other illiquid
investments, would exceed 15% of the Fund's total assets. The Manager
believes, however, that indexed and inverse floating obligations represent
flexible portfolio management instruments for the Fund which allow the Fund to
seek potential investment rewards, hedge other portfolio positions or to vary
the degree of investment leverage relatively efficiently under different
market conditions.
Also included within the general category of Municipal Bonds are
participation certificates issued by government authorities or entities to
finance the acquisition or construction of equipment, land and/or facilities.
The certificates represent participations in a lease, an installment purchase
contract or a conditional sales contract (hereinafter collectively called
"lease obligations") relating to such equipment, land or facilities. Although
lease obligations do not constitute general obligations of the issuer for
which the issuer's unlimited taxing power is pledged, a lease obligation
frequently is 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
15
<PAGE>
invest in illiquid lease obligations if such investments, together with other
illiquid investments, would exceed 15% of the Fund's total assets. The Fund
may, however, invest without regard to such limitation in lease obligations
which the Manager, pursuant to guidelines which have been adopted by the Board
of Trustees and subject to the supervision of the Board, determines to be
liquid. The Manager will deem lease obligations liquid if they are publicly
offered and have received an investment grade rating of Baa or better by
Moody's, or BBB or better by Standard & Poor's or Fitch. Unrated lease
obligations, or those rated below investment grade, will be considered liquid
if the obligations come to the market through an underwritten public offering
and at least two dealers are willing to give competitive bids. In reference to
obligations rated below investment grade, the Manager must, among other
things, also review the creditworthiness of the state or political subdivision
obligated to make payment under the lease obligation and make certain
specified determinations based on such factors as the existence of a rating or
credit enhancement (such as insurance), the frequency of trades or quotes for
the obligation and the willingness of dealers to make a market in the
obligation.
The value of bonds and other fixed-income obligations may fall when interest
rates rise and rise when interest rates fall. In general, bonds and other
fixed-income obligations with longer maturities will be subject to greater
volatility resulting from interest rate fluctuations than will similar
obligations with shorter maturities. Under normal conditions, it is generally
anticipated that the Fund's average weighted maturity would be in excess of
ten years.
Federal tax legislation has limited the types and volume of bonds the
interest on which qualifies for a Federal income tax exemption. As a result,
this legislation and legislation which may be enacted in the future may affect
the availability of Municipal Bonds for investment by the Fund.
CALL RIGHTS
The Fund may purchase a Municipal Bond issuer's right to call all or a
portion of such Municipal Bond for mandatory tender for purchase (a "Call
Right"). A holder of a Call Right may exercise such right to require a
mandatory tender for the purchase of related Municipal Bonds, subject to
certain conditions. A Call Right that is not exercised prior to the maturity
of the related Municipal Bond will expire without value. The economic effect
of holding both the Call Right and the related Municipal Bond is identical to
that of holding a Municipal Bond as a non-callable security. Certain
investments in such obligations may be illiquid. The Fund may not invest in
such illiquid obligations if such investments, together with other illiquid
investments, would exceed 15% of the Fund's total assets.
WHEN-ISSUED SECURITIES AND DELAYED DELIVERY TRANSACTIONS
The Fund may purchase or sell Municipal Bonds on a delayed delivery basis or
a when-issued basis at fixed purchase terms. These transactions arise when
securities are purchased or sold by the Fund with payment and delivery taking
place in the future. The purchase will be recorded on the date the Fund enters
into the commitment and the value of the obligation will thereafter be
reflected in the calculation of the Fund's net asset value. The value of the
obligation on the delivery date may be more or less than its purchase price. A
separate account of the Fund will be established with its custodian consisting
of cash, cash equivalents or liquid securities having a market value at all
times at least equal to the amount of the forward commitment.
16
<PAGE>
FINANCIAL FUTURES TRANSACTIONS AND OPTIONS
The Fund is authorized to purchase and sell certain exchange traded
financial futures contracts ("financial futures contracts") solely for the
purpose of hedging its investments in Municipal Bonds against declines in
value and to hedge against increases in the cost of securities it intends to
purchase. However, any transactions involving financial futures or options
(including puts and calls associated therewith) will be in accordance with the
Fund's investment policies and limitations. A financial futures contract
obligates the seller of a contract to deliver and the purchaser of a contract
to take delivery of the type of financial instrument covered by the contract,
or in the case of index-based futures contracts to make and accept a cash
settlement, at a specific future time for a specified price. A sale of
financial futures contracts may provide a hedge against a decline in the value
of portfolio securities because such depreciation may be offset, in whole or
in part, by an increase in the value of the position in the financial futures
contracts. A purchase of financial futures contracts may provide a hedge
against an increase in the cost of securities intended to be purchased,
because such appreciation may be offset, in whole or in part, by an increase
in the value of the position in the futures contracts. Distributions, if any,
of net long-term capital gains from certain transactions in futures or options
are taxable at long-term capital gains rates for Federal income tax purposes,
regardless of the length of time the shareholder has owned Fund shares. Recent
legislation has created new categories of capital gains taxable at different
rates, which the Fund may be able to pass through to shareholders. See
"Distributions and Taxes--Taxes."
The Fund deals in financial futures contracts traded on the Chicago Board of
Trade based on The Bond Buyer Municipal Bond Index, a price-weighted measure
of the market value of 40 large, recently issued tax-exempt bonds. There can
be no assurance, however, that a liquid secondary market will exist to
terminate any particular financial futures contract at any specific time. If
it is not possible to close a financial futures position entered into by the
Fund, the Fund would continue to be required to make daily cash payments of
variation margin in the event of adverse price movements. In such a situation,
if the Fund has insufficient cash, it may have to sell portfolio securities to
meet daily variation margin requirements at a time when it may be
disadvantageous to do so. The inability to close financial futures positions
also could have an adverse impact on the Fund's ability to hedge effectively.
There is also the risk of loss by the Fund of margin deposits in the event of
bankruptcy of a broker with whom the Fund has an open position in a financial
futures contract.
The Fund may purchase and sell financial futures contracts on U.S.
Government securities and write and purchase put and call options on such
futures contracts as a hedge against adverse changes in interest rates as
described more fully in the Statement of Additional Information. With respect
to U.S. Government securities, currently there are financial futures contracts
based on long-term U.S. Treasury bonds, Treasury notes, Government National
Mortgage Association ("GNMA") Certificates and three-month U.S. Treasury
bills.
Subject to policies adopted by the Trustees, the Fund also may engage in
other financial futures contracts transactions and options thereon, such as
financial futures contracts or options on other municipal bond indexes which
may become available if the Manager of the Fund and the Trustees of the Trust
should determine that there is normally a sufficient correlation between the
prices of such futures contracts and the Municipal Bonds in which the Fund
invests to make such hedging appropriate.
Utilization of futures transactions and options thereon involves the risk of
imperfect correlation in movements in the price of futures contracts and
movements in the price of the security which is the subject of the hedge. If
the price of the futures contract moves more or less than the price of the
security that is the subject of the hedge, the Fund will experience a gain or
loss which will not be completely offset by movements in the
17
<PAGE>
price of such security. There is a risk of imperfect correlation where the
securities underlying futures contracts have different maturities, ratings or
geographic mixes than the security being hedged. In addition, the correlation
may be affected by additions to or deletions from the index which serves as a
basis for a financial futures contract. Finally, in the case of futures
contracts on U.S. Government securities and options on such futures contracts,
the anticipated correlation of price movements between the U.S. Government
securities underlying the futures or options and Municipal Bonds may be
adversely affected by economic, political, legislative or other developments
which have a disparate impact on the respective markets for such securities.
Under regulations of the Commodity Futures Trading Commission ("CFTC"), the
futures trading activities described herein will not result in the Fund being
deemed to be a "commodity pool," as defined under such regulations, provided
that the Fund adheres to certain restrictions. In particular, the Fund may
purchase and sell futures contracts and options thereon (i) only for bona fide
hedging purposes, and (ii) for non-hedging purposes, if the aggregate initial
margins and premiums required to establish positions in such contracts and
options does not exceed 5% of the liquidation value of the Fund's portfolio
assets after taking into account unrealized profits and unrealized losses on
any such contracts and options. (However, as stated above, the Fund intends to
engage in options and futures transactions only for hedging purposes.) Margin
deposits may consist of cash or securities acceptable to the broker and the
relevant contract market.
When the Fund purchases a futures contract, or writes a put option or
purchases a call option thereon, it will maintain an amount of cash, cash
equivalents (e.g., high-grade commercial paper and daily tender adjustable
notes) or liquid securities in a segregated account with the Fund's custodian,
so that the amount so segregated plus the amount of initial and variation
margin held in the account of its broker equals the market value of the
futures contracts, thereby ensuring that the use of such futures contract is
unleveraged. It is not anticipated that transactions in futures contracts will
have the effect of increasing portfolio turnover.
Although certain risks are involved in options and futures transactions, the
Manager believes that, because the Fund will engage in futures transactions
only for hedging purposes, the futures portfolio strategies of the Fund will
not subject the Fund to certain risks frequently associated with speculation
in futures transactions. The Fund must meet certain Federal income tax
requirements under the Internal Revenue Code of 1986, as amended (the "Code"),
in order to qualify for the special tax treatment afforded regulated
investment companies, including a requirement that less than 30% of its gross
income be derived from the sale or other disposition of securities held for
less than three months. This requirement will no longer apply to the Fund
after its fiscal year ending July 31, 1998. Additionally, the Fund is required
to meet certain diversification requirements under the Code.
The liquidity of a secondary market in a futures contract may be adversely
affected by "daily price fluctuation limits" established by commodity
exchanges which limit the amount of fluctuation in a futures contract price
during a single trading day. Once the daily limit has been reached in the
contract, no trades may be entered into at a price beyond the limit, thus
preventing the liquidation of open futures positions. Prices have in the past
moved beyond the daily limit on a number of consecutive trading days.
The successful use of transactions in futures also depends on the ability of
the Manager to forecast correctly the direction and extent of interest rate
movements within a given time frame. To the extent these rates remain stable
during the period in which a futures contract is held by the Fund or 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
18
<PAGE>
increase in the value of portfolio securities. As a result, the Fund's total
return for such period may be less than if it had not engaged in the hedging
transaction. Furthermore, the Fund will only engage in hedging transactions
from time to time and may not necessarily be engaging in hedging transactions
when movements in interest rates occur.
Reference is made to the Statement of Additional Information for further
information on financial futures contracts and certain options thereon.
REPURCHASE AGREEMENTS
As Temporary Investments, the Fund may invest in securities pursuant to
repurchase agreements. Repurchase agreements may be entered into only with a
member bank of the Federal Reserve System or a primary dealer in U.S.
Government securities or an affiliate thereof. Under such agreements, the
seller agrees, upon entering into the contract, to repurchase the security
from the Fund at a mutually agreed upon time and price, thereby determining
the yield during the term of the agreement. This results in a fixed rate of
return insulated from market fluctuations during such period. The Fund may not
invest in repurchase agreements maturing in more than seven days if such
investments, together with the Fund's other illiquid investments, would exceed
15% of the Fund's total assets. In the event of a default by the seller under
a repurchase agreement, a Fund may suffer time delays and incur costs or
possible losses in connection with the disposition of the underlying
securities.
INVESTMENT RESTRICTIONS
The Fund's investment activities are subject to further restrictions that
are described in the Statement of Additional Information. Investment
restrictions and policies which are fundamental policies may not be changed
without the approval of the holders of a majority of the Fund's outstanding
voting securities, as defined in the 1940 Act which means the lesser of (i)
67% of the shares represented at a meeting at which more than 50% of the
outstanding shares are represented or (ii) more than 50% of the outstanding
shares. Among its fundamental policies, the Fund may not invest more than 25%
of its assets, taken at market value at the time of each investment, in the
securities of issuers in any particular industry (excluding the U.S.
Government and its agencies and instrumentalities) (for purposes of this
restriction, states, municipalities and their political subdivisions are not
considered to be part of any industry). Investment restrictions and policies
that are non-fundamental policies may be changed by the Board of Trustees
without shareholder approval. As a non-fundamental policy, the Fund may not
borrow amounts in excess of 20% of its total assets taken at market value
(including the amount borrowed), and then only from banks as a temporary
measure for extraordinary or emergency purposes. In addition, the Fund will
not purchase securities while borrowings are outstanding.
As a non-fundamental policy, the Fund will not invest in securities which
cannot be readily resold because of legal or contractual restrictions or which
cannot otherwise be marketed, redeemed or put to the issuer or a third party,
if at the time of acquisition more than 15% of its total assets would be
invested in such securities. This restriction shall not apply to securities
which mature within seven days or securities which the Board of Trustees of
the Trust has otherwise determined to be liquid pursuant to applicable law.
The Fund is classified as non-diversified within the meaning of the 1940
Act, which means that the Fund is not limited by the 1940 Act in the
proportion of its assets that it may invest in obligations of a single issuer.
19
<PAGE>
However, the Fund's investments will be limited so as to qualify as a
"regulated investment company" for purposes of the Code. See "Distributions
and Taxes--Taxes." To qualify, among other requirements, the Trust will limit
the Fund's investments so that, at the close of each quarter of the taxable
year, (i) not more than 25% of the market value of the Fund's total assets
will be invested in the securities of a single issuer, and (ii) with respect
to 50% of the market value of its total assets, not more than 5% of the market
value of its total assets will be invested in the securities of a single
issuer and the Fund will not own more than 10% of the outstanding voting
securities of a single issuer. For purposes of this restriction, the Fund will
regard each state and each political subdivision, agency or instrumentality of
such state and each multi-state agency of which such state is a member and
each public authority which issues securities on behalf of a private entity as
a separate issuer, except that if the security is backed only by the assets
and revenues of a non-government entity then the entity with the ultimate
responsibility for the payment of interest and principal may be regarded as
the sole issuer. These tax-related limitations may be changed by the Trustees
of the Trust to the extent necessary to comply with changes to the Federal tax
requirements. A fund which elects to be classified as "diversified" under the
1940 Act must satisfy the foregoing 5% and 10% requirements with respect to
75% of its total assets. To the extent that the Fund assumes large positions
in the obligations of a small number of issuers, the Fund's total return may
fluctuate to a greater extent than that of a diversified company as a result
of changes in the financial condition or in the market's assessment of the
issuers.
Investors are referred to the Statement of Additional Information for a
complete description of the Fund's investment restrictions.
MANAGEMENT OF THE TRUST
TRUSTEES
The Trustees of the Trust consist of six individuals, five of whom are not
"interested persons" of the Trust as defined in the 1940 Act. The Trustees are
responsible for the overall supervision of the operations of the Trust and the
Fund and perform the various duties imposed on the directors or trustees of
investment companies by the 1940 Act.
The Trustees are:
Arthur Zeikel*--President of the Manager and its affiliate, MLAM; President
and Director of Princeton Services, Inc. ("Princeton Services"); and Executive
Vice President of ML&Co.
James H. Bodurtha--Director and Executive Vice President, The China Business
Group, Inc.
Herbert I. London--John M. Olin Professor of Humanities, New York
University.
Robert R. Martin--Former Chairman, Kinnard Investments, Inc.
Joseph L. May--Attorney in private practice.
Andre F. Perold--Professor, Harvard Business School.
- --------
* Interested person, as defined in the 1940 Act, of the Trust.
20
<PAGE>
MANAGEMENT AND ADVISORY ARRANGEMENTS
The Manager, which is an affiliate of MLAM and is owned and controlled by
ML&Co., a financial services holding company, acts as the manager for the Fund
and provides the Fund with management services. The Manager or MLAM acts as
the investment adviser for more than 140 registered investment companies. MLAM
also offers portfolio management and portfolio analysis services to
individuals and institutions. As of September 30, 1997 the Manager and MLAM
had a total of approximately $272.5 billion in investment company and other
portfolio assets under management, including accounts of certain affiliates of
the Manager.
Subject to the direction of the Trustees, the Manager is responsible for the
actual management of the Fund's portfolio and constantly reviews the Fund's
holdings in light of its own research analysis and that from other relevant
sources. The responsibility for making decisions to buy, sell or hold a
particular security rests with the Manager. The Manager performs certain of
the other administrative services and provides all the office space,
facilities, equipment and necessary personnel for management of the Fund.
Robert D. Sneeden is the Portfolio Manager for the Fund and has been
responsible for the day-to-day management of the Fund's investment portfolio
since November 1996. Mr. Sneeden has been an Assistant Vice President of MLAM
since 1994 and was a Vice President with Lehman Brothers, Inc. from 1990 to
1994.
Pursuant to the management agreement between the Manager and the Trust on
behalf of the Fund (the "Management Agreement"), the Manager is entitled to
receive from the Fund a monthly fee based upon the average daily net assets of
the Fund at the following annual rates: 0.55% of the average daily net assets
not exceeding $500 million; 0.525% of the average daily net assets exceeding
$500 million but not exceeding $1.0 billion; and 0.50% of the average daily
net assets exceeding $1.0 billion. For the fiscal year ended July 31, 1997,
the total fee payable by the Fund to the Manager was $143,865 (based on
average daily net assets of approximately $26.2 million), all of which was
voluntarily waived.
The Management Agreement obligates the Trust on behalf of the Fund to pay
certain expenses incurred in the Fund's operations, including, among other
things, the management fee, legal and audit fees, unaffiliated Trustees' fees
and expenses, registration fees, custodian and transfer agency fees,
accounting and pricing costs, and certain of the costs of printing proxies,
shareholder reports, prospectuses and statements of additional information.
Accounting services are provided to the Fund by the Manager, and the Fund
reimburses the Manager for its costs in connection with such services. The
Manager may waive all or a portion of its management fee and may voluntarily
assume all or a portion of the Fund's expenses. For the fiscal year ended July
31, 1997, the Fund reimbursed the Manager $61,207 for accounting services. For
the fiscal year ended July 31, 1997, the ratio of total expenses to average
net assets was 1.32%, 1.82%, 1.92%, and 1.41% for Class A, Class B, Class C,
and Class D shares, respectively.
CODE OF ETHICS
The Board of Trustees of the Trust has adopted a Code of Ethics under Rule
17j-1 of the 1940 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.
21
<PAGE>
The Codes require that all employees of the Manager preclear any personal
securities investment (with limited exceptions, such as government
securities). The preclearance requirement and associated procedures are
designed to identify any substantive prohibition or limitation applicable to
the proposed investment. The substantive restrictions applicable to all
employees of the Manager include a ban on acquiring any securities in a "hot"
initial public offering and a prohibition from profiting on short-term trading
in securities. In addition, no employee may purchase or sell any security that
at the time is being purchased or sold (as the case may be), or to the
knowledge of the employee is being considered for purchase or sale, by any
fund advised by the Manager. Furthermore, the Codes provide for trading
"blackout periods" which prohibit trading by investment personnel of the Fund
within periods of trading by the Fund in the same (or equivalent) security (15
or 30 days depending upon the transaction).
TRANSFER AGENCY SERVICES
The Transfer Agent, which is a subsidiary of ML&Co., acts as the Fund's
transfer agent pursuant to a Transfer Agency, Dividend Disbursing Agency and
Shareholder Servicing Agency Agreement (the "Transfer Agency Agreement").
Pursuant to the Transfer Agency Agreement, the Transfer Agent is responsible
for the issuance, transfer and redemption of shares and the opening and
maintenance of shareholder accounts. Pursuant to the Transfer Agency
Agreement, the Transfer Agent receives an annual fee of up to $11.00 per Class
A or Class D account and up to $14.00 per Class B or Class C account, and is
entitled to reimbursement for certain transaction charges and out-of-pocket
expenses incurred by the Transfer Agent under the Transfer Agency Agreement.
Additionally, a $.20 monthly closed account charge will be assessed on all
accounts which close during the calendar year. Application of this fee will
commence the month following the month the account is closed. At the end of
the calendar year, no further fees will be due. For purposes of the Transfer
Agency Agreement, the term "account" includes a shareholder account maintained
directly by the Transfer Agent and any other account representing the
beneficial interest of a person in the relevant share class on a recordkeeping
system, provided the recordkeeping system is maintained by a subsidiary of
ML&Co. For the fiscal year ended July 31, 1997, the total fee paid by the Fund
to the Transfer Agent was $17,404 pursuant to the Transfer Agency Agreement.
PURCHASE OF SHARES
The Distributor, an affiliate of each of the Manager, MLAM and Merrill
Lynch, acts as the Distributor of the shares of the Fund. Shares of the Fund
are offered continuously for sale by the Distributor and other eligible
securities dealers (including Merrill Lynch). Shares of the Fund may be
purchased from securities dealers or by mailing a purchase order directly to
the Transfer Agent. The minimum initial purchase is $1,000 and the minimum
subsequent purchase is $50, except that for participants in certain fee-based
programs, the minimum initial purchase is $500 and the minimum subsequent
purchase is $50.
The Fund is offering its shares in four classes at a public offering price
equal to the next determined net asset value per share plus sales charges
imposed either at the time of purchase or on a deferred basis depending upon
the class of shares selected by the investor under the Merrill Lynch Select
Pricing SM System, as described below. The applicable offering price for
purchase orders is based upon the net asset value of the Fund next determined
after receipt of the purchase orders by the Distributor. As to purchase orders
received by securities dealers prior to the close of business on the New York
Stock Exchange (the "NYSE")(generally 4:00 p.m., New
22
<PAGE>
York time), which includes orders received after the close of business on the
previous day, the applicable offering price will be based on the net asset
value determined as of 15 minutes after the close of business on the NYSE on
that day, provided the Distributor in turn receives the order from the
securities dealer prior to 30 minutes after the close of business on the NYSE
on that day. If the purchase orders are not received by the Distributor prior
to 30 minutes after the close of business on the NYSE on that day, such orders
shall be deemed received on the next business day. The Trust or the
Distributor may suspend the continuous offering of the Fund's shares of any
class at any time in response to conditions in the securities markets or
otherwise and may thereafter resume such offering from time to time. Any order
may be rejected by the Distributor or the Trust. Neither the Distributor nor
the dealers are permitted to withhold placing orders to benefit themselves by
a price change. Merrill Lynch may charge its customers a processing fee
(presently $5.35) to confirm a sale of shares to such customers. Purchases
made directly through the Fund's Transfer Agent are not subject to the
processing fee.
The Fund issues four classes of shares under the Merrill Lynch Select
Pricing SM System, which permits each investor to choose the method of
purchasing shares that the investor believes is most beneficial given the
amount of the purchase, the length of time the investor expects to hold the
shares and other relevant circumstances. Shares of Class A and Class D are
sold to investors choosing the initial sales charge alternatives and shares of
Class B and Class C are sold to investors choosing the deferred sales charge
alternatives. Investors should determine whether under their particular
circumstances it is more advantageous to incur an initial sales charge or to
have the entire initial purchase price invested in the Fund with the
investment thereafter being subject to a CDSC, ongoing distribution fees and
higher account maintenance fees. A discussion of the factors that investors
should consider in determining the method of purchasing shares under the
Merrill Lynch Select Pricing SM System is set forth under "Merrill Lynch
Select Pricing SM System" on page 4.
Each Class A, Class B, Class C and Class D share of the Fund represents
identical interests in the investment portfolio of the Fund and has the same
rights, except that Class B, Class C and Class D shares bear the expenses of
the ongoing account maintenance fees, and Class B and Class C shares bear the
expenses of the ongoing distribution fees and the additional incremental
transfer agency costs resulting from the deferred sales charge arrangements.
The CDSCs, distribution and account maintenance fees that are imposed on Class
B and Class C shares, as well as the account maintenance fees that are imposed
on Class D shares, will be imposed directly against those classes and not
against all assets of the Fund and, accordingly, such charges will not affect
the net asset value of any other class or have any impact on investors
choosing another sales charge option. Dividends paid by the Fund for each
class of shares will be calculated in the same manner at the same time and
will differ only to the extent that account maintenance and distribution fees
and any incremental transfer agency costs relating to a particular class are
borne exclusively by that class. Class B, Class C and Class D shares each have
exclusive voting rights with respect to the Rule 12b-1 distribution plan
adopted with respect to such class pursuant to which account maintenance
and/or distribution fees are paid (except that Class B shareholders may vote
upon any material changes to expenses charged under the Class D Distribution
Plan). See "Distribution Plans" below. Each class has different exchange
privileges. See "Shareholder Services--Exchange Privilege."
Investors should understand that the purpose and function of the initial
sales charges with respect to Class A and Class D shares are the same as those
of the CDSCs and distribution fees with respect to Class B and Class C shares
in that the sales charges and distribution fees applicable to each class
provide for the financing of the distribution of the shares of the Fund. The
distribution-related revenues paid with respect to a class will not be used to
finance the distribution expenditures of another class. Sales personnel may
receive different
23
<PAGE>
compensation for selling different classes of shares. Investors are advised
that only Class A and Class D shares may be available for purchase through
securities dealers, other than Merrill Lynch, that are eligible to sell
shares.
The following table sets forth a summary of the distribution arrangements
for each class of shares under the Merrill Lynch Select PricingSM System.
<TABLE>
<CAPTION>
ACCOUNT
MAINTENANCE DISTRIBUTION
CLASS SALES CHARGE(/1/) FEE FEE CONVERSION FEATURE
- ----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
A Maximum 4.00% initial sales No No No
charge(/2/)(/3/)
- ----------------------------------------------------------------------------------------
B CDSC for a period of four years, 0.25% 0.25% B shares convert to
at a rate of 4.0% during the D shares automatically
first year, decreasing 1.0% after approximately
annually to 0.0%(/4/) ten years(/5/)
- ----------------------------------------------------------------------------------------
C 1.0% CDSC for one year(/6/) 0.25% 0.35% No
- ----------------------------------------------------------------------------------------
D Maximum 4.00% initial 0.10% No No
sales charge(/3/)
</TABLE>
- --------
(1) Initial sales charges are imposed at the time of purchase as a percentage
of the offering price. CDSCs are imposed if the redemption occurs within
the applicable CDSC time period. The charge will be assessed on an amount
equal to the lesser of the proceeds of redemption or the cost of the
shares being redeemed.
(2) Offered only to eligible investors. See "Initial Sales Charge
Alternatives--Class A and Class D Shares--Eligible Class A Investors."
(3) Reduced for purchases of $25,000 or more and waived for purchases of Class
A shares by participants in connection with certain fee-based programs.
Class A and Class D share purchases of $1,000,000 or more may not be
subject to an initial sales charge but instead may be subject to a 1.0%
CDSC if redeemed within one year. Such CDSC may be waived in connection
with certain fee-based programs.
(4) The CDSC may be modified in connection with certain fee-based programs.
(5) The conversion period for dividend reinvestment shares and certain fee-
based programs was modified. Also, Class B shares of certain other MLAM-
advised mutual funds into which exchanges may be made have an eight year
conversion period. If Class B shares of the Fund are exchanged for Class B
shares of another MLAM-advised mutual fund, the conversion period
applicable to the Class B shares acquired in the exchange will apply, and
the holding period for the shares exchanged will be tacked on to the
holding period for the shares acquired.
(6) The CDSC may be waived in connection with certain fee-based programs.
24
<PAGE>
INITIAL SALES CHARGE ALTERNATIVES--CLASS A AND CLASS D SHARES
Investors choosing the initial sales charge alternatives who are eligible to
purchase Class A shares should purchase Class A shares rather than Class D
shares because there is an account maintenance fee imposed on Class D shares.
The public offering price of Class A and Class D shares for purchasers
choosing the initial sales charge alternatives is the next determined net
asset value plus varying sales charges (i.e., sales loads), as set forth
below.
<TABLE>
<CAPTION>
SALES CHARGE SALES CHARGE AS DISCOUNT TO
AS PERCENTAGE PERCENTAGE* SELECTED DEALERS
OF OFFERING OF THE NET AS PERCENTAGE OF
AMOUNT OF PURCHASE PRICE AMOUNT INVESTED THE OFFERING PRICE
- ------------------ ------------- --------------- ------------------
<S> <C> <C> <C>
Less than $25,000............. 4.00% 4.17% 3.75%
$25,000 but less than $50,000. 3.75 3.90 3.50
$50,000 but less than
$100,000..................... 3.25 3.36 3.00
$100,000 but less than
$250,000..................... 2.50 2.56 2.25
$250,000 but less than
$1,000,000................... 1.50 1.52 1.25
$1,000,000 and over**......... 0.00 0.00 0.00
</TABLE>
- --------
* Rounded to the nearest one-hundredth percent.
** The initial sales charge may be waived on Class A and Class D purchases of
$1,000,000 or more and on Class A purchases by certain participants in
connection with certain fee-based programs. If the sales charge is waived
in connection with a purchase of $1,000,000 or more, such purchases may be
subject to a 1.0% CDSC if the shares are redeemed within one year after
purchase. Such CDSC may be waived in connection with certain fee-based
programs. The charge will be assessed on an amount equal to the lesser of
the proceeds of redemption or the cost of the shares being redeemed.
The Distributor may reallow discounts to selected dealers and retain the
balance over such discounts. At times the Distributor may reallow the entire
sales charge to such dealers. Since securities dealers selling Class A and
Class D shares of the Fund will receive a concession equal to most of the
sales charge, they may be deemed to be underwriters under the Securities Act
of 1933, as amended (the "Securities Act"). For the fiscal year ended July 31,
1997, the Fund sold 120,518 Class A shares for aggregate net proceeds of
$1,126,625. The gross sales charges for the sale of Class A shares of the Fund
for the year were $407, of which $32 and $375 were received by the Distributor
and Merrill Lynch, respectively. For the fiscal year ended July 31, 1997, the
Distributor received no CDSCs with respect to redemption within one year after
purchase of Class A shares purchased subject to a front-end sales charge
waiver. For the fiscal year ended July 31, 1997, the Fund sold 52,917 Class D
shares for aggregate net proceeds of $493,288. The gross sales charges for the
sale of Class D shares of the Fund for the year were $7,929, of which $689 and
$7,240 were received by the Distributor and Merrill Lynch, respectively. For
the fiscal year ended July 31, 1997, the Distributor received no CDSCs with
respect to redemption within one year after purchase of Class D shares
purchased subject to a front-end sales charge waiver.
Eligible Class A Investors. Class A shares are offered to a limited group of
investors and also will be issued upon reinvestment of dividends on
outstanding Class A shares. Investors that currently own Class A shares of the
Fund in a shareholder account are entitled to purchase additional Class A
shares of the Fund in that account. Class A shares are available at net asset
value to corporate warranty insurance reserve fund programs and U.S. branches
of foreign banking institutions provided that the program or branch has $3
million or more initially invested in MLAM-advised mutual funds. Also eligible
to purchase Class A shares at net asset value are
25
<PAGE>
participants in certain investment programs including TMA SM Managed Trusts to
which Merrill Lynch Trust Company provides discretionary trustee services,
collective investment trusts for which Merrill Lynch Trust Company serves as
trustee, and purchases made in connection with certain fee-based programs. In
addition, Class A shares are offered at net asset value to ML&Co. and its
subsidiaries and their directors and employees and to members of the Boards of
MLAM-advised investment companies, including the Trust. Certain persons who
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 or Class D shares of the Fund if certain conditions set forth in the
Statement of Additional Information are met. In addition, Class A shares of
the Fund and certain other MLAM-advised mutual funds are offered at net asset
value to shareholders of Merrill Lynch Senior Floating Rate Fund, Inc. and, if
certain conditions set forth in the Statement of Additional Information are
met, to shareholders of Merrill Lynch Municipal Strategy Fund, Inc. and
Merrill Lynch High Income Municipal Bond Fund, Inc. who wish to reinvest the
net proceeds from a sale of certain of their shares of common stock, pursuant
to a tender offer conducted by such funds in shares of the Fund and certain
other MLAM-advised mutual funds.
Reduced Initial Sales Charges. No initial sales charges are imposed upon
Class A and Class D shares issued as a result of the automatic reinvestment of
dividends or capital gains distributions. Class A and Class D sales charges
also may be reduced under a Right of Accumulation and a Letter of Intention.
Class A shares are offered at net asset value to certain eligible Class A
investors as set forth above under "Eligible Class A Investors." See
"Shareholder Services--Fee-Based Programs."
Provided applicable threshold requirements are met, either Class A or Class
D shares are offered at net asset value to Employee Access SM Accounts
available through authorized employers. Class A shares are offered at net
asset value to shareholders of Merrill Lynch Senior Floating Rate Fund, Inc.
and subject to certain conditions. Class A and Class D shares are offered at
net asset value to shareholders of Merrill Lynch Municipal Strategy Fund, Inc.
and Merrill Lynch High Income Municipal Bond Fund, Inc. who wish to reinvest
in shares of the Fund the net proceeds from a sale of certain of their shares
of common stock, pursuant to tender offers conducted by those funds.
Class D shares are offered at net asset value without sales charge to an
investor who has a business relationship with a Merrill Lynch financial
consultant, if certain conditions set forth in the Statement of Additional
Information are met. Class D shares may be offered at net asset value in
connection with the acquisition of assets of other investment companies.
Additional information concerning these reduced initial sales charges is set
forth in the Statement of Additional Information.
DEFERRED SALES CHARGE ALTERNATIVES--CLASS B AND CLASS C SHARES
Investors choosing the deferred sales charge alternatives should consider
Class B shares if they intend to hold their shares for an extended period of
time and Class C shares if they are uncertain as to the length of time they
intend to hold their assets in MLAM-advised mutual funds.
The public offering price of Class B and Class C shares for investors
choosing the deferred sales charge alternatives is the next determined net
asset value per share without the imposition of a sales charge at the time of
purchase. As discussed below, Class B shares are subject to a four-year CDSC
which declines each year,
26
<PAGE>
while Class C shares are subject only to a one-year 1.0% CDSC. On the other
hand, approximately ten years after Class B shares are issued, such Class B
shares, together with shares issued upon dividend reinvestment with respect to
those shares, are automatically converted into Class D shares of the Fund and
thereafter will be subject to lower continuing fees. See "Conversion of Class
B Shares to Class D Shares" below. Both Class B and Class C shares are subject
to an account maintenance fee of 0.25% of net assets and Class B and Class C
shares are subject to distribution fees of 0.25% and 0.35%, respectively, of
net assets as discussed below under "Distribution Plans."
Class B and Class C shares are sold without an initial sales charge so that
the Fund will receive the full amount of the investor's purchase payment.
Merrill Lynch compensates its Financial Consultants for selling Class B and
Class C shares at the time of purchase from its own funds. See "Distribution
Plans" below.
Proceeds from the CDSCs and the distribution fees are paid to the
Distributor and are used in whole or in part by the Distributor to defray the
expenses of dealers (including Merrill Lynch) related to providing
distribution-related services to the Fund in connection with the sale of the
Class B and Class C shares, such as the payment of compensation to financial
consultants for selling Class B and Class C shares from the 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. The proceeds
from the account maintenance fees are used to compensate Merrill Lynch
(pursuant to a sub-agreement) for providing continuing account maintenance
activities. Approximately ten years after issuance, Class B shares will
convert automatically into Class D shares of the Fund, which are subject to a
lower account maintenance fee and no distribution fee; Class B shares of
certain other MLAM-advised mutual funds into which exchanges may be made
convert into Class D shares automatically after approximately eight years. If
Class B shares of the Fund are exchanged for Class B shares of another MLAM-
advised mutual fund, the conversion period applicable to the Class B shares
acquired in the exchange will apply, and the holding period for the shares
exchanged will be tacked on to the holding period for the shares acquired.
Imposition of the CDSC and the distribution fee on Class B and Class C
shares is limited by the NASD asset-based sales charge rule. See "Limitations
on the Payment of Deferred Sales Charges" below. Class B shareholders of the
Fund exercising the exchange privilege described under "Shareholder Services--
Exchange Privilege" will continue to be subject to the Fund's CDSC schedule,
if such schedule is higher than the CDSC schedule relating to the Class B
shares acquired as a result of the exchange.
Contingent Deferred Sales Charges--Class B Shares. Class B shares that are
redeemed within four years of purchase may be subject to a CDSC at the rates
set forth below charged as a percentage of the dollar amount subject thereto.
The charge will be assessed on an amount equal to the lesser of the proceeds
of redemption or the cost of the shares being redeemed. Accordingly, no CDSC
will be imposed on increases in net asset value above the initial purchase
price. In addition, no CDSC will be assessed on shares derived from
reinvestment of dividends or capital gains distributions.
27
<PAGE>
The following table sets forth the rates of the Class B CDSC:
<TABLE>
<CAPTION>
CDSC AS A
PERCENTAGE OF
DOLLAR AMOUNT
YEAR SINCE PURCHASE PAYMENT MADE SUBJECT TO CHARGE
-------------------------------- -----------------
<S> <C>
0-1...................................................... 4.0%
1-2...................................................... 3.0%
2-3...................................................... 2.0%
3-4...................................................... 1.0%
4 and thereafter......................................... 0.0%
</TABLE>
For the fiscal year ended July 31, 1997, the Distributor received CDSCs of
$75,006 with respect to redemptions of Class B shares, all of which were paid
to Merrill Lynch. Additional CDSCs payable to the Distributor may have been
waived or converted to a contingent obligation in connection with a
shareholder's participation in certain fee-based programs.
In determining whether a CDSC is applicable to a redemption, the calculation
will be determined in the manner that results in the lowest applicable rate
being charged. Therefore, it will be assumed that the redemption is first of
shares held for over four years or shares acquired pursuant to reinvestment of
dividends or distributions and then of shares held longest during the four-
year period. The charge will not be applied to dollar amounts representing an
increase in the net asset value since the time of purchase. A transfer of
shares from a shareholder's account to another account will be assumed to be
made in the same order as a redemption.
To provide an example, assume an investor purchased 100 Class B shares at
$10 per share (at a cost of $1,000) and in the third year after purchase, the
net asset value per share is $12 and, during such time, the investor has
acquired 10 additional shares upon dividend reinvestment. If at such time the
investor makes his first redemption of 50 shares (proceeds of $600), 10 shares
will not be subject to a CDSC because of dividend reinvestment. With respect
to the remaining 40 shares, the CDSC is applied only to the original cost of
$10 per share and not to the increase in net asset value of $2 per share.
Therefore, $400 of the $600 redemption proceeds will be charged at a rate of
2.0% (the applicable rates in the third year after purchase).
The Class B CDSC is waived on redemptions of shares following the death or
disability (as defined in the Code) of a shareholder. The Class B CDSC also is
waived for any Class B shares that are purchased within qualifying Employee
AccessSM Accounts. Additional information concerning the waiver of the Class B
CDSC is set forth in the Statement of Additional Information. The terms of the
CDSC may be modified in connection with certain fee-based programs. See
"Shareholder Services--Fee-Based Programs."
Contingent Deferred Sales Charges--Class C Shares. Class C shares that are
redeemed within one year of purchase may be subject to a 1.0% CDSC charged as
a percentage of the dollar amount subject thereto. The charge will be assessed
on an amount equal to the lesser of the proceeds of redemption or the cost of
the shares being redeemed. Accordingly, no Class C CDSC will be imposed on
increases in net asset value above the initial purchase price. In addition, no
Class C CDSC will be assessed on shares derived from reinvestment of dividends
or capital gains distributions. For the fiscal year ended July 31, 1997, the
Distributor received CDSCs of $6,684
28
<PAGE>
with respect to redemptions of Class C shares, all of which were paid to
Merrill Lynch. The Class C CDSC may be waived in connection with certain fee-
based programs. See "Shareholder Services--Fee-Based Programs."
In determining whether a Class C CDSC is applicable to a redemption, the
calculation will be determined in the manner that results in the lowest
possible rate being charged. Therefore, it will be assumed that the redemption
is first of shares held for over one year or shares acquired pursuant to
reinvestment of dividends or distributions and then of shares held longest
during the one-year period. The charge will not be 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.
Conversion of Class B Shares to Class D Shares. After approximately ten
years (the "Conversion Period"), Class B shares will be converted
automatically into Class D shares of the Fund. Class D shares are subject to
an ongoing account maintenance fee of 0.10% of net assets but are not subject
to the distribution fee that is borne by Class B shares. Automatic conversion
of Class B shares into Class D shares will occur at least once each month (on
the "Conversion Date") on the basis of the relative net asset values of the
shares of the two classes on the Conversion Date, without the imposition of
any sales load, fee or other charge. Conversion of Class B shares to Class D
shares will not be deemed a purchase or sale of the shares for Federal income
tax purposes.
In addition, shares purchased through reinvestment of dividends on Class B
shares also will convert automatically to Class D shares. The Conversion Date
for dividend reinvestment shares will be calculated taking into account the
length of time the shares underlying such dividend reinvestment shares were
outstanding. If at a Conversion Date the conversion of Class B shares to Class
D shares of the Fund in a single account will result in less than $50 worth of
Class B shares being left in the account, all of the Class B shares of the
Fund held in the account on the Conversion Date will be converted to Class D
shares of the Fund.
Share certificates for Class B shares of the Fund to be converted must be
delivered to the Transfer Agent at least one week prior to the Conversion Date
applicable to those shares. In the event such certificates are not received by
the Transfer Agent at least one week prior to the Conversion Date, the related
Class B shares will convert to Class D shares on the next scheduled Conversion
Date after such certificates are delivered.
In general, Class B shares of equity MLAM-advised mutual funds will convert
approximately eight years after initial purchase, and Class B shares of
taxable and tax-exempt fixed income MLAM-advised mutual funds will convert
approximately ten years after initial purchase. If, during the Conversion
Period, a shareholder exchanges Class B shares with an eight-year Conversion
Period for Class B shares with a ten-year Conversion Period, or vice versa,
the Conversion Period applicable to the Class B shares acquired in the
exchange will apply, and the holding period for the shares exchanged will be
tacked onto the holding period for the shares acquired.
The Conversion Period also may be modified for investors who participate in
certain fee-based programs. See "Shareholder Services--Fee-Based Programs."
DISTRIBUTION PLANS
The Fund has adopted separate distribution plans for Class B, Class C and
Class D shares pursuant to Rule 12b-1 under the 1940 Act (each a "Distribution
Plan") with respect to the account maintenance and/or
29
<PAGE>
distribution fees paid by the Fund to the Distributor with respect to such
classes. The Class B and Class C Distribution Plans provide for the payment of
account maintenance fees and distribution fees, and the Class D Distribution
Plan provides for the payment of account maintenance fees.
The Distribution Plans for Class B, Class C and Class D shares each provides
that the Fund pays the Distributor an account maintenance fee relating to the
shares of the relevant class, accrued daily and paid monthly, at the annual
rates of 0.25%, 0.25% and 0.10%, respectively, of the average daily net assets
of the Fund attributable to shares of the relevant class in order to
compensate the Distributor and Merrill Lynch (pursuant to a sub-agreement) in
connection with account maintenance activities.
The Distribution Plans for Class B and Class C shares each provide that the
Fund also pays the Distributor a distribution fee relating to the shares of
the relevant class, accrued daily and paid monthly, at the annual rate of
0.25% and 0.35%, respectively, of the average daily net assets of the Fund
attributable to the shares of the relevant class in order to compensate the
Distributor and Merrill Lynch (pursuant to a sub-agreement) for providing
shareholder and distribution services, and bearing certain distribution-
related expenses of the Fund, including payments to financial consultants for
selling Class B and Class C shares of the Fund. The Distribution Plans
relating to Class B and Class C shares are designed to permit an investor to
purchase Class B and Class C shares through dealers without the assessment of
an initial sales charge and at the same time permit the dealer to compensate
its financial consultants in connection with the sale of the Class B and Class
C shares. In this regard, the purpose and function of the ongoing distribution
fee and the CDSC are the same as those of the initial sales charge with
respect to the Class A and Class D shares of the Fund in that the deferred
sales charges provide for the financing of the distribution of the Fund's
Class B and Class C shares.
For the fiscal year ended July 31, 1997, the Fund paid the Distributor
$108,915 pursuant to the Class B Distribution Plan (based on average daily net
assets subject to such Class B Distribution Plan of approximately $21.8
million), all of which was paid to Merrill Lynch for providing account
maintenance and distribution-related activities and services in connection
with Class B shares. For the fiscal year ended July 31, 1997, the Fund paid
the Distributor $13,074 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, 1997,
the Fund paid the Distributor $726 pursuant to the Class D Distribution Plan
(based on average daily net assets subject to such Class D Distribution Plan
of approximately $0.7 million), all of which was paid to Merrill Lynch for
providing account maintenance activities in connection with Class D shares.
Payments under the Distribution Plans are based on a percentage of average
daily net assets attributable to the shares regardless of the amount of
expenses incurred, and, accordingly, distribution-related revenues from the
Distribution Plans may be more or less than distribution-related expenses.
Information with respect to the distribution-related revenues and expenses is
presented to the Trustees for their consideration in connection with their
deliberations as to the continuance of the Class B and Class C Distribution
Plans. This information is presented annually as of December 31 of each year
on a "fully allocated accrual" basis and quarterly on a "direct expense and
revenue/cash" basis. On the fully allocated accrual basis, revenues consist of
the account maintenance fees, distribution fees, the CDSCs and certain other
related revenues, and expenses consist of financial consultant compensation,
branch office and regional operation center selling and transaction processing
expenses, advertising, sales promotion and market expenses, corporate overhead
and interest expense. On the
30
<PAGE>
direct expense and revenue/cash basis, revenues consist of the account
maintenance fees, distribution fees and CDSCs, and the expenses consist of
financial consultant compensation. As of December 31, 1996, the fully
allocated accrual expenses incurred by the Distributor and Merrill Lynch for
the period since the commencement of operations of Class B shares exceeded
fully allocated accrual revenues by approximately $492,000 (2.28% of Class B
net assets at that date). As of July 31, 1997, direct cash revenues for the
period since the commencement of operations of Class B shares exceeded direct
cash expenses by $135,422 (.62% of Class B net assets at that date). As of
December 31, 1996, the fully allocated accrual expenses incurred by the
Distributor and Merrill Lynch for the period since the commencement of
operations of Class C shares exceeded fully allocated accrual revenues by
approximately $12,000 (.49% of Class C net assets at that date). As of July
31, 1997, direct cash revenues for the period since the commencement of
operations of Class C shares exceeded direct cash expenses by $19,217 (.94% of
Class C net assets at that date).
LIMITATIONS ON THE PAYMENT OF DEFERRED SALES CHARGES
The maximum sales charge rule in the Conduct Rules of the NASD imposes a
limitation on certain asset-based sales charges such as the distribution fee
and the CDSC borne by the Class B and Class C shares, but not the account
maintenance fee. The maximum sales charge rule is applied separately to each
class. As applicable to the Fund, the maximum sales charge rule limits the
aggregate of distribution fee payments and CDSCs payable by the Fund to (1)
6.25% of eligible gross sales of Class B shares and Class C shares, computed
separately (defined to exclude shares issued pursuant to dividend
reinvestments and exchanges) plus (2) interest on the unpaid balance for the
respective class, computed separately, at the prime rate plus 1% (the unpaid
balance being the maximum amount payable minus amounts received from the
payment of the distribution fee and the CDSC). In connection with the Class B
shares, the Distributor has voluntarily agreed to waive interest charges on
the unpaid balance in excess of 0.50% of eligible gross sales. Consequently,
the maximum amount payable to the Distributor (referred to as the "voluntary
maximum") in connection with the Class B shares is 6.75% of eligible gross
sales. The Distributor retains the right to stop waiving the interest charges
at any time. To the extent payments would exceed the voluntary maximum, the
Fund will not make further payments of the distribution fee with respect to
Class B shares, and any CDSCs will be paid to the Fund rather than to the
Distributor; however, the Fund will continue to make payments of the account
maintenance fee. In certain circumstances the amount payable pursuant to the
voluntary maximum may exceed the amount payable under the NASD formula. In
such circumstances payments in excess of the amount payable under the NASD
formula will not be made.
The Fund has no obligation with respect to distribution and/or account
maintenance-related expenses incurred by the Distributor and Merrill Lynch in
connection with Class B, Class C and Class D shares, and there is no assurance
that the Trustees of the Trust will approve the continuance of the
Distribution Plans from year to year. However, the Distributor intends to seek
annual continuation of the Distribution Plans. In their review of the
Distribution Plans, the Trustees will be asked to take into consideration
expenses incurred in connection with the account maintenance and/or
distribution of each class of shares separately. The initial sales charges,
the account maintenance fees, the distribution fees and/or the CDSCs received
with respect to one class will not be used to subsidize the sale of shares of
another class. Payments of the distribution fee on Class B shares will
terminate upon conversion of those Class B shares into Class D shares as set
forth under "Deferred Sales Charge Alternatives--Class B and Class C Shares--
Conversion of Class B Shares to Class D Shares."
31
<PAGE>
REDEMPTION OF SHARES
The Trust is required to redeem for cash all shares of the Fund upon receipt
of a written request in proper form. The redemption price is the net asset
value per share next determined after the initial receipt of proper notice of
redemption. Except for any CDSC that may be applicable, there will be no
charge for redemption if the redemption request is sent directly to the
Transfer Agent. Shareholders liquidating their holdings will receive upon
redemption all dividends reinvested through the date of redemption. The value
of shares at the time of redemption may be more or less than the shareholder's
cost, depending on the market value of the securities held by the Fund at such
time.
REDEMPTION
A shareholder wishing to redeem shares may do so, without charge, by
tendering the shares directly to the Transfer Agent, Merrill Lynch Financial
Data Services, Inc., P.O. Box 45289, Jacksonville, Florida 32232-5289.
Redemption requests delivered other than by mail should be delivered to
Merrill Lynch Financial Data Services, Inc., 4800 Deer Lake Drive East,
Jacksonville, Florida 32246-6484. Proper notice of redemption in the case of
shares deposited with the Transfer Agent may be accomplished by a written
letter requesting redemption. Proper notice of redemption in the case of
shares for which certificates have been issued may be accomplished by a
written letter as noted above accompanied by certificates for the shares to be
redeemed. Redemption requests should not be sent to the Trust. The redemption
request in either event requires the signature(s) of all persons in whose
name(s) the shares are registered, signed exactly as such name(s) appear(s) on
the Transfer Agent's register. The signature(s) on the redemption request must
be guaranteed by an "eligible guarantor institution" as such term is defined
in Rule 17Ad-15 under the Securities Exchange Act of 1934, as amended, the
existence and validity of which may be verified by the Transfer Agent through
the use of industry publications. Notarized signatures are not sufficient. In
certain instances, the Transfer Agent may require additional documents such
as, but not limited to, trust instruments, death certificates, appointments as
executor or administrator, or certificates of corporate authority. For
shareholders redeeming directly with the Transfer Agent, payments will be
mailed within seven days of receipt of a proper notice of redemption.
At various times the Trust may be requested to redeem Fund shares for which
it has not yet received good payment (e.g., cash, Federal funds or certified
check drawn on a United States bank). The Trust may delay or cause to be
delayed the mailing of a redemption check until such time as it has assured
itself that good payment has been collected for the purchase of such Fund
shares, which will not exceed 10 days.
REPURCHASE
The Trust also will repurchase Fund shares through a shareholder's listed
securities dealer. The Trust normally will accept orders to repurchase Fund
shares by wire or telephone from dealers for their customers at the net asset
value next computed after receipt of the order by the dealer, provided that
the request for repurchase is received by the dealer prior to the close of
business on the NYSE (generally, 4:00 p.m., New York time) on the day received
and such request is received by the Trust from such dealer not later than 30
minutes after the close of business on the NYSE, on the same day. Dealers have
the responsibility of submitting such repurchase requests to the Trust not
later than 30 minutes after the close of business on the NYSE, in order to
obtain that day's closing price.
32
<PAGE>
The foregoing repurchase arrangements are for the convenience of
shareholders and do not involve a charge by the Trust (other than any
applicable CDSC). Securities firms that do not have selected dealer agreements
with the Distributor, however, may impose a transaction charge on the
shareholder for transmitting the notice of repurchase to the Trust. Merrill
Lynch may charge its customers a processing fee (presently $5.35) to confirm a
repurchase of shares to such customers. Repurchases made directly through the
Fund's Transfer Agent are not subject to the processing fee. The Trust
reserves the right to reject any order for repurchase, which right of
rejection might adversely affect shareholders seeking redemption through the
repurchase procedure. However, a shareholder whose order for repurchase is
rejected by the Trust may redeem Fund shares as set forth above. Redemption
payments will be made within seven days of the proper tender of the
certificates, if any, and stock power or letter requesting redemption, in each
instance with signatures guaranteed as noted above.
REINSTATEMENT PRIVILEGE--CLASS A AND CLASS D SHARES
Shareholders who have redeemed their Class A or Class D shares have a
privilege to reinstate their accounts by purchasing Class A or Class D shares
of the Fund, as the case may be, at net asset value without a sales charge up
to the dollar amount redeemed. The reinstatement privilege may be exercised by
sending a notice of exercise along with a check for the amount to be
reinstated to the Transfer Agent within 30 days after the date the request for
redemption was accepted by the Transfer Agent or the Distributor.
Alternatively, the reinstatement privilege may be exercised through the
investor's Merrill Lynch Financial Consultant within 30 days after the date
the request for redemption was accepted by the Transfer Agent or the
Distributor. The reinstatement will be made at the net asset value per share
next determined after the notice of reinstatement is received and cannot
exceed the amount of the redemption proceeds.
SHAREHOLDER SERVICES
The Trust offers a number of shareholder services and investment plans
described below that are designed to facilitate investment in shares of the
Fund. Full details as to each of such services, copies of the various plans
described below, and instructions as to how to participate in the various
services or plans, or to change options with respect thereto can be obtained
from the Trust by calling the telephone number on the cover page hereof or
from the Distributor or Merrill Lynch.
INVESTMENT ACCOUNT
Each shareholder whose account is maintained at the Transfer Agent has an
Investment Account and will receive statements at least quarterly from the
Transfer Agent. These statements will serve as transaction confirmations for
automatic investment purchases and the reinvestment of ordinary income
dividends and long-term capital gains distributions. These statements will
also show any other activity in the account since the preceding statement.
Shareholders will receive separate transaction confirmations for each purchase
or sale transaction other than automatic investment purchases and the
reinvestments of ordinary income dividends and long-term capital gains
distributions. A shareholder may make additions to his or her Investment
Account at any time by mailing a check directly to the Transfer Agent.
Shareholders may also maintain their accounts through Merrill Lynch. Upon the
transfer of shares out of a Merrill Lynch brokerage account, an Investment
Account in the transferring shareholder's name will be opened automatically at
the Transfer Agent. Shareholders considering
33
<PAGE>
transferring their Class A or Class D shares from Merrill Lynch to another
brokerage firm or financial institution should be aware that, if the firm to
which the Class A or Class D shares are to be transferred will not take
delivery of shares of the Fund, a shareholder either must redeem the Class A
or Class D shares (paying any applicable CDSC) so that the cash proceeds can
be transferred to the account at the new firm or such shareholder must
continue to maintain an Investment Account at the Transfer Agent for those
Class A or Class D shares. Shareholders interested in transferring their Class
B or Class C shares from Merrill Lynch and who do not wish to have an
Investment Account maintained for such shares at the Transfer Agent may
request their new brokerage firm to maintain such shares in an account
registered in the name of the brokerage firm for the benefit of the
shareholder at the Transfer Agent. If the new brokerage firm is willing to
accommodate the shareholder in this manner, the shareholder must request that
he or she be issued certificates for such shares and then must turn the
certificates over to the new firm for re-registration as described in the
preceding sentence.
EXCHANGE PRIVILEGE
U.S. shareholders of each class of shares of the Fund have an exchange
privilege with certain other MLAM-advised mutual funds. There is currently no
limitation on the number of times a shareholder may exercise the exchange
privilege. The exchange privilege may be modified or terminated at any time in
accordance with the rules of the Commission.
Under the Merrill Lynch Select Pricing SM System, Class A shareholders may
exchange Class A shares of the Fund for Class A shares of a second MLAM-
advised mutual fund if the shareholder holds any Class A shares of the second
fund in the account in which the exchange is made at the time of the exchange
or is otherwise eligible to purchase Class A shares of the second fund. If the
Class A shareholder wants to exchange Class A shares for shares of a second
MLAM-advised mutual fund, and the shareholder does not hold Class A shares of
the second fund in his or her account at the time of the exchange and is not
otherwise eligible to acquire Class A shares of the second fund, the
shareholder will receive Class D shares of the second fund as a result of the
exchange. Class D shares also may be exchanged for Class A shares of a second
MLAM-advised mutual fund at any time as long as, at the time of the exchange,
the shareholder holds Class A shares of the second fund in the account in
which the exchange is made or is otherwise eligible to purchase Class A shares
of the second fund.
Exchanges of Class A and Class D shares are made on the basis of the
relative net asset values per Class A or Class D share, respectively, plus an
amount equal to the difference, if any, between the sales charge previously
paid on the Class A or Class D shares being exchanged and the sales charge
payable at the time of the exchange on the shares being acquired.
Class B, Class C and Class D shares are exchangeable with shares of the same
class of other MLAM-advised mutual funds.
Shares of the Fund that are subject to a CDSC are exchangeable on the basis
of relative net asset value per share without the payment of any CDSC that
might otherwise be due upon redemption of the shares of the Fund. For purposes
of computing the CDSC that may be payable upon a disposition of the shares
acquired in the exchange, the holding period for the previously owned shares
of the Fund is "tacked" to the holding period for the newly acquired shares of
the other fund.
34
<PAGE>
Class A, Class B, Class C and Class D shares also are exchangeable for
shares of certain MLAM-advised money market funds specifically designated as
available for exchange by holders of Class A, Class B, Class C or Class D
shares. The period of time that Class A, Class B, Class C or Class D shares
are held in a money market fund, however, will not count toward satisfaction
of the holding period requirement for reduction of any CDSC imposed on such
shares, if any, and, with respect to Class B shares, toward satisfaction of
the Conversion Period.
Class B shareholders of the Fund exercising the exchange privilege will
continue to be subject to the Fund's CDSC schedule if such schedule is higher
than the CDSC schedule relating to the new Class B shares. In addition, Class
B shares of the Fund acquired through use of the exchange privilege will be
subject to the Fund's CDSC schedule if such schedule is higher than the CDSC
schedule relating to the Class B shares of the MLAM-advised mutual fund from
which the exchange has been made.
Exercise of the exchange privilege is treated as a sale of the exchanged
shares and a purchase of the acquired shares for Federal income tax purposes.
For further information, see "Shareholder Services--Exchange Privilege" in the
Statement of Additional Information.
AUTOMATIC REINVESTMENT OF DIVIDENDS AND CAPITAL GAINS DISTRIBUTIONS
All dividends and capital gains distributions are reinvested automatically
in full and fractional shares of the Fund, without a sales charge, at the net
asset value per share at the close of business on the monthly payment date for
such dividends and distributions. A shareholder may at any time, by written
notification to Merrill Lynch, if the shareholder's account is maintained with
Merrill Lynch, or by written notification or by telephone (1-800-MER-FUND) to
the Transfer Agent, if the shareholder's account is maintained with the
Transfer Agent, elect to have subsequent dividends or both dividends and
capital gains distributions paid in cash, rather than reinvested, in which
event payment will be mailed monthly. The Fund is not responsible for any
failure of delivery to the shareholder's address of record and no interest
will accrue on amounts represented by uncashed distribution or redemption
checks. Cash payments can also be directly deposited to the shareholder's bank
account. No CDSC will be imposed upon redemption of shares issued as a result
of the automatic reinvestment of dividends or capital gains distributions.
SYSTEMATIC WITHDRAWAL PLANS
A shareholder may elect to receive systematic withdrawal payments from his
or her Investment Account through automatic payment by check or through
automatic payment by direct deposit to his or her bank account on either a
monthly or quarterly basis. Alternatively, a shareholder whose shares are held
within a CMA(R) or CBA(R) account may elect to have shares redeemed on a
monthly, bimonthly, quarterly, semiannual or annual basis through the CMA(R)
or CBA(R) Systematic Redemption Program, subject to certain conditions. With
respect to redemptions of Class B or Class C shares pursuant to a systematic
withdrawal plan, the maximum number of Class B or Class C shares that can be
redeemed from an account annually shall not exceed 10% of the value of shares
of such class in that account at the time the election to join the systematic
withdrawal plan was made. Any CDSC that otherwise might be due on such
redemption of Class B or Class C shares will be waived. Shares redeemed
pursuant to a systematic withdrawal plan will be redeemed in the same order as
Class B or Class C shares are otherwise redeemed. See "Purchase of Shares--
Deferred Sales Charge Alternatives--Class B and Class C Shares--Contingent
Deferred Sales Charges--Class B Shares" and "--Contingent Deferred Sales
Charges--Class C Shares." Where the systematic withdrawal plan is applied to
Class B shares, upon conversion
35
<PAGE>
of the last Class B shares in an account to Class D shares, the systematic
withdrawal plan will automatically be applied thereafter to Class D shares.
See "Purchase of Shares--Deferred Sales Charge Alternatives--Class B and Class
C Shares--Conversion of Class B Shares to Class D Shares."
AUTOMATIC INVESTMENT PLANS
Regular additions of Class A, Class B, Class C and Class D shares may be
made to an investor's Investment Account by prearranged charges of $50 or more
to his or her regular bank account. Alternatively, investors who maintain
CMA(R) or CBA(R) accounts may arrange to have periodic investments made in the
Fund in their CMA(R) or CBA(R) account or in certain related accounts in
amounts of $100 or more through the CMA(R) or CBA(R) Automated Investment
Program.
FEE-BASED PROGRAMS
Certain Merrill Lynch fee-based programs, including pricing alternatives for
securities transactions (each referred to in this paragraph as a "Program"),
may permit the purchase of Class A shares at net asset value. Under specified
circumstances, participants in certain Programs may deposit other classes of
shares which will be exchanged for Class A shares. Initial or deferred sales
charges otherwise due in connection with such exchanges may be waived or
modified, as may the Conversion Period applicable to the deposited shares.
Termination of participation in a Program may result in the redemption of
shares held therein or the automatic exchange thereof to another class at net
asset value, which may be shares of a money market fund. In addition, upon
termination of participation in a Program, shares that have been held for less
than specified periods within such Program may be subject to a fee based upon
the current value of such shares. These Programs also generally prohibit such
shares from being transferred to another account at Merrill Lynch, to another
broker-dealer or to the Transfer Agent. Except in limited circumstances (which
may also involve an exchange as described above), such shares must be redeemed
and another class of shares purchased (which may involve the imposition of
initial or deferred sales charges and distribution and account maintenance
fees) in order for the investment not to be subject to Program fees.
Additional information regarding a specific Program (including charges and
limitations on transferability applicable to shares that may be held in such
Program) is available in such Program's client agreement and from the Transfer
Agent at (800) MER-FUND or (800) 637-3863.
PORTFOLIO TRANSACTIONS
The Trust has no obligation to deal with any dealer or group of dealers in
the execution of transactions in portfolio securities of the Fund. Municipal
Bonds and other securities in which the Fund invests are traded primarily in
the over-the-counter market. Where possible, the Trust deals directly with the
dealers who make a market in the securities involved except in those
circumstances where better prices and execution are available elsewhere. It is
the policy of the Trust to obtain the best net results in conducting portfolio
transactions for the Fund, taking into account such factors as price
(including the applicable dealer spread or commission), the size, type and
difficulty of the transactions involved, the firm's general execution and
operations facilities, and the firm's risk in positioning the securities
involved and the provision of supplemental investment research by the firm.
While reasonably competitive spreads or commissions are sought, the Fund will
not necessarily be paying the lowest spread or commission available. The sale
of shares of the Fund may be taken into consideration as a
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<PAGE>
factor in the selection of brokers or dealers to execute portfolio
transactions for the Fund. The portfolio securities of the Fund generally are
traded on a 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. Under the
1940 Act, persons affiliated with the Trust, including Merrill Lynch, are
prohibited from dealing with the Trust as a principal in the purchase and sale
of securities unless such trading is permitted by an exemptive order issued by
the Commission. The Trust has obtained an exemptive order permitting it to
engage in certain principal transactions with Merrill Lynch involving high
quality short-term municipal bonds subject to certain conditions. In addition,
the Fund may not purchase securities, including Municipal Bonds, during the
existence of any underwriting syndicate of which Merrill Lynch is a member or
in a private placement in which Merrill Lynch serves as placement agent except
pursuant to procedures approved by the Trustees of the Trust which either
comply with rules adopted by the Commission or with interpretations of the
Commission staff. Affiliated persons of the Trust may serve as its broker in
over-the-counter transactions conducted for the Fund on an agency basis only.
DISTRIBUTIONS AND TAXES
DISTRIBUTIONS
The net investment income of the Fund is declared as dividends prior to the
determination of the net asset value, which is calculated 15 minutes after the
close of business on the NYSE (generally, 4:00 p.m., New York time), on that
day. The net investment income of the Fund for dividend purposes consists of
interest earned on portfolio securities, less expenses, in each case computed
since the most recent determination of the net asset value. Expenses of the
Fund, including the management fees and the account maintenance and
distribution fees, are accrued daily. Dividends of net investment income are
declared daily and reinvested monthly in the form of additional full and
fractional shares of the Fund at net asset value as of the close of business
on the "payment date" unless the shareholder elects to receive such dividends
in cash. Shares will accrue dividends as long as they are issued and
outstanding. Shares are issued and outstanding from the settlement date of a
purchase order to the day prior to the settlement date of a redemption order.
All net realized capital gains, if any, are declared and distributed to the
Fund's shareholders at least annually. Capital gains distributions will be
reinvested automatically in shares 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 "Additional Information--
Determination of Net Asset Value."
See "Shareholder Services" for information as to how to elect either
dividend reinvestment or cash payments. Portions of dividends and
distributions which are taxable to shareholders as described below are subject
to income tax whether they are reinvested in shares of the Fund or received in
cash.
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<PAGE>
TAXES
The Trust will 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 its income.
To the extent that the dividends distributed to the Fund's Class A, Class B,
Class C and Class D shareholders (together, the "shareholders") are derived
from interest income exempt from Federal income tax under Code Section 103(a)
and are properly designated as "exempt-interest dividends," they will be
excludable from a shareholder's gross income for Federal income tax purposes.
Exempt-interest dividends are included, however, in determining the portion,
if any, of a person's social security benefits and railroad retirement
benefits subject to Federal income taxes. The portion of exempt-interest
dividends paid from interest received by the Fund from Maryland Municipal
Bonds and distributions attributable to gains from Maryland Municipal Bonds
(other than obligations issued by U.S. possessions) or interest on U.S.
Government obligations will be exempt from Maryland personal and corporate
income taxes; any other dividends from the Fund will be subject to Maryland
income tax. However, shareholders of the Fund that are financial institutions
otherwise subject to Maryland financial institution franchise taxes would be
subject to such taxes on distributions received from the Fund (including
exempt-interest dividends). Individual shareholders subject to income taxation
by states other than Maryland will realize a lower after-tax rate of return
than Maryland shareholders since the dividends distributed by the Fund
generally will not be exempt, to any significant degree, from income taxation
by such other states. The Trust will inform shareholders annually as to the
portion of the Fund's distributions which constitutes exempt-interest
dividends and the portion which is exempt from Maryland income tax. Interest
on indebtedness incurred or continued to purchase or carry Fund shares is not
deductible for Federal income or Maryland income tax purposes to the extent
attributable to exempt-interest dividends. Persons who may be "substantial
users" (or "related persons" of substantial users) of facilities financed by
industrial development bonds or private activity bonds held by the Fund should
consult their tax advisors before purchasing Fund shares.
Maryland presently includes in Maryland taxable income a portion of certain
items of tax preference as defined in the Code. Interest paid on certain
private activity bonds constitutes such a tax preference if the bonds (i) are
not Maryland Municipal Bonds or (ii) are Maryland Municipal Bonds issued by
U.S. possessions. Accordingly, up to 50% of any distributions of the Fund's
portfolio attributable to such private activity bonds may not be exempt from
Maryland state and local individual income taxes.
Shares of the Fund will not be subject to the Maryland personal property
tax.
Distributions from investment income and capital gains of the Fund,
including exempt-interest dividends, may also be subject to state taxes in
states other than Maryland and may be subject to local taxes. Accordingly,
investors in the Fund should consult their tax advisors with respect to the
application of such taxes to the receipt of Fund dividends and to the holding
of shares in the Fund.
To the extent that the Fund's distributions are derived from interest on its
taxable investments or from an excess of net short-term capital gains over net
long-term capital losses ("ordinary income dividends"), such distributions are
considered ordinary income for Federal and Maryland income tax purposes.
Distributions, if
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<PAGE>
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 Maryland income tax purposes, are
treated as capital gains which are taxed at ordinary income tax rates unless
derived from the sale of Maryland Municipal Bonds (other than obligations
issued by U.S. possessions). Recent legislation creates additional categories
of capital gains taxable at different rates. Although the legislation does not
explain how gain in these categories will be taxed to shareholders of RICs, it
authorizes regulations applying the new categories of gain and the new rates
to sales of securities by RICs. In the absence of guidance, there is some
uncertainty as to the manner in which the categories of gain and related rates
will be passed through to shareholders in capital gain dividends. It is
anticipated that IRS guidance permitting categories of gain and related rates
to be passed through to shareholders would also require the Fund to designate
the amounts of various categories of capital gain income included in capital
gain dividends in a written notice sent to shareholders. Distributions by the
Fund, whether from exempt-interest income, ordinary income or capital gains
will not be eligible for the dividends received deduction allowed to
corporations under the Code.
All or a portion of the Fund's gain from the sale or redemption of tax-
exempt obligations purchased at a market discount will be treated as ordinary
income rather than capital gain. This rule may increase the amount of ordinary
income dividends received by shareholders. Distributions in excess of the
Fund's earnings and profits will first reduce the adjusted tax basis of a
holder's shares and, after such adjusted tax basis is reduced to zero, will
constitute capital gains to such holder (assuming the shares are held as a
capital asset). Any loss upon the sale or exchange of shares held for six
months or less will be disallowed to the extent of any exempt-interest
dividends received by the shareholder. In addition, any such loss that is not
disallowed under the rule stated above will be treated as long-term capital
loss to the extent of any capital gain dividends received by the shareholder.
If the Fund pays a dividend in January which was declared in the previous
October, November or December to shareholders of record on a specified date in
one of such months, then such dividend will be treated for tax purposes as
being paid by the Fund and received by its shareholders on December 31 of the
year in which such dividend was declared.
The Code subjects interest received on certain otherwise tax-exempt
securities to an alternative minimum tax. This alternative minimum tax applies
to interest received on certain "private activity bonds" issued after August
7, 1986. Private activity bonds are bonds which, although tax-exempt, are used
for purposes other than those generally performed by governmental units and
which benefit non-governmental entities (e.g., bonds used for industrial
development or housing purposes). Income received on such bonds is classified
as an item of "tax preference," which could subject certain investors in such
bonds, including shareholders of the Fund, to an alternative minimum tax. The
Fund will purchase such "private activity bonds," and the Trust will report to
shareholders within 60 days after the Fund's taxable year-end the portion of
the Fund's dividends declared during the year which constitutes an item of tax
preference for alternative minimum tax purposes. The Code further provides
that corporations are subject to an alternative minimum tax based, in part, on
certain differences between taxable income as adjusted for other tax
preferences and the corporation's "adjusted current earnings," which more
closely reflect a corporation's economic income. Because an exempt-interest
dividend paid by the Fund will be included in adjusted current earnings, a
corporate shareholder may be required to pay alternative minimum tax on
exempt-interest dividends paid by the Fund.
No gain or loss will be recognized by Class B shareholders on the conversion
of their Class B shares into Class D shares. A shareholder's basis in the
Class D shares acquired will be the same as such shareholder's
39
<PAGE>
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 any loss the shareholder can recognize on the exchange will
be reduced (or the gain increased) to the extent any sales charge paid to the
Fund on the exchanged shares reduces any sales charge such shareholder would
have owed upon purchase of the new shares in the absence of the exchange
privilege. Instead, such sales charge will be treated as an amount paid for
the new shares.
A loss realized on a sale or exchange of shares of the Fund will be
disallowed if other Fund shares are acquired (whether through the automatic
reinvestment of dividends or otherwise) within a 61-day period beginning 30
days before and ending 30 days after the date that the shares are disposed of.
In such a case, the basis of the shares acquired will be adjusted to reflect
the disallowed loss.
Under certain Code provisions, some shareholders may be subject to a 31%
withholding tax on certain ordinary income dividends and on capital gain
dividends and redemption payments ("backup withholding"). Generally,
shareholders subject to backup withholding will be those for whom no certified
taxpayer identification number is on file with the Trust or who, to the
Trust's knowledge, have furnished an incorrect number. When establishing an
account, an investor must certify under penalty of perjury that such number is
correct and that such investor is not otherwise subject to backup withholding.
The Code provides that every person required to file a tax return must
include for information purposes on such return the amount of exempt-interest
dividends received from all sources (including the Fund) during the taxable
year.
The foregoing is a general and abbreviated summary of the applicable
provisions of the Code, Treasury regulations and Maryland tax laws presently
in effect. For the complete provisions, reference should be made to the
pertinent Code sections, the Treasury regulations promulgated thereunder and
the applicable Maryland income tax laws. The Code and the Treasury
regulations, as well as the Maryland tax laws, are subject to change by
legislative, judicial or administrative action either prospectively or
retroactively.
Shareholders are urged to consult their tax advisors regarding the
availability of any exemptions from state or local taxes (other than those
imposed by Maryland) and with specific questions as to Federal, foreign, state
or local taxes.
PERFORMANCE DATA
From time to time the Fund may include its average annual total return,
yield and tax-equivalent yield for various specified time periods in
advertisements or information furnished to present or prospective
shareholders. Average annual total return, yield and tax-equivalent yield are
computed separately for Class A, Class B, Class C and Class D shares in
accordance with formulas specified by the Commission.
Average annual total return quotations for the specified periods will be
computed by finding the average annual compounded rates of return (based on
net investment income and any realized and unrealized capital gains
40
<PAGE>
or losses on portfolio investments over such periods) that would equate the
initial amount invested to the redeemable value of such investment at the end
of each period. Average annual total return will be computed assuming all
dividends and distributions are reinvested and taking into account all
applicable recurring and nonrecurring expenses, including any CDSC that would
be applicable to a complete redemption of the investment at the end of the
specified period such as in the case of Class B and Class C shares and the
maximum sales charge in the case of Class A and Class D shares. Dividends paid
by the Fund with respect to all shares, to the extent any dividends are paid,
will be calculated in the same manner at the same time on the same day and
will be in the same amount, except that account maintenance fees and
distribution charges and any incremental transfer agency costs relating to
each class of shares will be borne exclusively by that class. The Fund will
include performance data for all classes of shares of the Fund in any
advertisement or information including performance data of the Fund.
The Fund also may quote total return and aggregate total return performance
data for various specified time periods. Such data will be calculated
substantially as described above, except that (1) the rates of return
calculated will not be average annual rates, but rather, actual annual,
annualized or aggregate rates of return and (2) the maximum applicable sales
charges will not be included with respect to annual or annualized rates of
return calculations. Aside from the impact on the performance data
calculations of including or excluding the maximum applicable sales charges,
actual annual or annualized total return data generally will be lower than
average annual total return data since the average annual rates of return
reflect compounding; aggregate total return data generally will be higher than
average annual total return data since the aggregate rates of return reflect
compounding over a longer period of time. In advertisements distributed to
investors whose purchases are subject to waiver of the CDSC in the case of
Class B and Class C shares or reduced sales charges in the case of Class A or
Class D shares, the performance data may take into account the reduced, and
not the maximum, sales charge or may not take into account the CDSC and
therefore may reflect greater total return since, due to the reduced sales
charges or waiver of the CDSC, a lower amount of expenses is deducted. See
"Purchase of Shares." The Fund's total return may be expressed either as a
percentage or as a dollar amount in order to illustrate such total return on a
hypothetical $1,000 investment in the Fund at the beginning of each specified
period.
Yield quotations will be computed based on a 30-day period by dividing (a)
the net income based on the yield of each security earned during the period by
(b) the average daily number of shares outstanding during the period that were
entitled to receive dividends multiplied by the maximum offering price per
share on the last day of the period. Tax equivalent yield quotations will be
computed by dividing (a) the part of the Fund's yield that is tax-exempt by
(b) one minus a stated tax rate and (c) adding the result to that part, if
any, of the Fund's yield that is not tax-exempt. The yield for the 30-day
period ended July 31, 1997 was 4.63% for Class A shares, 4.32% for Class B
shares, 4.21% for Class C shares and 4.53% for Class D shares and the tax-
equivalent yield for the same period (based on a Federal income tax rate of
28%) was 6.43% for Class A shares, 6.00% for Class B shares, 5.85% for Class C
shares and 6.29% for Class D shares. The yield without voluntary reimbursement
or waiver of Fund expenses for the 30-day period would have been 3.84% for
Class A shares, 3.49% for Class B shares, 3.38% for Class C shares and 3.74%
for Class D shares with a tax-equivalent yield of 5.33% for Class A shares,
4.85% for Class B shares, 4.69% for Class C shares and 5.19% for Class D
shares.
Total return, yield and tax-equivalent yield figures are based on the Fund's
historical performance and are not intended to indicate future performance.
The Fund's total return, yield and tax-equivalent yield will vary depending on
market conditions, the securities comprising the Fund's portfolio, the Fund's
operating expenses
41
<PAGE>
and the amount of realized and unrealized net capital gains or losses during
the period. The value of an investment in the Fund will fluctuate and an
investor's shares, when redeemed, may be worth more or less than their
original cost.
On occasion, the Fund may compare its performance to performance data
published by Lipper Analytical Services, Inc., Morningstar Publications, Inc.
("Morningstar") and CDA Investment Technology, Inc., or to data contained in
publications such as Money Magazine, U.S. News & World Report, Business Week,
Forbes Magazine and Fortune Magazine. From time to time, the Fund may include
the Fund's Morningstar risk-adjusted performance ratings in advertisements or
supplemental sales literature. As with other performance data, performance
comparisons should not be considered indicative of the Fund's relative
performance for any future period.
ADDITIONAL INFORMATION
DETERMINATION OF NET ASSET VALUE
The net asset value of the shares of all classes of the Fund is determined
by the Manager once daily 15 minutes after the close of business on the NYSE
(generally, 4:00 p.m., New York time), on each day during which the NYSE is
open for trading. The net asset value per share is computed by dividing the
sum of the value of the securities held by the Fund plus any cash or other
assets (including interest and dividends accrued but not yet received) minus
all liabilities (including accrued expenses) by the total number of shares
outstanding at such time, rounded to the nearest cent. Expenses, including the
fees payable to the Manager and the Distributor, are accrued daily.
The per share net asset value of Class A shares generally will be higher
than the per share net asset value of shares of the other classes, reflecting
the daily expense accruals of the account maintenance, distribution and higher
transfer agency fees applicable with respect to Class B and Class C shares and
the daily expense accruals of the account maintenance fees applicable with
respect to Class D shares; moreover, the per share net asset value of Class D
shares generally will be higher than the per share net asset value of Class B
and Class C shares, reflecting the daily expense accruals of the distribution
fees, higher account maintenance fees and higher transfer agency fees
applicable with respect to Class B and Class C shares. It is expected,
however, that the per share net asset value of the classes will tend to
converge (although not necessarily meet) immediately after the payment of
dividends or distributions which will differ by approximately the amount of
the expense accrual differentials between the classes.
ORGANIZATION OF THE TRUST
The Trust is a business trust organized on August 2, 1985 under the laws of
Massachusetts. On October 1, 1987, the Trust changed its name from "Merrill
Lynch Multi-State Tax-Exempt Series Trust" to "Merrill Lynch Multi-State
Municipal Bond Series Trust," and on December 22, 1987 the Trust again changed
its name to "Merrill Lynch Multi-State Municipal Series Trust." The Trust is
an open-end management investment company comprised of separate series
("Series"), each of which is a separate portfolio offering shares to selected
groups of purchasers. Each of the Series is managed independently in order to
provide to shareholders who are residents of the state to which such Series
relates as high a level of income exempt from
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<PAGE>
Federal and, in certain cases, state and local income taxes as is consistent
with prudent investment management. The Trustees are authorized to create an
unlimited number of Series and, with respect to each Series, to issue an
unlimited number of full and fractional shares of beneficial interest, $.10
par value per share of different classes. Shareholder approval is not required
for the authorization of additional Series or classes of a Series of the
Trust. At the date of this Prospectus, the shares of the Fund are divided into
Class A, Class B, Class C and Class D shares. Class A, Class B, Class C and
Class D shares represent interests in the same assets of the Fund and are
identical in all respects except that Class B, Class C and Class D shares bear
certain expenses relating to the account maintenance associated with such
shares, and Class B and Class C shares bear certain expenses relating to the
distribution of such shares. Each class has exclusive voting rights with
respect to matters relating to distribution and/or account maintenance
expenditures, as applicable. See "Purchase of Shares." The Trustees of the
Trust may classify and reclassify the shares of any Series into additional or
other classes at a future date.
Shareholders are entitled to one vote for each full share and to fractional
votes for fractional shares held in the election of Trustees (to the extent
hereinafter provided) and on other matters submitted to the vote of
shareholders. There normally will be no meeting of shareholders for the
purpose of electing Trustees unless and until such time as less than a
majority of the Trustees holding office have been elected by shareholders, at
which time the Trustees then in office will call a shareholders meeting for
the election of Trustees. Shareholders may, in accordance with the terms of
the Declaration of Trust, cause a meeting of shareholders to be held for the
purpose of voting on the removal of Trustees. Also, the Trust will be required
to call a special meeting of shareholders of a Series in accordance with the
requirements of the 1940 Act to seek approval of new management and advisory
arrangements, of a material increase in distribution fees or of a change in
the fundamental policies, objectives or restrictions of a Series. Except as
set forth above, the Trustees shall continue to hold office and appoint
successor Trustees. Upon liquidation or dissolution of a Series, each issued
and outstanding share of that Series is entitled to participate equally in
dividends and distributions declared by the respective Series and in net
assets of such Series remaining after satisfaction of outstanding liabilities
except that, as noted above, Class B, Class C and Class D shares bear certain
additional expenses. The obligations and liabilities of a particular Series
are restricted to the assets of that Series and do not extend to the assets of
the Trust generally. The shares of each Series, when issued, will be fully-
paid and non-assessable by the Trust.
SHAREHOLDER REPORTS
Only one copy of each shareholder report and certain shareholder
communications will be mailed to each identified shareholder regardless of the
number of accounts such shareholder has. If a shareholder wishes to receive
separate copies of each report and communication for each of the shareholder's
related accounts, the shareholder should notify in writing:
Merrill Lynch Financial Data Services, Inc.
P.O. Box 45289
Jacksonville, FL 32232-5289
The written notification should include the shareholder's name, address, tax
identification number and Merrill Lynch, Pierce, Fenner & Smith Incorporated
and/or mutual fund account numbers. If you have any questions regarding this
matter please call your Merrill Lynch Financial Consultant or Merrill Lynch
Financial Data Services, Inc. at 800-637-3863.
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SHAREHOLDER INQUIRIES
Shareholder inquiries may be addressed to the Trust at the address or
telephone number set forth on the cover page of this Prospectus.
----------------
The Declaration of Trust establishing the Trust, dated August 2, 1985, a copy
of which together with all amendments thereto (the "Declaration"), is on file
in the office of the Secretary of the Commonwealth of Massachusetts, provides
that the name "Merrill Lynch Multi-State Municipal Series Trust" refers to the
Trustees under the Declaration collectively as Trustees, but not as individuals
or personally; and no Trustee, shareholder, officer, employee or agent of the
Trust shall be held to any personal liability, nor shall resort be had to such
person's private property for the satisfaction of any obligation or claim of
the Trust, but the "Trust Property" only shall be liable.
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MERRILL LYNCH MARYLAND MUNICIPAL BOND FUND -- AUTHORIZATION FORM (PART 1)
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1. SHARE PURCHASE APPLICATION
I, being of legal age, wish to purchase: (choose one)
[_] Class A shares [_] Class B shares [_] Class C shares [_] Class D shares
of Merrill Lynch Maryland Municipal Bond Fund and establish an Investment
Account as described in the Prospectus. In the event that I am not eligible to
purchase Class A shares, I understand that Class D shares will be purchased.
Basis for establishing an Investment Account:
A. I enclose a check for $............ payable to Merrill Lynch Financial
Data Services, Inc., as an initial investment (minimum $1,000). I understand
that this purchase will be executed at the applicable offering price next to
be determined after this Application is received by you.
B. I already own shares of the following Merrill Lynch mutual funds that
would qualify for the right of accumulation as outlined in the Statement of
Additional Information: (Please list all funds. Use a separate sheet of
paper if necessary.)
1. .................................. 4. ..................................
2. .................................. 5. ..................................
3. .................................. 6. ..................................
Name...........................................................................
First Name Initial Last Name
Name of Co-Owner (if any)......................................................
First Name Initial Last Name
Address........................................................................
................................................. Date........................
(Zip Code)
Occupation........................... Name and Address of Employer ........
.....................................
.....................................
..................................... .....................................
Signature of Owner Signature of Co-Owner (if any)
(In the case of co-owners, a joint tenancy with right of survivorship will be
presumed unless otherwise specified.)
- -------------------------------------------------------------------------------
2. DIVIDEND AND CAPITAL GAIN DISTRIBUTION OPTIONS
Ordinary Income Dividends Long-Term Capital Gains
SELECT [_] Reinvest SELECT [_] Reinvest
ONE: [_] Cash ONE: [_] Cash
If no election is made, dividends and capital gains will be automatically
reinvested at net asset value without a sales charge.
IF CASH, SPECIFY HOW YOU WOULD LIKE YOUR DISTRIBUTIONS PAID TO YOU: [_] Check
or [_] Direct Deposit to bank account
IF DIRECT DEPOSIT TO BANK ACCOUNT IS SELECTED, PLEASE COMPLETE BELOW:
I hereby authorize payment of dividend and capital gain distributions by
direct deposit to my bank account and, if necessary, debit entries and
adjustments for any credit entries made to my account in accordance with the
terms I have selected on the Merrill Lynch Maryland Municipal Bond Fund
Authorization Form.
Specify type of account (check one): [_] checking [_] savings
Name on your Account ..........................................................
Bank Name .....................................................................
Bank Number ...................... Account Number ............................
Bank Address ..................................................................
I AGREE THAT THIS AUTHORIZATION WILL REMAIN IN EFFECT UNTIL I PROVIDE WRITTEN
NOTIFICATION TO MERRILL LYNCH FINANCIAL DATA SERVICES, INC. AMENDING OR
TERMINATING THIS SERVICE.
Signature of Depositor ........................................................
Signature of Depositor ............................... Date...................
(if joint account, both must sign)
NOTE: IF DIRECT DEPOSIT TO BANK ACCOUNT IS SELECTED, YOUR BLANK, UNSIGNED
CHECK MARKED "VOID" OR A DEPOSIT SLIP FROM YOUR SAVINGS ACCOUNT SHOULD
ACCOMPANY THIS APPLICATION.
45
<PAGE>
MERRILL LYNCH MARYLAND MUNICIPAL BOND FUND -- AUTHORIZATION FORM (PART 1) --
(CONTINUED)
- -------------------------------------------------------------------------------
3. SOCIAL SECURITY NUMBER OR TAXPAYER IDENTIFICATION NUMBER
[ ]
Social Security Number or Taxpayer Identification Number
Under penalty of perjury, I certify (1) that the number set forth above is
my correct Social Security Number or Taxpayer Identification Number and (2)
that I am not subject to backup withholding (as discussed in the Prospectus
under "Distribution and Taxes--Taxes") either because I have not been notified
that I am subject thereto as a result of a failure to report all interest or
dividends, or the Internal Revenue Service ("IRS") has notified me that I am
no longer subject thereto.
INSTRUCTION: YOU MUST STRIKE OUT THE LANGUAGE IN (2) ABOVE IF YOU HAVE BEEN
NOTIFIED THAT YOU ARE SUBJECT TO BACKUP WITHHOLDING DUE TO UNDER-REPORTING AND
IF YOU HAVE NOT RECEIVED A NOTICE FROM THE IRS THAT BACKUP WITHHOLDING HAS
BEEN TERMINATED. THE UNDERSIGNED AUTHORIZES THE FURNISHING OF THIS
CERTIFICATION TO OTHER MERRILL LYNCH SPONSORED MUTUAL FUNDS.
..................................... .....................................
Signature of Owner Signature of Co-Owner (if any)
- -------------------------------------------------------------------------------
4. LETTER OF INTENTION--CLASS A AND CLASS D SHARES ONLY (SEE TERMS AND
CONDITIONS IN THE STATEMENT OF ADDITIONAL INFORMATION)
..................., 19......
Dear Sir/Madam: Date of Initial Purchase
Although I am not obligated to do so, I intend to purchase shares of Merrill
Lynch Maryland Municipal Bond Fund or any other investment company with an
initial sales charge or deferred sales charge for which Merrill Lynch Funds
Distributor, Inc. acts as distributor over the next 13-month period which will
equal or exceed:
[_] $25,000 [_] $50,000 [_] $100,000 [_] $250,000 [_] $1,000,000
Each purchase will be made at the then reduced offering price applicable to
the amount checked above, as described in the Merrill Lynch Maryland Municipal
Bond Fund Prospectus.
I agree to the terms and conditions of the Letter of Intention. I hereby
irrevocably constitute and appoint Merrill Lynch Funds Distributor, Inc., my
attorney, with full power of substitution, to surrender for redemption any or
all shares of Merrill Lynch Maryland Municipal Bond Fund held as security.
By: ................................. .....................................
Signature of Owner Signature of Co-Owner
(If registered in joint names, both must sign)
In making purchases under this letter, the following are the related
accounts on which reduced offering prices are to apply:
(1) Name............................. (2) Name.............................
Account Number.......................
Account Number.......................
- -------------------------------------------------------------------------------
5. FOR DEALER ONLY
Branch Office, Address, Stamp We hereby authorize Merrill Lynch
Funds Distributor, Inc. to act as
- - - our agent in connection with
transactions under this
- - - authorization form and agree to
This form when completed, should notify the Distributor of any
be mailed to: purchases or sales made under a
Letter of Intention, Automatic
Merrill Lynch Maryland Municipal Investment Plan or Systematic
Bond Fund Withdrawal Plan. We guarantee the
shareholder's signature.
c/o Merrill Lynch Financial Data
Services, Inc. .....................................
P.O. Box 45289 Dealer Name and Address
Jacksonville, FL 32232-5289
By: ............................
Authorized Signature of Dealer
[ ][ ][ ] [ ][ ][ ][ ]
Branch Code F/C No. ...............
F/C Last Name
[ ][ ][ ] [ ][ ][ ][ ]
Dealer's Customer A/C No.
46
<PAGE>
MERRILL LYNCH MARYLAND MUNICIPAL BOND FUND -- AUTHORIZATION FORM (PART 2)
- -------------------------------------------------------------------------------
NOTE: THIS FORM IS REQUIRED TO APPLY FOR THE SYSTEMATIC WITHDRAWAL OR
AUTOMATIC INVESTMENT PLANS ONLY.
- -------------------------------------------------------------------------------
1. ACCOUNT REGISTRATION
(Please Print)
[ ]
Name of Owner...................... Social Security No. or
First Name Initial Last Name Taxpayer Identification
Number
Name of Co-Owner (if any)..........
First Name Initial Last Name
Address............................ Account Number ....................
(if existing account)
...................................
(Zip Code)
- -------------------------------------------------------------------------------
2. SYSTEMATIC WITHDRAWAL PLAN-- (SEE TERMS AND CONDITIONS IN THE STATEMENT OF
ADDITIONAL INFORMATION)
MINIMUM REQUIREMENTS: $10,000 for monthly disbursements, $5,000 for quarterly,
of [_] Class A, [_] Class B*, [_] Class C* or [_] Class D shares in Merrill
Lynch Maryland Municipal Bond Fund, at cost or current offering price.
Withdrawals to be made either (check one) [_] Monthly on the 24th day of each
month, or [_] Quarterly on the 24th day of March, June, September and
December. If the 24th falls on a weekend or holiday, the next succeeding
business day will be utilized. Begin systematic withdrawal on
--------
(month)
or as soon as possible thereafter.
SPECIFY THE AMOUNT OF THE WITHDRAWAL YOU WOULD LIKE PAID TO YOU (CHECK ONE):
[_] $ of [_] Class A, [_] Class B*, [_] Class C* or [_] Class D shares in
the account.
SPECIFY WITHDRAWAL METHOD: [_] check or [_] direct deposit to bank account
(check one and complete part (a) or (b) below):
DRAW CHECKS PAYABLE (CHECK ONE)
(a)I hereby authorize payment by check
[_] as indicated in Item 1.
[_] to the order of..........................................................
Mail to (check one)
[_] the address indicated in Item 1.
[_] Name (Please Print)......................................................
Address .......................................................................
..........................................................................
Signature of Owner................................ Date..................
Signature of Co-Owner (if any)............................................
(B) I HEREBY AUTHORIZE PAYMENT BY DIRECT DEPOSIT TO MY BANK ACCOUNT AND, IF
NECESSARY, DEBIT ENTRIES AND ADJUSTMENTS FOR ANY CREDIT ENTRIES MADE TO MY
ACCOUNT. I AGREE THAT THIS AUTHORIZATION WILL REMAIN IN EFFECT UNTIL I PROVIDE
WRITTEN NOTIFICATION TO MERRILL LYNCH FINANCIAL DATA SERVICES, INC. AMENDING
OR TERMINATING THIS SERVICE.
Specify type of account (check one): [_] checking [_] savings
Name on your Account...........................................................
Bank Name......................................................................
Bank Number........................ Account Number............................
Bank Address...................................................................
........................................................................
Signature of Depositor................................. Date...................
Signature of Depositor.........................................................
(if joint account, both must sign)
NOTE: IF DIRECT DEPOSIT IS ELECTED, YOUR BLANK, UNSIGNED CHECK MARKED "VOID"
OR A DEPOSIT SLIP FROM YOUR SAVINGS ACCOUNT SHOULD ACCOMPANY THIS APPLICATION.
* Annual withdrawal cannot exceed 10% of the value of shares of such class
held in the account at the time the election to join the systematic
withdrawal plan is made.
47
<PAGE>
MERRILL LYNCH MARYLAND MUNICIPAL BOND FUND -- AUTHORIZATION FORM (PART 2) --
(CONTINUED)
- -------------------------------------------------------------------------------
3. APPLICATION FOR AUTOMATIC INVESTMENT PLAN
I hereby request that Merrill Lynch Financial Data Services, Inc. draw an
automated clearing house ("ACH") debit on my checking account as described
below each month to purchase (choose one)
[_] Class A shares [_] Class B shares [_] Class C shares [_] Class D shares
of Merrill Lynch Maryland Municipal Bond Fund subject to the terms set forth
below. In the event that I am not eligible to purchase Class A shares, I
understand that Class D shares will be purchased.
AUTHORIZATION TO HONOR ACH DEBITS
MERRILL LYNCH FINANCIAL DATA
SERVICES, INC.
DRAWN BY MERRILL LYNCH FINANCIAL
You are hereby authorized to draw an DATA SERVICES, INC.
ACH debit each month on my bank
account for investment in Merrill
Lynch Maryland Municipal Bond Fund,
as indicated below:
To...............................Bank
(Investor's Bank)
Bank Address.........................
City...... State...... Zip Code......
Amount of each ACH debit $........
As a convenience to me, I hereby
Account Number ................... request and authorize you to pay and
charge to my account ACH debits
drawn on my account by and payable
Please date and invest ACH debits on to Merrill Lynch Financial Data
the 20th of each monthbeginning Services, Inc. I agree that your
or as soon thereafter as possible. rights in respect to each such debit
shall be the same as if it were a
(month) check drawn on you and signed
personally by me. This authority is
I agree that you are drawing these to remain in effect until revoked
ACH debits voluntarily at my request personally by me in writing. Until
and that you shall not be liable for you receive such notice, you shall
any loss arising from any delay in be fully protected in honoring any
preparing or failure to prepare any such debit. I further agree that if
such debit. If I change banks or any such debit be dishonored,
desire to terminate or suspend this whether with or without cause and
program, I agree to notify you whether intentionally or
promptly in writing. I hereby inadvertently, you shall be under no
authorize you to take any action to liability.
correct erroneous ACH debits of my
bank account or purchases of Fund ............ .....................
shares including liquidating shares Date Signature of
of the Fund and crediting my bank Depositor
account. I further agree that if a
debit is not honored upon ............ .....................
presentation, Merrill Lynch Financial Bank Signature of Depositor
Data Services, Inc. is authorized to Account (If joint account,
discontinue immediately the Automatic Number both must sign)
Investment Plan and to liquidate
sufficient shares held in my account
to offset the purchase made with the
dishonored debit.
............ .....................
Date Signature of
Depositor
......................
Signature of Depositor
(If joint account,
both must sign)
NOTE: IF AUTOMATIC INVESTMENT PLAN IS ELECTED, YOUR BLANK, UNSIGNED CHECK
MARKED "VOID" SHOULD ACCOMPANY THIS APPLICATION.
48
<PAGE>
[This Page Intentionally Left Blank]
<PAGE>
[This Page Intentionally Left Blank]
<PAGE>
MANAGER
Fund Asset Management
Administrative Offices:
800 Scudders Mill Road
Plainsboro, New Jersey
Mailing Address:
P.O. Box 9011
Princeton, New Jersey 08543-9011
DISTRIBUTOR
Merrill Lynch Funds Distributor, Inc.
Administrative Offices:
800 Scudders Mill Road
Plainsboro, New Jersey
Mailing Address:
P.O. Box 9081
Princeton, New Jersey 08543-9081
CUSTODIAN
State Street Bank and Trust Company
P.O. Box 351
Boston, Massachusetts 02101
TRANSFER AGENT
Merrill Lynch Financial Data Services, Inc.
Administrative Offices:
4800 Deer Lake Drive East
Jacksonville, Florida 32246-6484
Mailing Address:
P.O. Box 45289
Jacksonville, Florida 32232-5289
INDEPENDENT AUDITORS
Deloitte & Touche LLP
117 Campus Drive
Princeton, New Jersey 08540-6400
COUNSEL
Brown & Wood LLP
One World Trade Center
New York, New York 10048-0557
<PAGE>
NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATIONS, OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS, IN CONNECTION
WITH THE OFFER CONTAINED IN THIS PROSPECTUS, AND, IF GIVEN OR MADE, SUCH OTHER
INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN
AUTHORIZED BY THE TRUST, THE MANAGER OR THE DISTRIBUTOR. THIS PROSPECTUS DOES
NOT CONSTITUTE AN OFFERING IN ANY STATE IN WHICH SUCH OFFERING MAY NOT
LAWFULLY BE MADE.
---------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Fee Table.................................................................. 2
Merrill Lynch Select PricingSM System...................................... 4
Financial Highlights....................................................... 9
Investment Objective and Policies.......................................... 10
Potential Benefits........................................................ 12
Special and Risk Considerations Relating to Municipal Bonds............... 12
Description of Municipal Bonds............................................ 14
Call Rights............................................................... 16
When-Issued Securities and Delayed Delivery Transactions.................. 16
Financial Futures Transactions and Options................................ 17
Repurchase Agreements..................................................... 19
Investment Restrictions................................................... 19
Management of the Trust.................................................... 20
Trustees.................................................................. 20
Management and Advisory Arrangements...................................... 21
Code of Ethics............................................................ 21
Transfer Agency Services.................................................. 22
Purchase of Shares......................................................... 22
Initial Sales Charge Alternatives--Class A and Class D Shares............. 25
Deferred Sales Charge Alternatives--Class B and Class C Shares............ 26
Distribution Plans........................................................ 29
Limitations on the Payment of Deferred Sales Charges...................... 31
Redemption of Shares....................................................... 32
Redemption................................................................ 32
Repurchase................................................................ 32
Reinstatement Privilege--Class A and Class D Shares....................... 33
Shareholder Services....................................................... 33
Investment Account........................................................ 33
Exchange Privilege........................................................ 34
Automatic Reinvestment of Dividends and Capital Gains Distributions....... 35
Systematic Withdrawal Plans............................................... 35
Automatic Investment Plans................................................ 36
Fee-Based Programs........................................................ 36
Portfolio Transactions..................................................... 36
Distributions and Taxes.................................................... 37
Distributions............................................................. 37
Taxes..................................................................... 38
Performance Data........................................................... 40
Additional Information..................................................... 42
Determination of Net Asset Value.......................................... 42
Organization of the Trust................................................. 42
Shareholder Reports....................................................... 43
Shareholder Inquiries..................................................... 44
Authorization Form......................................................... 45
</TABLE>
CODE # 16858-1097
[LOGO] MERRILL LYNCH
Merrill Lynch
Maryland Municipal
Bond Fund
Merrill Lynch Multi-State
Municipal Series Trust
[ART]
PROSPECTUS
October 30, 1997
Distributor:
Merrill Lynch
Funds Distributor, Inc.
This prospectus should be retained for future reference.
<PAGE>
STATEMENT OF ADDITIONAL INFORMATION
MERRILL LYNCH MARYLAND MUNICIPAL BOND FUND
MERRILL LYNCH MULTI-STATE MUNICIPAL SERIES TRUST
P.O. BOX 9011, PRINCETON, NEW JERSEY 08543-9011--PHONE NO. (609) 282-2800
----------------
Merrill Lynch Maryland Municipal Bond Fund (the "Fund") is a series of
Merrill Lynch Multi-State Municipal Series Trust (the "Trust"), an open-end
management investment company organized as a Massachusetts business trust. The
investment objective of the Fund is to provide shareholders with as high a
level of income exempt from Federal and Maryland income taxes as is consistent
with prudent investment management. The Fund invests primarily in a non-
diversified portfolio of long-term investment grade obligations issued by or
on behalf of the State of Maryland, its political subdivisions, agencies and
instrumentalities and obligations of other qualifying issuers, such as issuers
located in Puerto Rico, the U.S. Virgin Islands and Guam, which pay interest
exempt, in the opinion of bond counsel to the issuer, from Federal and
Maryland income taxes. There can be no assurance that the investment objective
of the Fund will be realized.
Pursuant to the Merrill Lynch Select PricingSM System, the Fund offers four
classes of shares, each with a different combination of sales charges, ongoing
fees and other features. The Merrill Lynch Select PricingSM System permits an
investor to choose the method of purchasing shares that the investor believes
is most beneficial given the amount of the purchase, the length of time the
investor expects to hold the shares and other relevant circumstances.
----------------
The Statement of Additional Information of the Fund is not a prospectus and
should be read in conjunction with the prospectus of the Fund, dated October
30, 1997 (the "Prospectus"), which has been filed with the Securities and
Exchange Commission (the "Commission") and can be obtained, without charge, by
calling or by writing the Fund at the above telephone number or address. This
Statement of Additional Information has been incorporated by reference into
the Prospectus. Capitalized terms used but not defined herein have the same
meanings as in the Prospectus.
----------------
FUND ASSET MANAGEMENT -- MANAGER
MERRILL LYNCH FUNDS DISTRIBUTOR, INC. -- DISTRIBUTOR
----------------
The date of this Statement of Additional Information is October 30, 1997
<PAGE>
INVESTMENT OBJECTIVE AND POLICIES
The investment objective of the Fund is to provide shareholders with as high
a level of income exempt from Federal and Maryland 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 Maryland, its political subdivisions,
agencies and instrumentalities and obligations of other qualifying issuers,
such as issuers located in Puerto Rico, the U.S. Virgin Islands and Guam,
which pay interest exempt, in the opinion of bond counsel to the issuer, from
Federal and Maryland income taxes. Obligations exempt from Federal income
taxes are referred to herein as "Municipal Bonds" and obligations exempt from
both Federal and Maryland income taxes are referred to as "Maryland Municipal
Bonds." Unless otherwise indicated, references to Municipal Bonds shall be
deemed to include Maryland Municipal Bonds. The Fund anticipates that at all
times, except during temporary defensive periods, it will maintain at least
65% of its total assets invested in Maryland Municipal Bonds. At times, the
Fund will seek to hedge its portfolio through the use of futures transactions
to reduce volatility in the net asset value of Fund shares. Reference is made
to "Investment Objective and Policies" in the Prospectus for a discussion of
the investment objective and policies of the Fund.
Municipal Bonds may include general obligation bonds of the State and its
political subdivisions, revenue bonds of utility systems, highways, bridges,
port and airport facilities, colleges, hospitals, housing facilities, etc.,
and industrial development bonds or private activity bonds. The interest on
such obligations may bear a fixed rate or be payable at a variable or floating
rate. The Municipal Bonds purchased by the Fund will be primarily what are
commonly referred to as "investment grade" securities, which are obligations
rated at the time of purchase within the four highest quality ratings as
determined by either Moody's Investors Service, Inc. ("Moody's") (currently
Aaa, Aa, A and Baa), Standard & Poor's Ratings Services ("Standard & Poor's")
(currently AAA, AA, A and BBB) or Fitch Investors Service, Inc. ("Fitch")
(currently AAA, AA, A and BBB). If unrated, such securities will possess
creditworthiness comparable, in the opinion of the manager of the Fund, Fund
Asset Management, L.P. (the "Manager"), to other obligations in which the Fund
may invest.
The Fund ordinarily does not intend to realize investment income not exempt
from Federal and Maryland income taxes. However, to the extent that suitable
Maryland Municipal Bonds are not available for investment by the Fund, the
Fund may purchase Municipal Bonds, which are bonds issued by other states,
their agencies and instrumentalities, the interest income on which is exempt,
in the opinion of bond counsel to the issuer, from Federal but not Maryland
taxation. The Fund also may invest in securities not issued by or on behalf of
a state or territory or by an agency or instrumentality thereof, if the Fund
nevertheless believes such securities to be exempt from Federal income
taxation ("Non-Municipal Tax-Exempt Securities"). Non-Municipal Tax-Exempt
Securities may include securities issued by other investment companies that
invest in municipal bonds, to the extent permitted by applicable law. Other
Non-Municipal Tax-Exempt Securities could include trust certificates or other
instruments evidencing interests in one or more long-term municipal
securities.
Except when acceptable securities are unavailable as determined by the
Manager, the Fund, under normal circumstances, will invest at least 65% of its
total assets in Maryland Municipal Bonds. For temporary periods or to provide
liquidity, the Fund has the authority to invest as much as 35% of its total
assets in tax-exempt or taxable money market obligations with a maturity of
one year or less (such short-term obligations being referred to herein as
"Temporary Investments"), except that taxable Temporary Investments shall not
exceed 20% of the Fund's net assets. The Fund at all times will have at least
80% of its net assets invested in securities exempt
2
<PAGE>
from Federal income taxation. However, interest received on certain otherwise
tax-exempt securities which are classified as "private activity bonds" (in
general bonds that benefit non-governmental entities) may be subject to an
alternative minimum tax. The Fund may purchase such private activity bonds.
See "Distributions and Taxes." In addition, the Fund reserves the right to
invest temporarily a greater portion of its assets in Temporary Investments
for defensive purposes, when, in the judgment of the Manager, market
conditions warrant. The investment objective of the Fund set forth in this
paragraph is a fundamental policy of the Fund which may not be changed without
a vote of a majority of the outstanding shares of the Fund. The Fund's hedging
strategies are not fundamental policies and may be modified by the Trustees of
the Trust without the approval of the Fund's shareholders.
Municipal Bonds may at times be purchased or sold on a delayed delivery
basis or a when-issued basis. These transactions arise when securities are
purchased or sold by the Fund with payment and delivery taking place in the
future, often a month or more after the purchase. The payment obligation and
the interest rate are each fixed at the time the buyer enters into the
commitment. The Fund will make only commitments to purchase such securities
with the intention of actually acquiring the securities, but the Fund may sell
these securities prior to the settlement date if it is deemed advisable.
Purchasing Municipal Bonds on a when-issued basis involves the risk that the
yields available in the market when the delivery takes place actually may be
higher than those obtained in the transaction itself; if yields so increase,
the value of the when-issued obligations generally will decrease. The Fund
will maintain a separate account at its custodian bank consisting of cash,
cash equivalents or high-grade, liquid Municipal Bonds or Temporary
Investments (valued on a daily basis) equal at all times to the amount of the
when-issued commitment.
The Fund may invest in Municipal Bonds (and Non-Municipal Tax-Exempt
Securities) the return on which is based on a particular index of value or
interest rates. For example, the Fund may invest in Municipal Bonds that pay
interest based on an index of Municipal Bond interest rates or based on the
value of gold or some other commodity. The principal amount payable upon
maturity of certain Municipal Bonds also may be based on the value of an
index. Also, the Fund may invest in so-called "inverse floating obligations"
or "residual interest bonds" on which the interest rates typically decline as
market rates increase and increase as market rates decline. For example, to
the extent the Fund invests in these types of Municipal Bonds, the Fund's
return on such Municipal Bonds will be subject to risk with respect to the
value of the particular index, which may include reduced or eliminated
interest payments and losses of invested principal. Such securities have the
effect of providing a degree of investment leverage, since they may increase
or decrease in value in response to changes, as an illustration, in market
interest rates at a rate which is a multiple (typically two) of the rate at
which fixed-rate long-term tax-exempt securities increase or decrease in
response to such changes. As a result, the market values of such securities
will generally be more volatile than the market values of fixed-rate tax-
exempt securities. To seek to limit the volatility of these securities, the
Fund may purchase inverse floating obligations with shorter term maturities or
which contain limitations on the extent to which the interest rate may vary.
The Manager 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 to vary
the degree of investment leverage relatively efficiently under different
market conditions. Certain investments in such obligations may be illiquid.
The Fund may not invest in such illiquid obligations if such investments,
together with other illiquid investments, would exceed 15% of the Fund's total
assets. The Manager believes, however, that indexed and inverse floating
obligations represent flexible portfolio management
3
<PAGE>
instruments for the Fund which allow the Fund to seek potential investment
rewards, hedge other portfolio positions or vary the degree of investment
leverage relatively efficiently under different market conditions.
The Fund may purchase a Municipal Bond issuer's right to call all or a
portion of such Municipal Bond for mandatory tender for purchase (a "Call
Right"). A holder of a Call Right may exercise such right to require a
mandatory tender for the purchase of related Municipal Bonds, subject to
certain conditions. A Call Right that is not exercised prior to the maturity
of the related Municipal Bond will expire without value. The economic effect
of holding both the Call Right and the related Municipal Bond is identical to
holding a Municipal Bond as a non-callable security. Certain investments in
such obligations may be illiquid. The Fund may not invest in such illiquid
obligations if such investments, together with other illiquid investments,
would exceed 15% of the Fund's total assets.
The Fund may invest up to 20% of its total assets in Municipal Bonds which
are rated below Baa by Moody's or below BBB by Standard & Poor's or Fitch or
which, in the Manager's judgment, possess similar credit characteristics
("high yield securities"). See Appendix II--"Ratings of Municipal Bonds" for
additional information regarding ratings of debt securities. The Manager
considers the ratings assigned by Standard & Poor's, Moody's or Fitch as one
of several factors in its independent credit analysis of issuers.
High yield securities are considered by Standard & Poor's, Moody's and Fitch
to have varying degrees of speculative characteristics. Consequently, although
high yield securities can be expected to provide higher yields, such
securities may be subject to greater market price fluctuations and risk of
loss of principal than lower-yielding, higher-rated debt securities.
Investments in high yield securities will be made only when, in the judgment
of the Manager, such securities provide attractive total return potential
relative to the risk of such securities, as compared to higher quality debt
securities. The Fund generally will not invest in debt securities in the
lowest rating categories (those rated CC or lower by Standard & Poor's or
Fitch or Ca or lower by Moody's) unless the Manager believes that the
financial condition of the issuer or the protection afforded the particular
securities is stronger than would otherwise be indicated by such low ratings.
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
of high yield securities may be more likely to experience financial stress,
especially if such issuers are highly leveraged. In addition, the market for
high yield municipal securities is relatively new and has not yet weathered a
major economic recession, and it is unknown what effects such a recession
might have on such securities. During such periods, such issuers may not have
sufficient revenues to meet their interest payment obligations. The issuer's
ability to service its debt obligations also may be adversely affected by
specific issuer developments, or the issuer's inability to meet specific
projected business forecasts, or the unavailability of additional financing.
The risk of loss due to default by the issuer is significantly greater for the
holders of high yield securities because such securities may be unsecured and
may be subordinated to other creditors of the issuer.
High yield securities frequently have call or redemption features that would
permit an issuer to repurchase the security from the Fund. If a call were
exercised by the issuer during a period of declining interest rates, the Fund
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.
4
<PAGE>
The Fund may have difficulty disposing of certain high yield securities
because there may be a thin trading market for such securities. Because not
all dealers maintain markets in all high yield securities, there is no
established secondary market for many of these securities, and the Fund
anticipates that such securities could be sold only to a limited number of
dealers or institutional investors. To the extent that a secondary trading
market for high yield securities does exist, it generally is not as liquid as
the secondary market for higher rated securities. Reduced secondary market
liquidity may have an adverse impact on market price and the Fund's ability to
dispose of particular issues when necessary to meet the Fund's liquidity needs
or in response to a specific economic event such as a deterioration in the
creditworthiness of the issuer. Reduced secondary market liquidity for certain
securities also may make it more difficult for the Fund to obtain accurate
market quotations for purposes of valuing the Fund's portfolio. Market
quotations generally are available on many high yield securities only from a
limited number of dealers and may not necessarily represent firm bids of such
dealers or prices for actual sales.
It is expected that a significant portion of the high yield securities
acquired by the Fund will be purchased upon issuance, which may involve
special risks because the securities so acquired are new issues. In such
instances the Fund may be a substantial purchaser of the issue and therefore
have the opportunity to participate in structuring the terms of the offering.
Although this may enable the Fund to seek to protect itself against certain of
such risks, the considerations discussed herein would nevertheless remain
applicable.
Adverse publicity and investor perceptions, which may not be based on
fundamental analysis, also may decrease the value and liquidity of high yield
securities, particularly in a thinly traded market. Factors adversely
affecting the market value of high yield securities are likely to affect
adversely the Fund's net asset value. In addition, the Fund may incur
additional expenses to the extent that it is required to seek recovery upon a
default on a portfolio holding or participate in the restructuring of the
obligation.
DESCRIPTION OF MUNICIPAL BONDS AND TEMPORARY INVESTMENTS
Set forth below is a description of the Municipal Bonds and Temporary
Investments in which the Fund may invest. A more complete discussion
concerning futures and options transactions is set forth under "Investment
Objective and Policies" in the Prospectus. Information with respect to ratings
assigned to tax-exempt obligations which the Fund may purchase is set forth in
Appendix II to this Statement of Additional Information.
DESCRIPTION OF MUNICIPAL BONDS
Municipal Bonds include debt obligations issued to obtain funds for various
public purposes, including construction of a wide range of public facilities,
refunding of outstanding obligations and obtaining funds for general operating
expenses and loans to other public institutions and facilities. In addition,
certain types of bonds are issued by or on behalf of public authorities to
finance various privately owned or operated facilities, including certain
facilities for 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, in the opinion of bond counsel to the issuer, excluded from
gross income for Federal income tax purposes and, in the case of Maryland
Municipal Bonds, exempt from Maryland income taxes. Other types of industrial
development bonds or private activity bonds, the proceeds of which are used
for the construction,
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equipment or improvement of privately operated industrial or commercial
facilities, may constitute Municipal Bonds, although the current Federal tax
laws place substantial limitations on the size of such issues.
The two principal classifications of Municipal Bonds are "general
obligation" bonds, and "revenue" bonds, which latter category includes
industrial development bonds ("IDBs") and, for bonds issued after August 15,
1986, private activity bonds. General obligation bonds are secured by the
issuer's pledge of faith, credit and taxing power for the payment of principal
and interest. Revenue bonds are payable only from the revenues derived from a
particular facility or class of facilities or, in some cases, from the
proceeds of a special or limited tax or other specific revenue source such as
payments from the user of the facility being financed. IDBs and, in the case
of bonds issued after August 15, 1986, private activity bonds, are in most
cases revenue bonds and generally do not constitute the pledge of the credit
or taxing power of the issuer of such bonds. Generally, the payment of the
principal of and interest on such bonds depends solely on the ability of the
user of the facility financed by the bonds to meet its financial obligations
and the pledge, if any, of real and personal property so financed as security
for such payment, unless a line of credit, bond insurance or other security is
furnished. The Fund may invest in Municipal Bonds that are so-called "moral
obligation" bonds, which are normally issued by special purpose public
authorities. If an issuer of moral obligation bonds is unable to meet its
obligations, repayment of such bonds becomes a moral commitment, but not a
legal obligation, of the state or municipality in question.
Also included within the general category of Municipal Bonds are
participation certificates issued by government authorities or entities to
finance the acquisition or construction of equipment, land and/or facilities.
The certificates represent participations in a lease, an installment purchase
contract or a conditional sales contract (hereinafter collectively called
"lease obligations") relating to such equipment, land or facilities. Although
lease obligations do not constitute general obligations of the issuer for
which the issuer's unlimited taxing power is pledged, a lease obligation is
frequently backed by the issuer's covenant to budget for, appropriate and make
the payments due under the lease obligation. However, certain lease
obligations contain "non-appropriation" clauses which provide that the issuer
has no obligation to make lease or installment purchase payments in future
years unless money is appropriated for such purpose on a yearly basis.
Although "non-appropriation" lease obligations are secured by the leased
property, disposition of the property in the event of foreclosure might prove
difficult. These securities represent a relatively new type of financing that
has not yet developed the depth of marketability associated with more
conventional securities. Certain investments in lease obligations may be
illiquid. The Fund may not invest in illiquid lease obligations if such
investments, together with all other illiquid investments, would exceed 15% of
the Fund's total assets. The Fund may, however, invest without regard to such
limitation in lease obligations which the Manager, pursuant to the guidelines
which have been adopted by the Board of Trustees and subject to the
supervision of the Board of Trustees, determines to be liquid. The Manager
will deem lease obligations liquid if they are publicly offered and have
received an investment grade rating of Baa or better by Moody's, or BBB or
better by Standard & Poor's or Fitch. Unrated lease obligations, or those
rated below investment grade, will be considered liquid if the obligations
come to the market through an underwritten public offering and at least two
dealers are willing to give competitive bids. In reference to the latter, the
Manager must, among other things, also review the creditworthiness of the
entity obligated to make payment under the lease obligation and make certain
specified determinations based on such factors as the existence of a rating or
credit enhancement such as insurance, the frequency of trades or quotes for
the obligation and the willingness of dealers to make a market in the
obligation.
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Yields on Municipal Bonds are dependent on a variety of factors, including
the general condition of the money market and of the municipal bond market,
the size of a particular offering, the financial condition of the issuer, the
general conditions of the Municipal Bond market, the maturity of the
obligation, and the rating of the issue. The ability of the Fund to achieve
its investment objective also is dependent on the continuing ability of the
issuers of the bonds in which the Fund invests to meet their obligations for
the payment of interest and principal when due. There are variations in the
risks involved in holding Municipal Bonds, both within a particular
classification and between classifications, depending on numerous factors.
Furthermore, the rights of owners of Municipal Bonds and the obligations of
the issuer of such Municipal Bonds may be subject to applicable bankruptcy,
insolvency and similar laws and court decisions affecting the rights of
creditors generally and to general equitable principles, which may limit the
enforcement of certain remedies.
DESCRIPTION OF TEMPORARY INVESTMENTS
The Fund may invest in short-term tax-free and taxable securities subject to
the limitations set forth under "Investment Objective and Policies." The tax-
exempt money market securities may include municipal notes, municipal
commercial paper, municipal bonds with remaining maturity of less than one
year, variable rate demand notes and participations therein. Municipal notes
include tax anticipation notes, bond anticipation notes and grant anticipation
notes. Anticipation notes are sold as interim financing in anticipation of tax
collection, bond sales, government grants or revenue receipts. Municipal
commercial paper refers to short-term unsecured promissory notes generally
issued to finance short-term credit needs. The taxable money market securities
in which the Fund may invest as Temporary Investments consist of U.S.
Government securities, U.S. Government agency securities, domestic bank or
savings institution certificates of deposit and bankers' acceptances, short-
term corporate debt securities such as commercial paper, and repurchase
agreements. These Temporary Investments must have a stated maturity not in
excess of one year from the date of purchase.
Variable rate demand obligations ("VRDOs") are tax-exempt obligations which
contain a floating or variable interest rate adjustment formula and an
unconditional right of demand on the part of the holder thereof to receive
payment of the unpaid principal balance plus accrued interest upon a short
notice period not to exceed seven days. There is, however, the possibility
that because of default or insolvency the demand feature of VRDOs and
Participating VRDOs, described below, may not be honored. The interest rates
are adjustable at intervals (ranging from daily to up to one year) to some
prevailing market rate for similar investments, such adjustment formula being
calculated to maintain the market value of the VRDOs at approximately the par
value of the VRDOs on the adjustment date. The adjustments typically are based
upon the Public Securities Association Index or some other appropriate
interest rate adjustment index. The Fund may invest in all types of tax-exempt
instruments currently outstanding or to be issued in the future which satisfy
the short-term maturity and quality standards of the Fund.
The Fund also may invest in VRDOs in the form of participation interests
("Participating VRDOs") in variable rate tax-exempt obligations held by a
financial institution, typically a commercial bank. Participating VRDOs
provide the Fund with a specified undivided interest (up to 100%) of the
underlying obligation and the right to demand payment of the unpaid principal
balance plus accrued interest on the Participating VRDOs from the financial
institution upon a specified number of days' notice, not to exceed seven days.
In addition, a Participating VRDO is backed by an irrevocable letter of credit
or guaranty of the financial institution. The Fund would have an undivided
interest in the underlying obligation and thus participate on the same basis
as the financial institution in such obligation except that the financial
institution typically retains fees out of the interest
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paid on the obligation for servicing the obligation, providing the letter of
credit and issuing the repurchase commitment. The Fund has been advised by its
counsel that the Fund should be entitled to treat the income received on
Participating VRDOs as interest from tax-exempt obligations.
VRDOs that contain an unconditional right of demand to receive payment of
the unpaid principal balance plus accrued interest on a notice period
exceeding seven days may be deemed to be illiquid securities. A VRDO with a
demand notice period exceeding seven days therefore will be subject to the
Fund's restriction on illiquid investments unless, in the judgment of the
Trustees, such VRDO is liquid. The Trustees may adopt guidelines and delegate
to the Manager the daily function of determining and monitoring liquidity of
such VRDOs. The Trustees, however, will retain sufficient oversight and will
be ultimately responsible for such determination.
The Trust has established the following standards with respect to money
market securities and VRDOs in which the Fund invests. Commercial paper
investments at the time of purchase must be rated A-1 through A-3 by Standard
& Poor's, Prime-1 through Prime-3 by Moody's or F-1 through F-3 by Fitch or,
if not rated, issued by companies having an outstanding debt issue rated at
least A by Standard & Poor's, Moody's or Fitch. Investments in corporate bonds
and debentures (which must have maturities at the date of purchase of one year
or less) must be rated at the time of purchase at least A by Standard &
Poor's, Moody's or Fitch. Notes and VRDOs at the time of purchase must be
rated SP-1/A-1 through SP-2/A-3 by Standard & Poor's, MIG-l/VMIG-1 through
MIG-4/VMIG-4 by Moody's or F-1 through F-3 by Fitch. Temporary Investments, if
not rated, must be of comparable quality to securities rated in the above
rating categories in the opinion of the Manager. The Fund may not invest in
any security issued by a commercial bank or a savings institution unless the
bank or institution is organized and operating in the United States, has total
assets of at least one billion dollars and is a member of the Federal Deposit
Insurance Corporation ("FDIC"), except that up to 10% of total assets may be
invested in certificates of deposit of small institutions if such certificates
are insured fully by the FDIC.
REPURCHASE AGREEMENTS
The Fund may invest in securities pursuant to repurchase agreements.
Repurchase agreements may be entered into only with a member bank of the
Federal Reserve System or a primary dealer in U.S. Government securities or an
affiliate thereof. Under such agreements, the seller agrees, upon entering
into the contract, to repurchase the security from the Fund at a mutually
agreed upon time and price, thereby determining the yield during the term of
the agreement. This results in a fixed rate of return insulated from market
fluctuations during such period. In repurchase agreements, the prices at which
the trades are conducted do not reflect accrued interest on the underlying
obligations. Such agreements usually cover short periods, such as under one
week. Repurchase agreements may be construed to be collateralized loans by the
purchaser to the seller secured by the securities transferred to the
purchaser. In the case of a repurchase agreement, the Fund will require the
seller to provide additional collateral if the market value of the securities
falls below the repurchase price at any time during the term of the repurchase
agreement. In the event of default by the seller under a repurchase agreement
construed to be a collateralized loan, the underlying securities are not owned
by the Fund but only constitute collateral for the seller's obligation to pay
the repurchase price. Therefore, the Fund may suffer time delays and incur
costs or possible losses in connection with the disposition of the collateral.
In the event of a default under such a repurchase agreement, instead of the
contractual fixed rate of return, the rate of return to the Fund will depend
on intervening fluctuations of the market value of such security and the
accrued interest on the security. In such event, the Fund would have rights
against the seller for breach of contract with respect to any losses arising
from
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market fluctuations following the failure of the seller to perform. The Fund
may not invest in repurchase agreements maturing in more than seven days if
such investments, together with all other illiquid investments, would exceed
15% of the Fund's total assets.
In general, for Federal income tax purposes, repurchase agreements are
treated as collateralized loans secured by the securities "sold." Therefore,
amounts earned under such agreements will not be considered tax-exempt
interest.
FINANCIAL FUTURES TRANSACTIONS AND OPTIONS
Reference is made to the discussion concerning futures transactions under
"Investment Objective and Policies" in the Prospectus. Set forth below is
additional information concerning these transactions.
As described in the Prospectus, the Fund may purchase and sell exchange
traded financial futures contracts ("financial futures contracts") to hedge
its portfolio of Municipal Bonds against declines in the value of such
securities and to hedge against increases in the cost of securities the Fund
intends to purchase. However, any transactions involving financial futures or
options (or puts or calls associated therewith) will be in accordance with the
Fund's investment policies and limitations. To hedge its portfolio, the Fund
may take an investment position in a futures contract which will move in the
opposite direction from the portfolio position being hedged. While the Fund's
use of hedging strategies is intended to moderate capital changes in portfolio
holdings and thereby reduce the volatility of the net asset value of Fund
shares, the Fund anticipates that its net asset value will fluctuate. Set
forth below is information concerning futures transactions.
Description of Futures Contracts. A futures contract is an agreement between
two parties to buy and sell a security, or in the case of an index-based
futures contract, to make and accept a cash settlement for a set price on a
future date. A majority of transactions in futures contracts, however, do not
result in the actual delivery of the underlying instrument or cash settlement,
but are settled through liquidation, i.e., by entering into an offsetting
transaction. Futures contracts have been designed by boards of trade which
have been designated "contracts markets" by the Commodity Futures Trading
Commission ("CFTC").
The purchase or sale of a futures contract differs from the purchase or sale
of a security in that no price or premium is paid or received. Instead, an
amount of cash or securities acceptable to the broker and the relevant
contract market, which varies, but is generally about 5% of the contract
amount, must be deposited with the broker. This amount is known as "initial
margin" and represents a "good faith" deposit assuring the performance of both
the purchaser and seller under the futures contract. Subsequent payments to
and from the broker, called "variation margin," are required to be made on a
daily basis as the price of the futures contract fluctuates making the long
and short positions in the futures contract more or less valuable, a process
known as "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 which will operate to terminate the position in the futures contract.
A final determination of variation margin is then made, additional cash is
required to be paid to or released by the broker, and the purchaser realizes a
loss or gain. In addition, a nominal commission is paid on each completed sale
transaction.
The Fund may deal in financial futures contracts based on a long-term
municipal bond index developed by the Chicago Board of Trade ("CBT") and The
Bond Buyer (the "Municipal Bond Index"). The Municipal Bond
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Index is comprised of 40 tax-exempt municipal revenue and general obligations
bonds. Each bond included in the Municipal Bond Index must be rated A or
higher by Moody's or Standard & Poor's and must have a remaining maturity of
19 years or more. Twice a month new issues satisfying the eligibility
requirements are added to, and an equal number of old issues are deleted from,
the Municipal Bond Index. The value of the Municipal Bond Index is computed
daily according to a formula based on the price of each bond in the Municipal
Bond Index, as evaluated by six dealer-to-dealer brokers.
The Municipal Bond Index futures contract is traded only on the CBT. Like
other contract markets, the CBT assures performance under futures contracts
through a clearing corporation, a nonprofit organization managed by the
exchange membership which also is responsible for handling daily accounting of
deposits or withdrawals of margin.
As described in the Prospectus, the Fund may purchase and sell financial
futures contracts on U.S. Government securities as a hedge against adverse
changes in interest rates as described below. With respect to U.S. Government
securities, currently there are financial futures contracts based on long-term
U.S. Treasury bonds, Treasury notes, Government National Mortgage Association
("GNMA") Certificates and three-month U.S. Treasury bills. The Fund may
purchase and write call and put options on futures contracts on U.S.
Government securities in connection with its hedging strategies.
Subject to policies adopted by the Trustees, the Fund also may engage in
other futures contracts transactions such as futures contracts on other
municipal bond indices that may become available if the Manager and the
Trustees should determine that there is normally a sufficient correlation
between the prices of such futures contracts and the Municipal Bonds in which
the Fund invests to make such hedging appropriate.
Futures Strategies. The Fund may sell a financial futures contract (i.e.,
assume a short position) in anticipation of a decline in the value of its
investments in Municipal Bonds resulting from an increase in interest rates or
otherwise. The risk of decline could be reduced without employing futures as a
hedge by selling such Municipal Bonds and either reinvesting the proceeds in
securities with shorter maturities or by holding assets in cash. This
strategy, however, entails increased transaction costs in the form of dealer
spreads and typically would reduce the average yield of the Fund's portfolio
securities as a result of the shortening of maturities. The sale of futures
contracts provides an alternative means of hedging against declines in the
value of its investments in Municipal Bonds. As such values decline, the value
of the Fund's positions in the futures contracts will tend to increase, thus
offsetting all or a portion of the depreciation in the market value of the
Fund's Municipal Bond investments which are being hedged. While the Fund will
incur commission expenses in selling and closing out futures positions,
commissions on futures transactions are lower than transaction costs incurred
in the purchase and sale of Municipal Bonds. In addition, the ability of the
Fund to trade in the standardized contracts available in the futures markets
may offer a more effective defensive position than a program to reduce the
average maturity of the portfolio securities due to the unique and varied
credit and technical characteristics of the municipal debt instruments
available to the Fund. Employing futures as a hedge also may permit the Fund
to assume a defensive posture without reducing the yield on its investments
beyond any amounts required to engage in futures trading.
When the Fund intends to purchase Municipal Bonds, the Fund may purchase
futures contracts as a hedge against any increase in the cost of such
Municipal Bonds, resulting from an increase in interest rates or otherwise,
that may occur before such purchases can be effected. Subject to the degree of
correlation between the Municipal
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Bonds and the futures contracts, subsequent increases in the cost of Municipal
Bonds should be reflected in the value of the futures held by the Fund. As
such purchases are made, an equivalent amount of futures contracts will be
closed out. Due to changing market conditions and interest rate forecasts,
however, a futures position may be terminated without a corresponding purchase
of portfolio securities.
Call Options on Futures Contracts. The Fund also may purchase and sell
exchange traded call and put options on financial futures contracts on U.S.
Government securities. The purchase of a call option on a futures contract is
analogous to the purchase of a call option on an individual security.
Depending on the pricing of the option compared to either the futures contract
on which it is based, or on the price of the underlying debt securities, it
may or may not be less risky than ownership of the futures contract or
underlying debt securities. Like the purchase of a futures contract, the Fund
will purchase a call option on a futures contract to hedge against a market
advance when the Fund is not fully invested.
The writing of a call option on a futures contract constitutes a partial
hedge against declining prices of the securities which are deliverable upon
exercise of the futures contract. If the futures price at expiration is below
the exercise price, the Fund will retain the full amount of the option premium
which provides a partial hedge against any decline that may have occurred in
the Fund's portfolio holdings.
Put Options on Futures Contracts. The purchase of options on a futures
contract is analogous to the purchase of protective put options on portfolio
securities. The Fund will purchase put options on futures contracts to hedge
the Fund's portfolio against the risk of rising interest rates.
The writing of a put option on a futures contract constitutes a partial
hedge against increasing prices of the securities which are deliverable upon
exercise of the futures contract. If the futures price at expiration is higher
than the exercise price, the Fund will retain the full amount of the option
premium which provides a partial hedge against any increase in the price of
Municipal Bonds which the Fund intends to purchase.
The writer of an option on a futures contract is required to deposit initial
and variation margin pursuant to requirements similar to those applicable to
futures contracts. Premiums received from the writing of an option will be
included in initial margin. The writing of an option on a futures contract
involves risks similar to those relating to futures contracts.
----------------
The Trust has received an order from the Commission exempting it from the
provisions of Section 17(f) and Section 18(f) of the Investment Company Act of
1940, as amended (the "1940 Act"), in connection with its strategy of
investing in futures contracts. Section 17(f) relates to the custody of
securities and other assets of an investment company and may be deemed to
prohibit certain arrangements between the Trust and commodities brokers with
respect to initial and variation margin. Section 18(f) of the 1940 Act
prohibits an open-end investment company such as the Trust from issuing a
"senior security" other than a borrowing from a bank. The staff of the
Commission has in the past indicated that a futures contract may be a "senior
security" under the 1940 Act.
Restrictions on Use of Futures Transactions. Regulations of the CFTC
applicable to the Fund require that all of the Fund's futures transactions
constitute bona fide hedging transactions and that the Fund purchase and sell
futures contracts and options thereon (i) for bona fide hedging purposes, and
(ii) for non-hedging purposes,
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if the aggregate initial margin and premiums required to establish positions
in such contracts and options does not exceed 5% of the liquidation value of
the Fund's portfolio assets after taking into account unrealized profits and
unrealized losses on any such contracts and options. (However, the Fund
intends to engage in options and futures transactions only for hedging
purposes.) Margin deposits may consist of cash or securities acceptable to the
broker and the relevant contract market.
When the Fund purchases futures contracts or a call option with respect
thereto or writes a put option on a futures contract, an amount of cash, cash
equivalents or liquid securities will be deposited in a segregated account
with the Fund's custodian so that the amount so segregated, plus the amount of
initial and variation margin held in the account of its broker, equals the
market value of the futures contract, thereby ensuring that the use of such
futures is unleveraged.
Risk Factors in Futures Transactions and Options. Investment in futures
contracts involves the risk of imperfect correlation between movements in the
price of the futures contract and the price of the security being hedged. The
hedge will not be fully effective when there is imperfect correlation between
the movements in the prices of two financial instruments. For example, if the
price of the futures contract moves more than the price of the hedged
security, the Fund will experience either a loss or gain on the futures
contract which is not offset completely by movements in the price of the
hedged securities. To compensate for imperfect correlations, the Fund may
purchase or sell futures contracts in a greater dollar amount than the hedged
securities if the volatility of the hedged securities is historically greater
than the volatility of the futures contracts. Conversely, the Fund may
purchase or sell fewer futures contracts if the volatility of the price of the
hedged securities is historically less than that of the futures contracts.
The particular municipal bonds comprising the index underlying the Municipal
Bond Index financial futures contract may vary from the Municipal Bonds held
by the Fund. As a result, the Fund's ability to hedge effectively all or a
portion of the value of its Municipal Bonds through the use of such financial
futures contracts will depend in part on the degree to which price movements
in the index underlying the financial futures contract correlate with the
price movements of the Municipal Bonds held by the Fund. The correlation may
be affected by disparities in the average maturity, ratings, geographical mix
or structure of the Fund's investments as compared to those comprising the
Municipal Bond Index, and general economic or political factors. In addition,
the correlation between movements in the value of the Municipal Bond Index may
be subject to change over time as additions to and deletions from the
Municipal Bond Index alter its structure. The correlation between futures
contracts on U.S. Government securities and the Municipal Bonds held by the
Fund may be adversely affected by similar factors and the risk of imperfect
correlation between movements in the prices of such futures contracts and the
prices of the Municipal Bonds held by the Fund may be greater.
The Fund expects to liquidate a majority of the futures contracts it enters
into through offsetting transactions on the applicable contract market. There
can be no assurance, however, that a liquid secondary market will exist for
any particular futures contract at any specific time. Thus, it may not be
possible to close out a futures position. In the event of adverse price
movements, the Fund would continue to be required to make daily cash payments
of variation margin. In such situations, if the Fund has insufficient cash, it
may be required to sell portfolio securities to meet daily variation margin
requirements at a time when it may be disadvantageous to do so. The inability
to close out futures positions also could have an adverse impact on the Fund's
ability to hedge effectively its investments in Municipal Bonds. The Fund will
enter into a futures position only if, in the judgment of the Manager, there
appears to be an actively traded secondary market for such futures contracts.
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The successful use of transactions in futures and related options also
depends on the ability of the Manager to forecast correctly the direction and
extent of interest rate movements within a given time frame. To the extent
interest rates remain stable during the period in which a futures contract or
option is held by the Fund or such rates move in a direction opposite to that
anticipated, the Fund may realize a loss on the hedging transaction which is
not fully or partially offset by an increase in the value of portfolio
securities. As a result, the Fund's total return for such period may be less
than if it had not engaged in the hedging transaction.
Because of low initial margin deposits made on the opening of a futures
position, futures transactions involve substantial leverage. As a result,
relatively small movements in the price of the futures contracts can result in
substantial unrealized gains or losses. Because the Fund will engage in the
purchase and sale of futures contracts solely for hedging purposes, however,
any losses incurred in connection therewith should, if the hedging strategy is
successful, be offset in whole or in part by increases in the value of
securities held by the Fund or decreases in the price of securities the Fund
intends to acquire.
The amount of risk the Fund assumes when it purchases an option on a futures
contract is the premium paid for the option plus related transaction costs. In
addition to the correlation risks discussed above, the purchase of an option
on a futures contract also entails the risk that changes in the value of the
underlying futures contract will not be reflected fully in the value of the
option purchased.
Municipal Bond Index futures contracts were approved for trading in 1986.
Trading in such futures contracts may tend to be less liquid than that in
other futures contracts. The trading of futures contracts also is subject to
certain market risks, such as inadequate trading activity, which could at
times make it difficult or impossible to liquidate existing positions.
INVESTMENT RESTRICTIONS
The Fund has adopted a number of fundamental and non-fundamental
restrictions and policies relating to the investment of its assets and its
activities. The fundamental policies set forth below may not be changed
without the approval of the holders of a majority of the Fund's outstanding
voting securities (which for this purpose and under the 1940 Act means the
lesser of (i) 67% of the Fund's shares present at a meeting at which more than
50% of the outstanding shares of the Fund are represented or (ii) more than
50% of the Fund's outstanding shares). The Fund may not:
1. Invest more than 25% of its assets, taken at market value at the time
of each investment, in the securities of issuers in any particular industry
(excluding the U.S. Government and its agencies and instrumentalities). For
purposes of this restriction, states, municipalities and their political
subdivisions are not considered part of any industry.
2. Make investments for the purpose of exercising control or management.
3. Purchase or sell real estate, except that, to the extent permitted by
applicable law, the Fund may invest in securities directly or indirectly
secured by real estate or interests therein or issued by companies which
invest in real estate or interests therein.
4. Make loans to other persons, except that the acquisition of bonds,
debentures or other corporate debt securities and investment in government
obligations, commercial paper, pass-through instruments,
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certificates of deposit, bankers' acceptances, repurchase agreements or any
similar instruments shall not be deemed to be the making of a loan, and
except further that the Fund may lend its portfolio securities, provided
that the lending of portfolio securities may be made only in accordance
with applicable law and the guidelines set forth in the Fund's Prospectus
and Statement of Additional Information, as they may be amended from time
to time.
5. Issue senior securities to the extent such issuance would violate
applicable law.
6. Borrow money, except that (i) the Fund may borrow from banks (as
defined in the 1940 Act) in amounts up to 33 1/3% of its total assets
(including the amount borrowed), (ii) the Fund may, to the extent permitted
by applicable law, borrow up to an additional 5% of its total assets for
temporary purposes, (iii) the Fund may obtain such short-term credit as may
be necessary for the clearance of purchases and sales of portfolio
securities and (iv) the Fund may purchase securities on margin to the
extent permitted by applicable law. The Fund may not pledge its assets
other than to secure such borrowings or, to the extent permitted by the
Fund's investment policies as set forth in its Prospectus and Statement of
Additional Information, as they may be amended from time to time, in
connection with hedging transactions, short sales, when-issued and forward
commitment transactions and similar investment strategies.
7. Underwrite securities of other issuers, except insofar as the Fund
technically may be deemed an underwriter under the Securities Act of 1933,
as amended (the "Securities Act"), in selling portfolio securities.
8. Purchase or sell commodities or contracts on commodities, except to
the extent that the Fund may do so in accordance with applicable law and
the Fund's Prospectus and Statement of Additional Information, as they may
be amended from time to time, and without registering as a commodity pool
operator under the Commodity Exchange Act.
Under the non-fundamental investment restrictions, the Fund may not:
a. Purchase securities of other investment companies, except to the
extent such purchases are permitted by applicable law. As a matter of
policy, however, the Fund will not purchase shares of any registered open-
end investment company or registered unit investment trust, in reliance on
Section 12(d)(1)(F) or (G) (the "fund of funds" provisions) of the 1940 Act
at any time the Fund's shares are owned by another investment company that
is part of the same group of investment companies as the Fund.
b. Make short sales of securities or maintain a short position, except to
the extent permitted by applicable law. The Fund currently does not intend
to engage in short sales, except short sales "against the box."
c. Invest in securities which cannot be readily resold because of legal
or contractual restrictions or which cannot otherwise be marketed, redeemed
or put to the issuer or a third party, if at the time of acquisition more
than 15% of its total assets would be invested in such securities. This
restriction shall not apply to securities which mature within seven days or
securities which the Board of Trustees of the Trust has otherwise
determined to be liquid pursuant to applicable law.
d. Notwithstanding fundamental investment restriction (6) above, borrow
amounts in excess of 20% of its total assets, taken at market value
(including the amount borrowed), and then only from banks as a temporary
measure for extraordinary or emergency purposes. In addition, the Fund will
not purchase securities while borrowings are outstanding.
14
<PAGE>
In addition, to comply with Federal income tax requirements for
qualification as a "regulated investment company," the Fund's investments will
be limited in a manner such that, at the close of each quarter of each fiscal
year, (a) no more than 25% of the Fund's total assets are invested in the
securities of a single issuer, and (b) with regard to at least 50% of the
Fund's total assets, no more than 5% of its total assets are invested in the
securities of a single issuer. For purposes of this restriction, the Fund will
regard each state and each political subdivision, agency or instrumentality of
such state and each multi-state agency of which such state is a member and
each public authority which issues securities on behalf of a private entity as
a separate issuer, except that if the security is backed only by the assets
and revenues of a non-governmental entity then the entity with the ultimate
responsibility for the payment of interest and principal may be regarded as
the sole issuer. These tax-related limitations may be changed by the Trustees
of the Trust to the extent necessary to comply with changes to the Federal
income tax requirements.
Because of the affiliation of Merrill Lynch, Pierce, Fenner & Smith
Incorporated ("Merrill Lynch") with the Trust, the Fund is prohibited from
engaging in certain transactions involving such firm or its affiliates except
for brokerage transactions permitted under the 1940 Act involving only usual
and customary commissions or transactions pursuant to an exemptive order under
the 1940 Act. Included among such restricted transactions will be purchases
from or sales to Merrill Lynch of securities in transactions in which it acts
as principal. See "Portfolio Transactions." An exemptive order has been
obtained which permits the Trust to effect principal transactions with Merrill
Lynch in high quality, short-term, tax-exempt securities subject to conditions
set forth in such order.
MANAGEMENT OF THE TRUST
TRUSTEES AND OFFICERS
Information about the Trustees and executive officers of the Trust and the
portfolio manager of the Fund, including their ages and their principal
occupations for at least the last five years, is set forth below. Unless
otherwise noted, the address of each Trustee and executive officer is P.O. Box
9011, Princeton, New Jersey 08543-9011.
Arthur Zeikel (65)--President and Trustee(1)(2)--President of the Manager
(which term, as used herein, includes its corporate predecessors) since 1977;
President of MLAM (which term, as used herein, includes its corporate
predecessors) since 1977; President and Director of Princeton Services, Inc.
("Princeton Services") since 1993; Executive Vice President of Merrill Lynch &
Co., Inc. ("ML&Co.") since 1990.
James H. Bodurtha (53)--Trustee(2)--36 Popponesset Road, Cotuit,
Massachusetts 02635. Director and Executive Vice President, The China Business
Group, Inc. since 1996. Chairman and Chief Executive Officer, China Enterprise
Management Corporation from 1993 to 1996; Chairman, Berkshire Corporation
since 1980; Partner, Squire, Sanders & Dempsey from 1980 to 1993.
Herbert I. London (58)--Trustee(2)--113-115 University Place, New York, New
York 10003. John M. Olin Professor of Humanities, New York University since
1993; Professor thereof since 1980; President, Hudson Institute since 1997 and
Trustee since 1980; Dean, Gallatin Division of New York University from 1976
to 1993; Distinguished Fellow, Herman Kahn Chair, Hudson Institute from 1984
to 1985; Director, Damon Corporation
15
<PAGE>
from 1991 to 1995; Overseer, Center for Naval Analyses from 1983 to 1993;
Limited Partner, Hypertech LP since 1996.
Robert R. Martin (70)--Trustee(2)--513 Grand Hill, St. Paul, Minnesota
55102. Chairman and Chief Executive Officer, Kinnard Investments, Inc. from
1990 to 1993; Executive Vice President, Dain Bosworth from 1974 to 1989;
Director, Carnegie Capital Management from 1977 to 1985 and Chairman thereof
in 1979; Director, Securities Industry Association from 1981 to 1982 and
Public Securities Association from 1979 to 1980; Chairman of the Board, WTC
Industries, Inc. in 1994; Trustee, Northland College since 1992.
Joseph L. May (68)--Trustee(2)--424 Church Street, Suite 2000, Nashville,
Tennessee 37219. Attorney in private practice since 1984; President, May and
Athens Hosiery Mills Division, Wayne-Gossard Corporation from 1954 to 1983;
Vice President, Wayne-Gossard Corporation from 1972 to 1983; Chairman, The May
Corporation (personal holding company) from 1972 to 1983; Director, Signal
Apparel Co. from 1972 to 1989.
Andre F. Perold (45)--Trustee(2)--Morgan Hall, Soldiers Field, Boston,
Massachusetts 02163. Professor, Harvard Business School since 1989 and
Associate Professor from 1983 to 1989; Trustee, The Common Fund, since 1989;
Director, Quantec Limited since 1991 and TIBCO from 1994 to 1996.
Terry K. Glenn (57)--Executive Vice President(1)(2)--Executive Vice
President of the Manager and MLAM since 1983; Executive Vice President and
Director of Princeton Services since 1993; President of Merrill Lynch Funds
Distributor, Inc. ("MLFD" or the "Distributor") since 1986 and Director
thereof since 1991; President of Princeton Administrators, L.P. since 1988.
Vincent R. Giordano (53)--Senior Vice President(1)(2)--Senior Vice President
of the Manager and MLAM since 1984; Vice President of MLAM from 1980 to 1984;
Senior Vice President of Princeton Services since 1993.
Kenneth A. Jacob (46)--Vice President(1)(2)--First Vice President of MLAM
since 1997; Vice President of the Manager since 1984; Vice President of MLAM
from 1994 to 1997.
Robert D. Sneeden (44)--Portfolio Manager of the Fund(1)(2)--Assistant Vice
President of MLAM since 1994; Vice President with Lehman Brothers Inc. from
1990 to 1994.
Donald C. Burke (37)--Vice President(1)(2)--First Vice President of MLAM
since 1997; Vice President of MLAM from 1990 to 1997; Director of Taxation of
MLAM since 1990.
Gerald M. Richard (48)--Treasurer(1)(2)--Senior Vice President and Treasurer
of the Manager and MLAM since 1984; Senior Vice President and Treasurer of
Princeton Services since 1993; Treasurer of MLFD since 1984 and Vice President
thereof since 1981.
Robert E. Putney, III (37)--Secretary(1)(2)--Director (Legal Advisory) of
MLAM since 1997; Vice President of MLAM from 1994 to 1997; Attorney employed
by MLAM from 1991 to 1994; Attorney in private practice prior thereto.
- --------
(1) Interested person, as defined in the 1940 Act, of the Trust.
(2) Such Trustee or officer is a director, trustee or officer of certain other
investment companies for which the Manager or MLAM acts as investment
adviser or manager.
At September 30, 1997, the Trustees and officers of the Trust as a group (12
persons) owned an aggregate of less than 1.0% of the outstanding shares of the
Fund. At such date, Mr. Zeikel, a Trustee and officer of the Trust and the
other officers of the Trust owned an aggregate of less than 1.0% of the
outstanding shares of the Common Stock of ML&Co.
16
<PAGE>
COMPENSATION OF TRUSTEES
The Trust pays each Trustee not affiliated with the Manager (each a "non-
affiliated Trustee") a fee of $10,000 per year plus $1,000 per meeting
attended, together with such Trustee's actual out-of-pocket expenses relating
to attendance at meetings. The Trust also compensates members of its Audit and
Nominating Committee (the "Committee"), which consists of all the non-
affiliated Trustees, a fee of $2,000 per year plus $500 per meeting attended.
The Trust reimburses each non-affiliated Trustee for his out-of-pocket
expenses relating to attendance at Board and Committee meetings. The fees and
expenses of the Trustees are allocated to the respective series of the Trust
on the basis of asset size. For the fiscal year ended July 31, 1997, fees and
expenses paid to non-affiliated Trustees that were allocated to the Fund
aggregated $466.
The following table sets forth for the fiscal year ended July 31, 1997,
compensation paid by the Fund to the non-affiliated Trustees and for the
calendar year ended December 31, 1996, the aggregate compensation paid by all
registered investment companies (including the Trust) advised by the Manager
and its affiliate, MLAM ("FAM/MLAM Advised Funds") to the non-affiliated
Trustees:
<TABLE>
<CAPTION>
AGGREGATE
COMPENSATION
PENSION OR FROM TRUST AND
RETIREMENT BENEFITS OTHER FAM/MLAM
COMPENSATION ACCRUED AS PART ADVISED FUNDS
NAME OF TRUSTEE FROM FUND OF TRUST'S EXPENSES PAID TO TRUSTEE(1)
- --------------- ------------ ------------------- ------------------
<S> <C> <C> <C>
James H. Bodurtha........... $267 None $148,500
Herbert I. London........... $267 None $148,500
Robert R. Martin............ $267 None $148,500
Joseph L. May............... $267 None $148,500
Andre F. Perold............. $267 None $148,500
</TABLE>
- --------
(1) The Trustees serve on the boards of FAM/MLAM Advised Funds as follows: Mr.
Bodurtha (22 registered investment companies consisting of 46 portfolios);
Mr. London (22 registered investment companies consisting of 46
portfolios); Mr. Martin (22 registered investment companies consisting of
46 portfolios); Mr. May (22 registered investment companies consisting of
46 portfolios); and Mr. Perold (22 registered investment companies
consisting of 46 portfolios).
MANAGEMENT AND ADVISORY ARRANGEMENTS
Reference is made to "Management of the Trust--Management and Advisory
Arrangements" in the Prospectus for certain information concerning the
management and advisory arrangements of the Fund.
Securities may be held by, or be appropriate investments for, the Fund as
well as other funds or investment advisory clients of the Manager or MLAM.
Because of different objectives or other factors, a particular security may be
bought for one or more clients when one or more clients are selling the same
security. If purchases or sales of securities for the Fund or other funds for
which they act as manager or for their advisory clients arise for
consideration at or about the same time, transactions in such securities will
be made, insofar as feasible, for the respective funds and clients in a manner
deemed equitable to all. To the extent that transactions on behalf of more
than one client of the Manager or MLAM during the same period may increase the
demand for securities being purchased or the supply of securities being sold,
there may be an adverse effect on price.
Pursuant to a management agreement between the Trust on behalf of the Fund
and the Manager (the "Management Agreement"), the Manager receives for its
services to the Fund monthly compensation based
17
<PAGE>
upon the average daily net assets of the Fund at the following annual rates:
0.55% of the average daily net assets not exceeding $500 million; 0.525% of
the average daily net assets exceeding $500 million but not exceeding $1.0
billion; and 0.50% of the average daily net assets exceeding $1.0 billion. For
the fiscal years ended July 31, 1995, 1996 and 1997, the total advisory fees
payable by the Fund to the Manager were $98,737, $133,974 and $143, 865,
respectively, all of which were voluntarily waived.
The Management Agreement obligates the Manager to provide investment
advisory services and to pay all compensation of and furnish office space for
officers and employees of the Trust connected with investment and economic
research, trading and investment management of the Trust, as well as the fees
of all Trustees of the Trust who are affiliated persons of ML&Co. or any of
its affiliates. The Fund pays all other expenses incurred in its operation and
a portion of the Trust's general administrative expenses allocated on the
basis of the asset size of the respective series of the Trust ("Series").
Expenses that will be borne directly by the Series include, among other
things, redemption expenses, expenses of portfolio transactions, expenses of
registering the shares under Federal and state securities laws, pricing costs
(including the daily calculation of net asset value), expenses of printing
shareholder reports, prospectuses and statements of additional information
(except to the extent paid by the Distributor as described below), fees for
legal and auditing services, Commission fees, interest, certain taxes, and
other expenses attributable to a particular Series. Expenses that will be
allocated on the basis of asset size of the respective Series include fees and
expenses of unaffiliated Trustees, state franchise taxes, costs of printing
proxies and other expenses related to shareholder meetings, and other expenses
properly payable by the Trust. The organizational expenses of the Trust were
paid by the Trust, and as additional Series are added to the Trust, the
organizational expenses are allocated among the Series (including the Fund) in
a manner deemed equitable by the Trustees. Depending upon the nature of a
lawsuit, litigation costs may be assessed to the specific Series to which the
lawsuit relates or allocated on the basis of the asset size of the respective
Series. The Trustees have determined that this is an appropriate method of
allocation of expenses. Accounting services are provided to the Fund by the
Manager and the Fund reimburses the Manager for its costs in connection with
such services. For the fiscal years ended July 31, 1995, 1996 and 1997, the
Fund reimbursed the Manager $29,053, $42,113 and $61,207, respectively, for
accounting services. As required by the Fund's distribution agreements, the
Distributor will pay the promotional expenses of the Fund incurred in
connection with the offering of shares of the Fund. Certain expenses in
connection with account maintenance and the distribution of Class B shares
will be financed by the Fund pursuant to the Distribution Plan in compliance
with Rule 12b-1 under the 1940 Act. See "Purchase of Shares--Distribution
Plans."
The Manager is a limited partnership, the partners of which are ML&Co. and
Princeton Services. ML&Co. and Princeton Services are "controlling persons" of
the Manager as defined under the 1940 Act because of their ownership of its
voting securities or their power to exercise a controlling influence over its
management or policies.
Duration and Termination. Unless earlier terminated as described herein, the
Management Agreement will remain in effect from year to year if approved
annually (a) by the Trustees of the Trust or by a majority of the outstanding
shares of the Fund and (b) by a majority of the Trustees who are not parties
to such contract or interested persons (as defined in the 1940 Act) of any
such party. Such contracts are not assignable and may be terminated without
penalty on 60 days' written notice at the option of either party thereto or by
vote of the shareholders of the Fund.
18
<PAGE>
PURCHASE OF SHARES
Reference is made to "Purchase of Shares" in the Prospectus for certain
information as to the purchase of Fund shares.
The Fund issues four classes of shares under the Merrill Lynch Select
Pricing SM System: shares of Class A and Class D are sold to investors
choosing the initial sales charge alternatives, and shares of Class B and
Class C are sold to investors choosing the deferred sales charge alternatives.
Each Class A, Class B, Class C and Class D share of the Fund represents
identical interests in the investment portfolio of the Fund and has the same
rights, except that Class B, Class C and Class D shares bear the expenses of
the ongoing account maintenance fees, and Class B and Class C shares bear the
expenses of the ongoing distribution fees and the additional incremental
transfer agency costs resulting from the deferred sales charge arrangements.
Class B, Class C and Class D shares each have exclusive voting rights with
respect to the Rule 12b-1 distribution plan adopted with respect to such class
pursuant to which account maintenance and/or distribution fees are paid
(except that Class B shareholders may vote upon any material changes to
expenses charged under the Class D Distribution Plan). Each class has
different exchange privileges. See "Shareholder Services--Exchange Privilege."
The Merrill Lynch Select Pricing SM System is used by more than 50
registered investment companies advised by MLAM or its affiliate, the Manager.
Funds advised by MLAM or the Manager that utilize the Merrill Lynch Select
PricingSM System are referred to herein as "MLAM-advised mutual funds."
The Fund has entered into four separate distribution agreements with the
Distributor in connection with the continuous offering of each class of shares
of the Fund (the "Distribution Agreements"). The Distribution Agreements
obligate the Distributor to pay certain expenses in connection with the
offering of each class of shares of the Fund. After the prospectuses,
statements of additional information and periodic reports have been prepared,
set in type and mailed to shareholders, the Distributor pays for the printing
and distribution of copies thereof used in connection with the offering to
dealers and prospective investors. The Distributor also pays for other
supplementary sales literature and advertising costs. The Distribution
Agreements are subject to the same renewal requirements and termination
provisions as the Management Agreement described above.
INITIAL SALES CHARGE ALTERNATIVES--CLASS A AND CLASS D SHARES
The gross sales charges for the sale of Class A shares for the fiscal year
ended July 31, 1995 were $3,176, of which the Distributor received $252 and
Merrill Lynch received $2,924. The gross sales charges for the sale of Class A
shares for the fiscal year ended July 31, 1996 were $2,613, of which the
Distributor received $168 and Merrill Lynch received $2,445. The gross sales
charges for the sale of Class A shares for the fiscal year ended July 31, 1997
were $407, of which the Distributor received $32 and Merrill Lynch received
$375. The gross sales charges for the sale of Class D shares for the period
October 21, 1994 (commencement of operations) to July 31, 1995 were $1,685, of
which the Distributor received $99 and Merrill Lynch received $1,586. The
gross sales charges for the sale of Class D shares for the fiscal year ended
July 31, 1996 were $6,272, of which the Distributor received $599 and Merrill
Lynch received $5,674. The gross sales charges for the sale of Class D shares
for the fiscal year ended July 31, 1997 were $7,929, of which the Distributor
received $689 and Merrill Lynch received $7,240. For the fiscal years ended
July 31, 1995, 1996 and 1997, the Distributor received no contingent deferred
sales charges ("CDSCs") with respect to redemption within one year after
purchase of Class A shares purchased subject to a front-end sales charge
waiver. For the period October 21, 1994 (commencement
19
<PAGE>
of operations) to July 31, 1995 and for the fiscal years ended July 31, 1996
and 1997, the Distributor received no CDSCs with respect to redemption within
one year after purchase of Class D shares purchased subject to a front-end
sales charge waiver.
The term "purchase," as used in the Prospectus and this Statement of
Additional Information in connection with an investment in Class A and Class D
shares of the Fund, refers to a single purchase by an individual, or to
concurrent purchases, which in the aggregate are at least equal to the
prescribed amounts, by an individual, his spouse and their children under the
age of 21 years purchasing shares for his or their own account and to single
purchases by a trustee or other fiduciary purchasing shares for a single trust
estate or single fiduciary account although more than one beneficiary is
involved. The term "purchase" also includes purchases by any "company," as
that term is defined in the 1940 Act, but does not include purchases by any
such company that has not been in existence for at least six months or which
has no purpose other than the purchase of shares of the Fund or shares of
other registered investment companies at a discount; provided, however, that
it shall not include purchases by any group of individuals whose sole
organizational nexus is that the participants therein are credit cardholders
of a company, policyholders of an insurance company, customers of either a
bank or broker-dealer or clients of an investment adviser.
Closed-End Fund Investment Option. Class A shares of the Fund and certain
other MLAM-advised mutual funds ("Eligible Class A shares") are offered at net
asset value to shareholders of certain closed-end funds advised by the Manager
or MLAM who purchased such closed-end fund shares prior to October 21, 1994,
the date the Merrill Lynch Select PricingSM 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 MLAM-advised
mutual funds ("Eligible Class D shares"), if the following conditions are met.
First, the sale of closed-end fund shares must be made through Merrill Lynch,
and the net proceeds therefrom must be immediately reinvested in Eligible
Class A or Class D shares. Second, the closed-end fund shares must either have
been acquired in the initial public offering or be shares representing
dividends from shares of common stock acquired in such offering. Third, the
closed-end fund shares must have been continuously maintained in a Merrill
Lynch securities account. Fourth, there must be a minimum purchase of $250 to
be eligible for the investment option. Shareholders of certain MLAM-advised
continuously offered closed-end funds may reinvest at net asset value the net
proceeds from a sale of certain shares of common stock of such funds in shares
of the Fund. Upon exercise of this investment option, shareholders of Merrill
Lynch Senior Floating Rate Fund, Inc. will receive Class A shares of the Fund
and shareholders of Merrill Lynch Municipal Strategy Fund, Inc. and Merrill
Lynch High Income Municipal Bond Fund, Inc. will receive Class D shares of the
Fund, except that shareholders already owning Class A shares of the Fund will
be eligible to purchase additional Class A shares pursuant to this option, if
such additional Class A shares will be held in the same account as the
existing Class A shares and the other requirements pertaining to the
reinvestment privilege are met. In order to exercise this investment option, a
shareholder of one of the above-referenced continuously offered closed-end
funds (an "eligible fund") must sell his or her shares of common stock of the
eligible fund (the "eligible shares") back to the eligible fund in connection
with a tender offer conducted by the eligible fund and reinvest the proceeds
immediately in the designated class of shares of the Fund. This investment
option is available only with respect to eligible shares as to which no Early
Withdrawal Charge or CDSC (each as defined in the eligible fund's prospectus)
is applicable. Purchase orders from eligible
20
<PAGE>
fund shareholders wishing to exercise this investment option will be accepted
only on the day that the related tender offer terminates and will be effected
at the net asset value of the designated class of the Fund on such day.
REDUCED INITIAL SALES CHARGES
Right of Accumulation. Reduced sales charges are applicable through a right
of accumulation under which eligible investors are permitted to purchase
shares of the Fund subject to an initial sales charge at the offering price
applicable to the total of (a) the public offering price of the shares then
being purchased plus (b) an amount equal to the then current net asset value
or cost, whichever is higher, of the purchaser's combined holdings of all
classes of shares of the Fund and of other MLAM-advised mutual funds. For any
such right of accumulation to be made available, the Distributor must be
provided at the time of purchase, by the purchaser or the purchaser's
securities dealer, with sufficient information to permit confirmation of
qualification. Acceptance of the purchase order is subject to such
confirmation. The right of accumulation may be amended or terminated at any
time. Shares held in the name of a nominee or custodian under pension, profit-
sharing, or other employee benefit plans may not be combined with other shares
to qualify for the right of accumulation.
Letter of Intention. Reduced sales charges are applicable to purchases
aggregating $25,000 or more of the Class A or Class D shares of the Fund or
any other MLAM-advised mutual funds made within a 13-month period starting
with the first purchase pursuant to a Letter of Intention in the form provided
in the Prospectus. The Letter of Intention is available only to investors
whose accounts are maintained at the Fund's Transfer Agent. The Letter of
Intention is not available to employee benefit plans for which Merrill Lynch
provides plan participant, recordkeeping services. The Letter of Intention is
not a binding obligation to purchase any amount of Class A or Class D shares;
however, its execution will result in the purchaser paying a lower sales
charge at the appropriate quantity purchase level. A purchase not originally
made pursuant to a Letter of Intention may be included under a subsequent
Letter of Intention executed within 90 days of such purchase if the
Distributor is informed in writing of this intent within such 90-day period.
The value of Class A or Class D shares of the Fund and of other MLAM-advised
mutual funds presently held, at cost or maximum offering price (whichever is
higher), on the date of the first purchase under the Letter of Intention, may
be included as a credit toward the completion of such Letter, but the reduced
sales charge applicable to the amount covered by such Letter will be applied
only to new purchases. If the total amount of shares does not equal the amount
stated in the Letter of Intention (minimum of $25,000), the investor will be
notified and must pay, within 20 days of the expiration of such Letter, the
difference between the sales charge on the Class A or Class D shares purchased
at the reduced rate and the sales charge applicable to the shares actually
purchased through the Letter. Class A or Class D shares equal to at least five
percent of the intended amount will be held in escrow during the 13-month
period (while remaining registered in the name of the purchaser) for this
purpose. The first purchase under the Letter of Intention must be at least
five percent of the dollar amount of such Letter. If a purchase during the
term of such Letter would otherwise be subject to a further reduced sales
charge based on the right of accumulation, the purchaser will be entitled on
that purchase and subsequent purchases to that further reduced percentage
sales charge, but there will be no retroactive reduction of the sales charges
on any previous purchase. The value of any shares redeemed or otherwise
disposed of by the purchaser prior to termination or completion of the Letter
of Intention will be deducted from the total purchases made under such Letter.
An exchange from a MLAM-advised money market fund into the Fund that creates a
sales charge will count toward completing a new or existing Letter of
Intention from the Fund.
21
<PAGE>
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 for such accounts is $500, except that the initial minimum for shares
purchased for such accounts pursuant to the Automatic Investment Program is
$50.
TMASM Managed Trusts. Class A shares are offered to TMASM Managed Trusts to
which Merrill Lynch Trust Company provides discretionary trustee services at
net asset value.
Purchase Privilege of Certain Persons. 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.
Class D shares of the Fund are offered at net asset value, without a sales
charge, to an investor who has a business relationship with a Financial
Consultant who joined Merrill Lynch from another investment firm within six
months prior to the date of purchase by such investor, if the following
conditions are satisfied: first, the investor must advise Merrill Lynch that
it will purchase Class D shares of the Fund with proceeds from a redemption of
a mutual fund that was sponsored by the Financial Consultant's previous firm
and was subject to a sales charge either at the time of purchase or on a
deferred basis; and second, the investor also must establish that such
redemption had been made within 60 days prior to the investment in the Fund,
and the proceeds from the redemption had been maintained in the interim in
cash or a money market fund.
Class D shares of the Fund are also offered at net asset value, without a
sales charge, to an investor who has a business relationship with a Merrill
Lynch Financial Consultant and who has invested in a mutual fund sponsored by
a non-Merrill Lynch company for which Merrill Lynch has served as a selected
dealer and where Merrill Lynch has either received or given notice that such
arrangement will be terminated ("notice"), if the following conditions are
satisfied: first, the investor must purchase Class D shares of the Fund with
proceeds from a redemption of shares of such other mutual fund and the shares
of such other fund were subject to a sales charge either at the time of
purchase or on a deferred basis; and second, such purchase of Class D shares
must be made within 90 days after such notice.
Class D shares of the Fund are offered at net asset value, without a sales
charge, to an investor who has a business relationship with a Merrill Lynch
Financial Consultant and who has invested in a mutual fund for which Merrill
Lynch has not served as a selected dealer if the following conditions are
satisfied: first, the investor must advise Merrill Lynch that it will purchase
Class D shares of the Fund with proceeds from the redemption of shares of such
other mutual fund and that such shares have been outstanding for a period of
no less than six months; and second, such purchase of Class D shares must be
made within 60 days after the redemption and the proceeds from the redemption
must be maintained in the interim in cash or a money market fund.
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
22
<PAGE>
appreciation of the Fund. The issuance of Class D shares for consideration
other than cash is limited to bona fide reorganizations, statutory mergers or
other acquisitions of portfolio securities that (i) meet the investment
objectives and policies of the Fund; (ii) are acquired for investment and not
for resale (subject to the understanding that the disposition of the Fund's
portfolio securities shall at all times remain within its control); and (iii)
are liquid securities, the value of which is readily ascertainable, that are
not restricted as to transfer either by law or liquidity of market (except
that the Fund may acquire through such transactions restricted or illiquid
securities to the extent the Fund does not exceed the applicable limits on
acquisition of such securities set forth under "Investment Objective and
Policies" herein).
Reductions in or exemptions from the imposition of a sales load are due to
the nature of the investors and/or the reduced sales efforts that will be
needed in obtaining such investments.
DISTRIBUTION PLANS
Reference is made to "Purchase of Shares--Distribution Plans" in the
Prospectus for certain information with respect to the separate distribution
plans for Class B, Class C and Class D shares pursuant to Rule 12b-1 under the
1940 Act (each a "Distribution Plan") with respect to the account maintenance
and/or distribution fees paid by the Fund to the Distributor with respect to
such classes.
Payments of the account maintenance fees and/or distribution fees are
subject to the provisions of Rule 12b-1 under the 1940 Act. Among other
things, each Distribution Plan provides that the Distributor shall provide and
the Trustees shall review quarterly reports of the disbursement of the account
maintenance and/or distribution fees paid to the Distributor. In their
consideration of each Distribution Plan, the Trustees must consider all
factors they deem relevant, including information as to the benefits of the
Distribution Plan to the Fund and its related class of shareholders. Each
Distribution Plan further provides that, so long as the Distribution Plan
remains in effect, the selection and nomination of Trustees who are not
"interested persons" of the Trust, as defined in the 1940 Act (the
"Independent Trustees"), shall be committed to the discretion of the
Independent Trustees then in office. In approving each Distribution Plan in
accordance with Rule 12b-1, the Independent Trustees concluded that there is a
reasonable likelihood that such Distribution Plan will benefit the Fund and
its related class of shareholders. Each Distribution Plan can be terminated at
any time, without penalty, by the vote of a majority of the Independent
Trustees or by the vote of the holders of a majority of the outstanding
related class of voting securities of the Fund. A Distribution Plan cannot be
amended to increase materially the amount to be spent by the Fund without the
approval of the related class of shareholders, and all material amendments are
required to be approved by the vote of Trustees, including a majority of the
Independent Trustees who have no direct or indirect financial interest in such
Distribution Plan, cast in person at a meeting called for that purpose. Rule
12b-1 further requires that the Trust preserve copies of each Distribution
Plan and any report made pursuant to such plan for a period of not less than
six years from the date of such Distribution Plan or such report, the first
two years in an easily accessible place.
LIMITATIONS ON THE PAYMENT OF DEFERRED SALES CHARGES
The maximum sales charge rule in the Conduct Rules of the National
Association of Securities Dealers, Inc. (the "NASD") imposes a limitation on
certain asset-based sales charges such as the distribution fee and the CDSC
borne by the Class B and Class C shares but not the account maintenance fee.
The maximum sales charge rule is applied separately to each class. As
applicable to the Fund, the maximum sales charge rule limits the
23
<PAGE>
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 1.0% (the unpaid
balance being the maximum amount payable minus amounts received from the
payment of the distribution fee and the CDSC). In connection with the Class B
shares, the Distributor has voluntarily agreed to waive interest charges on
the unpaid balance in excess of 0.50% of eligible gross sales. Consequently,
the maximum amount payable to the Distributor (referred to as the "voluntary
maximum") in connection with the Class B shares is 6.75% of eligible gross
sales. The Distributor retains the right to stop waiving the interest charges
at any time. To the extent payments would exceed the voluntary maximum, the
Fund will not make further payments of the distribution fee with respect to
Class B shares, and any CDSCs will be paid to the Fund rather than to the
Distributor; however, the Fund will continue to make payments of the account
maintenance fee. In certain circumstances the amount payable pursuant to the
voluntary maximum may exceed the amount payable under the NASD formula. In
such circumstances payment in excess of the amount payable under the NASD
formula will not be made.
The following table sets forth comparative information as of July 31, 1997
with respect to the Class B and Class C shares of the Fund indicating the
maximum allowable payments that can be made under the NASD maximum sales
charge rule and, with respect to the Class B shares, the Distributor's
voluntary maximum.
<TABLE>
<CAPTION>
DATA CALCULATED AS OF JULY 31, 1997
---------------------------------------------------------------------------
ANNUAL
DISTRIBUTION
ALLOWABLE ALLOWABLE AMOUNTS FEE AT
ELIGIBLE AGGREGATE INTEREST MAXIMUM PREVIOUSLY AGGREGATE CURRENT
GROSS SALES ON UNPAID AMOUNT PAID TO UNPAID NET ASSET
SALES(1) CHARGES BALANCE(2) PAYABLE DISTRIBUTOR(3) BALANCE LEVEL(4)
-------- --------- ---------- ------- -------------- --------- ------------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
CLASS B SHARES, FOR THE
PERIOD OCTOBER 29, 1993
(COMMENCEMENT OF
OPERATIONS) TO JULY 31,
1997:
Under NASD Rule as
Adopted................ $29,411 $1,838 $446 $2,284 $414 $1,870 $55
Under Distributor's Vol-
untary
Waiver................. $29,411 $1,838 $147 $1,985 $414 $1,571 $55
CLASS C SHARES, FOR THE
PERIOD OCTOBER 21, 1994
(COMMENCEMENT OF
OPERATIONS) TO JULY 31,
1997:
Under NASD Rule as
Adopted................ $ 2,936 $ 184 $ 26 $ 210 $ 21 $ 189 $ 7
</TABLE>
- --------
(1) Purchase price of all eligible Class B or Class C shares sold during the
periods indicated other than shares acquired through dividend reinvestment
and the exchange privilege.
(2) Interest is computed on a monthly basis based upon the prime rate, as
reported in The Wall Street Journal, plus 1%, as permitted under the NASD
Rule.
(3) Consists of CDSC payments, distribution fee payments and accruals. This
figure may include CDSCs that were deferred when a shareholder redeemed
shares prior to the expiration of the applicable CDSC period and invested
the proceeds, without the imposition of a sales charge, in Class A shares
in conjunction with the shareholder's participation in the Merrill Lynch
Mutual Fund Advisor (Merrill Lynch MFA SM) Program (the "MFA Program").
The CDSC is booked as a contingent obligation that may be payable if the
shareholder terminates participation in the MFA Program.
(4) Provided to illustrate the extent to which the current level of
distribution fee payments (not including any CDSC payments) is amortizing
the unpaid balance. No assurance can be given that payments of the
distribution fee will reach either the NASD maximum or, with respect to
Class B Shares, the voluntary maximum.
24
<PAGE>
REDEMPTION OF SHARES
Reference is made to "Redemption of Shares" in the Prospectus for certain
information as to the redemption and repurchase of Fund shares.
The right to redeem shares or to receive payment with respect to any such
redemption may be suspended for more than seven days only for any period
during which trading on the NYSE is restricted as determined by the Commission
or the NYSE is closed (other than customary weekend and holiday closings), for
any period during which an emergency exists, as defined by the Commission, as
a result of which disposal of portfolio securities or determination of the net
asset value of the Fund is not reasonably practicable, and for such other
periods as the Commission may by order permit for the protection of
shareholders of the Fund.
The value of shares at the time of the redemption may be more or less than
the shareholder's cost, depending on the market value of the securities held
by the Fund at such time.
DEFERRED SALES CHARGES--CLASS B AND CLASS C SHARES
As discussed in the Prospectus under "Purchase of Shares--Deferred Sales
Charge Alternatives--Class B and Class C Shares," while Class B shares
redeemed within four years of purchase are subject to a CDSC under most
circumstances, the charge is waived on redemptions of Class B shares in
certain circumstances including following the death or disability of a Class B
shareholder. Redemptions for which the waiver applies are any partial or
complete redemption following the death or disability (as defined in the Code)
of a Class B shareholder (including one who owns the Class B shares as joint
tenant with his or her spouse), provided the redemption is requested within
one year of the death or initial determination of disability. For the fiscal
years ended July 31, 1995, 1996 and 1997, the Distributor received CDSCs of
$49,880, $91,447 and $75,006, respectively, with respect to redemptions of
Class B shares, all of which were paid to Merrill Lynch. Additional CDSCs
payable to the Distributor during the fiscal year ended July 31, 1997, may
have been waived or converted to a contingent obligation in connection with a
shareholder's participation in certain fee-based programs. For the period
October 21, 1994 (commencement of operations) to July 31, 1995, and for the
fiscal years ended July 31, 1996 and 1997, the Distributor received CDSCs of
$25, $530 and $6,684, respectively, with respect to redemptions of Class C
shares, all of which were paid to Merrill Lynch.
PORTFOLIO TRANSACTIONS
Reference is made to "Investment Objective and Policies" and "Portfolio
Transactions" in the Prospectus.
Under the 1940 Act, persons affiliated with the Trust are prohibited from
dealing with the Fund as a principal in the purchase and sale of securities
unless such trading is permitted by an exemptive order issued by the
Commission. Since over-the-counter ("OTC") transactions are usually principal
transactions, affiliated persons of the Trust, including Merrill Lynch, may
not serve as dealer in connection with transactions with the Fund. The Trust
has obtained an exemptive order permitting it to engage in certain principal
transactions with Merrill Lynch involving high quality short-term municipal
bonds subject to certain conditions. For the fiscal year ended July 31, 1995,
the Fund engaged in no transactions pursuant to this order. For the fiscal
year ended July 31, 1996, the Fund engaged in four transactions pursuant to
this order for an aggregate market value of $3,800,000. For the fiscal year
ended July 31, 1997, the Fund engaged in five transactions pursuant to this
order for an aggregate market value of $2,600,000. Affiliated persons of the
Trust may serve as broker for the Fund in over-the-counter transactions
conducted on an agency basis. Certain court decisions have raised questions as
to
25
<PAGE>
the extent to which investment companies should seek exemptions under the 1940
Act in order to seek to recapture underwriting and dealer spreads from
affiliated entities. The Trustees have considered all factors deemed relevant,
and have made a determination not to seek such recapture at this time. The
Trustees will reconsider this matter from time to time.
The Fund may not purchase securities, including Municipal Bonds, during the
existence of any underwriting syndicate of which Merrill Lynch is a member or
in a private placement in which Merrill Lynch serves as placement agent except
pursuant to procedures approved by the Trustees of the Trust which either
comply with rules adopted by the Commission or with interpretations of the
Commission staff. Rule 10f-3 under the 1940 Act sets forth conditions under
which the Fund may purchase municipal bonds from an underwriting syndicate of
which Merrill Lynch is a member. The rule sets forth requirements relating to,
among other things, the terms of an issue of municipal bonds purchased by the
Fund, the amount of municipal bonds which may be purchased in any one issue
and the assets of the Fund which may be invested in a particular issue.
The Fund does not expect to use any particular dealer in the execution of
transactions but, subject to obtaining the best net results, dealers who
provide supplemental investment research (such as information concerning tax-
exempt securities, economic data and market forecasts) to the Manager may
receive orders for transactions by the Fund. Information so received will be
in addition to and not in lieu of the services required to be performed by the
Manager under its Management Agreement and the expenses of the Manager will
not necessarily be reduced as a result of the receipt of such supplemental
information.
The Trust has no obligation to deal with any broker in the execution of
transactions for the Fund's portfolio securities. In addition, consistent with
the Rules of Fair Practice of the NASD and policies established by the
Trustees of the Trust, the Manager may consider sales of shares of the Fund as
a factor in the selection of brokers or dealers to execute portfolio
transactions for the Fund.
Generally, the Fund does not purchase securities for short-term trading
profits. However, the Fund may dispose of securities without regard to the
time they have been held when such action, for defensive or other reasons,
appears advisable to its Manager. As a result of the investment policies
described in the Prospectus, the Fund's annual portfolio turnover rate may be
higher than that of other investment companies. The portfolio turnover rate is
calculated by dividing the lesser of purchases or sales of portfolio
securities for the particular fiscal year by the monthly average of the value
of the portfolio securities owned by the Fund during the particular fiscal
year. For purposes of determining this rate, all securities whose maturities
at the time of acquisition are one year or less are excluded. The portfolio
turnover rates for the fiscal years ended July 31, 1996 and 1997 were 81.87%
and 94.90%, respectively.
Section 11(a) of the Securities Exchange Act of 1934, as amended, generally
prohibits members of the U.S. national securities exchanges from executing
exchange transactions for their affiliates and institutional accounts 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.
26
<PAGE>
DETERMINATION OF NET ASSET VALUE
Reference is made to "Additional Information--Determination of Net Asset
Value" in the Prospectus for information concerning the determination of net
asset value.
The net asset value of the shares of all classes of the Fund is determined
by the Manager once daily, Monday through Friday, as of 15 minutes after the
close of business on the NYSE (generally, 4:00 p.m., New York time) on each
day during which the NYSE is open for trading. The NYSE is not open on New
Year's Day, Martin Luther King, Jr. Day, Presidents' Day, Good Friday,
Memorial Day, Independence Day, Labor Day, Thanksgiving Day and Christmas Day.
Net asset value per share is computed by dividing the sum of the value of the
securities held by the Fund plus any cash or other assets (including interest
and dividends accrued but not yet received) minus all liabilities (including
accrued expenses) by the total number of shares outstanding at such time,
rounded to the nearest cent. Expenses, including the fees payable to the
Manager and 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 fees, and higher transfer agency fees
applicable with respect to Class B and Class C shares and the daily expense
accruals of the account maintenance fees applicable with respect to Class D
shares; moreover, the per share net asset value of Class B and Class C shares
generally will be lower than the per share net asset value of Class D shares,
reflecting the daily expense accruals of the distribution fees and higher
transfer agency fees applicable with respect to Class B and Class C shares of
the Fund. It is expected, however, that the per share net asset value of the
four classes will tend to converge (although not necessarily meet) immediately
after the payment of dividends, which will differ by approximately the amount
of the expense accrual differentials between the classes.
The Municipal Bonds, and other portfolio securities in which the Fund
invests, are traded primarily in OTC municipal bond and money markets and are
valued at the last available bid price in the OTC market or on the basis of
yield equivalents as obtained from one or more dealers that make markets in
the securities. One bond is the "yield equivalent" of another bond when,
taking into account market price, maturity, coupon rate, credit rating and
ultimate return of principal, both bonds will theoretically produce an
equivalent return to the bondholder. Financial futures contracts and options
thereon, which are traded on exchanges, are valued at their settlement prices
as of the close of such exchanges. Short-term investments with a remaining
maturity of 60 days or less are valued on an amortized cost basis, which
approximates market value. Securities and assets for which market quotations
are not readily available are valued at fair value as determined in good faith
by or under the direction of the Trustees of the Trust, including valuations
furnished by a pricing service retained by the Trust, which may utilize a
matrix system for valuations. The procedures of the pricing service and its
valuations are reviewed by the officers of the Trust under the general
supervision of the Trustees.
SHAREHOLDER SERVICES
The Trust offers a number of shareholder services described below which are
designed to facilitate investment in shares of the Fund. Full details as to
each of such services and copies of the various plans described below can be
obtained from the Trust, the Distributor or Merrill Lynch.
27
<PAGE>
INVESTMENT ACCOUNT
Each shareholder whose account is maintained at the Transfer Agent has an
Investment Account and will receive, at least quarterly, statements from the
Transfer Agent. These statements will serve as transaction confirmations for
automatic investment purchases and the reinvestment of ordinary income
dividends and long-term capital gains distributions. These statements will
also show any other activity in the account since the previous statement.
Shareholders also will receive separate confirmations for each purchase or
sale transaction other than automatic investment purchases and the
reinvestment of ordinary income dividends and long-term capital gains
distributions. A shareholder may make additions to his or her Investment
Account at any time by mailing a check directly to the Transfer Agent.
Share certificates are issued only for full shares and only upon the
specific request of the shareholder who has an Investment Account. Issuance of
certificates representing all or only part of the full shares in an Investment
Account may be requested by a shareholder directly from the Transfer Agent.
Shareholders considering transferring their Class A or Class D shares from
Merrill Lynch to another brokerage firm or financial institution should be
aware that, if the firm to which the Class A or Class D shares are to be
transferred will not take delivery of shares of the Fund, a shareholder either
must redeem the Class A or Class D shares (paying any applicable CDSC) so that
the cash proceeds can be transferred to the account at the new firm or
continue to maintain an Investment Account at the Transfer Agent for those
Class A or Class D shares. Shareholders interested in transferring their Class
B or Class C shares from Merrill Lynch and who do not wish to have an
Investment Account maintained for such shares at the Transfer Agent may
request their new brokerage firm to maintain such shares in an account
registered in the name of the brokerage firm for the benefit of the
shareholder at the Transfer Agent. If the new brokerage firm is willing to
accommodate the shareholder in this manner, the shareholder must request that
he or she be issued certificates for his or her shares, and then must turn the
certificates over to the new firm for re-registration as described in the
preceding sentence.
AUTOMATIC INVESTMENT PLANS
A shareholder may make additions to an Investment Account at any time by
purchasing Class A shares (if he or she is an eligible Class A investor as
described in the Prospectus) or Class B, Class C or Class D shares at the
applicable public offering price either through the shareholder's securities
dealer, or by mail directly to the Transfer Agent, acting as agent for such
securities dealers. Voluntary accumulation also can be made through a service
known as the Automatic Investment Plan whereby the Fund is authorized through
pre-authorized checks or automatic clearing house debits of $50 or more to
charge the regular bank account of the shareholder on a regular basis to
provide systematic additions to the Investment Account of such shareholder.
Alternatively, investors who maintain CMA(R) or CBA(R) accounts may arrange to
have periodic investments made in the Fund in their CMA(R) or CBA(R) account
or in certain related accounts in amounts of $100 or more through the CMA(R)
or CBA(R) Automated Investment Program.
AUTOMATIC REINVESTMENT OF DIVIDENDS AND CAPITAL GAINS DISTRIBUTIONS
Unless specific instructions are given as to the method of payment of
dividends and capital gains distributions, dividends and distributions will be
automatically reinvested in additional shares of the Fund. Such reinvestment
will be at the net asset value of shares of the Fund as of the close of
business on the monthly payment date for such dividends and distributions.
Shareholders may elect in writing to receive either their
28
<PAGE>
dividends or capital gains distributions, or both, in cash, in which event
payment will be mailed or direct deposited on or about the payment date. Cash
payments can also be directly deposited to the shareholder's bank account.
Shareholders may, at any time, notify Merrill Lynch in writing if their
account is maintained with Merrill Lynch or notify the Transfer Agent in
writing or by telephone (1-800-MER-FUND) if their account is maintained with
the Transfer Agent that they no longer wish to have their dividends and/or
capital gains distributions reinvested in shares of the Fund or vice versa
and, commencing ten days after the receipt by the Transfer Agent of such
notice, such instructions will be effected.
SYSTEMATIC WITHDRAWAL PLANS
A shareholder may elect to make systematic withdrawals from an Investment
Account of Class A, Class B, Class C or Class D shares on either a monthly or
quarterly basis as provided below. Quarterly withdrawals are available for
shareholders who have acquired shares of the Fund having a value, based on
cost or the current offering price, of $5,000 or more, and monthly withdrawals
are available for shareholders with shares having a value of $10,000 or more.
At the time of each withdrawal payment, sufficient shares are redeemed from
those on deposit in the shareholder's account to provide the withdrawal
payment specified by the shareholder. The shareholder may specify the dollar
amount and class of shares to be redeemed. Redemptions will be made at net
asset value as determined 15 minutes after the close of business on the NYSE
(generally, 4:00 p.m., New York time) on the 24th day of each month or the
24th day of the last month of each quarter, whichever is applicable. If the
NYSE is not open for business on such date, the shares will be redeemed at the
close of business on the following business day. The check for the withdrawal
payment will be mailed, or the direct deposit for the withdrawal payment will
be made, on the next business day following redemption. When a shareholder is
making systematic withdrawals, dividends and distributions on all shares in
the Investment Account are reinvested automatically in Fund shares. A
shareholder's Systematic Withdrawal Plan may be terminated at any time,
without charge or penalty, by the shareholder, the Trust, the Transfer Agent
or the Distributor.
With respect to redemptions of Class B or Class C shares pursuant to a
systematic withdrawal plan, the maximum number of Class B or Class C shares
that can be redeemed from an account annually shall not exceed 10% of the
value of shares of such class in that account at the time the election to join
the systematic withdrawal plan was made. Any CDSC that otherwise might be due
on such redemption of Class B or Class C shares will be waived. Shares
redeemed pursuant to a systematic withdrawal plan will be redeemed in the same
order as Class B or Class C shares are otherwise redeemed. See "Purchase of
Shares--Deferred Sales Charge Alternatives--Class B and Class C Shares--
Contingent Deferred Sales Charges--Class B Shares" and "--Contingent Deferred
Sales Charges--Class C Shares" in the Prospectus. Where the systematic
withdrawal plan is applied to Class B shares, upon conversion of the last
Class B shares in an account to Class D shares, the systematic withdrawal plan
will automatically be applied thereafter to Class D shares. See "Purchase of
Shares--Deferred Sales Charge Alternatives--Class B and Class C Shares--
Conversion of Class B Shares to Class D Shares" in the Prospectus; if an
investor wishes to change the amount being withdrawn in a systematic
withdrawal plan the investor should contact his or her Financial Consultant.
Withdrawal payments should not be considered as dividends, yield or income.
Each withdrawal is a taxable event. If periodic withdrawals continuously
exceed reinvested dividends, the shareholder's original investment may be
reduced correspondingly. Purchases of additional shares concurrent with
withdrawals are ordinarily disadvantageous to the shareholder because of sales
charges and tax liabilities. The Trust will not knowingly
29
<PAGE>
accept purchase orders for shares of the Fund from investors who maintain a
Systematic Withdrawal Plan unless such purchase is equal to at least one
year's scheduled withdrawals or $1,200, whichever is greater. Periodic
investments may not be made into an Investment Account in which the
shareholder has elected to make systematic withdrawals.
Alternatively, a shareholder whose shares are held within a CMA(R) or CBA(R)
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 CMA(R) or CBA(R)
Automated Investment Program. For more information on the CMA(R) or CBA(R)
Systematic Redemption Program, eligible shareholders should contact their
Financial Consultant.
EXCHANGE PRIVILEGE
U.S. shareholders of each class of shares of the Fund have an exchange
privilege with certain other MLAM-advised mutual funds. Under the Merrill
Lynch Select PricingSM System, Class A shareholders may exchange Class A
shares of the Fund for Class A shares of a second MLAM-advised mutual fund if
the shareholder holds any Class A shares of the second fund in his or her
account in which the exchange is made at the time of the exchange or is
otherwise eligible to purchase Class A shares of the second fund. If the Class
A shareholder wants to exchange Class A shares for shares of a second MLAM-
advised mutual fund, but does not hold Class A shares of the second fund in
his or her account at the time of the exchange and is not otherwise eligible
to acquire Class A shares of the second fund, the shareholder will receive
Class D shares of the second fund as a result of the exchange. Class D shares
also may be exchanged for Class A shares of a second MLAM-advised mutual fund
at any time as long as, at the time of the exchange, the shareholder holds
Class A shares of the second fund in the account in which the exchange is made
or is otherwise eligible to purchase Class A shares of the second fund. Class
B, Class C and Class D shares are exchangeable with shares of the same class
of other MLAM-advised mutual funds. For purposes of computing the CDSC that
may be payable upon a disposition of the shares acquired in the exchange, the
holding period for the previously owned shares of the Fund is "tacked" to the
holding period for the newly acquired shares of the other fund as more fully
described below. Class A, Class B, Class C and Class D shares are also
exchangeable for shares of certain MLAM-advised money market funds as follows:
Class A shares may be exchanged for shares of Merrill Lynch Ready Assets
Trust, Merrill Lynch Retirement Reserves Money Fund (available only for
exchanges within certain retirement plans), Merrill Lynch U.S.A. Government
Reserves and Merrill Lynch U.S. Treasury Money Fund; Class B, Class C and
Class D shares may be exchanged for shares of Merrill Lynch Government Fund,
Merrill Lynch Institutional Fund, Merrill Lynch Institutional Tax-Exempt Fund
and Merrill Lynch Treasury Fund. Shares with a net asset value of at least
$100 are required to qualify for the exchange privilege, and any shares
utilized in an exchange must have been held by the shareholder for at least 15
days. It is contemplated that the exchange privilege may be applicable to
other new mutual funds whose shares may be distributed by the Distributor.
30
<PAGE>
Exchanges of Class A or Class D shares outstanding ("outstanding Class A or
Class D shares") for Class A or Class D shares of another MLAM-advised mutual
fund ("new Class A or Class D shares") are transacted on the basis of relative
net asset value per Class A or Class D share, respectively, plus an amount
equal to the difference, if any, between the sales charge previously paid on
the outstanding Class A or Class D shares and the sales charge payable at the
time of the exchange on the new Class A or Class D shares. With respect to
outstanding Class A or Class D shares as to which previous exchanges have
taken place, the "sales charge previously paid" shall include the aggregate of
the sales charges paid with respect to such Class A or Class D shares in the
initial purchase and any subsequent exchange. Class A or Class D shares issued
pursuant to dividend reinvestment are sold on a no-load basis in each of the
funds offering Class A or Class D shares. For purposes of the exchange
privilege, Class A or Class D shares acquired through dividend reinvestment
shall be deemed to have been sold with a sales charge equal to the sales
charge previously paid on the Class A or Class D shares on which the dividend
was paid. Based on this formula, Class A and Class D shares of the Fund
generally may be exchanged into Class A or Class D shares of the other funds
or into shares of certain money market funds with a reduced or without a sales
charge.
In addition, each of the funds with Class B and Class C shares outstanding
("outstanding Class B or Class C shares") offers to exchange its outstanding
Class B or Class C shares, respectively, of another MLAM-advised mutual fund
("new Class B or Class C shares") on the basis of relative net asset value per
Class B or Class C share, without the payment of any CDSC that might otherwise
be due on redemption of the outstanding shares. Class B shareholders of the
Fund exercising the exchange privilege will continue to be subject to the
Fund's CDSC schedule if such schedule is higher than the CDSC schedule
relating to the new Class B shares acquired through use of the exchange
privilege. In addition, Class B shares of the Fund acquired through use of the
exchange privilege will be subject to the Fund's CDSC schedule if such
schedule is higher than the CDSC schedule relating to the Class B shares of
the fund from which the exchange has been made. For purposes of computing the
sales charge that may be payable on a disposition of the new Class B or Class
C shares, the holding period for the outstanding Class B or Class C shares is
"tacked" to the holding period of the new Class B or Class C shares. For
example, an investor may exchange Class B shares of the Fund for those of
Merrill Lynch Special Value Fund, Inc. ("Special Value Fund") after having
held the Fund's Class B shares for two and a half years. The 2% CDSC that
generally would apply to a redemption would not apply to the exchange. Three
years later the investor may decide to redeem the Class B shares of Special
Value Fund and receive cash. There will be no CDSC due on this redemption,
since by "tacking" the two and a half year holding period of the Fund's Class
B shares to the three year holding period for the Special Value Fund Class B
shares, the investor will be deemed to have held the Special Value Fund Class
B shares for more than five years.
Shareholders also may exchange shares of the Fund into shares of certain
money market funds advised by the Manager or its affiliates, but the period of
time that Class B or Class C shares are held in a money market fund will not
count towards satisfaction of the holding period requirement for purposes of
reducing the CDSC or, with respect to Class B shares, towards satisfaction of
the conversion period. However, shares of a money market fund that were
acquired as a result of an exchange for Class B or Class C shares of the Fund
may, in turn, be exchanged back into Class B or Class C shares, respectively,
of any fund offering such shares, in which event the holding period for Class
B or Class C shares of the newly-acquired fund will be aggregated with
previous holding periods for purposes of reducing the CDSC. Thus, for example,
an investor may exchange Class B shares of the Fund for shares of Merrill
Lynch Institutional Fund ("Institutional Fund") after having held the Fund
Class B shares for two and a half years and three years later decide to redeem
the shares of Institutional Fund for cash. At the time of this redemption, the
2% CDSC that would have been due had the Class B shares
31
<PAGE>
of the Fund been redeemed for cash rather than exchanged for shares of
Institutional Fund will be payable. If, instead of such redemption the
shareholder exchanged such shares for Class B shares of a fund that the
shareholder continued to hold for an additional two and a half years, any
subsequent redemption would not incur a CDSC.
Before effecting an exchange, shareholders should obtain a currently
effective prospectus of the fund into which the exchange is to be made.
To exercise the exchange privilege, a shareholder should contact his or her
Merrill Lynch Financial Consultant, who will advise the Fund of the exchange.
Shareholders of the Fund, and shareholders of other MLAM-advised 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 at any time in accordance with the
rules of the Commission. The Fund reserves the right to limit the number of
times an investor may exercise the exchange privilege. Certain funds may
suspend the continuous offering of their shares at any time and thereafter may
resume such offering from time to time. The exchange privilege is available
only to U.S. shareholders in states where the exchange legally may be made.
DISTRIBUTIONS AND TAXES
The Trust intends to continue to qualify the Fund for the special tax
treatment afforded regulated investment companies ("RICs") under the 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. So long as the Fund
qualifies as a RIC under the Code, it will not be subject to any Maryland
income tax.
As discussed in the Fund's Prospectus, the Trust has established other
series in addition to the Fund (together with the Fund, the "Series"). Each
Series of the Trust is treated as a separate corporation for Federal income
tax purposes. Each Series, therefore, is considered to be a separate entity in
determining its treatment under the rules for RICs described in the
Prospectus. Losses in one Series do not offset gains in another Series, and
the requirements (other than certain organizational requirements) for
qualifying for RIC status are determined for each Series 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
32
<PAGE>
unit), the Fund shall be qualified to pay exempt-interest dividends to its
Class A, Class B, Class C and Class D shareholders (together, the
"shareholders"). Exempt-interest dividends are dividends or any part thereof
paid by the Fund that are attributable to interest on tax-exempt obligations
and designated by the Trust as exempt-interest dividends in a written notice
mailed to the Fund's shareholders within 60 days after the close of the Fund's
taxable year. For this purpose, the Fund will allocate interest from tax-
exempt obligations (as well as ordinary income, capital gains, including new
categories of capital gains, and tax preference items discussed below) among
the Class A, Class B, Class C and Class D shareholders according to a method
(which it believes is consistent with the Commission rule permitting the
issuance and sale of multiple classes of shares) that is based on the gross
income allocable to Class A, Class B, Class C and Class D shareholders during
the taxable year, or such other method as the Internal Revenue Service may
prescribe. To the extent that the dividends distributed to the Fund's
shareholders are derived from interest income exempt from Federal income tax
under Code Section 103(a) and are properly designated as exempt-interest
dividends, they will be excludable from a shareholder's gross income for
Federal income tax purposes. Exempt-interest dividends are included, however,
in determining the portion, if any, of a person's social security benefits and
railroad retirement benefits subject to Federal income taxes. Interest on
indebtedness incurred or continued to purchase or carry shares of a RIC paying
exempt-interest dividends, such as the Fund, will not be deductible by the
investor for Federal income tax or Maryland 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 Maryland Municipal Bonds and distributions
attributable to gains from Maryland Municipal Bonds (other than obligations
issued by U.S. possessions) or interest on U.S. Government obligations will be
exempt from Maryland personal and corporate income taxes; any other dividends
from the Fund will be subject to Maryland income tax. However, shareholders of
the Fund that are financial institutions otherwise subject to Maryland
financial institution franchise taxes would be subject to such taxes on
distributions received from the Fund (including exempt-interest dividends).
Individual shareholders subject to income taxation by states other than
Maryland will realize a lower after tax rate of return than Maryland
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 Maryland income taxes. The Fund will allocate
exempt-interest dividends among Class A, Class B, Class C and Class D
shareholders for Maryland income tax purposes based on a method similar to
that described above for Federal income tax purposes.
Maryland presently includes in Maryland taxable income a portion of certain
items of tax preference as defined in the Code. Interest paid on certain
private activity bonds constitutes such a tax preference if the bonds (i) are
not Maryland Municipal Bonds or (ii) are Maryland Municipal Bonds issued by
U.S. possessions. Accordingly, up to 50% of any distributions of the Fund's
portfolio attributable to such private activity bonds may not be exempt from
Maryland State and local individual income taxes.
Shares of the Fund will not be subject to the Maryland personal property
tax.
To the extent that the Fund's distributions are derived from interest on its
taxable investments or from an excess of net short-term capital gains over net
long-term capital losses ("ordinary income dividends"), such
33
<PAGE>
distributions are considered taxable ordinary income for Federal and Maryland
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 Maryland income tax purposes, are treated as capital gains
which are taxed at ordinary income tax rates unless derived from the sale of
Maryland Municipal Bonds (other than obligations issued by U.S. possessions).
Recent legislation creates additional categories of capital gains taxable at
different rates. Although the legislation does not explain how gain in these
categories will be taxed to shareholders of RICs, it authorizes regulations
applying the new categories of gain and the new rates to sales of securities
by RICs. In the absence of guidance, there is some uncertainty as to the
manner in which the categories of gain and related rates will be passed
through to shareholders in capital gain dividends. It is anticipated that IRS
guidance permitting categories of gain and related rates to be passed through
to shareholders would also require the Fund to designate the amounts of
various categories of capital gain income included in capital gain dividends
in a written notice sent to shareholders. Distributions by the Fund, whether
from exempt-interest income, ordinary income or capital gains will not be
eligible for the dividends received deduction allowed to corporations under
the Code.
All or a portion of the Fund's gain from the sale or redemption of tax-
exempt obligations purchased at a market discount will be treated as ordinary
income rather than capital gain. This rule may increase the amount of ordinary
income dividends received by shareholders. Distributions in excess of the
Fund's earnings and profits will first reduce the adjusted tax basis of a
holder's shares and, after such adjusted tax basis is reduced to zero, will
constitute capital gains to such holder (assuming the shares are held as a
capital asset). Any loss upon the sale or exchange of Fund shares held for six
months or less will be disallowed to the extent of any exempt-interest
dividends received by the shareholder. In addition, any such loss that is not
disallowed under the rule stated above will be treated as long-term capital
loss to the extent of 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 specific date in
one of such months, then such dividend will be treated for tax purposes as
being paid by the Fund and received by its shareholders on December 31 of the
year in which such dividend was declared.
The Code subjects interest received on certain otherwise tax-exempt
securities to an alternative minimum tax. The alternative minimum tax applies
to interest received on certain "private activity bonds" issued after August
7, 1986. Private activity bonds are bonds which, although tax-exempt, are used
for purposes other than those generally performed by governmental units and
which benefit non-governmental entities (e.g., bonds used for industrial
development or housing purposes). Income received on such bonds is classified
as an item of "tax preference," which could subject certain investors in such
bonds, including shareholders of the Fund, to an alternative minimum tax. The
Fund will purchase such "private activity bonds" and the Trust will report to
shareholders within 60 days after the Fund's taxable year-end the portion of
the Fund's dividends declared during the year which constitutes an item of tax
preference for alternative minimum tax purposes. The Code further provides
that corporations are subject to an alternative minimum tax based, in part, on
certain differences between taxable income as adjusted for other tax
preferences and the corporation's "adjusted current earnings," which more
closely reflect a corporation's economic income. Because an exempt-interest
dividend paid by the Fund will be included in adjusted current earnings, a
corporate shareholder may be required to pay alternative minimum tax on
exempt-interest dividends paid by the Fund.
34
<PAGE>
The Fund may invest in high yield securities rated as described in the
Prospectus. Furthermore, the Fund may also invest in instruments the return on
which includes nontraditional features such as indexed principal or interest
payments ("nontraditional instruments"). These instruments may be subject to
special tax rules under which the Fund may be required to accrue and
distribute income before amounts due under the obligations are paid. In
addition, it is possible that all or a portion of the interest payments on
such high yield securities and/or nontraditional instruments could be
recharacterized as taxable ordinary income.
No gain or loss will be recognized by Class B shareholders on the conversion
of their Class B shares into Class D shares. A shareholder's basis in the
Class D shares acquired will be the same as such shareholder's basis in the
Class B shares converted, and the holding period of the acquired Class D
shares will include the holding period for the converted Class B shares.
If a shareholder exercises an exchange privilege within 90 days of acquiring
the shares, then the loss the shareholder can recognize on the exchange will
be reduced (or the gain increased) to the extent any sales charge paid to the
Fund on the exchanged shares reduces any sales charge such shareholder would
have owed upon purchase of the new shares in the absence of the exchange
privilege. Instead, such sales charge will be treated as an amount paid for
the new shares.
A loss realized on a sale or exchange of shares of the Fund will be
disallowed if other Fund shares are acquired (whether through the automatic
reinvestment of dividends or otherwise) within a 61-day period beginning 30
days before and ending 30 days after the date that the shares are disposed of.
In such a case, the basis of the shares acquired will be adjusted to reflect
the disallowed loss.
Ordinary income dividends paid to shareholders who are nonresident aliens or
foreign entities will be subject to a 30% U.S. withholding tax under existing
provisions of the Code applicable to foreign individuals and entities unless a
reduced rate of withholding or a withholding exemption is provided under
applicable treaty law. Nonresident shareholders are urged to consult their own
tax advisors concerning the applicability of the U.S. withholding tax.
Under certain Code provisions, some shareholders may be subject to a 31%
withholding tax on certain ordinary income dividends and on capital gain
dividends and redemption payments ("backup withholding"). Generally,
shareholders subject to backup withholding will be those for whom no certified
taxpayer identification number is on file with the Trust or who, to the
Trust's knowledge, have furnished an incorrect number. When establishing an
account, an investor must certify under penalty of perjury that such number is
correct and that such investor is not otherwise subject to backup withholding.
The Code provides that every person required to file a tax return must
include for information purposes on such return the amount of exempt-interest
dividends received from all sources (including the Fund) during the taxable
year.
TAX TREATMENT OF OPTIONS AND FUTURES TRANSACTIONS
The Fund may purchase or sell municipal bond index futures contracts and
interest rate futures contracts on U.S. Government securities ("financial
futures contracts"). The Fund may also purchase and write call and put options
on such financial futures contracts. In general, unless an election is
available to the Fund or an exception
35
<PAGE>
applies, such options and financial futures contracts that are "Section 1256
contracts" will be "marked to market" for Federal income tax purposes at the
end of each taxable year, i.e., each such option or financial futures contract
will be treated as sold for its fair market value on the last day of the
taxable year, and any gain or loss from transactions in options and financial
futures contracts will be 60% long-term and 40% short-term capital gain or
loss. Application of these rules to Section 1256 contracts held by the Fund
may alter the timing and character of distributions to shareholders. The mark-
to-market rules outlined above, however, will not apply to certain
transactions entered into by the Fund solely to reduce the risk of changes in
price or interest rates with respect to its investments.
Code Section 1092, which applies to certain "straddles," may affect the
taxation of the Fund's sales of securities and transactions in financial
futures contracts and related options. Under Section 1092, the Fund may be
required to postpone recognition for tax purposes of losses incurred in
certain sales of securities and certain closing transactions in financial
futures contracts or the related options.
One of the requirements for qualification as a RIC is that less than 30% of
the Fund's gross income be derived from gains from the sale or other
disposition of securities held for less than three months. Accordingly, the
Fund may be restricted in effecting closing transactions within three months
after entering into an option or financial futures contract. Under recently
enacted legislation, this requirement will no longer apply to the Fund after
its fiscal year ending July 31, 1998.
The foregoing is a general and abbreviated summary of the applicable
provisions of the Code, Treasury regulations and Maryland tax laws presently
in effect. For the complete provisions, reference should be made to the
pertinent Code sections, the Treasury regulations promulgated thereunder and
the applicable Maryland tax laws. The Code and the Treasury regulations, as
well as the Maryland tax laws, are subject to change by legislative, judicial
or administrative action either prospectively or retroactively.
Shareholders are urged to consult their own tax advisors regarding the
availability of any exemptions from state or local taxes (other than those
imposed by Maryland) and with specific questions as to Federal, state, local
or foreign taxes.
PERFORMANCE DATA
From time to time the Fund may include its average annual total return and
other total return data, as well as yield and tax-equivalent yield, in
advertisements or information furnished to present or prospective
shareholders. From time to time, the Fund may include the Fund's Morningstar
risk-adjusted performance ratings in advertisements or supplemental sales
literature. Total return, 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
36
<PAGE>
all dividends and distributions are reinvested and taking into account all
applicable recurring and nonrecurring expenses, including the maximum sales
charge in the case of Class A and Class D shares and the CDSC that would be
applicable to a complete redemption of the investment at the end of the
specified period in the case of the Class B and Class C shares.
The Fund also may quote annual, average annual and annualized total return
and aggregate total return performance data, both as a percentage and as a
dollar amount based on a hypothetical $1,000 investment, for various periods
other than those noted below. Such data will be computed as described above,
except that (1) as required by the periods of the quotations, actual annual,
annualized or aggregate data, rather than average annual data, may be quoted
and (2) the maximum applicable sales charges will not be included with respect
to annual or annualized rates of return calculations. Aside from the impact on
the performance data calculations of including or excluding the maximum
applicable sales charges, actual annual or annualized total return data
generally will be lower than average annual total return data since the
average rates of return reflect compounding of return; aggregate total return
data generally will be higher than average annual total return data since the
aggregate rates of return reflect compounding over a longer period of time.
37
<PAGE>
B
Set forth below is the total return, yield and tax-equivalent yield
information for Class A, Class B, Class C and Class D shares of the Fund for
the periods indicated.
<TABLE>
<CAPTION>
CLASS A SHARES CLASS B SHARES CLASS C SHARES CLASS D SHARES
----------------------------- ---------------------------- ---------------------------- ----------------------------
REDEEMABLE REDEEMABLE REDEEMABLE REDEEMABLE
EXPRESSED VALUE OF A EXPRESSED AS A VALUE OF A EXPRESSED AS A VALUE OF A EXPRESSED AS A VALUE OF A
AS A PERCENTAGE HYPOTHETICAL PERCENTAGE HYPOTHETICAL PERCENTAGE HYPOTHETICAL PERCENTAGE HYPOTHETICAL
BASED ON A $1,000 BASED ON A $1,000 BASED ON A $1,000 BASED ON A $1,000
HYPOTHETICAL INVESTMENT HYPOTHETICAL INVESTMENT HYPOTHETICAL INVESTMENT HYPOTHETICAL INVESTMENT
$1,000 AT THE END $1,000 AT THE END $1,000 AT THE END $1,000 AT THE END
PERIOD INVESTMENT OF THE PERIOD INVESTMENT OF THE PERIOD INVESTMENT OF THE PERIOD INVESTMENT OF THE PERIOD
------ --------------- ------------- -------------- ------------- -------------- ------------- -------------- -------------
AVERAGE ANNUAL TOTAL RETURN
(INCLUDING MAXIMUM APPLICABLE SALES CHARGE)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
One year ended
July 31, 1997... 5.94% $1,059.40 5.79% $1,057.90 8.67% $1,086.70 5.83% $1,058.30
Inception (Octo-
ber 29, 1993) to
July 31, 1997... 3.33% $1,130.70 3.69% $1,145.70
Inception (Octo-
ber 21, 1994) to
July 31, 1997... 8.43% $1,251.70 7.36% $1,217.80
<CAPTION>
ANNUAL TOTAL RETURN
(EXCLUDING MAXIMUM APPLICABLE SALES CHARGE)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Year ended July
31, 1997........ 10.35% $1,103.50 9.79% $1,097.90 9.67% $1,096.70 10.24% $1,102.40
Year ended July
31, 1996........ 5.85% $1,058.50 5.19% $1,051.90 5.18% $1,051.80 5.63% $1,056.30
Year ended July
31, 1995........ 5.39% $1,053.90 4.96% $1,049.60
Inception (Octo-
ber 29, 1993) to
July 31, 1994... (4.32%) $ 956.80 (4.68%) $ 953.20
Inception (Octo-
ber 21, 1994) to
July 31, 1995... 8.51% $1,085.10 8.94% $1,089.40
<CAPTION>
AGGREGATE TOTAL RETURN
(INCLUDING MAXIMUM APPLICABLE SALES CHARGE)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Inception (Octo-
ber 29, 1993) to
July 31, 1997... 13.07% $1,130.70 14.57% $1,145.70
Inception (Octo-
ber 21, 1994) to
July 31, 1997... 25.17% $1,251.70 21.78% $1,217.80
<CAPTION>
YIELD
<S> <C> <C> <C> <C> <C> <C> <C> <C>
30 days ended
July 31, 1997... 4.63% 4.32% 4.21% 4.53%
<CAPTION>
TAX-EQUIVALENT YIELD*
<S> <C> <C> <C> <C> <C> <C> <C> <C>
30 days ended
July 31, 1997... 6.43% 6.00% 5.85% 6.29%
</TABLE>
- ----
* Based on a Federal income tax rate of 28%.
In order to reflect the reduced sales charges in the case of Class A or
Class D shares or the waiver of the CDSC in the case of Class B or Class C
shares applicable to certain investors, as described under "Purchase of
Shares" and "Redemption of Shares," respectively, the total return data quoted
by the Fund in advertisements directed to such investors may take into account
the reduced, and not the maximum, sales charge or may take into account the
CDSC and therefore may reflect greater total return since, due to the reduced
sales charges or the waiver of sales charges, a lower amount of expenses is
deducted.
38
<PAGE>
GENERAL INFORMATION
DESCRIPTION OF SHARES
The Declaration of Trust provides that the Trust shall be comprised of
separate Series ("Series") each of which will consist of a separate portfolio
which will issue separate shares. The Trust is presently comprised of the
Fund, Merrill Lynch Arizona Municipal Bond Fund, Merrill Lynch Arkansas
Municipal Bond Fund, Merrill Lynch Colorado Municipal Bond Fund, Merrill Lynch
Connecticut Municipal Bond Fund, Merrill Lynch Florida Municipal Bond Fund,
Merrill Lynch Massachusetts Municipal Bond Fund, Merrill Lynch Michigan
Municipal Bond Fund, Merrill Lynch Minnesota Municipal Bond Fund, Merrill
Lynch New Jersey Municipal Bond Fund, Merrill Lynch New Mexico Municipal Bond
Fund, Merrill Lynch New York Municipal Bond Fund, Merrill Lynch North Carolina
Municipal Bond Fund, Merrill Lynch Ohio Municipal Bond Fund, Merrill Lynch
Oregon Municipal Bond Fund, Merrill Lynch Pennsylvania Municipal Bond Fund and
Merrill Lynch Texas Municipal Bond Fund. The Trustees are authorized to create
an unlimited number of Series and, with respect to each Series, to issue an
unlimited number of full and fractional shares of beneficial interest, par
value $.10 per share, of different classes and to divide or combine the shares
into a greater or lesser number of shares without thereby changing the
proportionate beneficial interests in the Series. Shareholder approval is not
necessary for the authorization of additional Series or classes of a Series of
the Trust. At the date of this Statement of Additional Information, the shares
of the Fund are divided into Class A, Class B, Class C and Class D shares.
Class A, Class B, Class C and Class D shares represent interests in the same
assets of the Fund and are identical in all respects except that Class B,
Class C and Class D shares bear certain expenses related to the account
maintenance and/or distribution of such shares and have exclusive voting
rights with respect to matters relating to such account maintenance and/or
distribution expenditures. The Board of Trustees of the Trust may classify and
reclassify the shares of any Series into additional or other classes at a
future date.
All shares of the Trust have equal voting rights, except that only shares of
the respective Series are entitled to vote on matters concerning only that
Series and, as noted above, Class B, Class C and Class D shares will have
exclusive voting rights with respect to matters relating to the account
maintenance and/or distribution expenses, as appropriate, being borne solely
by such class. Each issued and outstanding share of a Series is entitled to
one vote and to participate equally in dividends and distributions declared
with respect to that Series and, upon liquidation or dissolution of the
Series, in the net assets of such Series remaining after satisfaction of
outstanding liabilities, except that, as noted above, expenses relating to
distribution and/or account maintenance of the Class B, Class C and Class D
shares are borne solely by the respective class. There normally will be no
meeting of shareholders for the purposes of electing Trustees unless and until
such time as less than a majority of the Trustees holding office have been
elected by shareholders, at which time the Trustees then in office will call a
shareholders' meeting for the election of Trustees. Shareholders may, in
accordance with the terms of the Declaration of Trust, cause a meeting of
shareholders to be held for the purpose of voting on the removal of Trustees.
Also, the Trust will be required to call a special meeting of shareholders in
accordance with the requirements of the 1940 Act to seek approval of new
management and advisory arrangements, of a material increase in distribution
fees or of a change in the fundamental policies, objectives or restrictions of
a Series.
The obligations and liabilities of a particular Series are restricted to the
assets of that Series and do not extend to the assets of the Trust generally.
The shares of each Series, when issued, will be fully paid and nonassessable,
have no preference, preemptive, conversion, exchange or similar rights, and
will be freely transferable. Holders of shares of any Series are entitled to
redeem their shares as set forth elsewhere herein and
39
<PAGE>
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 make certain non-material
changes, without the affirmative vote of a majority of the outstanding shares
of the Trust or of the affected Series or class, as applicable.
Under Massachusetts law, shareholders of a business trust may, under certain
circumstances, be held personally liable as partners for the trust's
obligations. However, the risk of a shareholder incurring financial loss on
account of shareholder liability is limited to circumstances in which both
inadequate insurance existed and the trust itself was unable to meet its
obligations.
The Manager provided the initial capital for the Fund by purchasing 10,000
shares of the Fund for $100,000. Such shares were acquired for investment and
can only be disposed of by redemption. The organizational expenses of the Fund
were paid by the Fund and are being amortized over a period not exceeding five
years. The proceeds realized by the Manager (or any subsequent holder) upon
the redemption of any of the shares initially purchased by it will be reduced
by the proportionate amount of unamortized organizational expenses which the
number of shares redeemed bears to the number of shares initially purchased.
Such organizational expenses include certain of the initial organizational
expenses of the Trust which have been allocated to the Fund by the Trustees.
If additional Series are added to the Trust, the organizational expenses will
be allocated among the Series in a manner deemed equitable by the Trustees.
COMPUTATION OF OFFERING PRICE PER SHARE
An illustration of the computation of the offering price for Class A, Class
B, Class C and Class D shares of the Fund based on the value of the Fund's net
assets and number of shares outstanding on July 31, 1996 is calculated as set
forth below.
<TABLE>
<CAPTION>
CLASS A CLASS B CLASS C CLASS D
---------- ----------- ---------- --------
<S> <C> <C> <C> <C>
Net Assets.......................... $1,927,991 $21,851,185 $2,037,893 $883,389
========== =========== ========== ========
Number of Shares Outstanding........ 199,533 2,261,043 210,815 91,448
========== =========== ========== ========
Net Asset Value Per Share (net
assets divided by number of shares
outstanding)....................... $ 9.66 $ 9.66 $ 9.67 $ 9.66
Sales Charge for Class A and Class D
shares: 4.00% of offering price
(4.17% of net asset value per
share*)............................ .40 ** ** .40
---------- ----------- ---------- --------
Offering Price...................... $ 10.06 $ 9.66 $ 9.67 $ 10.06
========== =========== ========== ========
</TABLE>
- --------
* Rounded to the nearest one-hundredth percent; assumes maximum sales charge
is applicable.
** Class B and Class C shares are not subject to an initial sales charge but
may be subject to a CDSC on redemption of shares. See "Purchase of Shares--
Deferred Sales Charge Alternatives--Class B and Class C Shares" in the
Prospectus and "Redemption of Shares--Deferred Sales Charges--Class B and
Class C Shares" herein.
40
<PAGE>
INDEPENDENT AUDITORS
Deloitte & Touche LLP, 117 Campus Drive, Princeton, New Jersey 08540-6400,
has been selected as the independent auditors of the Fund. The selection of
independent auditors is subject to approval by the independent Trustees of the
Trust. The independent auditors are responsible for auditing the annual
financial statements of the Fund.
CUSTODIAN
State Street Bank and Trust Company, P.O. Box 351, Boston, Massachusetts
02101, acts as the custodian of the Fund's assets. The custodian is
responsible for safeguarding and controlling the Fund's cash and securities,
handling the receipt and delivery of securities and collecting interest on the
Fund's investments.
TRANSFER AGENT
Merrill Lynch Financial Data Services, Inc., 4800 Deer Lake Drive East,
Jacksonville, Florida 32246-6434, acts as the Trust's transfer agent. The
Transfer Agent is responsible for the issuance, transfer and redemption of
shares and the opening, maintenance and servicing of shareholder accounts. See
"Management of the Trust-- Transfer Agency Services" in the Prospectus.
LEGAL COUNSEL
Brown & Wood LLP, One World Trade Center, New York, New York 10048-0557, is
counsel for the Trust.
REPORTS TO SHAREHOLDERS
The fiscal year of the Fund ends on July 31 of each year. The Trust sends to
shareholders of the Fund at least semi-annually reports showing the Fund's
portfolio and other information. An annual report, containing financial
statements audited by independent auditors, is sent to shareholders each year.
After the end of each year shareholders will receive Federal income tax
information regarding dividends and capital gains distributions.
ADDITIONAL INFORMATION
The Prospectus and this Statement of Additional Information do not contain
all the information set forth in the Registration Statement and the exhibits
relating thereto, which the Trust has filed with the Commission, Washington,
D.C., under the Securities Act and the 1940 Act, to which reference is hereby
made.
The Declaration of Trust establishing the Trust dated August 2, 1985, a copy
of which, together with all amendments thereto (the "Declaration"), is on file
in the office of the Secretary of The Commonwealth of Massachusetts, provides
that the name "Merrill Lynch Multi-State Municipal Series Trust" refers to the
Trustees under the Declaration collectively as Trustees, but not as
individuals or personally; and no Trustee, shareholder, officer, employee or
agent of the Trust shall be held to any personal liability; nor shall resort
be had to any such person's private property for the satisfaction of any
obligation or claim of the Trust but the "Trust Property" only shall be
liable.
To the knowledge of the Fund, no person or entity owned beneficially 5% or
more of the Fund's shares on October 1, 1997.
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APPENDIX I
ECONOMIC CONDITIONS IN MARYLAND
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.
There can be no assurance that future statewide or regional economic
difficulties, and the resulting impact on the financial condition of Maryland
issuers generally, will not adversely affect the market value of Maryland
Municipal Obligations held in the portfolio of the Fund or the ability of
particular obligors to make timely payments of debt service on (or relating
to) those obligations.
The State and Its Economy. Maryland encompasses a geographic area of 12,186
square miles and ranks 42nd among the 50 states in size. Maryland's land area
(exclusive of inland waterways and the 1,726 square miles of the Chesapeake
Bay) is 9,837 square miles. According to the Maryland Office of Planning,
Maryland's population in 1996 was 5,071,600, reflecting an increase of 5.7%
from the 1990 Census which showed a Maryland population of 4,797,893.
Maryland's population is concentrated in urban areas; the eight counties and
Baltimore City located in the Baltimore and Washington corridor contain 37.4%
of the State's land area and 86.9% of its population. Overall Maryland's
population per square mile in 1990 was 487.7. In each Census report since 1940
(except in 1980), the percentage population increase in Maryland has exceeded
the nation as a whole.
After enjoying rapid economic growth in the 1980's, Maryland has experienced
declining rates of growth in the 1990's. Total personal income in Maryland
grew at annual rates between 8.1% and 11.5% in each of the years 1984 through
1990, but grew at a rate of 3.0% in 1991, 4.0% in 1992, 4.1% in 1993, 5.2% in
1994, 4.9% in 1995 and 4.0% in 1996. Similarly, per capita personal income,
which had grown at rates no lower than 6.4% for the period from 1972 to 1989,
grew at a rate of 4.8% in 1990, 1.7% in 1991, 3.0% in 1992, 3.2% in 1993, 4.3%
in 1994, 4.0% in 1995 and 3.3% in 1996. Unemployment in Maryland peaked in
1982 at 8.4%, then decreased steadily to a low of 3.7% in 1989. Unemployment
increased to 4.7% in 1990, to 6.0% in 1991, to 6.7% in 1992, but in 1993,
1994, 1995 and 1996 unemployment decreased to 6.2%, 5.1%, 5.1% and 4.9%,
respectively.
Retail sales in Maryland decreased by 2.2% in 1991, and grew by 0.2% in
1992, 6.1% in 1993, 9.6% in 1994, 2.9% in 1995 and 1.5% in 1996 versus
nationwide growth of 0.6%, 4.8%, 6.5%, 7.4%, 4.6% and 4.9% in such years,
respectively.
Services (including mining), wholesale and retail trade, government, and
manufacturing (primarily printing and publishing, food and kindred products,
instruments and related products, industrial machinery, electronic equipment,
and chemical and allied products) are the leading areas of employment in
Maryland. In contrast to the nation as a whole, more people in Maryland are
employed in government than in manufacturing. Between 1976 and 1996,
manufacturing employment decreased 25.2%, while non-manufacturing employment
increased 60.5%.
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State Fiscal Information. The State's total expenditures for the fiscal
years ending June 30, 1994, June 30, 1995 and June 30, 1996 were $12.351
billion, $13.528 billion and $14.168 billion, respectively. The State's fiscal
year 1997 budget was adopted projecting total expenditures for fiscal year
1997 of $14.631 billion. On June 30, 1994 the State's General Fund,
representing approximately 55% of each year's total budget, had a surplus on a
budgetary basis of $60 million and the Revenue Stabilization Account of the
State Reserve Fund contained $161.8 million; on June 30, 1995, the General
Fund contained a surplus on a budgetary basis of $26.5 million (after
reservation of $106 million for fiscal year 1996 expenses) and the Revenue
Stabilization Account of the State Reserve Fund contained $286.1 million. In
April 1995 the State's General Assembly approved a $14.4 billion budget for
fiscal year 1996, an 8.2% increase above the fiscal 1995 spending level. This
budget did not include any expenditures based upon additional revenue from new
or broad-based taxes, but included a $270 million appropriation to the State
Reserve Fund, including $200 million to the Revenue Stabilization Account.
When the fiscal year 1996 budget was enacted, the State projected that it
would end the fiscal year with a General Fund surplus of $3.1 million. In
December 1995 and March 1996 the State lowered its estimates of General Fund
revenues by a total of $148 million. To address this reduction in revenues the
State, among other things, reduced General Fund appropriations and transferred
$57 million from the Revenue Stabilization Account of the State Reserve Fund.
The balance in the Revenue Stabilization Account on June 30, 1996, taking into
account this transfer, was $461.2 million.
In April, 1996, the General Assembly approved a $14.6 billion 1997 fiscal
year budget. The budget as enacted includes funds sufficient to meet all
fiscal year 1996 deficiencies and to meet all specific statutory funding
requirements; the budget incorporates $29 million in savings from revisions to
the State personnel system and reform to the welfare and Medicare programs.
When this budget was enacted, the State estimated that the General Fund
surplus on a budgetary basis at June 30, 1996 would be approximately $22.5
million, in addition to which the State projected that there would be $490.4
million in the Revenue Stabilization Account of the State Reserve Fund. The
State currently projects a General Fund balance on a budgetary basis of $144.5
million.
In April, 1997 the General Assembly approved a $15.4 billion 1998 fiscal
year budget. This budget (i) includes funds sufficient to meet all specific
statutory funding requirements; (ii) incorporates the first year of a five-
year phase-in of a 10% reduction in personal income taxes (estimated to reduce
revenues by $38.5 million in fiscal year 1998 and $450 million when fully
phased in) and certain reductions in sales taxes on certain manufacturing
equipment (estimated to reduce revenues by $38.6 million when the reductions
are fully phased-in during fiscal year 2001); and (iii) includes the first
year's $30 million funding under an agreement to provide additional funds
totaling $230 million over a five-year period to schools in the City of
Baltimore and related grants to other subdivisions totaling $32 million. When
this budget was enacted, the State estimated the General Fund surplus on a
budgetary basis would be $28.2 million, in addition to which the State
projected that there would be a balance of $554 million in the Revenue
Stabilization Account of the State Reserve Fund.
State-level Municipal Obligations. The State of Maryland and its various
political subdivisions issue a number of different kinds of Municipal
Obligations, including general obligation bonds supported by tax collections,
revenue bonds payable from certain identified tax levies or revenue streams,
conduit revenue bonds payable from the repayment of certain loans to
authorized entities such as hospitals, universities and other private
entities, and certificates of participation in tax-exempt municipal leases.
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The State of Maryland issues general obligation bonds, debt service on which
is payable (to the extent not paid from other sources) from ad valorem
property taxes. The State Constitution prohibits the contracting of State debt
unless the debt is authorized by a law levying an annual tax or taxes
sufficient to pay the debt service within 15 years and prohibiting the repeal
of the tax or taxes or their use for another purpose until the debt has been
paid. The State also enters into lease-purchase agreements, participation
interests in which are often sold publicly as individual securities. These
obligations are subject to annual appropriation by the General Assembly.
As of August, 1997, the State's general obligation bonds were rated "Aaa" by
Moody's Investors Service, Inc. ("Moody's"), "AAA" by Standard & Poor's
Ratings Services ("S&P"), and "AAA" by Fitch Investors Service, Inc.
("Fitch"). There can be no assurance that these ratings will continue.
The Maryland Department of Transportation issues Consolidated Transportation
Bonds, which are payable out of specific excise taxes, motor vehicle taxes and
corporate income taxes, and from the general revenues of the Department or
from amounts payable under agreements between the Department and participating
counties. Issued to finance highway, port, transit, rail and aviation
facilities, these bonds were rated "Aa" by Moody's, "AA" by S&P and "AA" by
Fitch. The Maryland Transportation Authority, a unit of the Department, issues
its own revenue bonds for transportation facilities, which are payable from
certain highway, bridge and tunnel tolls. These bonds are rated "A+" by S&P.
There can be no assurance that these ratings will continue.
Other State agencies which issue Municipal Obligations include the Maryland
Stadium Authority, which has issued bonds payable from sports facility and
other lease revenues and certain lottery revenues, the Maryland Water Quality
Financing Administration, which issues bonds to provide loans to local
governments for wastewater control projects, the Community Development
Administration of the Department of Housing and Community Development, which
issues mortgage revenue bonds for housing, the Maryland Environmental Service,
which issues bonds secured by the revenues from its various water supply,
wastewater treatment and waste management projects, and the various public
institutions of higher education in the State (which include the University of
Maryland System, Morgan State University, Baltimore City Community College and
St. Mary's College of Maryland), which issue their own revenue bonds. None of
these bonds constitutes debt of the State or is secured by a pledge of the
full faith and credit of the State of Maryland. The issuers of these
obligations are subject to various economic risks and uncertainties, and the
credit quality of the securities issued by them may vary considerably from the
credit quality of obligations backed by the full faith and credit of the
State.
In addition, a number of State authorities issue conduit revenue bonds,
including the Maryland Health and Higher Educational Facilities Authority,
which issues revenue bonds for nonprofit health care institutions and
institutions of higher education, the Northeast Maryland Waste Disposal
Authority, which issues revenue bonds to finance solid waste disposal
facilities, and the Maryland Industrial Development Financing Authority, the
Maryland Economic Development Corporation and the Maryland Energy Financing
Administration, which issue revenue bonds to finance eligible projects for
private borrowers under relevant State and Federal laws. These bonds are
payable solely from the loan payments made by borrowers and other financing
participants, and their credit quality varies with the financial strengths of
these entities.
Municipal Obligations of Maryland Local Governments. Maryland has 24
geographical subdivisions, comprised of 23 counties plus the independent City
of Baltimore, which functions much like a county. Some of
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the counties and the City of Baltimore operate pursuant to the provisions of
charters or codes of their own adoption, while others operate pursuant to
State statutes.
Maryland counties and the City of Baltimore receive most of their revenues
from ad valorem taxes on real and personal property, individual income taxes,
transfer taxes, miscellaneous taxes and aid from the State. Their expenditures
include public education, public safety, public works, health, public welfare,
court and correctional services, and general governmental costs.
The economic factors affecting the State, as discussed above, also have
affected the counties and the City of Baltimore. In addition, reductions in
State aid caused by State budget deficits have caused the local governments to
trim expenditures and, in some cases, raise taxes.
Recent available ratings of the counties and the City of Baltimore are as
follows: general obligation bonds of Montgomery County (abutting Washington,
D.C.) are rated "Aaa" by Moody's and "AAA" by S&P; Anne Arundel County issues
general obligation bonds which are rated "AA+" by both Fitch and S&P and "Aa1"
by Moody's; Prince George's County, also in the Washington, D.C. suburbs,
issues general obligation bonds rated "Aa3" by Moody's and "AA-" by S&P;
Baltimore County, a separate political subdivision surrounding the City of
Baltimore, issues general obligation bonds rated "Aaa" by Moody's and "AAA" by
S&P. The City of Baltimore's general obligation bonds are rated "A1" by
Moody's and "A" by S&P and the other counties in Maryland which are rated all
have general obligation bond ratings of "A" or better, except for Allegany
County and Garrett County, the bonds of which are rated "Baa2" and "Baa3,"
respectively, by Moody's. There can be no assurance that these ratings will
continue.
Two bi-county agencies issue bonds to finance facilities for Montgomery and
Prince George's Counties. The Washington Suburban Sanitary Commission, which
provides water and sewerage services, issues general obligation bonds rated
"Aa1" by Moody's and "AA" by S&P. There can be no assurance that these ratings
will continue. The Maryland-National Capital Park and Planning Commission,
which administers a park system for these counties, issues general obligation
bonds that are guaranteed by the county in which the financed facilities are
located.
Additionally, many of the municipal corporations in Maryland (such as the
cities of Annapolis, Frederick and Rockville) have issued general obligation
bonds. These municipalities are subject to various economic risks and
uncertainties, and the credit quality of the securities issued by them may
vary considerably from the credit quality of obligations issued by rated
Maryland counties.
Other Issuers of Maryland Municipal Obligations. Many of Maryland's counties
have established subsidiary agencies with bond issuing powers, such as
sanitary districts, housing authorities, parking revenue authorities and
industrial development authorities. In addition, all Maryland municipalities
have the authority under State law to issue conduit revenue bonds payable from
payments from private borrowers. These entities are subject to various
economic risks and uncertainties, and the credit quality of the securities
issued by them varies with the financial strengths of the respective
borrowers.
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APPENDIX II
RATINGS OF MUNICIPAL BONDS
DESCRIPTION OF MOODY'S INVESTORS SERVICE, INC.'S ("MOODY'S") MUNICIPAL BOND
RATINGS
AAA Bonds which are rated Aaa are judged to be of the best quality. They
carry the smallest degree of investment risk and are generally referred
to as "gilt edge." Interest payments are protected by a large or by an
exceptionally stable margin and principal is secure. While the various
protective elements are likely to change, such changes as can be
visualized are most unlikely to impair the fundamentally strong
position of such issues.
AA Bonds which are rated Aa are judged to be of high quality by all
standards. Together with the Aaa group they comprise what are generally
known as high grade bonds. They are rated lower than the best bonds
because margins of protection may not be as large as in Aaa securities
or fluctuation of protective elements may be of greater amplitude or
there may be other elements present which make the long-term risks
appear somewhat larger than in Aaa securities.
A Bonds which are rated A possess many favorable investment attributes
and are to be considered as upper medium grade obligations. Factors
giving security to principal and interest are considered adequate, but
elements may be present which suggest a susceptibility to impairment
sometime in the future.
BAA Bonds which are rated Baa are considered as medium grade obligations,
i.e., they are neither highly protected nor poorly secured. Interest
payment and principal security appear adequate for the present but
certain protective elements may be lacking or may be characteristically
unreliable over any great length of time. Such bonds lack outstanding
investment characteristics and in fact have speculative characteristics
as well.
BA Bonds which are rated Ba are judged to have speculative elements; their
future cannot be considered as well assured. Often the protection of
interest and principal payments may be very moderate and thereby not
well safeguarded during both good and bad times over the future.
Uncertainty of position characterizes bonds in this class.
B Bonds which are rated B generally lack characteristics of the desirable
investment. Assurance of interest and principal payments or of
maintenance of other terms of the contract over any long period of time
may be small.
CAA Bonds which are rated Caa are of poor standing. Such issues may be in
default or there may be present elements of danger with respect to
principal or interest.
CA Bonds which are rated Ca represent obligations which are speculative in
a high degree. Such issues are often in default or have other marked
shortcomings.
C Bonds which are rated C are the lowest rated class of bonds, and issues
so rated can be regarded as having extremely poor prospects of ever
attaining any real investment standing.
Note: Those bonds in the Aa, A, Baa, Ba and B groups which Moody's believes
possess the strongest investment attributes are designated by the symbols Aa1,
A1, Baa1, Ba1 and B1.
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Short-term Notes: The four ratings of Moody's for short-term notes are MIG-
1/VMIG1, MIG-2/VMIG2, MIG-3/VMIG3 and MIG-4/VMIG4. MIG-1/VMIG1 denotes "best
quality . . . strong protection by established cash flows;" MIG-2/VMIG2
denotes "high quality" with ample margins of protection; MIG-3/VMIG3 notes are
of "favorable quality . . . but . . . lacking the undeniable strength of the
preceding grades;" MIG-4/VMIG4 notes are of "adequate quality . . .
[p]rotection commonly regarded as required of an investment security is
present . . . there is specific risk."
DESCRIPTION OF MOODY'S COMMERCIAL PAPER RATINGS
Moody's Commercial Paper ratings are opinions of the ability of issuers to
repay punctually promissory obligations not having an original maturity in
excess of nine months. Moody's employs the following three designations, all
judged to be investment grade, to indicate the relative repayment ability of
rated issuers:
Issuers rated Prime-1 (or supporting institutions) have a superior ability
for repayment of short-term promissory obligations. Prime-1 repayment ability
will often be evidenced by many of the following characteristics: leading
market positions in well-established industries; high rates of return on funds
employed; conservative capitalization structure with moderate reliance on debt
and ample asset protection; broad margins in earning coverage of fixed
financial charges and high internal cash generation; and well-established
access to a range of financial markets and assured sources of alternate
liquidity.
Issuers rated Prime-2 (or supporting institutions) have a strong ability for
repayment of short-term promissory obligations. This will normally be
evidenced by many of the characteristics cited above but to a lesser degree.
Earnings trends and coverage ratios, while sound, may be more subject to
variation. Capitalization characteristics, while still appropriate, may be
more affected by external conditions. Ample alternate liquidity is maintained.
Issuers rated Prime-3 (or supporting institutions) have an acceptable
ability for repayment of short-term promissory obligations. The effect of
industry characteristics and market compositions may be more pronounced.
Variability in earnings and profitability may result in changes in the level
of debt protection measurements and may require relatively high financial
leverage. Adequate alternate liquidity is maintained.
Issuers rated Not Prime do not fall within any of the Prime rating
categories.
DESCRIPTION OF STANDARD & POOR'S RATINGS SERVICES ("STANDARD & POOR'S")
MUNICIPAL DEBT RATINGS
A Standard & Poor's municipal debt rating is a current opinion of the
creditworthiness of an obligor with respect to a specific financial
obligation, a specific class of financial obligations, or a specific financial
program. It takes into consideration the creditworthiness of guarantors,
insurers or other forms of credit enhancement on the obligation.
The debt rating is not a recommendation to purchase, sell or hold a
financial obligation, inasmuch as it does not comment as to market price or
suitability for a particular investor.
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The ratings are based on current information furnished by the obligors or
obtained by Standard & Poor's from other sources it considers reliable.
Standard & Poor's does not perform an audit in connection with any rating and
may, on occasion, rely on unaudited financial information. The ratings may be
changed, suspended or withdrawn as a result of changes in, or unavailability
of, such information, or based on other circumstances.
The ratings are based, in varying degrees, on the following considerations:
I. Likelihood of payment-capacity and willingness of the obligor to meet
its financial commitment on an obligation in accordance with the terms of
the obligation;
II. Nature of and provisions of the obligations; 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.
AAA Debt rated "AAA" has the highest rating assigned by Standard & Poor's.
Capacity to meet its financial commitment on the obligation is
extremely strong.
AA Debt rated "AA" differs from the highest-rated obligations only in
small degree. The obligor's capacity to meet its financial commitment
on the obligation is very strong.
A Debt rated "A" is somewhat more susceptible to the adverse effects of
changes in circumstances and economic conditions than debt in higher-
rated categories. However, the obligor's capacity to meet its
financial commitment on the obligation is still strong.
BBB Debt rated "BBB" exhibits adequate protection parameters. However,
adverse economic conditions or changing circumstances are more likely
to lead to a weakened capacity of the obligor to meet its financial
commitment on the obligation.
BB
B
CCC
CC
C Debt rated "BB," "B," "CCC," "CC" and "C" are regarded, on balance, as
having significant speculative characteristics. "BB" indicates the
least degree of speculation and "C" the highest degree of speculation.
While such debt will likely have some quality and protective
characteristics, these may be outweighed by large uncertainties or
major exposures to adverse conditions.
D
Debt rated "D" is in payment default. The "D" rating category is used
when payments on an obligation are not made on the date due even if the
applicable grace period has not expired, unless Standard & Poor's
believes that such payments will be made during such grace period. The
"D" rating also will be used upon the filing of a bankruptcy petition or
the taking of a similar action if payments on an obligation are
jeopardized.
Plus (+) or Minus (-): The ratings from "AA" to "CCC" may be modified by the
addition of a plus or minus sign to show relative standing within the major
rating categories.
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DESCRIPTION OF STANDARD & POOR'S COMMERCIAL PAPER RATINGS
A Standard & Poor's Commercial Paper Rating is a current assessment of the
likelihood of timely payment of debt having an original maturity of no more
than 365 days. Ratings are graded into several categories, ranging from "A" for
the highest-quality obligations to "D" for the lowest. These categories are as
follows:
A-1 This designation indicates that the degree of safety regarding timely
payment is strong. Those issues determined to possess extremely strong
safety characteristics are denoted with a plus sign (+) designation.
A-2 Capacity for timely payment on issues with this designation is
satisfactory. However, the relative degree of safety is not as high as
for issues designated "A-1."
A-3 Issues carrying this designation have an adequate capacity for timely
payment. They are, however, more vulnerable to the adverse effects of
changes in circumstances than obligations carrying the higher
designations.
B Issues rated "B" are regarded as having only speculative capacity for
timely payment.
C This rating is assigned to short-term debt obligations with a doubtful
capacity for payment.
D Debt rated "D" is in payment default. The "D" rating category is used
when interest payments or principal payments are not made on the date
due, even if the applicable grace period has not expired, unless
Standard & Poor's believes that such payments will be made during such
grace period.
A Commercial Paper rating is not a recommendation to purchase or sell a
security. The ratings are based on current information furnished to Standard &
Poor's by the issuer and obtained by Standard & Poor's from other sources it
considers reliable. The ratings may be changed, suspended, or withdrawn as a
result of changes in, or unavailability of, such information.
DESCRIPTION OF STANDARD & POOR'S SHORT-TERM ISSUE CREDIT RATINGS
A Standard & Poor's note rating reflects the liquidity factors and market
access risks unique to notes. Notes due in three years or less will likely
receive a note rating. Notes maturing beyond three years will most likely
receive a long-term debt rating. The following criteria will be used in making
that assessment.
--Amortization schedule--the larger the final maturity relative to other
maturities, the more likely it will be treated as a note.
--Source of payment--the more dependent the issue is on the market for its
refinancing, the more likely it will be treated as a note.
Note rating symbols are as follows:
SP-1 Strong capacity to pay principal and interest. An issue determined to
possess a very strong capacity to pay debt service is given a plus "+"
designation.
SP-2 Satisfactory capacity to pay principal and interest with some
vulnerability to adverse financial and economic changes over the term
of the notes.
SP-3 Speculative capacity to pay principal and interest.
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DESCRIPTION OF FITCH INVESTORS SERVICE, INC.'S ("FITCH") INVESTMENT GRADE BOND
RATINGS
Fitch investment grade bond ratings provide a guide to investors in
determining the credit risk associated with a particular security. The ratings
represent Fitch's assessment of the issuer's ability to meet the obligations
of a specific debt issue or class of debt in a timely manner.
The rating takes into consideration special features of the issue, its
relationship to other obligations of the issuer, the current and prospective
financial condition and operating performance of the issuer and of any
guarantor, as well as the economic and political environment that might affect
the issuer's future financial strength and credit quality.
Fitch ratings do not reflect any credit enhancement that may be provided by
insurance policies or financial guaranties unless otherwise indicated.
Bonds carrying the same rating are of similar but not necessarily identical
credit quality since the rating categories do not fully reflect small
differences in the degrees of credit risk.
Fitch ratings are not recommendations to buy, sell, or hold any security.
Ratings do not comment on the adequacy of market price, the suitability of any
security for a particular investor, or the tax-exempt nature or taxability of
payments made in respect of any security.
Fitch ratings are based on information obtained from issuers, other
obligors, underwriters, their experts, and other sources Fitch believes to be
reliable. Fitch does not audit or verify the truth or accuracy of such
information. Ratings may be changed, suspended, or withdrawn as a result of
changes in, or the unavailability of, information or for any other reasons.
AAA Bonds considered to be investment grade and of the highest credit
quality. The obligor has an exceptionally strong ability to pay
interest and repay principal which is unlikely to be affected by
reasonably foreseeable events.
AA Bonds considered to be investment grade and of very high credit
quality. The obligor's ability to pay interest and repay principal is
very strong, although not quite as strong as bonds rated "AAA." Because
bonds rated in the "AAA" and "AA" categories are not significantly
vulnerable to foreseeable future developments, short-term debt of these
issuers is generally rated "F-1+."
A Bonds considered to be investment grade and of high credit quality. The
obligor's ability to pay interest and repay principal is considered to
be strong, but may be more vulnerable to adverse changes in economic
conditions and circumstances than bonds with higher ratings.
BBB Bonds considered to be investment grade and of satisfactory credit
quality. The obligor's ability to pay interest and repay principal is
considered to be adequate. Adverse changes in economic conditions and
circumstances, however, are more likely to have adverse impact on these
bonds, and therefore, impair timely payment. The likelihood that the
ratings of these bonds will fall below investment grade is higher than
for bonds with higher ratings.
Plus (+) or Minus (-): Plus and minus signs are used with a rating symbol to
indicate the relative position of a credit within the rating category. Plus
and minus signs, however, are not used in the "AAA" category.
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NR Indicates that Fitch does not rate the specific issue.
CONDITIONAL A conditional rating is premised on the successful completion of a
project or the occurrence of a specific event.
SUSPENDED A rating is suspended when Fitch deems the amount of information
available from the issuer to be inadequate for rating purposes.
WITHDRAWN A rating will be withdrawn when an issue matures or is called or
refinanced and, at Fitch's discretion, when an issuer fails to
furnish proper and timely information.
FITCH ALERT Ratings are placed on FitchAlert to notify investors of an
occurrence that is likely to result in a rating change and the
likely direction of such change. These are designated as
"Positive," indicating a potential upgrade, "Negative," for
potential downgrade, or "Evolving," where ratings may be raised or
lowered. FitchAlert is relatively short-term, and should be
resolved within 12 months.
Ratings Outlook: An outlook is used to describe the most likely direction of
any rating change over the intermediate term. It is described as "Positive" or
"Negative." The absence of a designation indicates a stable outlook.
DESCRIPTION OF FITCH SPECULATIVE GRADE BOND RATINGS
Fitch speculative grade bond ratings provide a guide to investors in
determining the credit risk associated with a particular security. The ratings
("BB" to "C") represent Fitch's assessment of the likelihood of timely payment
of principal and interest in accordance with the terms of obligation for bond
issues not in default. For defaulted bonds, the rating ("DDD" to "D") is an
assessment of the ultimate recovery value through reorganization or
liquidation.
The rating takes into consideration special features of the issue, its
relationship to other obligations of the issuer, the current and prospective
financial condition and operating performance of the issuer and any guarantor,
as well as the economic and political environment that might affect the
issuer's future financial strength.
Bonds that have the same rating are of similar but not necessarily identical
credit quality since rating categories cannot fully reflect the differences in
degrees of credit risk.
BB Bonds are considered speculative. The obligor's ability to pay interest
and repay principal may be affected over time by adverse economic
changes. However, business and financial alternatives can be identified
which could assist the obligor in satisfying its debt service
requirements.
B Bonds are considered highly speculative. While bonds in this class are
currently meeting debt service requirements, the probability of
continued timely payment of principal and interest reflects the
obligor's limited margin of safety and the need for reasonable business
and economic activity throughout the life of the issue.
CCC Bonds have certain identifiable characteristics which, if not remedied,
may lead to default. The ability to meet obligations requires an
advantageous business and economic environment.
CC Bonds are minimally protected. Default in payment of interest and/or
principal seems probable over time.
51
<PAGE>
C Bonds are in imminent default in payment of interest or principal.
DDD
DD
D Bonds are in default on interest and/or principal payments. Such bonds are
extremely speculative and should be valued on the basis of their ultimate
recovery value in liquidation or reorganization of the obligor. "DDD"
represents the highest potential for recovery on these bonds, and "D"
represents the lowest potential for recovery.
Plus (+) or Minus (-): Plus and minus signs are used with a rating symbol to
indicate the relative position of a credit within the rating category. Plus
and minus signs, however, are not used in the "DDD," "DD," or "D" categories.
DESCRIPTION OF FITCH INVESTMENT GRADE SHORT-TERM RATINGS
Fitch's short-term ratings apply to debt obligations that are payable on
demand or have original maturities of generally up to three years, including
commercial paper, certificates of deposit, medium-term notes, and municipal
and investment notes.
The short-term rating places greater emphasis than a long-term rating on the
existence of liquidity necessary to meet the issuer's obligations in a timely
manner.
Fitch short-term ratings are as follows:
F-1+ Exceptionally Strong Credit Quality. Issues assigned this rating are
regarded as having the strongest degree of assurance for timely
payment.
F-1 Very Strong Credit Quality. Issues assigned this rating reflect an
assurance of timely payment only slightly less in degree than issues
rated "F-1+."
F-2 Good Credit Quality. Issues assigned this rating have a satisfactory
degree of assurance for timely payment, but the margin of safety is not
as great as for issues assigned "F-1+" and "F-1" ratings.
F-3 Fair Credit Quality. Issues assigned this rating have characteristics
suggesting that the degree of assurance for timely payment is adequate,
however, near-term adverse changes could cause these securities to be
rated below investment grade.
F-S Weak Credit Quality. Issues assigned this rating have characteristics
suggesting a minimal degree of assurance for timely payment and are
vulnerable to near-term adverse changes in financial and economic
conditions.
D Default. Issues assigned this rating are in actual or imminent payment
default.
LOC The symbol "LOC" indicates that the rating is based on a letter of
credit issued by a commercial bank.
52
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Trustees and Shareholders,
Merrill Lynch Maryland Municipal Bond Fund of
Merrill Lynch Multi-State Municipal Series Trust:
We have audited the accompanying statement of assets and liabilities,
including the schedule of investments, of Merrill Lynch Maryland Municipal
Bond Fund of Merrill Lynch Multi-State Municipal Series Trust as of July 31,
1997, the related statements of operations for the year then ended and changes
in net assets for each of the years in the two-year period then ended, and the
financial highlights for each of the years in the three-year period then ended
and for the period October 29, 1993 (commencement of operations) to July 31,
1994. These financial statements and the financial highlights are the
responsibility of the Fund's management. Our responsibility is to express an
opinion on these financial statements and the financial highlights based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements and the
financial highlights are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements. Our procedures included confirmation of securities
owned at July 31, 1997 by correspondence with the custodian. An audit also
includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, such financial statements and financial highlights present
fairly, in all material respects, the financial position of Merrill Lynch
Maryland Municipal Bond Fund of Merrill Lynch Multi-State Municipal Series
Trust as of July 31, 1997, the results of its operations, the changes in its
net assets, and the financial highlights for the respective stated periods in
conformity with generally accepted accounting principles.
Deloitte & Touche LLP
Princeton, New Jersey
September 6, 1997
53
<PAGE>
<TABLE>
<CAPTION>
Merrill Lynch Maryland Municipal Bond Fund July 31, 1997
SCHEDULE OF INVESTMENTS (in Thousands)
S&P Moody's Face Value
Ratings Ratings Amount Issue (Note 1a)
<S> <C> <C> <C>
Maryland -- 81.8%
AAA Aaa $1,935 Baltimore, Maryland, Consolidated Public Improvement Bonds, UT, Series
A, 5.625% due 10/15/2013 (a) $2,041
AA- Aa3 1,000 Baltimore, Maryland, Port Facilities Revenue Bonds (Consolidated Coal
Sales Co.), 6.50% due 12/01/2010 1,095
AA Aa3 600 Carroll County, Maryland, Registered Revenue Bonds (County
Commissioners-Consolidated Public Improvement), UT, 6.50% due 10/01/2024 681
Maryland Community Development Administration, S/F Program Revenue Bonds
(Department of Housing and Community Development):
NR* Aa 500 4th Series, 6.45% due 4/01/2014 531
NR* Aa 250 6th Series, 7.05% due 4/01/2017 268
NR* Aa 490 7th Series, AMT, 7.30% due 4/01/2025 525
Maryland Health and Higher Educational Facilities Authority Revenue Bonds:
NR* VMIG1+ 800 (Pooled Loan Program), VRDN, Series A, 3.65% due 4/01/2035 (i) 800
AA- Aa2 1,650 Refunding (Johns Hopkins University), 5.625% due 7/01/2027 1,713
AAA Aaa 1,470 Refunding (Maryland General Hospital), 6.125% due 7/01/2019 (b) 1,572
A A 1,200 Refunding (Memorial Hospital of Cumberland), 6.50% due 7/01/2017 1,303
AAA Aaa 625 (University of Maryland Medical Systems), Series B, 7% due 7/01/2022 (a) 782
A- NR* 1,000 Maryland State Energy Financing Administration, Solid Waste Disposal
Revenue Bonds, Limited Obligation (Wheelabrator Water Projects), AMT,
6.45% due 12/01/2016 1,079
AAA Aaa 500 Maryland Transportation Authority, Special Obligation Revenue Bonds
(Baltimore/Washington International Airport Project), AMT, Series A,
6.25% due 7/01/2014 (a) 540
Maryland Water Quality Financing Administration, Revolving Loan Fund
Revenue Bonds, Series A:
AA Aa2 300 6.375% due 9/01/2010 329
AA Aa2 500 6.55% due 9/01/2014 548
NR* Baa 1,000 Montgomery County, Maryland, Golf Course System Revenue Authority, Series A,
6.125% due 10/01/2022 1,041
</TABLE>
PORTFOLIO ABBREVIATIONS
To simplify the listings of Merrill Lynch Maryland
Municipal Bond Fund's portfolio holdings in the Schedule
of Investments, we have abbreviated the names of many
of the securities according to the list at right.
AMT Alternative Minimum Tax (subject to)
PCR Pollution Control Revenue Bonds
S/F Single-Family
STRIPES Short-Term Rate Inverse Payment Exempt Securities
UT Unlimited Tax
VRDN Variable Rate Demand Notes
54
<PAGE>
<TABLE>
<S> <C> <C> <C> <C>
NR* Aa2 500 Montgomery County, Maryland, Housing Opportunities Commission, S/F
Mortgage Revenue Bonds, Series A, 5.75% due 7/01/2013 516
AAA Aaa 500 Montgomery County, Maryland, Parking Revenue Refunding Bonds (Silver Spring
Parking Lot), Series A, 6.25% due 6/01/2009 (a) 550
NR* A 1,000 Northeast Maryland, Waste Disposal Authority, Solid Waste Revenue Bonds
(Montgomery County Resource Recovery Project), AMT, Series A, 6.30% due
7/01/2016 1,063
AAA NR* 500 Prince Georges County, Maryland, Housing Authority, Mortgage Revenue
Refunding Bonds (Parker Apartments Project), Series A, 7.25% due 11/20/2016
(f) 536
AAA NR* 935 Prince Georges County, Maryland, Housing Authority, S/F Mortgage Revenue
Bonds, AMT, Series A, 6.60% due 12/01/2025 (g) 981
Prince Georges County, Maryland, PCR, Refunding (Potomac Electric Project):
A A1 1,000 5.75% due 3/15/2010 1,095
A A1 250 6.375% due 1/15/2023 267
A1+ VMIG1+ 300 University of Maryland, University Revenue Bonds (Revolving Equipment
Loan Program), VRDN, Series A, 3.55% due 7/01/2015 (e)(i) 300
AAA Aaa 1,000 Washington, D.C., Metropolitan Area Transportation Authority,
Gross Revenue Refunding Bonds, 6% due 7/01/2010 (a) 1,125
AA Aaa 500 Washington Suburban Sanitation District, Maryland, Registered, General
Construction Bonds, UT, 6.625% due 6/01/2004 (h) 565
Puerto Rico -- 12.8%
AAA Aaa 510 Puerto Rico Commonwealth, Highway and Transportation Authority, Highway
Revenue Bonds, Series T, 6.625% due 7/01/2002 (h) 574
AAA Aaa 500 Puerto Rico Commonwealth, Refunding Bonds, UT, 5.375% due 7/01/2022 (b) 504
Puerto Rico Electric Power Authority, Power Revenue Bonds:
BBB+ Aaa 1,000 Series P, 7% due 7/01/2001 (h) 1,125
AAA Aaa 400 Series T, STRIPES, 8.069% due 7/01/2005 (c)(d) 470
A Baa1 750 Puerto Rico Public Buildings Authority, Guaranteed Government Facilities
Revenue Bonds, Series B, 5.25% due 7/01/2021 739
Total Investments (Cost -- $23,540) -- 94.6% 25,258
Other Assets Less Liabilities -- 5.4% 1,442
-------
Net Assets -- 100.0% $26,700
=======
</TABLE>
(a) FGIC Insured.
(b) MBIA Insured.
(c) FSA Insured.
(d) The interest rate is subject to change periodically and inversely based upon
prevailing market rates. The interest rate shown is the rate in effect at
July 31, 1997.
(e) SLMA Insured.
(f) GNMA Collateralized.
(g) FNMA/GNMA Collateralized.
(h) Prerefunded.
(i) The interest rate is subject to change periodically based upon prevailing
market rates. The interest rate shown is the rate in effect at July 31,
1997.
* Not Rated.
+ Highest short-term rating by Moody's Investors Service, Inc.
Ratings of issues shown have not been audited by Deloitte & Touche LLP.
See Notes to Financial Statements.
55
<PAGE>
FINANCIAL INFORMATION
Statement of Assets and Liabilities as of July 31, 1997
<TABLE>
<S> <C> <C> <C>
Assets: Investments, at value (identified cost -- $23,540,294) (Note 1a) $25,257,514
Cash 110,139
Receivables:
Securities sold $1,002,222
Interest 276,799
Beneficial interest sold 182,998
Investment adviser (Note 2) 20,602 1,482,621
----------
Deferred organization expenses (Note 1e) 19,877
Prepaid registration fees and other assets (Note 1e) 5,028
-----------
Total assets 26,875,179
-----------
Liabilities: Payables:
Beneficial interest redeemed 71,897
Dividends to shareholders (Note 1f) 32,841
Distributor (Note 2) 10,146 114,884
----------
Accrued expenses and other liabilities 59,837
-----------
Total liabilities 174,721
-----------
Net Assets: Net assets $26,700,458
===========
Net Assets Class A Shares of beneficial interest, $.10 par value, unlimited number of
Consist of: shares authorized $19,953
Class B Shares of beneficial interest, $.10 par value, unlimited number of
shares authorized 226,104
Class C Shares of beneficial interest, $.10 par value, unlimited number of
shares authorized 21,082
Class D Shares of beneficial interest, $.10 par value, unlimited number of
shares authorized 9,145
Paid-in capital in excess of par 26,325,854
Accumulated realized capital losses on investments -- net (Note 5) (1,618,900)
Unrealized appreciation on investments -- net 1,717,220
-----------
Net assets $26,700,458
===========
Net Asset Value: Class A -- Based on net assets of $1,927,991 and 199,533 shares
of beneficial interest outstanding $9.66
===========
Class B -- Based on net assets of $21,851,185 and 2,261,043 shares
of beneficial interest outstanding $9.66
===========
Class C -- Based on net assets of $2,037,893 and 210,815 shares
of beneficial interest outstanding $9.67
===========
Class D -- Based on net assets of $883,389 and 91,448 shares
of beneficial interest outstanding $9.66
===========
</TABLE>
See Notes to Financial Statements.
56
<PAGE>
Statement of Operations
<TABLE>
<CAPTION>
For the Year Ended
July 31, 1997
<S> <C> <C> <C>
Investment Income Interest and amortization of premium and discount earned $1,453,928
(Note 1d):
Expenses: Investment advisory fees (Note 2) $143,865
Account maintenance and distribution fees -- Class B (Note 2) 108,915
Accounting services (Note 2) 61,207
Professional fees 57,137
Printing and shareholder reports 30,242
Amortization of organization expenses (Note 1e) 16,015
Transfer agent fees -- Class B (Note 2) 14,633
Account maintenance and distribution fees -- Class C (Note 2) 13,074
Registration fees (Note 1e) 11,211
Pricing fees 3,850
Custodian fees 2,357
Transfer agent fees -- Class C (Note 2) 1,552
Transfer agent fees -- Class A (Note 2) 817
Account maintenance fees -- Class D (Note 2) 726
Trustees' fees and expenses 466
Transfer agent fees -- Class D (Note 2) 402
Other 2,353
---------
Total expenses before reimbursement 468,822
Reimbursement of expenses (Note 2) (222,552)
---------
Total expenses after reimbursement 246,270
----------
Investment income -- net 1,207,658
----------
Realized & Realized gain on investments -- net 359,102
Unrealized Gain on Change in unrealized appreciation on investments -- net 878,768
Investments -- Net ----------
(Notes 1b, 1d & 3): Net Increase in Net Assets Resulting from Operations $2,445,528
==========
</TABLE>
See Notes to Financial Statements.
57
<PAGE>
Statements of Changes in Net Assets
<TABLE>
<CAPTION>
For the Year Ended July 31,
Increase (Decrease) in Net Assets: 1997 1996
<S> <C> <C> <C>
Operations: Investment income -- net $1,207,658 $1,110,219
Realized gain (loss) on investments -- net 359,102 (347,221)
Change in unrealized appreciation on investments -- net 878,768 423,676
----------- -----------
Net increase in net assets resulting from operations 2,445,528 1,186,674
----------- -----------
Dividends to Investment income -- net:
Shareholders Class A (75,091) (64,371)
(Note 1f): Class B (998,749) (946,432)
Class C (97,508) (68,646)
Class D (36,310) (30,770)
---------- ----------
Net decrease in net assets resulting from dividends to shareholders (1,207,658) (1,110,219)
----------- -----------
Beneficial Interest Net increase (decrease) in net assets derived from beneficial interest
Transactions transactions (718,693) 4,841,350
(Note 4): ----------- -----------
Net Assets: Total increase in net assets 519,177 4,917,805
Beginning of year 26,181,281 21,263,476
----------- -----------
End of year $26,700,458 $26,181,281
=========== ===========
</TABLE>
See Notes to Financial Statements.
58
<PAGE>
Financial Highlights
<TABLE>
<CAPTION>
Class A
For the
Period
The following per share data and ratios have been derived Oct. 29,
from information provided in the financial statements. 1993+ to
For the Year Ended July 31, July 31,
Increase (Decrease) in Net Asset Value: 1997 1996 1995 1994
<S> <C> <C> <C> <C> <C>
Per Share Net asset value, beginning of period $9.21 $9.15 $9.20 $10.00
Operating -------- -------- -------- --------
Performance: Investment income -- net .48 .47 .52 .37
Realized and unrealized gain (loss)
on investments -- net .45 .06 (.05) (.80)
-------- -------- -------- --------
Total from investment operations .93 .53 .47 (.43)
-------- -------- -------- --------
Less dividends from investment
income -- net (.48) (.47) (.52) (.37)
-------- -------- -------- --------
Net asset value, end of period $9.66 $9.21 $9.15 $9.20
======== ======== ======== ========
Total Investment Based on net asset value per share 10.35% 5.85% 5.39% (4.32%)++
Return:** ======== ======== ======== ========
Ratios to Average Expenses, net of reimbursement .47% .37% .13% .03%*
Net Assets: ======== ======== ======== ========
Expenses 1.32% 1.26% 1.57% 1.76%*
======== ======== ======== ========
Investment income -- net 5.11% 5.04% 5.80% 5.30%*
======== ======== ======== ========
Supplemental Net assets, end of period
Data: (in thousands) $1,928 $1,252 $1,362 $1,589
======== ======== ======== ========
Portfolio turnover 94.90% 81.87% 73.99% 29.40%
======== ======== ======== ========
* Annualized.
** Total investment returns exclude the effects of sales loads.
+ Commencement of Operations.
++ Aggregate total investment return.
</TABLE>
See Notes to Financial Statements.
59
<PAGE>
<TABLE>
<CAPTION>
Class B
For the
Period
The following per share data and ratios have been derived Oct. 29,
from information provided in the financial statements. 1993+ to
For the Year Ended July 31, July 31,
Increase (Decrease) in Net Asset Value: 1997 1996 1995 1994
<S> <C> <C> <C> <C> <C>
Per Share Net asset value, beginning of period $9.21 $9.16 $9.20 $10.00
Operating --------- --------- --------- ---------
Performance: Investment income -- net .43 .42 .47 .33
Realized and unrealized gain (loss)
on investments -- net .45 .05 (.04) (.80)
--------- --------- --------- ---------
Total from investment operations .88 .47 .43 (.47)
--------- --------- --------- ---------
Less dividends from investment
income -- net (.43) (.42) (.47) (.33)
--------- --------- --------- ---------
Net asset value, end of period $9.66 $9.21 $9.16 $9.20
========= ========= ========= =========
Total Investment Based on net asset value per share 9.79% 5.19% 4.96% (4.68%)++
Return:** ========= ========= ========= =========
Ratios to Average Expenses, net of reimbursement .97% .88% .65% .53%*
Net Assets: ========= ========= ========= =========
Expenses 1.82% 1.77% 2.08% 2.27%*
========= ========= ========= =========
Investment income -- net 4.59% 4.52% 5.29% 4.74%*
========= ========= ========= =========
Supplemental Net assets, end of period
Data: (in thousands) $21,851 $22,053 $18,371 $14,484
========= ========= ========= =========
Portfolio turnover 94.90% 81.87% 73.99% 29.40%
========= ========= ========= =========
* Annualized.
** Total investment returns exclude the effects of sales loads.
+ Commencement of Operations.
++ Aggregate total investment return.
</TABLE>
See Notes to Financial Statements.
60
<PAGE>
<TABLE>
<CAPTION>
Class C
For the
Period
The following per share data and ratios have been derived Oct. 21,
from information provided in the financial statements. For the Year Ended 1994+ to
July 31, July 31,
Increase (Decrease) in Net Asset Value: 1997 1996 1995
<S> <C> <C> <C> <C>
Per Share Net asset value, beginning of period $9.22 $9.16 $8.79
Operating --------- --------- ---------
Performance: Investment income -- net .42 .41 .36
Realized and unrealized gain on investments
-- net .45 .06 .37
--------- --------- ---------
Total from investment operations .87 .47 .73
--------- --------- ---------
Less dividends from investment income -- net (.42) (.41) (.36)
--------- --------- ---------
Net asset value, end of period $9.67 $9.22 $9.16
========= ========= =========
Total Investment Based on net asset value per share 9.67% 5.18% 8.51%++
Return:** ========= ========= =========
Ratios to Average Expenses, net of reimbursement 1.07% 1.00% .82%*
Net Assets: ========= ========= =========
Expenses 1.92% 1.88% 2.08%*
========= ========= =========
Investment income -- net 4.47% 4.39% 5.08%*
========= ========= =========
Supplemental Net assets, end of period (in thousands) $2,038 $2,229 $1,013
Data: ========= ========= =========
Portfolio turnover 94.90% 81.87% 73.99%
========= ========= =========
* Annualized.
** Total investment returns exclude the effects of sales loads.
+ Commencement of Operations.
++ Aggregate total investment return.
</TABLE>
See Notes to Financial Statements.
61
<PAGE>
<TABLE>
<CAPTION>
Class D
For the
Period
The following per share data and ratios have been derived Oct. 21,
from information provided in the financial statements. For the Year Ended 1994+ to
July 31, July 31,
Increase (Decrease) in Net Asset Value: 1997 1996 1995
<S> <C> <C> <C> <C>
Per Share Net asset value, beginning of period $9.21 $9.16 $8.79
Operating -------- -------- --------
Performance: Investment income -- net .47 .46 .40
Realized and unrealized gain on investments
-- net .45 .05 .37
-------- -------- --------
Total from investment operations .92 .51 .77
-------- -------- --------
Less dividends from investment income -- net (.47) (.46) (.40)
-------- -------- --------
Net asset value, end of period $9.66 $9.21 $9.16
======== ======== ========
Total Investment Based on net asset value per share 10.24% 5.63% 8.94%++
Return:** ======== ======== ========
Ratios to Average Expenses, net of reimbursement .56% .47% .31%*
Net Assets: ======== ======== ========
Expenses 1.41% 1.36% 1.55%*
======== ======== ========
Investment income -- net 5.00% 4.91% 5.57%*
======== ======== ========
Supplemental Net assets, end of period (in thousands) $883 $647 $517
Data: ======== ======== ========
Portfolio turnover 94.90% 81.87% 73.99%
======== ======== ========
* Annualized.
** Total investment returns exclude the effects of sales loads.
+ Commencement of Operations.
++ Aggregate total investment return.
</TABLE>
See Notes to Financial Statements.
62
<PAGE>
Merrill Lynch Maryland Municipal Bond Fund July 31, 1997
NOTES TO FINANCIAL STATEMENTS
1. Significant Accounting Policies:
Merrill Lynch Maryland Municipal Bond Fund (the "Fund") is part of
Merrill Lynch Multi-State Municipal Series Trust (the "Trust"). The Fund
is registered under the Investment Company Act of 1940 as a non-
diversified, open-end management investment company. The Fund offers
four classes of shares under the Merrill Lynch Select Pricing sm System.
Shares of Class A and Class D are sold with a front-end sales charge.
Shares of Class B and Class C may be subject to a contingent deferred
sales charge. All classes of shares have identical voting, dividend,
liquidation and other rights and the same terms and conditions, except
that Class B, Class C and Class D Shares bear certain expenses related
to the account maintenance of such shares, and Class B and Class C
Shares also bear certain expenses related to the distribution of such
shares. Each class has exclusive voting rights with respect to matters
relating to its account maintenance and distribution expenditures. The
following is a summary of significant accounting policies followed by
the Fund.
(a) Valuation of investments -- Municipal bonds and other portfolio
securities in which the Fund invests are traded primarily in the over-
the-counter municipal bond and money markets and are valued at the last
available bid price in the over-the-counter market or on the basis of
yield equivalents as obtained from one or more dealers that make markets
in the securities. Financial futures contracts and options thereon,
which are traded on exchanges, are valued at their settlement prices as
of the close of such exchanges. Short-term investments with remaining
maturities of sixty days or less are valued at amortized cost, which
approximates market value. Securities and assets for which market
quotations are not readily available are valued at fair value as
determined in good faith by or under the direction of the Board of
Trustees of the Trust, including valuations furnished by a pricing
service retained by the Trust, which may utilize a matrix system for
valuations. The procedures of the pricing service and its valuations are
reviewed by the officers of the Trust under the general supervision of
the Trustees.
(b) Derivative financial instruments -- The Fund may engage in various
portfolio strategies to seek to increase its return by hedging its
portfolio against adverse movements in the debt markets. Losses may
arise due to changes in the value of the contract or if the counterparty
does not perform under the contract.
[bullet] Financial futures contracts -- The Fund may purchase or sell
interest rate futures contracts and options on such futures contracts
for the purpose of hedging the market risk on existing securities or the
intended purchase of securities. Futures contracts are contracts for
delayed delivery of securities at a specific future date and at a
specific price or yield. Upon entering into a contract, the Fund
deposits and maintains as collateral such initial margin as required by
the exchange on which the transaction is effected. Pursuant to the
contract, the Fund agrees to receive from or pay to the broker an amount
of cash equal to the daily fluctuation in value of the contract. Such
receipts or payments are known as variation margin and are recorded by
the Fund as unrealized gains or losses. When the contract is closed, the
Fund records a realized gain or loss equal to the difference between the
value of the contract at the time it was opened and the value at the
time it was closed.
(c) Income taxes -- It is the Fund's policy to comply with the
requirements of the Internal Revenue Code applicable to regulated
investment companies and to distribute substantially all of its taxable
income to its shareholders. Therefore, no Federal income tax provision
is required.
(d) Security transactions and investment income -- Security transactions
are recorded on the dates the transactions are entered into (the trade
dates). Interest income is recognized on the accrual basis. Discounts
and market premiums are amortized into interest income. Realized gains
and losses on security transactions are determined on the identified
cost basis.
(e) Deferred organization expenses and prepaid registration fees --
Deferred organization expenses are charged to expense on a straight-line
basis over a five-year period. Prepaid registration fees are charged to
expense as the related shares are issued.
(f) Dividends and distributions -- Dividends from net investment income
are declared daily and paid monthly. Distributions of capital gains are
recorded on the ex-dividend dates.
63
<PAGE>
2. Investment Advisory Agreement and Transactions with Affiliates:
The Fund has entered into an Investment Advisory Agreement with Fund
Asset Management, L.P. ("FAM"). The general partner of FAM is Princeton
Services, Inc. ("PSI"), an indirect wholly-owned subsidiary of Merrill
Lynch & Co., Inc. ("ML & Co."), which is the limited partner. The Fund
has also entered into a Distribution Agreement and Distribution Plans
with Merrill Lynch Funds Distributor, Inc. ("MLFD" or "Distributor"), a
wholly-owned subsidiary of Merrill Lynch Group, Inc.
FAM is responsible for the management of the Fund's portfolio and
provides the necessary personnel, facilities, equipment and certain
other services necessary to the operations of the Fund. For such
services, the Fund pays a monthly fee based upon the average daily value
of the Fund's net assets at the following annual rates: 0.55% of the
Fund's average daily net assets not exceeding $500 million; 0.525% of
average daily net assets in excess of $500 million but not exceeding $1
billion; and 0.50% of average daily net assets in excess of $1 billion.
For the year ended July 31, 1997, FAM earned fees of $143,865, all of
which was voluntarily waived. FAM also reimbursed the Fund additional
expenses of $78,687.
Pursuant to the distribution plans (the "Distribution Plans") adopted by
the Fund in accordance with Rule 12b-1 under the Investment Company Act
of 1940, the Fund pays the Distributor ongoing account maintenance and
distribution fees. The fees are accrued daily and paid monthly at annual
rates based upon the average daily net assets of the shares as follows:
Account Distribution
Maintenance Fee Fee
Class B 0.25% 0.25%
Class C 0.25% 0.35%
Class D 0.10% --
Pursuant to a sub-agreement with the Distributor, Merrill Lynch, Pierce,
Fenner & Smith Inc. ("MLPF&S"), a subsidiary of ML & Co., also provides
account maintenance and distribution services to the Fund. The ongoing
account maintenance fee compensates the Distributor and MLPF&S for
providing account maintenance services to Class B, Class C and Class D
shareholders. The ongoing distribution fee compensates the Distributor
and MLPF&S for providing shareholder and distribution-related services
to Class B and Class C shareholders.
For the year ended July 31, 1997, MLFD earned underwriting discounts and
MLPF&S earned dealer concessions on sales of the Fund's Class A and
Class D Shares as follows:
MLFD MLPF&S
Class A $32 $375
Class D $689 $7,240
For the year ended July 31, 1997, MLPF&S received contingent deferred
sales charges of $94,623 and $6,684 relating to transactions in Class B
and Class C Shares, respectively.
Merrill Lynch Financial Data Services, Inc. ("MLFDS"), a wholly-owned
subsidiary of ML & Co., is the Fund's transfer agent.
Accounting services are provided to the Fund by FAM at cost.
Certain officers and/or trustees of the Fund are officers and/or
directors of FAM, PSI, MLFDS, MLFD, and/or ML & Co.
3. Investments:
Purchases and sales of investments, excluding short-term securities, for
the year ended July 31, 1997 were $23,592,417 and $24,116,792,
respectively.
Net realized and unrealized gains as of July 31, 1997 were as follows:
Realized Unrealized
Gains Gains
Long-term investments $359,102 $1,717,220
---------- ----------
Total $359,102 $1,717,220
========== ==========
As of July 31, 1997, net unrealized appreciation for Federal income tax
purposes aggregated $1,717,220, all of which was related to appreciated
securities. The aggregate cost of investments at July 31, 1997 for
Federal income tax purposes was $23,540,294.
64
<PAGE>
4. Beneficial Interest Transactions:
Net increase (decrease) in net assets derived from beneficial interest
transactions was $(718,693) and $4,841,350 for the years ended July 31,
1997 and July 31, 1996, respectively.
Transactions in shares of beneficial interest for each class were as
follows:
Class A Shares for the Year Dollar
Ended July 31, 1997 Shares Amount
Shares sold 120,518 $1,126,625
Shares issued to shareholders
in reinvestment of dividends 5,205 48,633
---------- ----------
Total issued 125,723 1,175,258
Shares redeemed (62,133) (579,345)
---------- ----------
Net increase 63,590 $595,913
========== ==========
Class A Shares for the Year Dollar
Ended July 31, 1996 Shares Amount
Shares sold 35,220 $327,383
Shares issued to shareholders
in reinvestment of dividends 4,930 45,725
---------- ----------
Total issued 40,150 373,108
Shares redeemed (53,019) (492,616)
---------- ----------
Net decrease (12,869) $(119,508)
========== ==========
Class B Shares for the Year Dollar
Ended July 31, 1997 Shares Amount
Shares sold 421,213 $3,938,104
Shares issued to shareholders
in reinvestment of dividends 54,885 512,408
---------- ----------
Total issued 476,098 4,450,512
Automatic conversion of shares (4,674) (43,514)
Shares redeemed (604,268) (5,645,241)
---------- ----------
Net decrease (132,844) $(1,238,243)
========== ==========
Class B Shares for the Year Dollar
Ended July 31, 1996 Shares Amount
Shares sold 813,901 $7,573,305
Shares issued to shareholders
in reinvestment of dividends 52,676 488,754
---------- ----------
Total issued 866,577 8,062,059
Automatic conversion of shares (2,990) (27,266)
Shares redeemed (476,011) (4,423,212)
---------- ----------
Net increase 387,576 $3,611,581
========== ==========
Class C Shares for the Year Dollar
Ended July 31, 1997 Shares Amount
Shares sold 118,650 $1,117,582
Shares issued to shareholders
in reinvestment of dividends 7,916 73,884
---------- ----------
Total issued 126,566 1,191,466
Shares redeemed (157,665) (1,466,129)
---------- ----------
Net decrease (31,099) $(274,663)
========== ==========
Class C Shares for the Year Dollar
Ended July 31, 1996 Shares Amount
Shares sold 156,426 $1,445,652
Shares issued to shareholders
in reinvestment of dividends 4,723 43,828
---------- ----------
Total issued 161,149 1,489,480
Shares redeemed (29,798) (271,440)
---------- ----------
Net increase 131,351 $1,218,040
========== ==========
Class D Shares for the Year Dollar
Ended July 31, 1997 Shares Amount
Shares sold 52,917 $493,288
Automatic conversion of shares 4,675 43,514
Shares issued to shareholders
in reinvestment of dividends 2,245 20,953
---------- ----------
Total issued 59,837 557,755
Shares redeemed (38,605) (359,455)
---------- ----------
Net increase 21,232 $198,300
========== ==========
Class D Shares for the Year Dollar
Ended July 31, 1996 Shares Amount
Shares sold 30,212 $282,355
Automatic conversion of shares 2,993 27,266
Shares issued to shareholders
in reinvestment of dividends 1,971 18,290
---------- ----------
Total issued 35,176 327,911
Shares redeemed (21,460) (196,674)
---------- ----------
Net increase 13,716 $131,237
========== ==========
5. Capital Loss Carryforward:
At July 31, 1997, the Fund had a net capital loss
carryforward of approximately $1,534,000, of which $756,000 expires in
2003 and $778,000 expires in 2004. This amount will be available to
offset like amounts of any future taxable gains.
65
<PAGE>
[This Page Intentionally Left Blank]
<PAGE>
[This Page Intentionally Left Blank]
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Investment Objective and Policies.......................................... 2
Description of Municipal Bonds and Temporary Investments................... 5
Description of Municipal Bonds............................................ 5
Description of Temporary Investments...................................... 7
Repurchase Agreements..................................................... 8
Financial Futures Transactions and Options................................ 9
Investment Restrictions.................................................... 13
Management of the Trust.................................................... 15
Trustees and Officers..................................................... 15
Compensation of Trustees.................................................. 17
Management and Advisory Arrangements...................................... 17
Purchase of Shares......................................................... 19
Initial Sales Charge Alternatives--Class A and Class D Shares............. 19
Reduced Initial Sales Charges............................................. 21
Distribution Plans........................................................ 23
Limitations on the Payment of Deferred Sales Charges...................... 23
Redemption of Shares....................................................... 25
Deferred Sales Charges--Class B and Class C Shares........................ 25
Portfolio Transactions..................................................... 25
Determination of Net Asset Value........................................... 27
Shareholder Services....................................................... 27
Investment Account........................................................ 28
Automatic Investment Plans................................................ 28
Automatic Reinvestment of Dividends and Capital Gains Distributions....... 28
Systematic Withdrawal Plans............................................... 29
Exchange Privilege........................................................ 30
Distributions and Taxes.................................................... 32
Tax Treatment of Option and Futures Transactions.......................... 35
Performance Data........................................................... 36
General Information........................................................ 39
Description of Shares..................................................... 39
Computation of Offering Price Per Share................................... 40
Independent Auditors...................................................... 41
Custodian................................................................. 41
Transfer Agent............................................................ 41
Legal Counsel............................................................. 41
Reports to Shareholders................................................... 41
Additional Information.................................................... 41
Appendix I--Economic Conditions in Maryland................................ 42
Appendix II--Ratings of Municipal Bonds.................................... 46
Independent Auditors' Report............................................... 53
Financial Statements....................................................... 54
</TABLE>
Code # 16860-1097
[LOGO] MERRILL LYNCH
Merrill Lynch
Maryland Municipal
Bond Fund
Merrill Lynch Multi-State
Merrrill Lynch Series Trust
[ART]
STATEMENT OF
ADDITIONAL
INFORMATION
October 30, 1997
Distributor:
Merrill Lynch
Funds Distributor, Inc.
<PAGE>
PART C. OTHER INFORMATION
ITEM 24. FINANCIAL STATEMENTS AND EXHIBITS.
(A) FINANCIAL STATEMENTS
Contained in Part A:
Financial Highlights for each of the years in the three-year period
ended July 31, 1997 and for the period October 29, 1993 (commencement
of operations) to July 31, 1994.
Contained in Part B:
Schedule of Investments as of July 31, 1997.
Statement of Assets and Liabilities as of July 31, 1997.
Statement of Operations for the year ended July 31, 1997.
Statements of Changes in Net Assets for each of the years in the
two-year period ended July 31, 1997.
Financial Highlights for each of the years in the three-year period
ended July 31, 1997 and for the period October 29, 1993
(commencement of operations) to July 31, 1994.
(B) EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER
-------
<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 Maryland Municipal Bond Fund
(the "Fund") as a series of Registrant.(d)
(g) --Instrument establishing Class A and Class B shares of beneficial
interest of the Fund.(e)
2 --By-Laws of Registrant.(a)
3 --None.
4 --Portions of the Declaration of Trust, Establishment and Designation
and By-Laws of the Registrant defining the rights of holders of the
Fund as a series of the Registrant.(b)
5(a) --Form of Management Agreement between Registrant and Fund Asset
Management, L.P.(a)
(b) --Supplement to Management Agreement between Registrant and Fund Asset
Management, L.P.(f)
6(a) --Form of Revised Class A Shares Distribution Agreement between
Registrant and Merrill Lynch Funds Distributor, Inc. (including Form
of Selected Dealers Agreement).(f)
(b) --Form of Class B Shares Distribution Agreement between Registrant and
Merrill Lynch Funds Distributor, Inc.(a)
(c) --Form of Class C Shares Distribution Agreement between Registrant and
Merrill Lynch Funds Distributor, Inc. (including Form of Selected
Dealers Agreement).(f)
(d) --Form of Class D Shares Distribution Agreement between Registrant and
Merrill Lynch Funds Distributor, Inc. (including Form of Selected
Dealers Agreement).(f)
(e) --Letter Agreement between the Fund and Merrill Lynch Funds
Distributor, Inc., dated September 15, 1993, in connection with the
Merrill Lynch Mutual Fund Advisor program.(e)
7 --None.
8 --Form of Custody Agreement between Registrant and State Street Bank &
Trust Company.(g)
9 --Amended Transfer Agency, Dividend Disbursing Agency and Shareholder
Servicing Agency Agreement between Registrant and Merrill Lynch
Financial Data Services, Inc. (formerly Financial Data Services,
Inc.)(c)
</TABLE>
C-1
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER
-------
<C> <S>
10 --None.
11 --Consent of Deloitte & Touche LLP, independent auditors for the
Registrant.
12 --None.
13 --Certificate of Fund Asset Management, L.P.(d)
14 --None.
15(a) --Class B Distribution Plan and Class B Distribution Plan Sub-
Agreement of the Registrant.(c)
(b) --Form of Class C Distribution Plan and Class C Distribution Plan Sub-
Agreement of the Registrant.(f)
(c) --Form of Class D Distribution Plan and Class D Distribution Plan Sub-
Agreement of the Registrant.(f)
16(a) --Schedule for computation of each performance quotation provided in
the Registration Statement in response to Item 22 relating to Class A
shares.(e)
(b) --Schedule for computation of each performance quotation provided in
the Registration Statement in response to Item 22 relating to Class B
shares.(e)
(c) --Schedule for computation of each performance quotation provided in
the Registration Statement in response to Item 22 relating to Class C
shares.(a)
(d) --Schedule for computation of each performance quotation provided in
the Registration Statement in response to Item 22 relating to Class D
shares.(a)
17(a) --Financial Data Schedule for Class A shares.
(b) --Financial Data Schedule for Class B shares.
(c) --Financial Data Schedule for Class C shares.
(d) --Financial Data Schedule for Class D shares.
18 --Merrill Lynch Select PricingSM System Plan pursuant to Rule 18f-
3.(h)
</TABLE>
- --------
(a) Filed on October 24, 1995 as an Exhibit to Post-Effective Amendment No. 3
to Registrant's Registration Statement on Form N-1A under the Securities
Act of 1933, as amended relating to shares of the Fund (File No. 33-49873)
(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.
3 to the Registration Statement; to the Certificates of Establishment and
Designation establishing the Fund as a series of the Registrant and
establishing Class A and Class B shares of beneficial interest of the
Fund, filed as Exhibits 1(f) and 1(g), respectively, with Post-Effective
Amendment No. 3 to the Registration Statement; and to Articles I, V and VI
of the Registrant's By-Laws, filed as Exhibit 2 with Post-Effective
Amendment No. 3 to the Registration Statement.
(c) Filed on July 30, 1993 as an Exhibit to the Registration Statement.
(d) Filed on September 3, 1993 as an Exhibit to Pre-Effective Amendment No. 1
to the Registration Statement.
(e) Filed on February 24, 1994 as an Exhibit to Post-Effective Amendment No. 1
to the Registration Statement.
(f) Filed on October 14, 1994 as an Exhibit to Post-Effective Amendment No. 2
to the Registration Statement.
(g) Incorporated by reference to Exhibit 8 to Post-Effective Amendment No. 3
to Registrant's Registration Statement on Form N-1A under the Securities
Act of 1933, as amended, filed on October 14, 1994, relating to shares of
the Merrill Lynch Minnesota Municipal Bond Fund series of the Registrant
(File No. 33-44734).
(h) Incorporated by reference to Exhibit 18 to Post-Effective Amendment No. 13
to Registrant's Registration Statement on Form N-1A under the Securities
Act of 1933, as amended, 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).
ITEM 25. PERSONS CONTROLLED BY OR UNDER COMMON CONTROL WITH REGISTRANT.
The Registrant is not controlled by or under common control with any person.
C-2
<PAGE>
ITEM 26. NUMBER OF HOLDERS OF SECURITIES.
<TABLE>
<CAPTION>
NUMBER OF
HOLDERS AT
TITLE OF CLASS SEPTEMBER 30, 1997
-------------- ------------------
<S> <C>
Class A shares of beneficial interest, par value $0.10
per share............................................ 120
Class B shares of beneficial interest, par value $0.10
per share............................................ 793
Class C shares of beneficial interest, par value $0.10
per share............................................ 104
Class D shares of beneficial interest, par value $0.10
per share............................................ 39
</TABLE>
Note: The number of holders shown above includes holders of record plus
beneficial owners, whose shares are held of record by Merrill Lynch, Pierce,
Fenner & Smith Incorporated.
ITEM 27. INDEMNIFICATION.
Section 5.3 of the Registrant's Declaration of Trust provides as follows:
"The Trust shall indemnify each of its Trustees, officers, employees and
agents (including persons who serve at its request as directors, officers or
trustees of another organization in which it has any interest as a
shareholder, creditor or otherwise) against all liabilities and expenses
(including amounts paid in satisfaction of judgments, in compromise, as fines
and penalties and as counsel fees) reasonably incurred by him in connection
with the defense or disposition of any action, suit or other proceeding,
whether civil or criminal, in which he may be involved or with which he may be
threatened, while in office or thereafter, by reason of his being or having
been such a trustee, officer, employee or agent, except with respect to any
matter as to which he shall have been adjudicated to have acted in bad faith,
willful misfeasance, gross negligence or reckless disregard of his duties;
provided, however, that as to any matter disposed of by a compromise payment
by such person, pursuant to a consent decree or otherwise, no indemnification
either for said payment or for any other expenses shall be provided unless the
Trust shall have received a written opinion from independent legal counsel
approved by the Trustees to the effect that if either the matter of willful
misfeasance, gross negligence or reckless disregard of duty, or the matter of
good faith and reasonable belief as to the best interests of the Trust, had
been adjudicated, it would have been adjudicated in favor of such person. The
rights accruing to any Person under these provisions shall not exclude any
other right to which he may be lawfully entitled; provided that no person may
satisfy any right in indemnity or reimbursement granted herein or in Section
5.1 or to which he may be otherwise entitled except out of the property of the
Trust, and no Shareholder shall be personally liable to any Person with
respect to any claim for indemnity or reimbursement or otherwise. The Trustees
may make advance payments in connection with indemnification under this
Section 5.3, provided that the indemnified person shall have given a written
undertaking to reimburse the Trust in the event it is subsequently determined
that he is not entitled to such indemnification."
Insofar as the conditional advancing of indemnification monies for actions
based upon the Investment Company Act of 1940, as amended, may be concerned,
such payments will be made only on the following conditions: (i) the advances
must be limited to amounts used, or to be used, for the preparation or
presentation of a defense to the action, including costs connected with the
preparation of a settlement; (ii) advances may be made only upon receipt of a
written promise by, or on behalf of, the recipient to repay that amount of the
advance which exceeds the amount which it is ultimately determined he is
entitled to receive from the Registrant by reason of indemnification; and
(iii) (a) such promise must be secured by a surety bond, other suitable
insurance or an equivalent form of security which assures that any repayments
may be obtained by the Registrant without delay or litigation, which bond,
insurance or other form of security must be provided by the recipient of the
advance, or (b) a majority of a quorum of the Registrant's disinterested, non-
party Trustees, or an independent legal counsel in a written opinion, shall
determine, based upon a review of readily available facts that the recipient
of the advance ultimately will be found entitled to indemnification.
In Section 9 of the Distribution Agreements relating to the securities being
offered hereby, the Registrant agrees to indemnify the Distributor and each
person, if any, who controls the Distributor within the meaning of
C-3
<PAGE>
the Securities Act of 1933, as amended (the "1933 Act"), against certain types
of civil liabilities arising in connection with the Registration Statement or
Prospectus and Statement of Additional Information.
Insofar as indemnification for liabilities arising under the 1933 Act may be
permitted to Trustees, officers and controlling persons of the Registrant and
the principal underwriter pursuant to the foregoing provisions or otherwise,
the Registrant has been advised that in the opinion of the Securities and
Exchange Commission such indemnification is against public policy as expressed
in the 1933 Act and is, therefore, unenforceable. In the event that a claim
for indemnification against such liabilities (other than the payment by the
Registrant of expenses incurred or paid by a Trustee, officer, or controlling
person of the Registrant and the principal underwriter in connection with the
successful defense of any action, suit or proceeding) is asserted by such
Trustee, officer or controlling person or the principal underwriter in
connection with the shares being registered, the Registrant will, unless in
the opinion of its counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question whether
such indemnification by it is against public policy as expressed in the 1933
Act and will be governed by the final adjudication of such issue.
ITEM 28. BUSINESS AND OTHER CONNECTIONS OF INVESTMENT ADVISER.
Fund Asset Management, L.P. (the "Manager" or "FAM") acts as the investment
adviser for the following open-end registered investment companies: CBA Money
Fund, CMA Government Securities Fund, CMA Money Fund, CMA Multi-State
Municipal Series Trust, CMA Tax-Exempt Fund, CMA Treasury Fund, The Corporate
Fund Accumulation Program, Inc., Financial Institutions Series Trust, Merrill
Lynch Basic Value Fund, Inc., Merrill Lynch California Municipal Series Trust,
Merrill Lynch Corporate Bond Fund, Inc., Merrill Lynch Emerging Tigers Fund,
Inc., Merrill Lynch Federal Securities Trust, Merrill Lynch Funds for
Institutions Series, Merrill Lynch Multi-State Limited Maturity Municipal
Series Trust, Merrill Lynch Multi-State Municipal Series Trust, Merrill Lynch
Municipal Bond Fund, Inc., Merrill Lynch Phoenix Fund, Inc., Merrill Lynch
Special Value Fund, Inc., Merrill Lynch World Income Fund, Inc. and The
Municipal Fund Accumulation Program, Inc.; and the following closed-end
registered investment companies: Apex Municipal Fund, Inc., Corporate High
Yield Fund, Inc., Corporate High Yield Fund II, Inc., Debt Strategies Fund,
Inc., Income Opportunities Fund 1999, Inc., Income Opportunities Fund 2000,
Inc., Merrill Lynch Municipal Strategy Fund, Inc., MuniAssets Fund, Inc.,
MuniEnhanced Fund, Inc., MuniHoldings California Insured Fund, Inc.,
MuniHoldings Florida Insured Fund, MuniHoldings Fund, Inc., MuniHoldings New
York Insured Fund, Inc., MuniInsured Fund, Inc., MuniVest Fund, Inc., MuniVest
Fund II, Inc., MuniVest Florida Fund, MuniVest Michigan Insured Fund, Inc.,
MuniVest New Jersey Fund, Inc., MuniVest Pennsylvania Insured Fund, MuniYield
Arizona Fund, Inc., MuniYield California Fund, Inc., MuniYield California
Insured Fund, Inc., MuniYield California Insured Fund II, Inc., MuniYield
Florida Fund, MuniYield Florida Insured Fund, MuniYield Fund, Inc., MuniYield
Insured Fund, Inc., MuniYield Michigan Fund, Inc., MuniYield Michigan Insured
Fund, Inc., MuniYield New Jersey Fund, Inc., MuniYield New Jersey Insured
Fund, Inc., MuniYield New York Insured Fund, Inc., MuniYield New York Insured
Fund II, Inc., MuniYield Pennsylvania Fund, MuniYield Quality Fund, Inc.,
MuniYield Quality Fund II, Inc., Senior High Income Portfolio, Inc., Taurus
MuniCalifornia Holdings, Inc., Taurus MuniNewYork Holdings, Inc. and Worldwide
DollarVest Fund, Inc.
Merrill Lynch Asset Management, L.P. ("MLAM"), an affiliate of the Manager,
acts as the investment adviser for the following open-end registered
investment companies: Merrill Lynch Adjustable Rate Securities Fund, Inc.,
Merrill Lynch Americas Income Fund, Inc., Merrill Lynch Asset Builder Program,
Inc., Merrill Lynch Asset Growth Fund, Inc., Merrill Lynch Asset Income Fund,
Inc., Merrill Lynch Capital Fund, Inc., Merrill Lynch Convertible Fund, Inc.,
Merrill Lynch Developing Capital Markets Fund, Inc., Merrill Lynch Dragon
Fund, Inc., Merrill Lynch EuroFund, Merrill Lynch Fundamental Growth Fund,
Inc., Merrill Lynch Fund For Tomorrow, Inc., Merrill Lynch Global Allocation
Fund, Inc., Merrill Lynch Global Bond Fund for Investment and Retirement,
Merrill Lynch Global Convertible Fund, Inc., Merrill Lynch Global Holdings,
Inc., Merrill Lynch Global Resources Trust, Merrill Lynch Global SmallCap
Fund, Inc., Merrill Lynch Global Utility Fund, Inc., Merrill Lynch Global
Value Fund, Inc., Merrill Lynch Growth Fund, Merrill Lynch Healthcare Fund,
Inc., Merrill Lynch Intermediate Government Bond Fund, Merrill Lynch
International Equity Fund, Merrill
C-4
<PAGE>
Lynch Latin America Fund, Inc., Merrill Lynch Middle East/Africa Fund, Inc.,
Merrill Lynch Municipal Series Trust, Merrill Lynch Pacific Fund, Inc.,
Merrill Lynch Ready Assets Trust, Merrill Lynch Retirement Series Trust,
Merrill Lynch Series Fund, Inc., Merrill Lynch Short-Term Global Income Fund,
Inc., Merrill Lynch Strategic Dividend Fund, Merrill Lynch Technology Fund,
Inc., Merrill Lynch U.S.A. Government Reserves, Merrill Lynch U.S. Treasury
Money Fund, Merrill Lynch Utility Income Fund, Inc., Merrill Lynch Variable
Series Funds, Inc. and Hotchkis and Wiley Funds (advised by Hotchkis and
Wiley, a division of MLAM); and the following closed-end 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 Advisory Trust.
The address of each of these investment companies is P.O. Box 9011,
Princeton, New Jersey 08543-9011, except that the address of Merrill Lynch
Funds for Institutions Series and Merrill Lynch Intermediate Government Bond
Fund is One Financial Center, 23rd Floor, Boston, Massachusetts 02111-2646.
The address of the Manager, MLAM, Princeton Services, Inc. ("Princeton
Services") and Princeton Administrators, L.P. is also P.O. Box 9011,
Princeton, New Jersey 08543-9011. The address of Merrill Lynch Funds
Distributor, Inc. ("MLFD") is P.O. Box 9081, Princeton, New Jersey 08543-9081.
The address of Merrill Lynch, Pierce, Fenner & Smith Incorporated ("Merrill
Lynch") and Merrill Lynch & Co., Inc. ("ML&Co.") is World Financial Center,
North Tower, 250 Vesey Street, New York, New York 10281. The address of the
Fund's transfer agent, Merrill Lynch Financial Data Services, Inc. ("MLFDS"),
is 4800 Deer Lake Drive East, Jacksonville, Florida 32246-6484.
Set forth below is a list of each executive officer and partner of the
Manager indicating each business, profession, vocation or employment of a
substantial nature in which each such person or entity has been engaged since
August 1, 1995 for his, her or its own account or in the capacity of director,
officer, partner or trustee. In addition, Mr. Zeikel is President, Mr. Glenn
is Executive Vice President and Mr. Richard is Treasurer of substantially all
of the investment companies described in the first two paragraphs of this Item
28 and Messrs. Giordano, Harvey, Kirstein, and Monagle are directors, trustees
or officers of one or more of such companies.
Officers and partners of FAM are set forth as follows:
<TABLE>
<CAPTION>
POSITION(S) WITH OTHER SUBSTANTIAL BUSINESS,
NAME THE MANAGER PROFESSION, VOCATION OR EMPLOYMENT
---- ---------------- ----------------------------------
<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.......... President President of MLAM; President and
Director of Princeton Services;
Executive Vice President of ML&Co.
Terry K. Glenn......... Executive Vice Executive Vice President of MLAM;
President Executive Vice President and
Director of Princeton Services;
President and Director of MLFD;
Director of MLFDS; President of
Princeton Administrators, L.P.
Linda L. Federici...... Senior Vice President Senior Vice President of MLAM
Vincent R. Giordano.... Senior Vice President Senior Vice President of MLAM;
Senior Vice President of Princeton
Services
Elizabeth Griffin...... Senior Vice President Senior Vice President of MLAM
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 of MLAM;
Senior Vice President of Princeton
Services
</TABLE>
C-5
<PAGE>
<TABLE>
<CAPTION>
POSITION(S) WITH OTHER SUBSTANTIAL BUSINESS,
NAME THE MANAGER PROFESSION, VOCATION OR EMPLOYMENT
---- ---------------- ----------------------------------
<C> <C> <S>
Philip L. Kirstein...... Senior Vice Senior Vice President, General
President, General Counsel and Secretary of MLAM;
Counsel and Senior Vice President, General
Secretary Counsel, Secretary and Director of
Princeton Services
Ronald M. Kloss......... Senior Vice President Senior Vice President and
and Controller Controller of MLAM; Senior Vice
President and Controller of
Princeton Services
Debra Landsman-Yaros.... Senior Vice President Senior Vice President of MLAM
Stephen M.M. Miller..... Senior Vice President Executive Vice President of
Princeton Administrators, L.P.;
Senior Vice President of Princeton
Services
Joseph T. Monagle, Jr. . Senior Vice President Senior Vice President of MLAM;
Senior Vice President of Princeton
Services
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
Richard L. Reller....... Senior Vice President Senior Vice President of MLAM;
Senior Vice President of Princeton
Services; Director of MLFD
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
MLFD
Gregory Upah............ Senior Vice President Senior Vice President of MLAM
Ronald L. Welburn....... Senior Vice President Senior Vice President of MLAM;
Senior Vice President of Princeton
Services
</TABLE>
ITEM 29. PRINCIPAL UNDERWRITERS.
(a) MLFD acts as the principal underwriter for the Registrant and for each
of the open-end investment companies referred to in the first two paragraphs
of Item 28 except CBA Money Fund, CMA Government Securities Fund, CMA Money
Fund, CMA Multi-State Municipal Series Trust, CMA Tax-Exempt Fund, CMA
Treasury Fund, The Corporate Fund Accumulation Program, Inc., and The
Municipal Fund Accumulation Program, Inc. and MLFD also acts as the principal
underwriter for the following closed-end investment companies: Merrill Lynch
High Income Municipal Bond Fund, Inc., Merrill Lynch Municipal Strategy Fund,
Inc. and Merrill Lynch Senior Floating Rate Fund, Inc.
(b) Set forth below is information concerning each director and officer of
MLFD. The principal business address of each such person is P.O. Box 9011,
Princeton, New Jersey 08543-9011, except that the address of Messrs. Aldrich,
Brady, Breen, Crook, Fatseas and Wasel is One Financial Center, 23rd Floor,
Boston, Massachusetts 02111-2665.
C-6
<PAGE>
<TABLE>
<CAPTION>
POSITION(S) AND OFFICES POSITION(S) AND OFFICES
NAME WITH MLFD WITH REGISTRANT
---- ----------------------- -----------------------
<S> <C> <C>
Terry K. Glenn............ President and Director Executive Vice President
Richard L. Reller......... Director None
Thomas J. Verage.......... Director None
William E. Aldrich........ Senior Vice President None
Robert W. Crook........... Senior Vice President None
Michael J. Brady.......... Vice President None
William M. Breen.......... Vice President None
Michael G. Clark.......... Vice President None
James T. Fatseas.......... Vice President None
Debra W. Landsman-Yaros... Vice President None
Michelle T. Lau........... Vice President None
Gerald M. Richard......... Vice President and Treasurer Treasurer
Salvatore Venezia......... Vice President None
William Wasel............. Vice President None
Robert Harris............. Secretary None
</TABLE>
(c) Not applicable.
ITEM 30. LOCATION OF ACCOUNTS AND RECORDS.
All accounts, books and other documents required to be maintained by Section
31(a) of the Investment Company Act of 1940, as amended, and the Rules
thereunder are maintained at the offices of the Registrant, 800 Scudders Mill
Road, Plainsboro, New Jersey 08536, and Merrill Lynch Financial Data Services,
Inc., 4800 Deer Lake Drive East, Jacksonville, Florida 32246-6484.
ITEM 31. MANAGEMENT SERVICES.
Other than as set forth under the caption "Management of the Trust--
Management and Advisory Arrangements" in the Prospectus constituting Part A of
the Registration Statement and under "Management of the Trust--Management and
Advisory Arrangements" in the Statement of Additional Information constituting
Part B of the Registration Statement, Registrant is not a party to any
management-related service contract.
ITEM 32. UNDERTAKINGS.
(a) Not applicable.
(b) Not applicable.
(c) Registrant undertakes to furnish each person to whom a Prospectus is
delivered with a copy of the Registrant's latest annual report to
shareholders, upon request and without charge.
C-7
<PAGE>
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933 AND THE
INVESTMENT COMPANY ACT OF 1940, THE REGISTRANT CERTIFIES THAT IT MEETS ALL OF
THE REQUIREMENTS FOR EFFECTIVENESS OF THIS POST-EFFECTIVE AMENDMENT TO ITS
REGISTRATION STATEMENT PURSUANT TO RULE 485(B) UNDER THE SECURITIES ACT OF
1933 AND HAS DULY CAUSED THIS POST-EFFECTIVE AMENDMENT TO ITS REGISTRATION
STATEMENT TO BE SIGNED ON ITS BEHALF BY THE UNDERSIGNED, THEREUNTO DULY
AUTHORIZED, IN THE TOWNSHIP OF PLAINSBORO, AND THE STATE OF NEW JERSEY, ON THE
29TH DAY OF OCTOBER, 1997.
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 ITS REGISTRATION STATEMENT HAS BEEN SIGNED BELOW BY THE
FOLLOWING PERSONS IN THE CAPACITIES AND ON THE DATE(S) INDICATED.
SIGNATURE TITLE DATE
Arthur Zeikel* President and
- ------------------------------------- Trustee
(ARTHUR ZEIKEL) (Principal Executive Officer)
Treasurer (Principal Financial
Gerald M. Richard* and Accounting
- ------------------------------------- Officer)
(GERALD M. RICHARD)
James H. Bodurtha* Trustee
- -------------------------------------
(JAMES H. BODURTHA)
Herbert I. London* Trustee
- -------------------------------------
(HERBERT I. LONDON)
Robert R. Martin* Trustee
- -------------------------------------
(ROBERT R. MARTIN)
Joseph L. May* Trustee
- -------------------------------------
(JOSEPH L. MAY)
Andre F. Perold* Trustee
- -------------------------------------
(ANDRE F. PEROLD)
/s/ Gerald M. Richard October 29,
*By: ________________________________ 1997
(GERALD M. RICHARD, ATTORNEY-IN-
FACT)
C-8
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<C> <S>
11 --Consent of Deloitte & Touche LLP, independent auditors for the Registrant.
17(a) --Financial Data Schedule for Class A shares.
(b) --Financial Data Schedule for Class B shares.
(c) --Financial Data Schedule for Class C shares.
(d) --Financial Data Schedule for Class D shares.
</TABLE>
<PAGE>
APPENDIX FOR GRAPHIC AND IMAGE MATERIAL
Pursuant to Rule 304 of Regulation S-T, the following table presents
fair and accurate narrative descriptions of graphic and image material omitted
from this EDGAR Submission file due to ASCII-incompatibility and cross-
references this material to the location of each occurrence in the text.
DESCRIPTION OF OMITTED LOCATION OF GRAPHIC
GRAPHIC OR IMAGE OR IMAGE IN TEXT
- ---------------------- -------------------
Compass plate, circular Back cover of Prospectus and
graph paper and Merrill Lynch back cover of Statement of
logo including stylized market Additional Information
bull
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 6
<SERIES>
<NUMBER> 001
<NAME> M/L MARYLAND MUNICIPAL BOND FUND FOR CLASS A SHARES
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> JUL-31-1997
<PERIOD-START> AUG-01-1996
<PERIOD-END> JUL-31-1997
<INVESTMENTS-AT-COST> 23540294
<INVESTMENTS-AT-VALUE> 25257514
<RECEIVABLES> 1482621
<ASSETS-OTHER> 135044
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 26875179
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 174721
<TOTAL-LIABILITIES> 174721
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 26602138
<SHARES-COMMON-STOCK> 199533
<SHARES-COMMON-PRIOR> 135943
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> (1618900)
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 1717220
<NET-ASSETS> 1927991
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 1453928
<OTHER-INCOME> 0
<EXPENSES-NET> (246270)
<NET-INVESTMENT-INCOME> 1207658
<REALIZED-GAINS-CURRENT> 359102
<APPREC-INCREASE-CURRENT> 878768
<NET-CHANGE-FROM-OPS> 2445528
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> (75091)
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 120518
<NUMBER-OF-SHARES-REDEEMED> (62133)
<SHARES-REINVESTED> 5205
<NET-CHANGE-IN-ASSETS> 519177
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> (1978003)
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 143865
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 468822
<AVERAGE-NET-ASSETS> 1469110
<PER-SHARE-NAV-BEGIN> 9.21
<PER-SHARE-NII> .48
<PER-SHARE-GAIN-APPREC> .45
<PER-SHARE-DIVIDEND> (.48)
<PER-SHARE-DISTRIBUTIONS> 0
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 9.66
<EXPENSE-RATIO> 1.32
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 6
<SERIES>
<NUMBER> 002
<NAME> M/L MARYLAND MUNICIPAL BOND FUND FOR CLASS B SHARES
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> JUL-31-1997
<PERIOD-START> AUG-01-1996
<PERIOD-END> JUL-31-1997
<INVESTMENTS-AT-COST> 23540294
<INVESTMENTS-AT-VALUE> 25257514
<RECEIVABLES> 1482621
<ASSETS-OTHER> 135044
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 26875179
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 174721
<TOTAL-LIABILITIES> 174721
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 26602138
<SHARES-COMMON-STOCK> 2261043
<SHARES-COMMON-PRIOR> 2393887
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> (1618900)
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 1717220
<NET-ASSETS> 21851185
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 1453928
<OTHER-INCOME> 0
<EXPENSES-NET> (246270)
<NET-INVESTMENT-INCOME> 1207658
<REALIZED-GAINS-CURRENT> 359102
<APPREC-INCREASE-CURRENT> 878768
<NET-CHANGE-FROM-OPS> 2445528
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> (998749)
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 421213
<NUMBER-OF-SHARES-REDEEMED> (608942)
<SHARES-REINVESTED> 54885
<NET-CHANGE-IN-ASSETS> 519177
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> (1978003)
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 143865
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 468822
<AVERAGE-NET-ASSETS> 21782859
<PER-SHARE-NAV-BEGIN> 9.21
<PER-SHARE-NII> .43
<PER-SHARE-GAIN-APPREC> .45
<PER-SHARE-DIVIDEND> (.43)
<PER-SHARE-DISTRIBUTIONS> 0
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 9.66
<EXPENSE-RATIO> 1.82
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 6
<SERIES>
<NUMBER> 003
<NAME> M/L MARYLAND MUNICIPAL BOND FUND FOR CLASS C SHARES
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> JUL-31-1997
<PERIOD-START> AUG-01-1996
<PERIOD-END> JUL-31-1997
<INVESTMENTS-AT-COST> 23540294
<INVESTMENTS-AT-VALUE> 25257514
<RECEIVABLES> 1482621
<ASSETS-OTHER> 135044
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 26875179
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 174721
<TOTAL-LIABILITIES> 174721
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 26602138
<SHARES-COMMON-STOCK> 210815
<SHARES-COMMON-PRIOR> 241914
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> (1618900)
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 1717220
<NET-ASSETS> 2037893
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 1453928
<OTHER-INCOME> 0
<EXPENSES-NET> (246270)
<NET-INVESTMENT-INCOME> 1207658
<REALIZED-GAINS-CURRENT> 359102
<APPREC-INCREASE-CURRENT> 878768
<NET-CHANGE-FROM-OPS> 2445528
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> (97508)
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 118650
<NUMBER-OF-SHARES-REDEEMED> (157665)
<SHARES-REINVESTED> 7916
<NET-CHANGE-IN-ASSETS> 519177
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> (1978003)
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 143865
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 468822
<AVERAGE-NET-ASSETS> 2179053
<PER-SHARE-NAV-BEGIN> 9.22
<PER-SHARE-NII> .42
<PER-SHARE-GAIN-APPREC> .45
<PER-SHARE-DIVIDEND> (.42)
<PER-SHARE-DISTRIBUTIONS> 0
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 9.67
<EXPENSE-RATIO> 1.92
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 6
<SERIES>
<NUMBER> 004
<NAME> M/L MARYLAND MUNICIPAL BOND FUND FOR CLASS D SHARES
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> JUL-31-1997
<PERIOD-START> AUG-01-1996
<PERIOD-END> JUL-31-1997
<INVESTMENTS-AT-COST> 23540294
<INVESTMENTS-AT-VALUE> 25257514
<RECEIVABLES> 1482621
<ASSETS-OTHER> 135044
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 26875179
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 174721
<TOTAL-LIABILITIES> 174721
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 26602138
<SHARES-COMMON-STOCK> 91448
<SHARES-COMMON-PRIOR> 70216
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> (1618900)
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 1717220
<NET-ASSETS> 883389
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 1453928
<OTHER-INCOME> 0
<EXPENSES-NET> (246270)
<NET-INVESTMENT-INCOME> 1207658
<REALIZED-GAINS-CURRENT> 359102
<APPREC-INCREASE-CURRENT> 878768
<NET-CHANGE-FROM-OPS> 2445528
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> (36310)
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 57592
<NUMBER-OF-SHARES-REDEEMED> (38605)
<SHARES-REINVESTED> 2245
<NET-CHANGE-IN-ASSETS> 519177
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> (1978003)
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 143865
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 468822
<AVERAGE-NET-ASSETS> 726234
<PER-SHARE-NAV-BEGIN> 9.21
<PER-SHARE-NII> .47
<PER-SHARE-GAIN-APPREC> .45
<PER-SHARE-DIVIDEND> (.47)
<PER-SHARE-DISTRIBUTIONS> 0
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 9.66
<EXPENSE-RATIO> 1.41
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
<PAGE>
EXHIBIT 99.11
INDEPENDENT AUDITORS' CONSENT
Merrill Lynch Maryland Municipal Bond Fund of
Merrill Lynch Multi-State Municipal Series Trust:
We consent to the use in Post Effective Amendment No. 5 to Registration
Statement No. 33-49873 of our report dated September 6, 1997 appearing in the
Statement of Additional Information, which is a part of such Registration
Statement, and to the reference to us under the caption "Financial Highlights"
appearing in the Prospectus, which also is a part of such Registration
Statement.
/s/ DELOITTE & TOUCHE LLP
Deloitte & Touche LLP
Princeton, New Jersey
October 28, 1997
