<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON FEBRUARY 16, 1994
SECURITIES ACT FILE NO. 33-
INVESTMENT COMPANY ACT FILE NO. 811-4375
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
----------------
FORM N-1A
REGISTRATION STATEMENT UNDER
THE SECURITIES ACT OF 1933 [X]
PRE-EFFECTIVE AMENDMENT NO. [_]
POST-EFFECTIVE AMENDMENT NO. [_]
AND/OR
REGISTRATION STATEMENT UNDER
THE INVESTMENT COMPANY ACT OF 1940 [X]
AMENDMENT NO. 73
(Check appropriate box or boxes) [X]
----------------
MERRILL LYNCH NEW MEXICO 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)
OFFICES)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE (609) 282-2800
ARTHUR ZEIKEL
MERRILL LYNCH MULTI-STATE MUNICIPAL SERIES TRUST
800 SCUDDERS MILL ROAD, PLAINSBORO, NEW JERSEY
MAILING ADDRESS: BOX 9011, PRINCETON, NEW JERSEY 08543-9011
----------------
COPIES TO:
COUNSEL FOR THE TRUST: PHILIP L. KIRSTEIN, ESQ.
BROWN & WOOD FUND ASSET MANAGEMENT
ONE WORLD TRADE CENTER BOX 9011
NEW YORK, NEW YORK 10048-0557 PRINCETON, NEW JERSEY 08543-9011
ATTENTION: THOMAS R. SMITH, JR., ESQ.
BRIAN M. KAPLOWITZ, ESQ.
----------------
APPROXIMATE DATE OF PROPOSED PUBLIC OFFERING:
AS SOON AS PRACTICABLE AFTER THE EFFECTIVE DATE OF THIS REGISTRATION STATEMENT.
----------------
AN INDEFINITE NUMBER OF CLASS A AND CLASS B SHARES OF BENEFICIAL INTEREST OF
THE REGISTRANT IS BEING REGISTERED BY THIS REGISTRATION STATEMENT UNDER THE
SECURITIES ACT OF 1933 PURSUANT TO RULE 24F-2 UNDER THE INVESTMENT COMPANY ACT
OF 1940.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
MERRILL LYNCH NEW MEXICO MUNICIPAL BOND FUND OF
MERRILL LYNCH MULTI-STATE MUNICIPAL SERIES TRUST
REGISTRATION STATEMENT ON FORM N-1A
CROSS REFERENCE SHEET
<TABLE>
<CAPTION>
N-LA ITEM NO. LOCATION
------------- --------
<C> <S> <C>
PART A
Item 1. Cover Page........................ Cover Page
Item 2. Synopsis ......................... Fee Table
Item 3. Condensed Financial Information... Not Applicable
Item 4. General Description of Registrant. Investment Objective and
Policies; Additional
Information
Item 5. Management of the Fund............ Fee Table; Management of
the Trust; Inside Back
Cover Page
Item 5A. Management's Discussion of Fund
Performance....................... Not Applicable
Item 6. Capital Stock and Other
Securities........................ Cover Page; Additional
Information
Item 7. Purchase of Securities Being
Offered .......................... Cover Page; Fee Table;
Alternative Sales
Arrangements; Purchase of
Shares; Shareholder
Services; Additional
Information; Inside Back
Cover Page
Item 8. Redemption of Repurchase.......... Fee Table; Alternative Sales
Arrangements; Purchase of
Shares; Redemption of Shares
Item 9. Pending Legal Proceedings......... Not Applicable
PART B
Item 10. Cover Page........................ Cover Page
Item 11. Table of Contents................. Back Cover Page
Item 12. General Information and History... Not Applicable
Item 13. Investment Objective and Policies. Investment Objective and
Policies; Investment
Restrictions
Item 14. Management of the Fund............ Management of the Trust
Item 15. Control Persons and Principal
Holders of Securities............. Management of the Trust;
Additional Information
Item 16. Investment Advisory and Other
Services.......................... Management of the Trust;
Purchase of Shares; General
Information
Item 17. Brokerage Allocation and Other
Practices......................... Portfolio Transactions
Item 18. Capital Stock and Other
Securities........................ General Information--
Description of Series and
Shares
Item 19. Purchase, Redemption and Pricing
of Securities Being Offered....... Purchase of Shares;
Redemption of Shares;
Determination of Net Asset
Value; Shareholder Services
Item 20. Tax Status........................ Distributions and Taxes
Item 21. Underwriters...................... Purchase of Shares
Item 22. Calculation of Performance Data... Performance Data
Item 23. Financial Statements.............. Statement of Assets and
Liabilities
PART C
Information required to be included in Part C is set forth under the appro-
priate Item, so numbered, in Part C to this Registration Statement.
</TABLE>
i
<PAGE>
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A +
+REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE +
+SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY +
+OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT +
+BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR +
+THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE +
+SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE +
+UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF +
+ANY SUCH STATE. +
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
SUBJECT TO COMPLETION
PRELIMINARY PROSPECTUS DATED FEBRUARY 16, 1994
PROSPECTUS
- ----------
, 1994
MERRILL LYNCH NEW MEXICO MUNICIPAL BOND FUND
MERRILL LYNCH MULTI-STATE MUNICIPAL SERIES TRUST
BOX 9011, PRINCETON, NEW JERSEY 08543-9011 . PHONE NO. (609) 282-2800
-------------
Merrill Lynch New Mexico Municipal Bond Fund (the "Fund") is a mutual fund
seeking to provide shareholders with as high a level of income exempt from
Federal and New Mexico income taxes as is consistent with prudent investment
management. The Fund invests primarily in a non-diversified portfolio of long-
term, investment grade obligations, the interest on which, in the opinion of
bond counsel to the issuer, is exempt from Federal and New Mexico income taxes.
The Fund may invest in certain tax-exempt securities classified as "private
activity bonds" that may subject certain investors in the Fund to an
alternative minimum tax. At times, the Fund may seek to hedge its portfolio
through the use of futures transactions and options. There can be no assurance
that the investment objective of the Fund will be realized.
The Fund offers two classes of shares which may be purchased during the
subscription offering at $10.00 per share and during the continuous offering at
a price equal to the next determined net asset value per share, plus in both
cases a sales charge which, at the election of the purchaser, may be imposed
(i) at the time of purchase (the "Class A shares"), or (ii) on a deferred basis
(the "Class B shares"). The deferred charges to which the Class B shares are
subject shall consist of a contingent deferred sales charge which may be
imposed on redemptions made within four years of purchase and an ongoing
account maintenance fee and distribution fee. These alternatives permit an
investor to choose the method of purchasing shares that is most beneficial
given the amount of the purchase, the length of time the investor expects to
hold the shares and other circumstances. Investors should understand that the
purpose and function of the deferred charges with respect to the Class B shares
are the same as those of the initial sales charge with respect to the Class A
shares. Investors also should understand that over time the deferred sales
charges related to Class B shares may exceed the initial sales charge with
respect to Class A shares. See "Alternative Sales Arrangements" on page 4.
(continued on following page)
-------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE
CONTRARY IS A CRIMINAL OFFENSE.
-------------
This Prospectus is a concise statement of information about the Fund that is
relevant to making an investment in the Fund. This Prospectus should be
retained for future reference. A statement containing additional information
about the Fund, dated , 1994 (the "Statement of Additional Information"),
has been filed with the Securities and Exchange Commission and is available,
without charge, by calling or by writing Merrill Lynch Multi-State Municipal
Series Trust (the "Trust") at the above telephone number or address. The
Statement of Additional Information is hereby incorporated by reference into
this Prospectus. The Fund is a separate series of the Trust, an open-end
management investment company organized as a Massachusetts business trust.
-------------
FUND ASSET MANAGEMENT--MANAGER
MERRILL LYNCH FUNDS DISTRIBUTOR, INC.--DISTRIBUTOR
<PAGE>
(continued from prior page)
Each Class A share and Class B share represents identical interests in the
investment portfolio of the Fund and has the same rights, except that Class B
shares bear the expenses of the account maintenance fee and distribution fee
and certain other costs resulting from the deferred sales charge arrangement,
which will cause Class B shares to have a higher expense ratio and to pay lower
dividends than those related to Class A shares, and that Class B shares have
exclusive voting rights with respect to the account maintenance fee and the
distribution fee. The two classes also have different exchange privileges.
Merrill Lynch Funds Distributor, Inc. (the "Distributor"), Box 9011,
Princeton, New Jersey 08543-9011 [(609) 282-2800], and other securities dealers
which have entered into selected dealer agreements with the Distributor,
including Merrill Lynch, Pierce, Fenner & Smith Incorporated ("Merrill Lynch"),
will solicit subscriptions for shares of the Fund during a period expected to
end on April 29, 1994, unless extended. On the fifth business day after the
conclusion of this subscription period, the subscriptions will be payable, the
shares will be issued and the Fund will commence operations. The public
offering price of the shares during the subscription offering will be $10.00
per share in the case of Class B shares and $10.00 per share plus a sales
charge of 4.00%, subject to reductions on purchases in single transactions of
$25,000 or more, in the case of Class A shares. After the completion of the
initial subscription offering, the Fund will engage in a continuous offering of
its shares at a price equal to the next determined net asset value per share in
the case of Class B shares and the next determined net asset value per share,
plus a sales charge subject to reductions as noted above, in the case of Class
A shares. Shareholders may redeem their shares at any time at the next
determined net asset value. The Class B Shares may be subject to a contingent
deferred sales charge if redeemed within four years of purchase and are subject
to ongoing account maintenance and distribution fees. The minimum initial
purchase during the subscription and continuous offerings is $1,000 and the
minimum subsequent purchase in the continuous offering is $50. Merrill Lynch
may charge its customers a processing fee (presently $4.85) for confirming
purchases and repurchases. Purchases and redemptions directly through the
Fund's Transfer Agent are not subject to the processing fee. See "Purchase of
Shares" and "Redemption of Shares".
2
<PAGE>
FEE TABLE
A general comparison of the sales arrangements and other nonrecurring and
recurring expenses applicable to Class A shares and Class B shares follows:
<TABLE>
<CAPTION>
CLASS A SHARES CLASS B SHARES
INITIAL SALES DEFERRED SALES
CHARGE CHARGE
ALTERNATIVE ALTERNATIVE
---------------- --------------
<S> <C> <C> <C> <C>
Shareholder Transaction Expenses:
Maximum Sales Charge Imposed on
Purchases (as a percentage of
offering price)................. 4.00%(a) None
Sales Charge Imposed on Dividend
Reinvestments .................. None None
Deferred Sales Charge (as a per-
centage of original purchase
price or redemption proceeds,
whichever is lower) ............ None 4.0% during the
first year,
decreasing
1.0% annually
to 0.0% after
the fourth year(b)
Exchange Fee .................... None None
Annual Fund Operating Expenses (as
a percentage of average net as-
sets):
Management Fees(c) .............. 0.55% 0.55%
Rule 12b-1 Fees ................. None 0.50%(d)
Other Expenses
Custodial Fees................. .05% .05%
Shareholder Servicing Costs(e). .06% .06%
Miscellaneous.................. 1.18% 1.18%
---- ----
Total Other Expenses......... 1.29% 1.29%
---- ----
Total Fund Operating Expenses..... 1.84% 2.34%
==== ====
</TABLE>
- --------
(a) Reduced for purchases of $25,000 and over, decreasing to 0.50% for
purchases of $1,000,000 and over. Certain purchasers of Class A shares
investing $1,000,000 or more may in lieu of a front-end sales load, be
assessed a deferred sales charge on redemptions within the first year of
such investment. See "Purchase of Shares--Initial Sales Charge
Alternative--Class A Shares"--page 20.
(b) See "Purchase of Shares--Deferred Sales Charge Alternative--Class B
Shares"--page 21.
(c) See "Management of the Trust--Management and Advisory Arrangements"--page
16.
(d) See "Purchase of Shares--Deferred Sales Charge Alternative--Class B
Shares--Distribution Plan"--page 22.
(e) See "Management of the Trust--Transfer Agency Services"--page 17.
EXAMPLE:
<TABLE>
<CAPTION>
CUMULATIVE EXPENSES PAID
FOR THE PERIOD OF:
-------------------------
1 YEAR 3 YEARS
------------ ------------
<S> <C> <C>
An investor would pay the following expenses on a
$1,000 investment including, for Class A shares,
the maximum $40 front-end sales charge and assuming
(1) an operating expense ratio of 1.84% for Class A
shares and 2.34% for Class B shares, (2) a 5% an-
nual return throughout the periods and (3) redemp-
tion at the end of the period:
Class A .......................................... $ 57.94 $95.55
Class B .......................................... $ 63.71 $93.04
An investor would pay the following expenses on the
same $1,000 investment assuming no redemption at
the end of the period:
Class A .......................................... $ 57.94 $95.55
Class B .......................................... $ 23.71 $73.04
</TABLE>
3
<PAGE>
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 expenses set forth under "Other Expenses" are based on
estimated amounts through the end of the Fund's first fiscal year on an
annualized basis. The Example set forth above assumes reinvestment of all
dividends and distributions and utilizes a 5% annual rate of return as mandated
by Securities and Exchange Commission (the "Commission") regulations. THE
EXAMPLE SHOULD NOT BE CONSIDERED A REPRESENTATION OF PAST OR FUTURE EXPENSES OR
ANNUAL RATE OF RETURN, AND ACTUAL EXPENSES OR ANNUAL RATE OF RETURN MAY BE MORE
OR LESS THAN THOSE ASSUMED FOR PURPOSES OF THE EXAMPLE. Class B 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 Rules of Fair Practice of the National Association
of Securities Dealers, Inc. Merrill Lynch may charge its customers a processing
fee (presently $4.85) for confirming purchases and repurchases. Purchases and
redemptions directly through the Fund's Transfer Agent are not subject to the
processing fee. See "Purchase of Shares" and "Redemption of Shares".
ALTERNATIVE SALES ARRANGEMENTS
Shares of the Fund may be purchased during the subscription offering at
$10.00 per share and during the continuous offering at a price equal to the
next determined net asset value per share, plus in both cases a sales charge
which, at the election of the purchaser, may be imposed either (i) at the time
of the purchase (the "initial sales charge alternative"), or (ii) on a deferred
basis (the "deferred sales charge alternative").
Class A Shares. An investor who elects the initial sales charge alternative
acquires Class A shares. Although Class A shares incur a sales charge when they
are purchased, they enjoy the benefit of not being subject to the ongoing
account maintenance and distribution fees to which Class B shares are subject
or any sales charge when they are redeemed. Certain purchasers of Class A
shares qualify for reduced initial sales charges. See "Purchase of Shares".
Class B Shares. An investor who elects the deferred sales charge alternative
acquires Class B shares. Class B shares do not incur a sales charge when they
are purchased, but they are subject to ongoing account maintenance and
distribution fees and a sales charge if they are redeemed within four years of
purchase. Class B shares enjoy the benefit of permitting all of the investor's
dollars to work from the time the investment is made. The ongoing account
maintenance and distribution fees paid by Class B shares will cause such shares
to have a higher expense ratio and to pay lower dividends than those related to
Class A shares. Payment of the distribution fee is subject to certain limits as
set forth under "Purchase of Shares--Deferred Sales Charge Alternative--Class B
Shares".
As an illustration, investors who qualify for significantly reduced sales
charges might elect the initial sales charge alternative because similar sales
charge reductions are not available for purchases under the deferred sales
charge alternative. Moreover, shares acquired under the initial sales charge
alternative would not be subject to ongoing account maintenance and
distribution fees. However, because initial sales charges are deducted at the
time of purchase, such investors would not have all their funds invested
initially. Investors not qualifying for reduced initial sales charges who
expect to maintain their investment for an extended period of time also might
elect the initial sales charge alternative because over time the accumulated
continuing account maintenance and distribution fees may exceed the initial
sales charge. Again, however, such investors must weigh this consideration
against the fact that not all of their funds will be invested initially.
4
<PAGE>
Furthermore, the ongoing account maintenance and distribution fees will be
offset to the extent any return is realized on the additional funds initially
invested under the deferred alternative. However, there can be no assurance as
to the return, if any, which will be realized on such additional funds. Certain
other investors might determine it to be more advantageous to have all of their
funds invested initially, although remaining subject to continued account
maintenance and distribution fees and, for a four-year period of time, a
contingent deferred sales charge.
The distribution expenses incurred by the Distributor and dealers (primarily
Merrill Lynch) in connection with the sale of the shares will be paid, in the
case of the Class A shares, from the proceeds of the initial sales charge. In
the case of the Class B shares, such distribution expenses will be paid from
the proceeds of the ongoing distribution fee and, if applicable, the contingent
deferred sales charge incurred upon redemption within four years of purchase.
Sales personnel may receive different compensation for selling Class A or Class
B shares. Investors should understand that the purpose and function of the
deferred sales charges with respect to the Class B shares are the same as those
of the initial sales charge with respect to the Class A shares.
Dividends paid by the Fund with respect to Class A and Class B shares, to the
extent any dividends are paid, will be calculated in the same manner at the
same time on the same day and will be in the same amount, except that account
maintenance and distribution fees and any incremental transfer agency costs
relating to Class B shares will be borne exclusively by that class. See
"Additional Information--Determination of Net Asset Value". Class A and Class B
shareholders of the Fund have an exchange privilege for Class A and Class B
shares, respectively, of certain other mutual funds sponsored by Merrill Lynch.
Class A and Class B shareholders of the Fund also may exchange their shares for
shares of certain money market funds sponsored by Merrill Lynch. See
"Shareholder Services--Exchange Privilege".
The Trustees of the Trust have determined that currently no conflict of
interest exists between the Class A and Class B shares. On an ongoing basis,
the Trustees of the Trust, pursuant to their fiduciary duties under the
Investment Company Act of 1940 and state laws, will seek to assure that no such
conflict arises.
The alternative sales arrangements permit an investor to choose the
method of purchasing shares that is most beneficial given the amount of the
purchase, the length of time the investor expects to hold the shares and
other circumstances. Investors should determine whether under their
particular circumstances it is more advantageous to incur an initial sales
charge and not be subject to ongoing charges, or to have the entire initial
purchase price invested in the Fund with the investment thereafter being
subject to ongoing account maintenance and distribution fees. To assist
investors in making this determination, the Fee Table on page 3 sets forth
the charges applicable to each class of shares and a discussion of relevant
factors in making such determination is set forth under "Purchase of
Shares--Alternative Sales Arrangements" on page 19.
5
<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 New Mexico 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 non-
diversified portfolio of securities consisting primarily of long-term
obligations issued by or on behalf of the State of New Mexico, its political
subdivisions, agencies and instrumentalities and obligations of other
qualifying issuers, such as issuers located in Puerto Rico, the Virgin Islands
and Guam, which pay interest exempt, in the opinion of bond counsel to the
issuer, from Federal and New Mexico income taxes. Obligations exempt from
Federal income taxes are referred to herein as "Municipal Bonds" and
obligations exempt from both Federal and New Mexico income taxes are referred
to as "New Mexico Municipal Bonds". Unless otherwise indicated, references to
Municipal Bonds shall be deemed to include New Mexico Municipal Bonds. The Fund
at all times, except during temporary defensive periods, will maintain at least
65% of its total assets invested in New Mexico 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. See "Description of
Municipal Bonds". 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 Corporation ("Standard & Poor's") (currently AAA, AA, A and
BBB) or Fitch Investors Service, Inc. ("Fitch") (currently AAA, AA, A and BBB).
If Municipal Bonds are unrated, such securities will possess creditworthiness
comparable, in the opinion of the manager of the Fund, Fund Asset Management,
L.P. (the "Manager"), to obligations in which the Fund may invest. Municipal
Bonds rated in the fourth highest rating category, while considered "investment
grade", have certain speculative characteristics and are more likely to be
downgraded to non-investment grade than obligations rated in one of the top
three rating categories. See Appendix II--"Ratings of Municipal Bonds" in the
Statement of Additional Information for more information regarding ratings of
debt securities. An issue of rated Municipal Bonds may cease to be rated or its
rating may be reduced below "investment grade" subsequent to its purchase by
the Fund. If an obligation is downgraded below investment grade, the Manager
will consider factors such as price, credit risk, market conditions, financial
condition of the issuer and interest rates to determine whether to continue to
hold the obligation in the Fund's portfolio.
The Fund may invest up to 20% of its total assets in Municipal Bonds that are
rated below Baa by Moody's or below BBB by Standard & Poor's or Fitch, or which
in the Manager's judgment, possess similar credit characteristics. Such
securities, sometimes referred to as "high-yield" or "junk" bonds, are
predominantly speculative with respect to the capacity to pay interest and
repay principal in accordance with the terms of the security and generally
involve a greater volatility of price than securities in higher rating
categories. The market prices of high-yielding, lower-rated securities may
fluctuate more than higher-rated securities and may decline significantly in
periods of general economic difficulty, which may follow periods of rising
interest rates. In purchasing such securities, the Fund will rely on the
Manager's judgment, analysis and experience in evaluating the creditworthiness
of the issuer of such securities. The Manager will take into consideration,
among other things, the issuer's financial resources, its sensitivity to
economic conditions and trends, its operating history, the quality of its
management and regulatory matters. See "Investment Objective
6
<PAGE>
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. Certain instruments
in which the Funds may invest may be characterized as derivative instruments.
See "Description of Municipal Bonds" and "Financial Futures Transactions and
Options".
The Fund's investments may also include variable rate demand obligations
("VRDOs") and VRDOs in the form of participation interests ("Participating
VRDOs") in variable rate tax-exempt obligations held by a financial
institution. The VRDOs in which the Fund will invest are tax-exempt obligations
which contain a floating or variable interest rate adjustment formula and an
unconditional right of demand on the part of the holder thereof to receive
payment of the unpaid principal balance plus accrued interest on a short notice
period not to exceed seven days. Participating VRDOs provide the Fund with a
specified undivided interest (up to 100%) of the underlying obligation and the
right to demand payment of the unpaid principal balance plus accrued interest
on the Participating VRDOs from the financial institution on a specified number
of days' notice, not to exceed seven days. There is, however, the possibility
that because of 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 judgement 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 New Mexico income taxes. However, to the extent that suitable
New Mexico 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 New Mexico, 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 derivative 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 New Mexico Municipal Bonds. For temporary
7
<PAGE>
defensive periods or to provide liquidity, the Fund has the authority to invest
as much as 35% of its total assets in tax-exempt or taxable money market
obligations with a maturity of one year or less (such short-term obligations
being referred to herein as "Temporary Investments"), except that taxable
Temporary Investments shall not exceed 20% of the Fund's net assets. The
Temporary Investments, VRDOs and Participating VRDOs in which the Fund may
invest also will be in the following rating categories at the time of purchase:
MIG-1/VMIG-1 through MIG-4/VMIG-4 for notes and VRDOs and Prime-1 through
Prime-3 for commercial paper (as determined by Moody's), SP-1 and 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 investment objective of the Fund is a
fundamental policy of the Fund which may be not changed without a vote of a
majority of the outstanding shares of the Fund. The Fund's hedging strategies,
which are described in more detail under "Financial Futures Transactions and
Options", are not fundamental policies and may be modified by the Trustees of
the Trust without the approval of the Fund's shareholders.
POTENTIAL BENEFITS
Investment in shares of the Fund offers several benefits. The Fund offers
investors the opportunity to receive income exempt from Federal and New Mexico
income taxes by investing in a professionally managed portfolio consisting
primarily of long-term New Mexico 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 Class B shares, account maintenance and distribution costs.
SPECIAL AND RISK CONSIDERATIONS RELATING TO NEW MEXICO MUNICIPAL BONDS
The Fund ordinarily will invest at least 65% of its total assets in New
Mexico Municipal Bonds, and therefore it is more susceptible to factors
adversely affecting issuers of New Mexico Municipal Bonds than is a tax-exempt
mutual fund that is not concentrated in issuers of New Mexico Municipal Bonds
to this degree.
For the current and ensuing fiscal years, the State General Fund stands at a
substantial surplus in relation to budgeted expenditures. Employment, per
capita personal income and the overall economy are growing slowly, although
mining is below earlier levels and reductions in federal spending associated
with the end of the Cold War have affected various national laboratories and
military installations in the State.
The Manager does not believe that the current economic conditions in New
Mexico or other factors described above will have a significant adverse effect
on the Fund's ability to invest in high New Mexico Municipal Bonds. Because the
Fund's portfolio will be comprised primarily of investment grade securities,
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<PAGE>
the Fund is expected to be less subject to market and credit risks than a fund
that invests primarily in lower quality New Mexico Municipal Bonds. See
Appendix I, "Economic and Financial Conditions in New Mexico" 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 exempt from
Federal income tax, and, as New Mexico Municipal Bonds if the interest thereon
is exempt from Federal and New Mexico income taxes, even though such bonds may
be "private activity bonds" as discussed below.
The two principal classifications of Municipal Bonds are "general obligation"
bonds and "revenue" bonds which latter category includes industrial development
bonds ("IDBs") and, for bonds issued after August 15, 1986, private activity
bonds. General obligation bonds are secured by the issuer's pledge of its
faith, credit and taxing power for the payment of principal and interest. The
taxing power of any governmental entity may be limited, however, by provisions
of state constitutions or laws, and an entity's creditworthiness will depend on
many factors, including potential erosion of the 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 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 will not invest more than 10% of
its total assets (taken at market value at the time of each investment) in
industrial revenue bonds where the entity supplying the revenues from which the
issuer is paid, including predecessors, has a record of less than three years
of continuous business operations. Investments involving entities with less
than three years of continuous business operations may pose somewhat greater
risks due to the lack of a substantial operating history for such entities. The
Manager believes, however, that the potential benefits of such investments
outweigh the potential risks, particularly given the Fund's limitations on such
investments.
The Fund may purchase IDBs and private activity bonds. IDBs and private
activity bonds are 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
9
<PAGE>
secured. Neither IDBs nor private activity bonds are 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 depends on the revenues of a private entity
and be aware of the risks that such an investment may entail. Continued ability
of an entity to generate sufficient revenues for the payment of principal and
interest on such bonds will be affected by many factors including the size of
the entity, capital structure, demand for its products or services,
competition, general economic conditions, 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.
If an issuer of such bonds is unable to meet its obligations, repayment of such
bonds becomes a moral commitment, but not a legal obligation, of the issuer.
The Fund may invest in Municipal Bonds the return on which is based on a
particular index of value or interest rates. For example, the Fund may invest
in Municipal Bonds that pay interest based on an index of Municipal Bond
interest rates or based on the value of gold or some other commodity. The
principal amount payable upon maturity of certain Municipal Bonds also may be
based on the value of an index. Also, the Fund may invest in so-called "inverse
floating obligations" or "residual interest bonds" on which the interest rates
typically decline as market rates increase and increase as market rates
decline. To the extent the Fund invests in these types of Municipal Bonds, the
Fund's return on such Municipal Bonds will be subject to risk with respect to
the value of the particular index. Such securities have the effect of providing
a degree of investment leverage, since they may increase or decrease in value
in response to changes, as an illustration, in market interest rates at a rate
which is a multiple (typically two) of the rate at which fixed-rate long-term
tax exempt securities increase or decrease in response to such changes. As a
result, the market values of such securities will generally be more volatile
than the market values of fixed-rate tax exempt securities. To seek to limit
the volatility of these securities, the Fund may purchase inverse floating
obligations with shorter term maturities or which contain limitations on the
extent to which the interest rate may vary. The Manager believes that indexed
and inverse floating obligations represent a flexible portfolio management
instrument for the Fund which allows the Manager to vary the degree of
investment leverage relatively efficiently under different market conditions.
Certain investments in such obligations may be illiquid. The Fund may not
invest in such illiquid obligations if such investments, together with other
illiquid investments, would exceed 15% of the Fund's net assets.
Also included within the general category of Municipal Bonds are
participation certificates issued by government authorities or entities to
finance the acquisition or construction of equipment, land and/or facilities.
The certificates represent participations in a lease, an installment purchase
contract or a conditional sales contract (hereinafter collectively called
"lease obligations") relating to such equipment, land or facilities. Although
lease obligations do not constitute general obligations of the issuer for which
the issuer's unlimited taxing power is pledged, a lease obligation 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 invest in
illiquid lease obligations if such investments, together with other illiquid
investments, would exceed 15% of the Fund's net assets. The Fund may, however,
invest without regard to such limitation in lease obligations which the
Manager, pursuant to guidelines which have been adopted by the Board of
Trustees and subject to the supervision of the Board, determines to be liquid.
The Manager will deem lease obligations liquid if they are publicly offered and
have received an
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<PAGE>
investment grade rating of Baa or better by Moody's, or BBB or better by
Standard & Poor's or Fitch. Unrated lease obligations, or those rated below
investment grade, will be considered liquid if the obligations come to the
market through an underwritten public offering and at least two dealers are
willing to give competitive bids. In reference to the latter, the Manager must,
among other things, also review the creditworthiness of the municipality
obligated to make payment under the lease obligation and make certain specified
determinations based on such factors as the existence of a rating or credit
enhancement such as insurance, the frequency of trades or quotes for the
obligation and the willingness of dealers to make a market in the obligation.
Federal tax legislation has limited the types and volume of bonds the
interest on which qualifies for a Federal income tax exemption. As a result,
this legislation and legislation which may be enacted in the future may affect
the availability of Municipal Bonds for investment by the Fund.
WHEN-ISSUED SECURITIES AND DELAYED DELIVERY TRANSACTIONS
The Fund may purchase or sell Municipal Bonds on a delayed delivery basis or
a when-issued basis at fixed purchase terms. These transactions arise when
securities are purchased or sold by the Fund with payment and delivery taking
place in the future. The purchase will be recorded on the date the Fund enters
into the commitment and the value of the obligation will thereafter be
reflected in the calculation of the Fund's net asset value. The value of the
obligation on the delivery date may be more or less than its purchase price. A
separate account of the Fund will be established with its custodian consisting
of cash, cash equivalents or high grade, liquid Municipal Bonds having a market
value at all times at least equal to the amount of the forward commitment.
CALL RIGHTS
The Fund may purchase a Municipal Bond issuer's right to call all or a
portion of such Municipal Bond for mandatory tender for purchase (a "Call
Right"). A holder of a Call Right may exercise such right to require a
mandatory tender for the purchase of related Municipal Bonds, subject to
certain conditions. A Call Right that is not exercised prior to the maturity of
the related Municipal Bond will expire without value. The economic effect to
holding both the Call Right and the related Municipal Bond is identical to
holding a Municipal Bond as a non-callable security. Certain investments in
such obligations may be illiquid. The Fund may not invest in such illiquid
obligations if such investments, together with other illiquid investments,
would exceed 15% of the Fund's net assets.
FINANCIAL FUTURES TRANSACTIONS AND OPTIONS
The Fund is authorized to purchase and sell certain exchange traded financial
futures contracts ("financial futures contracts") solely for the purpose of
hedging its investments in Municipal Bonds against declines in value and to
hedge against increases in the cost of securities it intends to purchase.
However, any transactions involving financial futures or options (including
puts and calls associated therewith) will be in accordance with the Fund's
investment policies and limitations. A financial futures contract obligates the
seller of a contract to deliver and the purchaser of a contract to take
delivery of the type of financial instrument covered by the contract, or in the
case of index-based futures contracts to make and accept a cash
11
<PAGE>
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. 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 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.
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<PAGE>
Under regulations of the Commodity Futures Trading Commission, the futures
trading activities described herein will not result in the Fund being deemed to
be a "commodity pool," as defined under such regulations, provided that the
Fund adheres to certain restrictions. In particular, the Fund may purchase and
sell futures contracts and options thereon (i) for bona fide hedging purposes,
and (ii) for non-hedging purposes, if the aggregate initial 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, 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 short-term, high-grade, fixed-income securities in a segregated
account with the Fund's custodian, so that the amount so segregated plus the
amount of initial and variation margin held in the account of its broker equals
the market value of the futures contracts, thereby ensuring that the use of
such futures contract is unleveraged. It is not anticipated that transactions
in futures contracts will have the effect of increasing portfolio turnover.
Although certain risks are involved in options and futures transactions, the
Manager believes that, because the Fund will engage in futures transactions
only for hedging purposes, the futures portfolio strategies of the Fund will
not subject the Fund to certain risks frequently associated with speculation in
futures transactions. The Fund must meet certain Federal income tax
requirements under the Internal Revenue Code of 1986, as amended (the "Code"),
in order to qualify for the special tax treatment afforded regulated investment
companies, including a requirement that less than 30% of its gross income be
derived from the sale or other disposition of securities held for less than
three months. Additionally, the Fund is required to meet certain
diversification requirements under the Code.
The liquidity of a secondary market in a futures contract may be adversely
affected by "daily price fluctuation limits" established by commodity exchanges
which limit the amount of fluctuation in a futures contract price during a
single trading day. Once the daily limit has been reached in the contract, no
trades may be entered into at a price beyond the limit, thus preventing the
liquidation of open futures positions. Prices have in the past moved beyond the
daily limit on a number of consecutive trading days.
The successful use of transactions in futures also depends on the ability of
the Manager to forecast correctly the direction and extent of interest rate
movements within a given time frame. To the extent these rates remain stable
during the period in which a futures contract is held by the Fund or moves in a
direction opposite to that anticipated, the Fund may realize a loss on the
hedging transaction which is not fully or partially offset by an increase in
the value of portfolio securities. As a result, the Fund's total return for
such period may be less than if it had not engaged in the hedging transaction.
Furthermore, the Fund will only engage in hedging transactions from time to
time and may not necessarily be engaging in hedging transactions when movements
in interest rates occur.
Reference is made to the Statement of Additional Information for further
information on financial futures contracts and certain options thereon.
13
<PAGE>
REPURCHASE AGREEMENTS AND PURCHASE AND SALE CONTRACTS
As Temporary Investments, the Fund may invest in securities pursuant to
repurchase agreements or purchase and sale contracts. Repurchase agreements and
purchase and sale contracts may be entered into only with a member bank of the
Federal Reserve System or primary dealer in U.S. Government securities. Under
such agreements, the bank or primary dealer agrees, upon entering into the
contract, to repurchase the security at a mutually agreed upon time and price,
thereby determining the yield during the term of the agreement. This results in
a fixed rate of return insulated from market fluctuations during such period.
In the case of repurchase agreements, the prices at which the trades are
conducted do not reflect accrued interest on the underlying obligations;
whereas, in the case of purchase and sale contracts, the prices take into
account accrued interest. 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; the Fund does not have the right to seek additional collateral in
the case of purchase and sale contracts. In the event of default by the seller
under the 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. A purchase and sale contract differs from a
repurchase agreement in that the contract arrangements stipulate that the
securities are owned by the Fund. In the event of a default under such a
repurchase agreement or under a purchase and sale contract, instead of the
contractual fixed rate of return, the rate of return to the Fund shall be
dependent upon intervening fluctuations of the market value of such security
and the accrued interest on the security. In such event, the Fund would have
rights against the seller for breach of contract with respect to any losses
arising from market fluctuations following the failure of the seller to
perform. The Fund may not invest in repurchase agreements or purchase and sale
contracts maturing in more than seven days if such investments, together with
all other illiquid investments, would exceed 15% of the Fund's net assets.
INVESTMENT RESTRICTIONS
The Fund has adopted a number of restrictions and policies relating to the
investment of the Fund's assets and its activities, which are fundamental
policies of the Fund and may not be changed without the approval of the holders
of a majority of the Fund's outstanding voting securities, as defined in the
1940 Act. Among the more significant restrictions, the Fund may not: (i)
purchase any securities other than securities referred to under "Investment
Objective and Policies" herein; (ii) purchase securities of other investment
companies, except in connection with certain specified transactions and with
respect to investments of up to 10% of the Fund's total assets in securities of
closed-end investment companies; (iii) borrow amounts in excess of 20% of its
total assets taken at market value (including the amount borrowed), and then
only from banks as a temporary measure for extraordinary or emergency purposes
[The Fund will not purchase securities while borrowings are outstanding]; (iv)
mortgage, pledge, hypothecate or in any manner transfer as security for
indebtedness any securities owned or held by the Fund except in connection with
certain specified transactions; (v) invest in securities which cannot be
readily resold because of legal or contractual restrictions or which are not
readily marketable, including individually negotiated loans that constitute
illiquid investments and illiquid lease obligations, and in repurchase
agreements and purchase and sale contracts maturing in more than seven days,
if, regarding all such securities taken together, more than 15% of its net
assets (taken at market value at the time of each investment) would be invested
in such securities; (vi) invest more than 10% of its total assets (taken at
market value at the time of each investment) in industrial revenue
14
<PAGE>
bonds where the entity supplying the revenues from which the issue is to be
paid, and the guarantor of the obligation, including predecessors, each have a
record of less than three years' continuous business operation; and (vii)
invest more than 25% of its total assets (taken at market value at the time of
each investment) in securities of issuers in any particular industry (other
than United States Government securities or Government agency securities,
Municipal Bonds and Non-Municipal Tax-Exempt Securities).
The Fund is classified as non-diversified within the meaning of the 1940 Act,
which means that the Fund is not limited by the 1940 Act in the proportion of
its assets that it may invest in obligations of a single issuer. However, the
Fund's investments will be limited so as to qualify as a "regulated investment
company" for purposes of the Internal Revenue Code. See "Taxes". To qualify,
among other requirements, the Trust will limit the Fund's investments so that,
at the close of each quarter of the taxable year, (i) not more than 25% of the
market value of the Fund's total assets will be invested in the securities of a
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.
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<PAGE>
MANAGEMENT OF THE TRUST
TRUSTEES
The Trustees of the Trust consist of six individuals, five of whom are not
"interested persons" of the Trust as defined in the 1940 Act. The Trustees are
responsible for the overall supervision of the operations of the Trust and the
Fund and perform the various duties imposed on the directors or trustees of
investment companies by the 1940 Act.
The Trustees are:
Arthur Zeikel*--President and Chief Investment Officer of Fund Asset
Management, L.P. and Merrill Lynch Asset Management, L.P. ("MLAM");
President and Director of Princeton Services, Inc.; Executive Vice
President of Merrill Lynch & Co., Inc. since 1990; Executive Vice
President of Merrill Lynch, Pierce, Fenner & Smith Incorporated
("Merrill Lynch") since 1990 and a Senior Vice President thereof from
1985 to 1990; Director of Merrill Lynch Funds Distributor, Inc.
Kenneth S. Axelson--Former Executive Vice President and Director, J.C.
Penney Company, Inc.
Robert R. Martin--Former Chairman, Kinnard Investments, Inc.
Herbert I. London--Former Dean, Gallatin Division of New York
University.
Joseph L. May--Attorney in private practice.
Andre F. Perold--Professor, Harvard Business School.
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*Interested person, as defined in the 1940 Act, of the Trust.
MANAGEMENT AND ADVISORY ARRANGEMENTS
Fund Asset Management, L.P. (the "Manager"), which is an affiliate of MLAM
and is owned and controlled by Merrill Lynch & Co., Inc., acts as the manager
for the Fund and provides the Fund with management services. The Manager or
MLAM acts as the investment adviser for over 90 other registered investment
companies. MLAM also offers portfolio management and portfolio analysis
services to individuals and institutions. As of December 29, 1993, the Manager
and MLAM had a total of approximately $160 billion in investment company and
other portfolio assets under management, including accounts of certain
affiliates of the Manager.
Subject to the direction of the Trustees, the Manager is responsible for the
actual management of the Fund's portfolio and constantly reviews the Fund's
holdings in light of its own research analysis and that from other relevant
sources. The responsibility for making decisions to buy, sell or hold a
particular security rests with the Manager. The Manager performs certain of
the other administrative services and provides all the office space,
facilities, equipment and necessary personnel for management of the Fund.
Vincent R. Giordano and Kenneth A. Jacob are the Portfolio Managers for the
Fund. Vincent R. Giordano has been a Portfolio Manager of the Manager and MLAM
since 1977 and a Senior Vice President of the Manager and MLAM since 1984.
Kenneth A. Jacob has been a Vice President of the Manager and MLAM since 1984.
Pursuant to the management agreement between the Manager and the Trust on
behalf of the Fund (the "Management Agreement"), the Manager is entitled to
receive from the Fund a monthly fee based upon the average daily net assets of
the Fund at the following annual rates: 0.55% of the average daily net assets
not
16
<PAGE>
exceeding $500 million; 0.525% of the average daily net assets exceeding $500
million but not exceeding $1.0 billion; and 0.50% of the average daily net
assets exceeding $1.0 billion.
The Management Agreement obligates 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.
TRANSFER AGENCY SERVICES
Financial Data Services, Inc. (the "Transfer Agent"), which is a wholly-owned
subsidiary of Merrill Lynch & Co., Inc., acts as the Trust's transfer agent
pursuant to a transfer agency, dividend disbursing agency and shareholder
servicing agency agreement (the "Transfer Agency Agreement"). Pursuant to the
Transfer Agency Agreement, the Transfer Agent is responsible for the issuance,
transfer and redemption of shares and the opening and maintenance of
shareholder accounts. Pursuant to the Transfer Agency Agreement, the Fund
pays the Transfer Agent an annual fee of $10.00 per Class A shareholder account
and $12.00 per Class B shareholder account, and the Transfer Agent is entitled
to reimbursement from the Fund for out-of-pocket expenses incurred by the
Transfer Agent under the Transfer Agency Agreement.
PURCHASE OF SHARES
SUBSCRIPTION OFFERING
Merrill Lynch Funds Distributor, Inc. (the "Distributor"), a subsidiary of
the Manager and an affiliate of Merrill Lynch, acts as the distributor of Class
A and Class B shares of the Fund.
The Distributor, Merrill Lynch and other securities dealers which have
entered into selected dealer agreements with the Distributor will solicit
subscriptions for shares of the Fund during a period expected to end on April
29, 1994. The subscription period may be extended for up to an additional 30
days upon agreement between the Trust on behalf of the Fund and the
Distributor. On the fifth business day after the conclusion of the subscription
period, the subscriptions will be payable, the Class A and Class B shares will
be issued and the Fund will commence operations. The subscription offering may
be terminated by the Trust or the Distributor at any time, in which event no
Class A and Class B shares will be issued (and, therefore, the Fund will not
commence operations and no amounts will be payable by subscribers, and no sales
charges will be assessed) or a limited number of shares will be issued.
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<PAGE>
The public offering price of the Class A shares during the subscription
offering is set forth in the table below:
<TABLE>
<CAPTION>
SUBSCRIPTION PERIOD
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SECURITIES DEALERS'
SALES CHARGE CONCESSION
------------------ ------------------------
PERCENTAGE* PERCENTAGE*
PUBLIC OF PUBLIC OF PUBLIC
OFFERING DOLLAR OFFERING DOLLAR OFFERING
PRICE AMOUNT PRICE AMOUNT PRICE
-------- ------ ----------- ---------- ------------
<S> <C> <C> <C> <C> <C>
Less than $25,000......... $10.417 $.417 4.00% $.417 4.00%
$25,000 but less than
$50,000.................. 10.390 .390 3.75 .390 3.75
$50,000 but less than
$100,000................. 10.336 .336 3.25 .336 3.25
$100,000 but less than
$250,000................. 10.256 .256 2.50 .256 2.50
$250,000 but less than
$1,000,000............... 10.152 .152 1.50 .152 1.50
$1,000,000 and over....... 10.050 .050 0.50 .050 0.50
</TABLE>
- --------
* Rounded to the nearest one-hundredth percent.
The proceeds per share to the Fund from the sale of all Class A shares sold
during the subscription period will be $10.00.
The public offering price of the Class B shares during the subscription
offering will be $10.00 per share. However, the Class B shares may be subject
to a contingent deferred sales charge described below under "Deferred Sales
Charge Alternative--Class B Shares--CDSC" if redeemed within four years of
purchase and are subject to ongoing account maintenance and distribution fees
as described below.
The minimum initial purchase for both Class A and Class B shares during the
subscription period is $1,000.
CONTINUOUS OFFERING
Commencing immediately after completion of the subscription offering, Class A
and Class B shares of the Fund will be offered continuously for sale by the
Distributor and other eligible securities dealers (including Merrill Lynch).
During the continuous offering, 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 during the continuous offering is $1,000.
The minimum subsequent purchase is $50.
The Fund will offer its shares during the continuous offering at a public
offering price equal to the next determined net asset value per share plus
sales charges which, at the option of the purchaser, may be imposed either at
the time of purchase (the "initial sales charge alternative") or on a deferred
basis (the "deferred sales charge alternative"), as described below. The
applicable offering price for purchase orders is based upon the net asset value
of the Fund next determined after receipt of the purchase orders by the
Distributor. As to purchase orders received by securities dealers prior to 4:15
P.M., New York time, which includes orders received after the determination of
net asset value on the previous day, the applicable offering price will be
based on the net asset value determined as of 4:15 P.M. on the day the order is
placed with the Distributor, provided the order is received by the Distributor
prior to 4:30 P.M., New York time, on that day. If the purchase orders are not
received by the Distributor prior to 4:30 P.M., New York time, such orders
shall be
18
<PAGE>
deemed received on the next business day. Any order may be rejected by the
Distributor or the Trust. The Trust or the Distributor may suspend the
continuous offering of the Fund's shares at any time in response to conditions
in the securities markets or otherwise and may thereafter resume such offering
from time to time. Neither the Distributor nor the dealers are permitted to
withhold placing orders to benefit themselves by a price change. Merrill Lynch
may charge its customers a processing fee (presently $4.85) to confirm a sale
of shares to such customers. Purchases directly through the Fund's Transfer
Agent are not subject to the processing fee.
----------------
The Fund issues two classes of shares: Class A shares are sold to investors
choosing the initial sales charge alternative, and Class B shares are sold to
investors choosing the deferred sales charge alternative. Each class of shares
represents an interest in the same portfolio of investments of the Fund, has
thesame rights and is identical to the other class in all respects, except that
Class B shares bear the expenses of the deferred sales arrangements, any
expenses (including incremental transfer agency costs) resulting from such
sales arrangements and the expenses paid by the account maintenance fee and
have exclusive voting rights with respect to the Rule 12b-1 distribution plan
pursuant to which the account maintenance and distribution fees are paid. The
two classes also have different exchange privileges. See "Shareholder
Services-- Exchange Privilege". The net income attributable to Class B shares
and the dividends payable on Class B shares will be reduced by the amount of
the account maintenance and distribution fees and incremental transfer agency
costs relating to Class B shares; accordingly, the net asset value of the Class
B shares will be reduced by such amount to the extent the Fund has
undistributed net income. Sales personnel may receive different compensation
for selling Class A or Class B shares. Investors are advised that only Class A
shares may be available for purchase through securities dealers, other than
Merrill Lynch, that are eligible to sell shares.
ALTERNATIVE SALES ARRANGEMENTS
The alternative sales arrangements of the Fund permit investors to choose the
method of purchasing shares that is most beneficial given the amount of their
purchase, the length of time the investor expects to hold his shares and other
relevant circumstances. INVESTORS SHOULD DETERMINE WHETHER UNDER THEIR
PARTICULAR CIRCUMSTANCES IT IS MORE ADVANTAGEOUS TO INCUR AN INITIAL SALES
CHARGE AND NOT BE SUBJECT TO ONGOING CHARGES, AS DISCUSSED BELOW, OR TO HAVE
THE ENTIRE INITIAL PURCHASE PRICE INVESTED IN THE FUND WITH THE INVESTMENT
THEREAFTER BEING SUBJECT TO ONGOING CHARGES.
As an illustration, investors who qualify for significantly reduced sales
charges, as described below, might elect the initial sales charge alternative
because similar sales charge reductions are not available for purchases under
the deferred sales charge alternative. Moreover, shares acquired under the
initial sales charge alternative would not be subject to ongoing account
maintenance and distribution fees as described below. However, because initial
sales charges are deducted at the time of purchase, such investors would not
have all their funds invested initially.
Investors not qualifying for reduced initial sales charges who expect to
maintain their investment for an extended period of time also might elect the
initial sales charge alternative because over time the accumulated continuing
account maintenance and distribution fees may exceed the initial sales charge.
Again, however, such investors must weigh this consideration against the fact
that not all their funds will be invested initially. Furthermore, the ongoing
account maintenance and distribution fees will be offset to the extent that any
19
<PAGE>
return is realized on the additional funds initially invested under the
deferred alternative. Another factor that may be applicable under certain
circumstances is that the payment of the Class B distribution fee and
contingent deferred sales charge ("CDSC") is subject to certain limits as set
forth below under "Deferred Sales Charge Alternative--Class B Shares".
Certain other investors might determine it to be more advantageous to have
all their funds invested initially, although remaining subject to continued
account maintenance and distribution fees and, for a four-year period of time,
a CDSC as described below. For example, an investor subject to the 4.0% initial
sales charge will have to hold his investment at least 8 years for the 0.25%
account maintenance fee and 0.25% distribution fee to exceed the initial sales
charge of Class A shares. This example does not take into account the time
value of money which further reduces the impact of the ongoing account
maintenance and distribution fees on the investment, fluctuations in the net
asset value, the effect of the return on the investment over this period of
time or the effect of any limits that may be imposed upon the payment of the
distribution fee and the CDSC.
INITIAL SALES CHARGE ALTERNATIVE--CLASS A SHARES
The public offering price of Class A shares for purchasers choosing the
initial sales charge alternative is the next determined net asset value plus
varying sales charges (i.e., sales loads), as set forth below.
<TABLE>
<CAPTION>
SALES CHARGE SALES CHARGE DISCOUNT TO
AS PERCENTAGE AS PERCENTAGE* SELECTED DEALERS
OF OFFERING OF THE NET AS PERCENTAGE OF THE
AMOUNT OF PURCHASE PRICE AMOUNT INVESTED OFFERING PRICE
------------------ ------------- --------------- --------------------
<S> <C> <C> <C>
Less than $25,000....... 4.00% 4.17% 3.75%
$25,000 but less than
$50,000................ 3.75 3.90 3.50
$50,000 but less than
$100,000............... 3.25 3.36 3.00
$100,000 but less than
$250,000............... 2.50 2.56 2.25
$250,000 but less than
$1,000,000............. 1.50 1.52 1.25
$1,000,000 and over..... 0.50 0.50 0.40
</TABLE>
--------
* Rounded to the nearest one-hundredth percent.
Initial sales charges may be waived for shareholders purchasing $1 million or
more in a single transaction (other than a tax qualified retirement plan under
Section 401 of the Code, or a deferred compensation plan under Section 403(b)
and Section 457 of the Code), or a purchase by a TMASM Managed Trust, of Class
A shares of the Fund. In addition, purchases of Class A shares of the Fund made
in connection with a single investment of $1 million or more under the Merrill
Lynch Mutual Fund Adviser Program will not be subject to initial sales charge.
Purchases described in this paragraph will be subject instead to a CDSC if the
shares are redeemed within one year after purchase at the following rates:
<TABLE>
<CAPTION>
CDSC AS A PERCENTAGE OF
AMOUNT OF PURCHASE DOLLAR AMOUNT SUBJECT TO CHANGE
------------------ -------------------------------
<S> <C>
$1 million up to $2.5 million............. 0.75%
Over $2.5 million up to $3.5 million...... 0.40%
Over $3.5 million up to $5 million........ 0.25%
Over $5 million........................... 0.20%
</TABLE>
The Distributor may reallow discounts to selected dealers and retain the
balance over such discounts. At times the Distributor may reallow the entire
sales charge to such dealers. Since securities dealers selling
20
<PAGE>
Class A 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.
Reduced Initial Sales Charges. Sales charges are reduced under a Right of
Accumulation and a Letter of Intention. Class A shares of the Fund are offered
at net asset value to Trustees of the Trust, to directors or trustees of
certain other Merrill Lynch-sponsored investment companies, 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 if certain conditions set forth in the Statement of Additional
Information are met, to directors of Merrill Lynch & Co., Inc. and to employees
of Merrill Lynch & Co., Inc. and its subsidiaries. Also, Class A shares may be
offered at net asset value in connection with the acquisition of assets of
other investment companies. No initial sales charges are imposed upon Class A
shares issued as a result of the automatic reinvestment of dividends or capital
gains distributions. Class A shares are offered to TMASM Managed Trusts to
which Merrill Lynch Trust Company provides discretionary trustee services at
net asset value plus a reduced sales charge. Class A shares of the Fund also
are offered at net asset value to shareholders of certain closed-end funds
advised by the Manager or MLAM who wish to reinvest the net proceeds from a
sale of their closed-end fund shares of common stock in shares of the Fund,
provided certain conditions are met. Thus, for example, Class A shares of the
Fund are offered at net asset value to shareholders of Merrill Lynch Senior
Floating Rate Fund (formerly known as Merrill Lynch Prime Fund, Inc.) ("Senior
Floating Rate Fund") who wish to reinvest the net proceeds from a sale of
certain of their shares of common stock of Senior Floating Rate Fund in shares
of the Fund. In order to exercise this investment option, Senior Floating Rate
Fund shareholders must sell their Senior Floating Rate Fund shares to the
Senior Floating Rate Fund in connection with a tender offer conducted by the
Senior Floating Rate Fund and reinvest the proceeds immediately in the Fund.
This investment option is available only with respect to the proceeds of Senior
Floating Rate Fund shares as to which no Early Withdrawal Charge (as defined in
the Senior Floating Rate Fund prospectus) is applicable. Purchase orders from
Senior Floating Rate Fund shareholders wishing to exercise this investment
option will be accepted only on the day that the related Senior Floating Rate
Fund tender offer terminates and will be effected at the net asset value of the
Fund at such day. Class A shares of the Fund may be purchased at net asset
value, without a sales charge, by programs associated with professional
athletic players' associations which have invested in the aggregate more than
$10 million in Merrill Lynch-sponsored investment companies. Additional
information concerning these reduced initial charges is set forth in the
Statement of Additional Information.
DEFERRED SALES CHARGE ALTERNATIVE--CLASS B SHARES
Investors choosing the deferred sales charge alternative purchase Class B
shares at net asset value per share without the imposition of a sales charge at
the time of purchase. The Class B shares are being 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 shares at the time of purchase from its own funds. The proceeds
of the CDSC and the ongoing distribution fee discussed below are used to defray
Merrill Lynch's distribution expenses, including compensating its financial
consultants. The proceeds from the ongoing account maintenance fee are used to
compensate Merrill Lynch for providing continuing account maintenance
activities.
Proceeds from the CDSCs 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
21
<PAGE>
to the Fund in connection with the sale of the Class B shares, such as the
payment of compensation to financial consultants for selling Class B shares.
Payments by the Fund to the Distributor of the distribution fee under the
distribution plan described below also may be used in whole or in part by the
Distributor for this purpose. The combination of the CDSC and the ongoing
distribution fee facilitates the ability of the Fund to sell the Class B shares
without a sales charge being deducted at the time of purchase. 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 deferred sales charge
schedule relating to the Class B shares acquired as a result of the exchange.
CDSC. Class B shares which are redeemed within four years of purchase may be
subject to a CDSC at the rates set forth below charged as a percentage of the
dollar amount subject thereto. The charge will be assessed on an amount equal
to the lesser of the current market value or the cost of the shares being
redeemed. Accordingly, no CDSC will be imposed on increases in net asset value
above the initial purchase price. In addition, no CDSC will be assessed on
shares derived from reinvestment of dividends or capital gains distributions.
The following table sets forth the rates of the CDSC:
<TABLE>
<CAPTION>
CDSC AS A
PERCENTAGE OF
YEAR SINCE DOLLAR AMOUNT
PURCHASE SUBJECT TO
PAYMENT MADE CHARGE
------------ -------------
<S> <C>
0-1........................................................ 4.0%
1-2........................................................ 3.0%
2-3........................................................ 2.0%
3-4........................................................ 1.0%
4 and thereafter........................................... None
</TABLE>
In determining whether a CDSC is applicable to a redemption, the calculation
will be determined in the manner that results in the lowest possible applicable
rate being charged. Therefore, it will be assumed that the redemption is first
of shares until such time as the CDSC is no longer applicable 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 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 charge 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 CDSC is waived on
redemptions of shares following the death or disability (as defined in the
Code) of a shareholder.
Distribution Plan. Pursuant to a distribution plan adopted by the Fund under
Rule 12b-1 under the 1940 Act (the "Distribution Plan"), the Fund pays the
Distributor an ongoing account maintenance fee and
22
<PAGE>
distribution fee relating to Class B shares, which are accrued daily and paid
monthly, at the annual rates of 0.25% and 0.25%, respectively, of the average
daily net assets of the Class B shares of the Fund. Pursuant to a sub-agreement
with the Distributor, Merrill Lynch also provides account maintenance and
distribution services to the Fund. The ongoing account maintenance fee
compensates the Distributor and Merrill Lynch for providing account maintenance
services to Class B shareholders.The ongoing distribution fee compensates the
Distributor and Merrill Lynch for providing distribution services and bearing
certain distribution-related expenses of the Fund, including payments to
financial consultants for selling Class B shares of the Fund.
The Distribution Plan is designed to permit an investor to purchase Class B
shares through dealers without the assessment of a front-end sales charge and
at the same time permit the dealer to compensate its financial consultants in
connection with the sale of the Class B shares. In this regard, the purpose and
function of the ongoing distribution fee under the Distribution Plan and the
CDSC are the same as those of the initial sales charge with respect to the
Class A shares of the Fund in that the deferred sales charges provide for the
financing of the distribution of the Fund's Class B shares.
The payments under the Distribution Plan are based on a percentage of average
daily net assets of Class B shares regardless of the amount of expenses
incurred, and, accordingly, distribution-related revenues 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 Distribution Plan. This information is presented annually as
of December 31 of each year on a "fully allocated accrual" basis and quarterly
on a "direct expense and revenue/cash" basis. On the fully allocated accrual
basis, revenues consist of the account maintenance fees, distribution fees, the
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 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.
The Fund has no obligation with respect to distribution-related expenses
incurred by the Distributor and Merrill Lynch in connection with the Class B
shares, and there is no assurance that the Trustees of the Trust will approve
the continuance of the Distribution Plan from year to year. However, the
Distributor intends to seek annual continuation of the Distribution Plan. In
their review of the Distribution Plan, the Trustees will not be asked to take
into consideration expenses incurred in connection with the distribution of
Class A shares or of shares of other funds for which the Distributor acts as
distributor. The account maintenance fee, the distribution fee and the CDSC in
the case of Class B shares will not be used to subsidize the sale of Class A
shares.
Limitations on the Payment of Deferred Sales Charges. The maximum sales
charge rule in the Rules of Fair Practice of the National Association of
Securities Dealers, Inc. ("NASD") imposes a limitation on certain asset-based
sales charges such as the Fund's distribution fee and the CDSC, but not the
account maintenance fee. 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 (defined to exclude
shares issued pursuant to dividend reinvestments and exchanges) plus (2)
interest on the unpaid balance 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). The Distributor has voluntarily agreed to waive
interest charges on the unpaid balance in excess of 0.50% of eligible gross
sales.
23
<PAGE>
Consequently, the maximum amount payable to the Distributor, (referred to as
the "voluntary maximum") 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 and any CDSCs will be paid to the Fund
rather than to the Distributor; however, the Fund will continue to make
payments of the account maintenance fee. In certain circumstances the amount
payable pursuant to the voluntary maximum may exceed the amount payable under
the NASD formula. In such circumstances, payments in excess of the amount
payable under the NASD Formula will not be made.
REDEMPTION OF SHARES
The Trust is required to redeem for cash all full and fractional shares of
the Fund upon receipt of a written request in proper form. The redemption price
is the net asset value per share next determined after the initial receipt of
proper notice of redemption. Except for any CDSC which may be applicable to
Class B shares, 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 by tendering the shares
directly to the Transfer Agent, Financial Data Services, Inc., Transfer Agency
Mutual Fund Operations, P.O. Box 45289, Jacksonville, Florida 32232-5289.
Redemption requests delivered other than by mail should be delivered to
Financial Data Services, Inc., Transfer Agency Mutual Fund Operations, 4800
Deer Lake Drive East, Jacksonville, Florida 32246-6484. Proper notice of
redemption in the case of shares deposited with the Transfer Agent may be
accomplished by a written letter requesting redemption. Proper notice of
redemption in the case of shares for which certificates have been issued may be
accomplished by a written letter as noted above accompanied by certificates for
the shares to be redeemed. Redemption requests should not be sent to the Trust.
The notice in either event requires the signature(s) of all persons in whose
name(s) the shares are registered, signed exactly as such name(s) appear(s) on
the Transfer Agent's register. The signature(s) on the redemption request must
be guaranteed by an "eligible guarantor institution" as such term is defined in
Rule 17Ad-15 under the Securities Exchange Act of 1934, as amended, the
existence and validity of which may be verified by the Transfer Agent through
the use of industry publications. Notarized signatures are not sufficient. In
certain instances, the Transfer Agent may require additional documents such as,
but not limited to, trust instruments, death certificates, appointments as
executor or administrator, or certificates of corporate authority. For
shareholders redeeming directly with the Transfer Agent, payments will be
mailed within seven days of receipt of a proper notice of redemption.
At various times the Trust may be requested to redeem Fund shares for which
it has not yet received good payment (e.g., cash, Federal funds or certified
check drawn on a United States bank). The Trust may delay or cause to be
delayed the mailing of a redemption check until such time as it has assured
itself that good payment has been collected for the purchase of such Fund
shares, which may take up to 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
24
<PAGE>
at the net asset value next computed after receipt of the order by the dealer,
provided that the request for repurchase is received by the dealer prior to the
close of business on the New York Stock Exchange on the day received and is
received by the Fund from such dealer not later than 4:30 P.M., New York time,
on the same day.
Dealers have the responsibility of submitting such repurchase requests to the
Trust not later than 4:30 P.M., New York time, in order to obtain that day's
closing price. The repurchase arrangements are for the convenience of
shareholders and do not involve a charge by the Trust (other than the
applicable CDSC in the case of Class B shares); securities firms which do not
have selected dealer agreements with the Distributor, however, may impose a
charge on the shareholder for transmitting the notice of repurchase to the
Trust. Merrill Lynch may charge its customers a processing fee (presently
$4.85) to confirm a repurchase of shares of such customers. Redemptions
directly through the Fund's Transfer Agent are not subject to the processing
fee. The Trust reserves the right to reject any order for repurchase, which
right of rejection might adversely affect shareholders seeking redemption
through the repurchase procedure. However, a shareholder whose order for
repurchase is rejected by the Trust may redeem Fund shares as set forth above.
REINSTATEMENT PRIVILEGE -- CLASS A SHARES
Shareholders who have redeemed their Class A shares have a one-time privilege
to reinstate their accounts by purchasing Class A shares of the Fund at net
asset value without a sales charge up to the dollar amount redeemed. The
reinstatement privilege may be exercised by sending a notice of exercise along
with a check for the amount to be reinstated to the Transfer Agent within 30
days after the date the request for redemption was accepted by the Transfer
Agent or the Distributor. The reinstatement will be made at the net asset value
per share next determined after the notice of reinstatement is received and
cannot exceed the amount of the redemption proceeds. The reinstatement is a
one-time privilege and may be exercised by the Class A shareholder only the
first time such shareholder makes a redemption.
SHAREHOLDER SERVICES
The Trust offers a number of shareholder services and investment plans
designed to facilitate investment in shares of the Fund. Full details as to
each of such services 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. Included in such services are the following:
Investment Account. Each shareholder whose account (an "Investment Account")
is maintained at the Transfer Agent has an Investment Account and will receive
monthly statements from the Transfer Agent showing any reinvestments of
dividends and capital gains distributions and any other activity in the account
since the preceding statement. Shareholders also will receive separate
confirmations for each purchase or sale transaction other than reinvestments of
dividends and capital gains distributions. A shareholder may make additions to
his Investment Account at any time by mailing a check directly to the Transfer
Agent. Shareholders may also maintain their accounts through Merrill Lynch.
Upon the transfer of shares out of a Merrill Lynch brokerage account, an
Investment Account in the transferring shareholder's name will be opened
automatically, without charge, at the Transfer Agent. Shareholders considering
transferring their Class A shares from Merrill Lynch to another brokerage firm
or financial institution should be aware that, if
25
<PAGE>
the firm to which the Class A shares are to be transferred will not take
delivery of shares of the Fund, a shareholder either must redeem the Class A
shares so that the cash proceeds can be transferred to the account at the new
firm or such shareholder must continue to maintain an Investment Account at the
Transfer Agent for those Class A shares. Shareholders interested in
transferring their Class B shares from Merrill Lynch and who do not wish to
have an Investment Account maintained for such shares at the Transfer Agent may
request their new brokerage firm to maintain such shares in an account
registered in the name of the brokerage firm for the benefit of the
shareholder. If the new brokerage firm is willing to accommodate the
shareholder in this manner, the shareholder must request that he be issued
certificates for his shares and then must turn the certificates over to the new
firm for re-registration as described in the preceding sentence.
Exchange Privilege. Shareholders of the Fund each have an exchange privilege
with certain other mutual funds sponsored by Merrill Lynch. 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 Securities and Exchange Commission (the
"Commission"). Class A shareholders of the Fund may exchange their shares
("outstanding Class A shares") for Class A shares of another fund ("new Class A
shares") on the basis of relative net asset value per Class A share, plus an
amount equal to the difference, if any, between the sales charge previously
paid on the outstanding Class A shares and the sales charge payable at the time
of the exchange on the new Class A shares. However, the Fund's exchange
privilege is modified with respect to purchases of Class A shares under the
Merrill Lynch Mutual Fund Adviser program. First, the initial allocation of
assets is made under the program. Then, any subsequent exchange under the
program of Class A shares of a fund for Class A shares of the Fund will be made
solely on the basis of the relative net asset values of the shares being
exchanged. Therefore, there will not be a charge for any difference between the
sales charge previously paid on the shares of the other fund and the sales
charge payable on the shares of the Fund being acquired in the exchange under
this program.
Class B shareholders of the Fund may exchange their shares ("outstanding
Class B shares") for Class B shares of another fund ("new Class B shares") on
the basis of relative net asset value per share, without the payment of any
CDSC that might otherwise be due upon the redemption of the outstanding Class B
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 deferred sales charge 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 deferred sales charge schedule relating to the Class B shares
of the fund from which the exchange has been made. For purposes of computing
the CDSC that may be payable upon a disposition of the new Class B shares, the
holding period for the outstanding Class B shares is "tacked" to the holding
period of the new Class B shares. Class A and Class B shareholders of the Fund
may also exchange their shares for shares of certain money market funds, but in
the case of an exchange from Class B shares the period of time that shares are
held in a money market fund will not count toward satisfaction of the holding
period requirement for purposes of reducing the CDSC. Exercise of the exchange
privilege is treated as a sale for Federal income tax purposes. For further
information, see "Shareholder Services -- Exchange Privilege" in the Statement
of Additional Information.
Automatic Reinvestment of Dividends and Capital Gains Distributions. All
dividends and capital gains distributions are reinvested automatically in full
and fractional shares of the Fund, without a sales charge, at the net asset
value per share at the close of business on the monthly payment date for such
dividends and distributions. A shareholder may at any time, by written
notification or by telephone (1-800-MER-FUND)
26
<PAGE>
to the Transfer Agent, elect to have subsequent dividends or both dividends and
capital gains distributions paid in cash, rather than reinvested, in which
event payment will be mailed monthly. No deferred sales charge will be imposed
upon redemption of shares issued as a result of the automatic reinvestment of
dividends or capital gains distributions.
Systematic Withdrawal and Automatic Investment Plans. A Class A shareholder
may elect to receive systematic withdrawal payments from his Investment Account
through automatic payment by check or through automatic payment by direct
deposit to his bank account on either a monthly or quarterly basis. A Class A
shareholder whose shares are held within a CMA(R), CBA(R) or Retirement Account
may elect to have shares redeemed on a monthly, bimonthly, quarterly,
semiannual or annual basis through the Systematic Redemption Program, subject
to certain conditions. Regular additions of both Class A and Class B shares may
be made to an investor's Investment Account by prearranged charges of $50 or
more to his regular bank account. The Fund's Automatic Investment Program is
not available to shareholders whose shares are held in a brokerage account with
Merrill Lynch. Alternatively, investors who maintain CMA(R) accounts may
arrange to have periodic investments made in the Fund in their CMA(R) account
or in certain related accounts in amounts of $100 or more through the CMA(R)
Automatic Investment Program.
PORTFOLIO TRANSACTIONS
The Trust has no obligation to deal with any dealer or group of dealers in
the execution of transactions in portfolio securities of the Fund. Municipal
Bonds and other securities in which the Fund invests are traded primarily in
the over-the-counter market. Where possible, the Trust deals directly with the
dealers who make a market in the securities involved except in those
circumstances where better prices and execution are available elsewhere. It is
the policy of the Trust to obtain the best net results in conducting portfolio
transactions for the Fund, taking into account such factors as price (including
the applicable dealer spread), the size, type and difficulty of the
transactions involved, the firm's general execution and operations facilities,
and the firm's risk in positioning the securities involved and the provision of
supplemental investment research by the firm. While reasonably competitive
spreads or commissions are sought, the Fund will not necessarily be paying the
lowest spread or commission available. The sale of shares of the Fund may be
taken into consideration as a factor in the selection of brokers or dealers to
execute portfolio transactions for the Fund. The portfolio securities of the
Fund generally are traded on a net basis and normally do not involve either
brokerage commissions or transfer taxes. The cost of portfolio securities
transactions of the Fund primarily consists of dealer or underwriter spreads.
Under the 1940 Act, persons affiliated with the Trust, including Merrill Lynch,
are prohibited from dealing with the Trust as a principal in the purchase and
sale of securities unless such trading is permitted by an exemptive order
issued by the Commission. The Trust has obtained an exemptive order permitting
it to engage in certain principal transactions with Merrill Lynch involving
high quality short-term municipal bonds subject to certain conditions. In
addition, the Trust may not purchase securities, including Municipal Bonds, for
the Fund during the existence of any underwriting syndicate of which Merrill
Lynch is a member except pursuant to procedures approved by the Trustees of the
Trust which comply with rules adopted by the Commission. Affiliated persons of
the Trust may serve as its broker in over-the-counter transactions conducted
for the Fund on an agency basis only.
27
<PAGE>
DISTRIBUTIONS AND TAXES
DISTRIBUTIONS
The net investment income of the Fund is declared as dividends daily
following the normal close of trading on the New York Stock Exchange (currently
4:00 P.M.) prior to the determination of the net asset value on that day. The
net investment income of the Fund for dividend purposes consists of interest
earned on portfolio securities, less expenses, in each case computed since the
most recent determination of the net asset value. Expenses of the Fund,
including the management fees and Class B account maintenance and distribution
fees, are accrued daily. Dividends of net investment income are declared daily
and reinvested monthly in the form of additional full and fractional shares of
the Fund at net asset value as of the close of business on the "payment date"
unless the shareholder elects to receive such dividends in cash. Shares will
accrue dividends as long as they are issued and outstanding. Shares are issued
and outstanding from the settlement date of a purchase order to the day prior
to settlement date of a redemption order.
All net realized long- or short-term capital gains, if any, are declared and
distributed to the Fund's shareholders at least annually. Capital gains
distributions will be reinvested automatically in shares unless the shareholder
elects to receive such distributions in cash.
The per share dividends and distributions on Class B shares will be lower
than per share dividends and distributions on Class A shares as a result of the
distribution and transfer agency fees applicable with respect to the Class B
shares. 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.
TAXES
The Trust intends to elect and to qualify the Fund for the special tax
treatment afforded regulated investment companies ("RICs") under the Internal
Revenue Code of 1986, as amended (the "Code"). If it so qualifies, in any
taxable year in which it distributes at least 90% of its taxable net income and
90% of its tax-exempt net income (see below), the Fund (but not its
shareholders) will not be subject to Federal income tax to the extent that it
distributes its net investment income and net realized capital gains. The Trust
intends to cause the Fund to distribute substantially all of such income.
To the extent that the dividends distributed to the Fund's Class A and Class
B 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" by the Trust, they will be excludable
from a shareholder's gross income for Federal income tax purposes. Exempt-
interest dividends are included, however, in determining the portion, if any,
of a person's social security benefits and railroad retirement benefits subject
to Federal income taxes. The portion of such exempt-interest dividends paid
from interest received by the Fund from New Mexico Municipal Bonds also will be
exempt from New Mexico personal and corporate income taxes. Shareholders
subject to income taxation by states other than New Mexico will realize a lower
after-tax rate of return than New Mexico 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
28
<PAGE>
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 New Mexico income tax. Interest on indebtedness incurred or
continued to purchase or carry Fund shares is not deductible for Federal or New
Mexico 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 advisers
before purchasing Fund shares.
Shares of the Fund will not be subject to the New Mexico 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 distributions are
considered ordinary income for Federal and New Mexico income tax purposes. Such
distributions are not eligible for the dividends-received deduction for
corporations. Distributions, if any, of net long-term capital gains from the
sale of securities or from certain transactions in futures or options ("capital
gain dividends") are taxable as long-term capital gains for Federal income tax
purposes, regardless of the length of time the shareholder has owned Fund
shares and, for New Mexico income tax purposes, are treated as capital gains
which are taxed at ordinary income rates. Under the Revenue Reconciliation Act
of 1993, all or a portion of the Fund's gain from the sale or redemption of
tax-exempt obligations purchased at a market discount will be treated as
ordinary income rather than capital gain. This rule may increase the amount of
ordinary income dividends received by shareholders. Distributions in excess of
the Fund's earnings and profits will first reduce the adjusted tax basis of a
holder's shares and, after such adjusted tax basis is reduced to zero, will
constitute capital gains 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 treated as long-term capital loss to the extent of any
capital gain dividends received by the shareholder. In addition, such loss will
be disallowed to the extent of any exempt-interest 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 "private activity bonds" issued after August 7, 1986.
Private activity bonds are bonds which, although tax-exempt, are used for
purposes other than those generally performed by governmental units and which
benefit non-governmental entities (e.g., bonds used for industrial development
or housing purposes). Income received on such bonds is classified as an item of
"tax preference," which could subject investors in such bonds, including
shareholders of the Fund, to an alternative minimum tax. The Fund will purchase
such "private activity bonds," and the Trust will report to shareholders within
60 days after the Fund's taxable year-end the portion of the Fund's dividends
declared during the year which constitutes an item of tax preference for
alternative minimum tax purposes. The Code further provides that corporations
are subject to an alternative minimum tax based, in part, on certain
differences between taxable income as adjusted for other tax preferences and
the corporation's "adjusted current earnings" (which more closely reflects a
corporation's economic income). Because an exempt-interest dividend paid by the
Fund will be included in adjusted current earnings, a corporate shareholder may
be required to pay alternative minimum tax on exempt-interest dividends paid by
the Fund.
The Revenue Reconciliation Act of 1993 has added new marginal tax brackets of
36% and 39.6% for individuals and has created a graduated structure of 26% and
28% for the alternative minimum tax
29
<PAGE>
applicable to individual taxpayers. These rate increases may affect an
individual investor's after-tax return from an investment in the Fund as
compared with such investor's return from taxable investments.
If a Class A shareholder exercises the exchange privilege within 90 days of
acquiring the shares, then the loss the shareholder can recognize on the
exchange will be reduced (or the gain increased) to the extent the sales charge
paid to the Fund reduces any sales charge such shareholder would have owed upon
purchase of the new Class A shares in the absence of the exchange privilege.
Instead, such sales charge will be treated as an amount paid for the new Class
A shares.
Under certain provisions of the Code, some shareholders may be subject to a
31% withholding tax on certain ordinary income dividends and capital gain
dividends and on 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 New Mexico 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 New Mexico income tax laws. The Code and the Treasury
regulations, as well as the New Mexico tax laws, are subject to change by
legislative, judicial or administrative action either prospectively or
retroactively.
Shareholders are urged to consult their tax advisers regarding the
availability of any exemptions from state or local taxes (other than those
imposed by New Mexico) and with specific questions as to Federal, foreign,
state or local taxes.
PERFORMANCE DATA
From time to time the Fund may include its average annual total return and
yield and tax equivalent yield for various specified time periods in
advertisements or information furnished to present or prospective shareholders.
Average annual total return, yield and tax equivalent yield are computed in
accordance with formulas specified by the Commission.
Average annual total return quotations for the specified periods will be
computed by finding the average annual compounded rates of return (based on net
investment income and any realized and unrealized capital gains or losses on
portfolio investments over such periods) that would equate the initial amount
invested to the redeemable value of such investment at the end of each period.
Average annual total return will be computed assuming all dividends and
distributions are reinvested and taking into account all applicable recurring
and nonrecurring expenses, including the maximum sales charge in the case of
Class A shares and the contingent deferred sales charge that would be
applicable to a complete redemption of the investment at the end of the
specified period in the case of Class B shares. Dividends paid by the Fund with
respect to Class A and Class B shares, to the extent any dividends are paid,
will be calculated in the same manner at the same time on the same day and will
be in the same amount, except that account maintenance and distribution charges
and any incremental transfer agency costs relating to Class B shares will be
borne exclusively by that Class. The Fund will include performance data for
both Class A and Class B shares of the Fund in any advertisement or information
including performance data of the Fund.
30
<PAGE>
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 reduced sales charges in the case of Class A shares or
waiver of the CDSC in the case of Class B shares (such as investors in certain
retirement plans), 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.
Total return and yield figures are based on the Fund's historical performance
and are not intended to indicate future performance. The Fund's total return
and yield will vary depending on market conditions, the securities comprising
the Fund's portfolio, the Fund's operating expenses and the amount of realized
and unrealized net capital gain or losses during the period. The value of an
investment in the Fund will fluctuate and an investor's shares, when redeemed,
may be worth more or less than their original cost.
On occasion, the Fund may compare its performance to performance data
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 representative of the Fund's relative
performance for any future period.
ADDITIONAL INFORMATION
DETERMINATION OF NET ASSET VALUE
The net asset value of the Fund is determined by the Manager once daily as of
4:15 P.M., New York time, on each day during which the New York Stock Exchange
is open for trading. The net asset value per share is computed by dividing the
sum of the value of the securities held by the Fund plus any cash or other
31
<PAGE>
assets minus all liabilities by the total number of shares outstanding at such
time, rounded to the nearest cent. Expenses, including the fees payable to the
Manager and the Distributor, are accrued daily.
The net asset value per share of the Class A shares and the net asset value
per share of the Class B shares are expected to be equivalent. Under certain
circumstances, however, the per share net asset value of the Class B shares may
be lower than the per share net asset value of the Class A shares reflecting
the higher daily expense accruals of the deferred charges (and incremental
transfer agency costs) applicable with respect to the Class B shares. Even
under those circumstances, the per share net asset value of the two classes
eventually will tend to converge immediately after the payment of dividends,
which will differ by approximately the amount of the expense accrual
differential between the classes.
ORGANIZATION OF THE TRUST
The Trust is an unincorporated business trust organized on August 2, 1985
under the laws of Massachusetts. On October 1, 1987, the Trust changed its name
from "Merrill Lynch Multi-State Tax-Exempt Series Trust" to "Merrill Lynch
Multi-State Municipal Bond Series Trust" and on December 22, 1987 the Trust
changed its name to "Merrill Lynch Multi-State Municipal Series Trust". The
Trust is an open-end management investment company comprised of separate series
("Series"), each of which is a separate portfolio offering shares to selected
groups of purchasers. Each of the Series is to be managed independently in
order to provide to shareholders who are residents of the state to which such
Series relates as high a level of income exempt from Federal, state and local
income taxes as is consistent with prudent investment management. The Trustees
are authorized to create an unlimited number of Series and, with respect to
each Series, to issue an unlimited number of full and fractional shares of
beneficial interest of $.10 par value of different classes. Shareholder
approval is not required for the authorization of additional Series or classes
of a Series of the Trust. At the date of this Prospectus, the shares of the
Fund are divided into Class A shares and Class B shares. Both Class A and Class
B shares represent an interest in the same assets of the Fund and have
identical voting, dividend, liquidation and other rights and the same terms and
conditions except that expenses related to the account maintenance and
distribution of the Class B shares are borne solely by such class and Class B
shares have exclusive voting rights with respect to matters relating to such
distribution expenditures. See "Purchase of Shares". The Trust has received an
order (the "Order") from the Commission permitting the issuance and sale of two
classes of shares, and the issuance and sale of any additional classes by any
Series will require an additional order from the Commission. There is no
assurance that such an additional order will be granted.
Shareholders are entitled to one vote for each full share and to fractional
votes for fractional shares held in the election of Trustees (to the extent
hereinafter provided) and on other matters submitted to the vote of
shareholders. All shares of the Trust have equal voting rights, except that
only shares of the respective Series are entitled to vote on matters concerning
only that Series and, as noted above, only Class B shares of a Series will have
exclusive voting rights with respect to matters relating to the account
maintenance and distribution expenses being borne solely by such class. 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
32
<PAGE>
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. Each issued and
outstanding share is entitled to participate equally in dividends and
distributions declared by the respective Series and in net assets of such
Series upon liquidation or dissolution remaining after satisfaction of
outstanding liabilities except that, as noted above, expenses related to the
distribution of the Class B shares of a Series will be borne solely by such
class. 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:
Financial Data Services, Inc.
Attn: Document Evaluation Unit
P.O. Box 45290
Jacksonville, FL 32232-5290
The written notification should include the shareholder's name, address, tax
identification number and Merrill Lynch, Pierce, Fenner & Smith Incorporated
and/or mutual fund account numbers. If you have any questions regarding this
matter please call your Merrill Lynch financial consultant or Financial Data
Services, Inc. at 800-637-3863.
SHAREHOLDER INQUIRIES
Shareholder inquiries may be addressed to the Trust at the address or
telephone number set forth on the cover page of this Prospectus.
The Declaration of Trust establishing the Trust, dated August 2, 1985, a copy
of which together with all amendments thereto (the "Declaration"), is on file
in the office of the Secretary of the Commonwealth of Massachusetts, provides
that the name "Merrill Lynch Multi-State Municipal Series Trust" refers to the
Trustees under the Declaration collectively as Trustees, but not as individuals
or personally; and no Trustee, shareholder, officer, employee or agent of the
Trust shall be held to any personal liability, nor shall resort be had to such
person's private property for the satisfaction of any obligation or claim of
the Trust, but the "Trust Property" only shall be liable.
33
<PAGE>
[THIS PAGE INTENTIONALLY LEFT BLANK.]
34
<PAGE>
MERRILL LYNCH NEW MEXICO MUNICIPAL BOND FUND--AUTHORIZATION FORM
- -------------------------------------------------------------------------------
1. SHARE PURCHASE APPLICATION
I, being of legal age, wish to purchase . . . . . . . Class A shares or
. . . . . . . Class B shares (choose one) of Merrill Lynch New Mexico
Municipal Bond Fund and establish an Investment Account as described in the
Prospectus.
Basis for establishing an Investment Account:
A. I enclose a check for $ . . . . . . . payable to Financial Data
Services, Inc., as an initial investment (minimum $1,000) (subsequent
investment $50 or more). 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:
1. ....................................... 4. ...............................
2. ....................................... 5. ...............................
3. ....................................... 6. ...............................
(Please list all Funds. Use a separate sheet of paper if necessary.)
Until you are notified by me in writing, the following options with
respect to dividends and distributions are elected:
Elect[_] reinvest Elect[_] reinvest capital
Distribution dividends gains
Options One[_] pay dividends in One[_] pay capital gains in
cash cash
If no election is made, dividends and capital gains will be reinvested
automatically at net asset value without a sales charge.
----------------
(Please Print)
Name .............................................
First Name Initial Last Name
[_][_][_][_][_][_][_]
Name of Co-Owner (if any) ............................. Social Security
First Name Initial Last Name No. or Taxpayer
Identification
No.
Address ..........................................
.................................................. ................, 19. .
(Zip Code) Date
Occupation .............. Name and Address..................................
of Employer.......................................
..................................................
Under penalty of perjury, I certify (1) that the number set forth above is
my correct Social Security No. or Taxpayer Identification No. and (2) that I
am not subject to backup withholding (as discussed under "Distribution and
Taxes--Taxes" in the Prospectus) 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.
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. LETTER OF INTENTION--CLASS A SHARES ONLY (SEE TERMS AND CONDITIONS IN THE
STATEMENT OF ADDITIONAL INFORMATION)
..............., 19...
Gentlemen: Date of initial
purchase
Although I am not obligated to do so, I intend to purchase shares of Merrill
Lynch New Mexico Municipal Bond Fund or any other investment company with an
initial sales charge or deferred sales charge for which the Merrill Lynch
Funds Distributor, Inc. acts as a 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 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 New Mexico Municipal Bond Fund held as security.
By .................................. .....................................
Signature of Owner Signature (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 ............................
- -------------------------------------------------------------------------------
35
<PAGE>
MERRILL LYNCH NEW MEXICO MUNICIPAL BOND FUND--AUTHORIZATION FORM
- -------------------------------------------------------------------------------
3.SYSTEMATIC WITHDRAWAL PLAN--CLASS A SHARES ONLY (SEE TERMS AND CONDITIONS IN
THE STATEMENT OF ADDITIONAL INFORMATION)
Minimum Requirements: $10,000 for monthly disbursements, $5,000 for
quarterly, of shares in Merrill Lynch New Mexico Municipal Bond Fund at cost
or current offering price.
Withdrawals to be made either (check
one) [_] Monthly [_] Quarterly. Quarterly
withdrawals are made on the 24th day of March, June,
September and December.
Begin systematic withdrawal on . . . . . . . . . , 19. .
[date] "
Specify withdrawal amount (check one): [_] $ . . . . . . . or [_] . . . . .%
of the current value of Class A shares in the account
Specify withdrawal method: [_] check or [_] direct deposit to bank account
(CHECK ONE AND COMPLETE PART (A) OR (B) BELOW):
(A) I HEREBY AUTHORIZE PAYMENT BY (B) I HEREBY AUTHORIZE PAYMENT BY
CHECK DIRECT DEPOSIT TO BANK ACCOUNT and
(if necessary) debit entries and
adjustments for any credit entries
made in error to my account
Draw checks payable
(check one) Specify type of account (check
[_] as indicated in item 1. one): [_] checking [_] savings
[_] to the order of ............... I agree that this authorization will
remain in effect until I provide
written notification to Financial
Data Services, Inc. amending or
terminating this service.
Name on your Account .................
Bank .................................
Mail to (check one) Bank # ...................
Account # ...
[_] the address indicated in item
1. Bank Address .........................
[_] Name (Please Print) ...........
Signature of Depositor ... Date .....
Address .............................
Signature of Depositor (if joint
Signature of Owner................... account) .............................
NOTE: IF AUTOMATIC DIRECT DEPOSIT IS
ELECTED, YOUR BLANK, UNSIGNED CHECK
MARKED "VOID" OR A DEPOSIT SLIP FROM
YOUR SAVINGS ACCOUNT SHOULD ACCOMPANY
THIS APPLICATION.
Signature of Co-Owner (if any).......
- -------------------------------------------------------------------------------
4. APPLICATION FOR AUTOMATIC INVESTMENT PLAN
I hereby request that Financial Data Services, Inc. draw a check or an
automated clearing house ("ACH") debit on my checking account as described
below each month to purchase . . . . . Class A shares or . . . . . Class B
shares of Merrill Lynch New Mexico Municipal Bond Fund subject to the terms
set forth below.
FINANCIAL DATA SERVICES, INC. AUTHORIZATION TO HONOR CHECKS OR ACH
DEBITS
You are hereby authorized to draw a DRAWN BY FINANCIAL DATA SERVICES, INC.
check or an ACH debit each month on To ................................Bank
my bank account for investment in (Investor's Bank)
Merrill Lynch New Mexico Municipal Bank Address ..........................
Bond Fund as indicated below: City ......... State .... Zip Code.....
Amount of each check or ACH
debit $ ...................... As a convenience to me, I hereby re-
quest and authorize you to pay and
Account No. .................. charge to my account checks or ACH
Please date and invest checks debits drawn on my account by and pay-
or draw ACH debits on the able to Financial Data Services, Inc.
20th of each month beginning I agree that your rights in respect to
.............................. each such check or debit shall be the
same as if it were a check drawn on
(Month) you and signed personally by me. This
or as soon thereafter as authority is to remain in effect until
possible. revoked personally by me in writing.
Until you receive such notice, you
I agree that you are preparing shall be fully protected in honoring
these checks or drawing these deb- any such check or debit. I further
its voluntarily at my request and agree that if any such check or debit
that you shall not be liable for be dishonored, whether with or without
any loss arising from any delay in cause and whether intentionally or in-
preparing or failure to prepare any advertently, you shall be under no li-
such check or debit. If I change ability.
banks or desire to terminate or ......... ...........................
suspend this program, I agree to Date Signature of Depositor
notify you promptly in writing. ......... ..........................
I further agree that if a check or Bank Signature of Depositor
debit is not honored upon Account (If joint account, both
presentation, Financial Data Number must sign)
Services, Inc. is authorized to
discontinue immediately the
Automatic Investment Plan and to NOTE: IF AUTOMATIC INVESTMENT PLAN IS
liquidate sufficient shares held in ELECTED, YOUR BLANK, UNSIGNED CHECK
my account to offset the purchase MARKED "VOID" SHOULD ACCOMPANY THIS
made with the returned check or APPLICATION.
dishonored debit.
........ .......................
Date Signature of Depositor
.......................
Signature of Depositor
(If joint account,
both must sign)
- -------------------------------------------------------------------------------
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 notify the
Distributor of any purchases made under a
Letter of Intention or Systematic With-
drawal Plan. We guarantee the Sharehold-
er's Signature.
- -
This form when completed should
be mailed to:
...........................................
Dealer Name and Address
By ........................................
Authorized Signature of Dealer
Merrill Lynch New Mexico
Municipal Bond Fund c/o
Financial Data Services, Inc.
Transfer Agency Mutual Fund
Operations P.O. Box
45289Jacksonville, FL 32232-
5289
[_][_][_] [_][_][_][_] .....................
Branch- F/C No. F/C Last Name
Code
[_][_][_] [_][_][_][_]
Dealer's Customer A/C No.
36
<PAGE>
[THIS PAGE INTENTIONALLY LEFT BLANK.]
37
<PAGE>
[THIS PAGE INTENTIONALLY LEFT BLANK.]
38
<PAGE>
MANAGER
Fund Asset Management, L.P.
Administrative Offices:
800 Scudders Mill Road
Plainsboro, New Jersey
Mailing Address:
Box 9011
Princeton, New Jersey 08543-9011
DISTRIBUTOR
Merrill Lynch Funds Distributor, Inc.
Administrative Offices:
800 Scudders Mill Road
Plainsboro, New Jersey
Mailing Address:
Box 9011
Princeton, New Jersey 08543-9011
CUSTODIAN
TRANSFER AGENT
Financial Data Services, Inc.
Administrative Offices:
Transfer Agency Mutual Fund Operations
4800 Deer Lake Drive East
Jacksonville, Florida 32246-6484
Mailing Address:
P.O. Box 45289
Jacksonville, Florida 32232-5289
INDEPENDENT AUDITORS
COUNSEL
Brown & Wood
One World Trade Center
New York, New York 10048-0557
<PAGE>
NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY REPRE-
SENTATIONS, OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS, IN CONNECTION WITH
THE OFFER CONTAINED IN THIS PROSPECTUS, AND, IF GIVEN OR MADE, SUCH OTHER IN-
FORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED
BY THE TRUST, THE MANAGER OR THE DISTRIBUTOR. THIS PROSPECTUS DOES NOT CONSTI-
TUTE AN OFFERING IN ANY STATE IN WHICH SUCH OFFERING MAY NOT LAWFULLY BE MADE.
----------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Fee Table................................................................. 3
Alternative Sales Arrangements............................................ 4
Investment Objective and Policies......................................... 6
Potential Benefits....................................................... 8
Special and Risk Considerations Relating to New Mexico Municipal Bonds... 8
Description of Municipal Bonds........................................... 9
When-Issued Securities and Delayed Delivery Transactions................. 11
Call Rights.............................................................. 11
Financial Futures Transactions and Options............................... 11
Repurchase Agreements and Purchase and Sale Contracts.................... 14
Investment Restrictions.................................................. 14
Management of the Trust................................................... 16
Trustees................................................................. 16
Management and Advisory Arrangements..................................... 16
Transfer Agency Services................................................. 17
Purchase of Shares........................................................ 17
Subscription Offering.................................................... 17
Continuous Offering...................................................... 18
Alternative Sales Arrangements........................................... 19
Initial Sales Charge Alternative -- Class A Shares....................... 20
Deferred Sales Charge Alternative-- Class B Shares....................... 21
Redemption of Shares...................................................... 24
Redemption............................................................... 24
Repurchase............................................................... 24
Reinstatement Privilege -- Class A Shares................................ 25
Shareholder Services...................................................... 25
Portfolio Transactions.................................................... 27
Distributions and Taxes................................................... 28
Distributions............................................................ 28
Taxes.................................................................... 28
Performance Data.......................................................... 30
Additional Information.................................................... 31
Determination of Net Asset Value......................................... 31
Organization of the Trust................................................ 32
Shareholder Reports...................................................... 33
Shareholder Inquiries.................................................... 33
Authorization Form........................................................ 34
</TABLE>
Code # 18034
Prospectus
(ART)
- -----------------------------------
MERRILL LYNCH
NEW MEXICO
MUNICIPAL BOND
FUND
MERRILL LYNCH MULTI-STATE
MUNICIPAL SERIES TRUST
, 1994
Distributor:
Merrill Lynch
Funds Distributor, Inc.
This prospectus should be
retained for future reference.
<PAGE>
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A +
+REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE +
+SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY +
+OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT +
+BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR +
+THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE +
+SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE +
+UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF +
+ANY SUCH STATE. THIS STATEMENT OF ADDITIONAL INFORMATION DOES NOT CONSTITUTE +
+A PROSPECTUS. +
+++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
SUBJECT TO COMPLETION PRELIMINARY STATEMENT OF ADDITIONAL INFORMATION DATED
FEBRUARY 16, 1994
STATEMENT OF ADDITIONAL INFORMATION
- -----------------------------------
MERRILL LYNCH NEW MEXICO MUNICIPAL BOND FUND
MERRILL LYNCH MULTI-STATE MUNICIPAL SERIES TRUST
BOX 9011, PRINCETON, NEW JERSEY 08543-9011--PHONE NO. (609) 282-2800
-------------
Merrill Lynch New Mexico 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 New Mexico income taxes as is
consistent with prudent investment management. The Fund invests primarily in a
non-diversified portfolio of long-term investment grade obligations the
interest on which is exempt from Federal and New Mexico income taxes in the
opinion of bond counsel to the issuer ("New Mexico Municipal Bonds"). There can
be no assurance that the investment objective of the Fund will be realized.
The Fund offers two classes of shares which may be purchased during the
subscription offering at $10.00 per share and during the continuous offering at
a price equal to the next determined net asset value per share, plus in both
cases a sales charge which, at the election of the purchaser, may be imposed
(i) at the time of purchase (the "Class A shares"), or (ii) on a deferred basis
(the "Class B shares"). These alternatives permit an investor to choose the
method of purchasing shares that is most beneficial given the amount of the
purchase, the length of time the investor expects to hold the shares and other
circumstances. Investors should understand that the purpose and function of the
deferred sales charge with respect to the Class B shares are the same as the
purpose and function of the initial sales charge with respect to the Class A
shares. Each Class A share and Class B share represents an identical interest
in the investment portfolio of the Fund and has the same rights, except that
Class B shares bear the expenses of the account maintenance and distribution
fees and certain other costs resulting from the deferred sales charge
arrangement and have exclusive voting rights with respect to the account
maintenance and distribution fees. The two classes also have different exchange
privileges.
-------------
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
, 1994 (the "Prospectus"), which has been filed with the Securities and
Exchange Commission and can be obtained, without charge, by calling or by
writing the Fund at the above telephone number or address. This Statement of
Additional Information has been incorporated by reference into the Prospectus.
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 , 1994
<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 New Mexico 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 New Mexico, its political subdivisions,
agencies and instrumentalities and obligations of other qualifying issuers,
such as issuers located in Puerto Rico, the Virgin Islands and Guam, which pay
interest exempt, in the opinion of bond counsel to the issuer, from Federal and
New Mexico income taxes. Obligations exempt from Federal income taxes are
referred to herein as "Municipal Bonds" and obligations exempt from both
Federal and New Mexico income taxes are referred to as "New Mexico Municipal
Bonds". Unless otherwise indicated, references to Municipal Bonds shall be
deemed to include New Mexico 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 New Mexico 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 Corporation ("Standard & Poor's") (currently AAA, AA, A
and BBB) or Fitch Investors Service, Inc. ("Fitch") (currently AAA, AA, A and
BBB). If unrated, such securities will possess creditworthiness comparable, in
the opinion of the manager of the Fund, Fund Asset Management, Inc. (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 New Mexico income taxes. However, to the extent that suitable
New Mexico 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 New Mexico 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 also
could include trust certificates or other instruments evidencing interests in
one or more long-term municipal securities.
Except when acceptable securities are unavailable as determined by the
Manager, the Fund, under normal circumstances, will invest at least 65% of its
total assets in New Mexico Municipal Bonds. For temporary periods or to provide
liquidity, the Fund has the authority to invest as much as 35% of its total
assets in tax-exempt or taxable money market obligations with a maturity of one
year or less (such short-term obligations being referred to herein as
"Temporary Investments"), except that taxable Temporary Investments shall not
exceed 20% of the Fund's net assets. The Fund at all times will have at least
80% of its net assets invested in securities exempt from Federal income
taxation. However, interest received on
2
<PAGE>
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 the return on which is based on a
particular index of value or interest rates. For example, the Fund may invest
in Municipal Bonds that pay interest based on an index of Municipal Bond
interest rates or based on the value of gold or some other commodity. The
principal amount payable upon maturity of certain Municipal Bonds also may be
based on the value of an index. Also, the Fund may invest in so-called "inverse
floating obligations" or "residual interest bonds" on which the interest rates
typically decline as market rates increase and increase as market rates
decline. For example, to the extent the Fund invests in these types of
Municipal Bonds, the Fund's return on such Municipal Bonds will be subject to
risk with respect to the value of the particular index. Such securities have
the effect of providing a degree of investment leverage, since they may
increase or decrease in value in response to changes, as an illustration, in
market interest rates at a rate which is a multiple (typically two) of the rate
at which fixed-rate long-term tax exempt securities increase or decrease in
response to such changes. As a result, the market values of such securities
will generally be more volatile than the market values of fixed-rate tax exempt
securities. To seek to limit the volatility of these securities, the Fund may
purchase inverse floating obligations with shorter term maturities or which
contain limitations on the extent to which the interest rate may vary. The
Manager believes that indexed and inverse floating obligations represent a
flexible portfolio management instrument for the Fund which allows the Manager
to vary the degree of investment leverage relatively efficiently under
different market conditions. Certain investments in such obligations may be
illiquid. The Fund may not invest in such illiquid obligations if such
investments, together with other illiquid investments, would exceed 15% of the
Fund's net assets.
The Fund may purchase a Municipal Bond issuer's right to call all or a
portion of such Municipal Bond for mandatory tender for purchase (a "Call
Right"). A holder of a Call Right may exercise such right to require a
mandatory tender for the purchase of related Municipal Bonds, subject to
certain conditions. A Call Right that is not exercised prior to the maturity of
the related Municipal Bond will expire without value. The economic effect of
holding both the Call Right and the related Municipal Bond is identical to
holding a
3
<PAGE>
Municipal Bond as a non-callable security. Certain investments in such
obligations may be illiquid. The Fund may not invest in such illiquid
obligations if such investments, together with other illiquid investments,
would exceed 15% of the Fund's net assets.
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. The Fund does not intend to
purchase debt securities.
Issuers of high yield securities may be highly leveraged and may not have
available to them more traditional methods of financing. Therefore, the risks
associated with acquiring the securities of such issuers or obligors generally
are greater than is the case with higher rated securities. For example, during
an economic downturn or a sustained period of rising interest rates, issuers of
high yield securities may be more likely to experience financial stress,
especially if such issuers are highly leveraged. During periods of economic
recession, such issuers may not have sufficient revenues to meet their interest
payment obligations. The issuer's ability to service its debt obligations also
may be adversely affected by specific issuer developments, or the issuer's
inability to meet specific projected business forecasts, or the unavailability
of additional financing. The risk of loss due to default by the issuer is
significantly greater for the holders of high yield securities because such
securities may be unsecured and may be subordinated to other creditors of the
issuer.
High yield securities frequently have call or redemption features that would
permit an issuer to repurchase the security from the Fund. If a call were
exercised by the issuer during a period of declining interest rates, the Fund
likely would have to replace such called security with a lower yielding
security, thus decreasing the net investment income to the Fund and dividends
to shareholders.
The Fund may have difficulty disposing of certain high yield securities
because there may be a thin trading market for such securities. Because not all
dealers maintain markets in all high yield securities, there is no established
secondary market for many of these securities, and the Fund anticipates that
such securities could be sold only to a limited number of dealers or
institutional investors. To the extent that a secondary trading market for high
yield securities does exist, it generally is not as liquid as the secondary
market for higher rated securities. Reduced secondary market liquidity may have
an adverse impact on market price and the Fund's ability to dispose of
particular issues when necessary to meet the Fund's liquidity needs or in
response to a specific economic event such as a deterioration in the
creditworthiness of the issuer. Reduced secondary market liquidity for certain
securities also may make it more difficult for the Fund to obtain
4
<PAGE>
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 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, excluded from gross income for
Federal income tax purposes and, in the case of New Mexico Municipal Bonds,
exempt from New Mexico income taxes. Other types of industrial development
bonds or private activity bonds, the proceeds of which are used for the
construction, equipment or improvement of privately operated industrial or
commercial facilities, may constitute Municipal Bonds, although the current
Federal tax laws place substantial limitations on the size of such issues.
The two principal classifications of Municipal Bonds are "general obligation"
bonds and "revenue" bonds which latter category includes industrial development
bonds 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. Industrial development bonds ("IDBs") and, in the case of bonds
issued after April 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 IDBs and private activity
5
<PAGE>
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 also may invest
in "moral obligation" bonds, which are normally issued by special purpose
public authorities. Under a moral obligation bond, if the issuer thereof is
unable to meet its obligations, the repayment of the bond becomes a moral
commitment, but not a legal obligation, of the state or municipality in
question.
Also included within the general category of Municipal Bonds are
participation certificates issued by government authorities or entities to
finance the acquisition or construction of equipment, land and/or facilities.
The certificates represent participations in a lease, an installment purchase
contract or a conditional sales contract (hereinafter collectively called
"lease obligations") relating to such equipment, land or facilities. Although
lease obligations do not constitute general obligations of the issuer for which
the issuer's unlimited taxing power is pledged, a lease obligation is
frequently backed by the issuer's covenant to budget for, appropriate and make
the payments due under the lease obligation. Certain investments in lease
obligations may be illiquid. The Fund may not invest in illiquid lease
obligations if such investments, together with all other illiquid investments,
would exceed 15% of the Fund's net assets. The Fund may, however, invest
without regard to such limitation in lease obligations which the Manager,
pursuant to the guidelines which have been adopted by the Board of Trustees and
subject to the supervision of the Board of Trustees, determines to be liquid.
The Manager will deem lease obligations liquid if they are publicly offered and
have received an investment grade rating of Baa or better by Moody's, or BBB or
better by Standard & Poor's or Fitch. Unrated lease obligations, or those rated
below investment grade, will be considered liquid if the obligations come to
the market through an underwritten public offering and at least two dealers are
willing to give competitive bids. In reference to the latter, the Manager must,
among other things, also review the creditworthiness of the municipality
obligated to make payment under the lease obligation and make certain specified
determinations based on such factors as the existence of a rating or credit
enhancement such as insurance, the frequency of trades or quotes for the
obligation and the willingness of dealers to make a market in the obligation.
Yields on Municipal Bonds are dependent on a variety of factors, including
the general condition of the money market and of the municipal bond market, the
size of a particular offering, the financial condition of the issuer, the
general conditions of the Municipal Bond market, the maturity of the
obligation, and the rating of the issue. The ability of the Fund to achieve its
investment objective 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.
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
6
<PAGE>
short-term unsecured promissory notes generally issued to finance short-term
credit needs. The taxable money market securities in which the Fund may invest
as Temporary Investments consist of U.S. Government securities, U.S. Government
agency securities, domestic bank or savings institution certificates of deposit
and bankers' acceptances, short-term corporate debt securities such as
commercial paper, and repurchase agreements. These Temporary Investments must
have a stated maturity not in excess of one year from the date of purchase.
Variable rate demand obligations ("VRDOs") are tax-exempt obligations which
contain a floating or variable interest rate adjustment formula and an
unconditional right of demand on the part of the holder thereof to receive
payment of the unpaid principal balance plus accrued interest upon a short
notice period not to exceed seven days. There is, however, the possibility that
because of default or insolvency the demand feature of VRDOs and Participating
VRDOs, described below, may not be honored. The interest rates are adjustable
at intervals (ranging from daily to up to one year) to some prevailing market
rate for similar investments, such adjustment formula being calculated to
maintain the market value of the VRDO at approximately the par value of the
VRDOs on the adjustment date. The adjustments typically are set at a rate
determined by the remarketing agent or based upon the prime rate of a bank or
some other appropriate interest rate adjustment index. The Fund may invest in
all types of tax-exempt instruments currently outstanding or to be issued in
the future which satisfy the short-term maturity and quality standards of the
Fund.
The Fund also may invest in VRDOs in the form of participation interests
("Participating VRDOs") in variable rate tax-exempt obligations held by a
financial institution, typically a commercial bank. Participating VRDOs provide
the Fund with a specified undivided interest (up to 100%) of the underlying
obligation and the right to demand payment of the unpaid principal balance plus
accrued interest on the Participating VRDOs from the financial institution upon
a specified number of days' notice, not to exceed seven days. In addition, a
Participating VRDO is backed by an irrevocable letter of credit or guaranty of
the financial institution. The Fund would have an undivided interest in the
underlying obligation and thus participate on the same basis as the financial
institution in such obligation except that the financial institution typically
retains fees out of the interest paid on the obligation for servicing the
obligation, providing the letter of credit and issuing the repurchase
commitment. The Fund has been advised by its counsel that the Fund should be
entitled to treat the income received on Participating VRDOs as interest from
tax-exempt obligations.
VRDOs that contain an unconditional right of demand to receive payment of the
unpaid principal balance plus accrued interest on a notice period exceeding
seven days may be deemed to be illiquid securities. A VRDO with a demand notice
period exceeding seven days 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, Fitch or Moody's. Investments in
corporate bonds and debentures (which must have maturities at the date of
purchase of one year or less) must be rated at the time of purchase at least
"A" by Standard & Poor's, Moody's or Fitch. Notes and VRDOs at the time of
purchase must be rated SP-1/A-1 through SP-2/A-3 by Standard & Poor's, MIG-
l/VMIG-1 through MIG-4/VMIG-4 by Moody's or F-1 through F-3
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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 AND PURCHASE AND SALE CONTRACTS
The Fund may invest in securities pursuant to repurchase agreements or
purchase and sale contracts. Repurchase agreements and purchase and sale
contracts may be entered into only with a member bank of the Federal Reserve
System or primary dealer in U.S. Government securities. Under such agreements,
the bank or primary dealer agrees, upon entering into the contract, to
repurchase the security at a mutually agreed upon time and price, thereby
determining the yield during the term of the agreement. This results in a fixed
rate of return insulated from market fluctuations during such period. In the
case of repurchase agreements, the prices at which the trades are conducted do
not reflect accrued interest on the underlying obligations; whereas, in the
case of purchase and sale contracts, the prices take into account accrued
interest. 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;
the Fund does not have the right to seek additional collateral in the case of
purchase and sale contracts. 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. A purchase and sale contract differs from a
repurchase agreement in that the contract arrangements stipulate that the
securities are owned by the Fund. In the event of a default under such a
repurchase agreement or under a purchase and sale contract, instead of the
contractual fixed rate of return, the rate of return to the Fund will depend on
intervening fluctuations of the market value of such security and the accrued
interest on the security. In such event, the Fund would have rights against the
seller for breach of contract with respect to any losses arising from market
fluctuations following the failure of the seller to perform. The Fund may not
invest in repurchase agreements or purchase and sale contracts maturing in more
than seven days if such investments, together with all other illiquid
investments, would exceed 15% of the Fund's net assets. While the substance of
purchase and sale contracts is similar to repurchase agreements, because of the
different treatment with respect to accrued interest and additional collateral,
management believes that purchase and sale contracts are not repurchase
agreements as such term is understood in the banking and brokerage community.
In general, for Federal income tax purposes, repurchase agreements are
treated as collateralized loans secured by the securities "sold". Therefore,
amounts earned under such agreements will not be considered tax-exempt
interest. The treatment of purchase and sale contracts is less certain.
However, it is likely that income from such arrangements also will not be
considered tax-exempt interest.
FINANCIAL FUTURES TRANSACTIONS AND OPTIONS
Reference is made to the discussion concerning futures transactions under
"Investment Objective and Policies" in the Prospectus. Set forth below is
additional information concerning these transactions.
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As described in the Prospectus, the Fund may purchase and sell exchange
traded financial futures contracts ("financial futures contracts") to hedge its
portfolio of Municipal Bonds against declines in the value of such securities
and to hedge against increases in the cost of securities the Fund intends to
purchase. However, any transactions involving financial futures or options (or
puts and calls associated therewith) will be in accordance with the Fund's
investment policies and limitations. See "Investment Objective and Policies--
Investment Restrictions" in the Prospectus. To hedge its portfolio, the Fund
may take an investment position in a futures contract which will move in the
opposite direction from the portfolio position being hedged. While the Fund's
use of hedging strategies is intended to moderate capital changes in portfolio
holdings and thereby reduce the volatility of the net asset value of Fund
shares, the Fund anticipates that its net asset value will fluctuate. Set forth
below is information concerning futures transactions.
Description of Futures Contracts. A futures contract is an agreement between
two parties to buy and sell a security, or in the case of an index-based
futures contract, to make and accept a cash settlement for a set price on a
future date. A majority of transactions in futures contracts, however, do not
result in the actual delivery of the underlying instrument or cash settlement,
but are settled through liquidation, i.e., by entering into an offsetting
transaction. Futures contracts have been designed by boards of trade which have
been designated "contracts markets" by the Commodity Futures Trading Commission
("CFTC").
The purchase or sale of a futures contract differs from the purchase or sale
of a security in that no price or premium is paid or received. Instead, an
amount of cash or securities acceptable to the broker and the relevant contract
market, which varies, but is generally about 5% of the contract amount, must be
deposited with the broker. This amount is known as "initial margin" and
represents a "good faith" deposit assuring the performance of both the
purchaser and seller under the futures contract. Subsequent payments to and
from the broker, called "variation margin", are required to be made on a daily
basis as the price of the futures contract fluctuates making the long and short
positions in the futures contract more or less valuable, a process known as
"mark to the market". At any time prior to the settlement date of the futures
contract, the position may be closed out by taking an opposite position which
will operate to terminate the position in the futures contract. A final
determination of variation margin is then made, additional cash is required to
be paid to or released by the broker, and the purchaser realizes a loss or
gain. In addition, a nominal commission is paid on each completed sale
transaction.
The Fund may deal in financial futures contracts based on a long-term
municipal bond index developed by the Chicago Board of Trade ("CBT") and The
Bond Buyer (the "Municipal Bond Index"). The Municipal Bond Index is comprised
of 40 tax-exempt municipal revenue and general obligations bonds. Each bond
included in the Municipal Bond Index must be rated A or higher by Moody's or
Standard & Poor's and must have a remaining maturity of 19 years or more. Twice
a month new issues satisfying the eligibility requirements are added to, and an
equal number of old issues are deleted from, the Municipal Bond Index. The
value of the Municipal Bond Index is computed daily according to a formula
based on the price of each bond in the Municipal Bond Index, as evaluated by
six dealer-to-dealer brokers.
The Municipal Bond Index futures contract is traded only on the CBT. Like
other contract markets, the CBT assures performance under futures contracts
through a clearing corporation, a nonprofit organization managed by the
exchange membership which 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.
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<PAGE>
Treasury bonds, Treasury notes, Government National Mortgage Association
("GNMA") Certificates and three-month U.S. Treasury bills. The Fund may
purchase and write call and put options on futures contracts on U.S. Government
securities in connection with its hedging strategies.
Subject to policies adopted by the Trustees, the Fund also may engage in
other futures contracts transactions such as futures contracts on other
municipal bond indices which may become available if the Manager and 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 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.
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<PAGE>
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 Securities and Exchange Commission
(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, if the aggregate initial margin and premiums
required to establish positions in such contracts and options does not exceed
5% of the liquidation value of the Fund's portfolio assets after taking into
account unrealized profits and unrealized losses on any such contracts and
options. (However, the Fund intends to engage in options and futures
transactions only for hedging purposes.) Margin deposits may consist of cash or
securities acceptable to the broker and the relevant contract market.
When the Fund purchases futures contracts or a call option with respect
thereto or writes a put option on a futures contract, an amount of cash, cash
equivalents or short-term, high-grade, fixed income securities will be
deposited in a segregated account with the Fund's custodian so that the amount
so segregated, plus the amount of initial and variation margin held in the
account of its broker, equals the market value of the futures contract, thereby
ensuring that the use of such futures is unleveraged.
Risk Factors in Futures Transactions and Options. Investment in futures
contracts involves the risk of imperfect correlation between movements in the
price of the futures contract and the price of the security being hedged. The
hedge will not be fully effective when there is imperfect correlation between
the movements in the prices of two financial instruments. For example, if the
price of the futures contract moves more than the price of the hedged security,
the Fund will experience either a loss or gain on the futures contract which is
not 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.
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<PAGE>
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.
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 have only recently been approved for
trading and therefore have little trading history. It is possible that trading
in such futures contracts will be less liquid than that in other futures
contracts. The trading of futures contracts also is subject to certain market
risks, such as inadequate trading activity, which could at times make it
difficult or impossible to liquidate existing positions.
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<PAGE>
INVESTMENT RESTRICTIONS
The Trust has adopted a number of restrictions and policies relating to the
investment of its assets and its activities, which are fundamental policies and
may not be changed without the approval of the holders of a majority of the
Fund's outstanding voting securities (which for this purpose and under the 1940
Act means the lesser of (i) 67% of the Fund's shares present at a meeting at
which more than 50% of the outstanding shares of the Fund are represented or
(ii) more than 50% of the Fund's outstanding shares). The Fund may not (1)
purchase any securities other than securities referred to under "Investment
Objective and Policies" herein and in the Prospectus; (2) invest more than 25%
of its total assets (taken at market value at the time of each investment) in
securities of issuers in any particular industry (other than U.S. Government
securities or Government agency securities, Municipal Bonds and Non-Municipal
Tax-Exempt Securities); (3) invest more than 10% of its total assets (taken at
market value at the time of each investment) in industrial revenue bonds where
the entity supplying the revenues from which the issuer is to be paid, and the
guarantor of the obligation, including predecessors, each have a record of less
than three years of continuous business operation; (4) make investments for the
purpose of exercising control or management; (5) purchase securities of other
investment companies, except in connection with a merger, consolidation,
acquisition or reorganization, and provided further that the Fund may purchase
securities of closed-end investment companies if immediately thereafter not
more than (i) 3% of the total outstanding voting stock of such company is owned
by the Fund, (ii) 5% of the Fund's total assets, taken at market value, would
be invested in any one such company, or (iii) 10% of the Fund's total assets,
taken at market value, would be invested in such securities; (6) purchase or
sell real estate (including limited partnership interests, but provided that
such restriction shall not apply to readily marketable securities secured by
real estate or interests therein or issued by companies which invest in real
estate or interests therein), commodities or commodity contracts (except that
the Fund may purchase and sell financial futures contracts), interests in oil,
gas or other mineral exploration or development programs or leases; (7)
purchase any securities on margin, except for use of short-term credit
necessary for clearance of purchases and sales of portfolio securities (the
deposit or payment by the Fund of initial or variation margin in connection
with financial futures contracts is not considered the purchase of a security
on margin); (8) make short sales of securities or maintain a short position or
invest in put, call, straddle or spread options (this restriction does not
apply to options on financial futures contracts); (9) make loans to other
persons, provided that the Fund may purchase a portion of an issue of tax-
exempt securities (the acquisition of a portion of an issue of tax-exempt
securities or bonds, debentures or other debt securities which are not publicly
distributed is considered to be the making of a loan under the 1940 Act) and
provided further that investments in repurchase agreements and purchase and
sale contracts shall not be deemed to be the making of a loan; (10) borrow
amounts in excess of 20% of its total assets, taken at market value (including
the amount borrowed), and then only from banks as a temporary measure for
extraordinary or emergency purposes [Usually only "leveraged" investment
companies may borrow in excess of 5% of their assets; however, the Fund will
not borrow to increase income but only to meet redemption requests which might
otherwise require untimely disposition of portfolio securities. The Fund will
not purchase securities while borrowings are outstanding. Interest paid on such
borrowings will reduce net income]; (11) mortgage, pledge, hypothecate or in
any manner transfer as security for indebtedness any securities owned or held
by the Fund except as may be necessary in connection with borrowings mentioned
in (10) above, and then such mortgaging, pledging or hypothecating may not
exceed 10% of its total assets, taken at market value, or except as may be
necessary in connection with transactions in financial futures contracts; (12)
invest in securities which cannot be readily resold because of legal or
contractual restrictions or which are not readily marketable, including
individually negotiated loans that constitute illiquid investments and illiquid
lease obligations, or in repurchase agreements or purchase and sale contracts
maturing in more than seven days,
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<PAGE>
if, regarding all such securities, more than 15% of its net assets (taken at
market value), would be invested in such securities; and (13) act as an
underwriter of securities, except to the extent that the Fund may technically
be deemed an underwriter when engaged in the activities described in (12) above
or insofar as the Fund may be deemed an underwriter under the Securities Act of
1933, as amended, in selling portfolio securities.
In addition, to comply with 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
The Trustees and executive officers of the Trust and their principal
occupations for at least the last five years are set forth below. Unless
otherwise noted, the address of each Trustee and executive officer is Box 9011,
Princeton, New Jersey 08543-9011.
Arthur Zeikel--President and Trustee(1)(2)--President and Chief Investment
Officer of Fund Asset Management, L.P. (the "Manager") since 1977; President of
Merrill Lynch Asset Management, L.P. ("MLAM") since 1977 and Chief Investment
Officer thereof since 1976; President and Director of Princeton Services, Inc.
("Princeton Services") since 1993; Executive Vice President of Merrill Lynch &
Co., Inc. since 1990; Executive Vice President of Merrill Lynch since 1990 and
a Senior Vice President thereof from 1985 to 1990; Director of Merrill Lynch
Funds Distributor, Inc. ("MLFD" or the "Distributor").
Kenneth S. Axelson--Trustee(2)--75 Jameson Point Road, Rockland, Maine 04841.
Executive Vice President and Director, J.C. Penney Company, Inc. until 1982;
Director, Grumman Corporation, UNUM Corporation, Protection Mutual Insurance
Company, Zurn Industries, Inc. and, until 1992, of Central Maine Power Company
and Key Trust Company of Maine; Trustee, The Chicago Dock and Canal Trust.
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<PAGE>
Robert R. Martin--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; Trustee, Northland College since
1992.
Herbert I. London--Trustee(2)--New York University--Gallatin Division, 113-
115 University Place, New York, New York 10003. Dean, Gallatin Division of New
York University from 1978 to 1993 and Director from 1975 to 1976; Professor,
New York University since 1973; Distinguished Fellow, Herman Kahn Chair, Hudson
Institute from 1984 to 1985; Director, Damon Corporation since 1991; Overseer,
Center for Naval Analyses.
Joseph L. May--Trustee(2)--424 Church Street, Suite 2000, Nashville,
Tennessee 37219. Attorney in private practice since 1984; President, May and
Athens Hosiery Mills Division, Wayne-Gossard Corporation from 1954 to 1983;
Vice President, Wayne-Gossard Corporation from 1972 to 1983; Chairman, The May
Corporation (personal holding company) from 1972 to 1983; Director, Signal
Apparel Co. from 1972 to 1989.
Andre F. Perold--Trustee(2)--Morgan Hall, Soldiers Field, Boston,
Massachusetts 02163. Professor, Harvard Business School since 1989 and
Associate Professor from 1983 to 1989; Trustee, The Common Fund, since 1989;
Director, Quantec Investment Technology (a private United Kingdom company).
Terry K. Glenn--Executive Vice President(1)(2)--Executive Vice President of
the Manager and MLAM since 1983; Executive Vice President and Director of
Princeton Services since 1993; President of MLFD since 1986 and Director
thereof since 1991.
Vincent R. Giordano--Senior Vice President and Portfolio Manager(1)(2)--
Portfolio Manager of the Manager and MLAM since 1977 and Senior Vice President
of the Manager and MLAM since 1984; Vice President of MLAM from 1980 to 1984;
Senior Vice President of Princeton Services since 1993.
Kenneth A. Jacob--Vice President and Portfolio Manager(1)(2)--Vice President
of the Manager and MLAM since 1984.
Donald C. Burke--Vice President(1)(2)--Vice President and Director of
Taxation of MLAM since 1990; Employee of Deloitte & Touche from 1982 to 1990.
Gerald M. Richard--Treasurer(1)(2)--Senior Vice President and Treasurer of
the Manager and MLAM since 1984; Senior Vice President and Treasurer of
Princeton Services since 1993; Treasurer of MLFD since 1984 and Vice President
since 1981.
Jerry Weiss--Secretary(1)(2)--Vice President of MLAM since 1990; Attorney in
private practice from 1982 to 1990.
- --------
(1) Interested person, as defined in the 1940 Act, of the Trust.
(2) Such Trustee or officer is a director or officer of certain other
investment companies for which the Manager or MLAM acts as investment
adviser or manager.
At , 1994, the Trustees and officers of the Trust as a group (12
persons) owned an aggregate of less than 1/4 of 1% of the outstanding shares of
Common Stock of Merrill Lynch & Co., Inc. and owned an aggregate of less than
1% of the outstanding shares of the Fund.
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<PAGE>
The Trust pays each Trustee not affiliated with the Manager a fee of $10,000
per year plus $1,000 per meeting attended, together with such Trustee's actual
out-of-pocket expenses relating to attendance at meetings. The Trust also
compensates members of its Audit Committee, which consists of all the non-
affiliated Trustees.
MANAGEMENT AND ADVISORY ARRANGEMENTS
Reference is made to "Management of the Trust--Management and Advisory
Arrangements" in the Prospectus for certain information concerning the
management and advisory arrangements of the Fund.
Securities may be held by, or be appropriate investments for, the Fund as
well as other funds or investment advisory clients of the Manager or its
affiliates. Because of different objectives or other factors, a particular
security may be bought for one or more clients when one or more clients are
selling the same security. If the Manager or its affiliates purchase or sell
securities for the Fund or other funds for which they act as manager or for
their advisory clients and such sales or purchases arise for consideration at
or about the same time, transactions in such securities will be made, insofar
as feasible, for the respective funds and clients in a manner deemed equitable
to all. To the extent that transactions on behalf of more than one client of
the Manager or its affiliates during the same period may increase the demand
for securities being purchased or the supply of securities being sold, there
may be an adverse effect on price.
Pursuant to a management agreement between the Trust on behalf of the Fund
and the Manager (the "Management Agreement"), the Manager receives for its
services to the Fund monthly compensation based upon the average daily net
assets of the Fund at the following annual rates: 0.55% of the average daily
net assets not exceeding $500 million; 0.525% of the average daily net assets
exceeding $500 million but not exceeding $1.0 billion; and 0.50% of the average
daily net assets exceeding $1.0 billion.
California imposes limitations on the expenses of the Fund. These annual
expense limitations require that the Manager reimburse the Fund in an amount
necessary to prevent the aggregate ordinary operating expenses (excluding
taxes, brokerage fees and commissions, distribution fees and extraordinary
charges such as litigation costs) from exceeding in any fiscal year 2.5% of the
Fund's first $30,000,000 of average net assets, 2.0% of the next $70,000,000 of
average net assets and 1.5% of the remaining average net assets. The Manager's
obligation to reimburse the Fund is limited to the amount of the management
fee. Expenses not covered by this limitation are interest, taxes, brokerage
commissions and other items such as extraordinary legal expenses. No fee
payment will be made to the Manager during any fiscal year which will cause
such expenses to exceed limitations at the time of such payment.
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 compensation of
all Trustees of the Trust who are affiliated persons of the Manager or any of
its subsidiaries. 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.
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Expenses which will be allocated on the basis of asset size of the respective
Series include fees and expenses of unaffiliated Trustees, state franchise
taxes, costs of printing proxies and other expenses related to shareholder
meetings, and other expenses properly payable by the Trust. The organizational
expenses of the Trust were paid by the Trust, and 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. 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--
Deferred Sales Charge Alternative--Class B Shares--Distribution Plan".
The Manager is a limited partnership, the partners of which are Merrill Lynch
& Co., Inc., Fund Asset Management, Inc. and Princeton Services, Inc.
Duration and Termination. Unless earlier terminated as described below, the
Management Agreement will remain in effect from year to year if approved
annually (a) by the Trustees of the Trust or by a majority of the outstanding
shares of the Fund and (b) by a majority of the Trustees who are not parties to
such contract or interested persons (as defined in the 1940 Act) of any such
party. Such contracts are not assignable and may be terminated without penalty
on 60 days' written notice at the option of either party thereto or by vote of
the shareholders of the Fund.
PURCHASE OF SHARES
Reference is made to "Purchase of Shares" in the Prospectus for certain
information as to the purchase of Fund shares.
ALTERNATIVE SALES ARRANGEMENTS
The Fund issues two classes of shares: Class A shares are sold to investors
choosing the initial sales charge alternative and Class B shares are sold to
investors choosing the deferred sales charge alternative. The two classes of
shares each represents an interest in the same portfolio of investments of the
Fund, has the same rights and is identical in all respects, except that Class B
shares bear the expenses of the deferred sales arrangements and any expenses
(including incremental transfer agency costs) resulting from such sales
arrangements and the expenses paid by the account maintenance fee. The two
classes also have different exchange privileges. See "Shareholder Services--
Exchange Privilege".
The Fund has entered into separate distribution agreements with the
Distributor in connection with the subscription and continuous offering of
Class A and Class B shares of the Fund (the "Distribution Agreements"). The
Distribution Agreements obligate the Distributor to pay certain expenses in
connection with the offering of the Class A and Class B 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
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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 ALTERNATIVE--CLASS A SHARES
The term "purchase", as used in the Prospectus and this Statement of
Additional Information in connection with an investment in Class A shares of
the Fund, refers to a single purchase by an individual, or to concurrent
purchases, which in the aggregate are at least equal to the prescribed amounts,
by an individual, his spouse and their children under the age of 21 years
purchasing shares for his or their own account and to single purchases by a
trustee or other fiduciary purchasing shares for a single trust estate or
single fiduciary account although more than one beneficiary is involved. The
term "purchase" also includes purchases by any "company", as that term is
defined in the 1940 Act, but does not include purchases by any such company
which has not been in existence for at least six months or which has no purpose
other than the purchase of shares of the Fund or shares of other registered
investment companies at a discount; provided, however, that it shall not
include purchases by any group of individuals whose sole organizational nexus
is that the participants therein are credit cardholders of a company,
policyholders of an insurance company, customers of either a bank or broker-
dealer or clients of an investment adviser.
REDUCED INITIAL SALES CHARGES--CLASS A SHARES
Right of Accumulation. Reduced sales charges are applicable through a right
of accumulation under which eligible investors are permitted to purchase Class
A shares of the Fund at the offering price applicable to the total of (a) the
dollar amount then being purchased plus (b) an amount equal to the then current
net asset value or cost, whichever is higher, of the purchaser's combined
holdings of the Class A shares and Class B shares of the Fund and of any other
investment company with an initial sales charge or a deferred sales charge for
which the Distributor acts as the distributor. For any such right of
accumulation to be made available, the Distributor must be provided at the time
of purchase, by the purchaser or 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.
Letter of Intention. Reduced sales charges are applicable to purchases
aggregating $25,000 or more of the Class A shares of the Fund or any other
investment company with an initial sales charge or a deferred sales charge for
which the Distributor acts as the distributor made within a thirteen-month
period starting with the first purchase pursuant to a Letter of Intention in
the form provided in the Prospectus. The Letter of Intention is available only
to investors whose accounts are maintained at the Fund's Transfer Agent. The
Letter of Intention is not available to employee benefit plans for which
Merrill Lynch provides plan participant, record-keeping services. The Letter of
Intention is not a binding obligation to purchase any amount of Class A 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 shares of the Fund and of other investment companies with an initial
sales charge or a deferred sales charge for which the Distributor acts as the
distributor 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
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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 shares purchased at the
reduced rate and the sales charge applicable to the shares actually purchased
through the Letter. Class A shares equal to at least five percent of the
intended amount will be held in escrow during the thirteen-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 during the term of such Letter, a purchase
brings the total amount invested to an amount equal to or in excess of the
amount indicated in the Letter, the purchaser will be entitled on that purchase
and subsequent purchases to the reduced percentage sales charge which would be
applicable to a single purchase equal to the total dollar value of the Class A
shares then being purchased under such Letter, 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 Merrill Lynch Ready Assets
Trust, Merrill Lynch Retirement Reserves Money Fund, Merrill Lynch U.S.
Treasury Money Fund or Merrill Lynch U.S.A. Government Reserves into the Fund
that creates a sales charge will count toward completing a new or existing
Letter of Intention from the Fund.
Purchase Privilege of Certain Persons. Trustees of the Trust and directors or
trustees of other Merrill Lynch-sponsored investment companies, directors of
Merrill Lynch & Co., Inc., employees of Merrill Lynch & Co., Inc. and its
subsidiaries and any trust, pension, profit-sharing or other benefit plan for
such persons, may purchase Class A shares of the Fund at net asset value. Under
such programs, the Fund realizes economies of scale and reduction of sales
related expenses by virtue of familiarity with the Fund.
Class A shares of the Fund will be offered at net asset value, without sales
charge, to an investor who has a business relationship with a financial
consultant who joined Merrill Lynch from another investment firm within six
months prior to the date of purchase by such investor, if the following
conditions are satisfied. First, the investor must purchase Class A shares of
the Fund with proceeds from a redemption of shares of a mutual fund that was
sponsored by the financial consultant's previous firm and imposed a sales
charge either at the time of purchase or on a deferred basis. Second, such
redemption must have been made within 60 days prior to the investment in the
Fund, and the proceeds from the redemption must have been maintained in the
interim in cash or a money market fund.
Closed-End Fund Option. Class A shares of the Fund and certain other mutual
funds advised by the Manager or MLAM (the "Eligible Class A shares") are
offered at net asset value to shareholders of certain closed-end funds advised
by the Manager or MLAM who wish to reinvest the net proceeds of a sale of their
closed-end fund shares of common stock in Eligible Class A shares, if the
conditions set forth below are satisfied. 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 shares. Second, the closed-end
fund shares must have either 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. Class A
shares of the Fund are offered at net asset value to shareholders of Merrill
Lynch Senior Floating Rate Fund (formerly Merrill Lynch Prime Fund, Inc.)
("Senior Floating Rate Fund") who wish to reinvest the net proceeds from a sale
of certain of their shares of common stock of Senior Floating Rate Fund in
shares of the Fund. In order to exercise this investment option, Senior
Floating Rate Fund shareholders must sell their Senior Floating Rate shares to
the Senior Floating Rate Fund in connection
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with a tender offer conducted by the Senior Floating Rate Fund and reinvest the
proceeds immediately in the Fund. This investment option is available only with
respect to the proceeds of Senior Floating Rate Fund shares as to which no
Early Withdrawal Charge (as defined in the Senior Floating Rate Fund
prospectus) is applicable. Purchase orders from Senior Floating Rate Fund
shareholders wishing to exercise this investment option will be accepted only
on the day that the related Senior Floating Rate Fund tender offer terminates
and will be effected at the net asset value of the Fund at such day.
Acquisition of Certain Investment Companies. The public offering price of
Class A shares may be reduced to the net asset value per Class A share in
connection with the acquisition of the assets of or merger or consolidation
with a personal holding company or a public or private investment company. The
value of the assets or company acquired in a tax-free transaction may be
adjusted in appropriate cases to reduce possible adverse tax consequences to
the Fund which might result from an acquisition of assets having net unrealized
appreciation which is disproportionately higher at the time of acquisition than
the realized or unrealized appreciation of the Fund.
DEFERRED SALES CHARGE ALTERNATIVE--CLASS B SHARES
Distribution Plan. Reference is made to "Purchase of Shares--Distribution
Plan" in the Prospectus for certain information with respect to the
Distribution Plan of the Fund.
The payment of the distribution fee is subject to the provisions of Rule 12b-
1 under the 1940 Act. Among other things, the Distribution Plan provides that
the Distributor shall provide and the Trustees shall review quarterly reports
of the disbursement of the distribution fees paid to the Distributor. In their
consideration of the 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 Class B shareholders. The 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 the Distribution Plan in accordance with Rule 12b-1, the Independent
Trustees concluded that there is reasonable likelihood that the Distribution
Plan will benefit the Fund and its Class B shareholders. The 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 Class B voting securities of the Fund. The Distribution Plan cannot
be amended to increase materially the amount to be spent by the Fund without
approval by Class B 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 the Distribution
Plan, cast in person at a meeting called for that purpose. Rule 12b-1 further
requires that the Trust preserve copies of the Distribution Plan and any report
made pursuant to such plan for a period of not less than six years from the
date of the Distribution Plan or such report, the first two years in an easily
accessible place.
REDEMPTION OF SHARES
Reference is made to "Redemption of Shares" in the Prospectus for certain
information as to the redemption and repurchase of Fund shares.
The right to redeem shares or to receive payment with respect to any such
redemption may be suspended only for any period during which trading on the New
York Stock Exchange is restricted as determined by
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the Commission or such Exchange is closed (other than customary weekend and
holiday closings), for any period during which an emergency exists, as defined
by the Commission, as a result of which disposal of portfolio securities or
determination of the net asset value of the Fund is not reasonably practicable,
and for such other periods as the Commission may by order permit for the
protection of shareholders of the Fund.
CONTINGENT DEFERRED SALES CHARGE--CLASS B SHARES
As discussed in the Prospectus under "Purchase of Shares--Alternative Sales
Arrangements--Deferred Sales Charge Alternative--Class B Shares", while Class B
shares redeemed within four years of purchase are subject to a contingent
deferred sales charge ("CDSC") under most circumstances, the charge is waived
on redemptions of Class B shares following the death or disability of a Class B
shareholder. Redemptions for which the waiver applies are any partial or
complete redemption following the death or disability (as defined in the
Internal Revenue Code of 1986, as amended (the "Code")) of a Class B
shareholder (including one who owns the Class B shares as joint tenant with his
or her spouse), provided the redemption is requested within one year of the
death or initial determination of disability.
PORTFOLIO TRANSACTIONS
Reference is made to "Investment Objective and Policies" and "Portfolio
Transactions" in the Prospectus.
Under the 1940 Act, persons affiliated with the Trust are prohibited from
dealing with the Fund as a principal in the purchase and sale of securities
unless such trading is permitted by an exemptive order issued by the
Commission. Since over-the-counter transactions are usually principal
transactions, affiliated persons of the Trust, including Merrill Lynch, may not
serve as dealer in connection with transactions with the Fund. The Trust has
obtained an exemptive order permitting it to engage in certain principal
transactions with Merrill Lynch involving high quality short-term municipal
bonds subject to certain conditions. Affiliated persons of the Trust may serve
as broker for the Fund in over-the-counter transactions conducted on an agency
basis. Certain court decisions have raised questions as to the extent to which
investment companies should seek exemptions under the 1940 Act in order to seek
to 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.
As a non-fundamental restriction, the Trust will prohibit the purchase or
retention by the Fund of the securities of any issuer if the officers,
directors or trustees of the Trust or the Manager owning beneficially more than
one-half of one per cent of the securities of an issuer together own
beneficially more than five per cent of the securities of that issuer. In
addition, under the 1940 Act, the Fund may not purchase securities during the
existence of any underwriting syndicate of which Merrill Lynch is a member
except pursuant to an exemptive order or rules adopted by the Commission. Rule
10f-3 under the 1940 Act sets forth conditions under which the Fund may
purchase municipal bonds in such transactions. The rule sets forth requirements
relating to, among other things, the terms of an issue of municipal bonds
purchased by the Fund, the amount of municipal bonds which may be purchased in
any one issue and the assets of the Fund which may be invested in a particular
issue.
The Fund does not expect to use any particular dealer in the execution of
transactions but, subject to obtaining the best net results, dealers who
provide supplemental investment research (such as information
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<PAGE>
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 National Association of Securities Dealers,
Inc., and policies established by the Trustees of the Trust, the Manager may
consider sales of shares of the Fund as a factor in the selection of brokers or
dealers to execute portfolio transactions for the Fund.
Generally, the Fund does not purchase securities for short-term trading
profits. However, the Fund may dispose of securities without regard to the time
they have been held when such action, for defensive or other reasons, appears
advisable to its Manager. While it is not possible to predict turnover rates
with any certainty, at present it is anticipated that the Fund's annual
portfolio turnover rate, under normal circumstances after the Fund's portfolio
is invested in accordance with its investment objective, will be less than
100%. (The portfolio turnover rate is calculated by dividing the lesser of
purchases or sales of portfolio securities for the particular fiscal year by
the monthly average of the value of the portfolio securities owned by the Fund
during the particular fiscal year. For purposes of determining this rate, all
securities whose maturities at the time of acquisition are one year or less are
excluded.)
DETERMINATION OF NET ASSET VALUE
The net asset value of the Fund is determined by the Manager once daily,
Monday through Friday, as of 4:15 P.M., New York City time, on each day during
which the New York Stock Exchange is open for trading. The New York Stock
Exchange is not open on New Year's Day, Washington's Birthday, Good Friday,
Memorial Day, Independence Day, Labor Day, Thanksgiving Day and Christmas Day.
Net asset value per share is computed by dividing the sum of the value of the
securities held by the Fund plus any cash or other assets minus all liabilities
by the total number of shares outstanding at such time, rounded to the nearest
cent. Expenses, including the fees payable to the Manager and Distributor, are
accrued daily. The net asset value per share of the Class A shares and the net
asset value per share of the Class B shares are expected to be equivalent.
Under certain circumstances, however, the per share net asset value of the
Class B shares may be lower than the per share net asset value of the Class A
shares reflecting the higher daily expense accruals of the account maintenance
and distribution fees (and incremental transfer agency costs) applicable with
respect to the Class B shares. Even under those circumstances, the per share
net asset value of the two classes will tend to converge immediately after the
payment of dividends, which will differ by approximately the amount of the
expense accrual differential between the classes.
The Municipal Bonds, and other portfolio securities in which the Fund invests
are traded primarily in over-the-counter municipal bond and money markets and
are valued at the last available bid price in the over-the-counter market or on
the basis of yield equivalents as obtained from one or more dealers that make
markets in the securities. One bond is the "yield equivalent" of another bond
when, taking into account market price, maturity, coupon rate, credit rating
and ultimate return of principal, both bonds will theoretically produce an
equivalent return to the bondholder. Financial futures contracts and options
thereon, which are traded on exchanges, are valued at their settlement prices
as of the close of such exchanges. Short-term investments with a remaining
maturity of 60 days or less are valued on an amortized cost basis, which
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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 can be obtained from the Trust, the Distributor or
Merrill Lynch.
INVESTMENT ACCOUNT
Each shareholder whose account is maintained at the Transfer Agent has an
Investment Account and will receive monthly statements from the Transfer Agent
showing any reinvestment of dividends and capital gains distributions activity
in the account since the preceding statement. Shareholders considering
transferring their Class A shares from Merrill Lynch to another brokerage firm
or financial institution should be aware that, if the firm to which the Class A
shares are to be transferred will not take delivery of shares of the Fund, a
shareholder either must redeem the Class A shares so that the cash proceeds can
be transferred to the account at the new firm or such shareholder must continue
to maintain an Investment Account at the Transfer Agent for those Class A
shares. Shareholders interested in transferring their Class B shares from
Merrill Lynch and who do not wish to have an Investment Account maintained for
such shares at the Transfer Agent may request their new brokerage firm to
maintain such shares in an account registered in the name of the brokerage firm
for the benefit of the shareholder. If the new brokerage firm is willing to
accommodate the shareholder in this manner, the shareholder must request that
he be issued certificates for his shares, and then must turn the certificates
over to the new firm for re-registration as described in the preceding
sentence. A shareholder may make additions to his Investment Account at any
time by mailing a check directly to the Transfer Agent.
Share certificates are issued only for full shares and only upon the specific
request of 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.
AUTOMATIC INVESTMENT PLAN
A shareholder may make additions to an Investment Account at any time by
purchasing Class A or Class B 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 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. The Fund's Automatic Investment Program is not available to
shareholders whose shares are held in brokerage account with Merrill Lynch.
Alternatively, investors who maintain CMA(R) accounts may arrange to have
periodic investments made in the Fund in their CMA(R) account or in certain
related accounts in amounts of $100 or more through the CMA(R) Automatic
Investment Program.
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AUTOMATIC REINVESTMENT OF DIVIDENDS AND CAPITAL GAINS DISTRIBUTIONS
Unless specific instructions are given as to the method of payment of
dividends and capital gains distributions, dividends and distributions will be
reinvested automatically in additional shares of the Fund. Such reinvestment
will be at the net asset value of shares of the Fund as of the close of
business on the monthly payment date for such dividends and distributions.
Shareholders may elect in writing to receive either their income dividends or
capital gains distributions, or both, in cash, in which event payment will be
mailed on or about the payment date.
Shareholders may, at any time, notify the Transfer Agent in writing or by
telephone (1-800-MER-FUND) that they no longer wish to have their dividends
and/or capital gains distributions reinvested in shares of the Fund or vice
versa and, commencing ten days after the receipt by the Transfer Agent of such
notice, such instructions will be effected.
SYSTEMATIC WITHDRAWAL PLANS--CLASS A SHARES
A Class A shareholder may elect to make systematic withdrawals from an
Investment Account on either a monthly or quarterly basis as provided below.
Quarterly withdrawals are available for shareholders who have acquired Class A
shares of the Fund having a value, based on cost or the current offering price,
of $5,000 or more, and monthly withdrawals for shareholders with Class A shares
with such a value of $10,000 or more.
At the time of each withdrawal payment, sufficient Class A shares are
redeemed from those on deposit in the shareholder's account to provide the
withdrawal payment specified by the shareholder. The shareholder may specify
either a dollar amount or a percentage of the value of his Class A shares.
Redemptions will be made at net asset value as determined at the normal close
of business on the New York Stock Exchange (currently 4:00 P.M., New York City
time) on the 24th day of each month or the 24th day of the last month of each
quarter, whichever is applicable. If the Exchange is not open for business on
such date, the Class A shares will be redeemed at the close of business on the
following business day. The check for the withdrawal payment will be mailed, or
the direct deposit for the withdrawal payment will be made, on the next
business day following redemption. When a shareholder is making systematic
withdrawals, dividends and distributions on all Class A shares in the
Investment Account are reinvested automatically in the Fund's Class A 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. Withdrawal payments should not be considered as dividends, yield
or income. Each withdrawal is a taxable event. If periodic withdrawals
continuously exceed reinvested dividends, the shareholder's original investment
may be reduced correspondingly. Purchases of additional Class A shares
concurrent with withdrawals are ordinarily disadvantageous to the shareholder
because of sales charges and tax liabilities. The Trust will not knowingly
accept purchase orders for Class A shares of the Fund from investors who
maintain a Systematic Withdrawal Plan unless such purchase is equal to at least
one year's scheduled withdrawals or $1,200, whichever is greater. Periodic
investments may not be made into an Investment Account in which the shareholder
has elected to make systematic withdrawals.
A Class A shareholder whose shares are held within a CMA(R), CBA(R) or
Retirement Account may elect to have shares redeemed on a monthly, bimonthly,
quarterly, semiannual or annual basis through the Systematic Redemption
Program. The minimum fixed dollar amount redeemable is $25. The proceeds of
systematic redemptions will be posted to the shareholder's account five
business days after the date the shares
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<PAGE>
are redeemed. Monthly systematic redemptions will be made at net asset value on
the first Monday of each month, bimonthly systematic redemption will be made at
net asset value on the first Monday of every other month, and quarterly,
semiannual or annual redemptions are made at net asset value on the first
Monday of months selected at the shareholder's option. If the first Monday of
the month is a holiday, the redemption will be processed at net asset value on
the next business day. The Systematic Redemption Program is not available if
Company shares are being purchased within the account pursuant to the Automatic
Investment Program. For more information on the Systematic Redemption Program,
eligible shareholders should contact their Financial Consultant.
EXCHANGE PRIVILEGE
Class A and Class B shareholders of the Fund may exchange their Class A or
Class B shares of the Fund for shares of the same class of Merrill Lynch
Adjustable Rate Securities Fund, Inc., Merrill Lynch Americas Income Fund,
Inc., Merrill Lynch Arizona Limited Maturity Municipal Bond Fund, Merrill Lynch
Arizona Municipal Bond Fund, Merrill Lynch Balanced Fund for Investment and
Retirement, Merrill Lynch Basic Value Fund, Inc., Merrill Lynch California
Insured Municipal Bond Fund, Merrill Lynch California Limited Maturity
Municipal Bond Fund, Merrill Lynch California Municipal Bond Fund, Merrill
Lynch Capital Fund, Inc., Merrill Lynch Colorado Municipal Bond Fund, Merrill
Lynch Corporate Bond Fund, Inc., Merrill Lynch Developing Capital Markets Fund,
Inc. (shares of which are deemed Class A shares for purposes of the exchange
privilege), Merrill Lynch Dragon Fund, Inc., Merrill Lynch EuroFund, Merrill
Lynch Federal Securities Trust, Merrill Lynch Florida Limited Maturity
Municipal Bond Fund, Merrill Lynch Florida Municipal Bond Fund, Merrill Lynch
Fund For Tomorrow, Inc., Merrill Lynch Fundamental Growth Fund, Inc., Merrill
Lynch Global Allocation Fund, Inc., Merrill Lynch Global Bond Fund for
Investment and Retirement, Merrill Lynch Global Convertible Fund, Inc., Merrill
Lynch Global Holdings, Inc. (residents of Arizona must meet investor
suitability standards), Merrill Lynch Global Utility Fund, Inc., Merrill Lynch
Growth Fund for Investment and Retirement, Merrill Lynch Healthcare Fund, Inc.
(residents of Wisconsin must meet investor suitability standards), Merrill
Lynch International Equity Fund, Merrill Lynch Global, (residents of Arizona
must meet investor suitability standards), Merrill Lynch Latin America Fund,
Inc., Merrill Lynch Maryland Municipal Bond Fund, Merrill Lynch Massachusetts
Limited Maturity Municipal Bond Fund, Merrill Lynch Massachusetts Municipal
Bond Fund, Merrill Lynch Michigan Limited Maturity Municipal Bond Fund, Merrill
Lynch Michigan Municipal Bond Fund, Merrill Lynch Minnesota Municipal Bond
Fund, Merrill Lynch Municipal Bond Fund, Inc., Merrill Lynch Municipal
Intermediate Term Fund, Merrill Lynch Global Resources Trust, Merrill Lynch New
Jersey Limited Maturity Municipal Bond Fund, Merrill Lynch New Jersey Municipal
Bond Fund, Merrill Lynch New York Limited Maturity 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 Pacific Fund, Inc., Merrill Lynch Pennsylvania Limited
Maturity Municipal Bond Fund, Merrill Lynch Pennsylvania Municipal Bond Fund,
Merrill Lynch Phoenix Fund, Inc., Merrill Lynch Short-Term Global Income Fund,
Inc., Merrill Lynch Special Value Fund, Inc., Merrill Lynch Strategic Dividend
Fund, Merrill Lynch Technology Fund, Inc., Merrill Lynch Texas Municipal Bond
Fund, Merrill Lynch Utility Income Fund, Inc. and Merrill Lynch World Income
Fund, Inc., on the basis described below. In addition, Class A shareholders of
the Fund may exchange their Class A shares for shares of Merrill Lynch U.S.A.
Government Reserves, Merrill Lynch U.S. Treasury Money Fund and Merrill Lynch
Ready Assets Trust (or Merrill Lynch Retirement Reserves Money Fund if the
exchange occurs within certain retirement plans) (together, the "Class A money
market funds") and Class B shareholders of the Fund may exchange their Class B
shares for shares of Merrill Lynch Government Fund, Merrill Lynch Institutional
25
<PAGE>
Fund, Merrill Lynch Treasury Fund and Merrill Lynch Institutional Tax-Exempt
Fund (together, the "Class B money market funds") on the basis described
below. Shares with a net asset value of at least $250 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. Certain funds into which
exchanges may be made may impose a redemption fee (not in excess of 2.00% of
the amount redeemed) on shares purchased through the exchange privilege when
such shares are subsequently redeemed, including redemption through subsequent
exchanges. Such redemption fee would be in addition to any contingent deferred
sales charge otherwise applicable to a redemption of Class B shares. It is
contemplated that the exchange privilege may be applicable to other new mutual
funds whose shares may be distributed by the Distributor. The exchange
privilege available to Participants in the Merrill Lynch Blueprint SM Program
may be different from that available to other investors.
Under the exchange privilege, each of the funds with Class A shares
outstanding offers to exchange its Class A shares ("new Class A shares") for
Class A shares ("outstanding Class A shares") of any of the other funds, on
the basis of relative net asset value per Class A share, plus an amount equal
to the difference, if any, between the sales charge previously paid on the
outstanding Class A shares and the sales charge payable at the time of the
exchange on the new Class A shares. With respect to outstanding Class A 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 shares in the initial purchase and any subsequent exchange. Class
A shares issued pursuant to dividend reinvestment are sold on a no-load basis
in each of the funds offering Class A shares. For purposes of the exchange
privilege, Class A 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 shares on which the dividend was paid. Based on
this formula, Class A shares of the Fund generally will be exchanged into the
Class A shares of the other funds or into shares of the Class A money market
funds without a sales charge.
In addition, each of the funds with Class B shares outstanding offers to
exchange its Class B shares ("new
Class B shares") for Class B shares ("outstanding Class B shares") of any of
the other funds on the basis of relative net asset value per Class B 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 deferred sales charge 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 deferred sales charge schedule relating to the Class B shares
of the fund from which the exchange has been made. For purposes of computing
the sales load that may be payable on a disposition of the new Class B shares,
the holding period for the outstanding Class B shares is "tacked" to the
holding period of the new Class B shares. For example, an investor may
exchange Class B shares of the Fund for those of Merrill Lynch Global
Resources Trust after having held the Fund's Class B shares for two and a half
years. The 2% sales load that generally would apply to a redemption would not
apply to the exchange. Three years later the investor may decide to redeem the
Class B shares of Merrill Lynch Natural Resources Trust 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 Merrill Lynch Global Resources Trust Class B shares,
the investor will be deemed to have held the new Class B shares for more than
five years.
Shareholders also may exchange Class A shares and Class B shares from any of
the funds into shares of the Class A money market funds and Class B money
market funds, respectively, but the period of time that
26
<PAGE>
Class B shares are held in a Class B money market fund will not count towards
satisfaction of the holding period requirement for purposes of reducing the
CDSC. However, shares of a Class B money market fund which were acquired as a
result of an exchange for Class B shares of a fund may, in turn, be exchanged
back into Class B shares of any fund offering such shares, in which event the
holding period for Class B shares of the 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 after having held the Fund Class B shares for two and a half
years and three years later decide to redeem the shares of Merrill Lynch
Institutional Fund for cash. At the time of this redemption, the 2% CDSC that
would have been due had the Class B shares of the Fund been redeemed for cash
rather than exchanged for shares of Merrill Lynch Institutional Fund will be
payable. If, instead of such redemption the shareholder exchanged such shares
for Class B shares of a fund which the shareholder continues to hold for an
additional two and a half years, any subsequent redemption will not incur a
CDSC.
The investment objectives of the other funds into which exchanges can be made
are as follows:
Merrill Lynch Adjustable
Rate Securities Fund,
Inc. ..................... High current income consistent with a policy of
limiting the degree of fluctuation in net asset
value by investing primarily in a portfolio of
adjustable rate securities, consisting
principally of mortgage-backed and asset backed
securities.
Merrill Lynch Americas
Income Fund, Inc. ........
A high level of current income, consistent with
prudent investment risk, by investing primarily
in debt securities denominated in a currency of
a country located in the Western Hemisphere
(i.e., North and South America and the
surrounding waters).
Merrill Lynch Arizona
Limited Maturity
Municipal Bond Fund ......
A portfolio of Merrill Lynch Multi-State Limited
Maturity Municipal Series Trust, a series fund,
whose objective is to provide as high a level of
income exempt from Federal and Arizona income
taxes as is consistent with prudent investment
management through investment in a portfolio
primarily of intermediate-term investment grade
Arizona Municipal Bonds.
Merrill Lynch Arizona
Municipal Bond Fund.......
A portfolio of Merrill Lynch Multi-State
Municipal Series Trust, a series fund, whose
objective is to provide investors with as high a
level of income exempt from Federal and Arizona
income taxes as is consistent with prudent
investment management.
Merrill Lynch Balanced
Fund for Investment and
Retirement ...............
As high a level of total investment return as is
consistent with reasonable risk by investing in
common stocks and other types of securities,
including fixed income securities and
convertible securities.
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<PAGE>
Merrill Lynch Basic Value
Fund, Inc. ...............
Capital appreciation and, secondarily, income
through investment in securities, primarily
equities, that are undervalued and therefore
represent basic investment value.
Merrill Lynch California
Insured Municipal Bond
Fund......................
A portfolio of Merrill Lynch California Municipal
Series Trust, a series fund whose objective is
to provide shareholders with as high a level of
income exempt from Federal and California income
taxes as is consistent with prudent investment
management through investment in a portfolio
primarily of insured California Municipal Bonds.
Merrill Lynch California
Limited Maturity
Municipal Bond Fund.......
A portfolio of Merrill Lynch Multi-State Limited
Maturity Municipal Series Trust, a series fund,
whose objective is to provide shareholders with
as high a level of income exempt from Federal
and California income taxes as is consistent
with prudent investment management through
investment in a portfolio primarily of
intermediate-term investment grade California
Municipal Bonds.
Merrill Lynch California
Municipal Bond Fund ......
A portfolio of Merrill Lynch California Municipal
Series Trust, a series fund, whose objective is
to provide investors with as high a level of
income exempt from Federal and California income
taxes as is consistent with prudent investment
management.
Merrill Lynch Capital
Fund, Inc. ...............
The highest total investment return consistent
with prudent risk through a fully managed
investment policy utilizing equity, debt and
convertible securities.
Merrill Lynch Colorado
Municipal Bond Fund.......
A portfolio of Merrill Lynch Multi-State
Municipal Series Trust, a series fund, whose
objective is as high a level of income exempt
from Federal and Colorado income taxes as is
consistent with prudent investment management.
Merrill Lynch Corporate
Bond Fund, Inc. ..........
Current income from three separate diversified
portfolios of fixed income securities.
Merrill Lynch Developing
Capital Markets Fund,
Inc. .....................
Long-term appreciation through investment in
securities, principally equities, of issuers in
countries having smaller capital markets.
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<PAGE>
Merrill Lynch Dragon Fund,
Inc. .....................
Capital appreciation primarily through investment
in equity and debt securities of issuers
domiciled in developing countries located in
Asia and the Pacific Basin, other than Japan,
Australia and New Zealand.
Merrill Lynch EuroFund..... Capital appreciation primarily through investment
in equity securities of corporations domiciled
in Europe.
Merrill Lynch Federal
Securities Trust .........
High current return through investments in U.S.
Government and Government agency securities,
including GNMA mortgage-backed certificates and
other mortgage-backed Government securities.
Merrill Lynch Florida
Limited Maturity
Municipal Bond Fund.......
A portfolio of Merrill Lynch Multi-State Limited
Maturity Municipal Series Trust, a series fund,
whose objective is as high a level of income
exempt from Federal income taxes as is
consistent with prudent investment management
while seeking to offer shareholders the
opportunity to own securities exempt from
Florida intangible personal property taxes
through investment in a portfolio primarily of
intermediate-term investment grade Florida
Municipal Bonds.
Merrill Lynch Florida
Municipal Bond Fund ......
A portfolio of Merrill Lynch Multi-State
Municipal Series Trust, a series fund, whose
objective is as high a level of income exempt
from Federal income taxes as is consistent with
prudent investment management while seeking to
offer shareholders the opportunity to own
securities exempt from Florida intangible
personal property taxes.
Merrill Lynch Fund For
Tomorrow, Inc.............
Long-term growth through investment in a portfo-
lio of good quality securities, primarily common
stock, potentially positioned to benefit from
demographic and cultural changes as they affect
consumer markets.
Merrill Lynch Fundamental
Growth Fund, Inc. ........
Long-term growth through investment in a
diversified portfolio of equity securities
placing particular emphasis on companies that
have exhibited above-average growth rates in
earnings.
Merrill Lynch Global
Allocation Fund, Inc......
High total return, consistent with prudent risk,
through a fully managed investment policy util-
izing United States and foreign equity, debt and
money market securities, the combination of
which will be varied from time to time both with
respect to the types of securities and markets
in response to changing market and economic
trends.
29
<PAGE>
Merrill Lynch Global Bond
Fund for Investment and
Retirement................
High total investment return from investment in a
global portfolio of debt instruments denominated
in various currencies and multi-national cur-
rency units.
Merrill Lynch Global
Convertible Fund, Inc.....
High total return from investment primarily in an
internationally diversified portfolio of con-
vertible debt securities, convertible preferred
stock and "synthetic" convertible securities
consisting of a combination of debt securities
or preferred stock and warrants or options.
Merrill Lynch Global
Holdings (residents of
Arizona must meet
investor suitability
standards) ...............
The highest total investment return consistent
with prudent risk through worldwide investment
in an internationally diversified portfolio of
securities.
Merrill Lynch Global
Utility Fund, Inc.........
Capital appreciation and current income through
investment of at least 65% of its total assets
in equity and debt securities issued by domestic
and foreign companies which are primarily en-
gaged in the ownership or operation of facili-
ties used to generate, transmit or distribute
electricity, telecommunications, gas or water.
Merrill Lynch Government
Fund......................
A portfolio of Merrill Lynch Funds For Institu-
tions Series, a series fund, whose objective is
to provide current income consistent with li-
quidity and security of principal from invest-
ment in securities issued or guaranteed by the
U.S. Government, its agencies and instrumentali-
ties and in repurchase agreements secured by
such obligations.
Merrill Lynch Growth Fund
for Investment and
Retirement................
Growth of capital and, secondarily, income from
investment in a diversified portfolio of equity
securities placing principal emphasis on those
securities which management of the fund believes
to be undervalued.
Merrill Lynch Healthcare
Fund, Inc. (residents of
Wisconsin must meet
investor suitability
standards)................
Capital appreciation through worldwide investment
in equity securities of companies that derive or
are expected to derive a substantial portion of
their sales from products and services in
healthcare.
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<PAGE>
Merrill Lynch
Institutional Fund........
A portfolio of Merrill Lynch Funds For Institu-
tions Series, a series fund, whose objective is
to provide maximum current income consistent
with liquidity and the maintenance of a high
quality portfolio of money market securities.
Merrill Lynch
Institutional Tax-Exempt
Fund...................... Current income exempt from Federal income taxes,
preservation of capital and liquidity available
from investing in a diversified portfolio of
short-term, high quality municipal bonds.
Merrill Lynch
International Equity
Fund......................
Capital appreciation and, secondarily, income by
investing in a diversified portfolio of equity
securities of issuers located in countries other
than the United States.
Merrill Lynch Latin
America Fund, Inc. .......
Capital appreciation by investing primarily in
Latin American equity and debt securities.
Merrill Lynch Maryland
Municipal Bond Fund.......
A portfolio of Merrill Lynch Multi-State Munici-
pal Series Trust, a series fund, whose objective
is as high a level of income exempt from Federal
and Maryland income taxes as is consistent with
prudent investment management.
Merrill Lynch
Massachusetts Limited
Maturity Municipal Bond
Fund......................
A portfolio of Merrill Lynch Multi-State Limited
Maturity Municipal Series Trust, a series fund,
whose objective is as high a level of income ex-
empt from Federal and Massachusetts income taxes
as is consistent with prudent investment manage-
ment through investment in a portfolio primarily
of intermediate-term investment grade Massachu-
setts Municipal Bonds.
Merrill Lynch
Massachusetts Municipal
Bond Fund.................
A portfolio of Merrill Lynch Multi-State Munici-
pal Series Trust, a series fund, whose objective
is as high a level of income exempt from Federal
and Massachusetts income taxes as is consistent
with prudent investment management.
Merrill Lynch Michigan
Limited Maturity
Municipal Bond Fund.......
A portfolio of Merrill Lynch Multi-State Limited
Maturity Municipal Series Trust, a series fund,
whose objective is as high a level of income ex-
empt from Federal and Michigan income taxes as
is consistent with prudent investment management
through investment in a portfolio primarily of
intermediate-term investment grade Michigan Mu-
nicipal Bonds.
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<PAGE>
Merrill Lynch Michigan
Municipal Bond Fund.......
A portfolio of Merrill Lynch Multi-State
Municipal Series Trust, a series fund, whose
objective is as high a level of income exempt
from Federal and Michigan income taxes as is
consistent with prudent investment management.
Merrill Lynch Minnesota
Municipal Bond Fund.......
A portfolio of Merrill Lynch Multi-State Munici-
pal Series Trust, a series fund, whose objective
is as high a level of income exempt from Federal
and Minnesota income taxes as is consistent with
prudent investment management.
Merrill Lynch Municipal
Bond Fund, Inc............
Tax-exempt income from three separate diversified
portfolios of municipal bonds.
Merrill Lynch Municipal
Intermediate Term Fund....
Currently the only portfolio of Merrill Lynch Mu-
nicipal Series Trust, a series fund, whose ob-
jective is to provide as high a level as possi-
ble of income exempt from Federal income taxes
by investing in investment grade obligations
with a dollar weighted average maturity of five
to twelve years.
Merrill Lynch Global
Resources Trust...........
Long-term growth and protection of capital from
investment in securities of domestic and foreign
companies that possess substantial natural re-
source assets.
Merrill Lynch New Jersey
Limited Maturity Munici-
pal Bond Fund.............
A portfolio of Merrill Lynch Multi-State Limited
Maturity Municipal Series Trust, a series fund,
whose objective is as high a level of income ex-
empt from Federal and New Jersey income taxes as
is consistent with prudent investment management
through a portfolio primarily of intermediate-
term investment grade New Jersey Municipal
Bonds.
Merrill Lynch New Jersey
Municipal Bond Fund.......
A portfolio of Merrill Lynch Multi-State Munici-
pal Series Trust, a series fund, whose objective
is as high a level of income exempt from Federal
and New Jersey income taxes as is consistent
with prudent investment management.
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<PAGE>
Merrill Lynch New York
Limited Maturity Munici-
pal Bond Fund.............
A portfolio of Merrill Lynch Multi-State Limited
Maturity Municipal Series Trust, a series fund,
whose objective is as high a level of income ex-
empt from Federal, New York State and New York
City income taxes as is consistent with prudent
investment management through investment in a
portfolio primarily of intermediate-term invest-
ment grade New York Municipal Bonds.
Merrill Lynch New York Mu-
nicipal Bond Fund.........
A portfolio of Merrill Lynch Multi-State Munici-
pal Series Trust, a series fund, whose objective
is as high a level of income exempt from Feder-
al, New York State and New York City income
taxes as is consistent with prudent investment
management.
Merrill Lynch North Caro-
lina Municipal Bond Fund..
A portfolio of Merrill Lynch Multi-State Munici-
pal Series Trust, a series fund, whose objective
is as high a level of income exempt from Federal
and North Carolina income taxes as is consistent
with prudent investment management.
Merrill Lynch Ohio Munici-
pal Bond Fund.............
A portfolio of Merrill Lynch Multi-State Munici-
pal Series Trust, a series fund, whose objective
is as high a level of income exempt from Federal
and Ohio income taxes as is consistent with pru-
dent investment management.
Merrill Lynch Oregon Mu-
nicipal Bond Fund.........
A portfolio of Merrill Lynch Multi-State Munici-
pal Series Trust, a series fund, whose objective
is as high a level of income exempt from Federal
and Oregon income taxes as is consistent with
prudent investment management.
Merrill Lynch Pacific
Fund, Inc.................
Capital appreciation by investing in equity secu-
rities of corporations domiciled in Far Eastern
and Western Pacific countries, including Japan,
Australia, Hong Kong and Singapore.
Merrill Lynch Pennsylvania
Limited Maturity Munici-
pal Bond Fund.............
A portfolio of Merrill Lynch Multi-State Limited
Maturity Municipal Series Trust, a series fund,
whose objective is to provide as high a level of
income exempt from Federal and Pennsylvania in-
come taxes as is consistent with prudent invest-
ment management through investment in a portfo-
lio of intermediate-term investment grade Penn-
sylvania Municipal Bonds.
33
<PAGE>
Merrill Lynch Pennsylvania
Municipal Bond Fund.......
A portfolio of Merrill Lynch Multi-State Munici-
pal Series Trust, a series fund, whose objective
is as high a level of income exempt from Federal
and Pennsylvania income taxes as is consistent
with prudent investment management.
Merrill Lynch Phoenix
Fund, Inc.................
Long-term growth of capital by investing in eq-
uity and fixed income securities, including tax-
exempt securities, of issuers in weak financial
condition or experiencing poor operating results
believed to be undervalued relative to the cur-
rent or prospective condition of such issuer.
Merrill Lynch Ready Assets
Trust.....................
Preservation of capital, liquidity and the high-
est possible current income consistent with the
foregoing objectives from the short-term money
market securities in which the Trust invests.
Merrill Lynch Retirement
Reserves Money Fund
(available only if the
exchange occurs within
certain retirement
plans)....................
Currently the only portfolio of Merrill Lynch Re-
tirement Series Trust, a series fund, whose ob-
jectives are current income, preservation of
capital and liquidity available from investing
in a diversified portfolio of short-term money
market securities.
Merrill Lynch Short-Term
Global Income Fund, Inc...
As high a level of current income as is consis-
tent with prudent investment management from a
global portfolio of high quality debt securities
denominated in various currencies and multina-
tional currency units and having remaining matu-
rities not exceeding three years.
Merrill Lynch Special
Value Fund, Inc...........
Long-term growth of capital from investments in
securities, primarily common stock, of rela-
tively small companies believed to have special
investment value and emerging growth companies
regardless of size.
Merrill Lynch Strategic
Dividend Fund.............
Long-term total return from investment in divi-
dend paying common stocks which yield more than
Standard & Poor's 500 Composite Stock Price In-
dex.
Merrill Lynch Technology
Fund, Inc.................
Capital appreciation through worldwide investment
in equity securities of companies that derive or
are expected to derive a substantial portion of
their sales from products and services in tech-
nology.
34
<PAGE>
Merrill Lynch Texas
Municipal Bond Fund.......
A portfolio of Merrill Lynch Multi-State Munici-
pal Series Trust, a series fund, whose objective
is as high a level of income exempt from Federal
income taxes as is consistent with prudent in-
vestment management by investing primarily in a
portfolio of long-term, investment grade obliga-
tions issued by the State of Texas, its politi-
cal subdivisions, agencies and instrumentali-
ties.
Merrill Lynch Treasury A portfolio of Merrill Lynch Funds For Institu-
Fund...................... tions Series, a series fund, whose objective is
to provide current income consistent with li-
quidity and security of principal from invest-
ment in direct obligations of the U.S. Treasury
and up to 10% of its total assets in repurchase
agreements secured by such obligations.
Merrill Lynch U.S.A.
Government Reserves.......
Preservation of capital, current income and li-
quidity available from investing in direct obli-
gations of the U.S. Government and repurchase
agreements relating to such securities.
Merrill Lynch U.S.
Treasury Money Fund.......
Preservation of capital, liquidity and current
income through investment exclusively in a di-
versified portfolio of short-term marketable se-
curities which are direct obligations of the
U.S. Treasury.
Merrill Lynch Utility In-
come Fund, Inc............
High current income through investment in equity
and debt securities issued by companies which
are primarily engaged in the ownership or opera-
tion of facilities used to generate, transmit or
distribute electricity, telecommunications, gas
or water.
Merrill Lynch World Income
Fund, Inc. ...............
High current income by investing in a global
portfolio of fixed income securities denominated
in various currencies, including multinational
currencies units.
Before effecting an exchange, shareholders of the Fund should obtain a
currently effective prospectus of the fund into which the exchange is to be
made. Exercise of the exchange privilege is treated as a sale for Federal
income tax purposes and, depending on the circumstances, a short- or long-term
capital gain or loss may be realized. In addition, a shareholder exchanging
shares of any of the funds may be subject to a backup withholding tax unless
such shareholder certifies under penalty of perjury that the taxpayer
identification number on file with any such fund is correct and that he is not
otherwise subject to backup withholding. See "Distributions and Taxes" below.
To exercise the exchange privilege, shareholders should contact their Merrill
Lynch financial consultant, who will advise the Fund of the exchange, or, if
the exchange does not involve a money market fund, the shareholder may write to
the Transfer Agent requesting that the exchange be effected. Such letter must
be signed exactly as the account is registered with signatures guaranteed by an
"eligible guarantor institution"
as such term is defined in Rule 17Ad-15 under the Securities and Exchange Act
of 1934, as amended, the
35
<PAGE>
existence and validity of which may be verified by the Transfer Agent through
the use of industry publications. Shareholders of the Fund, and shareholders of
the other funds described above with shares for which certificates have not
been issued, may exercise the exchange privilege by wire through their
securities dealers. The Fund reserves the right to require a properly completed
Exchange Application. This exchange privilege may be modified or terminated at
any time in accordance with the rules of the Commission. The Fund reserves the
right to limit the number of times an investor may exercise the exchange
privilege. Certain funds may suspend the continuous offering of their shares to
the general public at any time and may thereafter resume such offering from
time to time. The exchange privilege is available only to U.S. shareholders in
states where the exchange legally may be made.
DISTRIBUTIONS AND TAXES
The Trust intends to elect and to qualify the Fund for the special tax
treatment afforded regulated investment companies ("RICs") under the Internal
Revenue Code of 1986, as amended (the "Code"). If it so qualifies, in any
taxable year in which it distributes at least 90% of its taxable net income and
90% of its tax-exempt net income (see below), the Fund (but not its
shareholders) will not be subject to Federal income tax to the extent that it
distributes its net investment income and net realized capital gains. The Trust
intends to cause the Fund to distribute substantially all of such income.
As discussed in the Fund's Prospectus, the Trust has established other series
in addition to the Fund (together with the Fund, the "Series"). Each Series of
the Trust is treated as a separate corporation for Federal income tax purposes.
Each Series, therefore, is considered to be a separate entity in determining
its treatment under the rules for RICs described in the Prospectus. Losses in
one Series do not offset gains in another Series, and the requirements (other
than certain organizational requirements) for qualifying for RIC status are
determined at the Series level rather than at the Trust level.
The Code requires a RIC to pay a nondeductible 4% excise tax to the extent
the RIC does not distribute, during each calendar year, 98% of its ordinary
income, determined on a calendar year basis, and 98% of its capital gains,
determined, in general, on an October 31 year end, plus certain undistributed
amounts from previous years. The required distributions, however, are based
only on the taxable income of a RIC. The excise tax, therefore, generally will
not apply to the tax-exempt income of a RIC, such as the Fund, that pays
exempt-interest dividends. The Trust anticipates that it will make sufficient
timely distributions of taxable income of the Fund to avoid imposition of the
excise tax on the Fund.
The Trust intends to qualify the Fund to pay "exempt-interest dividends" as
defined in Section 852(b)(5) of the Code. Under such section if, at the close
of each quarter of the Fund's taxable year, at least 50% of the value of the
Fund's total assets consists of obligations exempt from Federal income tax
("tax-exempt obligations") under Section 103(a) of the Code (relating generally
to obligations of a state or local governmental unit), the Fund shall be
qualified to pay exempt-interest dividends to its Class A and Class B
shareholders (together, the "shareholders"). Exempt-interest dividends are
dividends or any part thereof paid by the Fund which are attributable to
interest on tax-exempt obligations and designated by the Trust as exempt-
interest dividends in a written notice mailed to the Fund's shareholders within
60 days after the close of the Fund's taxable year. For this purpose, the Fund
will allocate interest from tax-exempt obligations (as well as ordinary income,
capital gains and tax preference items, discussed below) between the Class A
and Class B shareholders according to a method (which it believes is consistent
with the Commission's exemptive order permitting the issuance and sale of two
classes of shares) that is based on the gross income allocable to Class A and
Class B shareholders during the taxable year, or such other method as the
Internal Revenue
36
<PAGE>
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 or New Mexico income tax purposes to the extent
attributable to exempt-interest dividends. Shareholders are advised to consult
their tax advisers with respect to whether exempt-interest dividends retain the
exclusion under Code Section 103(a) if a shareholder would be treated as a
"substantial user" or "related person" under Code Section 147(a) with respect
to property financed with the proceeds of an issue of "industrial development
bonds" or "private activity bonds," if any, held by the Fund.
The portion of the Fund's exempt-interest dividends paid from interest
received by the Fund from New Mexico Municipal Bonds will be exempt from New
Mexico personal and corporate income taxes. Shareholders subject to income
taxation in states other than New Mexico will realize a lower after-tax rate of
return than New Mexico shareholders since the dividends distributed by the Fund
generally will not be exempt, to any significant degree, from income taxation
by such other states. The Trust will inform shareholders annually regarding the
portion of the Fund's distributions which constitutes exempt-interest dividends
and the portion which is exempt from New Mexico income taxes. The Trust will
allocate exempt-interest dividends between Class A and Class B shareholders for
New Mexico income tax purposes based on a method similar to that described
above for Federal income tax purposes.
Shares of the Fund will not be subject to the New Mexico 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 distributions are
considered ordinary income for Federal and New Mexico income tax purposes. Such
distributions are not eligible for the dividends-received deduction for
corporations. Distributions, if any, of net long-term capital gains from the
sale of securities or from certain transactions in futures or options ("capital
gain dividends") are taxable as long-term capital gains for Federal income tax
purposes, regardless of the length of time the shareholder has owned Fund
shares and, for New Mexico income tax purposes, are treated as capital gains
which are taxed at ordinary income rates. Under the Revenue Reconciliation Act
of 1993, all or a portion of the Fund's gain from the sale or redemption of
tax-exempt obligations purchased at a market discount will be treated as
ordinary income rather than capital gain. This rule may increase the amount of
ordinary income dividends received by shareholders. Distributions in excess of
the Fund's earnings and profits will first reduce the adjusted tax basis of a
holder's shares and, after such adjusted tax basis is reduced to zero, will
constitute capital gains 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, however, will be treated as long-term capital loss to the
extent of capital gain dividends received by the shareholder. In addition, such
loss will be disallowed to the extent of any exempt-interest 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 "private activity bonds" issued after
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<PAGE>
August 7, 1986. Private activity bonds are bonds which, although tax-exempt,
are used for purposes other than those generally performed by governmental
units and which benefit non-governmental entities (e.g., bonds used for
industrial development or housing purposes). Income received on such bonds is
classified as an item of "tax preference," which could subject investors in
such bonds, including shareholders of the Fund, to an alternative minimum tax.
The Fund will purchase such "private activity bonds," and the Trust will
report to shareholders within 60 days after the Fund's taxable year-end the
portion of the Fund's dividends declared during the year which constitutes an
item of tax preference for alternative minimum tax purposes. The Fund will
allocate dividends which are a tax preference item between the Class A and
Class B shareholders based on a method similar to that described above for the
allocation of tax-exempt interest. 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 reflects a
corporation's economic income). Because an exempt-interest dividend paid by
the Fund will be included in adjusted current earnings, a corporate
shareholder may be required to pay alternative minimum tax on exempt-interest
dividends paid by the Fund.
The Revenue Reconciliation Act of 1993 has added new marginal tax brackets
of 36% and 39.6% for individuals and has created a graduated structure of 26%
and 28% for the alternative minimum tax applicable to individual taxpayers.
These rate increases may affect an individual investor's after-tax return from
an investment in the Fund as compared with such investor's return from taxable
investments.
If a Class A shareholder exercises the exchange privilege within 90 days of
acquiring the shares, then the loss the shareholder can recognize on the
exchange will be reduced (or the gain increased) to the extent the sales
charge paid to the Fund reduces any sales charge such shareholder would have
owed upon purchase of the new Class A shares in the absence of the exchange
privilege. Instead, such sales charge will be treated as an amount paid for
the new Class A shares.
Under certain provisions of the Code, some shareholders may be subject to a
31% withholding tax on certain ordinary income dividends and capital gain
dividends and on redemption payments ("backup withholding"). Generally,
shareholders subject to backup withholding will be those for whom no certified
taxpayer identification number is on file with the Trust or who, to the
Trust's knowledge, have furnished an incorrect number. When establishing an
account, an investor must certify under penalty of perjury that such number is
correct and that such investor is not otherwise subject to backup withholding.
Ordinary income dividends paid by the Fund to shareholders who are
nonresident aliens or foreign entities will be subject to a 30% United States
withholding tax under existing provisions of the Code applicable to foreign
individuals and entities unless a reduced rate of withholding or a withholding
exemption is provided under applicable treaty law. Nonresident shareholders
are urged to consult their own tax advisers concerning the applicability of
the United States withholding tax.
The Code provides that every person required to file a tax return must
include for information purposes on such return the amount of exempt-interest
dividends received from all sources (including the Fund) during the taxable
year.
ENVIRONMENTAL TAX
The Code imposes a deductible tax (the "Environmental Tax") on a
corporation's modified alternative minimum taxable income (computed without
regard to the alternative tax net operating loss deduction and
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<PAGE>
the deduction for the Environmental Tax) at a rate of $12 per $10,000 (0.12%)
of alternative minimum taxable income in excess of $2,000,000. The
Environmental Tax is imposed for taxable years beginning after December 31,
1986, and before January 1, 1996. The Environmental Tax is imposed even if the
corporation is not required to pay an alternative minimum tax because the
corporation's regular income tax liability exceeds its minimum tax liability.
The Code provides, however, that a RIC, such as the Fund, is not subject to the
Environmental Tax. However, exempt-interest dividends paid by the Fund that
create alternative minimum tax preferences for corporate shareholders under the
Code (as described above) may subject corporate shareholders of the Fund to the
Environmental Tax.
TAX TREATMENT OF OPTIONS AND FUTURES TRANSACTIONS
The Fund may purchase or sell municipal bond index futures contracts and
interest rate futures contracts on U.S. Government securities ("financial
futures contracts"). The Fund may also purchase and write call and put options
on such financial futures contracts. In general, unless an election is
available to the Fund or an exception applies, such options and financial
futures contracts that are "Section 1256 contracts" will be "marked to market"
for Federal income tax purposes at the end of each taxable year, i.e., each
such option or financial futures contract will be treated as sold for its fair
market value on the last day of the taxable year, and any gain or loss
attributable to Section 1256 contracts will be 60% long-term and 40% short-term
capital gain or loss. Application of these rules to Section 1256 contracts held
by the Fund may alter the timing and character of distributions to
shareholders.
Code Section 1092, which applies to certain "straddles," may affect the
taxation of the Fund's transactions in options and financial futures contracts.
Under Section 1092, the Fund may be required to postpone recognition for tax
purposes of losses incurred in certain closing transactions in options and
financial futures contracts.
One of the requirements for qualification as a RIC is that less than 30% of
the Fund's gross income must 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 options or financial futures contract.
----------------
The foregoing is a general and abbreviated summary of the applicable
provisions of the Code, Treasury regulations and New Mexico 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 New Mexico tax laws. The Code and the Treasury regulations, as
well as the New Mexico tax laws, are subject to change by legislative or
administrative action either prospectively or retroactively.
Shareholders are urged to consult their own tax advisers regarding the
availability of any exemptions from state or local taxes (other than those
imposed by New Mexico) 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.
Total return and yield and tax-equivalent yield figures are based on the Fund's
historical performance and are not intended to indicate future performance.
Average annual total return and yield are determined separately for Class A and
Class B shares in accordance with formulas specified by the Commission.
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<PAGE>
Average annual total return quotations for the specified periods are computed
by finding the average annual compounded rates of return (based on net
investment income and any realized and unrealized capital gains or losses on
portfolio investments over such periods) that would equate the initial amount
invested to the redeemable value of such investment at the end of each period.
Average annual total return is computed assuming all dividends and
distributions are reinvested and taking into account all applicable recurring
and nonrecurring expenses, including the maximum sales charge in the case of
Class A shares and the contingent deferred sales charge 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 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.
In order to reflect the reduced sales charges in the case of Class A shares
or the waiver of the contingent deferred sales charge in the case of Class B
shares applicable to certain investors, as described under "Purchase of Shares"
and "Redemption of Shares", respectively, the total return data quoted by the
Fund in advertisements directed to such investors may take into account the
reduced, and not the maximum, sales charge or may take into account the
contingent deferred sales charge and therefore may reflect greater total return
since, due to the reduced sales charge or the waiver of sales charges, a lower
amount of expenses is deducted.
GENERAL INFORMATION
DESCRIPTION OF SHARES
The Declaration of Trust provides that the Trust shall be comprised of
separate Series each of which will consist of a separate portfolio which will
issue separate shares. The Trust is presently comprised of the Fund, Merrill
Lynch Arizona Municipal Bond Fund, Merrill Lynch Colorado Municipal Bond Fund,
Merrill Lynch Florida Municipal Bond Fund, Merrill Lynch Maryland Municipal
Bond Fund, Merrill Lynch Massachusetts Municipal Bond Fund, Merrill Lynch
Michigan Municipal Bond Fund, Merrill Lynch Minnesota Municipal Bond Fund,
Merrill Lynch New Jersey Municipal Bond Fund, Merrill Lynch New 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
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<PAGE>
into Class A shares and Class B shares. Both Class A and Class B shares
represent an interest in the same assets of the Fund and have identical voting,
dividend, liquidation and other rights and the same terms and conditions except
that expenses related to the distribution fee of the Class B shares are borne
solely by such Class B shares and the Class B shares have exclusive voting
rights with respect to matters relating to such distribution expenditures. See
"Purchase of Shares". The Trust has received an order from the Commission
permitting the issuance and sale of two classes of shares of beneficial
interest and the issuance and sale of any additional classes will require an
additional order from the Commission. There is no assurance that such an
additional order will be granted.
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 shares will have exclusive voting rights
with respect to matters relating to the distribution expenses being borne
solely by such class. Each issued and outstanding share is entitled to one vote
and to participate equally in dividends and distributions declared by the Fund
and in the net assets of such Series upon liquidation or dissolution remaining
after satisfaction of outstanding liabilities, except that, as noted above,
expenses related to the distribution of the Class B shares will be borne solely
by such 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 are
freely transferable. Holders of shares of any Series are entitled to redeem
their shares as set forth elsewhere herein and in the Prospectus. Shares do not
have cumulative voting rights and the holders of more than 50% of the shares of
the Trust voting for the election of Trustees can elect all of the Trustees if
they choose to do so and in such event the holders of the remaining shares
would not be able to elect any Trustees. No amendments may be made to the
Declaration of Trust without the affirmative vote of a majority of the
outstanding shares of the Trust.
The Manager provided the initial capital for the Fund by purchasing 10,000
shares of the Fund for $100,000. Such shares were acquired for investment and
can only be disposed of by redemption. The organizational expenses of the Fund
(estimated at approximately $ ) will be paid by the Fund and 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.
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<PAGE>
COMPUTATION OF OFFERING PRICE PER SHARE
An illustration of the computation of the offering price for Class A and
Class B shares of the Fund based on the projected value of the Fund's estimated
net assets and projected number of shares outstanding on the date its shares
are first offered for sale to public investors is as follows:
TABLE*
<TABLE>
<CAPTION>
CLASS A CLASS B
---------- ----------
<S> <C> <C>
Net Assets............................................ $50,000.00 $50,000.00
Number of Shares Outstanding.......................... 5,000 5,000
========== ==========
Net Asset Value Per Share (net assets divided by num-
ber of shares outstanding)........................... $ 10.00 $ 10.00
Sales Charge (for Class A shares: 4.00% of offering
price (4.17% of net asset value per share))*......... $ .42 $ **
---------- ----------
Offering Price........................................ $ 10.42 $ 10.00
========== ==========
</TABLE>
- --------
* Rounded to the nearest one-hundredth percent; assumes maximum sales charge
is applicable.
** Class B shares are not subject to an initial sales charge but may be
subject to a contingent deferred sales charge on redemption of shares
within four years of purchase. See "Purchase of Shares--Deferred Sales
Charge Alternative--Class B Shares" herein and in the Prospectus.
INDEPENDENT AUDITORS
, has been selected as the independent
auditors of the Fund. The selection of independent auditors is subject to
ratification by the Shareholders of the Fund. In addition, the employment of
such auditors may be terminated without any penalty by vote of a majority of
the outstanding shares of the Trust at a meeting called for the purpose of
terminating such employment. The independent auditors are responsible for
auditing the annual financial statements of the Fund.
CUSTODIAN
, acts as the custodian of the
Fund's assets. The custodian is responsible for safeguarding and controlling
the Fund's cash and securities, handling the delivery of securities and
collecting interest on the Fund's investments.
TRANSFER AGENT
Financial Data Services, Inc., 4800 Deer Lake Drive East, Jacksonville,
Florida 32246-6484, acts as the Trust's transfer agent. The Transfer Agent is
responsible for the issuance, transfer and redemption of shares and the
opening, maintenance and servicing of shareholder accounts. See "Management of
the Trust--Transfer Agency Services" in the Prospectus.
LEGAL COUNSEL
Brown & Wood, One World Trade Center, New York, New York 10048-0557, is
counsel for the Trust.
REPORTS TO SHAREHOLDERS
The fiscal year of the Fund ends on July 31 of each year. The Trust sends to
shareholders of the Fund at least semi-annually reports showing the Fund's
portfolio and other information. An annual report, containing
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<PAGE>
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 Securities and Exchange
Commission, Washington, D.C., under the Securities Act of 1933 and the
Investment Company Act of 1940, to which reference is hereby made.
The Declaration of Trust establishing the Trust dated August 2, 1985, a copy
of which, together with all amendments thereto (the "Declaration") is on file
in the office of the Secretary of The Commonwealth of Massachusetts, provides
that the name "Merrill Lynch Multi-State Municipal Series Trust" refers to the
Trustees under the Declaration collectively as Trustees, but not as individuals
or personally; and no Trustee, shareholder, officer, employee or agent of the
Trust shall be held to any personal liability; nor shall resort be had to any
such person's private property for the satisfaction of any obligation or claim
of the Trust but the "Trust Property" only shall be liable.
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<PAGE>
APPENDIX I
ECONOMIC AND FINANCIAL INFORMATION CONCERNING NEW MEXICO
The information set forth below is derived from official statements prepared
in connection with the issuance of municipal bonds in New Mexico and other
sources that are generally available to investors. The information is provided
as general information intended to give a recent historical description and is
not intended to indicate future or continuing trends affecting the financial or
other positions of the State of New Mexico (the "State"). The Trust has not
independently verified this information.
The State, admitted as the forty-seventh state on January 6, 1912, is the
fifth largest state, containing approximately 121,365 square miles. The State's
terrain varies widely and incorporates six of the seven life zones between its
northern mountains and its arid southern plains.
The State's climate is characterized by sunshine and warm bright skies in
both winter and summer. Every part of the state receives no less than 70%
sunshine year-round. Humidities range from 60% (mornings) to 30% (afternoons).
Evenings are crisp and cool in all seasons because of low humidity.
The State has a semiarid subtropical climate with light precipitation.
Thunderstorms in July and August bring most of the moisture. December to March
snowfalls vary from 2 inches (lower Rio Grande Valley) to 300 inches (north
central mountains). The State is an experience in comfortable living with its
clean air, blue skies, and fair weather.
PRINCIPAL ECONOMIC ACTIVITIES
Major industries in the State are energy resources, tourism, services, arts
and crafts, agriculture-agribusiness, government, manufacturing, and mining. In
1991, the value of energy resources production (crude petroleum, natural gas,
uranium, and coal) was approximately $3.33 billion. Other mineral production
was more than $920 million. The mining industry employed about 14,900 New
Mexicans in 1992. Major federally funded scientific research facilities at Los
Alamos, Albuquerque and White Sands are also a notable part of the State's
economy.
The State has a thriving tourist industry. In 1992 there were approximately
2,265,400 visits to national parks and about 4,301,783 visits to state parks in
the State. According to a 1989 estimate by the U.S. Travel Data Center, the
State's tourist industry generated about $2.0 billion in revenue and more than
36,310 jobs.
Agriculture is a major part of the state's economy, with crop and livestock
sales in excess of $1.5 billion in 1991. As a high, relatively dry region with
extensive grasslands, the State is ideal for raising cattle, sheep, and other
livestock. Because of irrigation and a variety of climatic conditions, the
State's farmers are able to produce a diverse assortment of quality products.
The State's farmers are major producers of alfalfa, hay, wheat, chile peppers,
cotton, fruits and pecans. Agricultural businesses include chile canneries,
wineries, alfalfa pellets, chemical and fertilizer plants, farm machinery, feed
lots, and commercial slaughter plants.
The State's population at the time of the official 1990 United States Census
was 1,515,069.
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<PAGE>
GOVERNMENTAL ORGANIZATION
The State's government consists of the three branches characteristic of the
American political system: executive, legislative and judicial. The executive
branch is headed by the Governor who is elected for a four-year term. A
governor may succeed himself in office once. Following a reorganization plan
implemented in 1978 to reduce and consolidate some 390 agencies, boards and
commissions, the primary functions of the executive branch are now carried out
by sixteen cabinet departments, each headed by a cabinet secretary appointed by
the Governor.
The Legislature consists of 112 members and is divided into a Senate and a
House of Representatives. Senators are elected for four-year terms, members of
the House for two-year terms. The Legislature convenes in regular session
annually on the third Tuesday in January. Regular sessions are constitutionally
limited in length to sixty calendar days in odd-numbered years and thirty
calendar days in even-numbered years. In addition, special sessions of the
Legislature may be convened by the Governor under certain limited
circumstances. Legislators receive no salary, but do receive per diem and
mileage allowances while in session or on official State business.
The judicial branch is composed of a statewide system of Magistrate and
District Courts, the Court of Appeals and the Supreme Court. The district court
is the trial court of record with general jurisdiction.
STATE TAXES AND REVENUES
Programs and operations of the State are predominately funded through a
system of 29 major taxes administered by the Taxation and Revenue Department
("TRD"). In addition, interest income and earnings from the Permanent Fund and
the Severance Tax Permanent Fund provide important sources of funds for State
purposes. The most important tax and revenue sources as measured by magnitude
of revenue generation are described below.
GROSS RECEIPTS TAX
The gross receipts tax is levied on the total amount of money or the value of
other consideration received from selling property (including tangible personal
property) in the State, from leasing property employed in the State, and from
performing services in the State. Exempt from the tax are wagers, certain
agricultural products, dividends and interest, and gas, oil, or mineral
extractions. This tax is paid by the seller but generally passed on to the
purchaser.
The gross receipts tax is the largest single source of State General Fund
revenues and a primary source of revenues for cities and countries. The tax
includes the statewide gross receipts tax levy of 5% plus several local option
city and county levies. A credit of .5% against the statewide rate of 5% is
allowed for municipal local option taxes. Receipts from the statewide levy,
less disbursements to each incorporated municipality of 1.225% of the taxable
gross receipts reported in that municipality and less disbursements to the
State Aviation Fund of 2.15% of the value of jet fuel sales, are deposited in
the State General Fund.
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<PAGE>
In fiscal year 1992-93, total gross receipts collections, including local
option taxes, amounted to $1.289 billion. Of this amount $825 million was
distributed to the State General Fund, $463 million went to cities and counties
and $604 thousand to the Aviation Fund. Gross receipts taxes represented 36% of
recurring General Fund receipts.
PERSONAL INCOME TAX
The personal income tax is imposed on the net income of every resident
individual and upon the net income from business, property, or employment of
non-resident individuals. State taxable income is generally equal to federal
adjusted gross income less a personal exemption allowance, standard deductions
or itemized deductions and amounts non-taxable by the laws or Constitution of
the State or the United States. The State also allows deductions for income
earned by Indians on reservations and graduated deductions for income earned by
taxpayers 65 years or older. Collections are placed in the State General Fund.
For tax years beginning after 1986, tax rates range from 2.4% on taxable
income of $8,000 or less on joint returns (1.8% on taxable income at $5,200 or
less for single returns) to 8.5% on taxable income over $64,000 on joint
returns (8.5% on taxable income over $41,600 for single elderly).
State statutes provide for a number of tax rebates and tax credits which are
paid from or credited against the personal income tax and which have the effect
of reducing available personal income tax collections. Rebate programs target
those with very low incomes and include a general low income rebate, a gross
receipts tax rebate for food and medical expenses (which was repealed by the
1993 legislature) and a rebate for property taxes paid by the elderly. Credits
are available for day care costs.
In fiscal year 1992-1993 $527 million of personal income tax receipts were
distributed of which $491 million went to the General Fund and $33 million was
returned to taxpayers through rebates and credits. The remainder went to
special refund, intercept and donation programs. The distribution to the
General Fund represented approximately 22% of recurring General Fund receipts.
CORPORATE INCOME TAX
The corporate income tax is imposed on the net income of every domestic
corporation and upon the net income of foreign corporations from business,
property, and employment in the State. State taxable income is generally equal
to federal taxable income with adjustments for net operating loss carryovers
and amounts non-taxable by the laws or Constitution of the State or the United
States. The tax is not imposed on Insurance companies which pay a state premium
tax, nonprofit organizations or retirement trust funds. Collections, net of
refunds, are placed in the State General Fund.
Tax rates are established under a graduated table and range from 4.8% on the
first $500,000 of taxable income to 7.6% on income in excess of $1,000,000. In
fiscal year 1992-93 the corporate income tax resulted in net receipts of $90
million to the General Fund, representing 4% of recurring General Fund
receipts.
OIL AND GAS EMERGENCY SCHOOL TAX
The oil and gas emergency school tax is imposed against persons for the
privilege of engaging in the business of severing oil, natural gas, liquid
hydrocarbons and carbon dioxide from the soil of the State.
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<PAGE>
The oil and gas emergency school tax rate is 4.0% of the taxable value of
such products at the production unit. The rate was increased from 3.15% on July
1, 1993. The tax is due on the 25th day of the second month following the month
of production, creating a slight lag between oil and gas production and tax
collections. Oil and gas emergency school tax receipts are disbursed to the
General Fund. In fiscal year 1992-93 net oil and gas emergency school tax
receipts were equal to $103 million and represented approximately 4.5% of
General Fund receipts.
GASOLINE TAX
The Gasoline Tax is levied on all gasoline received in the State and is paid
by the distributors at the rate of 16.2 cents per gallon. In addition, there is
a petroleum products loading fee of $80/8,000 gallons (about one cent/gallon).
These taxes are distributed principally to the State Road Fund and the counties
and municipalities of the State based on a formula related to the amount of
fuel received in each jurisdiction. Other portions of tax revenues are
earmarked for local government road funds and for gas tank cleanup funds. The
$147 million of gasoline tax collections in fiscal year 1992-93 were
distributed as follows: $101 million to the State Road Fund, $14.9 million to
counties and municipalities, $18.6 million for local government road funds and
$11.7 million to the Corrective Action Fund. No gasoline tax receipts were
credited to the General Fund. However, the 1993 legislature increased gasoline
taxes 6 cents per gallon and special fuel taxes 2 cents per gallon effective
July 1, 1993, with all but 1 cent per gallon of the gasoline tax to be
distributed to the General Fund.
ROYALTIES, RENTS, AND BONUSES
FEDERAL LANDS
Under the federal 1920 Mineral Leasing Act, the State receives a 50% share of
all income generated from the leasing of federally held lands for mineral
production. Principal sources of income on federal lands are royalty payments
on oil and gas production. In 1992, approximately 37% of total oil production
and 67% of total gas production occurred on federal lands in the State.
Additional income is derived from bonus payments for oil and gas leases and
royalty payments on production of coal, potash, and other minerals. Federal
mineral lease income is collected by the U.S. Minerals Management Service. The
State receives its payments on a monthly basis and makes the deposits to the
General Fund, almost exclusively for funding public schools. In fiscal year
1992-93, $133 million, or 6% of total receipts, was deposited in the General
Fund from this source.
STATE LANDS
The State Land Office manages lands acquired by the State under the Federal
Ferguson Act, enacted prior to statehood, as well as under the State
Constitution. All income from such lands is dedicated to specific educational
purposes and institutions. As with Federal lands, the oil and gas industry is
the principal source of revenue from State lands. In 1992 State lands accounted
for 37% of State oil production and 18% of State gas production. Bonus income
is also collected in the form of cash payments as a result of competitive
bidding for State leases. Rentals and bonus income are distributed to the
respective beneficiary institutions, largely the public schools, for operating
purposes. The public school portion of leases, rents, and bonuses in 1992-93
was $10 million and was deposited in the General Fund.
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<PAGE>
Minerals production from State trust lands also generates royalty income
which is deposited in the State Permanent Fund. Royalties are imposed on most
minerals production values at the rate of 12 1/2%, although there is a
provision for rates of up to 20% for new leases on developed acreage.
Beneficiaries of the State Permanent Fund are the same as those educational
institutions and public schools benefiting from State lands. Fiscal year 1992-
93 royalty income to the Permanent Fund was $122.9 million, $103.9 million of
which represented the portion dedicated to public school purposes.
SEVERANCE TAXES
Severance taxes are levied on producers and others severing minerals and
mineral resources within the State, and are distinguished from several other
taxes on, or revenue sources related to, valuable mineral extraction in New
Mexico including the oil and gas emergency school tax, state royalties, bonus
revenues, oil and gas ad valorem production taxes, the oil and gas ad valorem
equipment tax, and the natural gas processors tax.
Severance taxes on natural gas, oil and carbon dioxide generated $121 million
or 78% of fiscal year 1992-93 severance tax collections. Severance taxes from
coal production generated $78 million or 19% of fiscal year 1992-93 severance
tax collections. Other minerals and material resources, subject to severance
taxation, which are produced in New Mexico include uranium, copper, potash,
gold, lead, manganese, sand, gravel, peat moss, timber, and a variety of
metals.
PRODUCTION AND PROPERTY TAXES ON OIL AND GAS
Statutory rates on oil for the School Tax (3.15%), the Oil and Gas Severance
Tax (3.75%) and the Conservation Tax (.18%) are effectively reduced by
deductions allowed for trucking costs and for Federal, State and Indian
royalties. Statutory rates on natural gas for the School Tax (3.15%), the Oil
and Gas Severance Tax (3.75%), and the Conservation Tax (.18%) are effectively
reduced by deductions for Federal, State and Indian royalties and by deductions
for transportation and processing tariffs upstream of the sales location. The
ad valorem taxes are imposed in lieu of property taxes on reserves and lease
equipment, and local rates vary in accordance with jurisdiction.
PRODUCTION TAXES ON COAL
Statutory rates for the Resources Excise and the Conservation Tax are
effectively reduced by a deduction for Federal, State and Indian royalties. The
effective Severance Tax rate on coal reflects the mix of old and new contract
sales and of underground and surface mines. Property taxes were computed on the
basis of average tax per ton liability for 1989 although the property tax
pertained to both equipment and production values. Fundamental differences in
tax bases preclude a true comparison between property taxes and other taxes
shown above. However, property taxes are included in this analysis to prevent
understating the tax burden.
PROPERTY TAXATION SYSTEM
With certain limited exceptions, real and tangible personal property owned by
individuals or corporations is subject to ad valorem taxation in the State.
Local county assessors are responsible for the appraisal of most residential
and commercial property. The Central Appraisal Bureau of the State Taxation
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and Revenue Department ("TRD") provides technical assistance to the county
assessors and assists in the implementation of the Property Tax Code.
The Central Assessment Bureau of the TRD is responsible for the assessment of
certain types of properties not assessed by the counties. Property assessed by
the Central Assessment Bureau is referred to as central valuations and includes
the following types of properties.
Railroads
Communication systems
Pipelines
Public utilities
Airlines
Electric generating plants
Construction machinery and equipment, and other personal property of
persons engaged in construction which is used in more than one county
Mineral property, excepting oil and gas property
Property valuations are established as of January 1 of each year (except
certain livestock). Centrally assessed property is verified and certified to
the local assessors who combine the values with all locally assessed property
values. The totals are reported to the Central Assessment Bureau and the
Department of Finance and Administration and certified for budgetary use. The
county treasurers levy the applicable rates against individual properties and
are required to mail tax bills for the current fiscal year no later than
November 1. Property taxes are due to the county treasurers in two equal
installments on November 10 and April 10. Taxes become delinquent on December
10 and May 10 following the two respective due dates. Civil penalties and
interest are imposed on delinquent taxes. County treasurers are responsible for
the collection of property taxes and their distribution to the governmental
entities participating in the tax receipts, including those amounts due to the
State for payment of principal, premium, if any, and interest on general
obligation bonds.
Maximum property tax rates for operations for various types of local
governments are imposed by the Constitution of the State and by governing
statutes. Differing rates of taxation may apply to residential and non-
residential properties. Except for property which by statute is subject to
special methods of valuation, the value of property is its market value as
determined by sales of comparable property. If comparable sales are
unavailable, an income or cost method of valuation is used. Residential
properties are eligible for a head of family exemption which is $2,000 for
property tax year 1993 and subsequent years. There is also a $2,000 veterans
exemption. Assessed value is computed as one-third of the value derived after
exemptions, the maximum assessment ratio allowed under the State Constitution.
All but one county had completed reappraisal for 1992. Values obtained thereby
will be maintained or revised every two years. As of January 1995, all property
will be valued, using the sale of comparable property method, at its 1992
value.
Oil and gas properties and related production equipment are subject to
property taxation in the State. The oil and gas ad valorem production tax is
levied on the basis of assessed value deemed the equivalent of 50% of the
actual price of the oil and gas received at the production unit, less certain
trucking expense deductions and royalties paid to the federal government, the
State, or Indian tribes. The oil and gas production equipment ad valorem tax is
levied based on assessed value deemed equivalent to 9% of the previous calendar
year sales value of the product from each production unit.
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The tax year for oil and gas production begins on September 1 based on tax
rates which are set on August 31. The oil and gas ad valorem production tax is
due by the 25th day of the second month following the month of production.
Taxes are collected monthly. The oil and gas production equipment ad valorem
tax is due on November 30. Collections are distributed to the county treasurers
who further distribute the tax revenues to the participating governmental
entities.
PROPERTY TAX RATE LIMITATIONS
The New Mexico Constitution imposes a four mill limit on taxes levied upon
real or personal property for State revenue except for the support of the
educational, penal and charitable institutions of the State, payment of the
State debt and interest thereon, and total annual tax levy upon such a property
for all State purposes exclusive of necessary levies for the State debt shall
not exceed ten mills, and taxes levied upon real or personal tangible property
for all purposes, except special levies on specific classes of property and
except necessary levies for public debt shall not exceed twenty mills annually
on each dollar of the assessed valuation thereof, but laws may be passed
authorizing additional taxes to be levied outside of such limitation when
approved by at least a majority of the qualified electors of the taxing
district who paid a property tax therein during the preceding year voting on
such proposition. Currently the State imposes no levy of property taxes except
for the payment of State debt.
Statutes establish maximum property tax rates for operating purposes for
cities, counties and school districts. The Department of Finance and
Administration is permitted by statute to set a rate at less than the maximum
rate in any tax year.
<TABLE>
<CAPTION>
DOLLARS
PER
THOUSAND
--------
<S> <C>
Counties........................................................ $11.85
Cities.......................................................... 7.65
Schools......................................................... 0.50
------
Maximum statutory tax rate for counties, cities, and schools
combined....................................................... $20.00
</TABLE>
Apart from the allowable operating rates above, New Mexico governments may
levy additional property taxes as authorized by statute and voter approval for:
Debt service
County hospitals
School district capital improvements
Branch and community colleges
Vocational schools
Flood control districts and authorities
Judgments
Water and sanitation districts
Conservancy districts
Other special districts
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In addition, the Legislature has established certain limits on the amount of
increase in property tax revenue which may be produced for county and city
operating purposes. The "yield control" formula is activated by property
valuation increases due to county assessor reappraisal programs. The yield
control law limits the increase in revenue in any one year over the prior year
to the lesser of 5% or the percentage increase in the annual price index
published by the United States Department of Commerce for State and Local
Government Purchases of Goods and Services, plus increases in tax revenues
resulting from new construction and improvements to properties.
STATE AND LOCAL GOVERNMENT LEASES
In 1989, the New Mexico Supreme Court held in the case of Montano v. Gabaldon
that certain lease purchase agreements which, without voter approval, commit
the State or a political subdivision of the State to make payments out of
general revenues in future years, violate the State Constitution. The Court
stated that its ruling will have modified prospective effect only. The ruling
has impeded lease financings and may reduce the number of New Mexico Municipal
Bonds and certificates of participation based on lease obligations.
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APPENDIX II
RATINGS OF MUNICIPAL BONDS
DESCRIPTION OF MOODY'S INVESTORS SERVICE, INC.'S ("MOODY'S") MUNICIPAL BOND
RATINGS
Aaa Bonds which are rated Aaa are judged to be of the best quality. They
carry the smallest degree of investment risk and are generally referred
to as "gilt edge". Interest payments are protected by a large or by an
exceptionally stable margin and principal is secure. While the various
protective elements are likely to change, such changes as can be
visualized are most unlikely to impair the fundamentally strong
position of such issues.
Aa Bonds which are rated Aa are judged to be of high quality by all
standards. Together with the Aaa group they comprise what are generally
known as high grade bonds. They are rated lower than the best bonds
because margins of protection may not be as large as in Aaa securities
or fluctuation of protective elements may be of greater amplitude or
there may be other elements present which make the long-term risks
appear somewhat larger than in Aaa securities.
A Bonds which are rated A possess many favorable investment attributes
and are to be considered as upper medium grade obligations. Factors
giving security to principal and interest are considered adequate, but
elements may be present which suggest a susceptibility to impairment
sometime in the future.
Baa Bonds which are rated Baa are considered as medium grade obligations,
i.e., they are neither highly protected nor poorly secured. Interest
payment and principal security appear adequate for the present but
certain protective elements may be lacking or may be characteristically
unreliable over any great length of time. Such bonds lack outstanding
investment characteristics and in fact have speculative characteristics
as well.
Ba Bonds which are rated Ba are judged to have speculative elements; their
future cannot be considered as well assured. Often the protection of
interest and principal payments may be very moderate and thereby not
well safeguarded during both good and bad times over the future.
Uncertainty of position characterizes bonds in this class.
B Bonds which are rated B generally lack characteristics of the desirable
investment. Assurance of interest and principal payments or of
maintenance of other terms of the contract over any long period of time
may be small.
Caa Bonds which are rated Caa are of poor standing. Such issues may be in
default or there may be present elements of danger with respect to
principal or interest.
Ca Bonds which are rated Ca represent obligations which are speculative in
a high degree. Such issues are often in default or have other marked
shortcomings.
C Bonds which are rated C are the lowest rated class of bonds, and issues
so rated can be regarded as having extremely poor prospects of ever
attaining any real investment standing.
Note: Those bonds in the Aa, A, Baa, Ba and B groups which Moody's believes
possess the strongest investment attributes are designated by the symbols Aa1,
A1, Baa1, Ba1 and B1.
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Short-term Notes: The four ratings of Moody's for short-term notes are MIG
1/VMIG1, MIG 2/VMIG2, MIG 3/VMIG3 and MIG 4/VMIG4; MIG 1/VMIG1 denotes "best
quality . . . strong protection by established cash flows"; MIG 2/VMIG2 denotes
"high quality" with ample margins of protection; MIG 3/VMIG3 notes are of
"favorable quality . . . but . . . lacking the undeniable strength of the
preceding grades"; MIG 4/VMIG4 notes are of "adequate quality . . .
[p]rotection commonly regarded as required of an investment security is
present . . . there is specific risk."
DESCRIPTION OF MOODY'S CORPORATE BOND RATINGS
Excerpts from Moody's description of its corporate bond ratings: Aaa--judged
to be the best quality, carry the smallest degree of investment risk; Aa--
judged to be of high quality by all standards; A--possess many favorable
investment attributes and are to be considered as upper medium grade
obligations.
DESCRIPTION OF MOODY'S COMMERCIAL PAPER RATINGS
Moody's Commercial Paper ratings are opinions of the ability of issuers to
repay punctually promissory obligations not having an original maturity in
excess of nine months. Moody's employs the following three designations, all
judged to be investment grade, to indicate the relative repayment capacity of
rated issuers:
Issuers rated Prime-1 (or related supporting institutions) have a superior
capacity for repayment of short-term promissory obligations. Prime-1 repayment
capacity will normally be evidenced by the following characteristics: leading
market positions in well established industries; high rates of return on funds
employed; conservative capitalization structures with moderate reliance on debt
and ample asset protection; broad margins in earning coverage of fixed
financial charges and high internal cash generation; and well established
access to a range of financial markets and assured sources of alternate
liquidity.
Issuers rated Prime-2 (or related supporting institutions) have a strong
capacity for repayment of short-term promissory obligations. This will normally
be evidenced by many of the characteristics cited above but to a lesser degree.
Earnings trends and coverage ratios, while sound, will be more subject to
variation. Capitalization characteristics, while still appropriate, may be more
affected by external conditions. Ample alternate liquidity is maintained.
Issuers rated Prime-3 (or related supporting institutions) have an acceptable
capacity for repayment of short-term promissory obligations. The effects of
industry characteristics and market composition may be more pronounced.
Variability in earnings and profitability may result in changes in the level of
debt protection measurements and the requirement for relatively high financial
leverage. Adequate alternate liquidity is maintained.
Issuers rated Not Prime do not fall within any of the Prime rating
categories.
DESCRIPTION OF STANDARD & POOR'S CORPORATION'S ("STANDARD & POOR'S") MUNICIPAL
DEBT RATINGS
A Standard & Poor's municipal debt rating is a current assessment of the
creditworthiness of an obligor with respect to a specific obligation. This
assessment may take into consideration obligors such as guarantors, insurers,
or lessees.
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<PAGE>
The debt rating is not a recommendation to purchase, sell or hold a security,
inasmuch as it does not comment as to market price or suitability for a
particular investor.
The ratings are based on current information furnished by the issuer or
obtained by Standard & Poor's from other sources Standard & Poor's considers
reliable. Standard & Poor's does not perform an audit in connection with any
rating and may, on occasion, rely on unaudited financial information. The
ratings may be changed, suspended or withdrawn as a result of changes in, or
unavailability of, such information, or for other circumstances.
The ratings are based, in varying degrees, on the following considerations:
I. Likelihood of default--capacity and willingness of the obligor as
to the timely payment of interest and repayment of principal in
accordance with the terms of the obligation;
II. Nature of and provisions of the obligations;
III. Protection afforded by, and relative position of, the obligation
in the event of bankruptcy, reorganization or other arrangement
under the laws of bankruptcy and other laws affecting creditors'
rights.
AAA Debt rated "AAA" has the highest rating assigned by Standard &
Poor's. Capacity to pay interest and repay principal is
extremely strong.
AA Debt rated "AA" has a very strong capacity to pay interest and
repay principal and differs from the higher-rated issues only
in small degree.
A Debt rated "A" has a strong capacity to pay interest and repay
principal although it is somewhat more susceptible to the
adverse effects of changes in circumstances and economic
conditions than debt in higher-rated categories.
BBB Debt rated "BBB" is regarded as having an adequate capacity to
pay interest and repay principal. Whereas it normally exhibits
adequate protection parameters, adverse economic conditions or
changing circumstances are more likely to lead to a weakened
capacity to pay interest and repay principal for debt in this
category than for debt in higher rated categories.
BB B CCC CC C Debt rated "BB", "B", "CCC", "CC" and "C" is regarded, on
balance, as predominately speculative with respect to capacity
to pay interest and repay principal in accordance with the
terms of the obligations. "BB" indicates the lowest degree of
speculation and "CC" the highest degree of speculation. While
such debt will likely have some quality and protective
characteristics, these are outweighed by large uncertainties
or major exposures to adverse conditions.
CI The rating "CI" is reserved for income bonds on which no
interest is being paid.
D Debt rated "D" is in payment default. The "D" rating category
is used when interest payments 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. The "D" rating
also will be used upon the filing of a bankruptcy petition if
debt service payments are jeopardized.
Plus (+) or Minus (-): The ratings from "AA" to "CCC" may be modified by the
addition of a plus or minus sign to show relative standing within the major
rating categories.
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<PAGE>
DESCRIPTION OF STANDARD & POOR'S CORPORATE BOND RATINGS
A Standard & Poor's corporate debt rating is a current assessment of the
creditworthiness of an obligor with respect to specific obligation. Debt rated
"AAA" has the highest rating assigned by Standard & Poor's. Capacity to pay
interest and repay principal is extremely strong. Debt rated "AA" has a very
strong capacity to pay interest and to repay principal and differs from the
highest rated issues only in small degree. Debt rated "A" has a strong capacity
to pay interest and repay principal although it is somewhat more susceptible to
the adverse effects of changes in circumstances and economic conditions than
debt of a higher rated category. Debt rated "BBB" is regarded as having an
adequate capacity to pay interest and repay principal. Whereas it normally
exhibits adequate protection parameters, adverse economic conditions or
changing circumstances are more likely to lead to a weakened capacity to pay
interest and repay principal for debt in this category than in higher rated
categories.
The ratings from "AA" to "BBB" may be modified by the addition of a plus or
minus sign to show relative standing within the major rating categories.
DESCRIPTION OF STANDARD & POOR'S COMMERCIAL PAPER RATINGS
A Standard & Poor's Commercial Paper Rating is a current assessment of the
likelihood of timely payment of debt having an original maturity of no more
than 365 days. Ratings are graded into four categories, ranging from "A" for
the highest quality obligations to "D" for the lowest. Ratings are applicable
to both taxable and tax-exempt commercial paper. Issues assigned the highest
rating are regarded as having the greatest capacity for timely payment. Issues
in this category are further refined with the designation 1, 2 and 3 to
indicate the relative degree of safety. The three designations in the "A"
category are as follows:
A-1
This designation indicates that the degree of safety regarding timely
payment is either overwhelming or very 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 strong.
However, the relative degree of safety is not as overwhelming as for
issues designated "A-1".
A-3
Issues carrying this designation have a satisfactory capacity for
timely payment. They are, however, somewhat more vulnerable to the
adverse effects of changes in circumstances than obligations carrying
the higher designations.
B
Issues rated "B" are regarded as having only speculative capacity for
timely payment.
C
This rating is assigned to short-term debt obligations with a doubtful
capacity for payment.
D
Debt rated "D" is in payment default. The "D" rating category is used
when interest payments or principal payments are not made on the date
due, even if the applicable grace period has not expired, unless S&P
believes that such payments will be made during such grace period.
A Commercial Paper Rating is not a recommendation to purchase or sell a
security. The ratings are based on current information furnished to Standard &
Poor's by the issuer and obtained by Standard & Poor's from other sources it
considers reliable. The ratings may be changed, suspended, or withdrawn as a
result of changes in, or unavailability of, such information.
A Standard & Poor's note rating reflects the liquidity concerns and market
access risks unique to notes. Notes due in 3 years or less will likely receive
a note rating. Notes maturing beyond 3 years will most likely receive a long-
term debt rating. The following criteria will be used in making that
assessment.
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<PAGE>
--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 sysmbols are as follows:
SP-1 A very strong or strong capacity to pay principal and interest. Those
issues determined to possess overwhelming safety characteristics will
be given a "+" designation.
SP-2 A satisfactory capacity to pay principal and interest.
SP-3 A speculative capacity to pay principal and interest.
Standard & Poor's may continue to rate note issues with a maturity greater
than three years in accordance with the same rating scale currently employed
for municipal bond ratings.
Unrated: Where no rating has been assigned or where a rating has been
suspended or withdrawn, it may be for reasons unrelated to the quality of the
issue.
Should no rating be assigned, the reason may be one of the following:
1. An application for rating was not received or accepted.
2. The issue or issuers belongs to a group of securities that are not
rated as a matter of policy.
3. There is a lack of essential data pertaining to the issue or issuer.
4. The issue was privately placed, in which case the rating is not
published in Moody's publications.
Suspension or withdrawal may occur if new and material circumstances arise, the
effects of which preclude satisfactory analysis; if there is no longer
available reasonable up-to-date information to permit a judgment to be formed;
if a bond is called for redemption; or for other reasons.
DESCRIPTION OF FITCH INVESTORS SERVICE, INC.'S ("FITCH") INVESTMENT GRADE BOND
RATINGS
Fitch investment grade bond ratings provide a guide to investors in
determining the credit risk associated with a particular security. The ratings
represent Fitch's assessment of the issuer's ability to meet the obligations of
a specific debt issue or class of debt in a timely manner.
The rating takes into consideration special features of the issue, its
relationship to other obligations of the issuer, the current and prospective
financial condition and operating performance of the issuer and of any
guarantor, as well as the economic and political environment that might affect
the issuer's future financial strength and credit quality.
Fitch ratings do not reflect any credit enhancement that may be provided by
insurance policies or financial guaranties unless otherwise indicated.
Bonds that have the same rating are of similar but not necessarily identical
credit quality since the rating categories do not fully reflect small
differences in the degrees of credit risk.
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.
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<PAGE>
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.
Credit Trend Indicator: Credit trend indicators show whether credit
fundamentals are improving, stable, declining, or uncertain, as follows:
Improving (UP ARROW)
Stable (LEFT/RIGHT ARROW)
Declining (DOWN ARROW)
Uncertain (UP/DOWN ARROW)
Credit trend indicators are not predictions that any rating change will occur,
and have a longer-term time frame than issues placed on FitchAlert.
indicates that Fitch does not rate the specific issue.
NR
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.
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WITHDRAWN A rating will be withdrawn when an issue matures or is called
or refinanced and, at Fitch's discretion, when an issuer
fails to furnish proper and timely information.
FITCHALERT Ratings are placed on FitchAlert to notify investors of an
occurrence that is likely to result in a rating change and
the likely direction of such change. These are designated as
"Positive," indicating a potential upgrade, "Negative," for
potential downgrade, or "Evolving," where ratings may be
raised or lowered. FitchAlert is relatively short-term, and
should be resolved within 12 months.
DESCRIPTION OF FITCH SPECULATIVE GRADE BOND RATINGS
Fitch speculative grade bond ratings provide a guide to investors in
determining the credit risk associated with a 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.
C Bonds are in imminent default in payment of interest or
principal.
DDD, DD and D Bonds are in default on interest and/or principal payments.
Such bonds are extremely speculative and should be valued on
the basis of their ultimate recovery value in liquidation or
reorganization of the obligor. "DDD" represents the highest
potential for recovery on these bonds, and "D" represents the
lowest potential for recovery.
Plus (+) or Minus (-): 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.
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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.
INS The symbol "INS" indicates that the rating is based on an
insurance policy or financial guaranty issued by an insurance
company.
59
<PAGE>
APPENDIX III
TAXABLE EQUIVALENT YIELDS FOR 1994
<TABLE>
<CAPTION>
1994 TAX
TAXABLE INCOME/1/ BRACKET/2/ A TAX-EXEMPT YIELD OF/3/
----------------------------------------------- -----------------------------
<S> <C> <C> <C> <C> <C> <C>
3.50% 4.00% 4.50% 5.00% 5.50%
<CAPTION>
FEDERAL
AND STATE
TAX IS EQUAL TO A NEW MEXICO
SINGLE RETURN JOINT RETURN BRACKET TAXABLE YIELD OF
------------- ----------------- ---------- -----------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
$22,751-$55,100 $38,001-$91,850 34.12% 5.31% 6.07% 6.83% 7.59% 8.35%
$55,101-$115,000 $91,851-$140,000 36.87% 5.54% 6.34% 7.13% 7.92% 8.71%
$115,001-$250,000 $140,001-$250,000 41.44% 5.98% 6.83% 7.68% 8.54% 9.39%
Over $250,000 Over $250,000 44.73% 6.33% 7.24% 8.14% 9.05% 9.95%
</TABLE>
- --------
/1/The above table is based on the Federal taxable income brackets which are
adjusted annually for inflation and assumes taxable income is the same for
Federal and New Mexico purposes. However, taxable income may vary and fall
into different brackets because of computational differences. For example,
certain amounts may be deductible for Federal but not New Mexico income tax
purposes and other amounts may be deductible for New Mexico but not Federal
income tax purposes. This may result in different tax-free yields than those
shown above. In addition, an investor's marginal tax rates may exceed the
rates shown in the above table if such investor does not itemize deductions
for Federal income tax purposes or due to the reduction, or possible
elimination, of the personal exemption deduction for high-income taxpayers
and an overall limit on itemized deductions. The above table does not apply
to corporate investors. The tax characteristics of the Fund are described
more fully elsewhere in this Prospectus. Consult your tax adviser for further
details. THIS CHART IS FOR ILLUSTRATIVE PURPOSES ONLY AND CANNOT BE TAKEN AS
AN INDICATION OF ANTICIPATED FUND PERFORMANCE.
/2/The above table is based on combined New Mexico and Federal taxable income
brackets and uses the highest New Mexico effective marginal rate that applies
to any income level in the ranges listed on the left of this chart.
Nominally, the New Mexico marginal rate is 6.9% for net taxable income over
$23,400 but not over $31,200 for single filers and for net taxable income
over $36,000 but not over $48,000 for joint filers, 7.7% for net taxable
income over $31,200 but not over $41,600 for single filers and for net
taxable income over $48,000 but not over $64,000 for joint filers and 8.5%
for net taxable income over $41,600 for single filers and for net taxable
income over $64,000 for joint filers.
/3/The taxable yields shown above assume that an investor pays regular Federal
tax rather than the alternative minimum tax and deducts state and local
income taxes for Federal income tax purposes. For investors who pay
alternative minimum tax, tax-free yields may be equivalent to lower taxable
yields than those shown above. As for shareholders subject to income taxation
by states other than New Mexico, tax-free yields also may be equivalent to
lower taxable yields than those shown above.
60
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Trustees and Shareholder,
Merrill Lynch New Mexico Municipal Bond Fund of
Merrill Lynch Multi-State Municipal Series Trust:
We have audited the accompanying statement of assets and liabilities of Merrill
Lynch New Mexico Municipal Bond Fund of Merrill Lynch Multi-State Municipal
Series Trust as of , 1994. This financial statement is the responsibility
of the Fund's management. Our responsibility is to express an opinion on this
financial statement based on our audit.
We conducted our audit 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 statement is free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statement. 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 audit provides a reasonable basis for our opinion.
In our opinion, such statement of assets and liabilities presents fairly, in
all material respects, the financial position of Merrill Lynch New Mexico
Municipal Bond Fund of Merrill Lynch Multi-State Municipal Series Trust as of
, 1994, in conformity with generally accepted accounting principles.
, 1994
61
<PAGE>
MERRILL LYNCH NEW MEXICO MUNICIPAL BOND FUND
MERRILL LYNCH MULTI-STATE MUNICIPAL SERIES TRUST
STATEMENT OF ASSETS AND LIABILITIES
, 1994
<TABLE>
<CAPTION>
<S> <C>
Assets:
Cash in bank..................................................... $
Prepaid registration fees (Note 3)...............................
Deferred organization expenses (Note 4)..........................
--------
Total Assets.......................................................
Liabilities-Accrued expenses.......................................
--------
Net Assets (equivalent to $10.00 per share on 5,000 Class A Shares
of beneficial interest (par value $0.10) and 5,000 of Class B
Shares of beneficial interest (par value $0.10) outstanding with an
unlimited number of shares authorized) (Note 1).................... $
========
</TABLE>
- --------
Notes to Statement of Assets and Liabilities:
(1) Merrill Lynch Multi-State Municipal Series Trust (the "Trust") was
organized as a Massachusetts business trust on August 2, 1985. To date,
Merrill Lynch New Mexico Municipal Bond Fund (the "Fund") has not had any
transactions other than those relating to organizational matters and the
sale of 5,000 Class A shares and 5,000 Class B shares of beneficial
interest of the Fund to Fund Asset Management, Inc. (the "Manager"). The
Trust is registered under the Investment Company Act of 1940 as an open-end
management investment company.
(2) The Trust has entered into a Management Agreement with the Manager and
separate Class A and Class B Distribution Agreements and a Distribution
Plan with Merrill Lynch Funds Distributor, Inc. (the "Distributor") on
behalf of the Fund. (See "Management of the Trust--Management and Advisory
Arrangements" in the Prospectus and Statement of Additional Information.)
Certain officers and/or Trustees of the Trust are officers and/or directors
of the Manager and the Distributor.
(3)Prepaid registration fees are charged to income as the related shares are
issued.
(4) Deferred organization expenses will be amortized over a period from the
date the Fund commences operations not exceeding five years. In the event
that the Manager (or any subsequent holder) redeems any of its original
shares prior to the end of the five-year period, the proceeds of the
redemption payable in respect of such shares shall be reduced by the pro
rata share (based on the proportionate share of the original shares
redeemed to the total number of original shares outstanding at the time of
redemption) of the unamortized deferred organization expenses as of the
date of such redemption. In the event that the Fund is liquidated prior to
the end of the five-year period, the Manager (or any subsequent holder)
shall bear the unamortized deferred organization expenses.
62
<PAGE>
[THIS PAGE INTENTIONALLY LEFT BLANK.]
63
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Investment Objective and Policies......................................... 2
Description of Municipal Bonds and Temporary
Investments.............................................................. 5
Description of Municipal Bonds........................................... 5
Description of Temporary Investments..................................... 6
Repurchase Agreements and Purchase and Sale Contracts.................... 8
Financial Futures Transactions and Options............................... 8
Investment Restrictions................................................... 13
Management of the Trust................................................... 14
Trustees and Officers.................................................... 14
Management and Advisory Arrangements..................................... 16
Purchase of Shares........................................................ 17
Alternative Sales Arrangements........................................... 17
Initial Sales Charge Alternative--Class A Shares......................... 18
Reduced Initial Sales Charges--Class A Shares............................ 18
Deferred Sales Charge Alternative--Class B Shares........................ 20
Redemption of Shares...................................................... 20
Contingent Deferred Sales Charge--Class B Shares......................... 21
Portfolio Transactions.................................................... 21
Determination of Net Asset Value.......................................... 22
Shareholder Services...................................................... 23
Investment Account....................................................... 23
Automatic Investment Plan................................................ 23
Automatic Reinvestment of Dividends and Capital Gains Distributions...... 24
Systematic Withdrawal Plans--Class A Shares.............................. 24
Exchange Privilege....................................................... 25
Distributions and Taxes................................................... 36
Environmental Tax........................................................ 38
Tax Treatment of Options and Futures Transactions........................ 39
Performance Data.......................................................... 39
General Information....................................................... 40
Description of Shares.................................................... 40
Computation of Offering Price Per Share.................................. 42
Independent Auditors..................................................... 42
Custodian................................................................ 42
Transfer Agent........................................................... 42
Legal Counsel............................................................ 42
Reports to Shareholders.................................................. 42
Additional Information................................................... 43
Appendix I--Economic and Financial Information Concerning New Mexico...... 44
Appendix II--Ratings of Municipal Bonds................................... 52
Appendix III--Taxable Equivalent Yield Table.............................. 60
Independent Auditors' Report.............................................. 61
Statement of Assets and Liabilities....................................... 62
</TABLE>
Code # 18036
Statement of
Additional Information
(ART)
- ------------------------------------
MERRILL LYNCH
NEW MEXICO
MUNICIPAL BOND
FUND
MERRILL LYNCH MULTI-STATE
MUNICIPAL SERIES TRUST
, 1994
Distributor:
Merrill Lynch
Funds Distributor, Inc.
<PAGE>
PART C. OTHER INFORMATION
ITEM 24. FINANCIAL STATEMENTS AND EXHIBITS.
(a)FINANCIAL STATEMENTS
Contained in Part B:
Statement of Assets and Liabilities as of , 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 October 3, 1988. (b)
(c) --Instrument establishing Merrill Lynch New Mexico Municipal Bond
Fund (the
"Fund") as a series of Registrant. (e)
(d) --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. (c)
5 --Form of Management Agreement between Registrant and Fund Asset
Management, L.P. (e)
6(a) --Form of Class A Shares Distribution Agreement between Registrant
and Merrill Lynch Funds Distributor, Inc. (e)
(b) --Form of Class B Shares Distribution Agreement between Registrant
and Merrill Lynch Funds Distributor, Inc. (e)
(c) --Letter Agreement between Registrant and Merrill Lynch Funds
Distributor, Inc., dated September 15, 1993, in connection with
the Merrill Lynch Mutual Fund Adviser Program. (e)
7 --None.
8 --Form of Letter Amendment to the Custody Agreement between
Registrant and . (e)
9 --Amended Transfer Agency, Dividend Disbursing Agency and
Shareholder Servicing Agency Agreement between Registrant and
Financial Data Services, Inc. (e)
10 --Opinion of Brown & Wood, counsel for the Registrant. (e)
11 --Consent of , independent auditors for the Registrant.
12 --None.
13 --Certificate of Fund Asset Management, L.P. (e)
14 --None.
15 --Form of Class B Shares Distribution Plan and Class B Shares
Distribution Plan
Sub-Agreement of the Registrant. (e)
16 --None.
</TABLE>
- --------
(a) Filed on August 6, 1985 as an Exhibit to the Registration Statement on Form
N-1A (File No. 2-99473) under the Securities Act of 1933 of Merrill Lynch
New York Municipal Bond Fund, a series of the Registrant.
C-1
<PAGE>
(b) Filed on October 11, 1988 as an Exhibit to Post-Effective Amendment No. 4
to the Registration Statement on Form N-1A (File No. 2-99473) under the
Securities Act of 1933 of Merrill Lynch New York Municipal Bond Fund, a
series of the Registrant.
(c) Reference is made to Article II, Section 2.3 and Articles V, VI, VIII, IX,
X and XI of the Registrant's Declaration of Trust, previously filed as
Exhibit 1(a) to the Registration Statement referred to in paragraph (a)
above; to the Certificates of Establishment and Designation establishing
the Fund as a series of the Registrant and establishing Class A and Class B
shares of beneficial interest of the Fund, which will be filed as Exhibits
1(c) and 1(d), respectively, to the Registration Statement; and to Articles
I, V and VI of the Registrant's By-Laws, previously filed as Exhibit 2 to
the Registration Statement referred to in paragraph (a) above.
(d) The Custody Agreement between Registrant and National Westminster Bank,
dated November 1, 1985, was filed on March 18, 1986 as an Exhibit to Post-
Effective Amendment No. 1 to the Registration Statement on Form N-1A (File
No. 2-99473) under the Securities Act of 1933 of Merrill Lynch New York
Municipal Bond Fund, a series of the Registrant, and is incorporated by
reference herein.
(e) To be filed by amendment.
ITEM 25. PERSONS CONTROLLED BY OR UNDER COMMON CONTROL WITH REGISTRANT.
Prior to the effective date of this Registration Statement, the Registrant
will sell 5,000 Class A shares of beneficial interest and 5,000 Class B shares
of beneficial interest of the Fund to Fund Asset Management, Inc. for an
aggregate of $100,000.
ITEM 26. NUMBER OF HOLDERS OF SECURITIES.
<TABLE>
<CAPTION>
NUMBER OF RECORD
HOLDERS AT
TITLE OF CLASS , 1994
-------------- ----------------
<S> <C>
Class A shares of beneficial interest par value $0.10
per share.............................................
Class B shares of beneficial interest par value $0.10
per share.............................................
</TABLE>
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
C-2
<PAGE>
he may be lawfully entitled; provided that no person may satisfy any right in
indemnity or reimbursement granted herein or in Section 5.1 or to which he may
be otherwise entitled except out of the property of the Trust, and no
Shareholder shall be personally liable to any Person with respect to any claim
for indemnity or reimbursement or otherwise. The Trustees may make advance
payments in connection with indemnification under this Section 5.3, provided
that the indemnified person shall have given a written undertaking to reimburse
the Trust in the event it is subsequently determined that he is not entitled to
such indemnification."
Insofar as the conditional advancing of indemnification monies for actions
based upon the Investment Company Act of 1940, as amended may be concerned,
such payments will be made only on the following conditions: (i) the advances
must be limited to amounts used, or to be used, for the preparation or
presentation of a defense to the action, including costs connected with the
preparation of a settlement; (ii) advances may be made only upon receipt of a
written promise by, or on behalf of, the recipient to repay that amount of the
advance which exceeds the amount to which it is ultimately determined that he
is entitled to receive from the Registrant by reason of indemnification; and
(iii) (a) such promise must be secured by a surety bond, other suitable
insurance or an equivalent form of security which assures that any repayments
may be obtained by the Registrant without delay or litigation, which bond,
insurance or other form of security must be provided by the recipient of the
advance, or (b) a majority of a quorum of the Registrant's disinterested, non-
party Trustees, or an independent legal counsel in a written opinion, shall
determine, based upon a review of readily available facts that the recipient of
the advance ultimately will be found entitled to indemnification.
In Section 9 of the Distribution Agreements relating to the securities being
offered hereby, the Registrant agrees to indemnify the Distributor and each
person, if any, who controls the Distributor within the meaning of the
Securities Act of 1933 ("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") acts as the investment adviser
for the following registered investment companies: Apex Municipal Fund, Inc.,
CBA Money Fund, CMA Government Securities Fund, CMA Money Fund, CMA Multi-State
Municipal Series Trust, CMA Tax-Exempt Fund, CMA Treasury Fund, The Corporate
Fund Accumulation Program, Inc., Corporate High Yield Fund, Inc., Corporate
High Yield Fund II, Inc., Financial Institutions Series Trust, Income
Opportunities Fund 1999, Inc., Income Opportunities Fund 2000, Inc., Merrill
Lynch Basic Value Fund, Inc., Merrill Lynch California
C-3
<PAGE>
Municipal Series Trust, Merrill Lynch Corporate Bond Fund, Inc., Merrill Lynch
Federal Securities Trust, Merrill Lynch Funds for Institutions Series, Merrill
Lynch Institutional Tax-Exempt Fund, Merrill Lynch Multi-State Municipal Series
Trust, Merrill Lynch Multi-State Limited Maturity Municipal Series Trust,
Merrill Lynch Municipal Bond Fund, Inc., Merrill Lynch Phoenix Fund, Inc.,
Merrill Lynch Special Value Fund, Inc., Merrill Lynch World Income Fund, Inc.,
MuniAssets Fund, Inc., MuniBond Income Fund, Inc., The Municipal Fund
Accumulation Program, Inc., MuniEnhanced Fund, Inc., MuniInsured Fund, Inc.,
MuniVest Fund, Inc., MuniVest Fund II, Inc., MuniVest California Insured Fund,
Inc., MuniVest Florida Fund, MuniVest Michigan Insured Fund, Inc., MuniVest New
Jersey Fund, Inc., MuniVest New York Insured Fund, Inc., MuniVest Pennsylvania
Insured Fund, MuniYield Arizona Fund, Inc., MuniYield Arizona Fund II, Inc.,
MuniYield California Fund, Inc., MuniYield California Insured Fund, Inc.,
MuniYield California Insured Fund II, Inc., MuniYield Florida Fund, MuniYield
Florida Insured Fund, MuniYield Fund, Inc., MuniYield Insured Fund, Inc.,
MuniYield Insured Fund II, Inc., MuniYield Michigan Fund, Inc., MuniYield
Michigan Insured Fund, Inc., MuniYield New Jersey Fund, Inc., MuniYield New
Jersey Insured Fund, Inc., MuniYield New York Insured Fund, Inc., MuniYield New
York Insured Fund II, Inc., MuniYield New York Insured Fund III, Inc.,
MuniYield Pennsylvania Fund, MuniYield Quality Fund, Inc., MuniYield Quality
Fund II, Inc., Senior High Income Portfolio, Inc., Senior High Income Portfolio
II, Inc., Taurus MuniCalifornia Holdings, Inc. and Taurus MuniNew York
Holdings, Inc. Merrill Lynch Asset Management, L.P. ("MLAM"), an affiliate of
the Manager, acts as the investment adviser for the following companies:
Convertible Holdings, Inc., Merrill Lynch Adjustable Rate Securities Fund,
Inc., Merrill Lynch Americas Income Fund, Inc., Merrill Lynch Balanced Fund for
Investment and Retirement, Merrill Lynch Capital Fund, Inc., Merrill Lynch
Developing Capital Markets Fund, Inc., Merrill Lynch Dragon Fund, Inc., Merrill
Lynch EuroFund, Merrill Lynch Fundamental Growth Fund, Inc., Merrill Lynch Fund
For Tomorrow, Inc., Merrill Lynch Global Bond Fund for Investment and
Retirement, Merrill Lynch Global Allocation Fund, Inc., Merrill Lynch Global
Convertible Fund, Inc., Merrill Lynch Global Holdings, Merrill Lynch Global
Resources Trust, Merrill Lynch Global Utility Fund, Inc., Merrill Lynch Growth
Fund for Investment and Retirement, Merrill Lynch Healthcare Fund, Inc.,
Merrill Lynch High Income Municipal Bond Fund, Inc., Merrill Lynch
Institutional Intermediate Fund, Merrill Lynch International Equity Fund,
Merrill Lynch Latin America Fund, Inc., Merrill Lynch Municipal Series Trust,
Merrill Lynch Pacific Fund, Inc., Merrill Lynch Ready Assets Trust, Merrill
Lynch Retirement Series Trust, Merrill Lynch Senior Floating Rate Fund, Merrill
Lynch Series Fund, Inc., Merrill Lynch Short-Term Global Income Fund, Inc.,
Merrill Lynch Strategic Dividend Fund, Merrill Lynch Technology Fund, Inc.,
Merrill Lynch U.S. Treasury Money Fund, Merrill Lynch U.S.A. Government
Reserves, Merrill Lynch Utility Income Fund, Inc. and Merrill Lynch Variable
Series Funds, Inc. The address of each of these investment companies is Box
9011, Princeton, New Jersey 08543-9011, except that the address of Merrill
Lynch Funds for Institutions Series, Merrill Lynch Institutional Tax-Exempt
Fund and Merrill Lynch Institutional Intermediate Fund is One Financial Center,
15th Floor, Boston, Massachusetts 02111-2646. The address of the Manager and
MLAM is also Box 9011, Princeton, New Jersey 08543-9011. The address of Merrill
Lynch, Pierce, Fenner & Smith Incorporated ("Merrill Lynch") and Merrill Lynch
& Co., Inc. ("ML & Co.") is World Financial Center, North Tower, 250 Vesey
Street, New York, New York 10281.
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
December 31, 1991 for his or its own account or in the capacity of director,
officer, partner or trustee. In addition, Mr. Zeikel is President, Mr. Richard
is Treasurer and Mr. Glenn is Executive Vice President of substantially all of
the investment companies described in the preceding paragraph and also hold the
same positions with all or substantially all of the investment companies
advised by MLAM as they do
C-4
<PAGE>
with those advised by the Manager, and Messrs. Durnin, Giordano, Harvey,
Hewitt, and Monagle are directors or officers of one or more of such companies.
OFFICERS AND PARTNERS OF FAM ARE SET FORTH AS FOLLOWS:
<TABLE>
<CAPTION>
OTHER SUBSTANTIAL
POSITION(S) WITH BUSINESS, PROFESSION,
NAME THE MANAGER VOCATION OR EMPLOYMENT
---- ---------------- ----------------------
<S> <C> <C>
ML & Co. ............... Limited Partner Financial Services Holding Company
Fund Asset Management,
Inc. .................. Limited Partner Investment Advisory Services
Princeton Services,
Inc. .................. General Partner General Partner of MLAM
("Princeton Services")
Arthur Zeikel........... President President of MLAM; President and Di-
rector of Princeton Services; Direc-
tor of MLFD; Executive Vice President
of ML & Co.; Executive Vice President
of Merrill Lynch
Terry K. Glenn.......... Executive Vice President Executive Vice President of MLAM; Ex-
ecutive Vice President and Director
of Princeton Services; President and
Director of MLFD; President of
Princeton Administrators
Bernard J. Durnin....... Senior Vice President Senior Vice President of MLAM; Senior
Vice President of Princeton Services
Vincent R. Giordano..... Senior Vice President Senior Vice President of MLAM; Senior
Vice President of Princeton Services
Elizabeth Griffin....... Senior Vice President Senior Vice President of MLAM
Norman R. Harvey........ Senior Vice President Senior Vice President of MLAM; Senior
Vice President of Princeton Services
N. John Hewitt.......... Senior Vice President Senior Vice President of MLAM; Senior
Vice President of Princeton Services
Philip L. Kirstein...... Senior Vice President, Senior Vice President, General Counsel
General Counsel and and Secretary of MLAM; Senior Vice
Secretary President, General Counsel, Director
and Secretary of Princeton Services;
Director of MLFD
Ronald M. Kloss......... Senior Vice President Senior Vice President and Controller
and Controller of MLAM; Senior Vice President and
Controller of Princeton Services
Joseph T. Monagle, Jr. . Senior Vice President Senior Vice President of MLAM; Senior
Vice President of Princeton Services
Gerald M. Richard....... Senior Vice President Senior Vice President and Treasurer of
and Treasurer MLAM; Senior Vice President and Trea-
surer of Princeton Services; Vice
President and Treasurer of MLFD
Richard L. Rufener...... Senior Vice President Senior Vice President of MLAM; Senior
Vice President of Princeton Services;
Vice President of MLFD
Ronald L. Welburn....... Senior Vice President Senior Vice President of MLAM; Senior
Vice President of Princeton Services
Anthony Wiseman......... Senior Vice President Senior Vice President of MLAM; Senior
Vice President of Princeton Services
</TABLE>
C-5
<PAGE>
ITEM 29. PRINCIPAL UNDERWRITERS.
(a) MLFD acts as the principal underwriter for the Registrant and, for each
of the open-end investment companies referred to in the first paragraph of Item
28 except Apex Municipal Fund, Inc., CBA Money Fund, CMA Government Securities
Fund, CMA Money Fund, CMA Multi-State Municipal Series Trust, CMA Tax-Exempt
Fund, CMA Treasury Fund, Convertible Holdings, Inc., The Corporate Fund
Accumulation Program, Inc., Corporate High Yield Fund, Inc., Corporate High
Yield Fund II, Inc., Income Opportunities Fund 1999, Inc., Income Opportunities
Fund 2000, Inc., MuniAssets Fund, Inc., MuniBond Income Fund, Inc., The
Municipal Fund Accumulation Program, Inc., MuniEnhanced Fund, Inc., MuniInsured
Fund, Inc., MuniVest Fund, Inc., MuniVest Fund II, Inc., MuniVest California
Insured Fund, Inc., MuniVest Florida Fund, MuniVest Michigan Insured Fund,
Inc., MuniVest New Jersey Fund, Inc., MuniVest New York Insured Fund, Inc.,
MuniVest Pennsylvania Insured Fund, MuniYield Arizona Fund, Inc., MuniYield
Arizona Fund II, Inc., MuniYield California Fund, Inc., MuniYield California
Insured Fund, Inc., MuniYield California Insured Fund II, Inc., MuniYield
Florida Fund, MuniYield Florida Insured Fund, MuniYield Fund, Inc., MuniYield
Insured Fund, Inc., MuniYield Insured Fund II, Inc., MuniYield Michigan Fund,
Inc., MuniYield Michigan Insured Fund, Inc., MuniYield New Jersey Fund, Inc.,
MuniYield New Jersey Insured Fund, Inc., MuniYield New York Insured Fund, Inc.,
MuniYield New York Insured Fund II, Inc., MuniYield New York Insured Fund III,
Inc., MuniYield Pennsylvania Fund, MuniYield Quality Fund, Inc., MuniYield
Quality Fund II, Inc., Senior High Income Portfolio, Inc., Senior High Income
Portfolio II, Inc., Taurus MuniCalifornia Holdings, Inc. and Taurus MuniNewYork
Holdings, Inc.
(b) Set forth below is information concerning each director and officer of
MLFD. The principal business address of each such person is Box 9011,
Princeton, New Jersey 08543-9011, except that the address of Messrs. Aldrich,
Breen, Crook, Graczyk, Fatseas and Wasel is One Financial Center, 15th Floor,
Boston, Massachusetts 02111-2646.
<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
Arthur Zeikel......... Director President and Trustee
Philip L. Kirstein.... Director None
William E. Aldrich.... Senior Vice President None
Robert W. Crook....... Senior Vice President None
Michael J. Brady...... Vice President None
William M. Breen...... Vice President None
Sharon Creveling...... Vice President and Assistant
Treasurer None
Mark A. DeSario....... Vice President None
James T. Fatseas...... Vice President None
Stanley Graczyk....... Vice President None
Michelle T. Lau....... Vice President None
Gerald M. Richard..... Vice President and Treasurer Treasurer
Richard L. Rufener.... Vice President None
Salvatore Venezia..... Vice President None
William Wasel......... Vice President None
Robert Harris......... Secretary None
</TABLE>
(c) Not applicable.
C-6
<PAGE>
ITEM 30. LOCATION OF ACCOUNTS AND RECORDS.
All accounts, books and other documents required to be maintained by Section
31(a) of the Investment Company Act of 1940, as amended and the Rules
thereunder are maintained at the offices of the Registrant and Financial Data
Services, Inc.
ITEM 31. MANAGEMENT SERVICES.
Other than as set forth under the caption "Management of the Trust--
Management and Advisory Arrangements" in the Prospectus constituting Part A of
the Registration Statement and under "Management of the Trust--Management and
Advisory Arrangements" in the Statement of Additional Information constituting
Part B of the Registration Statement, Registrant is not a party to any
management-related service contract.
ITEM 32. UNDERTAKINGS.
The Registrant undertakes to file a post-effective amendment, using financial
statements which need not be certified, within four to six months from the
effective date of Registrant's registration statement under the Securities Act
of 1933, as amended.
C-7
<PAGE>
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933 AND THE INVESTMENT
COMPANY ACT OF 1940, THE REGISTRANT HAS DULY CAUSED THIS REGISTRATION STATEMENT
TO BE SIGNED ON ITS BEHALF BY THE UNDERSIGNED, THEREUNTO DULY AUTHORIZED, IN
THE TOWNSHIP OF PLAINSBORO, AND STATE OF NEW JERSEY, ON THE 15TH DAY OF
FEBRUARY, 1994.
Merrill Lynch Multi-State Municipal
Series Trust
(Registrant)
/s/ Arthur Zeikel
By___________________________________
(Arthur Zeikel, President)
EACH PERSON WHOSE SIGNATURE APPEARS BELOW HEREBY AUTHORIZES ARTHUR ZEIKEL,
GERALD M. RICHARD AND TERRY K. GLENN, OR ANY OF THEM, AS ATTORNEY-IN-FACT, TO
SIGN ON HIS BEHALF, INDIVIDUALLY AND IN EACH CAPACITY STATED BELOW, ANY
AMENDMENTS TO THIS REGISTRATION STATEMENT (INCLUDING POST-EFFECTIVE AMENDMENTS)
AND TO FILE THE SAME, WITH ALL EXHIBITS THERETO, WITH THE SECURITIES AND
EXCHANGE COMMISSION.
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THIS REGISTRATION
STATEMENT HAS BEEN SIGNED BELOW BY THE FOLLOWING PERSONS IN THE CAPACITIES AND
ON THE DATES INDICATED.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<S> <C> <C>
/s/ Arthur Zeikel
- ------------------------------------
(Arthur Zeikel) President and Trustee
(Principal Executive
Officer) February 15, 1994
/s/ Gerald M. Richard
- ------------------------------------
(Gerald M. Richard) Treasurer (Principal
Financial and
Accounting Officer) February 15, 1994
- ------------------------------------
(Kenneth S. Axelson) Trustee
/s/ Herbert I. London
- ------------------------------------
(Herbert I. London) Trustee February 15, 1994
/s/ Robert R. Martin
- ------------------------------------
(Robert R. Martin) Trustee February 15, 1994
/s/ Joseph L. May
- ------------------------------------
(Joseph L. May) Trustee February 15, 1994
/s/ Andre F. Perold
- ------------------------------------
(Andre F. Perold) Trustee February 15, 1994
</TABLE>
C-8
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
SEQUENTIALLY
EXHIBIT NUMBERED
NUMBER DESCRIPTION PAGE
------- ----------- ------------
<S> <C> <C>
</TABLE>
