<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON NOVEMBER 14, 1997
SECURITIES ACT FILE NO. 33-52303
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. 4 /x/
AND/OR
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940
AMENDMENT NO. 150 /x/
(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 OFFICE) (ZIP CODE)
(609) 282-2800
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE
------------------------
ARTHUR ZEIKEL
MERRILL LYNCH MULTI-STATE MUNICIPAL SERIES TRUST
800 SCUDDERS MILL ROAD, PLAINSBORO, NEW JERSEY
MAILING ADDRESS: P.O. BOX 9011, PRINCETON, NEW JERSEY 08543-9011
(NAME AND ADDRESS OF AGENT FOR SERVICE)
------------------------
Copies to:
COUNSEL FOR THE FUND: PHILIP L. KIRSTEIN, ESQ.
BROWN & WOOD LLP FUND ASSET MANAGEMENT
ONE WORLD TRADE CENTER P.O. BOX 9011
NEW YORK, NEW YORK 10048-0557 PRINCETON, NEW JERSEY 08543-9011
ATTENTION: THOMAS R. SMITH JR., ESQ.
BRIAN M. KAPLOWITZ, ESQ.
------------------------
IT IS PROPOSED THAT THIS FILING WILL BECOME EFFECTIVE (CHECK APPROPRIATE BOX)
/x/ immediately upon filing pursuant to paragraph (b)
/ / on (date) pursuant to paragraph (b)
/ / 60 days after filing pursuant to paragraph (a)(i)
/ / on (date) pursuant to paragraph (a)(i)
/ / 75 days after filing pursuant to paragraph (a)(ii)
/ / on (date) pursuant to paragraph (a)(ii) of Rule 485.
IF APPROPRIATE, CHECK THE FOLLOWING BOX:
/ / this post-effective amendment designates a new effective
date for a previously filed post-effective amendment.
Title of Securities Being Registered: Shares of Beneficial Interest, par value
$.10 per share
================================================================================
<PAGE>
MERRILL LYNCH 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-1A ITEM NO. LOCATION
- ------------- --------
<S> <C> <C>
PART A
Item 1. Cover Page.................................... Cover Page
Item 2. Synopsis...................................... Fee Table
Item 3. Condensed Financial Information............... Financial Highlights; Performance Data
Item 4. General Description of Registrant............. Investment Objective and Policies;
Additional Information
Item 5. Management of the Fund........................ Fee Table; Management of the Trust;
Inside Back Cover Page
Item 5A. Management's Discussion of Fund
Performance................................. Not Applicable
Item 6. Capital Stock and Other Securities............ Cover Page; Merrill Lynch Select
Pricing(Service Mark) System; Additional
Information
Item 7. Purchase of Securities Being Offered.......... Cover Page; Fee Table; Merrill Lynch Select
Pricing(Service Mark) System; Purchase of
Shares; Shareholder Services; Additional
Information; Inside Back Cover Page
Item 8. Redemption or Repurchase...................... Fee Table; Merrill Lynch Select
Pricing(Service Mark) System; Purchase of
Shares; Redemption of Shares
Item 9. Pending Legal Proceedings..................... Not Applicable
PART B
Item 10. Cover Page.................................... Cover Page
Item 11. Table of Contents............................. Back Cover Page
Item 12. General Information and History............... Additional Information
Item 13. Investment Objective and Policies............. Investment Objective and Policies
Item 14. Management of the Fund........................ Management of the Trust
Item 15. Control Persons and Principal Holders of
Securities.................................. Management of the Trust; General
Information--Additional Information
Item 16. Investment Advisory and Other Services........ Management of the Trust; Purchase of Shares;
General Information
Item 17. Brokerage Allocation and Other Practices...... Portfolio Transactions
Item 18. Capital Stock and Other Securities............ General Information--Description of Shares
Item 19. Purchase, Redemption and Pricing of Securities
Being Offered............................... Purchase of Shares; Redemption of Shares;
Determination of Net Asset Value;
Shareholder Services
Item 20. Tax Status.................................... Distributions and Taxes
Item 21. Underwriters.................................. Purchase of Shares
Item 22. Calculation of Performance Data............... Performance Data
Item 23. Financial Statements.......................... Financial Statements
PART C
</TABLE>
Information required to be included in Part C is set forth under the
appropriate Item, so numbered, in Part C to this Registration Statement.
<PAGE>
PROSPECTUS
NOVEMBER 14, 1997
MERRILL LYNCH NEW MEXICO MUNICIPAL BOND FUND
MERRILL LYNCH MULTI-STATE MUNICIPAL SERIES TRUST
P.O. BOX 9011, PRINCETON, NEW JERSEY 08543-9011 o PHONE NO. (609) 282-2800
Merrill Lynch New Mexico Municipal Bond Fund (the 'Fund') is a mutual fund
that seeks to provide shareholders with as high a level of income exempt from
Federal and New Mexico income taxes as is consistent with prudent investment
management. The Fund invests primarily in a portfolio of long-term, investment
grade 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 U.S. Virgin
Islands and Guam, which pay interest exempt, in the opinion of bond counsel to
the issuer, 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. For more information on the Fund's investment objective and
policies, please see 'Investment Objective and Policies' on page 10.
------------------------
Pursuant to the Merrill Lynch Select Pricing(Service Mark) System, the Fund
offers four classes of shares each with a different combination of sales
charges, ongoing fees and other features. The Merrill Lynch Select
Pricing(Service Mark) System permits an investor to choose the method of
purchasing shares that the investor believes is most beneficial given the amount
of the purchase, the length of time the investor expects to hold the shares and
other relevant circumstances. See 'Merrill Lynch Select Pricing(Service Mark)
System' on page 3.
Shares may be purchased directly from Merrill Lynch Funds Distributor, Inc.
(the 'Distributor'), P.O. Box 9081, Princeton, New Jersey 08543-9081 ((609)
282-2800), or from securities dealers which have entered into dealer agreements
with the Distributor, including Merrill Lynch, Pierce, Fenner & Smith
Incorporated ('Merrill Lynch'). The minimum initial purchase is $1,000 and the
minimum subsequent purchase is $50 except that for participants in certain
fee-based programs the minimum initial purchase is $500 and the minimum
subsequent purchase is $50. Merrill Lynch may charge its customers a processing
fee (presently $5.35) for confirming purchases and repurchases. Purchases and
redemptions made directly through Merrill Lynch Financial Data Services, Inc.
(the 'Transfer Agent') are not subject to the processing fee. See 'Purchase of
Shares' and 'Redemption of Shares.'
------------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION NOR HAS THE COMMISSION PASSED UPON THE ACCURACY OR
ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE
CONTRARY IS A CRIMINAL OFFENSE.
------------------------
This Prospectus is a concise statement of information about the Fund that
is relevant to making an investment in the Fund. This Prospectus should be
retained for future reference. A statement containing additional information
about the Fund, dated November 14, 1997 (the 'Statement of Additional
Information'), has been filed with the Securities and Exchange Commission (the
'Commission') and is available, without charge, by calling or by writing Merrill
Lynch Multi-State Municipal Series Trust (the 'Trust') at the above telephone
number or address. The Commission maintains a Web site (http://www.sec.gov) that
contains the Statement of Additional Information, material incorporated by
reference and other information regarding the Fund. The Statement of Additional
Information is hereby incorporated by reference into this Prospectus. The Fund
is a separate series of the Trust, an open-end management investment company
organized as a Massachusetts business trust.
------------------------
FUND ASSET MANAGEMENT--MANAGER
MERRILL LYNCH FUNDS DISTRIBUTOR, INC.--DISTRIBUTOR
<PAGE>
FEE TABLE
A general comparison of the sales arrangements and other nonrecurring and
recurring expenses applicable to shares of the Fund follows:
<TABLE>
<CAPTION>
CLASS A(a) CLASS B(b) CLASS C CLASS D
---------- ------------------------------- ---------------- ---------
<S> <C> <C> <C> <C>
SHAREHOLDER TRANSACTION EXPENSES:
Maximum Sales Charge Imposed on Purchases
(as a percentage of offering price)................ 4.00%(c) None None 4.00%(c)
Sales Charge Imposed on Dividend Reinvestments....... None None None None
Deferred Sales Charge (as a percentage of original 4.0% during the first year, 1.0% for
purchase price or redemption proceeds, whichever is decreasing 1.0% annually one
lower)............................................. None(d) thereafter to 0.0% after the year(f) None (d)
fourth year(e)
Exchange Fee......................................... None None None None
ANNUAL FUND OPERATING EXPENSES (AS A PERCENTAGE OF
AVERAGE NET ASSETS):
Management Fees(g)................................... 0.55% 0.55% 0.55% 0.55%
Rule 12b-1 Fees(h):
Account Maintenance Fees........................... None 0.25% 0.25% 0.10%
Distribution Fees.................................. None 0.25% 0.35% None
(Class B shares convert to
Class D shares automatically
after approximately ten years,
cease being subject to
distribution fees and become
subject to lower account
maintenance fees)
OTHER EXPENSES:
Custodian Fees..................................... 0.01% 0.01% 0.01% 0.01%
Shareholder Servicing Costs(i)..................... 0.04% 0.05% 0.05% 0.04%
Miscellaneous...................................... 0.73% 0.73% 0.74% 0.74%
---- ---- ---- ----
Total Other Expenses............................. 0.78% 0.79% 0.80% 0.79%
---- ---- ---- ----
Total Fund Operating Expenses(j)..................... 1.33% 1.84% 1.95% 1.44%
==== ==== ==== ====
</TABLE>
- ------------------
(a) Class A shares are sold to a limited group of investors including existing
Class A shareholders and certain participants in connection with certain
fee-based programs. See 'Purchase of Shares--Initial Sales Charge
Alternatives--Class A and Class D Shares'--page 23 and 'Shareholder
Services--Fee-Based Programs'--page 33.
(b) Class B shares convert to Class D shares automatically approximately ten
years after initial purchase. See 'Purchase of Shares--Deferred Sales Charge
Alternatives--Class B and Class C Shares'--page 24.
(c) Reduced for purchases of $25,000 and over and waived for purchases of Class
A shares by participants in connection with certain fee-based programs.
Class A or Class D purchases of $1,000,000 or more may not be subject to an
initial sales charge. See 'Purchase of Shares--Initial Sales Charge
Alternatives--Class A and Class D Shares'--page 23.
(d) Class A and Class D shares are not subject to a contingent deferred sales
charge ('CDSC'), except that purchases of $1,000,000 or more that are not
subject to an initial sales charge may instead be subject to a CDSC of 1.0%
of amounts redeemed if redeemed within the first year after purchase. Such
CDSC may be waived in connection with certain fee-based programs. See
'Shareholder Services--Fee-Based Programs'--page 33.
(e) The CDSC may be modified in connection with certain fee-based programs. See
'Shareholder Services--Fee-Based Programs'--page 33.
(f) The CDSC may be waived in connection with certain fee-based programs. See
'Shareholder Services--Fee-Based Programs'--page 33.
(g) See 'Management of the Trust--Management and Advisory Arrangements'--page
19.
(h) See 'Purchase of Shares--Distribution Plans'--page 27.
(i) See 'Management of the Trust--Transfer Agency Services'--page 20.
(j) For the fiscal year ended July 31, 1997, Fund Asset Management, L.P. (the
'Manager') voluntarily waived $112,203 of the management fees due from the
Fund and voluntarily reimbursed the Fund for a portion of other expenses
(excluding Rule 12b-1 fees). Total Fund Operating Expenses in the fee table
have been restated to assume the absence of any such waiver or reimbursement
because the Manager may discontinue or reduce such waiver of fees and/or
assumption of expenses at any time without notice. For the fiscal year ended
July 31, 1997 the Manager waived management fees and reimbursed expenses
totaling 0.54% for Class A shares, 0.54% for Class B shares, 0.53% for Class
C shares and 0.54% for Class D shares after which the Fund's total expense
ratio was 0.79% for Class A shares, 1.30% for Class B shares, 1.42% for
Class C shares and 0.90% for Class D shares.
2
<PAGE>
EXAMPLE:
<TABLE>
<CAPTION>
CUMULATIVE EXPENSES PAID FOR THE PERIOD OF:
-------------------------------------------
1 YEAR 3 YEARS 5 YEARS 10 YEARS
------ ------- ------- --------
<S> <C> <C> <C> <C>
An investor would pay the following expenses on a $1,000 investment
including the maximum $40 initial sales charge (Class A and Class D
shares only) and assuming (1) the Total Fund Operating Expenses for
each class set forth on page 2, (2) a 5% annual return throughout the
periods and (3) redemption at the end of the period (including any
applicable CDSC for Class B and Class C shares):
Class A......................................................... $ 53 $80 $ 110 $194
Class B......................................................... $ 59 $78 $ 100 $216
Class C......................................................... $ 30 $61 $ 105 $227
Class D......................................................... $ 54 $84 $ 116 $206
An investor would pay the following expenses on the same $1,000
investment assuming no redemption at the end of the period:
Class A......................................................... $ 53 $80 $ 110 $194
Class B......................................................... $ 19 $58 $ 100 $216
Class C......................................................... $ 20 $61 $ 105 $227
Class D......................................................... $ 54 $84 $ 116 $206
</TABLE>
The foregoing Fee Table is intended to assist investors in understanding
the costs and expenses that a shareholder in the Fund will bear directly or
indirectly. The Example set forth above assumes reinvestment of all dividends
and distributions and utilizes a 5% annual rate of return as mandated by
Commission regulations. THE EXAMPLE SHOULD NOT BE CONSIDERED A REPRESENTATION OF
PAST OR FUTURE EXPENSES OR ANNUAL RATES OF RETURN, AND ACTUAL EXPENSES OR ANNUAL
RATES OF RETURN MAY BE MORE OR LESS THAN THOSE ASSUMED FOR PURPOSES OF THE
EXAMPLE. Class B and Class C shareholders who hold their shares for an extended
period of time may pay more in Rule 12b-1 distribution fees than the economic
equivalent of the maximum front-end sales charge permitted under the Conduct
Rules of the National Association of Securities Dealers, Inc. ('NASD'). Merrill
Lynch may charge its customers a processing fee (presently $5.35) for confirming
purchases and repurchases. Purchases and redemptions made directly through the
Fund's Transfer Agent are not subject to the processing fee. See 'Purchase of
Shares' and 'Redemption of Shares.'
MERRILL LYNCH SELECT PRICING(SERVICE MARK) SYSTEM
The Fund offers four classes of shares under the Merrill Lynch Select
Pricing(Service Mark) System. The shares of each class may be purchased at a
price equal to the next determined net asset value per share subject to the
sales charges and ongoing fee arrangements described below. Shares of Class A
and Class D are sold to investors choosing the initial sales charge
alternatives, and shares of Class B and Class C are sold to investors choosing
the deferred sales charge alternatives. The Merrill Lynch Select Pricing(Service
Mark) System is used by more than 50 registered investment companies advised by
Merrill Lynch Asset Management, L.P. ('MLAM') or Fund Asset Management, L.P.
('FAM' or the 'Manager'), an affiliate of MLAM. Funds advised by MLAM or FAM
that use the Merrill Lynch Select Pricing(Service Mark) System are referred to
herein as 'MLAM-advised mutual funds.'
3
<PAGE>
Each Class A, Class B, Class C or Class D share of the Fund represents an
identical interest in the investment portfolio of the Fund and has the same
rights, except that Class B, Class C and Class D shares bear the expenses of the
ongoing account maintenance fees and Class B and Class C shares bear the
expenses of the ongoing distribution fees and the additional incremental
transfer agency costs resulting from the deferred sales charge arrangements. The
CDSCs, distribution and account maintenance fees that are imposed on Class B and
Class C shares, as well as the account maintenance fees that are imposed on
Class D shares, are imposed directly against those classes and not against all
assets of the Fund and, accordingly, such charges will not affect the net asset
value of any other class or have any impact on investors choosing another sales
charge option. Dividends paid by the Fund for each class of shares will be
calculated in the same manner at the same time and will differ only to the
extent that account maintenance and distribution fees and any incremental
transfer agency costs relating to a particular class are borne exclusively by
that class. Each class has different exchange privileges. See 'Shareholder
Services--Exchange Privilege.'
Investors should understand that the purpose and function of the initial
sales charges with respect to the Class A and Class D shares are the same as
those of the CDSCs and distribution fees with respect to the Class B and Class C
shares in that the sales charges and distribution fees applicable to each class
provide for the financing of the distribution of the shares of the Fund. The
distribution-related revenues paid with respect to a class will not be used to
finance the distribution expenditures of another class. Sales personnel may
receive different compensation for selling different classes of shares.
The following table sets forth a summary of the distribution arrangements
for each class of shares under the Merrill Lynch Select Pricing(Service Mark)
System, followed by a more detailed description of each class and a discussion
of the factors that investors should consider in determining the method of
purchasing shares under the Merrill Lynch Select Pricing(Service Mark) System
that the investor believes is most beneficial under his particular
circumstances. More detailed information as to each class of shares is set forth
under 'Purchase of Shares.'
<TABLE>
<CAPTION>
ACCOUNT
MAINTENANCE DISTRIBUTION
CLASS SALES CHARGE(1) FEE FEE CONVERSION FEATURE
----- --------------- --- --- ------------------
<S> <C> <C> <C> <C>
A Maximum 4.00% initial sales No No No
charge(2)(3)
B CDSC for a period of four years, at 0.25% 0.25% B shares convert to D shares
a rate of 4.0% during the first automatically after approximately
year, decreasing 1.0% annually to ten years(5)
0.0%(4)
C 1.0% CDSC for one year(6) 0.25% 0.35% No
D Maximum 4.00% initial sales 0.10% No No
charge(3)
</TABLE>
- ------------------
(1) Initial sales charges are imposed at the time of purchase as a percentage of
the offering price. CDSCs are imposed if the redemption occurs within the
applicable CDSC time period. The charge will be assessed on an amount equal
to the lesser of the proceeds of redemption or the cost of the shares being
redeemed.
(Footnotes continued on next page)
4
<PAGE>
(Footnotes continued from previous page)
(2) Offered only to eligible investors. See 'Purchase of Shares--Initial Sales
Charge Alternatives--Class A and Class D Shares--Eligible Class A
Investors.'
(3) Reduced for purchases of $25,000 or more and waived for purchases of Class A
shares by participants in connection with certain fee-based programs. Class
A and Class D share purchases of $1,000,000 or more may not be subject to an
initial sales charge but instead may be subject to a 1.0% CDSC if redeemed
within one year. Such CDSC may be waived in connection with certain
fee-based programs. See 'Class A' and 'Class D' below.
(4) The CDSC may be modified in connection with certain fee-based programs.
(5) The conversion period for dividend reinvestment shares and certain fee-based
programs was modified. Also, Class B shares of certain other MLAM-advised
mutual funds into which exchanges may be made have an eight-year conversion
period. If Class B shares of the Fund are exchanged for Class B shares of
another MLAM-advised mutual fund, the conversion period applicable to the
Class B shares acquired in the exchange will apply, and the holding period
for the shares exchanged will be tacked onto the holding period for the
shares acquired.
(6) The CDSC may be waived in connection with certain fee-based programs.
Class A: Class A shares incur an initial sales charge when they are purchased
and bear no ongoing distribution or account maintenance fees. Class A
shares are offered to a limited group of investors and also will be
issued upon reinvestment of dividends on outstanding Class A shares.
Investors who currently own Class A shares of the Fund in a shareholder
account are entitled to purchase additional Class A shares of the Fund
in that account. Other eligible investors include participants in
certain investment programs. Other eligible investors include
participants in certain fee-based programs. In addition, Class A shares
will be offered at net asset value to Merrill Lynch & Co., Inc. ('ML &
Co.') and its subsidiaries (the term 'subsidiaries,' when used herein
with respect to ML & Co., includes MLAM, the Manager and certain other
entities directly or indirectly wholly-owned and controlled by ML &
Co.) and their directors and employees and to members of the Boards of
MLAM-advised mutual funds. The maximum initial sales charge of 4.00% is
reduced for purchases of $25,000 and over and waived for purchases of
Class A shares by participants in connection with certain fee-based
programs. Purchases of $1,000,000 or more may not be subject to an
initial sales charge but if the initial sales charge is waived such
purchases may be subject to a 1.0% CDSC if the shares are redeemed
within one year after purchase. Such CDSC may be waived in connection
with certain fee-based programs. Sales charges also are reduced under a
right of accumulation that takes into account the investor's holdings
of all classes of all MLAM-advised mutual funds. See 'Purchase of
Shares--Initial Sales Charge Alternatives--Class A and Class D Shares.'
Class B: Class B shares do not incur a sales charge when they are purchased, but
they are subject to an ongoing account maintenance fee of 0.25% and an
ongoing distribution fee of 0.25% of the Fund's average net assets
attributable to Class B shares as well as a CDSC if they are redeemed
within four years of purchase. Such CDSC may be modified in connection
with certain fee-based programs. Approximately ten years after
issuance, Class B shares will convert automatically into Class D shares
of the Fund, which are subject to a lower account maintenance fee of
0.10% and no distribution fee; Class B shares of certain other
MLAM-advised mutual funds into which exchanges may be made convert into
Class D shares automatically after approximately eight years. If Class
B shares of the Fund are exchanged for Class B shares of another
MLAM-advised mutual fund, the conversion period applicable to the Class
B shares acquired in the exchange will apply, as will the Class D
account maintenance fee of the acquired fund upon the conversion, and
the holding period for the shares exchanged will be tacked onto the
holding period for the shares acquired. Automatic conversion of Class B
shares into Class D shares will occur at least once a month on the
basis of the relative net asset values of the shares of the two classes
on the conversion date, without the imposition of any sales load, fee
or other charge. Conversion of
5
<PAGE>
Class B shares to Class D shares will not be deemed a purchase or sale
of the shares for Federal income tax purposes. Shares purchased through
reinvestment of dividends on Class B shares also will convert
automatically to Class D shares. The conversion period for dividend
reinvestment shares is modified as described under 'Purchase of
Shares--Deferred Sales Charge Alternatives--Class B and Class C
Shares--Conversion of Class B Shares to Class D Shares.'
Class C: Class C shares do not incur a sales charge when they are purchased, but
they are subject to an ongoing account maintenance fee of 0.25% and an
ongoing distribution fee of 0.35% of the Fund's average net assets
attributable to Class C shares. Class C shares are also subject to a
1.0% CDSC if they are redeemed within one year after purchase. Such
CDSC may be waived in connection with certain fee-based programs.
Although Class C shares are subject to a CDSC for only one year (as
compared to four years for Class B), Class C shares have no conversion
feature and, accordingly, an investor who purchases Class C shares will
be subject to account maintenance fees and higher distribution fees
that will be imposed on Class C shares for an indefinite period subject
to annual approval by the Fund's Board of Directors and regulatory
limitations.
Class D: Class D shares incur an initial sales charge when they are purchased
and are subject to an ongoing account maintenance fee of 0.10% of the
Fund's average net assets attributable to Class D shares. Class D
shares are not subject to an ongoing distribution fee or any CDSC when
they are redeemed. The maximum initial sales charge of 4.00% is reduced
for purchases of $25,000 and over. Purchases of $1,000,000 or more may
not be subject to an initial sales charge but if the initial sales
charge is waived such purchases may be subject to a 1.0% CDSC if the
shares are redeemed within one year after purchase. Such CDSC may be
waived in connection with certain fee-based programs. The schedule of
initial sales charges and reductions for Class D shares is the same as
the schedule for Class A shares except that there is no waiver for
purchases in connection with certain fee-based programs. Class D shares
also will be issued upon conversion of Class B shares as described
above under 'Class B.' See 'Purchase of Shares--Initial Sales Charge
Alternatives--Class A and Class D Shares.'
The following is a discussion of the factors that investors should consider
in determining the method of purchasing shares under the Merrill Lynch Select
Pricing(Service Mark) System that the investor believes is most beneficial under
his particular circumstances.
Initial Sales Charge Alternatives. Investors who prefer an initial sales
charge alternative may elect to purchase Class D shares or, if an eligible
investor, Class A shares. Investors choosing the initial sales charge
alternative who are eligible to purchase Class A shares should purchase Class A
shares rather than Class D shares because there is an account maintenance fee
imposed on Class D shares. Investors qualifying for significantly reduced
initial sales charges may find the initial sales charge alternative particularly
attractive because similar sales charge reductions are not available with
respect to the CDSCs imposed in connection with purchases of Class B or Class C
shares. Investors not qualifying for reduced initial sales charges who expect to
maintain their investment for an extended period of time also may elect to
purchase Class A or Class D shares because over time the accumulated ongoing
account maintenance and distribution fees on Class B or Class C shares may
exceed the initial sales charge and, in the case of Class D shares, the account
maintenance fee. Although some investors that previously purchased Class A
shares may no longer be eligible to purchase Class A shares of other
MLAM-advised mutual funds, those previously purchased Class A shares, together
with Class B, Class C and Class D share holdings, will count toward a right of
accumulation that may qualify the investor for reduced initial sales charges on
new initial sales charge purchases. In addition, the ongoing Class B and Class C
account maintenance and distribution fees will cause Class B and Class C shares
to have higher expense ratios, pay lower dividends and have lower total returns
than the initial sales charge shares. The ongoing Class D account
6
<PAGE>
maintenance fees will cause Class D shares to have a higher expense ratio, pay
lower dividends and have a lower total return than Class A shares.
Deferred Sales Charge Alternatives. Because no initial sales charges are
deducted at the time of purchase, Class B and Class C shares provide the benefit
of putting all of the investor's dollars to work from the time the investment is
made. The deferred sales charge alternatives may be particularly appealing to
investors who do not qualify for a reduction in initial sales charges. Both
Class B and Class C shares are subject to ongoing account maintenance fees and
distribution fees; however, the ongoing account maintenance and distribution
fees potentially may be offset to the extent any return is realized on the
additional funds initially invested in Class B or Class C shares. In addition,
Class B shares will be converted into Class D shares of the Fund after a
conversion period of approximately ten years, and thereafter investors will be
subject to lower ongoing fees.
Certain investors may elect to purchase Class B shares if they determine it
to be most advantageous to have all their funds invested initially and intend to
hold their shares for an extended period of time. Investors in Class B shares
should take into account whether they intend to redeem their shares within the
CDSC period and, if not, whether they intend to remain invested until the end of
the conversion period and thereby take advantage of the reduction in ongoing
fees resulting from the conversion into Class D shares. Other investors,
however, may elect to purchase Class C shares if they determine that it is
advantageous to have all their assets invested initially and they are uncertain
as to the length of time they intend to hold their assets in MLAM-advised mutual
funds. Although Class C shareholders are subject to a shorter CDSC period at a
lower rate, they are subject to higher distribution fees and forego the Class B
conversion feature, making their investment subject to account maintenance and
distribution fees for an indefinite period of time. In addition, while both
Class B and Class C distribution fees are subject to the limitations on
asset-based sales charges imposed by the NASD, the Class B distribution fees are
further limited under a voluntary waiver of asset-based sales charges. See
'Purchase of Shares--Limitations on the Payment of Deferred Sales Charges.'
7
<PAGE>
FINANCIAL HIGHLIGHTS
The financial information in the table below has been audited in connection
with the annual audits of the financial statements of the Fund by Deloitte &
Touche LLP, independent auditors. Financial statements for the year ended July
31, 1997 and the independent auditors' report thereon are included in the
Statement of Additional Information. The following per share data and ratios
have been derived from information provided in the Fund's audited financial
statements. Further information about the performance of the Fund is contained
in the Fund's most recent annual report to shareholders which may be obtained,
without charge, by calling or by writing the Trust at the telephone number or
address on the front cover of this Prospectus.
<TABLE>
<CAPTION>
CLASS A CLASS B
-------------------------------------- -----------------------------------------
FOR THE YEAR FOR THE PERIOD FOR THE YEAR FOR THE PERIOD
ENDED JULY 31, MAY 6, 1994+ ENDED JULY 31, MAY 6, 1994+
---------------------- TO JULY 31, ------------------------- TO JULY 31,
1997 1996 1995 1994 1997 1996 1995 1994
------ ------ ------ -------------- ------- ------- ------- --------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Increase (Decrease) in Net Asset Value:
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period....... $10.36 $10.29 $10.24 $10.00 $10.36 $10.29 $10.24 $10.00
------ ------ ------ ------- ------- ------- ------- -------
Investment income--net..................... .53 .56 .60 .13 .48 .50 .54 .12
Realized and unrealized gain on
investments--net......................... .46 .10 .06 .24 .46 .10 .06 .24
------ ------ ------ ------- ------- ------- ------- -------
Total from investment operations........... .99 .66 .66 .37 .94 .60 .60 .36
------ ------ ------ ------- ------- ------- ------- -------
Less dividends and distributions:
Investment income--net..................... (.53) (.56) (.60) (.13) (.48) (.50) (.54) (.12)
In excess of realized gain on
investments--net......................... -- (.03) (.01) -- -- (.03) (.01) --
------ ------ ------ ------- ------- ------- ------- -------
Total dividends and distributions.......... (.53) (.59) (.61) (.13) (.48) (.53) (.55) (.12)
------ ------ ------ ------- ------- ------- ------- -------
Net asset value, end of period............. $10.82 $10.36 $10.29 $10.24 $10.82 $10.36 $10.29 $10.24
------ ------ ------ ------- ------- ------- ------- -------
------ ------ ------ ------- ------- ------- ------- -------
TOTAL INVESTMENT RETURN:**
Based on net asset value per share......... 9.86% 6.53% 6.65% 3.76%# 9.30% 5.98% 6.11% 3.64%#
------ ------ ------ ------- ------- ------- ------- -------
------ ------ ------ ------- ------- ------- ------- -------
RATIOS TO AVERAGE NET ASSETS:
Expenses, net of reimbursement............. .79% .49% .07% --% 1.30% 1.01% .59% .50%*
------ ------ ------ ------- ------- ------- ------- -------
------ ------ ------ ------- ------- ------- ------- -------
Expenses................................... 1.33% 1.42% 1.65% 2.47%* 1.84% 1.92% 2.16% 2.97%*
------ ------ ------ ------- ------- ------- ------- -------
------ ------ ------ ------- ------- ------- ------- -------
Investment income--net..................... 5.08% 5.33% 5.92% 5.49%* 4.57% 4.81% 5.40% 4.98%*
------ ------ ------ ------- ------- ------- ------- -------
------ ------ ------ ------- ------- ------- ------- -------
SUPPLEMENTAL DATA:
Net assets, end of period (in thousands)... $3,862 $5,287 $7,715 $8,166 $11,703 $13,964 $12,104 $8,505
------ ------ ------ ------- ------- ------- ------- -------
------ ------ ------ ------- ------- ------- ------- -------
Portfolio turnover......................... 40.53% 63.02% 28.16% 16.06% 40.53% 63.02% 28.16% 16.06%
------ ------ ------ ------- ------- ------- ------- -------
------ ------ ------ ------- ------- ------- ------- -------
</TABLE>
- ------------
+ Commencement of operations.
* Annualized.
# Aggregate total investment return.
** Total investment returns exclude the effects of sales loads.
8
<PAGE>
<TABLE>
<CAPTION>
CLASS C CLASS D
-------------------------------------- ------------------------------------
FOR THE YEAR FOR THE PERIOD FOR THE YEAR FOR THE PERIOD
ENDED JULY 31, OCTOBER 21, 1994+ ENDED JULY 31, OCTOBER 21, 1994+
----------------- TO JULY 31, ----------------- TO JULY 31,
1997 1996 1995 1997 1996 1995
------ ------ ------------------ ----------- --------------------
<S> <C> <C> <C> <C> <C> <C>
Increase (Decrease) in Net Asset Value:
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period....... $10.36 $10.30 $9.89 $10.36 $10.29 $9.89
------ ------ ------- ------ ------ -------
Investment income--net..................... .47 .49 .40 .52 .55 .46
Realized and unrealized gain on
investments--net......................... .47 .09 .42 .46 .10 .41
------ ------ ------- ------ ------ -------
Total from investment operations........... .94 .58 .82 .98 .65 .87
------ ------ ------- ------ ------ -------
Less dividends and distributions:
Investment income--net..................... (.47) (.49) (.40) (.52) (.55) (.46)
In excess of realized gain on
investments--net......................... -- (.03) (.01) -- (.03) (.01)
------ ------ ------- ------ ------ -------
Total dividends and distributions.......... (.47) (.52) (.41) (.52) (.58) (.47)
------ ------ ------- ------ ------ -------
Net asset value, end of period............. $10.83 $10.36 $10.30 $10.82 $10.36 $10.29
------ ------ ------- ------ ------ -------
------ ------ ------- ------ ------ -------
TOTAL INVESTMENT RETURN:**
Based on net asset value per share......... 9.29% 5.76% 8.44%# 9.75% 6.42% 8.91%#
------ ------ ------- ------ ------ -------
------ ------ ------- ------ ------ -------
RATIOS TO AVERAGE NET ASSETS:
Expenses, net of reimbursement............. 1.42% 1.15% .80%* .90% .61% .23%*
------ ------ ------- ------ ------ -------
------ ------ ------- ------ ------ -------
Expenses................................... 1.95% 2.03% 2.27%* 1.44% 1.51% 1.74%*
------ ------ ------- ------ ------ -------
------ ------ ------- ------ ------ -------
Investment income--net..................... 4.45% 4.67% 5.20%* 4.97% 5.21% 5.80%*
------ ------ ------- ------ ------ -------
------ ------ ------- ------ ------ -------
SUPPLEMENTAL DATA:
Net assets, end of period (in thousands)... $1,082 $712 $164 $2,699 $2,110 $1,569
------ ------ ------- ------ ------ -------
------ ------ ------- ------ ------ -------
Portfolio turnover......................... 40.53% 63.02% 28.16% 40.53% 63.02% 28.16%
------ ------ ------- ------ ------ -------
------ ------ ------- ------ ------ -------
</TABLE>
9
<PAGE>
INVESTMENT OBJECTIVE AND POLICIES
The investment objective of the Fund is to provide shareholders with as
high a level of income exempt from Federal and 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
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 U.S. 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. The Fund may also
invest in variable rate demand obligations ('VRDOs'). The interest on Municipal
Bonds may bear a fixed rate or be payable at a variable or floating rate. At
least 80% of the Municipal Bonds purchased by the Fund primarily will be what
are commonly referred to as 'investment grade' securities, which are obligations
rated at the time of purchase within the four highest quality ratings as
determined by either Moody's Investors Service, Inc. ('Moody's') (currently Aaa,
Aa, A and Baa), Standard & Poor's Ratings Services ('Standard & Poor's')
(currently AAA, AA, A and BBB) or Fitch Investors Service, Inc. ('Fitch')
(currently AAA, AA, A and BBB). If Municipal Bonds are unrated, such securities
will possess creditworthiness comparable, in the opinion of the Manager to
obligations in which the Fund may invest. Municipal Bonds rated in the fourth
highest rating category, while considered 'investment grade,' have certain
speculative characteristics and are more likely to be downgraded to
non-investment grade than obligations rated in one of the top three rating
categories. See Appendix II--'Ratings of Municipal Bonds' in the Statement of
Additional Information for more information regarding ratings of debt
securities. An issue of rated Municipal Bonds may cease to be rated or its
rating may be reduced below 'investment grade' subsequent to its purchase by the
Fund. If an obligation is downgraded below investment grade, the Manager will
consider factors such as price, credit risk, market conditions, financial
condition of the issuer and interest rates to determine whether to continue to
hold the obligation in the Fund's portfolio.
The Fund may invest up to 20% of its total assets in Municipal Bonds that
are rated below Baa by Moody's or below BBB by Standard & Poor's or Fitch, or
which in the Manager's judgment, possess similar credit characteristics. Such
securities, sometimes referred to as 'high yield' or 'junk' bonds, are
predominantly speculative with respect to the capacity to pay interest and repay
principal in accordance with the terms of the security and generally involve a
greater volatility of price than securities in higher rating categories. The
market prices of high-yielding, lower-rated securities may fluctuate more than
higher-rated securities and may decline significantly in periods of general
economic difficulty, which may follow periods of rising interest rates. In
purchasing such securities, the Fund will rely on the Manager's judgment,
analysis and experience in evaluating the creditworthiness of the issuer of such
securities. The Manager will take into consideration, among other things, the
issuer's financial resources, its sensitivity to economic conditions and trends,
its operating history, the quality of its management and regulatory matters. See
'Investment Objective and Policies' in the Statement of Additional Information
for a more detailed discussion of the pertinent risk factors involved in
investing in 'high yield' or 'junk' bonds and Appendix II--'Ratings of Municipal
Bonds' in the Statement of Additional
10
<PAGE>
Information for additional information regarding ratings of debt securities. The
Fund does not intend to purchase debt securities that are in default or which
the Manager believes will be in default.
Certain Municipal Bonds may be entitled to the benefits of letters of
credit or similar credit enhancements issued by financial institutions. In such
instances, the Trustees and the Manager will take into account in assessing the
quality of such bonds not only the creditworthiness of the issuer of such bonds
but also the creditworthiness of the financial institution.
The Fund's investments may also include VRDOs and VRDOs in the form of
participation interests ('Participating VRDOs') in variable rate tax-exempt
obligations held by a financial institution. The VRDOs in which the Fund will
invest are tax-exempt obligations which contain a floating or variable interest
rate adjustment formula and an unconditional right of demand on the part of the
holder thereof to receive payment of the unpaid principal balance plus accrued
interest on a short notice period not to exceed seven days. Participating VRDOs
provide the Fund with a specified undivided interest (up to 100%) of the
underlying obligation and the right to demand payment of the unpaid principal
balance plus accrued interest on the Participating VRDOs from the financial
institution on a specified number of days' notice, not to exceed seven days.
There is, however, the possibility that because of a default or insolvency, the
demand feature of VRDOs or Participating VRDOs may not be honored. The Fund has
been advised by its counsel that the Fund should be entitled to treat the income
received on Participating VRDOs as interest from tax-exempt obligations.
VRDOs that contain an unconditional right of demand to receive payment of
the unpaid principal balance plus accrued interest on a notice period exceeding
seven days may be deemed illiquid securities. A VRDO with a demand notice period
exceeding seven days will therefore be subject to the Fund's restriction on
illiquid investments unless, in the judgment of the Trustees, such VRDO is
liquid. The Trustees may adopt guidelines and delegate to the Manager the daily
function of determining and monitoring liquidity of such VRDOs. The Trustees,
however, will retain sufficient oversight and be ultimately responsible for such
determinations.
The Fund ordinarily does not intend to realize investment income not exempt
from Federal and 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 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 through SP-2 for notes and A-1 through
A-3 for VRDOs and commercial paper
11
<PAGE>
(as determined by Standard & Poor's), or F-1 through F-3 for notes, VRDOs and
commercial paper (as determined by Fitch) or, if unrated, of comparable quality
in the opinion of the Manager. The Fund at all times will have at least 80% of
its net assets invested in securities the interest on which is exempt from
Federal taxation. However, interest received on certain otherwise tax-exempt
securities which are classified as 'private activity bonds' (in general, bonds
that benefit non-governmental entities), may be subject to a Federal alternative
minimum tax. The percentage of the Fund's net assets invested in 'private
activity bonds' will vary during the year. See 'Distributions and Taxes.' In
addition, the Fund reserves the right to invest temporarily a greater portion of
its assets in Temporary Investments for defensive purposes, when, in the
judgment of the Manager, market conditions warrant. The Fund's hedging
strategies, which are described in more detail under 'Financial Futures
Transactions and Options,' are not fundamental policies and may be modified by
the Trustees of the Trust without the approval of the Fund's shareholders.
POTENTIAL BENEFITS
Investment in shares of the Fund offers several benefits. The Fund offers
investors the opportunity to receive income exempt from Federal and 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 certain classes of shares, account maintenance and distribution fees.
SPECIAL AND RISK CONSIDERATIONS RELATING TO MUNICIPAL BONDS
The risks and special considerations involved in investments in Municipal
Bonds vary with the types of instruments being acquired. Investments in
Non-Municipal Tax-Exempt Securities may present similar risks, depending on the
particular investment. Certain instruments in which the Fund may invest may be
characterized as derivative securities. See 'Description of Municipal Bonds' and
'Financial Futures Transactions and Options.'
Moreover, the Fund ordinarily will invest at least 65% of its total assets
in New Mexico Municipal Bonds, and therefore it is more susceptible to factors
and conditions adversely affecting issuers of New Mexico Municipal Bonds than is
a municipal bond mutual fund that is not concentrated in issuers of New Mexico
Municipal Bonds to this degree. For the current fiscal year, the New Mexico
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 adversely affected
various national laboratories and military installations in the State.
The value of Municipal Bonds generally may be affected by uncertainties in
the municipal markets as a result of legislation or litigation changing the
taxation of Municipal Bonds or the rights of Municipal Bond holders in the event
of a bankruptcy. Municipal bankruptcies are rare, and certain provisions of the
U.S. Bankruptcy Code governing such bankruptcies are unclear. Further, the
application of state law to Municipal Bond issuers could produce varying results
among the states or among Municipal Bond issuers within a state. These
uncertainties could have a significant impact on the prices of the New Mexico
Municipal Bonds or Municipal Bonds in which the Fund invests.
12
<PAGE>
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 quality New Mexico Municipal Bonds.
Because the Fund's portfolio will be comprised primarily of investment grade
securities, the Fund is expected to be less subject to market and credit risks
than a fund that invests primarily in lower quality New Mexico Municipal Bonds.
See 'Description of Municipal Bonds' in the Statement of Additional Information
and see also Appendix I, 'Economic and Financial Information Concerning 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 (such as 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 local facilities for water supply, gas,
electricity or sewage or solid waste disposal. For purposes of this Prospectus,
such obligations are referred to as Municipal Bonds if the interest paid thereon
is excluded from gross income for purposes of Federal income taxation, and, as
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 its state constitution 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's or entity's control. Accordingly, the capacity of the issuer
of a general obligation bond as to the timely payment of interest and the
repayment of principal when due is affected by the issuer's maintenance of its
tax base.
Revenue bonds are payable only from the revenues derived from a particular
facility or class of facilities or, in some cases, from the proceeds of a
special excise tax or other specific revenue source such as payments from the
user of the facility being financed; accordingly, the timely payment of interest
and the repayment of principal in accordance with the terms of the revenue or
special obligation bond is a function of the economic viability of such facility
or such revenue source.
The Fund may purchase IDBs and private activity bonds. IDBs and private
activity bonds are, in most cases, tax-exempt securities issued by states,
municipalities or public authorities to provide funds, usually through a loan or
lease arrangement, to a private entity for the purpose of financing construction
or improvement of a facility to be used by the entity. Such bonds are secured
primarily by revenues derived from loan repayments or lease payments due from
the entity, which may or may not be guaranteed by a parent company or otherwise
secured. IDBs and private activity bonds are generally not secured by a pledge
of the taxing power of the issuer of such bonds. Therefore, an investor should
be aware that repayment of such bonds generally depends on the revenues of a
private entity and be aware of the risks that such an investment may entail.
Continued ability of an
13
<PAGE>
entity to generate sufficient revenues for the payment of principal and interest
on such bonds will be affected by many factors including the size of the entity,
capital structure, demand for its products or services, competition, general
economic conditions, governmental regulation and the entity's dependence on
revenues for the operation of the particular facility being financed. The Fund
may also invest in so-called 'moral obligation' bonds, which are normally issued
by special purpose authorities. If an issuer of moral obligation bonds is unable
to meet its obligations, repayment of such bonds becomes a moral commitment, but
not a legal obligation of the state or municipality in question.
The Fund may invest in Municipal Bonds (and Non-Municipal Tax-Exempt
Securities) the return on which is based on a particular index of value or
interest rates. For example, the Fund may invest in Municipal Bonds that pay
interest based on an index of Municipal Bond interest rates or based on the
value of gold or some other commodity. The principal amount payable upon
maturity of certain Municipal Bonds also may be based on the value of an index.
To the extent the Fund invests in these types of Municipal Bonds, the Fund's
return on such Municipal Bonds will be subject to risk with respect to the value
of the particular index. Interest and principal payable on the Municipal Bonds
may also be based on relative changes among particular indices. Also, the Fund
may invest in so-called 'inverse floating obligations' or 'residual interest
bonds' on which the interest rates typically decline as market rates increase
and increase as market rates decline. The Fund's return on such types of
Municipal Bonds (and Non-Municipal Tax-Exempt Securities) will be subject to
risk with respect to the value of the particular index, which may include
reduced or eliminated interest payments and losses of invested principal. Such
securities have the effect of providing a degree of investment leverage, since
they may increase or decrease in value in response to changes, as an
illustration, in market interest rates at a rate which is a multiple (typically
two) of the rate at which fixed-rate long-term tax-exempt securities increase or
decrease in response to such changes. As a result, the market values of such
securities will generally be more volatile than the market values of fixed-rate
tax-exempt securities. To seek to limit the volatility of these securities, the
Fund may purchase inverse floating obligations with shorter term maturities or
which contain limitations on the extent to which the interest rate may vary.
Certain investments in such obligations may be illiquid. The Fund may not invest
in such illiquid obligations if such investments, together with other illiquid
investments, would exceed 15% of the Fund's total assets. The Manager believes,
however, that indexed and inverse floating obligations represent flexible
portfolio management instruments for the Fund which allow the Fund to seek
potential investment rewards, hedge other portfolio positions or to vary the
degree of investment leverage relatively efficiently under different market
conditions.
Also included within the general category of Municipal Bonds are
participation certificates issued by government authorities or entities to
finance the acquisition or construction of equipment, land and/or facilities.
The certificates represent participations in a lease, an installment purchase
contract or a conditional sales contract (hereinafter collectively called 'lease
obligations') relating to such equipment, land or facilities. Although lease
obligations do not constitute general obligations of the issuer for which the
issuer's unlimited taxing power is pledged, a lease obligation frequently is
backed by the issuer's covenant to budget for, appropriate and make the payments
due under the lease obligation. However, certain lease obligations contain
'non-appropriation' clauses which provide that the issuer has no obligation to
make lease or installment purchase payments in future years unless money is
appropriated for such purpose on a yearly basis. Although 'non-appropriation'
lease obligations are secured by the leased property, disposition of the
property in the event of foreclosure might prove difficult. These securities
represent a type of financing that has not yet developed the depth of
marketability associated with more conventional securities. Certain investments
in lease obligations may be illiquid. The Fund may not invest in illiquid lease
obligations if such investments, together with other illiquid investments, would
exceed 15% of the Fund's total assets. The Fund may, however, invest without
regard to such limitation in lease
14
<PAGE>
obligations which the Manager, pursuant to guidelines which have been adopted by
the Board of Trustees and subject to the supervision of the Board, determines to
be liquid. The Manager will deem lease obligations liquid if they are publicly
offered and have received an investment grade rating of Baa or better by
Moody's, or BBB or better by Standard & Poor's or Fitch. Unrated lease
obligations, or those rated below investment grade, will be considered liquid if
the obligations come to the market through an underwritten public offering and
at least two dealers are willing to give competitive bids. In reference to
obligations rated below investment grade, the Manager must, among other things,
also review the creditworthiness of the municipality obligated to make payment
under the lease obligation and make certain specified determinations based on
such factors as the existence of a rating or credit enhancement such as
insurance, the frequency of trades or quotes for the obligation and the
willingness of dealers to make a market in the obligation.
The value of bonds and other fixed-income obligations may fall when
interest rates rise and rise when interest rates fall. In general, bonds and
other fixed-income obligations with other longer maturities will be subject to
greater volatility resulting from interest rate fluctuations than will similar
obligations with shorter maturities. Under normal conditions, it is generally
anticipated that the Fund's average weighted maturity would be in excess of ten
years.
Federal tax legislation has limited the types and volume of bonds the
interest on which qualifies for a Federal income tax exemption. As a result,
this legislation and legislation which may be enacted in the future may affect
the availability of Municipal Bonds for investment by the Fund.
CALL RIGHTS
The Fund may purchase a Municipal Bond issuer's right to call all or a
portion of such Municipal Bond for mandatory tender for purchase (a 'Call
Right'). A holder of a Call Right may exercise such right to require a mandatory
tender for the purchase of related Municipal Bonds, subject to certain
conditions. A Call Right that is not exercised prior to the maturity of the
related Municipal Bond will expire without value. The economic effect of holding
both the Call Right and the related Municipal Bond is identical to that of
holding a Municipal Bond as a non-callable security. Certain investments in such
obligations may be illiquid. The Fund may not invest in such illiquid
obligations if such investments, together with other illiquid investments, would
exceed 15% of the Fund's total assets.
WHEN-ISSUED SECURITIES AND DELAYED DELIVERY TRANSACTIONS
The Fund may purchase or sell Municipal Bonds on a delayed delivery basis
or a when-issued basis at fixed purchase terms. These transactions arise when
securities are purchased or sold by the Fund with payment and delivery taking
place in the future. The purchase will be recorded on the date the Fund enters
into the commitment and the value of the obligation will thereafter be reflected
in the calculation of the Fund's net asset value. The value of the obligation on
the delivery date may be more or less than its purchase price. A separate
account of the Fund will be established with its custodian consisting of cash,
cash equivalents or liquid securities having a market value at all times at
least equal to the amount of the forward commitment.
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
15
<PAGE>
the Fund's investment policies and limitations. A financial futures contract
obligates the seller of a contract to deliver and the purchaser of a contract to
take delivery of the type of financial instrument covered by the contract, or in
the case of index-based futures contracts to make and accept a cash settlement,
at a specific future time for a specified price. A sale of financial futures
contracts may provide a hedge against a decline in the value of portfolio
securities because such depreciation may be offset, in whole or in part, by an
increase in the value of the position in the financial futures contracts. A
purchase of financial futures contracts may provide a hedge against an increase
in the cost of securities intended to be purchased, because such appreciation
may be offset, in whole or in part, by an increase in the value of the position
in the futures contracts. Distributions, if any, of net long-term capital gains
from certain transactions in futures or options are taxable at long-term capital
gains rates for Federal income tax purposes, regardless of the length of time
the shareholder has owned Fund shares. Recent legislation has created new
categories of capital gains taxable at different rates, which the Fund may be
able to pass through to shareholders. See 'Distributions and Taxes--Taxes.'
The Fund deals in financial futures contracts traded on the Chicago Board
of Trade based on The Bond Buyer Municipal Bond Index, a price-weighted measure
of the market value of 40 large, recently issued tax-exempt bonds. There can be
no assurance, however, that a liquid secondary market will exist to terminate
any particular financial futures contract at any specific time. If it is not
possible to close a financial futures position entered into by the Fund, the
Fund would continue to be required to make daily cash payments of variation
margin in the event of adverse price movements. In such a situation, if the Fund
has insufficient cash, it may have to sell portfolio securities to meet daily
variation margin requirements at a time when it may be disadvantageous to do so.
The inability to close financial futures positions also could have an adverse
impact on the Fund's ability to hedge effectively. There is also the risk of
loss by the Fund of margin deposits in the event of bankruptcy of a broker with
whom the Fund has an open position in a financial futures contract.
The Fund may purchase and sell financial futures contracts on U.S.
Government securities and write and purchase put and call options on such
futures contracts as a hedge against adverse changes in interest rates as
described more fully in the Statement of Additional Information. With respect to
U.S. Government securities, currently there are financial futures contracts
based on long-term U.S. Treasury bonds, Treasury notes, Government National
Mortgage Association ('GNMA') Certificates and three-month U.S. Treasury bills.
Subject to policies adopted by the Trustees, the Fund also may engage in
other financial futures contracts transactions and options thereon, such as
financial futures contracts or options on other municipal bond indexes which may
become available if the Manager of the Fund and the Trustees of the Trust should
determine that there is normally a sufficient correlation between the prices of
such futures contracts and the Municipal Bonds in which the Fund invests to make
such hedging appropriate.
Utilization of futures transactions and options thereon involves the risk
of imperfect correlation in movements in the price of futures contracts and
movements in the price of the security which is the subject of the hedge. If the
price of the futures contract moves more or less than the price of the security
that is the subject of the hedge, the Fund will experience a gain or loss which
will not be completely offset by movements in the 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.
16
<PAGE>
Under regulations of the Commodity Futures Trading Commission ('CFTC'), the
futures trading activities described herein will not result in the Fund being
deemed to be a 'commodity pool,' as defined under such regulations, provided
that the Fund adheres to certain restrictions. In particular, the Fund may
purchase and sell futures contracts and options thereon (i) 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 liquid securities in a segregated account with the Fund's custodian,
so that the amount so segregated plus the amount of initial and variation margin
held in the account of its broker equals the market value of the futures
contracts, thereby ensuring that the use of such futures contract is
unleveraged. It is not anticipated that transactions in futures contracts will
have the effect of increasing portfolio turnover.
Although certain risks are involved in options and futures transactions,
the Manager believes that, because the Fund will engage in futures transactions
only for hedging purposes, the futures portfolio strategies of the Fund will not
subject the Fund to certain risks frequently associated with speculation in
futures transactions. The Fund must meet certain Federal income tax requirements
under the Internal Revenue Code of 1986, as amended (the 'Code'), in order to
qualify for the special tax treatment afforded regulated investment companies,
including a requirement that less than 30% of its gross income be derived from
the sale or other disposition of securities held for less than three months.
This requirement will no longer apply to the Fund after its fiscal year ending
July 31, 1998. Additionally, the Fund is required to meet certain
diversification requirements under the Code.
The liquidity of a secondary market in a futures contract may be adversely
affected by 'daily price fluctuation limits' established by commodity exchanges
which limit the amount of fluctuation in a futures contract price during a
single trading day. Once the daily limit has been reached in the contract, no
trades may be entered into at a price beyond the limit, thus preventing the
liquidation of open futures positions. Prices have in the past moved beyond the
daily limit on a number of consecutive trading days.
The successful use of transactions in futures also depends on the ability
of the Manager to forecast correctly the direction and extent of interest rate
movements within a given time frame. To the extent these rates remain stable
during the period in which a futures contract is held by the Fund or moves in a
direction opposite to that anticipated, the Fund may realize a loss on the
hedging transaction which is not fully or partially offset by an increase in the
value of portfolio securities. As a result, the Fund's total return for such
period may be less than if it had not engaged in the hedging transaction.
Furthermore, the Fund will only engage in hedging transactions from time to time
and may not necessarily be engaging in hedging transactions when movements in
interest rates occur.
Reference is made to the Statement of Additional Information for further
information on financial futures contracts and certain options thereon.
17
<PAGE>
REPURCHASE AGREEMENTS
As Temporary Investments, the Fund may invest in securities pursuant to
repurchase agreements. Repurchase agreements may be entered into only with a
member bank of the Federal Reserve System or a primary dealer in U.S. Government
securities or an affiliate thereof. Under such agreements, the seller agrees,
upon entering into the contract, to repurchase the security from the Fund at a
mutually agreed upon time and price, thereby determining the yield during the
term of the agreement. This results in a fixed rate of return insulated from
market fluctuations during such period. The Fund may not invest in repurchase
agreements maturing in more than seven days if such investments, together with
the Fund's other illiquid investments, would exceed 15% of the Fund's total
assets. In the event of a default by the seller under a repurchase agreement,
the Fund may suffer time delays and incur costs or possible losses in connection
with the disposition of the underlying securities.
INVESTMENT RESTRICTIONS
The Fund's investment activities are subject to further restrictions that
are described in the Statement of Additional Information. Investment
restrictions and policies which are fundamental policies may not be changed
without the approval of the holders of a majority of the Fund's outstanding
voting securities, as defined in the 1940 Act which means the lesser of (i) 67%
of the shares represented at a meeting at which more than 50% of the outstanding
shares are represented or (ii) more than 50% of the outstanding shares. Among
its fundamental policies, the Fund may not invest more than 25% of its assets,
taken at market value at the time of each investment, in the securities of
issuers in any particular industry (excluding the U.S. Government and its
agencies and instrumentalities) (For purposes of this restriction, states,
municipalities and their political subdivisions are not considered to be part of
any industry). Investment restrictions and policies that are non-fundamental
policies may be changed by the Board of Trustees without shareholder approval.
As a non-fundamental policy, the Fund may not borrow amounts in excess of 20% of
its total assets taken at market value (including the amount borrowed), and then
only from banks as a temporary measure for extraordinary or emergency purposes.
In addition, the Fund will not purchase securities while borrowings are
outstanding.
As a non-fundamental policy, the Fund will not invest in securities which
cannot be readily resold because of legal or contractual restrictions or which
cannot otherwise be marketed, redeemed or put to the issuer or a third party, if
at the time of acquisition more than 15% of its total assets would be invested
in such securities. This restriction shall not apply to securities which mature
within seven days or securities which the Board of Trustees of the Trust has
otherwise determined to be liquid pursuant to applicable law.
The Fund is classified as non-diversified within the meaning of the 1940
Act, which means that the Fund is not limited by the 1940 Act in the proportion
of its assets that it may invest in obligations of a single issuer. However, the
Fund's investments will be limited so as to qualify as a 'regulated investment
company' for purposes of the Code. See 'Distributions and Taxes--Taxes.' To
qualify, among other requirements, the Trust will limit the Fund's investments
so that, at the close of each quarter of the taxable year, (i) not more than 25%
of the market value of the Fund's total assets will be invested in the
securities of a single issuer, and (ii) with respect to 50% of the market value
of its total assets, not more than 5% of the market value of its total assets
will be invested in the securities of a single issuer and the Fund will not own
more than 10% of the outstanding voting securities of a single issuer. For
purposes of this restriction, the Fund will regard each state and each political
subdivision, agency or instrumentality of such state and each multi-state agency
of which such state is a member and each public authority which issues
securities on behalf of a private entity as a separate issuer, except that if
the security is backed only by the assets and revenues of a non-government
entity then the entity with the ultimate responsibility for the payment of
interest and principal may be regarded as the sole issuer. These tax-
18
<PAGE>
related limitations may be changed by the Trustees of the Trust to the extent
necessary to comply with changes to the Federal tax requirements. A fund which
elects to be classified as 'diversified' under the 1940 Act must satisfy the
foregoing 5% and 10% requirements with respect to 75% of its total assets. To
the extent that the Fund assumes large positions in the obligations of a small
number of issuers, the Fund's total return may fluctuate to a greater extent
than that of a diversified company as a result of changes in the financial
condition or in the market's assessment of the issuers.
Investors are referred to the Statement of Additional Information for a
complete description of the Fund's investment restrictions.
MANAGEMENT OF THE TRUST
TRUSTEES
The Trustees of the Trust consist of six individuals, five of whom are not
'interested persons' of the Trust as defined in the 1940 Act. The Trustees are
responsible for the overall supervision of the operations of the Trust and the
Fund and perform the various duties imposed on the directors or trustees of
investment companies by the 1940 Act.
The Trustees are:
ARTHUR ZEIKEL*--President of the Manager and its affiliate, MLAM; President
and Director of Princeton Services, Inc. ('Princeton Services') and Executive
Vice President of ML & Co.
JAMES H. BODURTHA--Director and Executive Vice President, The China
Business Group, Inc.
HERBERT I. LONDON--John M. Olin Professor of Humanities, New York
University.
ROBERT R. MARTIN--Former Chairman, Kinnard Investments, Inc.
JOSEPH L. MAY--Attorney in private practice.
ANDRE F. PEROLD--Professor, Harvard Business School.
- ------------------------
* Interested person, as defined in the 1940 Act, of the Trust.
MANAGEMENT AND ADVISORY ARRANGEMENTS
The Manager, which is an affiliate of MLAM and is owned and controlled by
ML & Co., a financial services holding company, acts as the manager for the Fund
and provides the Fund with management services. The Manager or MLAM acts as the
investment adviser for over 140 registered investment companies and provides
investment advisory services to individual and institutional accounts. As of
October 31, 1997, the Manager and MLAM had a total of approximately $271.9
billion in investment company and other portfolio assets under management,
including accounts of certain affiliates of the Manager.
Subject to the direction of the Trustees, the Manager is responsible for
the actual management of the Fund's portfolio and constantly reviews the Fund's
holdings in light of its own research analysis and that from other relevant
sources. The responsibility for making decisions to buy, sell or hold a
particular security rests with the Manager. The Manager performs certain of the
other administrative services and provides all the office space, facilities,
equipment and necessary personnel for management of the Fund.
19
<PAGE>
Robert D. Sneeden is the Portfolio Manager of the Fund and has been
responsible for the day-to-day management of the Fund's investment portfolio
since June 1997. He has been an Assistant Vice President of MLAM since June
1994. Prior to that he was a Vice President with Lehman Brothers Inc. from 1990
to 1994.
Pursuant to the management agreement between the Manager and the Trust on
behalf of the Fund (the 'Management Agreement'), the Manager is entitled to
receive from the Fund a monthly fee based upon the average daily net assets of
the Fund at the following annual rates: 0.55% of the average daily net assets
not exceeding $500 million; 0.525% of the average daily net assets exceeding
$500 million but not exceeding $1.0 billion; and 0.50% of the average daily net
assets exceeding $1.0 billion. For the fiscal year ended July 31, 1997, the fee
payable by the Fund to the Manager was $120,031 (based on average daily net
assets of approximately $21.8 million), of which $112,203 was voluntarily
waived.
The Management Agreement obligates the Trust on behalf of the Fund to pay
certain expenses incurred in the Fund's operations, including, among other
things, the management fee, legal and audit fees, unaffiliated Trustees' fees
and expenses, registration fees, custodian and transfer agency fees, accounting
and pricing costs, and certain of the costs of printing proxies, shareholder
reports, prospectuses and statements of additional information. Accounting
services are provided to the Fund by the Manager, and the Fund reimburses the
Manager for its costs in connection with such services. For the fiscal year
ended July 31, 1997, the Fund reimbursed the Manager $32,909 for accounting
services. For the fiscal year ended July 31, 1997, the ratio of total expenses
to average net assets was 1.33% for Class A shares, 1.84% for Class B shares,
1.95% for Class C shares and 1.44% for Class D shares.
CODE OF ETHICS
The Board of Trustees of the Trust has adopted a Code of Ethics under Rule
17j-1 of the 1940 Act which incorporates the Code of Ethics of the Manager
(together, the 'Codes'). The Codes significantly restrict the personal investing
activities of all employees of the Manager and, as described below, impose
additional, more onerous, restrictions on fund investment personnel.
The Codes require that all employees of the Manager preclear any personal
securities investment (with limited exceptions, such as government securities).
The preclearance requirement and associated procedures are designed to identify
any substantive prohibition or limitation applicable to the proposed investment.
The substantive restrictions applicable to all employees of the Manager include
a ban on acquiring any securities in a 'hot' initial public offering and a
prohibition from profiting on short-term trading in securities. In addition, no
employee may purchase or sell any security that at the time is being purchased
or sold (as the case may be), or to the knowledge of the employee is being
considered for purchase or sale, by any fund advised by the Manager.
Furthermore, the Codes provide for trading 'blackout periods' which prohibit
trading by investment personnel of the Fund within periods of trading by the
Fund in the same (or equivalent) security (15 or 30 days depending upon the
transaction).
TRANSFER AGENCY SERVICES
The Transfer Agent, which is a subsidiary of ML & Co., acts as the Trust's
transfer agent pursuant to a Transfer Agency, Dividend Disbursing Agency and
Shareholder Servicing Agency Agreement (the 'Transfer Agency Agreement').
Pursuant to the Transfer Agency Agreement, the Transfer Agent is responsible for
the issuance, transfer and redemption of shares and the opening and maintenance
of shareholder accounts. Pursuant to the Transfer Agency Agreement, the Transfer
Agent receives an annual fee of up to $11.00 per Class A or Class D account and
up to $14.00 per Class B or Class C account, and is entitled to reimbursement
for certain
20
<PAGE>
transaction charges and out-of-pocket expenses incurred by the Transfer Agent
under the Transfer Agency Agreement. Additionally, a $.20 monthly closed account
charge will be assessed on all accounts which close during the calendar year.
Application of this fee will commence the month following the month the account
is closed. At the end of the calendar year, no further fees will be due. For
purposes of the Transfer Agency Agreement, the term 'account' includes a
shareholder account maintained directly by the Transfer Agent and any other
account representing the beneficial interest of a person in the relevant share
class on a recordkeeping system, provided the recordkeeping system is maintained
by a subsidiary of ML & Co. For the fiscal year ended July 31, 1997, the total
fee paid by the Fund to the Transfer Agent was $9,789 pursuant to the Transfer
Agency Agreement.
PURCHASE OF SHARES
The Distributor, an affiliate of each of the Manager, MLAM and Merrill
Lynch, acts as the distributor of the shares of the Fund. Shares of the Fund are
offered continuously for sale by the Distributor and other eligible securities
dealers (including Merrill Lynch). Shares of the Fund may be purchased from
securities dealers or by mailing a purchase order directly to the Transfer
Agent. The minimum initial purchase is $1,000, and the minimum subsequent
purchase is $50, except that for participants in certain fee-based programs, the
minimum initial purchase is $500 and the minimum subsequent purchase is $50.
The Fund is offering its shares in four classes at a public offering price
equal to the next determined net asset value per share plus sales charges
imposed either at the time of purchase or on a deferred basis depending upon the
class of shares selected by the investor under the Merrill Lynch Select
Pricing(Service Mark) System, as described below. The applicable offering price
for purchase orders is based upon the net asset value of the Fund next
determined after receipt of the purchase orders by the Distributor. As to
purchase orders received by securities dealers prior to the close of business on
the New York Stock Exchange (the 'NYSE') (generally, 4:00 p.m., New York time),
which includes orders received after the close of business on the previous day,
the applicable offering price will be based on the net asset value determined as
of 15 minutes after the close of business on the NYSE on that day, provided the
Distributor in turn receives the order from the securities dealer prior to 30
minutes after the close of business on the NYSE on that day. If the purchase
orders are not received prior to 30 minutes after the close of business on the
NYSE on that day, such orders shall be deemed received on the next business day.
The Trust or the Distributor may suspend the continuous offering of the Fund's
shares of any class at any time in response to conditions in the securities
markets or otherwise and may thereafter resume such offering from time to time.
Any order may be rejected by the Distributor or the Trust. Neither the
Distributor nor the dealers are permitted to withhold placing orders to benefit
themselves by a price change. Merrill Lynch may charge its customers a
processing fee (presently $5.35) to confirm a sale of shares to such customers.
Purchases made directly through the Fund's Transfer Agent are not subject to the
processing fee.
The Fund issues four classes of shares under the Merrill Lynch Select
Pricing(Service Mark) System, which permits each investor to choose the method
of purchasing shares that the investor believes is most beneficial given the
amount of the purchase, the length of time the investor expects to hold the
shares and other relevant circumstances. Shares of Class A and Class D are sold
to investors choosing the initial sales charge alternatives and shares of Class
B and Class C are sold to investors choosing the deferred sales charge
alternatives. Investors should determine whether under their particular
circumstances it is more advantageous to incur an initial sales charge or to
have the entire initial purchase price invested in the Fund with the investment
thereafter being subject to a CDSC and ongoing distribution fees and higher
account maintenance fees. A discussion of the factors that investors should
consider in determining the method of purchasing shares under the Merrill Lynch
Select Pricing(Service Mark) System is set forth under 'Merrill Lynch Select
Pricing(Service Mark) System' on page 3.
21
<PAGE>
Each Class A, Class B, Class C and Class D share of the Fund represents
identical interests in the investment portfolio of the Fund and has the same
rights, except that Class B, Class C and Class D shares bear the expenses of the
ongoing account maintenance fees, and Class B and Class C shares bear the
expenses of the ongoing distribution fees and the additional incremental
transfer agency costs resulting from the deferred sales charge arrangements. The
CDSCs, distribution and account maintenance fees that are imposed on Class B and
Class C shares, as well as the account maintenance fees that are imposed on
Class D shares, will be imposed directly against those classes and not against
all assets of the Fund and, accordingly, such charges will not affect the net
asset value of any other class or have any impact on investors choosing another
sales charge option. Dividends paid by the Fund for each class of shares will be
calculated in the same manner at the same time and will differ only to the
extent that account maintenance and distribution fees and any incremental
transfer agency costs relating to a particular class are borne exclusively by
that class. Class B, Class C and Class D shares each have exclusive voting
rights with respect to the Rule 12b-1 distribution plan adopted with respect to
such class pursuant to which account maintenance and/or distribution fees are
paid (except that Class B shareholders may vote upon any material changes to
expenses charged under the Class D Distribution Plan). See 'Distribution Plans'
below. Each class has different exchange privileges. See 'Shareholder
Services--Exchange Privilege.'
Investors should understand that the purpose and function of the initial
sales charges with respect to Class A and Class D shares are the same as those
of the CDSCs and distribution fees with respect to Class B and Class C shares in
that the sales charges and distribution fees applicable to each class provide
for the financing of the distribution of the shares of the Fund. The
distribution-related revenues paid with respect to a class will not be used to
finance the distribution expenditures of another class. Sales personnel may
receive different compensation for selling different classes of shares.
Investors are advised that only Class A and Class D shares may be available for
purchase through securities dealers, other than Merrill Lynch, that are eligible
to sell shares.
The following table sets forth a summary of the distribution arrangements
for each class of shares under the Merrill Lynch Select Pricing(Service Mark)
System.
<TABLE>
<CAPTION>
ACCOUNT
MAINTENANCE DISTRIBUTION
CLASS SALES CHARGE(1) FEE FEE CONVERSION FEATURE
----- --------------- --- --- ------------------
<S> <C> <C> <C> <C>
A Maximum 4.00% initial sales No No No
charge(2)(3)
B CDSC for a period of four years, at 0.25% 0.25% B shares convert to D shares
a rate of 4.0% during the first automatically after approximately
year, decreasing 1.0% annually to ten years(5)
0.0%(4)
C 1.0% CDSC for one year(6) 0.25% 0.35% No
D Maximum 4.00% initial sales 0.10% No No
charge(3)
</TABLE>
- ------------------
(1) Initial sales charges are imposed at the time of purchase as a percentage of
the offering price. CDSCs are imposed if the redemption occurs within the
applicable CDSC time period. The charge will be assessed on an amount equal
to the lesser of the proceeds of redemption or the cost of the shares being
redeemed.
(Footnotes continued on next page)
22
<PAGE>
(Footnotes continued from previous page)
(2) Offered only to eligible investors. See 'Initial Sales Charge
Alternatives--Class A and Class D Shares--Eligible Class A Investors.'
(3) Reduced for purchases of $25,000 or more and waived for purchases of Class A
shares by participants in connection with certain fee-based programs. Class
A and Class D share purchases of $1,000,000 or more may not be subject to an
initial sales charge but instead may be subject to a 1.0% CDSC if redeemed
within one year. Such CDSC may be waived in connection with certain
fee-based programs.
(4) The CDSC may be modified in connection with certain fee-based programs.
(5) The conversion period for dividend reinvestment shares and certain fee-based
programs may be modified. Also, Class B shares of certain other MLAM-advised
mutual funds into which exchanges may be made have an eight-year conversion
period. If Class B shares of the Fund are exchanged for Class B shares of
another MLAM-advised mutual fund, the conversion period applicable to the
Class B shares acquired in the exchange will apply, and the holding period
for the shares exchanged will be tacked onto the holding period for the
shares acquired.
(6) The CDSC may be waived in connection with certain fee-based programs.
INITIAL SALES CHARGE ALTERNATIVES--CLASS A AND CLASS D SHARES
Investors choosing the initial sales charge alternatives who are eligible
to purchase Class A shares should purchase Class A shares rather than Class D
shares because there is an account maintenance fee imposed on Class D shares.
The public offering price of Class A and Class D shares for purchasers
choosing the initial sales charge alternative is the next determined net asset
value plus varying sales charges (i.e., sales loads), as set forth below.
<TABLE>
<CAPTION>
SALES CHARGE SALES CHARGE DISCOUNT TO
AS PERCENTAGE AS PERCENTAGE* SELECTED DEALERS
OF OFFERING OF THE NET AS PERCENTAGE OF THE
AMOUNT OF PURCHASE PRICE AMOUNT INVESTED OFFERING PRICE
- ------------------------------------------------------------ -------------- --------------- --------------------
<S> <C> <C> <C>
Less than $25,000........................................... 4.00% 4.17% 3.75%
$25,000 but less than $50,000............................... 3.75 3.90 3.50
$50,000 but less than $100,000.............................. 3.25 3.36 3.00
$100,000 but less than $250,000............................. 2.50 2.56 2.25
$250,000 but less than $1,000,000........................... 1.50 1.52 1.25
$1,000,000 and over**....................................... 0.00 0.00 0.00
</TABLE>
- ------------------
* Rounded to the nearest one-hundredth percent.
** The initial sales charge may be waived on Class A and Class D purchases of
$1,000,000 or more and on Class A purchases by participants in connection
with certain fee-based programs. If the sales charge is waived in connection
with a purchase of $1,000,000 or more, such purchases may be subject to a
1.0% CDSC if the shares are redeemed within one year after purchase. Such
CDSC may be waived in connection with certain fee-based programs. The charge
will be assessed on an amount equal to the lesser of the proceeds of the
redemption or the cost of the shares being redeemed. A sales charge of 0.75%
will be charged on purchases of $1 million or more of Class A or Class D
shares by certain employer-sponsored retirement or savings plans.
The Distributor may reallow discounts to selected dealers and retain the
balance over such discounts. At times the Distributor may reallow the entire
sales charge to such dealers. Since securities dealers selling Class A and Class
D shares of the Fund will receive a concession equal to most of the sales
charge, they may be deemed to be underwriters under the Securities Act of 1933,
as amended. For the fiscal year ended July 31, 1997, the Fund sold 141,231 Class
A shares for aggregate net proceeds of $1,483,036. The gross sales charges for
the sale of Class A shares of the Fund for the year were $2,518, of which $199
and $2,319 were received by the Distributor and Merrill Lynch, respectively. For
the fiscal year ended July 31, 1997, the Distributor received no CDSCs with
respect to redemption within one year after purchase of Class A shares purchased
subject to a front-end sales charge waiver. For the fiscal year ended July 31,
1997, the Fund sold 44,220 Class D shares for aggregate net proceeds of
$462,121. The gross sales charges for the sale of Class D shares of the Fund for
the year were $8,756, of which $765 and $7,991 were received by the Distributor
and Merrill Lynch, respectively. For the fiscal year ended July 31, 1997, the
Distributor received no CDSCs with respect to redemption within one year after
purchase of Class D shares purchased subject to a front-end sales charge waiver.
23
<PAGE>
Eligible Class A Investors. Class A shares are offered to a limited group
of investors and also will be issued upon reinvestment of dividends on
outstanding Class A shares. Investors that currently own Class A shares of the
Fund in a shareholder account are entitled to purchase additional Class A shares
of the Fund in that account. Class A shares are available at net asset value to
corporate warranty insurance reserve fund programs and U.S. branches of foreign
banking institutions provided that the program or branch has $3 million or more
initially invested in MLAM-advised mutual funds. Also eligible to purchase Class
A shares at net asset value are participants in certain investment programs
including TMA(Service Mark) Managed Trusts to which Merrill Lynch Trust Company
provides discretionary trustee services, collective investment trusts for which
Merrill Lynch Trust Company serves as trustee and purchases made in connection
with certain fee-based programs. In addition, Class A shares are offered at net
asset value to ML & Co. and its subsidiaries and their directors and employees
and to members of the Boards of MLAM-advised investment companies, including the
Trust. Certain persons who acquire shares of MLAM-advised closed-end funds in
their initial offerings who wish to reinvest the net proceeds from a sale of
their closed-end fund shares of common stock in shares of the Fund also may
purchase Class A shares of the Fund if certain conditions set forth in the
Statement of Additional Information are met. In addition, Class A shares of the
Fund and certain other MLAM-advised mutual funds are offered at net asset value
to shareholders of Merrill Lynch Senior Floating Rate Fund, Inc. and, if certain
conditions set forth in the Statement of Additional Information are met, to
shareholders of Merrill Lynch Municipal Strategy Fund, Inc. and Merrill Lynch
High Income Municipal Bond Fund, Inc. who wish to reinvest the net proceeds from
a sale of certain of their shares of common stock pursuant to a tender offer
conducted by such funds in shares of the Fund and certain other MLAM-advised
mutual funds.
Reduced Initial Sales Charges. No initial sales charges are imposed upon
Class A and Class D shares issued as a result of the automatic reinvestment of
dividends or capital gains distributions. Class A and Class D sales charges also
may be reduced under a Right of Accumulation and a Letter of Intention. Class A
shares are offered at net asset value to certain eligible Class A investors as
set forth above under 'Eligible Class A Investors.' See 'Shareholder
Services--Fee-Based Programs.'
Provided applicable threshold requirements are met, either Class A or Class
D shares are offered at net asset value to Employee Access(Service Mark)
Accounts available through authorized employers. Class A shares are offered at
net asset value to shareholders of Merrill Lynch Senior Floating Rate Fund, Inc.
and, subject to certain conditions, Class A and Class D shares are offered at
net asset value to shareholders of Merrill Lynch Municipal Strategy Fund, Inc.
and Merrill Lynch High Income Municipal Bond Fund, Inc., who wish to reinvest in
shares of the Fund the net proceeds from a sale of certain of their shares of
Common Stock, pursuant to tender offers conducted by those funds.
Class D shares are offered at net asset value, without sales charge, to an
investor who has a business relationship with a Merrill Lynch Financial
Consultant, if certain conditions set forth in the Statement of Additional
Information are met. Class D shares may be offered at net asset value in
connection with the acquisition of assets of other investment companies.
Additional information concerning these reduced initial sales charges is
set forth in the Statement of Additional Information.
DEFERRED SALES CHARGE ALTERNATIVES--CLASS B AND CLASS C SHARES
Investors choosing the deferred sales charge alternatives should consider
Class B shares if they intend to hold their shares for an extended period of
time and Class C shares if they are uncertain as to the length of time they
intend to hold their assets in MLAM-advised mutual funds.
24
<PAGE>
The public offering price of Class B and Class C shares for investors
choosing the deferred sales charge alternatives is the next determined net asset
value per share without the imposition of a sales charge at the time of
purchase. As discussed below, Class B shares are subject to a four-year CDSC,
which declines each year, while Class C shares are subject only to a one-year
1.0% CDSC. On the other hand, approximately ten years after Class B shares are
issued, such Class B shares, together with shares issued upon dividend
reinvestment with respect to those shares, are automatically converted into
Class D shares of the Fund and thereafter will be subject to lower continuing
fees. See 'Conversion of Class B Shares to Class D Shares' below. Both Class B
and Class C shares are subject to an account maintenance fee of 0.25% of net
assets and Class B and Class C shares are subject to distribution fees of 0.25%
and 0.35%, respectively, of net assets as discussed below under 'Distribution
Plans.'
Class B and Class C shares are sold without an initial sales charge so that
the Fund will receive the full amount of the investor's purchase payment.
Merrill Lynch compensates its Financial Consultants for selling Class B and
Class C shares at the time of purchase from its own funds. See 'Distribution
Plans' below.
Proceeds from the CDSC and the distribution fee are paid to the Distributor
and are used in whole or in part by the Distributor to defray the expenses of
dealers (including Merrill Lynch) related to providing distribution-related
services to the Fund in connection with the sale of the Class B and Class C
shares, such as the payment of compensation to financial consultants for selling
Class B and Class C shares, from the dealers' own funds. The combination of the
CDSC and the ongoing distribution fee facilitates the ability of the Fund to
sell the Class B and Class C shares without a sales charge being deducted at the
time of purchase. Approximately ten years after issuance, Class B shares will
convert automatically into Class D shares of the Fund, which are subject to a
lower account maintenance fee and no distribution fee; Class B shares of certain
other MLAM-advised mutual funds into which exchanges may be made convert into
Class D shares automatically after approximately eight years. If Class B shares
of the Fund are exchanged for Class B shares of another MLAM-advised mutual
fund, the conversion period applicable to the Class B shares acquired in the
exchange will apply, and the holding period for the shares exchanged will be
tacked onto the holding period for the shares acquired.
Imposition of the CDSC and the distribution fee on Class B and Class C
shares is limited by the NASD asset-based sales charge rule. See 'Limitations on
the Payment of Deferred Sales Charges' below. The proceeds from the ongoing
account maintenance fees are used to compensate the Distributor and Merrill
Lynch (pursuant to a sub-agreement) for providing continuing account maintenance
activities. Class B shareholders of the Fund exercising the exchange privilege
described under 'Shareholder Services--Exchange Privilege' will continue to
be subject to the Fund's CDSC schedule if such schedule is higher than the CDSC
schedule relating to the Class B shares acquired as a result of the exchange.
Contingent Deferred Sales Charges--Class B Shares. Class B shares that are
redeemed within four years of purchase may be subject to a CDSC at the rates set
forth below charged as a percentage of the dollar amount subject thereto. The
charge will be assessed on an amount equal to the lesser of the proceeds of
redemption or the cost of the shares being redeemed. Accordingly, no CDSC will
be imposed on increases in net asset value above the initial purchase price. In
addition, no CDSC will be assessed on shares derived from reinvestment of
dividends or capital gains distributions.
25
<PAGE>
The following table sets forth the Class B CDSC:
<TABLE>
<CAPTION>
CDSC AS A
PERCENTAGE OF
DOLLAR AMOUNT
YEAR SINCE PURCHASE PAYMENT MADE SUBJECT TO CHARGE
- -------------------------------- -----------------
<S> <C>
0-1......................................................................... 4.0%
1-2......................................................................... 3.0%
2-3......................................................................... 2.0%
3-4......................................................................... 1.0%
4 and thereafter............................................................ None
</TABLE>
For the fiscal year ended July 31, 1997, the Distributor received CDSCs of
$58,462 with respect to redemptions of Class B shares, all of which were paid to
Merrill Lynch. Additional CDSCs payable to the Distributor may have been waived
or converted to a contingent obligation in connection with a shareholder's
participation in certain fee-based programs.
In determining whether a CDSC is applicable to a redemption, the
calculation will be determined in the manner that results in the lowest
applicable rate being charged. Therefore, it will be assumed that the redemption
is first of shares held for over four years or shares acquired pursuant to
reinvestment of dividends or distributions and then of shares held longest
during the four-year period. The charge will not be applied to dollar amounts
representing an increase in the net asset value since the time of purchase. A
transfer of shares from a shareholder's account to another account will be
assumed to be made in the same order as a redemption.
To provide an example, assume an investor purchased 100 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 charge is applied only to the original cost of $10 per
share and not to the increase in net asset value of $2 per share. Therefore,
$400 of the $600 redemption proceeds will be charged at a rate of 2.0% (the
applicable rate in the third year after purchase).
The Class B CDSC is waived on redemptions of shares following the death or
disability (as defined in the Code) of a shareholder. The Class B CDSC also is
waived for any Class B shares which are purchased within qualifying Employee
Access(Service Mark) Accounts. Additional information concerning the waiver of
the Class B CDSC is set forth in the Statement of Additional Information. The
terms of the CDSC may be modified in connection with certain fee-based programs.
See 'Shareholder Services--Fee-Based Programs.'
Contingent Deferred Sales Charges--Class C Shares. Class C shares that are
redeemed within one year of purchase may be subject to a 1.0% CDSC charged as a
percentage of the dollar amount subject thereto. The charge will be assessed on
an amount equal to the lesser of the proceeds of redemption or the cost of the
shares being redeemed. Accordingly, no Class C CDSC will be imposed on increases
in net asset value above the initial purchase price. In addition, no Class C
CDSC will be assessed on shares derived from reinvestment of dividends or
capital gains distributions. For the fiscal year ended July 31, 1997, the
Distributor received CDSCs of $64 with respect to redemptions of Class C shares,
all of which were paid to Merrill Lynch. The Class C CDSC may be waived in
connection with certain fee-based programs. See 'Shareholder Services--Fee-Based
Programs.'
In determining whether a Class C CDSC is applicable to a redemption, the
calculation will be determined in the manner that results in the lowest possible
rate being charged. Therefore, it will be assumed that the redemption is first
of shares held for over one year or shares acquired pursuant to reinvestment of
dividends or
26
<PAGE>
distributions and then of shares held longest during the one-year period. The
charge will not be applied to dollar amounts representing an increase in the net
asset value since the time of purchase. A transfer of shares from a
shareholder's account to another account will be assumed to be made in the same
order as a redemption.
Conversion of Class B Shares to Class D Shares. After approximately ten
years (the 'Conversion Period'), Class B shares will be converted automatically
into Class D shares of the Fund. Class D shares are subject to an ongoing
account maintenance fee of 0.10% of net assets but are not subject to the
distribution fee that is borne by Class B shares. Automatic conversion of Class
B shares into Class D shares will occur at least once each month (on the
'Conversion Date') on the basis of the relative net asset values of the shares
of the two classes on the Conversion Date, without the imposition of any sales
load, fee or other charge. Conversion of Class B shares to Class D shares will
not be deemed a purchase or sale of the shares for Federal income tax purposes.
In addition, shares purchased through reinvestment of dividends on Class B
shares also will convert automatically to Class D shares. The Conversion Date
for dividend reinvestment shares will be calculated taking into account the
length of time the shares underlying such dividend reinvestment shares were
outstanding. If at a Conversion Date the conversion of Class B shares to Class D
shares of the Fund in a single account will result in less than $50 worth of
Class B shares being left in the account, all of the Class B shares of the Fund
held in the account on the Conversion Date will be converted to Class D shares
of the Fund.
Share certificates for Class B shares of the Fund to be converted must be
delivered to the Transfer Agent at least one week prior to the Conversion Date
applicable to those shares. In the event such certificates are not received by
the Transfer Agent at least one week prior to the Conversion Date, the related
Class B shares will convert to Class D shares on the next scheduled Conversion
Date after such certificates are delivered.
In general, Class B shares of equity MLAM-advised mutual funds will convert
approximately eight years after initial purchase, and Class B shares of taxable
and tax-exempt fixed income MLAM-advised mutual funds will convert approximately
ten years after initial purchase. If, during the Conversion Period, a
shareholder exchanges Class B shares with an eight-year Conversion Period for
Class B shares with a ten-year Conversion Period, or vice versa, the Conversion
Period applicable to the Class B shares acquired in the exchange will apply, and
the holding period for the shares exchanged will be tacked onto the holding
period for the shares acquired.
The Conversion Period also may be modified for investors who participate in
certain fee-based programs. See 'Shareholder Services--Fee-Based Programs.'
DISTRIBUTION PLANS
The Fund has adopted separate distribution plans for Class B, Class C and
Class D shares pursuant to Rule 12b-1 under the 1940 Act (each a 'Distribution
Plan') with respect to the account maintenance and/or distribution fees paid by
the Fund to the Distributor with respect to such classes. The Class B and Class
C Distribution Plans provide for the payment of account maintenance fees and
distribution fees, and the Class D Distribution Plan provides for the payment of
account maintenance fees.
The Distribution Plans for Class B, Class C and Class D shares each
provides that the Fund pays the Distributor an account maintenance fee relating
to the shares of the relevant class, accrued daily and paid monthly, at the
annual rates of 0.25%, 0.25% and 0.10%, respectively, of the average daily net
assets of the Fund attributable to shares of the relevant class in order to
compensate the Distributor and Merrill Lynch (pursuant to a sub-agreement) in
connection with account maintenance activities.
27
<PAGE>
The Distribution Plans for Class B and Class C shares each provides that
the Fund also pays the Distributor a distribution fee relating to the shares of
the relevant class, accrued daily and paid monthly, at the annual rate of 0.25%
and 0.35%, respectively, of the average daily net assets of the Fund
attributable to the shares of the relevant class in order to compensate the
Distributor and Merrill Lynch (pursuant to a sub-agreement) for providing
shareholder and distribution services, and bearing certain distribution-related
expenses of the Fund, including payments to financial consultants for selling
Class B and Class C shares of the Fund. The Distribution Plans relating to Class
B and Class C shares are designed to permit an investor to purchase Class B and
Class C shares through dealers without the assessment of an initial sales charge
and at the same time permit the dealer to compensate its financial consultants
in connection with the sale of the Class B and Class C shares. In this regard,
the purpose and function of the ongoing distribution fees and the CDSC are the
same as those of the initial sales charge with respect to the Class A and Class
D shares of the Fund in that the deferred sales charges provide for the
financing of the distribution of the Fund's Class B and Class C shares.
For the fiscal year ended July 31, 1997, the Fund paid the Distributor
$69,591 pursuant to the Class B Distribution Plan (based on average daily net
assets subject to such Class B Distribution Plan of approximately $13.9
million), all of which was paid to Merrill Lynch for providing account
maintenance and distribution-related activities and services in connection with
Class B shares. For the fiscal year ended July 31, 1997, the Fund paid the
Distributor $5,338 pursuant to the Class C Distribution Plan (based on average
daily net assets subject to such Class C Distribution Plan of approximately $0.9
million), all of which was paid to Merrill Lynch for providing account
maintenance and distribution-related activities and services in connection with
Class C shares. For the fiscal year ended July 31, 1997, the Fund paid the
Distributor $2,293 pursuant to the Class D Distribution Plan (based on average
daily net assets subject to such Class D Distribution Plan of approximately $2.3
million), all of which was paid to Merrill Lynch for providing account
maintenance activities in connection with Class D shares.
Payments under the Distribution Plans are based on a percentage of average
daily net assets attributable to the shares regardless of the amount of expenses
incurred, and, accordingly, distribution-related revenues from the Distribution
Plans may be more or less than distribution-related expenses. Information with
respect to the distribution-related revenues and expenses is presented to the
Trustees for their consideration in connection with their deliberations as to
the continuance of the Class B and Class C Distribution Plans. This information
is presented annually as of December 31 of each year on a 'fully allocated
accrual' basis and quarterly on a 'direct expense and revenue/cash' basis. On
the fully allocated accrual basis, revenues consist of the account maintenance
fees, distribution fees, the CDSC 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.
As of December 31, 1996, the fully allocated accrual expenses incurred by
the Distributor and Merrill Lynch for the period since the commencement of
operations of Class B shares exceeded fully allocated accrual revenues
by approximately $334,000 (2.25% of Class B net assets at that date). As of July
31, 1997, direct cash revenues for the period since the commencement of
operations of Class B shares exceeded direct cash expenses by $75,156 (0.64% of
Class B net assets at that date). As of December 31, 1996, the fully allocated
accrual expenses incurred by the Distributor and Merrill Lynch for the period
since the commencement of operations of Class C shares exceeded fully allocated
accrual revenues by approximately $1,000 (0.12% of Class C net assets at that
date). As of July 31, 1997, direct cash revenues for the period since the
commencement of operations of Class C shares exceeded direct cash expenses by
$3,759 (0.35% of Class C net assets at that date).
28
<PAGE>
LIMITATIONS ON THE PAYMENT OF DEFERRED SALES CHARGES
The maximum sales charge rule in the Conduct Rules of the NASD imposes a
limitation on certain asset-based sales charges such as the distribution fee and
the CDSC borne by the Class B and Class C shares, but not the account
maintenance fee. The maximum sales charge rule is applied separately to each
class. As applicable to the Fund, the maximum sales charge rule limits the
aggregate of distribution fee payments and CDSCs payable by the Fund to (1)
6.25% of eligible gross sales of Class B shares and Class C shares, computed
separately (defined to exclude shares issued pursuant to dividend reinvestments
and exchanges) plus (2) interest on the unpaid balance for the respective class,
computed separately, at the prime rate plus 1% (the unpaid balance being the
maximum amount payable minus amounts received from the payment of the
distribution fee and the CDSC). In connection with the Class B shares, the
Distributor has voluntarily agreed to waive interest charges on the unpaid
balance in excess of 0.50% of eligible gross sales. Consequently, the maximum
amount payable to the Distributor (referred to as the 'voluntary maximum') in
connection with the Class B shares is 6.75% of eligible gross sales. The
Distributor retains the right to stop waiving the interest charges at any time.
To the extent payments would exceed the voluntary maximum, the Fund will not
make further payments of the distribution fee with respect to Class B shares,
and any CDSCs will be paid to the Fund rather than to the Distributor; however,
the Fund will continue to make payments of the account maintenance fee. In
certain circumstances the amount payable pursuant to the voluntary maximum may
exceed the amount payable under the NASD formula. In such circumstances,
payments in excess of the amount payable under the NASD formula will not be
made.
The Fund has no obligation with respect to distribution and/or account
maintenance-related expenses incurred by the Distributor and Merrill Lynch in
connection with Class B, Class C and Class D shares, and there is no assurance
that the Trustees of the Trust will approve the continuance of the Distribution
Plans from year to year. However, the Distributor intends to seek annual
continuation of the Distribution Plans. In their review of the Distribution
Plans, the Trustees will be asked to take into consideration expenses incurred
in connection with the account maintenance and/or distribution of each class of
shares separately. The initial sales charges, the account maintenance fee, the
distribution fee and/or the CDSCs received with respect to one class will not be
used to subsidize the sale of shares of another class. Payments of the
distribution fee on Class B shares will terminate upon conversion of those Class
B shares into Class D shares as set forth under 'Deferred Sales Charge
Alternatives--Class B and Class Shares--Conversion of Class B Shares to Class D
Shares.'
REDEMPTION OF SHARES
The Trust is required to redeem for cash all shares of the Fund upon
receipt of a written request in proper form. The redemption price is the net
asset value per share next determined after the initial receipt of proper notice
of redemption. Except for any CDSC that may be applicable, there will be no
charge for redemption if the redemption request is sent directly to the Transfer
Agent. Shareholders liquidating their holdings will receive upon redemption all
dividends reinvested through the date of redemption. The value of shares at the
time of redemption may be more or less than the shareholder's cost, depending on
the market value of the securities held by the Fund at such time.
REDEMPTION
A shareholder wishing to redeem shares may do so, without charge, by
tendering the shares directly to the Transfer Agent, Merrill Lynch Financial
Data Services, Inc., P.O. Box 45289, Jacksonville, Florida 32232-5289.
Redemption requests delivered other than by mail should be delivered to Merrill
Lynch Financial Data Services, Inc., 4800 Deer Lake Drive East, Jacksonville,
Florida 32246-6484. Proper notice of redemption in the case of shares deposited
with the Transfer Agent may be accomplished by a written letter requesting
redemption. Proper
29
<PAGE>
notice of redemption in the case of shares for which certificates have been
issued may be accomplished by a written letter as noted above accompanied by
certificates for the shares to be redeemed. Redemption requests should not be
sent to the Trust. The redemption request in either event requires the
signature(s) of all persons in whose name(s) the shares are registered, signed
exactly as such name(s) appear(s) on the Transfer Agent's register. The
signature(s) on the redemption request must be guaranteed by an 'eligible
guarantor institution' as such is defined in Rule 17Ad-15 under the Securities
Exchange Act of 1934, as amended, the existence and validity of which may be
verified by the Transfer Agent through the use of industry publications.
Notarized signatures are not sufficient. In certain instances, the Transfer
Agent may require additional documents such as, but not limited to, trust
instruments, death certificates, appointments as executor or administrator, or
certificates of corporate authority. For shareholders redeeming directly with
the Transfer Agent, payments will be mailed within seven days of receipt of a
proper notice of redemption.
At various times the Trust may be requested to redeem Fund shares for which
it has not yet received good payment (e.g., cash, Federal funds or certified
check drawn on a United States bank). The Trust may delay or cause to be delayed
the mailing of a redemption check until such time as it has assured itself that
good payment has been collected for the purchase of such Fund shares, which will
not exceed 10 days.
REPURCHASE
The Trust also will repurchase Fund shares through a shareholder's listed
securities dealer. The Trust normally will accept orders to repurchase Fund
shares by wire or telephone from dealers for their customers at the net asset
value next computed after receipt of the order by the dealer, provided that the
request for repurchase is received by the dealer prior to the close of business
on the NYSE (generally, 4:00 p.m. New York time) on the day received and such
request is received by the Trust from such dealer not later than 30 minutes
after the close of business on the NYSE, on the same day. Dealers have the
responsibility to submit such repurchase requests to the Fund not later than 30
minutes after the close of business on the NYSE in order to obtain that day's
closing price.
The foregoing repurchase arrangements are for the convenience of
shareholders and do not involve a charge by the Trust (other than any applicable
CDSC). Securities firms that 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 $5.35) to confirm a repurchase of shares to such
customers. Repurchases made directly through the Fund's Transfer Agent are not
subject to the processing fee. The Trust reserves the right to reject any order
for repurchase, which right of rejection might adversely affect shareholders
seeking redemption through the repurchase procedure. However, a shareholder
whose order for repurchase is rejected by the Trust may redeem Fund shares as
set forth above.
Redemption payments will be made within seven days of the proper tender of
the certificates, if any, and stock power or letter requesting redemption, in
each instance with signatures guaranteed as noted above.
REINSTATEMENT PRIVILEGE--CLASS A AND CLASS D SHARES
Shareholders who have redeemed their Class A or Class D shares have a
privilege to reinstate their accounts by purchasing Class A or Class D shares,
as the case may be, of the Fund at net asset value without a sales charge up to
the dollar amount redeemed. The reinstatement privilege may be exercised by
sending a notice of exercise along with a check for the amount to be reinstated
to the Transfer Agent within 30 days after the date the request for redemption
was accepted by the Transfer Agent or the Distributor. Alternatively, the
reinstatement privilege may be exercised through the investor's Merrill Lynch
Financial Consultant within 30 days after the date the request for redemption
was accepted by the Transfer Agent or the Distributor. The reinstatement will be
made at
30
<PAGE>
the net asset value per share next determined after the notice of reinstatement
is received and cannot exceed the amount of the redemption proceeds.
SHAREHOLDER SERVICES
The Trust offers a number of shareholder services and investment plans
described below that are designed to facilitate investment in shares of the
Fund. Full details as to each of such services, copies of the various plans
described below, and instructions as to how to participate in the various
services or plans, or to change options with respect thereto can be obtained
from the Trust by calling the telephone number on the cover page hereof or from
the Distributor or Merrill Lynch.
INVESTMENT ACCOUNT
Each shareholder whose account is maintained at the Transfer Agent has an
Investment Account and will receive statements at least quarterly from the
Transfer Agent. These statements will serve as transaction confirmations for
automatic investment purchases and the reinvestment of ordinary income dividends
and long-term capital gains distributions. These statements will also show any
other activity in the account since the preceding statement. Shareholders will
receive separate transaction confirmations for each purchase or sale transaction
other than automatic investment purchases and the reinvestment of ordinary
income dividends and long-term capital gains distributions. A shareholder may
make additions to his or her Investment Account at any time by mailing a check
directly to the Transfer Agent. Shareholders may also maintain their accounts
through Merrill Lynch. Upon the transfer of shares out of a Merrill Lynch
brokerage account, an Investment Account in the transferring shareholder's name
will be opened automatically at the Transfer Agent. Shareholders considering
transferring their Class A or Class D shares from Merrill Lynch to another
brokerage firm or financial institution should be aware that, if the firm to
which the Class A or Class D shares are to be transferred will not take delivery
of shares of the Fund, a shareholder either must redeem the Class A or Class D
shares (paying any applicable CDSC) so that the cash proceeds can be transferred
to the account at the new firm or such shareholder must continue to maintain an
Investment Account at the Transfer Agent for those Class A or Class D shares.
Shareholders interested in transferring their Class B or Class C shares from
Merrill Lynch and who do not wish to have an Investment Account maintained for
such shares at the Transfer Agent may request their new brokerage firm to
maintain such shares in an account registered in the name of the brokerage firm
for the benefit of the shareholder at the Transfer Agent. If the new brokerage
firm is willing to accommodate the shareholder in this manner, the shareholder
must request that he or she be issued certificates for such shares and then must
turn the certificates over to the new firm for re-registration as described in
the preceding sentence.
EXCHANGE PRIVILEGE
U.S. shareholders of each class of shares of the Fund have an exchange
privilege with certain other MLAM-advised mutual funds. There is currently no
limitation on the number of times a shareholder may exercise the exchange
privilege. The exchange privilege may be modified or terminated at any time in
accordance with the rules of the Commission.
Under the Merrill Lynch Select Pricing(Service Mark) System, Class A
shareholders may exchange Class A shares of the Fund for Class A shares of a
second MLAM-advised mutual fund if the shareholder holds any Class A shares of
the second fund in the account in which the exchange is made at the time of the
exchange or is otherwise eligible to purchase Class A shares of the second fund.
If the Class A shareholder wants to exchange Class A shares for shares of a
second MLAM-advised mutual fund, and the shareholder does not hold Class A
shares of the second fund in his or her account at the time of the exchange and
is not otherwise eligible to acquire Class A shares of
31
<PAGE>
the second fund, the shareholder will receive Class D shares of the second fund
as a result of the exchange. Class D shares also may be exchanged for Class A
shares of a second MLAM-advised mutual fund at any time as long as, at the time
of the exchange, the shareholder holds Class A shares of the second fund in the
account in which the exchange is made or is otherwise eligible to purchase Class
A shares of the second fund.
Exchanges of Class A and Class D shares are made on the basis of the
relative net asset values per Class A or Class D share, respectively, plus an
amount equal to the difference, if any, between the sales charge previously paid
on the Class A or Class D shares being exchanged and the sales charge payable at
the time of the exchange on the shares being acquired.
Class B, Class C and Class D shares are exchangeable with shares of the
same class of other MLAM-advised mutual funds.
Shares of the Fund that are subject to a CDSC are exchangeable on the basis
of relative net asset value per share without the payment of any CDSC that might
otherwise be due upon redemption of the shares of the Fund. For purposes of
computing the CDSC that may be payable upon a disposition of the shares acquired
in the exchange, the holding period for the previously owned shares of the Fund
is 'tacked' to the holding period for the newly acquired shares of the other
fund.
Class A, Class B, Class C and Class D shares also are exchangeable for
shares of certain MLAM-advised money market funds specifically designated as
available for exchange by holders of Class A, Class B, Class C or Class D
shares. The period of time that Class A, Class B, Class C or Class D shares are
held in a money market fund, however, will not count toward satisfaction of the
holding period requirement for reduction of any CDSC imposed on such shares, if
any, and, with respect to Class B shares, toward satisfaction of the Conversion
Period.
Class B shareholders of the Fund exercising the exchange privilege will
continue to be subject to the Fund's CDSC schedule if such schedule is higher
than the CDSC schedule relating to the new Class B shares. In addition, Class B
shares of the Fund acquired through use of the exchange privilege will be
subject to the Fund's CDSC schedule if such schedule is higher than the CDSC
schedule relating to the Class B shares of the MLAM-advised mutual fund from
which the exchange has been made.
Exercise of the exchange privilege is treated as a sale of the exchanged
shares and a purchase of the acquired shares for Federal income tax purposes.
For further information, see 'Shareholder Services--Exchange Privilege' in the
Statement of Additional Information.
AUTOMATIC REINVESTMENT OF DIVIDENDS AND CAPITAL GAINS DISTRIBUTIONS
All dividends and capital gains distributions are reinvested automatically
in full and fractional shares of the Fund, without a sales charge, at the net
asset value per share at the close of business on the monthly payment date for
such dividends and distributions. A shareholder may at any time, by written
notification to Merrill Lynch if the shareholder's account is maintained with
Merrill Lynch or by written notification or by telephone (1-800-MER-FUND) to the
Transfer Agent if the shareholder's account is maintained with the Transfer
Agent, elect to have subsequent dividends or both dividends and capital gains
distributions paid in cash, rather than reinvested, in which event payment will
be mailed monthly. The Fund is not responsible for any failure of delivery to
the shareholder's address of record and no interest will accrue on amounts
represented by uncashed distribution or redemption checks. Cash payments can
also be directly deposited to the shareholder's bank account. No CDSC will be
imposed upon redemption of shares issued as a result of the automatic
reinvestment of dividends or capital gains distributions.
32
<PAGE>
SYSTEMATIC WITHDRAWAL PLANS
A shareholder may elect to receive systematic withdrawal payments from his
or her Investment Account through automatic payment by check or through
automatic payment by direct deposit to his or her bank account on either a
monthly or quarterly basis. Alternatively, a shareholder whose shares are held
within a CMA(Registered) or CBA(Registered) account may elect to have shares
redeemed on a monthly, bimonthly, quarterly, semiannual or annual basis through
the CMA(Registered) or CBA(Registered) Systematic Redemption Program, subject to
certain conditions. With respect to redemptions of Class B or Class C shares
pursuant to a systematic withdrawal plan, the maximum number of Class B or Class
C shares that can be redeemed from an account annually shall not exceed 10% of
the value of shares of such class in that account at the time the election to
join the systematic withdrawal plan was made. Any CDSC that otherwise might be
due on such redemption of Class B or Class C shares will be waived. Shares
redeemed pursuant to a systematic withdrawal plan will be redeemed in the same
order as Class B or Class C shares are otherwise redeemed. See 'Purchase of
Shares--Deferred Sales Charge Alternatives--Class B and Class C
Shares--Contingent Deferred Sales Charges--Class B Shares' and '--Contingent
Deferred Sales Charges--Class C Shares.' Where the systematic withdrawal plan is
applied to Class B shares, upon conversion of the last Class B shares in an
account to Class D shares, the systematic withdrawal plan will automatically be
applied thereafter to Class D shares. See 'Purchase of Shares-- Deferred Sales
Charge Alternatives--Class B and Class C Shares--Conversion of Class B Shares to
Class D Shares.'
AUTOMATIC INVESTMENT PLANS
Regular additions of Class A, Class B, Class C and Class D shares may be
made to an investor's Investment Account by prearranged charges of $50 or more
to his or her regular bank account. Alternatively, investors who maintain
CMA(Registered) or CBA(Registered) accounts may arrange to have periodic
investments made in the Fund in their CMA(Registered) or CBA(Registered) account
or in certain related accounts in amounts of $100 or more through the
CMA(Registered) or CBA(Registered) Automated Investment Program.
FEE-BASED PROGRAMS
Certain Merrill Lynch fee-based programs, including pricing alternatives
for securities transactions (each referred to in this paragraph as a 'Program'),
may permit the purchase of Class A shares at net asset value. Under specified
circumstances, participants in certain Programs may deposit other classes of
shares which will be exchanged for Class A shares. Initial or deferred sales
charges otherwise due in connection with such exchanges may be waived or
modified, as may the Conversion Period applicable to the deposited shares.
Termination of participation in a Program may result in the redemption of shares
held therein or the automatic exchange thereof to another class at net asset
value, which may be shares of a money market fund. In addition, upon termination
of participation in a Program, shares that have been held for less than
specified periods within such Program may be subject to a fee based upon the
current value of such shares. These Programs also generally prohibit such shares
from being transferred to another account at Merrill Lynch, to another
broker-dealer or to the Transfer Agent. Except in limited circumstances (which
may also involve an exchange as described above), such shares must be redeemed
and another class of shares purchased (which may involve the imposition of
initial or deferred sales charges and distribution and account maintenance fees)
in order for the investment not to be subject to Program fees. Additional
information regarding a specific Program (including charges and limitations on
transferability applicable to shares that may be held in such Program) is
available in such Program's client agreement and from the Transfer Agent at
(800) MER-FUND or (800) 637-3863.
33
<PAGE>
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 Fund
may not purchase securities, including Municipal Bonds, during the existence of
any underwriting syndicate of which Merrill Lynch is a member or in a private
placement in which Merrill Lynch serves as placement agent except pursuant to
procedures approved by the Trustees of the Trust which either comply with rules
adopted by the Commission or with interpretations of the Commission staff. An
affiliated person of the Trust may serve as its broker in over-the-counter
transactions conducted for the Fund on an agency basis only.
DISTRIBUTIONS AND TAXES
DISTRIBUTIONS
The net investment income of the Fund is declared as dividends prior to the
determination of the net asset value, which is calculated 15 minutes after the
close of business on the NYSE (generally, 4:00 p.m., New York time) on that day.
The net investment income of the Fund for dividend purposes consists of interest
earned on portfolio securities, less expenses, in each case computed since the
most recent determination of the net asset value. Expenses of the Fund,
including the management fees and the account maintenance and distribution fees,
are accrued daily. Dividends of net investment income are declared daily and
reinvested monthly in the form of additional full and fractional shares of the
Fund at net asset value as of the close of business on the 'payment date' unless
the shareholder elects to receive such dividends in cash. Shares will accrue
dividends as long as they are issued and outstanding. Shares are issued and
outstanding from the settlement date of a purchase order to the day prior to
settlement date of a redemption order.
All net realized capital gains, if any, are declared and distributed to the
Fund's shareholders at least annually. Capital gains distributions will be
reinvested automatically in shares unless the shareholder elects to receive such
distributions in cash.
The per share dividends and distributions on each class of shares will be
reduced as a result of any account maintenance, distribution and transfer agency
fees applicable to that class. See 'Additional Information--Determination of
Net Asset Value.'
34
<PAGE>
See 'Shareholder Services' for information as to how to elect either
dividend reinvestment or cash payments. Portions of dividends and distributions
which are taxable to shareholders as described below are subject to income tax
whether they are reinvested in shares of the Fund or received in cash.
TAXES
The Trust intends to continue to qualify the Fund for the special tax
treatment afforded regulated investment companies ('RICs') under the Code. As
long as it so qualifies, the Fund (but not its shareholders) will not be subject
to Federal income tax to the extent that it distributes its net investment
income and net realized capital gains. The Trust intends to cause the Fund to
distribute substantially all of such income.
To the extent that the dividends distributed to the Fund's Class A, Class
B, Class C and Class D shareholders (together, the 'shareholders') are derived
from interest income exempt from Federal income tax under Code Section 103(a)
and are properly designated as 'exempt-interest dividends' 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 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 advisors before purchasing Fund
shares. Holders should consult their own tax advisors regarding collateral New
Mexico income tax consequences relating to the ownership of shares of the Fund,
including, but not limited to, the inclusion of tax-exempt income attributable
to ownership of shares in 'modified gross income,' as that term is used in the
New Mexico Income Tax Act, as amended, for purposes of determining eligibility
for and the amount of various New Mexico credits and rebates.
Shares of the Fund will not be subject to the New Mexico personal property
tax.
Distributions from investment income and capital gains of the Fund,
including exempt-interest dividends, may also be subject to state taxes in
states other than New Mexico and may be subject to local taxes in other states.
Accordingly, investors in the Fund should consult their tax advisors with
respect to the application of such taxes to the receipt of Fund dividends and to
the holding of shares in the Fund.
To the extent that the Fund's distributions are derived from interest on
its taxable investments or from an excess of net short-term capital gains over
net long-term capital losses ('ordinary income dividends'), such distributions
are considered ordinary income for Federal and New Mexico income tax purposes.
Distributions, if any, from an excess of net long-term capital gains over net
short-term capital losses derived from the sale of securities or from certain
transactions in futures or options ('capital gain dividends') are taxable as
long-term capital gains for Federal income tax purposes, regardless of the
length of time the shareholder has owned Fund shares and, for New Mexico income
tax purposes, are treated as capital gains which are taxed at ordinary income
rates. Recent legislation creates additional categories of capital gains taxable
at different rates. Not later than 60 days after the close of its taxable year,
the Fund will provide its shareholders with a written notice designating the
amounts of any exempt-interest dividends, ordinary income dividends or capital
gain dividends, as well as the
35
<PAGE>
amount of capital gain dividends in the different categories of capital gain
referred to above. Distributions by the Fund, whether from exempt-interest
income, ordinary income or capital gains, will not be eligible for the dividends
received deduction allowed to corporations under the Code.
All or a portion of the Fund's gain from the sale or redemption of
tax-exempt obligations purchased at a market discount will be treated as
ordinary income rather than capital gain. This rule may increase the amount of
ordinary income dividends received by shareholders. Distributions in excess of
the Fund's earnings and profits will first reduce the adjusted tax basis of a
holder's shares and, after such adjusted tax basis is reduced to zero, will
constitute capital gains to such holder (assuming the shares are held as a
capital asset). Any loss upon the sale or exchange of shares held for six months
or less will be disallowed to the extent of any exempt-interest dividends
received by the shareholder. In addition, any such loss that is not disallowed
under the rule stated above will be treated as long-term capital loss to the
extent of any capital gain dividends received by the shareholder. If the Fund
pays a dividend in January which was declared in the previous October, November
or December to shareholders of record on a specified date in one of such months,
then such dividend will be treated for tax purposes as being paid by the Fund
and received by its shareholders on December 31 of the year in which such
dividend was declared.
The Code subjects interest received on certain otherwise tax-exempt
securities to an alternative minimum tax. The alternative minimum tax applies to
interest received on certain 'private activity bonds' issued after August 7,
1986. Private activity bonds are bonds which, although tax-exempt, are used for
purposes other than those generally performed by governmental units and which
benefit non-governmental entities (e.g., bonds used for industrial development
or housing purposes). Income received on such bonds is classified as an item of
'tax preference,' which could subject certain investors in such bonds, including
shareholders of the Fund, to an alternative minimum tax. The Fund will purchase
such 'private activity bonds,' and the Trust will report to shareholders within
60 days after the Fund's taxable year-end the portion of its dividends declared
during the year which constitutes an item of tax preference for alternative
minimum tax purposes. The Code further provides that corporations are subject to
an alternative minimum tax based, in part, on certain differences between
taxable income as adjusted for other tax preferences and the corporation's
'adjusted current earnings,' which more closely reflect a corporation's economic
income. Because an exempt-interest dividend paid by the Fund will be included in
adjusted current earnings, a corporate shareholder may be required to pay
alternative minimum tax on exempt-interest dividends paid by the Fund.
No gain or loss will be recognized by Class B shareholders on the
conversion of their Class B shares into Class D shares. A shareholder's basis in
the Class D shares acquired will be the same as such shareholder's basis in the
Class B shares converted, and the holding period of the acquired Class D shares
will include the holding period for the converted Class B shares.
If a shareholder exercises an exchange privilege within 90 days of
acquiring the shares, then the loss the shareholder can recognize on the
exchange will be reduced (or the gain increased) to the extent any sales charge
paid to the Fund on the exchanged shares reduces any sales charge the
shareholder would have owed upon purchase of the new shares in the absence of
the exchange privilege. Instead, such sales charge will be treated as an amount
paid for the new shares.
A loss realized on a sale or exchange of shares of the Fund will be
disallowed if other Fund shares are acquired (whether through the automatic
reinvestment of dividends or otherwise) within a 61-day period beginning 30
days before and ending 30 days after the date that the shares are disposed of.
In such a case, the basis of the shares acquired will be adjusted to reflect
the disallowed loss.
36
<PAGE>
Under certain Code provisions, some shareholders may be subject to a 31%
withholding tax on certain ordinary income dividends and on capital gain
dividends and redemption payments ('backup withholding'). Generally,
shareholders subject to backup withholding will be those for whom no certified
taxpayer identification number is on file with the Trust or who, to the Trust's
knowledge, have furnished an incorrect number. When establishing an account, an
investor must certify under penalty of perjury that such number is correct and
that such investor is not otherwise subject to backup withholding.
The Code provides that every person required to file a tax return must
include for information purposes on such return the amount of exempt-interest
dividends received from all sources (including the Fund) during the taxable
year.
The foregoing is a general and abbreviated summary of the applicable
provisions of the Code, Treasury regulations and 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 advisors regarding the
availability of any exemptions from state or local taxes and with specific
questions as to Federal, foreign, state or local taxes.
PERFORMANCE DATA
From time to time the Fund may include its average annual total return,
yield and tax-equivalent yield for various specified time periods in
advertisements or information furnished to present or prospective shareholders.
Average annual total return, yield and tax-equivalent yield are computed
separately for Class A, Class B, Class C and Class D shares in accordance with
formulas specified by the Commission.
Average annual total return quotations for the specified periods will be
computed by finding the average annual compounded rates of return (based on net
investment income and any realized and unrealized capital gains or losses on
portfolio investments over such periods) that would equate the initial amount
invested to the redeemable value of such investment at the end of each period.
Average annual total return will be computed assuming all dividends and
distributions are reinvested and taking into account all applicable recurring
and nonrecurring expenses, including any CDSC that would be applicable to a
complete redemption of the investment at the end of the specified period such as
in the case of Class B and Class C shares and the maximum sales charge in the
case of Class A and Class D shares. Dividends paid by the Fund with respect to
all shares, to the extent any dividends are paid, will be calculated in the same
manner at the same time on the same day and will be in the same amount, except
that account maintenance fees and distribution charges and any incremental
transfer agency costs relating to each class of shares will be borne exclusively
by that class. The Fund will include performance data for all classes of shares
of the Fund in any advertisement or information including performance data of
the Fund.
The Fund also may quote total return and aggregate total return performance
data for various specified time periods. Such data will be calculated
substantially as described above, except that (1) the rates of return calculated
will not be average annual rates, but rather, actual annual, annualized or
aggregate rates of return and (2) the maximum applicable sales charges will not
be included with respect to annual or annualized rates of return calculations.
Aside from the impact on the performance data calculations of including or
excluding the maximum applicable sales charges, actual annual or annualized
total return data generally will be lower than average annual total return data
since the average annual rates of return reflect compounding. Aggregate total
return data generally will be higher than average annual total return data since
the aggregate rates of return reflect
37
<PAGE>
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 or Class D shares or waiver of the CDSC in the case of Class B shares,
the performance data may take into account the reduced, and not the maximum,
sales charge or may not take into account the CDSC and therefore may reflect
greater total return since, due to the reduced sales charges or waiver of the
CDSC, a lower amount of expenses is deducted. See 'Purchase of Shares.' The
Fund's total return may be expressed either as a percentage or as a dollar
amount in order to illustrate such total return on a hypothetical $1,000
investment in the Fund at the beginning of each specified period.
Yield quotations will be computed based on a 30-day period by dividing (a)
the net income based on the yield of each security earned during the period by
(b) the average daily number of shares outstanding during the period that were
entitled to receive dividends multiplied by the maximum offering price per share
on the last day of the period. Tax equivalent yield quotations will be computed
by dividing (a) the part of the Fund's yield that is tax-exempt by (b) one minus
a stated tax rate and (c) adding the result to that part, if any, of the Fund's
yield that is not tax-exempt. The yield for the 30-day period ended July 31,
1997 was 4.39% for Class A shares, 4.08% for Class B shares, 3.97% for Class C
shares and 4.30% for Class D shares, and the tax-equivalent yield for the same
period (based on a Federal income tax rate of 28%) was 6.10% for Class A shares,
5.67% for Class B shares, 5.51% for Class C shares and 5.97% for Class D shares.
The yield without voluntary reimbursement for the 30-day period would have been
3.96% for Class A shares, 3.63% for Class B shares, 3.53% for Class C shares and
3.87% for Class D shares with a tax equivalent yield of 5.50% for Class A
shares, 5.04% for Class B shares, 4.90% for Class C shares and 5.38% for Class D
shares.
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, yield and tax-equivalent yield will vary depending on market
conditions, the securities comprising the Fund's portfolio, the Fund's operating
expenses and the amount of realized and unrealized net capital gains or losses
during the period. The value of an investment in the Fund will fluctuate and an
investor's shares, when redeemed, may be worth more or less than their original
cost.
On occasion, the Fund may compare its performance to performance data
published by Lipper Analytical Services, Inc., Morningstar Publications, Inc.
('Morningstar') and CDA Investment Technology, Inc., or to data contained in
publications such as Money Magazine, U.S. News & World Report, Business Week,
Forbes Magazine and Fortune Magazine. From time to time, the Fund may include
the Fund's Morningstar risk-adjusted performance ratings in advertisements or
supplemental sales literature. As with other performance data, performance
comparisons should not be considered indicative of the Fund's relative
performance for any future period.
ADDITIONAL INFORMATION
DETERMINATION OF NET ASSET VALUE
The net asset value of the shares of all classes of the Fund is determined
by the Manager once daily 15 minutes after the close of business on the NYSE
(generally, 4:00 p.m., New York time), on each day during which the NYSE is open
for trading. The net asset value per share is computed by dividing the sum of
the value of the securities held by the Fund plus any cash or other assets
(including interest and dividends accrued but not yet received) minus all
liabilities (including accrued expenses) by the total number of shares
outstanding at such time, rounded to the nearest cent. Expenses, including the
fees payable to the Manager and the Distributor, are accrued daily.
The per share net asset value of the Class A shares generally will be
higher than the per share net asset value of shares of the other classes,
reflecting the daily expense accruals of the account maintenance, distribution
and
38
<PAGE>
higher transfer agency fees applicable with respect to Class B and Class C
shares and the daily expense accruals of the account maintenance fees applicable
with respect to Class D shares; moreover, the per share net asset value of Class
D shares generally will be higher than the per share net asset value of Class B
and Class C shares, reflecting the daily expense accruals of the distribution
fees, higher account maintenance fees and higher transfer agency fees applicable
with respect to Class B and Class C shares. It is expected, however, that the
per share net asset value of the classes will tend to converge (although not
necessarily meet) immediately after the payment of dividends or distributions
which will differ by approximately the amount of the expense accrual
differentials between the classes.
ORGANIZATION OF THE TRUST
The Trust is a business trust organized on August 2, 1985 under the laws of
Massachusetts. On October 1, 1987, the Trust changed its name from 'Merrill
Lynch Multi-State Tax-Exempt Series Trust' to 'Merrill Lynch Multi-State
Municipal Bond Series Trust,' and on December 22, 1987 the Trust again changed
its name to 'Merrill Lynch Multi-State Municipal Series Trust.' The Trust is an
open-end management investment company comprised of separate series ('Series'),
each of which is a separate portfolio offering shares to selected groups of
purchasers. Each of the Series is managed independently in order to provide to
shareholders who are residents of the state to which such Series relates as high
a level of income exempt from Federal, and, in certain cases, state and local
income taxes as is consistent with prudent investment management. The Trustees
are authorized to create an unlimited number of Series and, with respect to each
Series, to issue an unlimited number of full and fractional shares of beneficial
interest, $.10 par value per share, of different classes. Shareholder approval
is not required for the authorization of additional Series or classes of a
Series of the Trust. At the date of this Prospectus, the shares of the Fund are
divided into Class A, Class B, Class C and Class D shares. Class A, Class B,
Class C and Class D shares represent interests in the same assets of the Fund
and are identical in all respects except that Class B, Class C and Class D
shares bear certain expenses relating to the account maintenance associated with
such shares, and Class B and Class C shares bear certain expenses relating to
the distribution of such shares. Each class has exclusive voting rights with
respect to matters relating to distribution and/or account maintenance
expenditures, as applicable. See 'Purchase of Shares.' The Trustees of the Trust
may classify and reclassify the shares of any Series into additional or other
classes at a future date.
Shareholders are entitled to one vote for each full share and to fractional
votes for fractional shares held in the election of Trustees (to the extent
hereinafter provided) and on other matters submitted to the vote of
shareholders. There normally will be no meeting of shareholders for the purpose
of electing Trustees unless and until such time as less than a majority of the
Trustees holding office have been elected by shareholders, at which time the
Trustees then in office will call a shareholders' meeting for the election of
Trustees. Shareholders may, in accordance with the terms of the Declaration of
Trust, cause a meeting of shareholders to be held for the purpose of voting on
the removal of Trustees. Also, the Trust will be required to call a special
meeting of shareholders of a Series in accordance with the requirements of the
1940 Act to seek approval of new management and advisory arrangements, of a
material increase in distribution fees or of a change in the fundamental
policies, objectives or restrictions of a Series. Except as set forth above, the
Trustees shall continue to hold office and appoint successor Trustees. Upon
liquidation or dissolution of a Series, each issued and outstanding share of
that Series is entitled to participate equally in dividends and distributions
declared with respect to that Series and in net assets of such Series remaining
after satisfaction of outstanding liabilities except that, as noted above, the
Class B, Class C and Class D shares bear certain additional expenses. The
obligations and liabilities of a particular Series are restricted to the assets
of that Series and do not extend to the assets of the Trust generally. The
shares of each Series, when issued, will be fully-paid and non-assessable by
the Trust.
39
<PAGE>
SHAREHOLDER REPORTS
Only one copy of each shareholder report and certain shareholder
communications will be mailed to each identified shareholder regardless of the
number of accounts such shareholder has. If a shareholder wishes to receive
separate copies of each report and communication for each of the shareholder's
related accounts, the shareholder should notify in writing:
Merrill Lynch Financial Data Services, Inc.
P.O. Box 45289
Jacksonville, FL 32232-5289
The written notification should include the shareholder's name, address,
tax identification number and Merrill Lynch, Pierce, Fenner & Smith Incorporated
and/or mutual fund account numbers. If you have any questions regarding this
matter please call your Merrill Lynch Financial Consultant or Merrill Lynch
Financial Data Services, Inc. at 800-637-3863.
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, 1982, 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.
40
<PAGE>
MERRILL LYNCH NEW MEXICO MUNICIPAL BOND FUND--AUTHORIZATION FORM (PART 1)
- --------------------------------------------------------------------------------
1. SHARE PURCHASE APPLICATION
I, being of legal age, wish to purchase: (choose one)
/ / Class A shares / / Class B shares / / Class C shares / / Class D
shares
of Merrill Lynch New Mexico Municipal Bond Fund and establish an Investment
Account as described in the Prospectus. In the event that I am not eligible to
purchase Class A shares, I understand that Class D shares will be purchased.
Basis for establishing an Investment Account:
A. I enclose a check for $ ..... payable to Merrill Lynch Financial Data
Services, Inc., as an initial investment (minimum
$1,000). I understand that this purchase will be executed at the applicable
offering price next to be determined after this Application is received by
you.
B. I already own shares of the following Merrill Lynch mutual funds that
would qualify for the right of accumulation as outlined in the Statement of
Additional Information: (Please list all funds. Use a separate sheet of
paper if necessary.)
<TABLE>
<S> <C>
1. ...................................................... 4. ......................................................
2. ...................................................... 5. ......................................................
3. ...................................................... 6. ......................................................
Name..................................................................................................................
First Name Initial Last Name
Name of Co-Owner (if any).............................................................................................
First Name Initial Last Name
Address...............................................................................................................
.......................................................... Date......................................................
(Zip Code)
Occupation................................................ Name and Address of Employer..............................
..........................................................
..........................................................
.......................................................... ..........................................................
Signature of Owner Signature of Co-Owner (if any)
(In the case of co-owners, a joint tenancy with right of survivorship will be presumed unless otherwise specified.)
</TABLE>
- --------------------------------------------------------------------------------
2. DIVIDEND AND CAPITAL GAIN DISTRIBUTION OPTIONS
<TABLE>
<S> <C>
Ordinary Income Dividends Long-Term Capital Gains
SELECT / / Reinvest SELECT / / Reinvest
ONE: / / Cash ONE: / / Cash
</TABLE>
If no election is made, dividends and capital gains will be automatically
reinvested at net asset value without a sales charge.
IF CASH, SPECIFY HOW YOU WOULD LIKE YOUR DISTRIBUTIONS PAID TO YOU: / / Check
or / / Direct Deposit to bank account
IF DIRECT DEPOSIT TO BANK ACCOUNT IS SELECTED, PLEASE COMPLETE BELOW:
I hereby authorize payment of dividend and capital gain distributions by direct
deposit to my bank account and, if necessary, debit entries and adjustments for
any credit entries made to my account in accordance with the terms I have
selected on the Merrill Lynch New Mexico Municipal Bond Fund Authorization Form.
SPECIFY TYPE OF ACCOUNT (CHECK ONE): / / checking / / savings
Name on your account ...........................................................
Bank Name ......................................................................
Bank Number ......................... Account Number .........................
Bank Address ...................................................................
I AGREE THAT THIS AUTHORIZATION WILL REMAIN IN EFFECT UNTIL I PROVIDE WRITTEN
NOTIFICATION TO MERRILL LYNCH FINANCIAL DATA SERVICES, INC. AMENDING OR
TERMINATING THIS SERVICE.
Signature of Depositor .........................................................
Signature of Depositor ......................... Date ........................
(If joint account, both must sign)
NOTE: IF DIRECT DEPOSIT TO BANK ACCOUNT IS SELECTED, YOUR BLANK, UNSIGNED CHECK
MARKED 'VOID' OR A DEPOSIT SLIP FROM YOUR SAVINGS ACCOUNT SHOULD ACCOMPANY THIS
APPLICATION.
41
<PAGE>
MERRILL LYNCH NEW MEXICO MUNICIPAL BOND FUND--AUTHORIZATION FORM (PART
1)--(CONTINUED)
- --------------------------------------------------------------------------------
3. SOCIAL SECURITY NUMBER OR TAXPAYER IDENTIFICATION NUMBER
------------------------------------------
------------------------------------------
Social Security Number or Taxpayer Identification Number
Under penalty of perjury, I certify (1) that the number set forth above is
my correct Social Security Number or Taxpayer Identification Number and (2) that
I am not subject to backup withholding (as discussed in the Prospectus under
'Distributions and Taxes--Taxes') either because I have not been notified that I
am subject thereto as a result of a failure to report all interest or dividends,
or the Internal Revenue Service ('IRS') has notified me that I am no longer
subject thereto.
INSTRUCTION: YOU MUST STRIKE OUT THE LANGUAGE IN (2) ABOVE IF YOU HAVE BEEN
NOTIFIED THAT YOU ARE SUBJECT TO BACKUP WITHHOLDING DUE TO UNDERREPORTING AND IF
YOU HAVE NOT RECEIVED A NOTICE FROM THE IRS THAT BACKUP WITHHOLDING HAS BEEN
TERMINATED. THE UNDERSIGNED AUTHORIZES THE FURNISHING OF THIS CERTIFICATION TO
OTHER MERRILL LYNCH SPONSORED MUTUAL FUNDS.
<TABLE>
<S> <C>
...................................... .......................................
Signature of Owner Signature of Co-Owner (if any)
</TABLE>
- --------------------------------------------------------------------------------
4. LETTER OF INTENTION--CLASS A AND CLASS D SHARES ONLY (SEE TERMS AND
CONDITIONS IN THE STATEMENT OF ADDITIONAL INFORMATION)
.................. , 19 ......
Date of Initial Purchase
Dear Sir/Madam:
Although I am not obligated to do so, I intend to purchase shares of Merrill
Lynch New Mexico Municipal Bond Fund or any other investment company with an
initial sales charge or deferred sales charge for which Merrill Lynch Funds
Distributor, Inc. acts as distributor over the next 13-month period which will
equal or exceed:
/ / $25,000 / / $50,000 / / $100,000 / / $250,000 / / $1,000,000
Each purchase will be made at the then reduced offering price applicable to
the amount checked above, as described in the Merrill Lynch New Mexico Municipal
Bond Fund Prospectus.
I agree to the terms and conditions of the Letter of Intention. I hereby
irrevocably constitute and appoint Merrill Lynch Funds Distributor, Inc., my
attorney, with full power of substitution, to surrender for redemption any or
all shares of Merrill Lynch New Mexico Municipal Bond Fund held as security.
<TABLE>
<S> <C>
By: ................................... .......................................
Signature of Owner Signature of Co-Owner
(If registered in joint names, both
must sign)
</TABLE>
In making purchases under this letter, the following are the related
accounts on which reduced offering prices are to apply:
<TABLE>
<S> <C>
(1) Name .............................. (2) Name ..............................
Account Number ........................ Account Number ........................
</TABLE>
- --------------------------------------------------------------------------------
5. FOR DEALER ONLY
Branch Office, Address, Stamp
|- -|
|_ _|
This form, when completed, should be mailed to:
Merrill Lynch New Mexico Municipal Bond Fund
c/o Merrill Lynch Financial Data Services, Inc.
P.O. Box 45289
Jacksonville, Florida 32232-5289
We hereby authorize Merrill Lynch Funds Distributor, Inc. to act as our agent in
connection with transactions under this authorization form and agree to notify
the Distributor of any purchases or sales made under a Letter of Intention,
Automatic Investment Plan or Systematic Withdrawal Plan. We guarantee the
Shareholder's signature.
...............................................................................
Dealer Name and Address
By:.............................................................................
Authorized Signature of Dealer
<TABLE>
<S> <C>
/ / / / / / / ---------------------
Branch Code F/C No. F/C Last Name
/ / / / / / /
Dealer's Customer Account No.
</TABLE>
42
<PAGE>
MERRILL LYNCH NEW MEXICO MUNICIPAL BOND FUND--AUTHORIZATION FORM (PART 2)
- --------------------------------------------------------------------------------
<TABLE>
<S> <C> <C> <C> <C> <C>
1. ACCOUNT ---------------------------------
REGISTRATION ---------------------------------
(Please Print) Social Security Number
Name of Owner ............................... or Taxpayer Identification Number
First Name Initial Name Last
Name of Co-Owner (if any)
..............................................
First Name Initial Last Name
Address ......................................
.............................................. Account Number .................
(Zip Code) (if existing account)
</TABLE>
- --------------------------------------------------------------------------------
2. SYSTEMATIC WITHDRAWAL PLAN (SEE TERMS AND CONDITIONS IN THE STATEMENT OF
ADDITIONAL INFORMATION)
MINIMUM REQUIREMENTS: $10,000 for monthly disbursements, $5,000 for quarterly,
of / / Class A, / / Class B*, / / Class C* or / / Class D shares in Merrill
Lynch New Mexico Municipal Bond Fund at cost or current offering price.
Withdrawals to be made either (check one) / / Monthly on the 24th day of each
month, or / / Quarterly on the 24th day of March, June, September and December.
If the 24th falls on a weekend or holiday, the next succeeding business day will
be utilized. Begin systematic withdrawal on _______________, or as soon as
possible thereafter. (month)
SPECIFY THE AMOUNT OF THE WITHDRAWAL YOU WOULD LIKE PAID TO YOU (CHECK ONE): /
/ $_______________ of / / Class A, / / Class B*, / / Class C* or / / Class D
shares in the account.
SPECIFY WITHDRAWAL METHOD: / / check or / / direct deposit to bank account
(check one and complete part (a) or (b) below):
DRAW CHECKS PAYABLE (CHECK ONE)
(a) I hereby authorize payment by check
/ / as indicated in Item 1.
/ / to the order of ........................................................
Mail to (check one)
/ / the address indicated in Item 1.
/ / Name (please print) ....................................................
Address .......................................................................
.......................................................................
Signature of Owner ........................... Date ..........................
Signature of Co-Owner (if any) ................................................
(B) I HEREBY AUTHORIZE PAYMENT BY DIRECT DEPOSIT TO MY BANK ACCOUNT AND, IF
NECESSARY, DEBIT ENTRIES AND ADJUSTMENTS FOR ANY CREDIT ENTRIES MADE TO MY
ACCOUNT. I AGREE THAT THIS AUTHORIZATION WILL REMAIN IN EFFECT UNTIL I PROVIDE
WRITTEN NOTIFICATION TO MERRILL LYNCH FINANCIAL DATA SERVICES, INC. AMENDING OR
TERMINATING THIS SERVICE.
Specify type of account (check one): / / checking / / savings
Name on your account ...........................................................
Bank Name ......................................................................
Bank Number ......................... Account Number .........................
Bank Address ...................................................................
...................................................................
Signature of Depositor ......................... Date ........................
Signature of Depositor .........................................................
(If joint account, both must sign)
NOTE: IF DIRECT DEPOSIT IS ELECTED, YOUR BLANK, UNSIGNED CHECK MARKED 'VOID' OR
A DEPOSIT SLIP FROM YOUR SAVINGS ACCOUNT SHOULD ACCOMPANY THIS APPLICATION.
*ANNUAL WITHDRAWAL CANNOT EXCEED 10% OF THE VALUE OF SHARES OF SUCH CLASS HELD
IN THE ACCOUNT AT THE TIME THE ELECTION TO JOIN THE SYSTEMATIC WITHDRAWAL PLAN
IS MADE.
43
<PAGE>
MERRILL LYNCH NEW MEXICO MUNICIPAL BOND FUND--AUTHORIZATION FORM (PART
2)--(CONTINUED)
- --------------------------------------------------------------------------------
3. APPLICATION FOR AUTOMATIC INVESTMENT PLAN
I hereby request that Merrill Lynch Financial Data Services, Inc. draw an
automated clearing house ('ACH') debit on my checking account as described below
each month to purchase: (choose one)
/ / Class A shares / / Class B shares / / Class C shares / / Class D
shares
of Merrill Lynch New Mexico Municipal Bond Fund subject to the terms set forth
below. In the event that I am not eligible to purchase Class A shares, I
understand that Class D shares will be purchased.
MERRILL LYNCH FINANCIAL DATA SERVICES, INC.
You are hereby authorized to draw an ACH debit each month on my bank account for
investment in Merrill Lynch New Mexico Municipal Bond Fund, as indicated below:
Amount of each ACH debit $ ................................................
Account number ............................................................
Please date and invest ACH debits on the 20th of each month
beginning ___________________________________ or as soon thereafter as possible.
(Month)
I agree that you are drawing these ACH debits voluntarily at my request and
that you shall not be liable for any loss arising from any delay in preparing or
failure to prepare any such debit. If I change banks or desire to terminate or
suspend this program, I agree to notify you promptly in writing. I hereby
authorize you to take any action to correct erroneous ACH debits of my bank
account or purchases of Fund shares including liquidating shares of the Fund and
crediting my bank account. I further agree that if a check or debit is not
honored upon presentation, Merrill Lynch Financial Data Services, Inc. is
authorized to discontinue immediately the Automatic Investment Plan and to
liquidate sufficient shares held in my account to offset the purchase made with
the dishonored debit.
<TABLE>
<S> <C>
...................................... .......................................
Date Signature of Depositor
.......................................
Signature of Depositor
(If joint account, both must sign)
</TABLE>
AUTHORIZATION TO HONOR ACH DEBITS
DRAWN BY MERRILL LYNCH FINANCIAL DATA
SERVICES, INC.
To ....................................................................... Bank
(Investor's Bank)
Bank Address ..................................................................
City ............ State ............ Zip Code ...............................
As a convenience to me, I hereby request and authorize you to pay and charge to
my account ACH debits drawn on my account by and payable to Merrill Lynch
Financial Data Services, Inc. I agree that your rights in respect to each such
debit shall be the same as if it were a check drawn on you and signed personally
by me. This authority is to remain in effect until revoked by me in writing.
Until you receive such notice, you shall be fully protected in honoring any such
debit. I further agree that if any such debit be dishonored, whether with or
without cause and whether intentionally or inadvertently, you shall be under no
liability.
<TABLE>
<S> <C>
...................................... .......................................
Date Signature of Depositor
...................................... .......................................
Bank Account Number Signature of Depositor
(If joint account, both must sign)
</TABLE>
NOTE: IF AUTOMATIC INVESTMENT PLAN IS ELECTED, YOUR BLANK, UNSIGNED CHECK MARKED
'VOID' SHOULD ACCOMPANY THIS APPLICATION.
44
<PAGE>
MANAGER
Fund Asset Management
Administrative Offices:
800 Scudders Mill Road
Plainsboro, New Jersey
Mailing Address:
P.O. Box 9011
Princeton, New Jersey 08543-9011
DISTRIBUTOR
Merrill Lynch Funds Distributor, Inc.
Administrative Offices:
800 Scudders Mill Road
Plainsboro, New Jersey 08536
Mailing Address:
P.O. Box 9081
Princeton, New Jersey 08543-9081
CUSTODIAN
State Street Bank and Trust Company
P.O. Box 351
Boston, Massachusetts 02101
TRANSFER AGENT
Merrill Lynch Financial Data Services, Inc.
Administrative Offices:
4800 Deer Lake Drive East
Jacksonville, Florida 32246-6484
Mailing Address:
P.O. Box 45289
Jacksonville, Florida 32232-5289
INDEPENDENT AUDITORS
Deloitte & Touche LLP
117 Campus Drive
Princeton, New Jersey 08540-6400
COUNSEL
Brown & Wood LLP
One World Trade Center
New York, New York 10048-0557
<PAGE>
NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATIONS, OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS, IN CONNECTION
WITH THE OFFER CONTAINED IN THIS PROSPECTUS, AND, IF GIVEN OR MADE, SUCH OTHER
INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED
BY THE TRUST, THE MANAGER OR THE DISTRIBUTOR. THIS PROSPECTUS DOES NOT
CONSTITUTE AN OFFERING IN ANY STATE IN WHICH SUCH OFFERING MAY NOT LAWFULLY BE
MADE.
------------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Fee Table...................................... 2
Merrill Lynch Select Pricing(Service Mark)
System....................................... 3
Financial Highlights........................... 8
Investment Objective and Policies.............. 10
Potential Benefits........................... 12
Special and Risk Considerations Relating to
Municipal Bonds............................ 12
Description of Municipal Bonds............... 13
Call Rights.................................. 15
When-Issued Securities and Delayed Delivery
Transactions............................... 15
Financial Futures Transactions and Options... 15
Repurchase Agreements........................ 18
Investment Restrictions...................... 18
Management of the Trust........................ 19
Trustees..................................... 19
Management and Advisory Arrangements......... 19
Code of Ethics............................... 20
Transfer Agency Services..................... 20
Purchase of Shares............................. 21
Initial Sales Charge Alternatives--Class A
and Class D Shares......................... 23
Deferred Sales Charge Alternatives--Class B
and Class C Shares......................... 24
Distribution Plans........................... 27
Limitations on the Payment of Deferred Sales
Charges.................................... 29
Redemption of Shares........................... 29
Redemption................................... 29
Repurchase................................... 30
Reinstatement Privilege--Class A and Class D
Shares..................................... 30
Shareholder Services........................... 31
Investment Account........................... 31
Exchange Privilege........................... 31
Automatic Reinvestment of Dividends and
Capital Gains Distributions................ 32
Systematic Withdrawal Plans.................. 33
Automatic Investment Plans................... 33
Fee-Based Programs........................... 33
Portfolio Transactions......................... 34
Distributions and Taxes........................ 34
Distributions................................ 34
Taxes........................................ 35
Performance Data............................... 37
Additional Information......................... 38
Determination of Net Asset Value............. 38
Organization of the Trust.................... 39
Shareholder Reports.......................... 40
Shareholder Inquiries........................ 40
Authorization Form............................. 41
</TABLE>
Code # 18034-1197
[Logo] Merrill Lynch
Merrill Lynch
New Mexico Municipal
Bond Fund
Merrill Lynch Multi-State
Municipal Series Trust
PROSPECTUS
November 14, 1997
Distributor:
Merrill Lynch
Funds Distributor, Inc.
This prospectus should be
retained for future reference.
<PAGE>
STATEMENT OF ADDITIONAL INFORMATION
MERRILL LYNCH NEW MEXICO MUNICIPAL BOND FUND
MERRILL LYNCH MULTI-STATE MUNICIPAL SERIES TRUST
P.O. BOX 9011, PRINCETON, NEW JERSEY 08543-9011 o PHONE NO. (609) 282-2800
------------------------
Merrill Lynch 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 portfolio of
long-term, investment grade 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 U.S. Virgin Islands and Guam, which pay interest exempt, in the opinion of
bond counsel to the issuer, from Federal and New Mexico income taxes ('New
Mexico Municipal Bonds'). There can be no assurance that the investment
objective of the Fund will be realized.
Pursuant to the Merrill Lynch Select Pricing(Service Mark) System, the Fund
offers four classes of shares, each with a different combination of sales
charges, ongoing fees and other features. The Merrill Lynch Select
Pricing(Service Mark) System permits an investor to choose the method of
purchasing shares that the investor believes is most beneficial, given the
amount of the purchase, the length of time the investor expects to hold the
shares and other relevant circumstances.
------------------------
The Statement of Additional Information of the Fund is not a prospectus and
should be read in conjunction with the prospectus of the Fund, dated November
14, 1997 (the 'Prospectus'), which has been filed with the Securities and
Exchange Commission (the 'Commission') and can be obtained, without charge, by
calling or by writing the Fund at the above telephone number or address. This
Statement of Additional Information has been incorporated by reference into the
Prospectus. Capitalized terms used but not defined herein have the same meanings
as in the Prospectus.
------------------------
FUND ASSET MANAGEMENT--MANAGER
MERRILL LYNCH FUNDS DISTRIBUTOR, INC.--DISTRIBUTOR
------------------------
The date of this Statement of Additional Information is November 14, 1997.
<PAGE>
INVESTMENT OBJECTIVE AND POLICIES
The investment objective of the Fund is to provide shareholders with as
high a level of income exempt from Federal and 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 U.S. 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 Ratings Services ('Standard & Poor's') (currently AAA, AA, A
and BBB) or Fitch Investors Service, Inc. ('Fitch') (currently AAA, AA, A and
BBB). If unrated, such securities will possess creditworthiness comparable, in
the opinion of the manager of the Fund, Fund Asset Management, L.P. (the
'Manager'), to other obligations in which the Fund may invest.
The Fund ordinarily does not intend to realize investment income not exempt
from Federal and 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 to the issuer, 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 assets in
tax-exempt or taxable money market obligations with a maturity of one year or
less (such short-term obligations being referred to herein as 'Temporary
Investments'), except that taxable Temporary Investments shall not exceed 20% of
the Fund's net assets. The Fund at all times will have at least 80% of its net
assets invested in securities exempt from Federal income taxation. However,
interest received on certain otherwise tax-exempt securities which are
classified as 'private activity bonds' (in general bonds that benefit
non-governmental entities) may be subject to an alternative minimum tax. The
Fund may purchase such private activity bonds. See 'Distributions and Taxes.' In
2
<PAGE>
addition, the Fund reserves the right to invest temporarily a greater portion of
its assets in Temporary Investments for defensive purposes, when, in the
judgment of the Manager, market conditions warrant. The investment objective of
the Fund set forth in this paragraph is a fundamental policy of the Fund which
may not be changed without a vote of a majority of the outstanding shares of the
Fund. The Fund's hedging strategies are not fundamental policies and may be
modified by the Trustees of the Trust without the approval of the Fund's
shareholders.
Municipal Bonds may at times be purchased or sold on a delayed delivery
basis or a when-issued basis. These transactions arise when securities are
purchased or sold by the Fund with payment and delivery taking place in the
future, often a month or more after the purchase. The payment obligation and the
interest rate are each fixed at the time the buyer enters into the commitment.
The Fund will make only commitments to purchase such securities with the
intention of actually acquiring the securities, but the Fund may sell these
securities prior to the settlement date if it is deemed advisable. Purchasing
Municipal Bonds on a when-issued basis involves the risk that the yields
available in the market when the delivery takes place actually may be higher
than those obtained in the transaction itself; if yields so increase, the value
of the when-issued obligations generally will decrease. The Fund will maintain a
separate account at its custodian bank consisting of cash, cash equivalents or
high-grade, liquid Municipal Bonds or Temporary Investments (valued on a daily
basis) equal at all times to the amount of the when-issued commitment.
The Fund may invest in Municipal Bonds (and Non-Municipal Tax- Exempt
Securities) the return on which is based on a particular index of value or
interest rates. For example, the Fund may invest in Municipal Bonds that pay
interest based on an index of Municipal Bond interest rates or based on the
value of gold or some other commodity. The principal amount payable upon
maturity of certain Municipal Bonds also may be based on the value of an index.
Also, the Fund may invest in so-called 'inverse floating obligations' or
'residual interest bonds' on which the interest rates typically decline as
market rates increase and increase as market rates decline. For example, to the
extent the Fund invests in these types of Municipal Bonds, the Fund's return on
such Municipal Bonds will be subject to risk with respect to the value of the
particular index, which may include reduced or eliminated interest payments and
losses of invested principal. Such securities have the effect of providing a
degree of investment leverage, since they may increase or decrease in value in
response to changes, as an illustration, in market interest rates at a rate
which is a multiple (typically two) of the rate at which fixed-rate long-term
tax-exempt securities increase or decrease in response to such changes. As a
result, the market values of such securities will generally be more volatile
than the market values of fixed-rate tax-exempt securities. To seek to limit the
volatility of these securities, the Fund may purchase inverse floating
obligations with shorter term maturities or which contain limitations on the
extent to which the interest rate may vary. Certain investments in such
obligations may be illiquid. The Fund may not invest in such illiquid
obligations if such investments, together with other illiquid investments, would
exceed 15% of the Fund's total assets. The Manager believes, however, that
indexed and inverse floating obligations represent flexible portfolio management
instruments for the Fund which allow the Fund to seek potential investment
rewards, hedge other portfolio positions or vary the degree of investment
leverage relatively efficiently under different market conditions.
The Fund may purchase a Municipal Bond issuer's right to call all or a
portion of such Municipal Bond for mandatory tender for purchase (a 'Call
Right'). A holder of a Call Right may exercise such right to require a mandatory
tender for the purchase of related Municipal Bonds, subject to certain
conditions. A Call Right that is not exercised prior to the maturity of the
related Municipal Bond will expire without value. The economic effect of holding
both the Call Right and the related Municipal Bond is identical to holding a
Municipal Bond as a non-callable security. Certain investments in such
obligations may be illiquid. The Fund may not invest in such
3
<PAGE>
illiquid obligations if such investments, together with other illiquid
investments, would exceed 15% of the Fund's total assets.
The Fund may invest up to 20% of its total assets in Municipal Bonds which
are rated below Baa by Moody's or below BBB by Standard & Poor's or Fitch or
which, in the Manager's judgment, possess similar credit characteristics ('high
yield securities'). See Appendix II--'Ratings of Municipal Bonds' for additional
information regarding ratings of debt securities. The Manager considers the
ratings assigned by Standard & Poor's, Moody's or Fitch as one of several
factors in its independent credit analysis of issuers.
High yield securities are considered by Standard & Poor's, Moody's and
Fitch to have varying degrees of speculative characteristics. Consequently,
although high yield securities can be expected to provide higher yields, such
securities may be subject to greater market price fluctuations and risk of loss
of principal than lower yielding, higher rated debt securities. Investments in
high yield securities will be made only when, in the judgment of the Manager,
such securities provide attractive total return potential relative to the risk
of such securities, as compared to higher quality debt securities. The Fund
generally will not invest in debt securities in the lowest rating categories
(those rated CC or lower by Standard & Poor's or Fitch or Ca or lower by
Moody's) unless the Manager believes that the financial condition of the issuer
or the protection afforded the particular securities is stronger than would
otherwise be indicated by such low ratings. The Fund does not intend to purchase
debt securities that are in default or which the Manager believes will be in
default.
Issuers or obligors of high yield securities may be highly leveraged and
may not have available to them more traditional methods of financing. Therefore,
the risks associated with acquiring the securities of such issuers 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 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.
4
<PAGE>
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. Such obligations are
included within the term Municipal Bonds if the interest paid thereon is, in the
opinion of bond counsel to the issuer, excluded from gross income for Federal
income tax purposes and, in the case of 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 ('IDBs') and, for bonds issued after August 15, 1986, private
activity bonds. General obligation bonds are secured by the issuer's pledge of
faith, credit and taxing power for the payment of principal and interest.
Revenue bonds are payable only from the revenues derived from a particular
facility or class of facilities or, in some cases, from the proceeds of a
special or limited tax or other specific revenue source such as payments from
the user of the facility being financed. IDBs and private activity bonds are in
most cases revenue bonds and generally do not constitute the pledge of the
credit or taxing power of the issuer of such bonds. Generally, the payment of
the principal of and interest on such bonds depends solely on the ability of the
user of the facility financed by the bonds to meet its financial obligations and
the pledge, if any, of real and personal property so financed as security for
such payment, unless a line of credit, bond insurance or other security is
furnished. The Fund also may invest in 'moral obligation' bonds, which are
normally issued by special purpose public authorities. If an issuer of moral
obligation bonds is unable to meet its obligations, repayment of such bonds
becomes a moral commitment, but not a legal obligation, of the state or
municipality in question.
5
<PAGE>
Also included within the general category of Municipal Bonds are
participation certificates issued by government authorities or entities to
finance the acquisition or construction of equipment, land and/or facilities.
The certificates represent participations in a lease, an installment purchase
contract or a conditional sales contract (hereinafter collectively called 'lease
obligations') relating to such equipment, land or facilities. Although lease
obligations do not constitute general obligations of the issuer for which the
issuer's unlimited taxing power is pledged, a lease obligation is frequently
backed by the issuer's covenant to budget for, appropriate and make the payments
due under the lease obligation. Certain investments in lease obligations may be
illiquid. The Fund may not invest in illiquid lease obligations if such
investments, together with all other illiquid investments, would exceed 15% of
the Fund's total assets. The Fund may, however, invest without regard to such
limitation in lease obligations which the Manager, pursuant to the guidelines
which have been adopted by the Board of Trustees and subject to the supervision
of the Board of Trustees, determines to be liquid. The Manager will deem lease
obligations liquid if they are publicly offered and have received an investment
grade rating of Baa or better by Moody's, or BBB or better by Standard & Poor's
or Fitch. Unrated lease obligations, or those rated below investment grade, will
be considered liquid if the obligations come to the market through an
underwritten public offering and at least two dealers are willing to give
competitive bids. In reference to the latter, the Manager must, among other
things, also review the creditworthiness of the municipality obligated to make
payment under the lease obligation and make certain specified determinations
based on such factors as the existence of a rating or credit enhancement such as
insurance, the frequency of trades or quotes for the obligation and the
willingness of dealers to make a market in the obligation.
Yields on Municipal Bonds are dependent on a variety of factors, including
the general condition of the money market and of the municipal bond market, the
size of a particular offering, the financial condition of the issuer, the
general conditions of the Municipal Bond market, the maturity of the obligation,
and the rating of the issue. The ability of the Fund to achieve its investment
objective also is dependent on the continuing ability of the issuers of the
bonds in which the Fund invests to meet their obligations for the payment of
interest and principal when due. There are variations in the risks involved in
holding Municipal Bonds, both within a particular classification and between
classifications, depending on numerous factors. Furthermore, the rights of
owners of Municipal Bonds and the obligations of the issuer of such Municipal
Bonds may be subject to applicable bankruptcy, insolvency and similar laws and
court decisions affecting the rights of creditors generally and to general
equitable principles, which may limit the enforcement of certain remedies.
DESCRIPTION OF TEMPORARY INVESTMENTS
The Fund may invest in short-term tax-free and taxable securities subject
to the limitations set forth under 'Investment Objective and Policies.' The
tax-exempt money market securities may include municipal notes, municipal
commercial paper, municipal bonds with remaining maturity of less than one year,
variable rate demand notes and participations therein. Municipal notes include
tax anticipation notes, bond anticipation notes and grant anticipation notes.
Anticipation notes are sold as interim financing in anticipation of tax
collection, bond sales, government grants or revenue receipts. Municipal
commercial paper refers to short-term unsecured promissory notes generally
issued to finance short-term credit needs. The taxable money market securities
in which the Fund may invest as Temporary Investments consist of U.S. Government
securities, U.S. Government agency securities, domestic bank or savings
institution certificates of deposit and bankers' acceptances, short-term
corporate debt securities such as commercial paper, and repurchase agreements.
These Temporary Investments must have a stated maturity not in excess of one
year from the date of purchase.
Variable rate demand obligations ('VRDOs') are tax-exempt obligations which
contain a floating or variable interest rate adjustment formula and an
unconditional right of demand on the part of the holder thereof to
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receive payment of the unpaid principal balance plus accrued interest upon a
short notice period not to exceed seven days. There is, however, the possibility
that because of default or insolvency the demand feature of VRDOs and
Participating VRDOs, described below, may not be honored. The interest rates are
adjustable at intervals (ranging from daily to up to one year) to some
prevailing market rate for similar investments, such adjustment formula being
calculated to maintain the market value of the VRDOs at approximately the par
value of the VRDOs on the adjustment date. The adjustments typically are set at
a rate determined by the remarketing agent or based upon the Public Securities
Association Index or some other appropriate interest rate adjustment index. The
Fund may invest in all types of tax- exempt instruments currently outstanding or
to be issued in the future which satisfy the short-term maturity and quality
standards of the Fund.
The Fund also may invest in VRDOs in the form of participation interests
('Participating VRDOs') in variable rate tax-exempt obligations held by a
financial institution, typically a commercial bank. Participating VRDOs provide
the Fund with a specified undivided interest (up to 100%) of the underlying
obligation and the right to demand payment of the unpaid principal balance plus
accrued interest on the Participating VRDOs from the financial institution upon
a specified number of days' notice, not to exceed seven days. In addition, a
Participating VRDO is backed by an irrevocable letter of credit or guaranty of
the financial institution. The Fund would have an undivided interest in the
underlying obligation and thus participate on the same basis as the financial
institution in such obligation except that the financial institution typically
retains fees out of the interest paid on the obligation for servicing the
obligation, providing the letter of credit and issuing the repurchase
commitment. The Fund has been advised by its counsel that the Fund should be
entitled to treat the income received on Participating VRDOs as interest from
tax-exempt obligations.
VRDOs that contain an unconditional right of demand to receive payment of
the unpaid principal balance plus accrued interest on a notice period exceeding
seven days may be deemed to be illiquid securities. A VRDO with a demand notice
period exceeding seven days therefore will be subject to the Fund's restriction
on illiquid investments unless, in the judgment of the Trustees, such VRDO is
liquid. The Trustees may adopt guidelines and delegate to the Manager the daily
function of determining and monitoring liquidity of such VRDOs. The Trustees,
however, will retain sufficient oversight and will be ultimately responsible for
such determination.
The Trust has established the following standards with respect to money
market securities and VRDOs in which the Fund invests. Commercial paper
investments at the time of purchase must be rated A-1 through A-3 by Standard &
Poor's, Prime-1 through Prime-3 by Moody's or F-1 through F-3 by Fitch or, if
not rated, issued by companies having an outstanding debt issue rated at least A
by Standard & Poor's, Moody's or Fitch. Investments in corporate bonds and
debentures (which must have maturities at the date of purchase of one year or
less) must be rated at the time of purchase at least A by Standard & Poor's,
Moody's or Fitch. Notes and VRDOs at the time of purchase must be rated SP-1/A-1
through SP-2/A-3 by Standard & Poor's, MIG-1/VMIG-1 through MIG-4/VMIG-4 by
Moody's or F-1 through F-3 by Fitch. Temporary Investments, if not rated, must
be of comparable quality to securities rated in the above rating categories in
the opinion of the Manager. The Fund may not invest in any security issued by a
commercial bank or a savings institution unless the bank or institution is
organized and operating in the United States, has total assets of at least one
billion dollars and is a member of the Federal Deposit Insurance Corporation
('FDIC'), except that up to 10% of total assets may be invested in certificates
of deposit of small institutions if such certificates are insured fully by the
FDIC.
REPURCHASE AGREEMENTS
The Fund may invest in securities pursuant to repurchase agreements.
Repurchase agreements may be entered into only with a member bank of the Federal
Reserve System or a primary dealer in U.S. Government securities or an affiliate
thereof. Under such agreements, the seller agrees, upon entering into the
contract, to
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repurchase the security at a mutually agreed upon time and price, thereby
determining the yield during the term of the agreement. This results in a fixed
rate of return insulated from market fluctuations during such period. In
repurchase agreements, the prices at which the trades are conducted do not
reflect accrued interest on the underlying obligations. Such agreements usually
cover short periods, such as under one week. Repurchase agreements may be
construed to be collateralized loans by the purchaser to the seller secured by
the securities transferred to the purchaser. In the case of a repurchase
agreement, the Fund will require the seller to provide additional collateral if
the market value of the securities falls below the repurchase price at any time
during the term of the repurchase agreement. In the event of default by the
seller under a repurchase agreement construed to be a collateralized loan, the
underlying securities are not owned by the Fund but only constitute collateral
for the seller's obligation to pay the repurchase price. Therefore, the Fund may
suffer time delays and incur costs or possible losses in connection with the
disposition of the collateral. In the event of a default under such a repurchase
agreement, instead of the contractual fixed rate of return, the rate of return
to the Fund will depend on intervening fluctuations of the market value of such
security and the accrued interest on the security. In such event, the Fund would
have rights against the seller for breach of contract with respect to any losses
arising from market fluctuations following the failure of the seller to perform.
The Fund may not invest in repurchase agreements maturing in more than seven
days if such investments, together with all other illiquid investments, would
exceed 15% of the Fund's total assets.
In general, for Federal income tax purposes, repurchase agreements are
treated as collateralized loans secured by the securities 'sold.' Therefore,
amounts earned under such agreements will not be considered tax-exempt interest.
The treatment of purchase and sale contracts is less certain.
FINANCIAL FUTURES TRANSACTIONS AND OPTIONS
Reference is made to the discussion concerning futures transactions under
'Investment Objective and Policies' in the Prospectus. Set forth below is
additional information concerning these transactions.
As described in the Prospectus, the Fund may purchase and sell exchange
traded financial futures contracts ('financial futures contracts') to hedge its
portfolio of Municipal Bonds against declines in the value of such securities
and to hedge against increases in the cost of securities the Fund intends to
purchase. However, any transactions involving financial futures or options will
be in accordance with the Fund's investment policies and limitations. 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
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broker. This amount is known as 'initial margin' and represents a 'good faith'
deposit assuring the performance of both the purchaser and seller under the
futures contract. Subsequent payments to and from the broker, called 'variation
margin,' are required to be made on a daily basis as the price of the futures
contract fluctuates making the long and short positions in the futures contract
more or less valuable, a process known as 'marking to market.' At any time prior
to the settlement date of the futures contract, the position may be closed out
by taking an opposite position which will operate to terminate the position in
the futures contract. A final determination of variation margin is then made,
additional cash is required to be paid to or released by the broker, and the
purchaser realizes a loss or gain. In addition, a nominal commission is paid on
each completed sale transaction.
The Fund may deal in financial futures contracts based on a long-term
municipal bond index developed by the Chicago Board of Trade ('CBT') and The
Bond Buyer (the 'Municipal Bond Index'). The Municipal Bond Index is comprised
of 40 tax-exempt municipal revenue and general obligations bonds. Each bond
included in the Municipal Bond Index must be rated A or higher by Moody's or
Standard & Poor's and must have a remaining maturity of 19 years or more. Twice
a month new issues satisfying the eligibility requirements are added to, and an
equal number of old issues are deleted from, the Municipal Bond Index. The value
of the Municipal Bond Index is computed daily according to a formula based on
the price of each bond in the Municipal Bond Index, as evaluated by six
dealer-to-dealer brokers.
The Municipal Bond Index futures contract is traded only on the CBT. Like
other contract markets, the CBT assures performance under futures contracts
through a clearing corporation, a nonprofit organization managed by the exchange
membership which also is responsible for handling daily accounting of deposits
or withdrawals of margin.
As described in the Prospectus, the Fund may purchase and sell financial
futures contracts on U.S. Government securities as a hedge against adverse
changes in interest rates as described below. With respect to U.S. Government
securities, currently there are financial futures contracts based on long-term
U.S. Treasury bonds, U.S. Treasury notes, Government National Mortgage
Association ('GNMA') Certificates and three-month U.S. Treasury bills. The Fund
may purchase and write call and put options on futures contracts on U.S.
Government securities in connection with its hedging strategies.
Subject to policies adopted by the Trustees, the Fund also may engage in
other futures contracts transactions such as futures contracts on other
municipal bond indices that may become available if the Manager and the Trustees
should determine that there is normally a sufficient correlation between the
prices of such futures contracts and the Municipal Bonds in which the Fund
invests to make such hedging appropriate.
Futures Strategies. The Fund may sell a financial futures contract (i.e.,
assume a short position) in anticipation of a decline in the value of its
investments in Municipal Bonds resulting from an increase in interest rates or
otherwise. The risk of decline could be reduced without employing futures as a
hedge by selling such Municipal Bonds and either reinvesting the proceeds in
securities with shorter maturities or by holding assets in cash. This strategy,
however, entails increased transaction costs in the form of dealer spreads and
typically would reduce the average yield of the Fund's portfolio securities as a
result of the shortening of maturities. The sale of futures contracts provides
an alternative means of hedging against declines in the value of its investments
in Municipal Bonds. As such values decline, the value of the Fund's positions in
the futures contracts will tend to increase, thus offsetting all or a portion of
the depreciation in the market value of the Fund's Municipal Bond 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
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the futures markets may offer a more effective defensive position than a program
to reduce the average maturity of the portfolio securities due to the unique and
varied credit and technical characteristics of the municipal debt instruments
available to the Fund. Employing futures as a hedge also may permit the Fund to
assume a defensive posture without reducing the yield on its investments beyond
any amounts required to engage in futures trading.
When the Fund intends to purchase Municipal Bonds, the Fund may purchase
futures contracts as a hedge against any increase in the cost of such Municipal
Bonds, resulting from an increase in interest rates or otherwise, that may occur
before such purchases can be effected. Subject to the degree of correlation
between the Municipal Bonds and the futures contracts, subsequent increases in
the cost of Municipal Bonds should be reflected in the value of the futures held
by the Fund. As such purchases are made, an equivalent amount of futures
contracts will be closed out. Due to changing market conditions and interest
rate forecasts, however, a futures position may be terminated without a
corresponding purchase of portfolio securities.
Call Options on Futures Contracts. The Fund also may purchase and sell
exchange traded call and put options on financial futures contracts on U.S.
Government securities. The purchase of a call option on a futures contract is
analogous to the purchase of a call option on an individual security. Depending
on the pricing of the option compared to either the futures contract on which it
is based, or on the price of the underlying debt securities, it may or may not
be less risky than ownership of the futures contract or underlying debt
securities. Like the purchase of a futures contract, the Fund will purchase a
call option on a futures contract to hedge against a market advance when the
Fund is not fully invested.
The writing of a call option on a futures contract constitutes a partial
hedge against declining prices of the securities which are deliverable upon
exercise of the futures contract. If the futures price at expiration is below
the exercise price, the Fund will retain the full amount of the option premium
which provides a partial hedge against any decline that may have occurred in the
Fund's portfolio holdings.
Put Options on Futures Contracts. The purchase of options on a futures
contract is analogous to the purchase of protective put options on portfolio
securities. The Fund will purchase put options on futures contracts to hedge the
Fund's portfolio against the risk of rising interest rates.
The writing of a put option on a futures contract constitutes a partial
hedge against increasing prices of the securities which are deliverable upon
exercise of the futures contract. If the futures price at expiration is higher
than the exercise price, the Fund will retain the full amount of the option
premium which provides a partial hedge against any increase in the price of
Municipal Bonds which the Fund intends to purchase.
The writer of an option on a futures contract is required to deposit
initial and variation margin pursuant to requirements similar to those
applicable to futures contracts. Premiums received from the writing of an option
will be included in initial margin. The writing of an option on a futures
contract involves risks similar to those relating to futures contracts.
------------------------
The Trust has received an order from the Commission exempting it from the
provisions of Section 17(f) and Section 18(f) of the Investment Company Act of
1940, as amended (the '1940 Act'), in connection with its strategy of investing
in futures contracts. Section 17(f) relates to the custody of securities and
other assets of an investment company and may be deemed to prohibit certain
arrangements between the Trust and commodities brokers with respect to initial
and variation margin. Section 18(f) of the 1940 Act prohibits an open-end
investment company such as the Trust from issuing a 'senior security' other than
a borrowing from a bank. The staff of the Commission has in the past indicated
that a futures contract may be a 'senior security' under the 1940 Act.
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Restrictions on Use of Futures Transactions. Regulations of the CFTC
applicable to the Fund require that all of the Fund's futures transactions
constitute bona fide hedging transactions and that the Fund purchase and sell
futures contracts and options thereon (i) for bona fide hedging purposes, and
(ii) for non- hedging purposes, if the aggregate initial margin and premiums
required to establish positions in such contracts and options does not exceed 5%
of the liquidation value of the Fund's portfolio assets after taking into
account unrealized profits and unrealized losses on any such contracts and
options. (However, the Fund intends to engage in options and futures
transactions only for hedging purposes.) Margin deposits may consist of cash or
securities acceptable to the broker and the relevant contract market.
When the Fund purchases futures contracts or a call option with respect
thereto or writes a put option on a futures contract, an amount of cash, cash
equivalents or liquid securities will be deposited in a segregated account with
the Fund's custodian so that the amount so segregated, plus the amount of
initial and variation margin held in the account of its broker, equals the
market value of the futures contract, thereby ensuring that the use of such
futures is unleveraged.
Risk Factors in Futures Transactions and Options. Investment in futures
contracts involves the risk of imperfect correlation between movements in the
price of the futures contract and the price of the security being hedged. The
hedge will not be fully effective when there is imperfect correlation between
the movements in the prices of two financial instruments. For example, if the
price of the futures contract moves more than the price of the hedged security,
the Fund will experience either a loss or gain on the futures contract which is
not offset completely by movements in the price of the hedged securities. To
compensate for imperfect correlations, the Fund may purchase or sell futures
contracts in a greater dollar amount than the hedged securities if the
volatility of the hedged securities is historically greater than the volatility
of the futures contracts. Conversely, the Fund may purchase or sell fewer
futures contracts if the volatility of the price of the hedged securities is
historically less than that of the futures contracts.
The particular municipal bonds comprising the index underlying the
Municipal Bond Index financial futures contract may vary from the Municipal
Bonds held by the Fund. As a result, the Fund's ability to hedge effectively all
or a portion of the value of its Municipal Bonds through the use of such
financial futures contracts will depend in part on the degree to which price
movements in the index underlying the financial futures contract correlate with
the price movements of the Municipal Bonds held by the Fund. The correlation may
be affected by disparities in the average maturity, ratings, geographical mix or
structure of the Fund's investments as compared to those comprising the
Municipal Bond Index, and general economic or political factors. In addition,
the correlation between movements in the value of the Municipal Bond Index may
be subject to change over time as additions to and deletions from the Municipal
Bond Index alter its structure. The correlation between futures contracts on
U.S. Government securities and the Municipal Bonds held by the Fund may be
adversely affected by similar factors and the risk of imperfect correlation
between movements in the prices of such futures contracts and the prices of the
Municipal Bonds held by the Fund may be greater.
The Fund expects to liquidate a majority of the futures contracts it enters
into through offsetting transactions on the applicable contract market. There
can be no assurance, however, that a liquid secondary market will exist for any
particular futures contract at any specific time. Thus, it may not be possible
to close out a futures position. In the event of adverse price movements, the
Fund would continue to be required to make daily cash payments of variation
margin. In such situations, if the Fund has insufficient cash, it may be
required to sell portfolio securities to meet daily variation margin
requirements at a time when it may be disadvantageous to do so. The inability to
close out futures positions also could have an adverse impact on the Fund's
ability to hedge effectively its investments in Municipal Bonds. The Fund will
enter into a futures position only if, in the judgment of the Manager, there
appears to be an actively traded secondary market for such futures contracts.
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The successful use of transactions in futures and related options also
depends on the ability of the Manager to forecast correctly the direction and
extent of interest rate movements within a given time frame. To the extent
interest rates remain stable during the period in which a futures contract or
option is held by the Fund or such rates move in a direction opposite to that
anticipated, the Fund may realize a loss on the hedging transaction which is not
fully or partially offset by an increase in the value of portfolio securities.
As a result, the Fund's total return for such period may be less than if it had
not engaged in the hedging transaction.
Because of low initial margin deposits made on the opening of a futures
position, futures transactions involve substantial leverage. As a result,
relatively small movements in the price of the futures contracts can result in
substantial unrealized gains or losses. Because the Fund will engage in the
purchase and sale of futures contracts solely for hedging purposes, however, any
losses incurred in connection therewith should, if the hedging strategy is
successful, be offset in whole or in part by increases in the value of
securities held by the Fund or decreases in the price of securities the Fund
intends to acquire.
The amount of risk the Fund assumes when it purchases an option on a
futures contract is the premium paid for the option plus related transaction
costs. In addition to the correlation risks discussed above, the purchase of an
option on a futures contract also entails the risk that changes in the value of
the underlying futures contract will not be reflected fully in the value of the
option purchased.
Municipal Bond Index futures contracts were approved for trading in 1986.
Trading in such futures contracts may tend to be less liquid than that in other
futures contracts. The trading of futures contracts also is subject to certain
market risks, such as inadequate trading activity, which could at times make it
difficult or impossible to liquidate existing positions.
INVESTMENT RESTRICTIONS
The Fund has adopted a number of fundamental and non-fundamental
restrictions and policies relating to the investment of its assets and its
activities. The fundamental policies set forth below may not be changed without
the approval of the holders of a majority of the Fund's outstanding voting
securities (which for this purpose and under the 1940 Act means the lesser of
(i) 67% of the Fund's shares present at a meeting at which more than 50% of the
outstanding shares of the Fund are represented or (ii) more than 50% of the
Fund's outstanding shares). The Fund may not:
1. Invest more than 25% of its assets, taken at market value at the
time of each investment, in the securities of issuers in any particular
industry (excluding the U.S. Government and its agencies and
instrumentalities). For purposes of this restriction, states,
municipalities and their political subdivisions are not considered part of
any industry.
2. Make investments for the purpose of exercising control or
management.
3. Purchase or sell real estate, except that, to the extent permitted
by applicable law, the Fund may invest in securities directly or indirectly
secured by real estate or interests therein or issued by companies which
invest in real estate or interests therein.
4. Make loans to other persons, except that the acquisition of bonds,
debentures or other corporate debt securities and investment in government
obligations, commercial paper, pass-through instruments, certificates of
deposit, bankers' acceptances, repurchase agreements or any similar
instruments shall not be deemed to be the making of a loan, and except
further that the Fund may lend its portfolio securities, provided that the
lending of portfolio securities may be made only in accordance with
applicable law and the
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guidelines set forth in the Fund's Prospectus and Statement of Additional
Information, as they may be amended from time to time.
5. Issue senior securities to the extent such issuance would violate
applicable law.
6. Borrow money, except that (i) the Fund may borrow from banks (as
defined in the 1940 Act) in amounts up to 33 1/3% of its total assets
(including the amount borrowed), (ii) the Fund may, to the extent permitted
by applicable law, borrow up to an additional 5% of its total assets for
temporary purposes, (iii) the Fund may obtain such short-term credit as may
be necessary for the clearance of purchases and sales of portfolio
securities and (iv) the Fund may purchase securities on margin to the
extent permitted by applicable law. The Fund may not pledge its assets
other than to secure such borrowings or, to the extent permitted by the
Fund's investment policies as set forth in its Prospectus and Statement of
Additional Information, as they may be amended from time to time, in
connection with hedging transactions, short sales, when-issued and forward
commitment transaction and similar investment strategies.
7. Underwrite securities of other issuers, except insofar as the Fund
technically may be deemed an underwriter under the Securities Act of 1933,
as amended (the 'Securities Act'), in selling portfolio securities.
8. Purchase or sell commodities or contracts on commodities, except to
the extent that the Fund may do so in accordance with applicable law and
the Fund's Prospectus and Statement of Additional Information, as they may
be amended from time to time, and without registering as a commodity pool
operator under the Commodity Exchange Act.
Under the non-fundamental investment restrictions, the Fund may not:
a. Purchase securities of other investment companies, except to the
extent such purchases are permitted by applicable law. As a matter of
policy, however, the Fund will not purchase shares of any registered open-
end investment company or registered unit investment trust, in reliance on
Section 12(d)(1)(F) or (G) (the 'fund of funds' provisions) of the 1940
Act, at any time the Fund's shares are owned by another investment company
that is part of the same group of investment companies as the Fund.
b. Make short sales of securities or maintain a short position, except
to the extent permitted by applicable law. The Fund currently does not
intend to engage in short sales, except short sales 'against the box.'
c. Invest in securities which cannot be readily resold because of
legal or contractual restrictions or which cannot otherwise be marketed,
redeemed or put to the issuer or a third party, if at the time of
acquisition more than 15% of its total assets would be invested in such
securities. This restriction shall not apply to securities which mature
within seven days or securities which the Board of Trustees of the Trust
have otherwise determined to be liquid pursuant to applicable law.
d. Notwithstanding fundamental investment restriction (6) above,
borrow amounts in excess of 20% of its total assets, taken at market value
(including the amount borrowed), and then only from banks as a temporary
measure for extraordinary or emergency purposes. In addition, the Fund will
not purchase securities while borrowings are outstanding.
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
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securities of a single issuer. For purposes of this restriction, the Fund will
regard each state and each political subdivision, agency or instrumentality of
such state and each multi-state agency of which such state is a member and each
public authority which issues securities on behalf of a private entity as a
separate issuer, except that if the security is backed only by the assets and
revenues of a non-governmental entity then the entity with the ultimate
responsibility for the payment of interest and principal may be regarded as the
sole issuer. These tax-related limitations may be changed by the Trustees of the
Trust to the extent necessary to comply with changes to the Federal income tax
requirements.
Because of the affiliation of Merrill Lynch, Pierce, Fenner & Smith
Incorporated ('Merrill Lynch') with the Trust, the Fund is prohibited from
engaging in certain transactions involving such firm or its affiliates except
for brokerage transactions permitted under the 1940 Act involving only usual and
customary commissions or transactions pursuant to an exemptive order under the
1940 Act. Included among such restricted transactions will be purchases from or
sales to Merrill Lynch of securities in transactions in which it acts as
principal. See 'Portfolio Transactions.' An exemptive order has been obtained
which permits the Trust to effect principal transactions with Merrill Lynch in
high quality, short-term, tax-exempt securities subject to conditions set forth
in such order.
MANAGEMENT OF THE TRUST
TRUSTEES AND OFFICERS
Information about the Trustees and executive officers of the Trust and the
portfolio manager of the Fund, including their ages and principal occupations
for at least the last five years, is set forth below. Unless otherwise noted,
the address of the portfolio manager and of each Trustee and executive officer
is P.O. Box 9011, Princeton, New Jersey 08543-9011.
ARTHUR ZEIKEL (65)--President and Trustee(1)(2)--President of the Manager
(which term as used herein includes its corporate predecessors) since 1977;
President of Merrill Lynch Asset Management, L.P. ('MLAM') (which term as used
herein includes its corporate predecessors) since 1977; President and Director
of Princeton Services, Inc. ('Princeton Services') since 1993; Executive Vice
President of Merrill Lynch & Co., Inc. ('ML & Co.') since 1990.
JAMES H. BODURTHA (53)--Trustee(2)--36 Popponesset Road, Cotuit,
Massachusetts 02635. Director and Executive Vice President, The China Business
Group, Inc. since 1996; Chairman and Chief Executive Officer, China Enterprise
Management Corporation from 1993 to 1996; Chairman, Berkshire Corporation since
1980; Partner, Squire, Sanders & Dempsey from 1980 to 1993.
HERBERT I. LONDON (58)--Trustee(2)--113-115 University Place, New York, New
York 10003. John M. Olin Professor of Humanities, New York University since 1993
and Professor thereof since 1980; President, Hudson Institute since 1997 and
Trustee since 1980; Dean, Gallatin Division of New York University from 1976 to
1993; Distinguished Fellow, Herman Kahn Chair, Hudson Institute from 1984 to
1985; Director, Damon Corporation from 1991 to 1995; Overseer, Center for Naval
Analyses from 1983 to 1993; Limited Partner, Hypertech LP in 1996.
ROBERT R. MARTIN (70)--Trustee(2)--513 Grand Hill, St. Paul, Minnesota
55102. Chairman and Chief Executive Officer, Kinnard Investments, Inc. from 1990
to 1993; Executive Vice President, Dain Bosworth from 1974 to 1989; Director,
Carnegie Capital Management from 1977 to 1985 and Chairman thereof in 1979;
14
<PAGE>
Director, Securities Industry Association from 1981 to 1982 and Public
Securities Association from 1979 to 1980; Chairman of the Board, WTC Industries
Inc. in 1994; Trustee, Northland College since 1992.
JOSEPH L. MAY (68)--Trustee(2)--424 Church Street, Suite 2000, Nashville,
Tennessee 37219. Attorney in private practice since 1984; President, May and
Athens Hosiery Mills Division, Wayne-Gossard Corporation from 1954 to 1983; Vice
President, Wayne-Gossard Corporation from 1972 to 1983; Chairman, The May
Corporation (personal holding company) from 1972 to 1983; Director, Signal
Apparel Co. from 1972 to 1989.
ANDRE F. PEROLD (45)--Trustee(2)--Morgan Hall, Soldiers Field, Boston,
Massachusetts 02163. Professor, Harvard Business School since 1989 and Associate
Professor from 1983 to 1989; Trustee, The Common Fund, since 1989; Director,
Quantec Limited since 1991 and TIBCO from 1994 to 1996.
TERRY K. GLENN (57)--Executive Vice President(1)(2)--Executive Vice
President of the Manager and MLAM since 1983; Executive Vice President and
Director of Princeton Services since 1993; President of Merrill Lynch Funds
Distributor Inc. ('MLFD' or the 'Distributor') since 1986 and Director thereof
since 1991; President of Princeton Administrators, L.P. since 1988.
VINCENT R. GIORDANO (53)--Senior Vice President(1)(2)--Senior Vice
President of the Manager and MLAM since 1984; Vice President of MLAM from 1980
to 1984; Senior Vice President of Princeton Services since 1993.
KENNETH A. JACOB (46)--Vice President(1)(2)--First Vice President of MLAM
since 1997; Vice President of MLAM from 1984 to 1997; Vice President of the
Manager since 1984.
ROBERT D. SNEEDEN (44)--Vice President and Portfolio Manager of the
Fund(1)(2)--Assistant Vice President of MLAM since 1994. Vice President of
Lehman Brothers Inc. from 1990 to 1994.
DONALD C. BURKE (37)--Vice President(1)(2)--First Vice President of MLAM
since 1997; Vice President of MLAM from 1990 to 1997; Director of Taxation of
MLAM since 1990.
GERALD M. RICHARD (48)--Treasurer(1)(2)--Senior Vice President and
Treasurer of the Manager and MLAM since 1984; Senior Vice President and
Treasurer of Princeton Services since 1993; Treasurer of MLFD since 1984 and
Vice President thereof since 1981.
ROBERT E. PUTNEY, III (37)--Secretary(1)(2)--Director (Legal Advisory) of
MLAM since 1997; Vice President of MLAM from 1994 to 1997; Attorney employed by
MLAM from 1991 to 1994; Attorney in private practice prior thereto.
- ------------------
(1) Interested person, as defined in the 1940 Act, of the Trust.
(2) Such Trustee or officer is a director, trustee or officer of certain other
investment companies for which the Manager or MLAM acts as investment
adviser or manager.
At November 1, 1997, the Trustees and officers of the Trust as a group (13
persons) owned an aggregate of less than 1% of the outstanding shares of the
Fund. At such date, Mr. Zeikel, a Trustee and officer of the Trust, and the
other officers of the Trust owned an aggregate of less than 1% of the
outstanding shares of common stock of ML & Co.
COMPENSATION OF TRUSTEES
The Trust pays each Trustee not affiliated with the Manager (each a
'non-affiliated Trustee') a fee of $10,000 per year plus $1,000 per meeting
attended, together with such Trustee's actual out-of-pocket expenses relating to
attendance at meetings. The Trust also compensates members of its Audit and
Nominating Committee (the 'Committee') which consists of all the non-affiliated
Trustees, a fee of $2,000 per year plus $500 per
15
<PAGE>
Committee meeting attended. The Trust reimburses each non-affiliated Trustee for
his out-of-pocket expenses relating to attendance at Board and Committee
meetings. The fees and expenses of the Trustees are allocated to the respective
series of the Trust on the basis of asset size. For the fiscal year ended July
31, 1997, fees and expenses paid to non-affiliated Trustees which were allocated
to the Fund aggregated $1,049.
The following table sets forth for the fiscal year ended July 31, 1997,
compensation paid by the Fund to the non-affiliated Trustees and for the
calendar year ended December 31, 1996, the aggregate compensation paid by all
registered investment companies (including the Trust) advised by FAM and its
affiliate, MLAM ('FAM/MLAM Advised Funds') to the non-affiliated Trustees:
<TABLE>
<CAPTION>
PENSION OR AGGREGATE COMPENSATION
RETIREMENT BENEFITS FROM TRUST AND OTHER
NAME OF COMPENSATION ACCRUED AS PART FAM/MLAM ADVISED
TRUSTEE FROM FUND OF TRUST'S EXPENSES FUNDS PAID TO TRUSTEE(1)
- ------- ------------ ------------------- ------------------------
<S> <C> <C> <C>
James H. Bodurtha..................................... $226 None $148,500
Herbert I. London..................................... $226 None $148,500
Robert R. Martin...................................... $226 None $148,500
Joseph L. May......................................... $226 None $148,500
Andre F. Perold....................................... $226 None $148,500
</TABLE>
- ------------------
(1) The Trustees serve on the boards of FAM/MLAM Advised Funds as follows: Mr.
Bodurtha (22 registered investment companies consisting of 46 portfolios);
Mr. London (22 registered investment companies consisting of 46 portfolios);
Mr. Martin (22 registered investment companies consisting of 46 portfolios);
Mr. May (22 registered investment companies consisting of 46 portfolios);
and Mr. Perold (22 registered investment companies consisting of 46
portfolios).
MANAGEMENT AND ADVISORY ARRANGEMENTS
Reference is made to 'Management of the Trust--Management and Advisory
Arrangements' in the Prospectus for certain information concerning the
management and advisory arrangements of the Fund.
Securities may be held by, or be appropriate investments for, the Fund as
well as other funds or investment advisory clients of the Manager or its
affiliates. Because of different objectives or other factors, a particular
security may be bought for one or more clients when one or more clients are
selling the same security. If the Manager or its affiliates purchase or sell
securities for the Fund or other funds for which they act as manager or for
their advisory clients and such sales or purchases arise for consideration at or
about the same time, transactions in such securities will be made, insofar as
feasible, for the respective funds and clients in a manner deemed equitable to
all. To the extent that transactions on behalf of more than one client of the
Manager or its affiliates during the same period may increase the demand for
securities being purchased or the supply of securities being sold, there may be
an adverse effect on price.
Pursuant to a management agreement between the Trust on behalf of the Fund
and the Manager (the 'Management Agreement'), the Manager receives for its
services to the Fund monthly compensation based upon the average daily net
assets of the Fund at the following annual rates: 0.55% of the average daily net
assets not exceeding $500 million; 0.525% of the average daily net assets
exceeding $500 million but not exceeding $1.0 billion; and 0.50% of the average
daily net assets exceeding $1.0 billion. For the fiscal years ended July 31,
1995 and 1996, the total advisory fees payable by the Fund to the Manager were
$103,271 and $125,811 respectively, all of which were voluntarily waived. For
the fiscal year ended July 31, 1997, the total advisory fees payable by the Fund
to the Manager were $120,031, of which $112,203 was voluntarily waived.
The Management Agreement obligates the Manager to provide investment
advisory services and to pay all compensation of and furnish office space for
officers and employees of the Trust connected with investment and economic
research, trading and investment management of the Trust, as well as the fees of
all Trustees of the
16
<PAGE>
Trust who are affiliated persons of ML & Co. or any of its affiliates. The Fund
pays all other expenses incurred in its operation and a portion of the Trust's
general administrative expenses allocated on the basis of the asset size of the
respective series of the Trust ('Series'). Expenses that will be borne directly
by the Series include, among other things, redemption expenses, expenses of
portfolio transactions, expenses of registering the shares under Federal and
state securities laws, pricing costs (including the daily calculation of net
asset value), expenses of printing shareholder reports, prospectuses and
statements of additional information (except to the extent paid by the
Distributor as described below), fees for legal and auditing services,
Commission fees, interest, certain taxes, and other expenses attributable to a
particular Series. Expenses that will be allocated on the basis of asset size of
the respective Series include fees and expenses of unaffiliated Trustees, state
franchise taxes, costs of printing proxies and other expenses related to
shareholder meetings, and other expenses properly payable by the Trust. The
organizational expenses of the Trust were paid by the Trust, and as additional
Series are added to the Trust, the organizational expenses are allocated among
the Series (including the Fund) in a manner deemed equitable by the Trustees.
Depending upon the nature of a lawsuit, litigation costs may be assessed to the
specific Series to which the lawsuit relates or allocated on the basis of the
asset size of the respective Series. The Trustees have determined that this is
an appropriate method of allocation of expenses. Accounting services are
provided to the Fund by the Manager and the Fund reimburses the Manager for its
costs in connection with such services. For the fiscal years ended July 31,
1995, 1996 and 1997, the Fund reimbursed the Manager $24,542, $55,886 and
$32,909, respectively, for accounting services. As required by the Fund's
distribution agreements, the Distributor will pay the promotional expenses of
the Fund incurred in connection with the offering of shares of the Fund. Certain
expenses in connection with account maintenance and the distribution of Class B
and Class C shares will be financed by the Fund pursuant to the Distribution
Plan in compliance with Rule 12b-1 under the 1940 Act. See 'Purchase of Shares--
Distribution Plans.'
The Manager is a limited partnership, the partners of which are ML & Co.
and Princeton Services. ML & Co. and Princeton Services are 'controlling
persons' of the Manager as defined under the 1940 Act because of their ownership
of its voting securities or their power to exercise a controlling influence over
its management or policies.
Duration and Termination. Unless earlier terminated as described herein,
the Management Agreement will remain in effect from year to year if approved
annually (a) by the Trustees of the Trust or by a majority of the outstanding
shares of the Fund and (b) by a majority of the Trustees who are not parties to
such contract or interested persons (as defined in the 1940 Act) of any such
party. Such contracts are not assignable and may be terminated without penalty
on 60 days' written notice at the option of either party thereto or by vote of
the shareholders of the Fund.
PURCHASE OF SHARES
Reference is made to 'Purchase of Shares' in the Prospectus for certain
information as to the purchase of Fund shares.
The Fund issues four classes of shares under the Merrill Lynch Select
Pricing(Service Mark) System; shares of Class A and Class D are sold to
investors choosing the initial sales charge alternatives, and shares of Class B
and Class C are sold to investors choosing the deferred sales charge
alternatives. Each Class A, Class B, Class C and Class D share of the Fund
represents identical interests in the investment portfolio of the Fund and has
the same rights, except that Class B, Class C and Class D shares bear the
expenses of the ongoing account maintenance fees, and Class B and Class C shares
bear the expenses of the ongoing distribution fees and the additional
incremental transfer agency costs resulting from the deferred sales charge
arrangements. Class B, Class C and Class D shares each have exclusive voting
rights with respect to the Rule 12b-1 distribution plan adopted with respect
to such
17
<PAGE>
class pursuant to which account maintenance and/or distribution fees are paid
(except that Class B shareholders may vote upon any material changes to expenses
charged under the Class D Distribution Plan). Each class has different exchange
privileges. See 'Shareholder Services--Exchange Privilege.'
The Merrill Lynch Select Pricing(Service Mark) System is used by more than
50 registered investment companies advised by MLAM or its affiliate, the
Manager. Funds advised by MLAM or the Manager that utilize the Merrill Lynch
Select Pricing(Service Mark) System are referred to herein as 'MLAM-advised
mutual funds.'
The Fund has entered into four separate distribution agreements with the
Distributor in connection with the continuous offering of each class of shares
of the Fund (the 'Distribution Agreements'). The Distribution Agreements
obligate the Distributor to pay certain expenses in connection with the offering
of each class of shares of the Fund. After the prospectuses, statements of
additional information and periodic reports have been prepared, set in type and
mailed to shareholders, the Distributor pays for the printing and distribution
of copies thereof used in connection with the offering to dealers and
prospective investors. The Distributor also pays for other supplementary sales
literature and advertising costs. The Distribution Agreements are subject to the
same renewal requirements and termination provisions as the Management Agreement
described above.
INITIAL SALES CHARGE ALTERNATIVES--CLASS A AND CLASS D SHARES
The gross sales charges for the sale of Class A shares for the fiscal year
ended July 31, 1995 were $19,965, of which the Distributor received $2,322 and
Merrill Lynch received $17,643. The gross sales charges for the sale of Class A
shares for the fiscal year ended July 31, 1996 were $2,110, of which the
Distributor received $179 and Merrill Lynch received $1,931. The gross sales
charges for the sale of Class A shares for the fiscal year ended July 31, 1997
were $2,518, of which the Distributor received $199 and Merrill Lynch received
$2,319. For the fiscal years ended July 31, 1995, 1996 and 1997, the Distributor
received no contingent deferred sales charges ('CDSCs') with respect to
redemptions within one year after purchase of Class A shares purchased subject
to a front-end sales charge waiver. The gross sales charges for the sale of
Class D shares for the period October 21, 1994 (commencement of operations) to
July 31, 1995 were $21,134, of which the Distributor received $3,264 and Merrill
Lynch received $17,870. The gross sales charges for the sale of Class D shares
for the fiscal year ended July 31, 1996 were $8,433, of which the Distributor
received $661 and Merrill Lynch received $7,772. The gross sales charges for the
sale of Class D shares for the fiscal year ended July 31, 1997 were $8,756, of
which the Distributor received $765 and Merrill Lynch received $7,991. For the
period October 21, 1994 (commencement of operations) to July 31, 1995 and for
the fiscal years ended July 31, 1996 and 1997, the Distributor received no CDSCs
with respect to redemption within one year after purchase of Class D shares
purchased subject to a front-end sales charge waiver.
The term 'purchase,' as used in the Prospectus and this Statement of
Additional Information in connection with an investment in Class A and Class D
shares of the Fund, refers to a single purchase by an individual, or to
concurrent purchases, which in the aggregate are at least equal to the
prescribed amounts, by an individual, his spouse and their children under the
age of 21 years purchasing shares for his or their own account and to single
purchases by a trustee or other fiduciary purchasing shares for a single trust
estate or single fiduciary account although more than one beneficiary is
involved. The term 'purchase' also includes purchases by any 'company,' as that
term is defined in the 1940 Act, but does not include purchases by any such
company that has not been in existence for at least six months or which has no
purpose other than the purchase of shares of the Fund or shares of other
registered investment companies at a discount; provided, however, that it shall
not include purchases by any group of individuals whose sole organizational
nexus is that the participants therein are credit cardholders of a company,
policyholders of an insurance company, customers of either a bank or
broker-dealer or clients of an investment adviser.
18
<PAGE>
Closed-End Investment Option. Class A shares of the Fund and certain other
MLAM-advised mutual funds ('Eligible Class A shares') are offered at net asset
value to shareholders of certain closed-end funds advised by the Manager or MLAM
who purchased such closed-end fund shares prior to October 21, 1994 and wish to
reinvest the net proceeds from a sale of their closed-end fund shares of common
stock in Eligible Class A or Class D shares, if the conditions set forth below
are satisfied. Alternatively, closed-end fund shareholders who purchased such
shares on or after October 21, 1994 and wish to reinvest the net proceeds from a
sale of their closed-end fund shares are offered Class A shares (if eligible to
buy Class A shares) or Class D shares of the Fund and other MLAM-advised mutual
funds ('Eligible Class D shares'), if the following conditions are met. First,
the sale of closed-end fund shares must be made through Merrill Lynch, and the
net proceeds therefrom must be immediately reinvested in Eligible Class A or
Class D shares. Second, the closed-end fund shares must either have been
acquired in the initial public offering or be shares representing dividends from
shares of common stock acquired in such offering. Third, the closed-end fund
shares must have been continuously maintained in a Merrill Lynch securities
account. Fourth, there must be a minimum purchase of $250 to be eligible for the
investment option.
Shareholders of certain MLAM-advised continuously offered closed-end funds
may reinvest at net asset value the net proceeds from a sale of certain shares
of common stock of such funds in shares of the Fund. Upon exercise of this
investment option, shareholders of Merrill Lynch Senior Floating Rate Fund, Inc.
will receive Class A shares of the Fund and shareholders of Merrill Lynch
Municipal Strategy Fund, Inc. and Merrill Lynch High Income Municipal Bond Fund,
Inc. will receive Class D shares of the Fund, except that shareholders already
owning Class A shares of the Fund will be eligible to purchase additional Class
A shares pursuant to this option, if such additional Class A shares will be held
in the same account as the existing Class A shares and the other requirements
pertaining to the reinvestment privilege are met. In order to exercise this
investment option, a shareholder of one of the above-referenced continuously
offered closed-end funds (an 'eligible fund') must sell his or her shares of
common stock of the eligible fund (the 'eligible shares') back to the eligible
fund in connection with a tender offer conducted by the eligible fund and
reinvest the proceeds immediately in the designated class of shares of the Fund.
This investment option is available only with respect to eligible shares as to
which no Early Withdrawal Charge or CDSC (each as defined in the eligible fund's
prospectus) is applicable. Purchase orders from eligible fund shareholders
wishing to exercise this investment option will be accepted only on the day that
the related tender offer terminates and will be effected at the net asset value
of the designated class of the Fund on such day.
REDUCED INITIAL SALES CHARGES
Right of Accumulation. Reduced sales charges are applicable through a
right of accumulation under which eligible investors are permitted to purchase
shares of the Fund subject to an initial sales charge at the offering price
applicable to the total of (a) the public offering price of the shares then
being purchased plus (b) an amount equal to the then current net asset value or
cost, whichever is higher, of the purchaser's combined holdings of all classes
of shares of the Fund and of other MLAM-advised mutual funds. For any such right
of accumulation to be made available, the Distributor must be provided at the
time of purchase, by the purchaser or the purchaser's securities dealer, with
sufficient information to permit confirmation of qualification. Acceptance of
the purchase order is subject to such confirmation. The right of accumulation
may be amended or terminated at any time. Shares held in the name of a nominee
or custodian under pension, profit-sharing or other employee benefit plans may
not be combined with other shares to qualify for the right of accumulation.
Letter of Intention. Reduced sales charges are applicable to purchases
aggregating $25,000 or more of the Class A or Class D shares of the Fund or any
other MLAM-advised mutual funds made within a 13-month period
19
<PAGE>
starting with the first purchase pursuant to a Letter of Intention in the form
provided in the Prospectus. The Letter of Intention is available only to
investors whose accounts are maintained at the Fund's transfer agent. The Letter
of Intention is not available to employee benefit plans for which Merrill Lynch
provides plan participant, record keeping services. The Letter of Intention is
not a binding obligation to purchase any amount of Class A or Class D shares;
however, its execution will result in the purchaser paying a lower sales charge
at the appropriate quantity purchase level. A purchase not originally made
pursuant to a Letter of Intention may be included under a subsequent Letter of
Intention executed within 90 days of such purchase if the Distributor is
informed in writing of this intent within such 90-day period. The value of Class
A and Class D shares of the Fund and of other MLAM-advised mutual funds
presently held, at cost or maximum offering price (whichever is higher), on the
date of the first purchase under the Letter of Intention, may be included as a
credit toward the completion of such Letter, but the reduced sales charge
applicable to the amount covered by such Letter will be applied only to new
purchases. If the total amount of shares does not equal the amount stated in the
Letter of Intention (minimum of $25,000), the investor will be notified and must
pay, within 20 days of the expiration of such Letter, the difference between the
sales charge on the Class A or Class D shares purchased at the reduced rate and
the sales charge applicable to the shares actually purchased through the Letter.
Class A or Class D shares equal to at least five percent of the intended amount
will be held in escrow during the 13-month period (while remaining registered in
the name of the purchaser) for this purpose. The first purchase under the Letter
of Intention must be at least five percent of the dollar amount of such Letter.
If a purchase during the term of such Letter would otherwise be subject to a
further reduced sales charge based on the right of accumulation, the purchaser
will be entitled on that purchase and subsequent purchases to that further
reduced percentage sales charge, but there will be no retroactive reduction of
the sales charges on any previous purchase. The value of any shares redeemed or
otherwise disposed of by the purchaser prior to termination or completion of the
Letter of Intention will be deducted from the total purchases made under such
Letter. An exchange from a MLAM-advised money market fund into the Fund that
creates a sales charge will count toward completing a new or existing Letter of
Intention from the Fund.
Employee Access(Service Mark) Accounts. Provided applicable threshold
requirements are met, either Class A or Class D shares are offered at net asset
value to Employee Access(Service Mark) Accounts available through authorized
employers. The initial minimum for such accounts is $500, except that the
initial minimum for shares purchased for such accounts pursuant to the Automatic
Investment Program is $50.
TMA(Service Mark) Managed Trusts. Class A shares are offered at net asset
value to TMA(Service Mark) Managed Trusts to which Merrill Lynch Trust Company
provides discretionary trustee services.
Purchase Privilege of Certain Persons. Trustees of the Trust, members of
the Boards of other MLAM-advised investment companies, ML & Co. and its
subsidiaries (the term 'subsidiaries,' when used herein with respect to ML &
Co., includes MLAM, the Manager and certain other entities directly or
indirectly wholly-owned and controlled by ML & Co.), and their directors and
employees, and any trust, pension, profit-sharing or other benefit plan for such
persons, may purchase Class A shares of the Fund at net asset value.
Class D shares of the Fund are offered at net asset value, without a sales
charge, to an investor who has a business relationship with a Financial
Consultant who joined Merrill Lynch from another investment firm within six
months prior to the date of purchase by such investor, if the following
conditions are satisfied: first, the investor must advise Merrill Lynch that it
will purchase Class D shares of the Fund with proceeds from a redemption of a
mutual fund that was sponsored by the Financial Consultant's previous firm and
was subject to a sales charge either at the time of purchase or on a deferred
basis; and second, the investor also must establish that such redemption had
been made within 60 days prior to the investment in the Fund, and the proceeds
from the redemption had been maintained in the interim in cash or a money market
fund.
20
<PAGE>
Class D shares of the Fund are also offered at the net asset value, without
a sales charge, to an investor who has a business relationship with a Merrill
Lynch Financial Consultant and who has invested in a mutual fund sponsored by a
non-Merrill Lynch company for which Merrill Lynch has served as a selected
dealer and where Merrill Lynch has either received or given notice that such
arrangement will be terminated ('notice'), if the following conditions are
satisfied: first, the investor must purchase Class D shares of the Fund with
proceeds from a redemption of shares of such other mutual fund and the shares of
such other fund were subject to a sales charge either at the time of purchase or
on a deferred basis; and second, such purchase of Class D shares must be made
within 90 days after such notice.
Class D shares of the Fund are offered at net asset value, without a sales
charge, to an investor who has a business relationship with a Merrill Lynch
Financial Consultant and who has invested in a mutual fund for which Merrill
Lynch has not served as a selected dealer if the following conditions are
satisfied: first, the investor must advise Merrill Lynch that it will purchase
Class D shares of the Fund with proceeds from the redemption of shares of such
other mutual fund and that such shares have been outstanding for a period of no
less than six months; and second, such purchase of Class D shares must be made
within 60 days after the redemption and the proceeds from the redemption must be
maintained in the interim in cash or a money market fund.
Acquisition of Certain Investment Companies. The public offering price of
Class D shares may be reduced to the net asset value per Class D share in
connection with the acquisition of the assets of or merger or consolidation with
a personal holding company or a public or private investment company. The value
of the assets or company acquired in a tax-free transaction may be adjusted in
appropriate cases to reduce possible adverse tax consequences to the Fund that
might result from an acquisition of assets having net unrealized appreciation
that is disproportionately higher at the time of acquisition than the realized
or unrealized appreciation of the Fund. The issuance of Class D shares for
consideration other than cash is limited to bona fide reorganizations, statutory
mergers or other acquisitions of portfolio securities that (i) meet the
investment objective and policies of the Fund; (ii) are acquired for investment
and not for resale (subject to the understanding that the disposition of the
Fund's portfolio securities shall at all times remain within its control); and
(iii) are liquid securities, the value of which is readily ascertainable, that
are not restricted as to transfer either by law or liquidity of market (except
that the Fund may acquire through such transactions restricted or illiquid
securities to the extent the Fund does not exceed the applicable limits on
acquisition of such securities set forth under 'Investment Objective and
Policies' herein).
Reductions in or exemptions from the imposition of a sales load are due to
the nature of the investors and/or the reduced sales efforts that will be needed
in obtaining such investments.
DISTRIBUTION PLANS
Reference is made to 'Purchase of Shares--Distribution Plans' in the
Prospectus for certain information with respect to the separate distribution
plans for Class B, Class C and Class D shares pursuant to Rule 12b-1 under the
1940 Act (each a 'Distribution Plan') with respect to the account maintenance
and/or distribution fees paid by the Fund to the Distributor with respect to
such classes.
Payments of the account maintenance fees and/or distribution fees are
subject to the provisions of Rule 12b-1 under the 1940 Act. Among other things,
each Distribution Plan provides that the Distributor shall provide and the
Trustees shall review quarterly reports of the disbursement of the account
maintenance and/or distribution fees paid to the Distributor. In their
consideration of each Distribution Plan, the Trustees must consider all factors
they deem relevant, including information as to the benefits of the Distribution
Plan to the Fund and its related class of shareholders. Each Distribution Plan
further provides that, so long as the Distribution
21
<PAGE>
Plan remains in effect, the selection and nomination of Trustees who are not
'interested persons' of the Trust, as defined in the 1940 Act (the 'Independent
Trustees'), shall be committed to the discretion of the Independent Trustees
then in office. In approving each Distribution Plan in accordance with Rule
12b-1, the Independent Trustees concluded that there is reasonable likelihood
that each Distribution Plan will benefit the Fund and its related class of
shareholders. Each Distribution Plan can be terminated at any time, without
penalty, by the vote of a majority of the Independent Trustees or by the vote of
the holders of a majority of the outstanding related class of voting securities
of the Fund. A Distribution Plan cannot be amended to increase materially the
amount to be spent by the Fund without the approval of the related class of
shareholders, and all material amendments are required to be approved by the
vote of Trustees, including a majority of the Independent Trustees who have no
direct or indirect financial interest in such Distribution Plan, cast in person
at a meeting called for that purpose. Rule 12b-1 further requires that the Trust
preserve copies of each Distribution Plan and any report made pursuant to such
plan for a period of not less than six years from the date of such Distribution
Plan or such report, the first two years in an easily accessible place.
LIMITATIONS ON THE PAYMENT OF DEFERRED SALES CHARGES
The maximum sales charge rule in the Conduct Rules of the National
Association of Securities Dealers, Inc. (the 'NASD') imposes a limitation on
certain asset-based sales charges such as the distribution fee and the CDSC
borne by the Class B and Class C shares but not the account maintenance fee. The
maximum sales charge rule is applied separately to each class. As applicable to
the Fund, the maximum sales charge rule limits the aggregate of distribution fee
payments and CDSCs payable by the Fund to (1) 6.25% of eligible gross sales of
Class B shares and Class C shares, computed separately (defined to exclude
shares issued pursuant to dividend reinvestments and exchanges), plus (2)
interest on the unpaid balance for the respective class, computed separately, at
the prime rate plus 1% (the unpaid balance being the maximum amount payable
minus amounts received from the payment of the distribution fee and the CDSC).
In connection with the Class B shares, the Distributor has voluntarily agreed to
waive interest charges on the unpaid balance in excess of 0.50% of eligible
gross sales. Consequently, the maximum amount payable to the Distributor
(referred to as the 'voluntary maximum') in connection with the Class B shares
is 6.75% of eligible gross sales. The Distributor retains the right to stop
waiving the interest charges at any time. To the extent payments would exceed
the voluntary maximum, the Fund will not make further payments of the
distribution fee with respect to Class B shares, and any CDSCs will be paid to
the Fund rather than to the Distributor; however, the Fund will continue to make
payments of the account maintenance fee. In certain circumstances the amount
payable pursuant to the voluntary maximum may exceed the amount payable under
the NASD formula. In such circumstances payment in excess of the amount payable
under the NASD formula will not be made.
22
<PAGE>
The following table sets forth comparative information as of July 31, 1997
with respect to the Class B and Class C shares of the Fund indicating the
maximum allowable payments that can be made under the NASD maximum sales charge
rule and, with respect to Class B shares, the Distributor's voluntary maximum.
<TABLE>
<CAPTION>
DATA CALCULATED AS OF JULY 31, 1997
-------------------------------------------------------------------------------------------
(IN THOUSANDS)
ANNUAL
DISTRIBUTION
ALLOWABLE ALLOWABLE AMOUNTS FEE AT
ELIGIBLE AGGREGATE INTEREST ON MAXIMUM PREVIOUSLY AGGREGATE CURRENT
GROSS SALES UNPAID AMOUNT PAID TO UNPAID NET ASSET
SALES (1) CHARGES BALANCE (2) PAYABLE DISTRIBUTOR (3) BALANCE LEVEL (4)
--------- --------- ----------- ------- ---------------- --------- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
CLASS B SHARES, FOR THE PERIOD MAY
6, 1994 (COMMENCEMENT OF
OPERATIONS) TO JULY 31, 1997:
Under NASD Rule as Adopted.......... $16,126 $1,008 $229 $1,237 $232 $1,005 $29
Under Distributor's Voluntary
Waiver............................ $16,126 $1,008 $81 $1,089 $232 $857 $29
CLASS C SHARES, FOR THE PERIOD
OCTOBER 21, 1994 (COMMENCEMENT OF
OPERATIONS) TO JULY 31, 1997:
Under NASD Rule as Adopted.......... $1,097 $69 $7 $76 $5 $71 $4
</TABLE>
- ------------------
(1) Purchase price of all eligible Class B or Class C shares sold during the
periods indicated other than shares acquired through dividend reinvestment
and the exchange privilege.
(2) Interest is computed on a monthly basis based upon the prime rate, as
reported in The Wall Street Journal, plus 1.0%, as permitted under the NASD
Rule.
(3) Consists of CDSC payments, distribution fee payments and accruals. See
'Purchase of Shares--Distribution Plans' in the Prospectus. This figure may
include CDSCs that were deferred when a shareholder redeemed shares prior to
the expiration of the applicable CDSC period and invested the proceeds
without the imposition of a sales charge, in Class A shares in conjunction
with the shareholder's participation in the Merrill Lynch Mutual Fund
Advisor (Merrill Lynch MFA(Service Mark)) Program (the 'MFA Program'). The
CDSC is booked as a contingent obligation that may be payable if the
shareholder terminates participation in the MFA Program.
(4) Provided to illustrate the extent to which the current level of distribution
fee payments (not including any CDSC payments) is amortizing the unpaid
balance. No assurance can be given that payments of the distribution fee
will reach either the voluntary maximum or the NASD maximum.
REDEMPTION OF SHARES
Reference is made to 'Redemption of Shares' in the Prospectus for certain
information as to the redemption and repurchase of Fund shares.
The right to redeem shares or to receive payment with respect to any such
redemption may be suspended for more than seven days only for any period during
which trading on the NYSE is restricted as determined by the Commission or the
NYSE is closed (other than customary weekend and holiday closings), for any
period during which an emergency exists, as defined by the Commission, as a
result of which disposal of portfolio securities or determination of the net
asset value of the Fund is not reasonably practicable, and for such other
periods as the Commission may by order permit for the protection of shareholders
of the Fund.
The value of shares at the time of the redemption may be more or less than
the shareholder's cost, depending in part on the market value of the securities
held by the Fund at such time.
23
<PAGE>
DEFERRED SALES CHARGES--CLASS B AND CLASS C SHARES
As discussed in the Prospectus under 'Purchase of Shares--Deferred Sales
Charge Alternatives--Class B and Class C Shares,' while Class B shares redeemed
within four years of purchase are subject to a CDSC under most circumstances,
the charge is waived on redemptions of Class B shares in certain instances
including following the death or disability of a Class B shareholder.
Redemptions for which the waiver applies, in case of such withdrawal, are any
partial or complete redemption following the death or disability (as defined in
the Code) of a Class B shareholder (including one who owns the Class B shares as
joint tenant with his or her spouse), provided the redemption is requested
within one year of the death or initial determination of disability. For the
fiscal years ended July 31, 1995, 1996 and 1997, the Distributor received CDSCs
of $15,982, $43,949, and $58,462, respectively, with respect to redemptions of
Class B shares, all of which were paid to Merrill Lynch. Additional CDSCs
payable to the Distributor during the fiscal year ended July 31, 1997, may have
been waived or converted to a contingent obligation in connection with a
shareholder's participation in certain fee-based programs. For the period
October 21, 1994 (commencement of operations) to July 31, 1995 and for the
fiscal year ended July 31, 1996, the Distributor received no CDSCs with respect
to redemptions of Class C shares. For the fiscal year ended July 31, 1997, the
Distributor received CDSCs of $64 with respect to redemptions of Class C shares,
all of which were paid to Merrill Lynch.
PORTFOLIO TRANSACTIONS
Reference is made to 'Investment Objective and Policies' and 'Portfolio
Transactions' in the Prospectus.
Under the 1940 Act, persons affiliated with the Trust are prohibited from
dealing with the Fund as a principal in the purchase and sale of securities
unless such trading is permitted by an exemptive order issued by the Commission.
Since over-the-counter ('OTC') transactions are usually principal transactions,
affiliated persons of the Trust, including Merrill Lynch, may not serve as
dealer in connection with transactions with the Fund. The Trust has obtained an
exemptive order permitting it to engage in certain principal transactions with
Merrill Lynch involving high quality short-term municipal bonds subject to
certain conditions. For the fiscal years ended July 31, 1995, 1996 and 1997, the
Fund engaged in no transactions pursuant to such order. Affiliated persons of
the Trust may serve as broker for the Fund in OTC transactions conducted on an
agency basis. Certain court decisions have raised questions as to the extent to
which investment companies should seek exemptions under the 1940 Act in order to
seek to recapture underwriting and dealer spreads from affiliated entities. The
Trustees have considered all factors deemed relevant, and have made a
determination not to seek such recapture at this time. The Trustees will
reconsider this matter from time to time.
The Fund may not purchase securities, including Municipal Bonds, during the
existence of any underwriting syndicate of which Merrill Lynch is a member or in
a private placement in which Merrill Lynch serves as placement agent except
pursuant to procedures approved by the Trustees of the Trust which either comply
with rules adopted by the Commission or with interpretations of the Commission
staff. Rule 10f-3 under the 1940 Act sets forth conditions under which the Fund
may purchase municipal bonds from an underwriting syndicate of which Merrill
Lynch is a member. The rule sets forth requirements relating to, among other
things, the terms of an issue of municipal bonds purchased by the Fund, the
amount of municipal bonds which may be purchased in any one issue and the assets
of the Fund which may be invested in a particular issue.
The Fund does not expect to use any particular dealer in the execution of
transactions but, subject to obtaining the best net results, dealers who provide
supplemental investment research (such as information concerning tax-exempt
securities, economic data and market forecasts) to the Manager may receive
orders for transactions by the Fund. Information so received will be in addition
to and not in lieu of the services required to
24
<PAGE>
be performed by the Manager under its Management Agreement and the expenses of
the Manager will not necessarily be reduced as a result of the receipt of such
supplemental information.
The Trust has no obligation to deal with any broker in the execution of
transactions for the Fund's portfolio securities. In addition, consistent with
the Conduct Rules of the NASD and policies established by the Trustees of the
Trust, the Manager may consider sales of shares of the Fund as a factor in the
selection of brokers or dealers to execute portfolio transactions for the Fund.
Generally, the Fund does not purchase securities for short-term trading
profits. However, the Fund may dispose of securities without regard to the time
they have been held when such action, for defensive or other reasons, appears
advisable to its Manager. As a result of the investment policies described in
the Prospectus, the Fund's annual portfolio turnover rate may be higher than
that of other investment companies. (The portfolio turnover rate is calculated
by dividing the lesser of purchases or sales of portfolio securities for the
particular fiscal year by the monthly average of the value of the portfolio
securities owned by the Fund during the particular fiscal year. For purposes of
determining this rate, all securities whose maturities at the time of
acquisition are one year or less are excluded.) The portfolio turnover rates for
the fiscal years ended July 31, 1996 and 1997 were 63.02%, and 40.53%,
respectively.
Section 11(a) of the Securities Exchange Act of 1934, as amended, generally
prohibits members of the U.S. national securities exchanges from executing
exchange transactions for their affiliates and institutional accounts that they
manage unless the member (i) has obtained prior express authorization from the
account to effect such transactions, (ii) at least annually furnishes the
account with a statement setting forth the aggregate compensation received by
the member in effecting such transactions, and (iii) complies with any rules the
Commission has prescribed with respect to the requirements of clauses (i) and
(ii). To the extent Section 11(a) would apply to Merrill Lynch acting as a
broker for the Fund in any of its portfolio transactions executed on any such
securities exchange of which it is a member, appropriate consents have been
obtained from the Fund and annual statements as to aggregate compensation will
be provided to the Fund.
DETERMINATION OF NET ASSET VALUE
Reference is made to 'Additional Information--Determination of Net Asset
Value' in the Prospectus for information concerning the determination of net
asset value.
The net asset value of the shares of all classes of the Fund is determined
by the Manager once daily, Monday through Friday, as of 15 minutes after the
close of business on the NYSE (generally, 4:00 p.m., New York time) on each day
during which the NYSE is open for trading. The NYSE is not open on New Year's
Day, Martin Luther King, Jr. Day, Presidents' Day, Good Friday, Memorial Day,
Independence Day, Labor Day, Thanksgiving Day and Christmas Day.
Net asset value per share is computed by dividing the sum of the value of
the securities held by the Fund plus any cash or other assets (including
interest and dividends accrued but not yet received) minus all liabilities
(including accrued expenses) by the total number of shares outstanding at such
time, rounded to the nearest cent. Expenses, including the fees payable to the
Manager and Distributor, are accrued daily. The per share net asset value of
Class B, Class C and Class D shares generally will be lower than the per share
net asset value of Class A shares, reflecting the daily expense accruals of the
account maintenance, distribution and higher transfer agency fees applicable
with respect to Class B and Class C shares and the daily expense accruals of the
account maintenance fees applicable with respect to Class D shares; moreover the
per share net asset value of Class B and Class C shares generally will be lower
than the per share net asset value of Class D shares, reflecting the daily
25
<PAGE>
expense accruals of the distribution fees, higher account maintenance fees and
higher transfer agency fees applicable with respect to Class B and Class C
shares of the Fund. It is expected, however, that the per share net asset value
of the four classes will tend to converge (although not necessarily meet)
immediately after the payment of dividends, which will differ by approximately
the amount of the expense accrual differentials between the classes.
The Municipal Bonds, and other portfolio securities in which the Fund
invests are traded primarily in OTC municipal bond and money markets and are
valued at the last available bid price in the OTC market or on the basis of
yield equivalents as obtained from one or more dealers that make markets in the
securities. One bond is the 'yield equivalent' of another bond when, taking into
account market price, maturity, coupon rate, credit rating and ultimate return
of principal, both bonds will theoretically produce an equivalent return to the
bondholder. Financial futures contracts and options thereon, which are traded on
exchanges, are valued at their settlement prices as of the close of such
exchanges. Short-term investments with a remaining maturity of 60 days or less
are valued on an amortized cost basis, which approximates market value.
Securities and assets for which market quotations are not readily available are
valued at fair value as determined in good faith by or under the direction of
the Trustees of the Trust, including valuations furnished by a pricing service
retained by the Trust, which may utilize a matrix system for valuations. The
procedures of the pricing service and its valuations are reviewed by the
officers of the Trust under the general supervision of the Trustees.
SHAREHOLDER SERVICES
The Trust offers a number of shareholder services described below which are
designed to facilitate investment in shares of the Fund. Full details as to each
of such services and copies of the various plans described below can be obtained
from the Trust, the Distributor or Merrill Lynch.
INVESTMENT ACCOUNT
Each shareholder whose account is maintained at the Transfer Agent has an
Investment Account and will receive statements, at least quarterly, from the
Transfer Agent. These statements will serve as transaction confirmations for
automatic investment purchases and the reinvestment of ordinary income dividends
and long-term capital gains distributions. These statements will also show any
other activity in the account since the previous statement. Shareholders also
will receive separate confirmations for each purchase or sale transaction other
than automatic investment purchases and the reinvestment of ordinary income
dividends and long-term capital gains distributions. A shareholder may make
additions to his or her Investment Account at any time by mailing a check
directly to the Transfer Agent.
Share certificates are issued only for full shares and only upon the
specific request of the shareholder who has an Investment Account. Issuance of
certificates representing all or only part of the full shares in an Investment
Account may be requested by a shareholder directly from the Transfer Agent.
Shareholders considering transferring their Class A or Class D shares from
Merrill Lynch to another brokerage firm or financial institution should be aware
that, if the firm to which the Class A or Class D shares are to be transferred
will not take delivery of shares of the Fund, a shareholder either must redeem
the Class A or Class D shares (paying any applicable CDSC) so that the cash
proceeds can be transferred to the account at the new firm or continue to
maintain an Investment Account at the Transfer Agent for those Class A or Class
D shares. Shareholders interested in transferring their Class B or Class C
shares from Merrill Lynch and who do not wish to have an Investment Account
maintained for such shares at the Transfer Agent may request their new brokerage
firm to maintain such shares in an account registered in the name of the
brokerage firm for the benefit
26
<PAGE>
of the shareholder at the Transfer Agent. If the new brokerage firm is willing
to accommodate the shareholder in this manner, the shareholder must request that
he or she be issued certificates for his or her shares, and then must turn the
certificates over to the new firm for re-registration as described in the
preceding sentence.
AUTOMATIC INVESTMENT PLANS
A shareholder may make additions to an Investment Account at any time by
purchasing Class A shares (if he or she is an eligible Class A investor as
described in the Prospectus) or Class B, Class C or Class D shares at the
applicable public offering price either through the shareholder's securities
dealer, or by mail directly to the Transfer Agent, acting as agent for such
securities dealers. Voluntary accumulation also can be made through a service
known as the Fund's Automatic Investment Plan whereby the Fund is authorized
through pre-authorized checks or automated clearing house debits of $50 or more
to charge the regular bank account of the shareholder on a regular basis to
provide systematic additions to the Investment Account of such shareholder.
Alternatively, investors who maintain CMA(Registered) or CBA(Registered)
accounts may arrange to have periodic investments made in the Fund in their
CMA(Registered) or CBA(Registered) account or in certain related accounts in
amounts of $100 or more through the CMA(Registered) or CBA(Registered) Automated
Investment Program.
AUTOMATIC REINVESTMENT OF DIVIDENDS AND CAPITAL GAINS DISTRIBUTIONS
Unless specific instructions are given as to the method of payment of
dividends and capital gains distributions, dividends and distributions will be
automatically reinvested in additional shares of the Fund. Such reinvestment
will be at the net asset value of shares of the Fund as of the close of business
on the monthly payment date for such dividends and distributions. Shareholders
may elect in writing to receive either their income dividends or capital gains
distributions, or both, in cash, in which event payment will be mailed on or
about the payment date.
Shareholders may, at any time, notify Merrill Lynch in writing if their
account is maintained with Merrill Lynch or notify the Transfer Agent in writing
or by telephone (1-800-MER-FUND) if their account is maintained with the
Transfer Agent, that they no longer wish to have their dividends and/or capital
gains distributions reinvested in shares of the Fund or vice versa and,
commencing ten days after receipt by the Transfer Agent of such notice, such
instructions will be effected.
SYSTEMATIC WITHDRAWAL PLANS
A shareholder may elect to make systematic withdrawals from an Investment
Account of Class A, Class B, Class C or Class D shares on either a monthly or
quarterly basis as provided below. Quarterly withdrawals are available for
shareholders who have acquired shares of the Fund having a value, based on cost
or the current offering price, of $5,000 or more, and monthly withdrawals are
available for shareholders with shares having a value of $10,000 or more.
At the time of each withdrawal payment, sufficient shares are redeemed from
those on deposit in the shareholder's account to provide the withdrawal payment
specified by the shareholder. The shareholder may specify the dollar amount and
class of shares to be redeemed. Redemptions will be made at net asset value as
determined 15 minutes after the close of business on the NYSE (generally, 4:00
p.m., New York time) on the 24th day of each month or the 24th day of the last
month of each quarter, whichever is applicable. If the NYSE is not open for
business on such date, the shares will be redeemed at the close of business on
the following business day. The check for the withdrawal payment will be mailed,
or the direct deposit for the withdrawal payment will be made, on the next
business day following redemption. When a shareholder is making systematic
withdrawals,
27
<PAGE>
dividends and distributions on all shares in the Investment Account are
reinvested automatically in Fund shares. A shareholder's Systematic Withdrawal
Plan may be terminated at any time, without charge or penalty, by the
shareholder, the Trust, the Transfer Agent or the Distributor.
With respect to redemptions of Class B and Class C shares pursuant to a
systematic withdrawal plan, the maximum number of Class B or Class C shares that
can be redeemed from an account annually shall not exceed 10% of the value of
such class in that account at the time the election to join the systematic
withdrawal plan was made. Any CDSC that otherwise might be due on such
redemption of Class B or Class C shares will be waived. Shares redeemed pursuant
to a systematic withdrawal plan will be redeemed in the same order as Class B or
Class C shares are otherwise redeemed. See 'Purchase of Shares--Deferred Sales
Charge Alternatives--Class B and Class C Shares--Contingent Deferred Sales
Charges--Class B Shares' and '--Contingent Deferred Sales Charges--Class C
Shares' in the Prospectus. Where the systematic withdrawal plan is applied to
Class B shares, upon conversion of the last Class B shares in an account to
Class D shares, the systematic withdrawal plan will automatically be applied
thereafter to Class D shares. See 'Purchase of Shares--Deferred Sales Charge
Alternatives--Class B and Class C Shares--Conversion of Class B Shares to Class
D Shares' in the Prospectus; if an investor wishes to change the amount being
withdrawn in a systematic withdrawal plan the investor should contact his or her
Financial Consultant.
Withdrawal payments should not be considered as dividends, yield or income.
Each withdrawal is a taxable event. If periodic withdrawals continuously exceed
reinvested dividends, the shareholder's original investment may be reduced
correspondingly. Purchases of additional shares concurrent with withdrawals are
ordinarily disadvantageous to the shareholder because of sales charges and tax
liabilities. The Trust will not knowingly accept purchase orders for shares of
the Fund from investors who maintain a Systematic Withdrawal Plan unless such
purchase is equal to at least one year's scheduled withdrawals or $1,200,
whichever is greater. Periodic investments may not be made into an Investment
Account in which the shareholder has elected to make systematic withdrawals.
Alternatively, a shareholder whose shares are held within a CMA(Registered)
or CBA(Registered) Account may elect to have shares redeemed on a monthly,
bimonthly, quarterly, semiannual or annual basis through the CMA(Registered) or
CBA(Registered) Systematic Redemption Program. The minimum fixed dollar amount
redeemable is $50. The proceeds of systematic redemptions will be posted to the
shareholder's account three business days after the date the shares are
redeemed. All redemptions are made at net asset value. A shareholder may elect
to have his or her shares redeemed on the first, second, third or fourth Monday
of each month, in the case of monthly redemptions, or of every other month, in
the case of bimonthly redemptions. For quarterly, semiannual or annual
redemptions, the shareholder may select the month in which the shares are to be
redeemed and may designate whether the redemption is to be made on the first,
second, third or fourth Monday of the month. If the Monday selected is not a
business day, the redemption will be processed at net asset value on the next
business day. The CMA(Registered) or CBA(Registered) Systematic Redemption
Program is not available if Fund shares are being purchased within the account
pursuant to the Automatic Investment Program. For more information on the
CMA(Registered) or CBA(Registered) Systematic Redemption Program, eligible
shareholders should contact their Financial Consultant.
EXCHANGE PRIVILEGE
U.S. shareholders of each class of shares of the Fund have an exchange
privilege with certain other MLAM-advised mutual funds. Under the Merrill Lynch
Select Pricing(Service Mark) System, Class A shareholders may exchange Class A
shares of the Fund for Class A shares of a second MLAM-advised mutual fund if
the shareholder holds any Class A shares of the second fund in his or her
account in which the exchange is made at the time of the exchange or is
otherwise eligible to purchase Class A shares of the second fund. If the Class A
shareholder wants
28
<PAGE>
to exchange Class A shares for shares of a second MLAM-advised mutual fund, but
does not hold Class A shares of the second fund in his or her account at the
time of the exchange and is not otherwise eligible to acquire Class A shares of
the second fund, the shareholder will receive Class D shares of the second fund
as a result of the exchange. Class D shares also may be exchanged for Class A
shares of a second MLAM-advised mutual fund at any time as long as, at the time
of the exchange, the shareholder holds Class A shares of the second fund in the
account in which the exchange is made or is otherwise eligible to purchase Class
A shares of the second fund. Class B, Class C and Class D shares are
exchangeable with shares of the same class of other MLAM-advised mutual funds.
For purposes of computing the CDSC that may be payable upon a disposition of the
shares acquired in the exchange, the holding period for the previously owned
shares of the Fund is 'tacked' to the holding period of the newly acquired
shares of the other fund as more fully described below. Class A, Class B, Class
C and Class D shares are also exchangeable for shares of certain MLAM-advised
money market funds as follows: Class A shares may be exchanged for shares of
Merrill Lynch Ready Assets Trust, Merrill Lynch Retirement Reserves Money Fund
(available only for exchanges within certain retirement plans), Merrill Lynch
U.S.A. Government Reserves and Merrill Lynch U.S. Treasury Money Fund; Class B,
Class C and Class D shares may be exchanged for shares of Merrill Lynch
Government Fund, Merrill Lynch Institutional Fund, Merrill Lynch Institutional
Tax-Exempt Fund and Merrill Lynch Treasury Fund. Shares with a net asset value
of at least $100 are required to qualify for the exchange privilege, and any
shares utilized in an exchange must have been held by the shareholder for at
least 15 days. It is contemplated that the exchange privilege may be applicable
to other new mutual funds whose shares may be distributed by the Distributor.
Exchanges of Class A or Class D shares outstanding ('outstanding Class A or
Class D shares') for Class A or Class D shares of another MLAM-advised mutual
fund ('new Class A or Class D shares') are transacted on the basis of relative
net asset value per Class A or Class D share, respectively, plus an amount equal
to the difference, if any, between the sales charge previously paid on the
outstanding Class A or Class D shares and the sales charge payable at the time
of the exchange on the new Class A or Class D shares. With respect to
outstanding Class A or Class D shares as to which previous exchanges have taken
place, the 'sales charge previously paid' shall include the aggregate of the
sales charges paid with respect to such Class A or Class D shares in the initial
purchase and any subsequent exchange. Class A or Class D shares issued pursuant
to dividend reinvestment are sold on a no-load basis in each of the funds
offering Class A or Class D shares. For purposes of the exchange privilege,
Class A and Class D shares acquired through dividend reinvestment shall be
deemed to have been sold with a sales charge equal to the sales charge
previously paid on the Class A or Class D shares on which the dividend was paid.
Based on this formula, Class A and Class D shares generally may be exchanged
into the Class A or Class D shares of the other funds or into shares of certain
money market funds with a reduced or without a sales charge.
In addition, each of the funds with Class B and Class C shares outstanding
('outstanding Class B or Class C shares') offers to exchange its Class B or
Class C shares for Class B or Class C shares, respectively, of another
MLAM-advised mutual fund ('new Class B or Class C shares') on the basis of
relative net asset value per Class B or Class C share, without the payment of
any CDSC that might otherwise be due on redemption of the outstanding shares.
Class B shareholders of the Fund exercising the exchange privilege will continue
to be subject to the Fund's CDSC schedule if such schedule is higher than the
CDSC schedule relating to the new Class B shares acquired through use of the
exchange privilege. In addition, Class B shares of the Fund acquired through use
of the exchange privilege will be subject to the Fund's CDSC schedule if such
schedule is higher than the CDSC schedule relating to the Class B shares of the
fund from which the exchange has been made. For purposes of computing the sales
load that may be payable on a disposition of the new Class B or Class C shares,
the holding period for the outstanding Class B or Class C shares is 'tacked' to
the holding period of the new Class B or Class C shares. For example, an
investor may exchange Class B shares of the Fund for those of Merrill
29
<PAGE>
Lynch Special Value Fund ('Special Value Fund') after having held the Fund's
Class B shares for two and a half years. The 2% CDSC that generally would apply
to a redemption would not apply to the exchange. Three years later the investor
may decide to redeem the Class B shares of Merrill Lynch Special Value Fund and
receive cash. There will be no CDSC due on this redemption, since by 'tacking'
the two and a half-year holding period of the Fund's Class B shares to the
three-year holding period for the Special Value Fund Class B shares, the
investor will be deemed to have held the Special Value Fund Class B shares for
more than five years.
Shareholders also may exchange shares of the Fund into shares of certain
money market funds advised by the Manager or its affiliates, but the period of
time that Class B or Class C shares are held in a money market fund will not
count towards satisfaction of the holding period requirement for purposes of
reducing the CDSC or, with respect to Class B shares, towards satisfaction of
the conversion period. However, shares of a money market fund that were acquired
as a result of an exchange for Class B or Class C shares of the Fund may, in
turn, be exchanged back into Class B or Class C shares, respectively, of any
fund offering such shares, in which event the holding period for Class B or
Class C shares of the newly acquired fund will be aggregated with previous
holding periods for purposes of reducing the CDSC. Thus, for example, an
investor may exchange Class B shares of the Fund for shares of Merrill Lynch
Institutional Fund ('Institutional Fund') after having held the Fund Class B
shares for two and a half years and three years later decide to redeem the
shares of Institutional Fund for cash. At the time of this redemption, the 2%
CDSC that would have been due had the Class B shares of the Fund been redeemed
for cash rather than exchanged for shares of Institutional Fund will be payable.
If, instead of such redemption the shareholder exchanged such shares for Class B
shares of a fund that the shareholder continued to hold for an additional two
and a half years, any subsequent redemption would not incur a CDSC.
Before effecting an exchange, shareholders should obtain a currently
effective prospectus of the fund into which the exchange is to be made.
To exercise the exchange privilege, a shareholder should contact his or her
Merrill Lynch Financial Consultant, who will advise the Fund of the exchange.
Shareholders of the Fund, and shareholders of the other MLAM-advised funds with
shares for which certificates have not been issued, may exercise the exchange
privilege by wire through their securities dealers. The Fund reserves the right
to require a properly completed Exchange Application. This exchange privilege
may be modified or terminated at any time in accordance with the rules of the
Commission. The Fund reserves the right to limit the number of times an investor
may exercise the exchange privilege. Certain funds may suspend the continuous
offering of their shares 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 continue to qualify the Fund for the special tax
treatment afforded regulated investment companies ('RICs') under the Internal
Revenue Code of 1986, as amended (the 'Code'). As long as it so qualifies, the
Fund (but not its shareholders) will not be subject to Federal income tax to the
extent that it distributes its net investment income and net realized capital
gains. The Trust intends to cause the Fund to distribute substantially all of
such income.
As discussed in the Fund's Prospectus, the Trust has established other
series in addition to the Fund (together with the Fund, the 'Series'). Each
Series of the Trust is treated as a separate corporation for Federal income tax
purposes. Each Series therefore is considered to be a separate entity in
determining its treatment under the rules for RICs described in the Prospectus.
Losses in one Series do not offset gains in another Series, and the requirements
(other than certain organizational requirements) for qualifying for RIC status
are determined at the Series level rather than at the Trust level.
30
<PAGE>
The Code requires a RIC to pay a nondeductible 4% excise tax to the extent
the RIC does not distribute, during each calendar year, 98% of its ordinary
income, determined on a calendar year basis, and 98% of its capital gains,
determined, in general, on an October 31 year end, plus certain undistributed
amounts from previous years. The required distributions, however, are based only
on the taxable income of a RIC. The excise tax, therefore, generally will not
apply to the tax-exempt income of a RIC, such as the Fund, that pays exempt-
interest dividends.
The Trust intends to qualify the Fund to pay 'exempt-interest dividends,'
as defined in Section 852(b)(5) of the Code. Under such section if, at the close
of each quarter of the Fund's taxable year, at least 50% of the value of its
total assets consists of obligations exempt from Federal income tax ('tax-exempt
obligations') under Section 103(a) of the Code (relating generally to
obligations of a state or local governmental unit), the Fund shall be qualified
to pay exempt-interest dividends to its Class A, Class B, Class C and Class D
shareholders (together, the 'shareholders'). Exempt-interest dividends are
dividends or any part thereof paid by the Fund that are attributable to interest
on tax-exempt obligations and designated by the Trust as exempt-interest
dividends in a written notice mailed to the Fund's shareholders within 60 days
after the close of the Fund's taxable year. For this purpose, the Fund will
allocate interest from tax-exempt obligations (as well as ordinary income,
capital gains, including new categories of capital gains, and tax preference
items, discussed below) among the Class A, Class B, Class C and Class D
shareholders according to a method (which it believes is consistent with the
Commission rule permitting the issuance and sale of multiple classes of shares)
that is based on the gross income allocable to Class A, Class B, Class C and
Class D shareholders during the taxable year, or such other method as the
Internal Revenue Service may prescribe. To the extent that the dividends
distributed to the Fund's shareholders are derived from interest income exempt
from Federal income tax under Code Section 103(a) and are properly designated as
exempt-interest dividends, they will be excludable from a shareholder's gross
income for Federal income tax purposes. Exempt-interest dividends are included,
however, in determining the portion, if any, of a person's social security
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 that constitutes exempt-interest dividends
and the portion that is exempt from New Mexico income taxes. The Fund will
allocate exempt-interest dividends among Class A, Class B, Class C and Class D
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. Holders should consult their own tax advisors regarding collateral New
Mexico income tax consequences relating to the ownership of shares of the Fund,
including, but not limited to, the inclusion of tax-exempt income attributable
to ownership of
31
<PAGE>
shares in 'modified gross income', as that term is used in the New Mexico Income
Tax Act, as amended, for purposes of determining eligibility for and the amount
of various New Mexico credits and rebates.
Distributions from investment income and capital gains of the Fund,
including exempt-interest dividends, may be subject to tax in states other than
New Mexico and may be subject to local taxes in other states. Accordingly,
investors in the Fund should consult their tax advisors with respect to the
application of such taxes to an investment in the Fund, the receipt of Fund
dividends and as to their New Mexico tax situation in general.
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.
Distributions, if any, from an excess of net long-term capital gains over net
short-term capital losses derived from the sale of securities or from certain
transactions in futures or options ('capital gain dividends') are taxable as
long-term capital gains for Federal income tax purposes, regardless of the
length of time the shareholder has owned Fund shares and, for New Mexico income
tax purposes, are treated as capital gains that are taxed at ordinary income
rates. Recent legislation creates additional categories of capital gains taxable
at different rates. Not later than 60 days after the close of its taxable year,
the Fund will provide its shareholders with a written notice designating the
amounts of any exempt-interest dividends, ordinary income dividends or capital
gain dividends, as well as the amount of capital gain dividends in the different
categories of capital gain referred to above. Distributions by the Fund,
whether from exempt-interest income, ordinary income or capital gains, will not
be eligible for the dividends received deduction allowed to corporations under
the Code.
All or a portion of the Fund's gain from the sale or redemption of
tax-exempt obligations purchased at a market discount will be treated as
ordinary income rather than capital gain. This rule may increase the amount of
ordinary income dividends received by shareholders. Distributions in excess of
the Fund's earnings and profits will first reduce the adjusted tax basis of a
holder's shares and, after such adjusted tax basis is reduced to zero, will
constitute capital gains to such holder (assuming the shares are held as a
capital asset). Any loss upon the sale or exchange of Fund shares held for six
months or less will be disallowed to the extent of any exempt-interest dividends
received by the shareholder. In addition, any such loss that is not disallowed
under the rule stated above will be treated as long-term capital loss to the
extent of any capital gain dividends received by the shareholder. If the Fund
pays a dividend in January which was declared in the previous October, November
or December to shareholders of record on a specific date in one of such months,
then such dividend will be treated for tax purposes as being paid by the Fund
and received by its shareholders on December 31 of the year in which such
dividend was declared.
The Code subjects interest received on certain otherwise tax-exempt
securities to an alternative minimum tax. The alternative minimum tax applies to
interest received on certain 'private activity bonds' issued after August 7,
1986. Private activity bonds are bonds which, although tax-exempt, are used for
purposes other than those generally performed by governmental units and which
benefit non-governmental entities (e.g., bonds used for industrial development
or housing purposes). Income received on such bonds is classified as an item of
'tax preference,' which could subject certain investors in such bonds, including
shareholders of the Fund, to an alternative minimum tax. The Fund will purchase
such 'private activity bonds,' and the Trust will report to shareholders within
60 days after the Fund's taxable year-end the portion of the Fund's dividends
declared during the year which constitutes an item of tax preference for
alternative minimum tax purposes. The Code further provides that corporations
are subject to an alternative minimum tax based, in part, on certain differences
between taxable income as adjusted for other tax preferences and the
corporation's 'adjusted current earnings,' which more closely reflect a
corporation's economic income. Because an exempt-interest dividend paid by the
32
<PAGE>
Fund will be included in adjusted current earnings, a corporate shareholder may
be required to pay alternative minimum tax on exempt-interest dividends paid by
the Fund.
The Fund may invest in high yield securities, as described in the
Prospectus. Furthermore, the Fund may also invest in instruments the return on
which includes nontraditional features such as indexed principal or interest
payments ('nontraditional instruments'). These instruments may be subject to
special tax rules under which the Fund may be required to accrue and distribute
income before amounts due under the obligations are paid. In addition, it is
possible that all or a portion of the interest payments on such high yield
securities and/or nontraditional instruments could be recharacterized as taxable
ordinary income.
No gain or loss will be recognized by Class B shareholders on the
conversion of their Class B shares into Class D shares. A shareholder's basis in
the Class D shares acquired will be the same as such shareholder's basis in the
Class B shares converted, and the holding period of the acquired Class D shares
will include the holding period for the converted Class B shares.
If a shareholder exercises an exchange privilege within 90 days of
acquiring the shares, then the loss the shareholder can recognize on the
exchange will be reduced (or the gain increased) to the extent any sales charge
paid to the Fund on the exchanged shares reduces any sales charge the
shareholder would have owed upon purchase of the new shares in the absence of
the exchange privilege. Instead, such sales charge will be treated as an amount
paid for the new shares.
A loss realized on a sale or exchange of shares of the Fund will be
disallowed if other Fund shares are acquired (whether through the automatic
reinvestment of dividends or otherwise) within a 61-day period beginning 30 days
before and ending 30 days after the date that the shares are disposed of. In
such a case, the basis of the shares acquired will be adjusted to reflect the
disallowed loss.
Ordinary income dividends paid to shareholders who are nonresident aliens
or foreign entities will be subject to a 30% United States withholding tax under
existing provisions of the Code applicable to foreign individuals and entities
unless a reduced rate of withholding or a withholding exemption is provided
under applicable treaty law. Nonresident shareholders are urged to consult their
own tax advisors concerning the applicability of the United States withholding
tax.
Under certain Code provisions, some shareholders may be subject to a 31%
withholding tax on certain ordinary income dividends and on capital gain
dividends and redemption payments ('backup withholding'). Generally,
shareholders subject to backup withholding will be those for whom no certified
taxpayer identification number is on file with the Trust or who, to the Trust's
knowledge, have furnished an incorrect number. When establishing an account, an
investor must certify under penalty of perjury that such number is correct and
that such investor is not otherwise subject to backup withholding.
The Code provides that every person required to file a tax return must
include for information purposes on such return the amount of exempt-interest
dividends received from all sources (including the Fund) during the taxable
year.
TAX TREATMENT OF OPTIONS AND FUTURES TRANSACTIONS
The Fund may purchase or sell municipal bond index futures contracts and
interest rate futures contracts on U.S. Government securities ('financial
futures contracts'). The Fund may also purchase and write call and put options
on such financial futures contracts. In general, unless an election is available
to the Fund or an exception applies, such options and financial futures
contracts that are 'Section 1256 contracts' will be 'marked to market' for
Federal income tax purposes at the end of each taxable year, i.e., each such
option or financial
33
<PAGE>
futures contract will be treated as sold for its fair market value on the last
day of the taxable year, and any gain or loss attributable to Section 1256
contracts will be 60% long-term and 40% short-term capital gain or loss.
Application of these rules to Section 1256 contracts held by the Fund may alter
the timing and character of distributions to shareholders. The mark-to-market
rules outlined above, however, will not apply to certain transactions entered
into by the Fund solely to reduce the risk of changes in price or interest rates
with respect to its investments.
Code Section 1092, which applies to certain 'straddles,' may affect the
taxation of the Fund's sales of securities and transactions in financial futures
contracts and related options. Under Section 1092, the Fund may be required to
postpone recognition for tax purposes of losses incurred in certain sales of
securities and certain closing transactions in financial futures contracts or
the related options.
One of the requirements for qualification as a RIC is that less than 30% of
the Fund's gross income be derived from gains from the sale or other disposition
of securities held for less than three months. Accordingly, the Fund may be
restricted in effecting closing transactions within three months after entering
into an option or financial futures contract. Under recently enacted
legislation, this requirement will no longer apply to the Fund after its fiscal
year ending July 31, 1998.
------------------------
The foregoing is a general and abbreviated summary of the applicable
provisions of the Code, Treasury regulations and 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, judicial or
administrative action either prospectively or retroactively.
Shareholders are urged to consult their own tax advisors regarding the
availability of any exemptions from state or local taxes and with specific
questions as to Federal, foreign, state or local taxes.
PERFORMANCE DATA
From time to time the Fund may include its average annual total return and
other total return data, as well as yield and tax-equivalent yield, in
advertisements or information furnished to present or prospective shareholders.
From time to time, the Fund may include the Fund's Morningstar risk-adjusted
performance ratings in advertisements or supplemental sales literature. Total
return 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, yield and tax-equivalent yield are determined
separately for Class A, Class B, Class C and Class D shares in accordance with
formulas specified by the Commission.
Average annual total return quotations for the specified periods are
computed by finding the average annual compounded rates of return (based on net
investment income and any realized and unrealized capital gains or losses on
portfolio investments over such periods) that would equate the initial amount
invested to the redeemable value of such investment at the end of each period.
Average annual total return is computed assuming all dividends and distributions
are reinvested and taking into account all applicable recurring and nonrecurring
expenses, including the maximum sales charge in the case of Class A and Class D
shares and the CDSC that would be applicable to a complete redemption of the
investment at the end of the specified period in the case of the Class B and
Class C shares.
The Fund also may quote annual, average annual and annualized total return
and aggregate total return performance data, both as a percentage and as a
dollar amount based on a hypothetical $1,000 investment, for
34
<PAGE>
various periods other than those noted below. Such data will be computed as
described above, except that (1) as required by the periods of the quotations,
actual annual, annualized or aggregate data, rather than average annual data,
may be quoted and (2) the maximum applicable sales charges will not be included
with respect to annual or annualized rates of return calculations. Aside from
the impact on the performance data calculations of including or excluding the
maximum applicable sales charges, actual annual or annualized total return data
generally will be lower than average annual total return data since the average
rates of return reflect compounding of return; aggregate total return data
generally will be higher than average annual total return data since the
aggregate rates of return reflect compounding over a longer period of time.
Set forth below is total return, yield and tax-equivalent yield information
for the Class A, Class B, Class C and Class D shares of the Fund for the periods
indicated.
<TABLE>
<CAPTION>
CLASS A SHARES CLASS B SHARES
----------------------------------------- --------------------------------------
EXPRESSED REDEEMABLE VALUE EXPRESSED REDEEMABLE VALUE
AS A PERCENTAGE OF A HYPOTHETICAL AS A PERCENTAGE OF A HYPOTHETICAL
BASED ON A $1,000 INVESTMENT BASED ON A $1,000 INVESTMENT
HYPOTHETICAL AT THE END HYPOTHETICAL AT THE END
PERIOD $1,000 INVESTMENT OF THE PERIOD $1,000 INVESTMENT OF THE PERIOD
------ -------------------- ----------------- ----------------- -----------------
<S> <C> <C> <C> <C>
AVERAGE ANNUAL TOTAL RETURN
(including maximum applicable sales charge)
One year ended July 31, 1997......... 5.46% $1,054.60 5.30% $1,053.00
Inception (May 6, 1994) to
July 31, 1997...................... 6.96% $1,243.30 7.51% $1,264.00
<CAPTION>
ANNUAL TOTAL RETURN
(excluding maximum applicable sales charge)
<S> <C> <C> <C> <C>
Year ended July 31, 1997............. 9.86% $1,098.60 9.30% $1,093.00
Year ended July 31, 1996............. 6.53% $1,065.30 5.98% $1,059.80
Year ended July 31, 1995............. 6.65% $1,066.50 6.11% $1,061.10
Inception (May 6, 1994) to
July 31, 1994...................... 3.76% $1,037.60 3.64% $1,036.40
<CAPTION>
AGGREGATE TOTAL RETURN
(including maximum applicable sales charge)
<S> <C> <C> <C> <C>
Inception (May 6, 1994) to
July 31, 1997...................... 24.33% $1,243.30 26.40% $1,264.00
<CAPTION>
YIELD
<S> <C> <C> <C> <C>
30 days ended July 31, 1997.......... 4.39% 4.08%
<CAPTION>
TAX EQUIVALENT YIELD*
<S> <C> <C> <C> <C>
30 days ended July 31, 1997.......... 6.10% 5.67%
</TABLE>
- ------------------
* Based on a Federal income tax rate of 28%.
35
<PAGE>
<TABLE>
<CAPTION>
CLASS C SHARES CLASS D SHARES
----------------------------------------- --------------------------------------
EXPRESSED REDEEMABLE VALUE EXPRESSED REDEEMABLE VALUE
AS A PERCENTAGE OF A HYPOTHETICAL AS A PERCENTAGE OF A HYPOTHETICAL
BASED ON A $1,000 INVESTMENT BASED ON A $1,000 INVESTMENT
HYPOTHETICAL AT THE END HYPOTHETICAL AT THE END
PERIOD $1,000 INVESTMENT OF THE PERIOD $1,000 INVESTMENT OF THE PERIOD
------ -------------------- ----------------- ----------------- -----------------
AVERAGE ANNUAL TOTAL RETURN
(including maximum applicable sales charge)
<S> <C> <C> <C> <C>
One year ended July 31, 1997......... 8.29% $1,082.90 5.36% $1,053.60
Inception (October 21, 1994) to
July 31, 1997...................... 8.48% $1,253.40 7.46% $1,221.20
<CAPTION>
ANNUAL TOTAL RETURN
(excluding maximum applicable sales charge)
<S> <C> <C> <C> <C>
Year ended July 31, 1997............. 9.29% $1,092.90 9.75% $1,097.50
Year ended July 31, 1996............. 5.76% $1,057.60 6.42% $1,064.20
Inception (October 21, 1994) to
July 31, 1995...................... 8.44% $1,084.40 8.91% $1,089.10
<CAPTION>
AGGREGATE TOTAL RETURN
(including maximum applicable sales charge)
<S> <C> <C> <C> <C>
Inception (October 21, 1994) to
July 31, 1997...................... 25.34% $1,253.40 22.12% $1,221.20
<CAPTION>
YIELD
<S> <C> <C> <C> <C>
30 days ended July 31, 1997.......... 3.97% 4.30%
<CAPTION>
TAX EQUIVALENT YIELD*
<S> <C> <C> <C> <C>
30 days ended July 31, 1997.......... 5.51% 5.97%
</TABLE>
- ------------------
* Based on a Federal income tax rate of 28%.
In order to reflect the reduced sales charges, in the case of Class A or
Class D shares, or the waiver of the CDSC, in the case of Class B or Class C
shares, applicable to certain investors, as described under 'Purchase of Shares'
and 'Redemption of Shares,' respectively, the total return data quoted by the
Fund in advertisements directed to such investors may take into account the
reduced, and not the maximum, sales charge or may not take into account the CDSC
and, therefore, may reflect greater total return since, due to the reduced sales
charges or the waiver of sales charges, a lower amount of expenses may be
deducted.
GENERAL INFORMATION
DESCRIPTION OF SHARES
The Declaration of Trust provides that the Trust shall be comprised of
separate Series each of which will consist of a separate portfolio which will
issue separate shares. The Trust is presently comprised of the Fund, Merrill
Lynch Arizona Municipal Bond Fund, Merrill Lynch Arkansas Municipal Bond Fund,
Merrill Lynch Colorado Municipal Bond Fund, Merrill Lynch Connecticut Municipal
Bond Fund, Merrill Lynch Florida Municipal Bond Fund, Merrill Lynch Maryland
Municipal Bond Fund, Merrill Lynch Massachusetts Municipal Bond Fund, Merrill
Lynch Michigan Municipal Bond Fund, Merrill Lynch Minnesota Municipal Bond Fund,
Merrill Lynch New Jersey Municipal Bond Fund, Merrill Lynch New 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
36
<PAGE>
Bond Fund. The Trustees are authorized to create an unlimited number of Series
and, with respect to each Series, to issue an unlimited number of full and
fractional shares of beneficial interest, par value $.10 per share, of different
classes and to divide or combine the shares into a greater or lesser number of
shares without thereby changing the proportionate beneficial interests in the
Series. Shareholder approval is not necessary for the authorization of
additional Series or classes of a Series of the Trust. At the date of this
Statement of Additional Information, the shares of the Fund are divided into
Class A, Class B, Class C and Class D shares. Class A, Class B, Class C and
Class D shares represent interests in the same assets of the Fund and are
identical in all respects except that Class B, Class C and Class D shares bear
certain expenses related to the account maintenance and/or distribution of such
shares and have exclusive voting rights with respect to matters relating to such
account maintenance and/or distribution expenditures. The Board of Trustees of
the Trust may classify and reclassify the shares of any Series into additional
or other classes at a future date.
All shares of the Trust have equal voting rights, except that only shares
of the respective Series are entitled to vote on matters concerning only that
Series and, as noted above, Class B, Class C and Class D shares will have
exclusive voting rights with respect to matters relating to the account
maintenance and/or distribution expenses, as appropriate, being borne solely by
such class. Each issued and outstanding share of a Series is entitled to one
vote and to participate equally in dividends and distributions declared with
respect to that Series and, upon liquidation or dissolution of the Series, in
the net assets of such Series remaining after satisfaction of outstanding
liabilities, except that, as noted above, expenses relating to distribution
and/or account maintenance of the Class B, Class C and Class D shares are borne
solely by the respective class. There normally will be no meeting of
shareholders for the purposes of electing Trustees unless and until such time as
less than a majority of the Trustees holding office have been elected by
shareholders, at which time the Trustees then in office will call a
shareholders' meeting for the election of Trustees. Shareholders may, in
accordance with the terms of the Declaration of Trust, cause a meeting of
shareholders to be held for the purpose of voting on the removal of Trustees.
Also, the Trust will be required to call a special meeting of shareholders in
accordance with the requirements of the 1940 Act to seek approval of new
management and advisory arrangements, of a material increase in distribution
fees or of a change in the fundamental policies, objectives or restrictions of a
Series.
The obligations and liabilities of a particular Series are restricted to
the assets of that Series and do not extend to the assets of the Trust
generally. The shares of each Series, when issued, will be fully paid and
nonassessable, have no preference, preemptive, conversion, exchange or similar
rights, and will be freely transferable. Holders of shares of any Series are
entitled to redeem their shares as set forth elsewhere herein and in the
Prospectus. Shares do not have cumulative voting rights and the holders of more
than 50% of the shares of the Trust voting for the election of Trustees can
elect all of the Trustees if they choose to do so, and in such event the holders
of the remaining shares would not be able to elect any Trustees. No amendments
may be made to the Declaration of Trust other than amendments necessary to
conform the Declaration to certain laws or regulations, to change the name of
the Trust, or to make certain non-material changes, without the affirmative vote
of a majority of the outstanding shares of the Trust or of the affected Series
or class, as applicable.
Under Massachusetts law, shareholders of a business trust may, under
certain circumstances, be held personally liable as partners for the trust's
obligations. However, the risk of a shareholder incurring financial loss on
account of shareholder liability is limited to circumstances in which both
inadequate insurance existed and the trust itself was unable to meet its
obligations.
The Manager provided the initial capital for the Fund by purchasing 10,000
shares of the Fund for $100,000. Such shares were acquired for investment and
can only be disposed of by redemption. The organizational expenses of the Fund
were paid by the Fund and are being amortized over a period not exceeding five
years. The proceeds realized by the Manager (or any subsequent holder) upon the
redemption of any of the shares initially
37
<PAGE>
purchased by it will be reduced by the proportionate amount of unamortized
organizational expenses which the number of shares redeemed bears to the number
of shares initially purchased. Such organizational expenses include certain of
the initial organizational expenses of the Trust which have been allocated to
the Fund by the Trustees. If additional Series are added to the Trust, the
organizational expenses will be allocated among the Series in a manner deemed
equitable by the Trustees.
COMPUTATION OF OFFERING PRICE PER SHARE
An illustration of the computation of the offering price for Class A, Class
B, Class C and Class D shares of the Fund based on the value of the Fund's net
assets and number of shares outstanding on July 31, 1997 is calculated as set
forth below.
<TABLE>
<CAPTION>
CLASS A CLASS B CLASS C CLASS D
---------- ----------- ---------- ----------
<S> <C> <C> <C> <C>
Net Assets.............................................. $3,861,823 $11,703,165 $1,081,509 $2,699,427
---------- ----------- ---------- ----------
---------- ----------- ---------- ----------
Number of Shares Outstanding............................ 356,866 1,081,380 99,883 249,457
---------- ----------- ---------- ----------
---------- ----------- ---------- ----------
Net Asset Value Per Share (net assets divided by number
of shares outstanding)................................ $10.82 $10.82 $10.83 $10.82
Sales Charge (for Class A and Class D shares:
4.00% of offering price; 4.17% of net asset value per
share)*............................................... .45 ** ** .45
---------- ----------- ---------- ----------
Offering Price.......................................... $11.27 $10.82 $10.83 $11.27
---------- ----------- ---------- ----------
---------- ----------- ---------- ----------
</TABLE>
- ------------------
* Rounded to the nearest one-hundredth percent; assumes maximum sales charge is
applicable.
** Class B and Class C shares are not subject to an initial sales charge but may
be subject to a CDSC on redemption of shares. See 'Purchase of
Shares--Deferred Sales Charge Alternatives--Class B and Class C Shares' in
the Prospectus and 'Redemption of Shares--Deferred Sales Charges--Class B and
Class C Shares' herein.
INDEPENDENT AUDITORS
Deloitte & Touche LLP, 117 Campus Drive, Princeton, New Jersey 08540-6400,
has been selected as the independent auditors of the Fund. The selection of
independent auditors is subject to approval by the independent Trustees of the
Trust. The independent auditors are responsible for auditing the annual
financial statements of the Fund.
CUSTODIAN
State Street Bank and Trust Company, P.O. Box 351, Boston, Massachusetts
02101, acts as the custodian of the Fund's assets. The custodian is responsible
for safeguarding and controlling the Fund's cash and securities, handling the
delivery of securities and collecting interest on the Fund's investments.
TRANSFER AGENT
Merrill Lynch Financial Data Services, Inc., 4800 Deer Lake Drive East,
Jacksonville, Florida 32246-6484, acts as the Trust's transfer agent. The
Transfer Agent is responsible for the issuance, transfer and redemption of
shares and the opening, maintenance and servicing of shareholder accounts. See
'Management of the Trust--Transfer Agency Services' in the Prospectus.
38
<PAGE>
LEGAL COUNSEL
Brown & Wood LLP, One World Trade Center, New York, New York 10048-0557, is
counsel for the Trust.
REPORTS TO SHAREHOLDERS
The fiscal year of the Fund ends on July 31 of each year. The Trust sends
to shareholders of the Fund at least semi-annually reports showing the Fund's
portfolio and other information. An annual report, containing financial
statements audited by independent auditors, is sent to shareholders each year.
After the end of each year shareholders will receive Federal income tax
information regarding dividends and capital gains distributions.
ADDITIONAL INFORMATION
The Prospectus and this Statement of Additional Information do not contain
all the information set forth in the Registration Statement and the exhibits
relating thereto, which the Trust has filed with the Commission, Washington,
D.C., under the Securities Act and 1940 Act, to which reference is hereby made.
The Declaration of Trust establishing the Trust dated August 2, 1985, a
copy of which, together with all amendments thereto (the 'Declaration') is on
file in the office of the Secretary of the Commonwealth of Massachusetts,
provides that the name 'Merrill Lynch Multi-State Municipal Series Trust' refers
to the Trustees under the Declaration collectively as Trustees, but not as
individuals or personally; and no Trustee, shareholder, officer, employee or
agent of the Trust shall be held to any personal liability; nor shall resort be
had to any such person's private property for the satisfaction of any obligation
or claim of the Trust but the 'Trust Property' only shall be liable.
To the knowledge of the Trust, no person or entity owned beneficially 5% or
more of the Fund's shares on November 1, 1997, except as set forth below:
<TABLE>
<CAPTION>
Percent of Shares
Name and Address Outstanding Owned Beneficially
- ----------------------------- ------------------------------
<S> <C>
Drummond Hadley Ttee in Trust 9.94%
Under Drummond Hadley R.L.T.
c/o Donna Byers
335 N. Wilmot Rd. #300
Tucson, AZ 85711
</TABLE>
39
<PAGE>
APPENDIX I
ECONOMIC AND FINANCIAL INFORMATION CONCERNING NEW MEXICO
The following information is a brief summary of factors affecting the
economy of the State and does not purport to be a complete description of such
factors. Other factors will affect issuers. The summary is based primarily upon
one or more publicly available offering statements relating to debt offerings of
state issuers; however, it has not been updated nor will it be updated during
the year. The Trust has not independently verified the information.
The State, 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
According to reports of the Bureau of Business and Economic Research of the
University of New Mexico ('BBER') through July 1997 and covering reports of
economic results for 1996 and the first quarter of 1997, New Mexico's economic
growth leveled off during the period. The rate of job growth continued to slow
and personal income growth leveled off to 5% for 1996. For the year 1996,
non-agricultural employment rose 1.8 percent. It increased to 2.0 percent for
the first quarter of 1997. However, New Mexico still ranks very low with respect
to per capita income. Nevertheless, new gross state product ('GSP') estimates
from the U.S. Bureau of Economic Analysis for 1977-1994 released in June
indicate that New Mexico ranks first in terms of growth between 1990 and 1994.
Even though government is still the major employer in the State, it is
becoming less so. New Mexico's financial strength is now led by manufacturing
and services. These industries replace energy, the sector which powered New
Mexico's growth in the 1970s and early 1980s. The government sector has declined
in importance as a direct employer, increasing only 2.8 percent for 1996 and 5.4
percent for the first quarter of 1997. Services increased 2.1 percent for 1996
and 2.6 percent for the first quarter of 1997. However, both the Government
employment and the services employment statistics have been skewed by a change
in reporting those figures. Solid growth has occurred in employment by
enterprises owned by Indian tribes, especially casinos. Employment in this area,
which was formerly reported under services, is now reported by the New Mexico
Department of Labor under local government. This reclassification has improved
the growth figures for government and reduced the growth figures for services.
For example, the growth in services employment would have been close to 4.5
percent for 1996, instead of 2.1 percent, without the reclassification.
Historically, the State's economy has been highly dependent upon government
spending in general and defense spending in particular. Further job losses are
expected over the long term as a result of anticipated spending cutbacks by the
Department of Energy which will adversely impact the national laboratories at
Sandia
40
<PAGE>
in Albuquerque and at Los Alamos. New Mexico has largely escaped the negative
impacts of recent corporate downsizing which affected other parts of the United
States, reflecting the small number of large businesses headquartered in the
State.
The Albuquerque economy experienced a construction boom during the
mid-1980s, but construction employment decreased in every year from 1985 to
1991. A major increase in jobs occurred during 1992 and the construction sector
led the Albuquerque economy in 1993 and 1994, spurred by low interest rates,
pent-up demand for housing and retail and public works construction projects. In
early 1993, this sector received an immense boost when Intel Corporation began
an expansion of its microprocessor production facility in Rio Rancho, within the
Albuquerque Metropolitan Statistical Area ('MSA'), creating as many as 3,000
construction jobs as of Spring, 1993. During 1994, construction continued to be
the Albuquerque MSA's fastest growing employment sector with a 23.2% increase.
Construction employment in the Albuquerque MSA increased 4.3 percent in the
first quarter of 1996 but showed a 0.9 percent decrease for the complete year of
1996. Statewide construction employment was down 1.5 percent for 1996 and down
3.5 percent for the first quarter of 1997.
Mining employment recovered slightly to show a 0.2 percent increase for
1996 and a 1.1 percent increase for the first quarter of 1997.
Employment in the manufacturing sector increased 1.8 percent in 1996 and
3.8 percent for the first quarter of 1997.
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.
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<PAGE>
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 wages,
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 counties. 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.
In fiscal year 1995-96, total gross receipts collections, including local
option taxes, amounted to $1.564 billion. Of this amount $986 million was
distributed to the State General Fund, $577 million went to cities and counties
and $641,000 to the Aviation Fund.
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. Since State taxable income is substantially
derived from federal adjusted gross income, federal concepts characterizing
income and entities are generally followed in New Mexico. The State also allows
deductions for income earned by Indians on reservations and graduated deductions
for income earned by taxpayers 65 years old 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.
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In fiscal year 1995-1996 $665 million of personal income tax receipts was
distributed of which $589 million went to the General Fund and $3 million was
returned to taxpayers through rebates and credits. The remainder went to special
refund, intercept and donation programs.
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 1995-96 the corporate income tax resulted in net receipts of $163
million to the General Fund.
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.
The oil and gas emergency school tax rate is levied on 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 1995-96 net oil and gas emergency school tax
receipts were equal to $102 million.
GASOLINE TAX
The Gasoline Tax is levied on all gasoline received in the State and is
paid by the distributors. 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 $166 million of gasoline tax
collections in fiscal year 1995-96 was distributed as follows: $117 million to
the State Road Fund, $15.7 million to counties and municipalities, $6.6 million
for local government road funds and $6.1 million to the Corrective Action Fund.
No gasoline tax receipts were credited 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
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basis and makes the deposits to the General Fund, almost exclusively for funding
public schools. In fiscal year 1992-93, $133 million 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 1995 State lands accounted
for 35% of State oil production and 15.6% 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. Leases, rents, and bonuses in fiscal year 1995-1996 totalled $12.3
million.
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 1995-96 royalty income to the
Permanent Fund was $95.8 million.
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 $106
million for fiscal year 1995-96. 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
The School Tax, the Oil and Gas Severance Tax and the Conservation Tax
provide for deductions for trucking costs and for federal, State and Indian
royalties. Statutory rates on natural gas for the School Tax on Natural Gas, the
Oil and Gas Severance Tax, and the Conservation Tax provide for 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
Resource Excise Tax is separate and apart from the severance tax, and is levied
on persons or entities which sever or process natural resources in New Mexico.
Separate Resources Excise Taxes are levied as follows: a 'resources tax' on the
severer who owns the resource; a 'processors tax' on the processor; and a
'service tax' on one who severs a natural resource owned by another. 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
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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 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.
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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.
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.
As of the date of this Statement of Additional Information, the State's
general obligation bonds are rated AA1 by Moody's Investors Service, Inc. and
AA+ by Standard & Poor's Ratings Services, Inc.
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APPENDIX II
RATINGS OF MUNICIPAL BONDS
DESCRIPTION OF MOODY'S INVESTORS SERVICE, INC.'S ('MOODY'S') MUNICIPAL BOND
RATINGS
<TABLE>
<S> <C>
Aaa Bonds which are rated Aaa are judged to be of the best quality. They carry the smallest degree of
investment risk and are generally referred to as 'gilt edge.' Interest payments are protected by a large
or by an exceptionally stable margin and principal is secure. While the various protective elements are
likely to change, such changes as can be visualized are most unlikely to impair the fundamentally strong
position of such issues.
Aa Bonds which are rated Aa are judged to be of high quality by all standards. Together with the Aaa group
they comprise what are generally known as high grade bonds. They are rated lower than the best bonds
because margins of protection may not be as large as in Aaa securities or fluctuation of protective
elements may be of greater amplitude or there may be other elements present which make the long-term risks
appear somewhat larger than in Aaa securities.
A Bonds which are rated A possess many favorable investment attributes and are to be considered as upper
medium grade obligations. Factors giving security to principal and interest are considered adequate, but
elements may be present which suggest a susceptibility to impairment sometime in the future.
Baa Bonds which are rated Baa are considered as medium grade obligations, i.e., they are neither highly
protected nor poorly secured. Interest payment and principal security appear adequate for the present but
certain protective elements may be lacking or may be characteristically unreliable over any great length
of time. Such bonds lack outstanding investment characteristics and in fact have speculative
characteristics as well.
Ba Bonds which are rated Ba are judged to have speculative elements; their future cannot be considered as
well assured. Often the protection of interest and principal payments may be very moderate and thereby not
well safeguarded during both good and bad times over the future. Uncertainty of position characterizes
bonds in this class.
B Bonds which are rated B generally lack characteristics of the desirable investment. Assurance of interest
and principal payments or of maintenance of other terms of the contract over any long period of time may
be small.
Caa Bonds which are rated Caa are of poor standing. Such issues may be in default or there may be present
elements of danger with respect to principal or interest.
Ca Bonds which are rated Ca represent obligations which are speculative in a high degree. Such issues are
often in default or have other marked shortcomings.
C Bonds which are rated C are the lowest rated class of bonds and issues so rated can be regarded as having
extremely poor prospects of ever attaining any real investment standing.
</TABLE>
Note: Those bonds in the Aa, A, Baa, Ba and B groups which Moody's believes
possess the strongest investment attributes are designated by the symbols Aa1,
A1, Baa1, Ba1 and B1.
Short-term Notes: The four ratings of Moody's for short-term notes are 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
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notes are of 'adequate quality. . .[p]rotection commonly regarded as required of
an investment security is present. . .there is specific risk.'
DESCRIPTION OF MOODY'S COMMERCIAL PAPER RATINGS
Moody's Commercial Paper ratings are opinions of the ability of issuers to
repay punctually promissory obligations not having an original maturity in
excess of nine months. Moody's employs the following three designations, all
judged to be investment grade, to indicate the relative repayment ability of
rated issuers:
Issuers rated Prime-1 (or supporting institutions) have a superior ability
for repayment of short-term promissory obligations. Prime-1 repayment ability
will often be evidenced by many of the following characteristics: leading market
positions in well established industries; high rates of return on funds
employed; conservative capitalization structure with moderate reliance on debt
and ample asset protection; broad margins in earning coverage of fixed financial
charges and high internal cash generation; and well established access to a
range of financial markets and assured sources of alternate liquidity.
Issuers rated Prime-2 (or supporting institutions) have a strong ability
for repayment of short-term promissory obligations. This will normally be
evidenced by many of the characteristics cited above but to a lesser degree.
Earnings trends and coverage ratios, while sound, may be more subject to
variation. Capitalization characteristics, while still appropriate, may be more
affected by external conditions. Ample alternate liquidity is maintained.
Issuers rated Prime-3 (or supporting institutions) have an acceptable
ability for repayment of short-term promissory obligations. The effect of
industry characteristics and market compositions may be more pronounced.
Variability in earnings and profitability may result in changes in the level of
debt protection measurements and may require relatively high financial leverage.
Adequate alternate liquidity is maintained.
Issuers rated Not Prime do not fall within any of the Prime rating
categories.
DESCRIPTION OF STANDARD & POOR'S RATINGS SERVICES ('STANDARD & POOR'S')
MUNICIPAL DEBT RATINGS
A Standard & Poor's municipal debt rating is a current opinion of the
creditworthiness of an obligor with respect to a specific financial obligation,
a specific class of financial obligations or a specific financial program. It
takes into consideration the creditworthiness of guarantors, insurers, or other
forms of credit enhancement on the obligation.
The debt rating is not a recommendation to purchase, sell or hold a
financial obligation, inasmuch as it does not comment as to market price or
suitability for a particular investor.
The ratings are based on current information furnished by the obligors or
obtained by Standard & Poor's from other sources Standard & Poor's considers
reliable. Standard & Poor's does not perform an audit in connection with any
rating and may, on occasion, rely on unaudited financial information. The
ratings may be changed, suspended or withdrawn as a result of changes in, or
unavailability of, such information, or based on other circumstances.
The ratings are based, in varying degrees, on the following considerations:
I. Likelihood of payment--capacity and willingness of the obligor to
meet its financial commitment on an obligation in accordance with the terms
of the obligation;
II. Nature of and provisions of the obligations; and
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<PAGE>
III. Protection afforded by, and relative position of, the obligation
in the event of bankruptcy, reorganization or other arrangement under the
laws of bankruptcy and other laws affecting creditors' rights.
<TABLE>
<S> <C>
AAA Debt rated 'AAA' has the highest rating assigned by Standard & Poor's. Capacity to meet its financial
commitment on the obligation is very strong.
AA Debt rated 'AA' differs from the highest-rated obligations only in small degree. The obligor's capacity to
meet its financial commitment on the obligation is very strong.
A Debt rated 'A' is somewhat more susceptible to the adverse effects of changes in circumstances and
economic conditions than debt in higher-rated categories. However, the obligor's capacity to meet its
financial commitment on the obligation is still strong.
BBB Debt rated 'BBB' exhibits adequate protection parameters. However, adverse economic conditions or changing
circumstances are more likely to lead to a weakened capacity of the obligor to meet its financial
commitment on the obligation to pay interest and repay principal for debt in this category than for debt
in higher-rated categories.
BB Debt rated 'BB,' 'B,' 'CCC,' 'CC' and 'C' are regarded as having significant speculative characteristics.
B 'BB' indicates the least degree of speculation and 'C' the highest degree of speculation. While such debt
CCC will likely have some quality and protective characteristics, these may be outweighed by large
CC uncertainties or major exposures to adverse conditions.
C
D Debt rated 'D' is in payment default. The 'D' rating category is used when payments on an obligation are
not made on the date due even if the applicable grace period has not expired, unless Standard & Poor's
believes that such payments will be made during such grace period. The 'D' rating also will be used upon
the filing of a bankruptcy petition or the taking of a similar action if payments on an obligation are
jeopardized.
</TABLE>
Plus (+) or Minus (-): The ratings from 'AA' to 'CCC' may be modified by
the addition of a plus or minus sign to show relative standing within the major
rating categories.
DESCRIPTION OF STANDARD & POOR'S COMMERCIAL PAPER RATINGS
A Standard & Poor's Commercial Paper Rating is a current assessment of the
likelihood of timely payment of debt having an original maturity of no more than
365 days. Ratings are graded into several categories, ranging from 'A' for the
highest quality obligations to 'D' for the lowest. These categories are as
follows:
<TABLE>
<S> <C>
A-1 This designation indicates that the degree of safety regarding timely payment is strong. Those issues
determined to possess extremely strong safety characteristics are denoted with a plus sign (+)
designation.
A-2 Capacity for timely payment on issues with this designation is satisfactory. However, the relative degree
of safety is not as high as for issues designated 'A-1.'
A-3 Issues carrying this designation have an adequate capacity for timely payment. They are, however, more
vulnerable to the adverse effects of changes in circumstances than obligations carrying the higher
designations.
B Issues rated 'B' are regarded as having only speculative capacity for timely payment.
C This rating is assigned to short-term debt obligations with a doubtful capacity for payment.
</TABLE>
50
<PAGE>
<TABLE>
<S> <C>
D Debt rated 'D' is in payment default. The 'D' rating category is used when interest payments or principal
payments are not made on the date due, even if the applicable grace period has not expired, unless
Standard & Poor's believes that such payments will be made during such grace period.
</TABLE>
A Commercial Paper rating is not a recommendation to purchase or sell a
security. The ratings are based on current information furnished to Standard &
Poor's by the issuer and obtained by Standard & Poor's from other sources it
considers reliable. The ratings may be changed, suspended, or withdrawn as a
result of changes in, or unavailability of, such information.
DESCRIPTION OF STANDARD & POOR'S SHORT-TERM ISSUE CREDIT RATINGS
A Standard & Poor's note rating reflects the liquidity factors and market
access risks unique to notes. Notes due in three years or less will likely
receive a note rating. Notes maturing beyond three years will most likely
receive a long-term debt rating. The following criteria will be used in making
that assessment.
o Amortization schedule--the larger the final maturity relative to other
maturities, the more likely it will be treated as a note.
o Source of payment--the more dependent the issue is on the market for its
refinancing, the more likely it will be treated as a note.
Note rating symbols are as follows:
<TABLE>
<S> <C>
SP-1 Strong capacity to pay principal and interest. An issue determined to possess a very strong capacity to
pay debt service is given a plus (+) designation.
SP-2 Satisfactory capacity to pay principal and interest with some vulnerability to adverse financial and
economic changes over the term of the notes.
SP-3 Speculative capacity to pay principal and interest.
</TABLE>
DESCRIPTION OF FITCH INVESTORS SERVICE, INC.'S ('FITCH') INVESTMENT GRADE BOND
RATINGS
Fitch investment grade bond ratings provide a guide to investors in
determining the credit risk associated with a particular security. The ratings
represent Fitch's assessment of the issuer's ability to meet the obligations of
a specific debt issue or class of debt in a timely manner.
The rating takes into consideration special features of the issue, its
relationship to other obligations of the issuer, the current and prospective
financial condition and operating performance of the issuer and of any
guarantor, as well as the economic and political environment that might affect
the issuer's future financial strength and credit quality.
Fitch ratings do not reflect any credit enhancement that may be provided by
insurance policies or financial guaranties unless otherwise indicated.
Bonds carrying the same rating are of similar but not necessarily identical
credit quality since the rating categories do not fully reflect small
differences in the degrees of credit risk.
Fitch ratings are not recommendations to buy, sell, or hold any security.
Ratings do not comment on the adequacy of market price, the suitability of any
security for a particular investor, or the tax-exempt nature or taxability of
payments made in respect of any security.
51
<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.
<TABLE>
<S> <C>
AAA Bonds considered to be investment grade and of the highest credit quality. The obligor has an
exceptionally strong ability to pay interest and repay principal, which is unlikely to be affected by
reasonably foreseeable events.
AA Bonds considered to be investment grade and of very high credit quality. The obligor's ability to pay
interest and repay principal is very strong, although not quite as strong as bonds rated 'AAA.' Because
bonds rated in the 'AAA' and 'AA' categories are not significantly vulnerable to foreseeable future
developments, short-term debt of these issuers is generally rated 'F-1+.'
A Bonds considered to be investment grade and of high credit quality. The obligor's ability to pay interest
and repay principal is considered to be strong, but may be more vulnerable to adverse changes in economic
conditions and circumstances than bonds with higher ratings.
BBB Bonds considered to be investment grade and of satisfactory credit quality. The obligor's ability to pay
interest and repay principal is considered to be adequate. Adverse changes in economic conditions and
circumstances, however, are more likely to have adverse impact on these bonds, and therefore, impair
timely payment. The likelihood that the ratings of these bonds will fall below investment grade is higher
than for bonds with higher ratings.
</TABLE>
Plus (+) or Minus (-): Plus and minus signs are used with a rating symbol
to indicate the relative position of a credit within the rating category. Plus
and minus signs, however, are not used in the 'AAA' category.
<TABLE>
<S> <C>
NR Indicates that Fitch does not rate the specific issue.
Conditional A conditional rating is premised on the successful completion of a project or the occurrence of a
specific event.
Suspended A rating is suspended when Fitch deems the amount of information available from the issuer to be
inadequate for rating purposes.
Withdrawn A rating will be withdrawn when an issue matures or is called or refinanced and, at Fitch's
discretion, when an issuer fails to furnish proper and timely information.
FitchAlert Ratings are placed on FitchAlert to notify investors of an occurrence that is likely to result in
a rating change and the likely direction of such change. These are designated as 'Positive,'
indicating a potential upgrade, 'Negative,' for potential downgrade, or 'Evolving,' where ratings
may be raised or lowered. FitchAlert is relatively short-term, and should be resolved within 12
months.
</TABLE>
Ratings Outlook: An outlook is used to describe the most likely direction
of any rating change over the intermediate term. It is described as 'Positive'
or 'Negative.' The absence of a designation indicates a stable outlook.
DESCRIPTION OF FITCH SPECULATIVE GRADE BOND RATINGS
Fitch speculative grade bond ratings provide a guide to investors in
determining the credit risk associated with a particular security. The ratings
('BB' to 'C') represent Fitch's assessment of the likelihood of timely payment
of principal and interest in accordance with the terms of obligation for bond
issues not in default. For
52
<PAGE>
defaulted bonds, the rating ('DDD' to 'D') is an assessment of the ultimate
recovery value through reorganization or liquidation.
The rating takes into consideration special features of the issue, its
relationship to other obligations of the issuer, the current and prospective
financial condition and operating performance of the issuer and any guarantor,
as well as the economic and political environment that might affect the issuer's
future financial strength.
Bonds that have the same rating are of similar but not necessarily
identical credit quality since rating categories cannot fully reflect the
differences in degrees of credit risk.
<TABLE>
<S> <C>
BB Bonds are considered speculative. The obligor's ability to pay interest and repay principal may be
affected over time by adverse economic changes. However, business and financial alternatives can
be identified which could assist the obligor in satisfying its debt service requirements.
B Bonds are considered highly speculative. While bonds in this class are currently meeting debt
service requirements, the probability of continued timely payment of principal and interest
reflects the obligor's limited margin of safety and the need for reasonable business and economic
activity throughout the life of the issue.
CCC Bonds have certain identifiable characteristics which, if not remedied, may lead to default. The
ability to meet obligations requires an advantageous business and economic environment.
CC Bonds are minimally protected. Default in payment of interest and/or principal seems probable over
time.
C Bonds are in imminent default in payment of interest or principal.
DDD Bonds are in default on interest and/or principal payments. Such bonds are extremely speculative
DD and should be valued on the basis of their ultimate recovery value in liquidation or
D reorganization of the obligor. 'DDD' represents the highest potential for recovery on these bonds,
and 'D' represents the lowest potential for recovery.
</TABLE>
Plus (+) or Minus (-): Plus and minus signs are used with a rating symbol
to indicate the relative position of a credit within the rating category. Plus
and minus signs, however, are not used in the 'DDD,' 'DD,' or 'D' categories.
DESCRIPTION OF FITCH INVESTMENT GRADE SHORT-TERM RATINGS
Fitch's short-term ratings apply to debt obligations that are payable on
demand or have original maturities of generally up to three years, including
commercial paper, certificates of deposit, medium-term notes, and municipal and
investment notes.
The short-term rating places greater emphasis than a long-term rating on
the existence of liquidity necessary to meet the issuer's obligations in a
timely manner.
Fitch short-term ratings are as follows:
<TABLE>
<S> <C>
F-1+ Exceptionally Strong Credit Quality. Issues assigned this rating are regarded as having the strongest
degree of assurance for timely payment.
</TABLE>
53
<PAGE>
<TABLE>
<S> <C>
F-1 Very Strong Credit Quality. Issues assigned this rating reflect an assurance of timely payment only
slightly less in degree than issues rated 'F-1+.'
F-2 Good Credit Quality. Issues assigned this rating have a satisfactory degree of assurance for timely
payment, but the margin of safety is not as great as for issues assigned 'F-1+' and 'F-1' ratings.
F-3 Fair Credit Quality. Issues assigned this rating have characteristics suggesting that the degree of
assurance for timely payment is adequate; however, near-term adverse changes could cause these securities
to be rated below investment grade.
F-S Weak Credit Quality. Issues assigned this rating have characteristics suggesting a minimal degree of
assurance for timely payment and are vulnerable to near-term adverse changes in financial and economic
conditions.
D Default. Issues assigned this rating are in actual or imminent payment default.
LOC The symbol 'LOC' indicates that the rating is based on a letter of credit issued by a commercial bank.
</TABLE>
54
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Trustees and Shareholders,
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, including
the schedule of investments, of Merrill Lynch New Mexico Municipal Bond Fund of
Merrill Lynch Multi-State Municipal Series Trust as of July 31, 1997, the
related statements of operations for the year then ended and changes in net
assets for each of the years in the two-year period then ended, and the
financial highlights for each of the years in the three-year period then ended
and for the period May 6, 1994 (commencement of operations) to July 31, 1994.
These financial statements and the financial highlights are the responsibility
of the Fund's management. Our responsibility is to express an opinion on these
financial statements and the financial highlights based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements and the financial
highlights are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. Our procedures included confirmation of securities owned at July 31,
1997 by correspondence with the custodian. An audit also includes assessing the
accounting principles used and significant estimates made by management, as well
as evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
In our opinion, such financial statements and financial highlights present
fairly, in all material respects, the financial position of Merrill Lynch New
Mexico Municipal Bond Fund of Merrill Lynch Multi-State Municipal Series Trust
as of July 31, 1997, the results of its operations, the changes in its net
assets, and the financial highlights for the respective stated periods in
conformity with generally accepted accounting principles.
Deloitte & Touche LLP
Princeton, New Jersey
September 5, 1997
55
<PAGE>
<TABLE>
<CAPTION>
Merrill Lynch New Mexico Municipal Bond Fund July 31, 1997
SCHEDULE OF INVESTMENTS (in Thousands)
S&P Moody's Face Value
Ratings Ratings Amount Issue (Note 1a)
<S> <C> <C> <C> <C>
New Mexico -- 92.5%
AAA Aaa $1,000 Albuquerque, New Mexico, Airport Revenue Bonds, AMT, Series A, 6.60% due 7/01/2016 (d) $1,096
AA Aa 500 Bernalillo County, New Mexico, Gross Receipts Tax Revenue Bonds, Series A, 5.75%
due 4/01/2016 520
NR* A 500 Carlsbad, New Mexico, Sales Tax Revenue Bonds, 6.30% due 10/01/2010 534
A1+ P1 500 Farmington, New Mexico, PCR (Arizona Public Service Co.), VRDN, AMT, Series C,
3.70% due 9/01/2024 (a) 500
Farmington, New Mexico, PCR, Refunding, Series A:
AAA Aaa 500 (Public Service Company of New Mexico), 6.375% due 12/15/2022 (d) 553
BB+ Ba1 500 (Public Service Company of San Juan), 6.30% due 12/01/2016 522
A+ A2 1,000 (Southern California Edison Company), 7.20% due 4/01/2021 1,092
AAA Aaa 1,780 Gallup, New Mexico, PCR, Refunding (Plains Electric Generation), 6.65% due 8/15/2017 (b) 1,977
AAA Aaa 1,000 Las Cruces, New Mexico, Health Facilities Revenue Refunding Bonds (Evangelical
Lutheran Project), 6.45% due 12/01/2017 (e) 1,106
A A2 1,000 Lordsburg, New Mexico, PCR, Refunding (Phelps Dodge Corporation Project),
6.50% due 4/01/2013 1,079
AAA Aaa 1,000 Los Alamos County, New Mexico, Utility System Revenue Refunding Bonds, Series A,
6% due 7/01/2015 (e) 1,067
NR* A 1,955 New Mexico Educational Assistance Foundation, Student Loan Revenue Bonds, AMT,
First Sub-Series A-2, 6.65% due 11/01/2025 2,074
New Mexico Mortgage Finance Authority, Mortgage-Backed Securities (c)(f):
NR* Aaa 750 Series A, 6.875% due 1/01/2025 833
AAA NR* 500 Series F, 7% due 1/01/2026 557
New Mexico Mortgage Finance Authority, S/F Mortgage Program, AMT (f):
AAA NR* 895 Series A, 6.65% due 7/01/2026 947
AAA NR* 985 Series H, 6.60% due 7/01/2015 1,040
AA A1 750 New Mexico State University, Revenue Refunding and Improvement Bonds, 5.75%
due 4/01/2016 769
AAA Aaa 1,000 Santa Fe County, New Mexico, Correctional System Revenue Bonds, 6% due 2/01/2027 (e) 1,123
AA A1 500 University of New Mexico, University Revenue Bonds, Series B, 5.75% due 6/01/2022 516
Puerto Rico -- 5.7%
BBB+ Baa1 1,000 Puerto Rico Electric Power Authority, Power Revenue Bonds, Series T, 6.375%
due 7/01/2024 1,098
Total Investments (Cost -- $17,730) -- 98.2% 19,003
Other Assets Less Liabilities -- 1.8% 343
-----------
Net Assets -- 100.0% $19,346
===========
(a) The interest rate is subject to change periodically based upon prevailing
market rates. The interest rate shown is the rate in effect at July 31,
1997.
(b) MBIA Insured.
(c) FHA Insured.
(d) AMBAC Insured.
(e) FSA Insured.
(f) GNMA/FNMA Collateralized.
* Not Rated.
Ratings of issues shown have not been
audited by Deloitte & Touche LLP.
See Notes to Financial Statements.
PORTFOLIO ABBREVIATIONS
To simplify the listings of Merrill Lynch New Mexico Municipal Bond Fund's
portfolio holdings in the Schedule of Investments, we have abbreviated the names
of many of the securities according to the list at right.
AMT Alternative Minimum Tax (subject to)
PCR Pollution Control Revenue Bonds
S/F Single-Family
VRDN Variable Rate Demand Notes
</TABLE>
56
<PAGE>
Merrill Lynch New Mexico Municipal Bond Fund July 31, 1997
<TABLE>
<CAPTION>
FINANCIAL INFORMATION
Statement of Assets and Liabilities as of July 31, 1997
<S> <C> <C> <C>
Assets: Investments, at value (identified cost --$17,729,989) (Note 1a) $19,003,082
Cash 95,361
Receivables:
Interest $257,416
Beneficial interest sold 33,664 291,080
------------
Deferred organization expenses (Note 1e) 20,387
Prepaid registration fees and other assets (Note 1e) 11,205
------------
Total assets 19,421,115
------------
Liabilities: Payables:
Dividends to shareholders (Note 1f) 24,495
Beneficial interest redeemed 11,564
Distributor (Note 2) 6,173
Investment adviser (Note 2) 1,762 43,994
------------
Accrued expenses and other liabilities 31,197
------------
Total liabilities 75,191
------------
Net Assets: Net assets $19,345,924
============
Net Assets Class A Shares of beneficial interest, $.10 par value, unlimited number of
Consist of: shares authorized $35,687
Class B Shares of beneficial interest, $.10 par value, unlimited number of
shares authorized 108,138
Class C Shares of beneficial interest, $.10 par value, unlimited number of
shares authorized 9,988
Class D Shares of beneficial interest, $.10 par value, unlimited number of
shares authorized 24,946
Paid-in capital in excess of par 17,676,759
Undistributed realized capital gains on investments -- net 217,313
Unrealized appreciation on investments -- net 1,273,093
------------
Net assets $19,345,924
============
Net Asset Value: Class A -- Based on net assets of $3,861,823 and 356,866 shares
of beneficial interest outstanding $10.82
============
Class B -- Based on net assets of $11,703,165 and 1,081,380 shares
of beneficial interest outstanding $10.82
============
Class C -- Based on net assets of $1,081,509 and 99,883 shares
of beneficial interest outstanding $10.83
============
Class D -- Based on net assets of $2,699,427 and 249,457 shares
of beneficial interest outstanding $10.82
============
See Notes to Financial Statements.
</TABLE>
57
<PAGE>
Merrill Lynch New Mexico Municipal Bond Fund July 31, 1997
FINANCIAL INFORMATION (continued)
<TABLE>
<CAPTION>
Statement of Operations
For the Year Ended
July 31, 1997
<S> <C> <C> <C>
Investment Income Interest and amortization of premium and discount earned $1,280,938
(Note 1d):
Expenses: Investment advisory fees (Note 2) $120,031
Account maintenance & distribution fees -- Class B (Note 2) 69,591
Professional fees 56,941
Printing and shareholder reports 40,367
Accounting services (Note 2) 32,909
Registration fees (Note 1e) 11,972
Amortization of organization expenses (Note 1e) 11,573
Transfer agent fees -- Class B (Note 2) 6,565
Account maintenance & distribution fees -- Class C (Note 2) 5,338
Pricing fees 3,700
Account maintenance fees -- Class D (Note 2) 2,293
Custodian fees 2,112
Transfer agent fees -- Class A (Note 2) 1,861
Trustees' fees and expenses 1,049
Transfer agent fees -- Class D (Note 2) 908
Transfer agent fees -- Class C (Note 2) 455
Other 1,887
------------
Total expenses before reimbursement 369,552
Reimbursement of expenses (Note 2) (118,290)
------------
Total expenses after reimbursement 251,262
------------
Investment income -- net 1,029,676
------------
Realized & Realized gain on investments -- net 404,483
Unrealized Gain on Change in unrealized appreciation on investments -- net 522,563
Investments -- Net ------------
(Notes 1b, 1d & 3): Net Increase in Net Assets Resulting from Operations $1,956,722
============
See Notes to Financial Statements.
</TABLE>
58
<PAGE>
Merrill Lynch New Mexico Municipal Bond Fund July 31, 1997
FINANCIAL INFORMATION (continued)
<TABLE>
<CAPTION>
Statements of Changes in Net Assets
For the Year Ended July 31,
1997 1996
Increase (Decrease) in Net Assets:
<S> <C> <C> <C>
Operations: Investment income -- net $1,029,676 $1,146,648
Realized gain (loss) on investments -- net 404,483 (5,034)
Change in unrealized appreciation on investments -- net 522,563 147,724
------------ ------------
Net increase in net assets resulting from operations 1,956,722 1,289,338
------------ ------------
Dividends & Investment income -- net:
Distributions to Class A (239,874) (379,304)
Shareholders Class B (636,250) (653,404)
(Note 1f): Class C (39,611) (15,894)
Class D (113,941) (98,046)
In excess of realized gain on investments -- net:
Class A -- (24,218)
Class B -- (43,528)
Class C -- (813)
Class D -- (6,212)
------------ ------------
Net decrease in net assets resulting from dividends and distributions
to shareholders (1,029,676) (1,221,419)
------------ ------------
Beneficial Interest Net increase (decrease) in net assets derived from beneficial interest
Transactions transactions (3,654,416) 453,019
(Note 4): ------------ ------------
Net Assets: Total increase (decrease) in net assets (2,727,370) 520,938
Beginning of year 22,073,294 21,552,356
------------ ------------
End of year $19,345,924 $22,073,294
============ ============
See Notes to Financial Statements.
</TABLE>
59
<PAGE>
Merrill Lynch New Mexico Municipal Bond Fund July 31, 1997
FINANCIAL INFORMATION (continued)
<TABLE>
<CAPTION>
Financial Highlights
Class A
For the Period
The following per share data and ratios have been derived May 6,
from information provided in the financial statements. For the Year Ended July 31 1994+ to
1997 1996 1995 July 31, 1994
------ ------ ------ -------------
Increase (Decrease) in Net Asset Value:
<S> <C> <C> <C> <C> <C>
Per Share Net asset value, beginning of period $10.36 $10.29 $10.24 $10.00
Operating ------ ------ ------ ------
Performance: Investment income -- net .53 .56 .60 .13
Realized and unrealized gain on investments -- net .46 .10 .06 .24
------ ------ ------ ------
Total from investment operations .99 .66 .66 .37
------ ------ ------ ------
Less dividends and distributions:
Investment income -- net (.53) (.56) (.60) (.13)
In excess of realized gain on investments -- net -- (.03) (.01) --
------ ------ ------ ------
Total dividends and distributions (.53) (.59) (.61) (.13)
------ ------ ------ ------
Net asset value, end of period $10.82 $10.36 $10.29 $10.24
====== ====== ====== ======
Total Investment Based on net asset value per share 9.86% 6.53% 6.65% 3.76%++++
Return:** ====== ====== ====== ======
Ratios to Expenses, net of reimbursement .79% .49% .07% .00%*
Average Net ====== ====== ====== ======
Assets: Expenses 1.33% 1.42% 1.65% 2.47%*
====== ====== ====== ======
Investment income -- net 5.08% 5.33% 5.92% 5.49%*
====== ====== ====== ======
Supplemental Net assets, end of period (in thousands) $3,862 $5,287 $7,715 $8,166
Data: ====== ====== ====== ======
Portfolio turnover 40.53% 63.02% 28.16% 16.06%
====== ====== ====== ======
Class B
For the Period
The following per share data and ratios have been derived May 6,
from information provided in the financial statements. For the Year Ended July 31 1994+ to
1997 1996 1995 July 31, 1994
------- ------- ------- -------------
Increase (Decrease) in Net Asset Value:
<S> <C> <C> <C> <C> <C>
Per Share Net asset value, beginning of period $10.36 $10.29 $10.24 $10.00
Operating ------- ------- ------- -------
Performance: Investment income -- net .48 .50 .54 .12
Realized and unrealized gain on investments -- net .46 .10 .06 .24
------- ------- ------- -------
Total from investment operations .94 .60 .60 .36
------- ------- ------- -------
Less dividends and distributions:
Investment income -- net (.48) (.50) (.54) (.12)
In excess of realized gain on investments -- net -- (.03) (.01) --
------- ------- ------- -------
Total dividends and distributions (.48) (.53) (.55) (.12)
------- ------- ------- -------
Net asset value, end of period $10.82 $10.36 $10.29 $10.24
======= ======= ======= =======
Total Investment Based on net asset value per share 9.30% 5.98% 6.11% 3.64%++++
Return:** ======= ======= ======= =======
Ratios to Expenses, net of reimbursement 1.30% 1.01% .59% .50%*
Average Net ======= ======= ======= =======
Assets: Expenses 1.84% 1.92% 2.16% 2.97%*
======= ======= ======= =======
Investment income -- net 4.57% 4.81% 5.40% 4.98%*
======= ======= ======= =======
Supplemental Net assets, end of period (in thousands) $11,703 $13,964 $12,104 $8,505
Data: ======= ======= ======= =======
Portfolio turnover 40.53% 63.02% 28.16% 16.06%
======= ======= ======= =======
* Annualized.
** Total investment returns exclude the effects of sales loads.
+ Commencement of Operations.
++++ Aggregate total investment return.
See Notes to Financial Statements.
</TABLE>
60
<PAGE>
Merrill Lynch New Mexico Municipal Bond Fund July 31, 1997
FINANCIAL INFORMATION (continued)
<TABLE>
<CAPTION>
Financial Highlights (concluded)
Class C Class D
For the For the
Period Period
Oct. 21, Oct. 21,
The following per share data and ratios have been derived For the Year 1994+ to For the Year 1994+ to
from information provided in the financial statements. Ended July 31, July 31, Ended July 31, July 31,
1997 1996 1995 1997 1996 1995
<S> <C> <C> <C> <C> <C> <C> <C>
Increase (Decrease) in Net Asset Value:
Per Share Net asset value, beginning of period $10.36 $10.30 $9.89 $10.36 $10.29 $9.89
Operating ------- ------- ------- ------- ------- -------
Performance: Investment income -- net .47 .49 .40 .52 .55 .46
Realized and unrealized gain on
investments -- net .47 .09 .42 .46 .10 .41
------- ------- ------- ------- ------- -------
Total from investment operations .94 .58 .82 .98 .65 .87
------- ------- ------- ------- ------- -------
Less dividends and distributions:
Investment income -- net (.47) (.49) (.40) (.52) (.55) (.46)
In excess of realized gain on
investments -- net -- (.03) (.01) -- (.03) (.01)
------- ------- ------- ------- ------- -------
Total dividends and distributions (.47) (.52) (.41) (.52) (.58) (.47)
------- ------- ------- ------- ------- -------
Net asset value, end of period $10.83 $10.36 $10.30 $10.82 $10.36 $10.29
======= ======= ======= ======= ======= =======
Total Investment Based on net asset value per share 9.29% 5.76% 8.44%++++ 9.75% 6.42% 8.91%++++
Return:** ======= ======= ======= ======= ======= =======
Ratios to Average Expenses, net of reimbursement 1.42% 1.15% .80%* .90% .61% .23%*
Net Assets: ======= ======= ======= ======= ======= =======
Expenses 1.95% 2.03% 2.27%* 1.44% 1.51% 1.74%*
======= ======= ======= ======= ======= =======
Investment income -- net 4.45% 4.67% 5.20%* 4.97% 5.21% 5.80%*
======= ======= ======= ======= ======= =======
Supplemental Net assets, end of period
Data: (in thousands) $1,082 $712 $164 $2,699 $2,110 $1,569
======= ======= ======= ======= ======= =======
Portfolio turnover 40.53% 63.02% 28.16% 40.53% 63.02% 28.16%
======= ======= ======= ======= ======= =======
* Annualized.
** Total investment returns exclude the effects of sales loads.
+ Commencement of Operations.
++++ Aggregate total investment return.
See Notes to Financial Statements.
</TABLE>
61
<PAGE>
Merrill Lynch New Mexico Municipal Bond Fund July 31, 1997
NOTES TO FINANCIAL STATEMENTS
1. Significant Accounting Policies:
Merrill Lynch New Mexico Municipal Bond Fund (the "Fund") is part of Merrill
Lynch Multi-State Municipal Series Trust (the "Trust"). The Fund is registered
under the Investment Company Act of 1940 as a non-diversified, open-end
management investment company. The Fund offers four classes of shares under the
Merrill Lynch Select Pricing SM System. Shares of Class A and Class D are sold
with a front-end sales charge. Shares of Class B and Class C may be subject to a
contingent deferred sales charge. All classes of shares have identical voting,
dividend, liquidation and other rights and the same terms and conditions, except
that Class B, Class C and Class D Shares bear certain expenses related to the
account maintenance of such shares, and Class B and Class C Shares also bear
certain expenses related to the distribution of such shares. Each class has
exclusive voting rights with respect to matters relating to its account
maintenance and distribution expenditures. The following is a summary of
significant accounting policies followed by the Fund.
(a) Valuation of investments -- Municipal bonds and other portfolio securities
in which the Fund invests are traded primarily in the over-the-counter municipal
bond and money markets and are valued at the last available bid price in the
over-the-counter market or on the basis of yield equivalents as obtained from
one or more dealers that make markets in the securities. Financial futures
contracts and options thereon, which are traded on exchanges, are valued at
their settlement prices as of the close of such exchanges. Short-term
investments with remaining maturities of sixty days or less are valued at
amortized cost, which approximates market value. Securities and assets for which
market quotations are not readily available are valued at fair value as
determined in good faith by or under the direction of the Board of Trustees of
the Trust, including valuations furnished by a pricing service retained by the
Trust, which may utilize a matrix system for valuations. The procedures of the
pricing service and its valuations are reviewed by the officers of the Trust
under the general supervision of the Trustees.
(b) Derivative financial instruments -- The Fund may engage in various portfolio
strategies to seek to increase its return by hedging its portfolio against
adverse movements in the debt markets. Losses may arise due to changes in the
value of the contract or if the counterparty does not perform under the
contract.
[bullet] Financial futures contracts -- The Fund may purchase or sell interest
rate futures contracts and options on such futures contracts for the purpose of
hedging the market risk on existing securities or the intended purchase of
securities. Futures contracts are contracts for delayed delivery of securities
at a specific future date and at a specific price or yield. Upon entering into a
contract, the Fund deposits and maintains as collateral such initial margin as
required by the exchange on which the transaction is effected. Pursuant to the
contract, the Fund agrees to receive from or pay to the broker an amount of cash
equal to the daily fluctuation in value of the contract. Such receipts or
payments are known as variation margin and are recorded by the Fund as
unrealized gains or losses. When the contract is closed, the Fund records a
realized gain or loss equal to the difference between the value of the contract
at the time it was opened and the value at the time it was closed.
(c) Income taxes -- It is the Fund's policy to comply with the requirements of
the Internal Revenue Code applicable to regulated investment companies and to
distribute substantially all of its taxable income to its shareholders.
Therefore, no Federal income tax provision is required.
(d) Security transactions and investment income -- Security transactions are
recorded on the dates the transactions are entered into (the trade dates).
Interest income is recognized on the accrual basis. Discounts and market
premiums are amortized into interest income. Realized gains and losses on
security transactions are determined on the identified cost basis.
(e) Deferred organization expenses and prepaid registration fees -- Deferred
organization expenses are charged to expense on a straight-line basis over a
five-year period. Prepaid registration fees are charged to expense as the
related shares are issued.
(f) Dividends and distributions -- Dividends from net investment income are
declared daily and paid monthly. Distributions of capital gains are recorded on
the ex-dividend dates. Distributions in excess of realized capital gains are due
primarily to differing tax treatments for post- October losses.
62
<PAGE>
2. Investment Advisory Agreement and Transactions with Affiliates:
The Fund has entered into an Investment Advisory Agreement with Fund
Asset Management, L.P. ("FAM"). The general partner of FAM is Princeton
Services, Inc. ("PSI"), an indirect wholly-owned subsidiary of Merrill
Lynch & Co., Inc. ("ML & Co."), which is the limited partner. The Fund
has also entered into a Distribution Agreement and Distribution Plans
with Merrill Lynch Funds Distributor, Inc. ("MLFD" or "Distributor"), a
wholly-owned subsidiary of Merrill Lynch Group, Inc.
FAM is responsible for the management of the Fund's portfolio and provides the
necessary personnel, facilities, equipment and certain other services necessary
to the operations of the Fund. For such services, the Fund pays a monthly fee
based upon the average daily value of the Fund's net assets at the following
annual rates: 0.55% of the Fund's average daily net assets not exceeding $500
million; 0.525% of average daily net assets in excess of $500 million but not
exceeding $1 billion; and 0.50% of average daily net assets in excess of $1
billion.
For the year ended July 31, 1997, FAM earned fees of $120,031, of which $112,203
was voluntarily waived. FAM also reimbursed the Fund additional expenses of
$6,087.
Pursuant to the distribution plans (the "Distribution Plans") adopted by the
Fund in accordance with Rule 12b-1 under the Investment Company Act of 1940, the
Fund pays the Distributor ongoing account maintenance and distribution fees. The
fees are accrued daily and paid monthly at annual rates based upon the average
daily net assets of the shares as follows:
Account Distribution
Maintenance Fee Fee
Class B 0.25% 0.25%
Class C 0.25% 0.35%
Class D 0.10% --
Pursuant to a sub-agreement with the Distributor, Merrill Lynch, Pierce, Fenner
& Smith Inc. ("MLPF&S"), a subsidiary of ML & Co., also provides account
maintenance and distribution services to the Fund. The ongoing account
maintenance fee compensates the Distributor and MLPF&S for providing account
maintenance services to Class B, Class C and Class D shareholders. The ongoing
distribution fee compensates the Distributor and MLPF&S for providing
shareholder and distribution-related services to Class B and Class C
shareholders.
For the year ended July 31, 1997, MLFD earned underwriting discounts and MLPF&S
earned dealer concessions on sales of the Fund's Class A and Class D Shares as
follows:
MLFD MLPF&S
Class A $199 $2,319
Class D $765 $7,991
For the year ended July 31, 1997, MLPF&S received contingent deferred sales
charges of $74,568 and $64 relating to transactions in Class B and Class C
Shares, respectively.
Merrill Lynch Financial Data Services, Inc. ("MLFDS"), a wholly-owned
subsidiary of ML & Co., is the Fund's transfer agent.
Accounting services are provided to the Fund by FAM at cost.
Certain officers and/or trustees of the Fund are officers and/or directors of
FAM, PSI, MLFDS, MLFD, and/or ML & Co.
3. Investments:
Purchases and sales of investments, excluding short-term securities, for the
year ended July 31, 1997 were $8,418,378 and $11,160,567, respectively.
Net realized and unrealized gains as of July 31, 1997 were as follows:
Realized Unrealized
Gains Gains
Long-term investments $404,483 $1,273,093
--------- ----------
Total $404,483 $1,273,093
========= ==========
As of July 31, 1997, net unrealized appreciation for Federal income tax purposes
aggregated $1,273,093, all of which related to appreciated securities. The
aggregate cost of investments at July 31, 1997 for Federal income tax purposes
was $17,729,989.
63
<PAGE>
4. Beneficial Interest Transactions:
Net increase (decrease) in net assets derived from beneficial interest
transactions was $(3,654,416) and $453,019 for the years ended July 31, 1997 and
July 31, 1996, respectively.
Transactions in shares of beneficial interest for each class were as follows:
Class A Shares for the Year Dollar
Ended July 31, 1997 Shares Amount
Shares sold 141,231 $1,483,036
Shares issued to shareholders
in reinvestment of dividends 6,350 66,621
------------ ------------
Total issued 147,581 1,549,657
Shares redeemed (301,171) (3,172,107)
------------ ------------
Net decrease (153,590) $(1,622,450)
============ ============
Class A Shares for the Year Dollar
Ended July 31, 1996 Shares Amount
Shares sold 35,804 $375,197
Shares issued to shareholders
in reinvestment of dividends
and distributions 6,444 67,522
------------ ------------
Total issued 42,248 442,719
Shares redeemed (281,275) (2,905,316)
------------ ------------
Net decrease (239,027) $(2,462,597)
============ ============
Class B Shares for the Year Dollar
Ended July 31, 1997 Shares Amount
Shares sold 260,889 $2,740,720
Shares issued to shareholders
in reinvestment of dividends 27,133 284,566
------------ ------------
Total issued 288,022 3,025,286
Automatic conversion
of shares (1,409) (14,659)
Shares redeemed (553,456) (5,843,171)
------------ ------------
Net decrease (266,843) $(2,832,544)
============ ============
Class B Shares for the Year Dollar
Ended July 31, 1996 Shares Amount
Shares sold 379,728 $3,988,696
Shares issued to shareholders
in reinvestment of dividends
and distributions 20,659 216,452
------------ ------------
Total issued 400,387 4,205,148
Shares redeemed (227,902) (2,381,102)
------------ ------------
Net increase 172,485 $1,824,046
============ ============
Class C Shares for the Year Dollar
Ended July 31, 1997 Shares Amount
Shares sold 47,282 $492,323
Shares issued to shareholders
in reinvestment of dividends 2,768 29,059
------------ ------------
Total issued 50,050 521,382
Shares redeemed (18,886) (198,644)
------------ ------------
Net increase 31,164 $322,738
============ ============
Class C Shares for the Year Dollar
Ended July 31, 1996 Shares Amount
Shares sold 63,403 $667,096
Shares issued to shareholders
in reinvestment of dividends
and distributions 1,180 12,350
------------ ------------
Total issued 64,583 679,446
Shares redeemed (11,803) (126,868)
------------ ------------
Net increase 52,780 $552,578
============ ============
Class D Shares for the Year Dollar
Ended July 31, 1997 Shares Amount
Shares sold 44,220 $462,121
Automatic conversion
of shares 1,409 14,659
Shares issued to shareholders
in reinvestment of dividends 5,906 61,981
------------ ------------
Total issued 51,535 538,761
Shares redeemed (5,806) (60,921)
------------ ------------
Net increase 45,729 $477,840
============ ============
Class D Shares for the Year Dollar
Ended July 31, 1996 Shares Amount
Shares sold 53,269 $558,846
Shares issued to shareholders
in reinvestment of dividends
and distributions 5,883 61,650
------------ ------------
Total issued 59,152 620,496
Shares redeemed (7,864) (81,504)
------------ ------------
Net increase 51,288 $538,992
============ ============
64
<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........................ 7
Financial Futures Transactions and Options... 8
Investment Restrictions........................ 12
Management of the Trust........................ 14
Trustees and Officers........................ 14
Compensation of Trustees..................... 15
Management and Advisory Arrangements......... 16
Purchase of Shares............................. 17
Initial Sales Charge Alternatives--
Class A and Class D Shares................. 18
Reduced Initial Sales Charges................ 19
Distribution Plans........................... 21
Limitations on the Payment of Deferred Sales
Charges.................................... 22
Redemption of Shares........................... 23
Deferred Sales Charges--
Class B and Class C Shares................. 24
Portfolio Transactions......................... 24
Determination of Net Asset Value............... 25
Shareholder Services........................... 26
Investment Account........................... 26
Automatic Investment Plans................... 27
Automatic Reinvestment of Dividends and
Capital Gains Distributions................ 27
Systematic Withdrawal Plans.................. 27
Exchange Privilege........................... 28
Distributions and Taxes........................ 30
Tax Treatment of Options and Futures
Transactions............................... 33
Performance Data............................... 34
General Information............................ 36
Description of Shares........................ 36
Computation of Offering Price Per Share...... 38
Independent Auditors......................... 38
Custodian.................................... 38
Transfer Agent............................... 38
Legal Counsel................................ 39
Reports to Shareholders...................... 39
Additional Information....................... 39
Appendix I--Economic and Financial Information
Concerning New Mexico........................ 40
Appendix II--Ratings of Municipal Bonds........ 48
Independent Auditors' Report................... 55
Financial Statements........................... 56
</TABLE>
Code # 18036-1197
[Logo] Merrill Lynch
Merrill Lynch
New Mexico Municipal
Bond Fund
Merrill Lynch Multi-State
Municipal Series Trust
[ARTWORK]
STATEMENT OF
ADDITIONAL
INFORMATION
November 14, 1997
Distributor:
Merrill Lynch
Funds Distributor, Inc.
<PAGE>
PART C. OTHER INFORMATION
ITEM 24. FINANCIAL STATEMENTS AND EXHIBITS.
(A) FINANCIAL STATEMENTS:
Contained in Part A:
Financial Highlights for each of the years in the three-year period
ended July 31, 1997 and for the period May 6, 1994 (commencement of
operations) to July 31, 1994.
Contained in Part B:
Schedule of Investments as of July 31, 1997.
Statement of Assets and Liabilities as of July 31, 1997.
Statement of Operations for the year ended July 31, 1997.
Statement of Changes in Net Assets for each of the years in the
two-year period ended July 31, 1997.
Financial Highlights for each of the years in the three-year period
ended July 31, 1997 and for the period May 6, 1994 (commencement of
operations) to July 31, 1994.
(B) EXHIBITS:
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
<S> <C>
1(a) -- Declaration of Trust of the Registrant, dated August 2, 1985.(a)
(b) -- Amendment to Declaration of Trust, dated September 18, 1987.(a)
(c) -- Amendment to Declaration of Trust, dated December 21, 1987.(a)
(d) -- Amendment to Declaration of Trust, dated October 3, 1988.(a)
(e) -- Amendment to Declaration of Trust, dated October 17, 1994 and
instrument establishing Class C and Class D shares of beneficial
interest.(a)
(f) -- Instrument establishing Merrill Lynch New Mexico Municipal Bond
Fund (the 'Fund') as a series of Registrant.(c)
(g) -- Instrument establishing Class A and Class B shares of beneficial
interest of the Fund.(c)
2 -- By-Laws of Registrant.(a)
3 -- None.
4 -- Portions of the Declaration of Trust, Establishment and Designation
and By-Laws of the Registrant defining the rights of holders of the
Fund as a series of the Registrant.(b)
5 -- Management Agreement between Registrant and Fund Asset Management,
L.P.(c)
6(a) -- Form of Revised Class A Shares Distribution Agreement between
Registrant and Merrill Lynch Funds Distributor, Inc. (including
Form of Selected Dealers Agreement).(e)
(b) -- Form of Class B Shares Distribution Agreement between Registrant
and Merrill Lynch Funds Distributor, Inc.(a)
(c) -- Form of Class C Shares Distribution Agreement between Registrant
and Merrill Lynch Funds Distributor, Inc. (including Form of
Selected Dealers Agreement).(e)
(d) -- Form of Class D Shares Distribution Agreement between Registrant
and Merrill Lynch Funds Distributor, Inc. (including Form of
Selected Dealers Agreement).(e)
</TABLE>
C-1
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
<S> <C>
(e) -- Letter Agreement between Registrant and Merrill Lynch Funds
Distributor, Inc., dated March 31, 1994, in connection with the
Merrill Lynch Mutual Fund Adviser Program.(c)
7 -- None.
8 -- Form of Custody Agreement between Registrant and State Street Bank
and Trust Company.(d)
9 -- Transfer Agency, Dividend Disbursing Agency and Shareholder
Servicing Agency Agreement between Registrant and Merrill Lynch
Financial Data Services, Inc. (formerly Financial Data Services,
Inc.)(c)
10 -- None.
11 -- Consent of Deloitte & Touche LLP, independent auditors for the
Registrant.
12 -- None.
13 -- Certificate of Fund Asset Management, L.P.(c)
14 -- None.
15(a) -- Class B Distribution Plan and Class B Distribution Plan
Sub-Agreement of the Registrant.(c)
(b) -- Form of Class C Distribution Plan and Class C Distribution Plan
Sub-Agreement of the Registrant.(e)
(c) -- Form of Class D Distribution Plan and Class D Distribution Plan
Sub-Agreement of the Registrant.(e)
16(a) -- Schedule for computation of each performance quotation provided in
the Registration Statement in response to Item 22 relating to Class
A shares.(e)
(b) -- Schedule for computation of each performance quotation provided in
the Registration Statement in response to Item 22 relating to Class
B shares.(e)
(c) -- Schedule for computation of each performance quotation provided in
the Registration Statement in response to Item 22 relating to Class
C shares.(a)
(d) -- Schedule for computation of each performance quotation provided in
the Registration Statement in response to Item 22 relating to Class
D shares.(a)
17(a) -- Financial Data Schedule for Class A shares.
(b) -- Financial Data Schedule for Class B shares.
(c) -- Financial Data Schedule for Class C shares.
(d) -- Financial Data Schedule for Class D shares.
18 -- Merrill Lynch Select Pricing(Service Mark) System Plan Pursuant to
Rule 18f-3.(f)
</TABLE>
- ------------------
(a) Filed on November 17, 1995 as an Exhibit to Post-Effective Amendment No. 2
to the Registrant's Registration Statement on Form N-1A (File No. 33-52303)
under the Securities Act of 1933, as amended, relating to shares of the Fund
(the 'Registration Statement').
(b) Reference is made to Article II, Section 2.3 and Articles V, VI, VIII, IX, X
and XI of the Registrant's Declaration of Trust, as amended, filed as
Exhibits 1(a), 1(b), 1(c), 1(d) and 1(e) with Post-Effective Amendment No. 2
to the Registration Statement; to the Certificates of Establishment and
Designation establishing the Fund as a series of the Registrant and
establishing Class A and Class B shares of beneficial interest of the Fund,
filed as Exhibits 1(f) and 1(g), respectively, with Pre-Effective Amendment
No. 1 to the Registration Statement; and to Articles I, V and VI of the
Registrant's By-Laws, filed as Exhibit 2 with Post-Effective Amendment No. 2
to the Registration Statement.
(Footnotes continued on next page)
C-2
<PAGE>
(Footnotes continued from previous page)
(c) Filed on April 22, 1994 as an Exhibit to Pre-Effective Amendment No. 1 to
the Registration Statement.
(d) Incorporated by reference to Exhibit 8 to Post-Effective Amendment No. 3 to
Registrant's Registration Statement on Form N-1A under the Securities Act of
1933, as amended, filed on October 14, 1994, relating to shares of the
Merrill Lynch Minnesota Municipal Bond Fund series of the Registrant (File
No. 33-44734).
(e) Filed on October 18, 1994 as an Exhibit to Post-Effective Amendment No. 1 to
the Registration Statement.
(f) Incorporated by reference to Exhibit 18 to Post-Effective Amendment No. 13
to the Registrant's Registration Statement filed on January 25, 1996,
relating to shares of the Merrill Lynch New York Municipal Bond Fund series
of the Registrant (File No. 2-99473).
ITEM 25. PERSONS CONTROLLED BY OR UNDER COMMON CONTROL WITH REGISTRANT.
Registrant is not controlled by or under common control with any person.
ITEM 26. NUMBER OF HOLDERS OF SECURITIES.
<TABLE>
<CAPTION>
NUMBER OF
HOLDERS AT
TITLE OF CLASS SEPTEMBER 30, 1997*
-------------- -------------------
<S> <C>
Class A shares of beneficial interest, par value
$0.10 per share................................. 193
Class B shares of beneficial interest, par value
$0.10 per share................................. 283
Class C shares of beneficial interest, par value
$0.10 per share................................. 37
Class D shares of beneficial interest, par value
$0.10 per share................................. 49
</TABLE>
- ------------------
* The number of holders includes holders of record plus beneficial owners whose
shares are held of record by Merrill Lynch, Pierce, Fenner & Smith
Incorporated.
ITEM 27. INDEMNIFICATION.
Section 5.3 of the Registrant's Declaration of Trust provides as follows:
'The Trust shall indemnify each of its Trustees, officers, employees and
agents (including persons who serve at its request as directors, officers or
trustees of another organization in which it has any interest as a shareholder,
creditor or otherwise) against all liabilities and expenses (including amounts
paid in satisfaction of judgments, in compromise, as fines and penalties and as
counsel fees) reasonably incurred by him in connection with the defense or
disposition of any action, suit or other proceeding, whether civil or criminal,
in which he may be involved or with which he may be threatened, while in office
or thereafter, by reason of his being or having been such a trustee, officer,
employee or agent, except with respect to any matter as to which he shall have
been adjudicated to have acted in bad faith, willful misfeasance, gross
negligence or reckless disregard of his duties; provided, however, that as to
any matter disposed of by a compromise payment by such person, pursuant to a
consent decree or otherwise, no indemnification either for said payment or for
any other expenses shall be provided unless the Trust shall have received a
written opinion from independent legal counsel approved by the Trustees to the
effect that if either the matter of willful misfeasance, gross negligence or
reckless disregard of duty, or the matter of good faith and reasonable belief as
to the best interests of the Trust, had been adjudicated, it would have been
adjudicated in favor of such person. The rights accruing to any Person under
these provisions shall not exclude any other right to which he may be lawfully
entitled; provided that no person may satisfy any
C-3
<PAGE>
right in indemnity or reimbursement granted herein or in Section 5.1 or to which
he may be otherwise entitled except out of the property of the Trust, and no
Shareholder shall be personally liable to any Person with respect to any claim
for indemnity or reimbursement or otherwise. The Trustees may make advance
payments in connection with indemnification under this Section 5.3, provided
that the indemnified person shall have given a written undertaking to reimburse
the Trust in the event it is subsequently determined that he is not entitled to
such indemnification.'
Insofar as the conditional advancing of indemnification monies for actions
based upon the Investment Company Act of 1940, as amended may be concerned, such
payments will be made only on the following conditions: (i) the advances must be
limited to amounts used, or to be used, for the preparation or presentation of a
defense to the action, including costs connected with the preparation of a
settlement; (ii) advances may be made only upon receipt of a written promise by,
or on behalf of, the recipient to repay that amount of the advance which exceeds
the amount which it is ultimately determined he is entitled to receive from the
Registrant by reason of indemnification; and (iii) (a) such promise must be
secured by a surety bond, other suitable insurance or an equivalent form of
security which assures that any repayments may be obtained by the Registrant
without delay or litigation, which bond, insurance or other form of security
must be provided by the recipient of the advance, or (b) a majority of a quorum
of the Registrant's disinterested, non-party Trustees, or an independent legal
counsel in a written opinion, shall determine, based upon a review of readily
available facts that the recipient of the advance ultimately will be found
entitled to indemnification.
In Section 9 of the Distribution Agreements relating to the securities
being offered hereby, the Registrant agrees to indemnify the Distributor and
each person, if any, who controls the Distributor within the meaning of the
Securities Act of 1933, as amended ('1933 Act'), against certain types of civil
liabilities arising in connection with the Registration Statement or Prospectus
and Statement of Additional Information.
Insofar as indemnification for liabilities arising under the 1933 Act may
be permitted to Trustees, officers and controlling persons of the Registrant and
the principal underwriter pursuant to the foregoing provisions or otherwise, the
Registrant has been advised that in the opinion of the Securities and Exchange
Commission such indemnification is against public policy as expressed in the
1933 Act and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by the
Registrant of expenses incurred or paid by a Trustee, officer, or controlling
person of the Registrant and the principal underwriter in connection with the
successful defense of any action, suit or proceeding) is asserted by such
Trustee, officer or controlling person or the principal underwriter in
connection with the shares being registered, the Registrant will, unless in the
opinion of its counsel the matter has been settled by controlling precedent,
submit to a court of appropriate jurisdiction the question whether such
indemnification by it is against public policy as expressed in the 1933 Act and
will be governed by the final adjudication of such issue.
ITEM 28. BUSINESS AND OTHER CONNECTIONS OF INVESTMENT ADVISER.
Fund Asset Management, L.P. (the 'Manager' or 'FAM') acts as the investment
adviser for the following open-end registered investment companies: CBA Money
Fund, CMA Government Securities Fund, CMA Money Fund, CMA Multi-State Municipal
Series Trust, CMA Tax-Exempt Fund, CMA Treasury Fund, The Corporate Fund
Accumulation Program, Inc., Financial Institutions Series Trust, Merrill Lynch
Basic Value Fund, Inc., Merrill Lynch California Municipal Series Trust, Merrill
Lynch Corporate Bond Fund, Inc., Merrill Lynch Emerging Tigers Fund, Inc.,
Merrill Lynch Federal Securities Trust, Merrill Lynch Funds for Institutions
Series, Merrill Lynch Multi-State 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., and The Municipal Fund
Accumulation Program, Inc.; and
C-4
<PAGE>
the following closed-end registered investment companies: Apex Municipal Fund,
Inc., Corporate High Yield Fund, Inc., Corporate High Yield Fund II, Inc., Debt
Strategies Fund, Inc., Income Opportunities Fund 1999, Inc., Income
Opportunities Fund 2000, Inc., Merrill Lynch Municipal Strategy Fund, Inc.,
MuniAssets Fund, Inc., MuniEnhanced Fund, Inc., MuniHoldings California Insured
Fund, Inc., MuniHoldings Florida Insured Fund, MuniHoldings Fund, Inc.,
MuniHoldings New York Insured Fund Inc., MuniInsured Fund, Inc., MuniVest Fund,
Inc., MuniVest Fund II, Inc., MuniVest Florida Fund, MuniVest Michigan Insured
Fund, Inc., MuniVest New Jersey Fund, Inc., MuniVest Pennsylvania Insured Fund,
MuniYield Arizona Fund, Inc., MuniYield California Fund, Inc., MuniYield
California Insured Fund, Inc., MuniYield California Insured Fund II, Inc.,
MuniYield Florida Fund, MuniYield Florida Insured Fund, MuniYield Fund, Inc.,
MuniYield Insured Fund, Inc., MuniYield Michigan Fund, Inc., MuniYield Michigan
Insured Fund, Inc., MuniYield New Jersey Fund, Inc., MuniYield New Jersey
Insured Fund, Inc., MuniYield New York Insured Fund, Inc., MuniYield New York
Insured Fund II, Inc., MuniYield Pennsylvania Fund, MuniYield Quality Fund,
Inc., MuniYield Quality Fund II, Inc., Senior High Income Portfolio, Inc.,
Taurus MuniCalifornia Holdings, Inc., Taurus MuniNewYork Holdings, Inc. and
Worldwide DollarVest Fund, Inc.
Merrill Lynch Asset Management, L.P. ('MLAM'), an affiliate of the Manager,
acts as the investment adviser for the following open-end registered investment
companies: Merrill Lynch Adjustable Rate Securities Fund, Inc., Merrill Lynch
Americas Income Fund, Inc., Merrill Lynch Asset Builder Program, Inc., Merrill
Lynch Asset Growth Fund, Inc., Merrill Lynch Asset Income Fund, Inc., Merrill
Lynch Capital Fund, Inc., Merrill Lynch Convertible Fund, Inc., Merrill Lynch
Developing Capital Markets Fund, Inc., Merrill Lynch Dragon Fund, Inc., Merrill
Lynch EuroFund, Merrill Lynch Fundamental Growth Fund, Inc., Merrill Lynch Fund
For Tomorrow, Inc., Merrill Lynch Global Bond Fund for Investment and
Retirement, Merrill Lynch Global Allocation Fund, Inc., Merrill Lynch Global
Convertible Fund, Inc., Merrill Lynch Global Growth Fund, Inc., Merrill Lynch
Global Holdings, Inc., Merrill Lynch Global Resources Trust, Merrill Lynch
Global SmallCap Fund, Inc., Merrill Lynch Global Utility Fund, Inc., Merrill
Lynch Global Value Fund, Inc., Merrill Lynch Growth Fund, Merrill Lynch
Healthcare Fund, Inc., Merrill Lynch Intermediate Government Bond Fund, Merrill
Lynch International Equity Fund, Merrill Lynch Latin America Fund, Inc., Merrill
Lynch Middle East/Africa Fund, Inc., Merrill Lynch Municipal Series Trust,
Merrill Lynch Pacific Fund, Inc., Merrill Lynch Ready Assets Trust, Merrill
Lynch Retirement Series Trust, Merrill Lynch Series Fund, Inc., Merrill Lynch
Short-Term Global Income Fund, Inc., Merrill Lynch Strategic Dividend Fund,
Merrill Lynch Technology Fund, Inc., Merrill Lynch U.S. Treasury Money Fund,
Merrill Lynch U.S.A. Government Reserves, Merrill Lynch Utility Income Fund,
Inc., Merrill Lynch Variable Series Funds, Inc. and Hotchkis and Wiley Funds
(advised by Hotchkis and Wiley, a division of MLAM); and the following
closed-end registered investment companies: Merrill Lynch High Income Municipal
Bond Fund, Inc. and Merrill Lynch Senior Floating Rate Fund, Inc. MLAM also acts
as sub-adviser to Merrill Lynch World Strategy Portfolio and Merrill Lynch Basic
Value Equity Portfolio, two investment portfolios of EQ Advisory Trust.
The address of each of these investment companies is P.O. Box 9011,
Princeton, New Jersey 08543-9011, except that the address of Merrill Lynch Funds
for Institutions Series and Merrill Lynch Intermediate Government Bond Fund is
One Financial Center, 23rd Floor, Boston, Massachusetts 02111-2646. The address
of the Manager, MLAM, Princeton Services, Inc. ('Princeton Services') and
Princeton Administrators, L.P. is also Box 9011, Princeton, New Jersey
08543-9011. The address of Merrill Lynch Funds Distributor, Inc. ('MLFD') is
P.O. Box 9081, Princeton, New Jersey 08543-9081. The address of Merrill Lynch,
Pierce, Fenner & Smith Incorporated ('Merrill Lynch') and Merrill Lynch & Co.,
Inc. ('ML & Co.') is World Financial Center, North Tower, 250 Vesey Street, New
York, New York 10281. The address of Merrill Lynch Financial Data Services, Inc.
('MLFDS') is 4800 Deer Lake Drive East, Jacksonville, Florida 32246-6484.
C-5
<PAGE>
Set forth below is a list of each executive officer and partner of the
Manager indicating each business, profession, vocation or employment of a
substantial nature in which each such person or entity has been engaged since
August 1, 1995 for his, her or its own account or in the capacity of director,
officer, partner or trustee. In addition, Mr. Zeikel is President, Mr. Richard
is Treasurer and Mr. Glenn is Executive Vice President of substantially all of
the investment companies described in the first two paragraphs of this Item 28
and Messrs. Giordano, Harvey, Kirstein and Monagle are directors, trustees or
officers of one or more of such companies.
Officers and Partners of FAM are set forth as follows:
<TABLE>
<CAPTION>
POSITION(S)
WITH OTHER SUBSTANTIAL BUSINESS,
NAME THE MANAGER PROFESSION, VOCATION OR EMPLOYMENT
---- --------------- -----------------------------------
<S> <C> <C>
ML & Co.................. Limited Partner Financial Services Holding Company;
Limited Partner of MLAM
Princeton Services....... General Partner General Partner of MLAM
Arthur Zeikel............ President President of MLAM; President and
Director of Princeton Services;
Executive Vice President of ML &
Co.
Terry K. Glenn........... Executive Vice Executive Vice President of MLAM;
President Executive Vice President and
Director of Princeton Services;
President and Director of MLFD;
President of Princeton
Administrators, L.P.; Director of
MLFDS
Linda L. Federici........ Senior Vice Senior Vice President of MLAM;
President Senior Vice President of
Princeton Services
Vincent R. Giordano...... Senior Vice Senior Vice President of MLAM;
President Senior Vice President of Princeton
Services
Elizabeth A. Griffin..... Senior Vice Senior Vice President of MLAM;
President Senior Vice President of Princeton
Services
Norman R. Harvey......... Senior Vice Senior Vice President of MLAM;
President Senior Vice President of Princeton
Services
Michael J. Hennewinkel... Senior Vice Senior Vice President of MLAM;
President Senior Vice President of Princeton
Services
Philip L. Kirstein....... Senior Vice Senior Vice President, General
President, Counsel and Secretary of MLAM;
General Senior Vice President, General
Counsel and Counsel, Director and Secretary
Secretary of Princeton Services
Ronald M. Kloss.......... Senior Vice Senior Vice President and
President and Controller of MLAM; Senior Vice
Controller President and Controller of
Princeton Services
Debra W. Landsman-Yaros.. Senior Vice Senior Vice President of MLAM;
President Vice President of MLFD;
Senior Vice President of
Princeton Services
Stephen M.M. Miller...... Senior Vice Executive Vice President of
President Princeton Administrators, L.P.;
Senior Vice President of
Princeton Services
</TABLE>
C-6
<PAGE>
<TABLE>
<CAPTION>
POSITION(S)
WITH OTHER SUBSTANTIAL BUSINESS,
NAME THE MANAGER PROFESSION, VOCATION OR EMPLOYMENT
---- --------------- -----------------------------------
Joseph T. Monagle, Jr.... Senior Vice Senior Vice President of MLAM;
President Senior Vice President of Princeton
Services
<S> <C> <C>
Michael L. Quinn......... Senior Vice Senior Vice President of MLAM;
President Senior Vice President of Princeton
Services; Managing Director and
First Vice President of Merrill
Lynch from 1989 to 1995
Richard L. Reller........ Senior Vice Senior Vice President of MLAM;
President Senior Vice President of Princeton
Services; Director of MLFD
Gerald M. Richard........ Senior Vice Senior Vice President and Treasurer
President and of MLAM; Senior Vice President and
Treasurer Treasurer of Princeton Services;
Vice President and Treasurer of
MLFD
Gregory D. Upah............Senior Vice Senior Vice President of MLAM;
President Senior Vice President of
Princeton Services
Ronald L. Welburn........ Senior Vice Senior Vice President of MLAM;
President Senior Vice President of Princeton
Services
</TABLE>
ITEM 29. PRINCIPAL UNDERWRITERS.
(a) MLFD acts as the principal underwriter for the Registrant and for each
of the open-end investment companies referred to in the first two paragraphs of
Item 28 except CBA Money Fund, CMA Government Securities Fund, CMA Money Fund,
CMA Multi-State Municipal Series Trust, CMA Tax-Exempt Fund, CMA Treasury Fund,
The Corporate Fund Accumulation Program, Inc., MuniAssets Fund, Inc., and The
Municipal Fund Accumulation Program, Inc., and furthermore MLFD also acts as the
principal underwriter for the following closed-end investment companies: Merrill
Lynch High Income Municipal Bond Fund, Inc., Merrill Lynch Municipal Strategy
Fund, Inc. and Merrill Lynch Senior Floating Rate Fund, Inc.
(b) Set forth below is information concerning each director and officer of
MLFD. The principal business address of each such person is P.O. Box 9011,
Princeton, New Jersey 08543-9011, except that the address of Messrs. Aldrich,
Brady, Breen, Crook, Fatseas and Wasel is One Financial Center, 23rd Floor,
Boston, Massachusetts 02111-2665.
<TABLE>
<CAPTION>
POSITION(S) AND OFFICES POSITION(S) AND OFFICES
NAME WITH MLFD WITH REGISTRANT
---- ------------------------- -------------------------
<S> <C> <C>
Terry K. Glenn............ President and Director Executive Vice President
Richard L. Reller......... Director None
Thomas J. Verage.......... Director None
William E. Aldrich........ Senior Vice President None
Robert W. Crook........... Senior Vice President None
Michael J. Brady.......... Vice President None
William M. Breen.......... Vice President None
Michael G. Clark.......... Vice President None
James T. Fatseas.......... Vice President None
Debra W. Landsman-Yaros... Vice President None
Michelle T. Lau........... Vice President None
</TABLE>
C-7
<PAGE>
<TABLE>
<CAPTION>
POSITION(S) AND OFFICES POSITION(S) AND OFFICES
NAME WITH MLFD WITH REGISTRANT
---- ------------------------- -------------------------
<S> <C> <C>
Gerald M. Richard......... Vice President and Treasurer
Treasurer
Salvatore Venezia......... Vice President None
William Wasel............. Vice President None
Robert Harris............. Secretary None
</TABLE>
(c) Not applicable.
ITEM 30. LOCATION OF ACCOUNTS AND RECORDS.
All accounts, books and other documents required to be maintained by
Section 31(a) of the Investment Company Act of 1940, as amended and the Rules
thereunder are maintained at the offices of the Registrant, 800 Scudders Mill
Road, Plainsboro, New Jersey 08536, and Merrill Lynch Financial Data Services,
Inc., 4800 Deer Lake Drive East, Jacksonville, Florida 32246-6484.
ITEM 31. MANAGEMENT SERVICES.
Other than as set forth under the caption 'Management of the
Trust--Management and Advisory Arrangements' in the Prospectus constituting Part
A of the Registration Statement and under 'Management of the Trust--Management
and Advisory Arrangements' in the Statement of Additional Information
constituting Part B of the Registration Statement, the Registrant is not a party
to any management-related service contract.
ITEM 32. UNDERTAKINGS.
(a) Not applicable.
(b) Not applicable.
(c) Registrant undertakes to furnish each person to whom a prospectus is
delivered with a copy of the Registrant's latest annual report to shareholders,
upon request and without charge.
C-8
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933 and the
Investment Company Act of 1940, the Registrant certifies that it meets all of
the requirements for effectiveness of the Post-Effective Amendment to its
Registration Statement pursuant to Rule 485(b) under the Securities Act of 1933
and has duly caused this Post-Effective Amendment to its Registration Statement
to be signed on its behalf by the undersigned, thereunto duly authorized, in the
Township of Plainsboro, and State of New Jersey, on the 13th day of November,
1997.
MERRILL LYNCH MULTI-STATE MUNICIPAL
SERIES TRUST
(Registrant)
By: /s/ GERALD M. RICHARD
(Gerald M. Richard, Treasurer)
Pursuant to the requirements of the Securities Act of 1933, this
Post-Effective Amendment to the Registration Statement has been signed below by
the following persons in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<C> <S> <C>
ARTHUR ZEIKEL* President and Trustee (Principal Executive
----------------------------- Officer)
(Arthur Zeikel)
GERALD M. RICHARD* Treasurer (Principal Financial and
----------------------------- Accounting Officer)
(Gerald M. Richard)
JAMES H. BODURTHA* Trustee
-----------------------------
(James H. Bodurtha)
HERBERT I. LONDON* Trustee
-----------------------------
(Herbert I. London)
ROBERT R. MARTIN* Trustee
-----------------------------
(Robert R. Martin)
JOSEPH L. MAY* Trustee
-----------------------------
(Joseph L. May)
ANDRE F. PEROLD* Trustee
-----------------------------
(Andre F. Perold)
*By: /s/ GERALD M. RICHARD November 13, 1997
-----------------------------
(Gerald M. Richard,
Attorney-in-Fact)
</TABLE>
C-9
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------ ------------
<S> <C>
11 -- Consent of Deloitte & Touche LLP, independent auditors for the Registrant
17(a) -- Financial Data Schedule for Class A shares
(b) -- Financial Data Schedule for Class B shares
(c) -- Financial Data Schedule for Class C shares
(d) -- Financial Data Schedule for Class D shares
</TABLE>
<PAGE>
EXHIBIT 11
INDEPENDENT AUDITORS' CONSENT
Merrill Lynch New Mexico Municipal Bond Fund
of Merrill Lynch Multi-State Municipal Series Trust:
We consent to the use in Post-Effective Amendment No. 4 to Registration
Statement No. 33-52303 of our report dated September 5, 1997 appearing in the
Statement of Additional Information, which is a part of such Registration
Statement, and to the reference to us under the caption 'Financial Highlights'
appearing in the Prospectus, which also is a part of such Registration
Statement.
Deloitte & Touche LLP
Princeton, New Jersey
November 14, 1997
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<INVESTMENTS-AT-VALUE> 19003082
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<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 19421115
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<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 75191
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<SENIOR-EQUITY> 0
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<INTEREST-INCOME> 1280938
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