<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON SEPTEMBER 20, 1994
SECURITIES ACT FILE NO. 33-
INVESTMENT COMPANY ACT FILE NO. 811-4375
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
----------------
FORM N-1A
REGISTRATION STATEMENT UNDER
THE SECURITIES ACT OF 1933 [X]
PRE-EFFECTIVE AMENDMENT NO. [_]
POST-EFFECTIVE AMENDMENT NO. [_]
AND/OR
REGISTRATION STATEMENT UNDER
THE INVESTMENT COMPANY ACT OF 1940 [X]
AMENDMENT NO. 82
(Check appropriate box or boxes) [X]
----------------
MERRILL LYNCH ALABAMA MUNICIPAL BOND FUND
OF MERRILL LYNCH MULTI-STATE MUNICIPAL SERIES TRUST
(EXACT NAME OF REGISTRANT AS SPECIFIED IN CHARTER)
800 SCUDDERS MILL ROAD
PLAINSBORO, NEW JERSEY 08536
(ADDRESS OF PRINCIPAL EXECUTIVE (ZIP CODE)
OFFICES)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE (609) 282-2800
ARTHUR ZEIKEL
MERRILL LYNCH MULTI-STATE MUNICIPAL SERIES TRUST
800 SCUDDERS MILL ROAD, PLAINSBORO, NEW JERSEY
MAILING ADDRESS: BOX 9011, PRINCETON, NEW JERSEY 08543-9011
----------------
COPIES TO:
COUNSEL FOR THE TRUST: PHILIP L. KIRSTEIN, ESQ.
BROWN & WOOD FUND ASSET MANAGEMENT, L.P.
ONE WORLD TRADE CENTER BOX 9011
NEW YORK, NEW YORK 10048-0557 PRINCETON, NEW JERSEY 08543-9011
ATTENTION: THOMAS R. SMITH, JR., ESQ.
BRIAN M. KAPLOWITZ, ESQ.
----------------
APPROXIMATE DATE OF PROPOSED PUBLIC OFFERING:
AS SOON AS PRACTICABLE AFTER THE EFFECTIVE DATE OF THIS REGISTRATION STATEMENT.
----------------
AN INDEFINITE NUMBER OF CLASS A AND CLASS B SHARES OF BENEFICIAL INTEREST OF
THE REGISTRANT IS BEING REGISTERED BY THIS REGISTRATION STATEMENT UNDER THE
SECURITIES ACT OF 1933 PURSUANT TO RULE 24F-2 UNDER THE INVESTMENT COMPANY ACT
OF 1940.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
MERRILL LYNCH ALABAMA MUNICIPAL BOND FUND OF
MERRILL LYNCH MULTI-STATE MUNICIPAL SERIES TRUST
REGISTRATION STATEMENT ON FORM N-1A
CROSS REFERENCE SHEET
<TABLE>
<CAPTION>
N-LA ITEM NO. LOCATION
------------- --------
<C> <S> <C>
PART A
Item 1. Cover Page........................ Cover Page
Item 2. Synopsis ......................... Fee Table
Item 3. Condensed Financial Information... Not Applicable
Item 4. General Description of Registrant. Investment Objective and
Policies; Additional
Information
Item 5. Management of the Fund............ Fee Table; Management of
the Trust; Inside Back
Cover Page
Item 5A. Management's Discussion of Fund
Performance....................... Not Applicable
Item 6. Capital Stock and Other
Securities........................ Cover Page; Additional
Item 7. Purchase of Securities Being Information
Offered .......................... Cover Page; Fee Table;
Merrill Lynch Select
Pricing SM System; Purchase
of Shares; Shareholder
Services; Additional
Information; Inside Back
Cover Page
Item 8. Redemption of Repurchase.......... Fee Table; Merrill Lynch
Select Pricing SM 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... Not Applicable
Item 13. Investment Objective and Policies. Investment Objective and
Policies; Investment
Restrictions
Item 14. Management of the Fund............ Management of the Trust
Item 15. Control Persons and Principal
Holders of Securities............. Management of the Trust;
Item 16. Investment Advisory and Other Additional Information
Services.......................... Management of the Trust;
Purchase of Shares; General
Information
Item 17. Brokerage Allocation and Other
Practices......................... Portfolio Transactions
Item 18. Capital Stock and Other
Securities........................ General Information--
Description of Series and
Shares
Item 19. Purchase, Redemption and Pricing
of Securities Being Offered....... Purchase of Shares;
Redemption of Shares;
Determination of Net Asset
Value; Shareholder Services
Item 20. Tax Status........................ Distributions and Taxes
Item 21. Underwriters...................... Purchase of Shares
Item 22. Calculation of Performance Data... Performance Data
Item 23. Financial Statements.............. Statement of Assets and
Liabilities
PART C
Information required to be included in Part C is set forth under the appro-
priate Item, so numbered, in Part C to this Registration Statement.
</TABLE>
i
<PAGE>
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A +
+REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE +
+SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY +
+OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT +
+BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR +
+THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE +
+SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE +
+UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF +
+ANY SUCH STATE. +
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
SUBJECT TO COMPLETION
PRELIMINARY PROSPECTUS DATED SEPTEMBER 20, 1994
PROSPECTUS
- ----------
, 1994
MERRILL LYNCH ALABAMA MUNICIPAL BOND FUND
MERRILL LYNCH MULTI-STATE MUNICIPAL SERIES TRUST
P.O. BOX 9011, PRINCETON, NEW JERSEY 08543-9011 . PHONE NO. (609) 282-2800
--------------
Merrill Lynch Alabama Municipal Bond Fund (the "Fund") is a mutual fund
seeking to provide shareholders with as high a level of income exempt from
Federal and Alabama income taxes as is consistent with prudent investment
management. The Fund invests primarily in a non-diversified portfolio of long-
term, investment grade obligations, the interest on which, in the opinion of
bond counsel to the issuer, is exempt from Federal and Alabama 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.
Pursuant to the Merrill Lynch Select PricingSM System, the Fund offers four
classes of shares, each with a different combination of sales charges, ongoing
fees and other features. The Select Pricing 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 System" on page 4.
(continued on following page)
--------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
--------------
This Prospectus is a concise statement of information about the Fund that is
relevant to making an investment in the Fund. This Prospectus should be
retained for future reference. A statement containing additional information
about the Fund, dated , 1994 (the "Statement of Additional Information"),
has been filed with the Securities and Exchange Commission and is available,
without charge, by calling or by writing Merrill Lynch Multi-State Municipal
Series Trust (the "Trust") at the above telephone number or address. The
Statement of Additional Information is hereby incorporated by reference into
this Prospectus. The Fund is a separate series of the Trust, an open-end
management investment company organized as a Massachusetts business trust.
--------------
FUND ASSET MANAGEMENT, L.P.--MANAGER
MERRILL LYNCH FUNDS DISTRIBUTOR, INC.--DISTRIBUTOR
<PAGE>
(continued from prior page)
Merrill Lynch Funds Distributor, Inc. (the "Distributor"), P.O. Box 9011,
Princeton, New Jersey 08543-9011 [(609) 282-2800], and other securities dealers
which have entered into selected dealer agreements with the Distributor,
including Merrill Lynch, Pierce, Fenner & Smith Incorporated ("Merrill Lynch"),
will solicit subscriptions for shares of the Fund during a period expected to
end on November 25, 1994, unless extended. On the fifth business day after the
conclusion of this subscription period, the subscriptions will be payable, the
shares will be issued and the Fund will commence operations. The public
offering price of the shares during the subscription offering will be $10.00
per share in the case of Class B and Class C shares and $10.00 per share plus a
sales charge of 4.00%, subject to reductions on purchases in single
transactions of $25,000 or more, in the case of Class A and Class D shares.
After the completion of the initial subscription offering, the Fund will engage
in a continuous offering of its shares at a price equal to the next determined
net asset value per share in the case of Class B and Class C shares and the
next determined net asset value per share, plus a sales charge subject to
reductions as noted above, in the case of Class A and Class D shares.
Shareholders may redeem their shares at any time at the next determined net
asset value. The Class B shares may be subject to a contingent deferred sales
charge if redeemed within four years of purchase and are subject to ongoing
account maintenance and distribution fees. The Class C shares may be subject to
a contingent deferred sales charge if redeemed within one year of purchase and
are subject to ongoing account maintenance and distribution fees. The Class D
shares are subject to an ongoing account maintenance fee. The minimum initial
purchase during the subscription and continuous offerings is $1,000 and the
minimum subsequent purchase in the continuous offering is $50. Merrill Lynch
may charge its customers a processing fee (presently $4.85) for confirming
purchases and repurchases. Purchases and redemptions directly through the
Fund's Transfer Agent are not subject to the processing fee. See "Purchase of
Shares" and "Redemption of Shares".
2
<PAGE>
FEE TABLE
A general comparison of the sales arrangements and other nonrecurring and
recurring expenses applicable to shares of the Fund follows:
<TABLE>
<CAPTION>
CLASS A(A) CLASS B(B) CLASS C CLASS D
------------- ------------ ------------- -----------
<S> <C> <C> <C> <C>
SHAREHOLDER TRANSACTION
EXPENSES:
Maximum Sales Charge
Imposed on Purchases
(as a percentage of
offering price)....... 4.00%(c) None None 4.00%(c)
Sales Charge Imposed on
Dividend Reinvestments
...................... None None None None
Deferred Sales Charge
(as a percentage of
original purchase None(d) 4.0% during 1% for one None(d)
price or redemption the first year
proceeds, whichever is year,
lower) ............... decreasing
1.0%
annually
thereafter
to 0.0%
after the
fourth year
Exchange Fee .......... None None None None
ANNUAL FUND OPERATING
EXPENSES (AS A
PERCENTAGE OF AVERAGE
NET ASSETS):
Management Fees(e) .... 0.55% 0.55% 0.55% 0.55%
12b-1 Fees(f):
Account Maintenance
Fees................ None 0.25% 0.25% 0.10%
Distribution Fees.... None 0.25% 0.35% None
(Class B shares
convert to Class D
shares automatically
after approximately
ten years and
cease being subject
to distribution fees)
Other Expenses:
Custodial Fees..... .03% .03% .03% .03%
Shareholder Servic-
ing Costs(g)...... .07% .07% .07% .07%
Miscellaneous...... 1.06% 1.06% 1.06% 1.06%
Total Other Ex-
penses........... 1.16% 1.16% 1.16% 1.16%
Total Fund Operating
Expenses........... 1.71% 2.21% 2.31% 1.81%
</TABLE>
- --------
(a) Class A shares are sold to a limited group of investors including existing
Class A shareholders, certain retirement plans and investment programs.
See "Purchase of Shares--Initial Sales Charge Alternatives--Class A and
Class D Shares"--page 23.
(b) Class B shares convert to Class D shares automatically approximately 10
years after initial purchase. See "Purchase of Shares--Deferred Sales
Charge Alternatives--Class B and Class C Shares"--page 25.
(c) Reduced for purchases of $25,000 and over. Class A or Class D purchases of
$1,000,000 or more are not 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 which are not
subject to an initial sales charge may instead be subject to a CDSC of 1%
of amounts if redeemed within the first year of purchase.
(e) See "Management of the Fund--Management and Advisory Arrangements"--page
19.
(f) See "Purchase of Shares--Distribution Plans"--page 28.
(g) See "Management of the Fund--Transfer Agency Services"--page 19.
3
<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
above, (2) a 5% annual return throughout the
periods and (3) redemption at the end of the
period:
Class A .................................... $57 $92 $129 $234
Class B .................................... $62 $89 $118 $254
Class C..................................... $33 $72 $124 $265
Class D .................................... $58 $95 $134 $244
An investor would pay the following expenses
on the same $1,000 investment assuming no re-
demption at the end of the period:
Class A .................................... $57 $92 $129 $234
Class B .................................... $22 $69 $118 $254
Class C..................................... $23 $73 $124 $265
Class D .................................... $58 $95 $134 $244
</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 expenses set forth under "Other Expenses" are based on
estimated amounts through the end of the Fund's first fiscal year on an
annualized basis. The Example set forth above assumes reinvestment of all
dividends and distributions and utilizes a 5% annual rate of return as mandated
by Securities and Exchange Commission (the "Commission") regulations. THE
EXAMPLE SHOULD NOT BE CONSIDERED A REPRESENTATION OF PAST OR FUTURE EXPENSES OR
ANNUAL RATES OF RETURN, AND ACTUAL EXPENSES OR ANNUAL RATES OF RETURN MAY BE
MORE OR LESS THAN THOSE ASSUMED FOR PURPOSES OF THE EXAMPLE. Class B and Class
C shareholders who hold their shares for an extended period of time may pay
more in Rule 12b-1 distribution fees than the economic equivalent of the
maximum front-end sales charges permitted under the Rules of Fair Practice of
the National Association of Securities Dealers, Inc. ("NASD") Merrill Lynch may
charge its customers a processing fee (presently $4.85) for confirming
purchases and repurchases. Purchases and redemptions directly through the
Fund's Transfer Agent are not subject to the processing fee. See "Purchase of
Shares" and "Redemption of Shares".
MERRILL LYNCH SELECT PRICING/SM/ SYSTEM
The Fund offers four classes of shares under the Merrill Lynch Select
Pricing/SM/ System. The shares of each class may be purchased during the
subscription offering at $10.00 per share and during the continuous offering at
a price equal to the next determined net asset value per share subject during
both the subscription offering and the continuous offering 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 System is used by more than 50
mutual funds advised by Merrill Lynch Asset Management, L.P. ("MLAM") or its
affiliate, Fund Asset Management, L.P. ("FAM" or the "Manager"). Funds advised
by MLAM or FAM are referred to herein as "MLAM-advised mutual funds".
Each Class A, Class B, Class C or Class D share of the Fund represents an
identical interest in the investment portfolio of the Fund and has the same
rights, except that Class B, Class C and Class D shares
4
<PAGE>
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 deferred sales charges 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 the 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. 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 deferred sales charges with respect to the Class B and Class C
shares in that the sales charges 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 Select Pricing 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 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
----- ---------------------- ----------- ------------ ------------------------
<C> <S> <C> <C> <C>
A Maximum 4.00% initial No No No
sales charge(/2/),
(/3/)
B CDSC for periods of up 0.25% 0.25% B shares convert to
to 4 years, at a rate D shares automatically
of 4.0% during the after approximately ten
first year, decreas- years(/4/)
ing 1.0% annually to
0.0%
C 1.0% CDSC for one year 0.25% 0.35% No
D Maximum 4.00% initial 0.10% No No
sales charge(/3/)
</TABLE>
- --------
(1) Initial sales charges are imposed at the time of purchase as a percentage
of the offering price. Contingent deferred sales charges ("CDSCs") are
imposed if the redemption occurs within the applicable CDSC time period.
The charge will be assessed on an amount equal to the lesser of the
proceeds of redemption or the cost of the shares being redeemed.
(2) Offered only to eligible investors. See "Purchase of Shares--Initial Sales
Charge Alternatives--Class A and Class D Shares--Eligible Class A
Investors".
(3) Reduced for purchases of $25,000 or more. 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 CDSC if redeemed within one year.
See "Class A" and "Class D" below.
(4) The conversion period for dividend reinvestment shares and certain
retirement plans is 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.
5
<PAGE>
Class A: Class A shares incur an initial sales charge when they are purchased
and bear no ongoing distribution or account maintenance fees. Class A
shares are offered to a limited group of investors and also will be
issued upon reinvestment of dividends on outstanding Class A shares.
Investors that currently own Class A shares in a shareholder account
are entitled to purchase additional Class A shares in that account.
Other eligible investors include certain retirement plans and
participants in certain investment programs. In addition, Class A
shares will be offered to directors and employees of Merrill Lynch &
Co., Inc. and its subsidiaries and to members of the Boards of MLAM-
advised mutual funds. The maximum initial sales charge is 4.00%, which
is reduced for purchases of $25,000 and over. Purchases of $1,000,000
or more may not be not subject to an initial sales charge but if the
initial sales charge is waived, may be subject to a contingent
deferred sales charge ("CDSC") if the shares are redeemed within one
year after purchase. Sales charges also are reduced under a right of
accumulation which 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% of
the Fund's average net assets attributable to the Class B shares, an
ongoing distribution fee of 0.25% and a CDSC if they are redeemed
within four years 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 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 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 and for
certain retirement plans is modified as described under "Purchase of
Shares--Deferred Sales Charge Alternatives--Class B and Class C
Shares--Conversion of Class B Shares to Class D Shares".
Class C: Class C shares do not incur a sales charge when they are purchased,
but they are subject to an ongoing account maintenance fee of 0.25%
and an ongoing distribution fee of 0.35% of the Fund's average net
assets attributable to Class C shares. Class C shares are also subject
to a CDSC if they are redeemed within one year of purchase. Although
Class C shares are subject to a 1.0% CDSC for only one year (as
compared to four years for Class B), Class C shares have no conversion
feature and, accordingly, an investor that purchases Class C shares
will be subject to distribution fees that will be imposed on Class C
shares for an indefinite period subject to annual approval by the
Fund's Board of Trustees and regulatory limitations.
Class D: Class D shares incur an initial sales charge when they are purchased
and are subject to an ongoing account maintenance fee of 0.10% of the
Fund's average net assets attributable to Class D shares.
6
<PAGE>
Class D shares are not subject to an ongoing distribution fee or any CDSC
when they are redeemed. The schedule of initial sales charges and
reductions for the Class D shares is the same as the schedule for Class A
shares. 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 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 of the account maintenance fee
imposed on Class D shares. Investors qualifying for significantly reduced
initial sales charges may find the initial sales charge alternative
particularly attractive because similar sales charge reductions are not
available with respect to the deferred sales charges imposed in connection with
purchases of Class B or Class C shares. Investors not qualifying for reduced
initial sales charges who expect to maintain their investment for an extended
period of time also may elect to purchase Class A or Class D shares, because
over time the accumulated ongoing account maintenance and distribution fees on
Class B or Class C shares may exceed the initial sales 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 which may qualify the investor for reduced
initial sales charges on new initial sales charge purchases. In addition, the
ongoing Class B and Class C account maintenance and distribution fees will
cause Class B and Class C shares to have higher expense ratios, pay lower
dividends and have lower total returns than the initial sales charge shares.
The ongoing Class D account maintenance fees will cause Class D shares to have
a higher expense ratio, pay lower dividends and have a lower total return than
Class A shares.
Deferred Sales Charge Alternatives. Because no initial sales charges are
deducted at the time of purchase, Class B and Class C shares provide the
benefit of putting all of the investor's dollars to work from the time the
investment is made. The deferred sales charge alternatives may be particularly
appealing to investors who do not qualify for a reduction in initial sales
charges. Both Class B and Class C shares are subject to ongoing account
maintenance fees and distribution fees; however, the ongoing account
maintenance and distribution fees potentially may be offset to the extent any
return is realized on the additional funds initially invested in Class B or
Class C shares. In addition, Class B shares will be converted into Class D
shares of the Fund after a conversion period of approximately ten years, and
thereafter investors will be subject to lower ongoing fees.
Certain investors may elect to purchase Class B shares if they determine it
to be most advantageous to have all their funds invested initially and intend
to hold their shares for an extended period of time. Investors in Class B
shares should take into account whether they intend to redeem their shares
within the CDSC period and, if 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
7
<PAGE>
lower rate, they are subject to higher distribution fees and forgo the Class B
conversion feature, making their investment subject to account maintenance and
distribution fees for an indefinite period of time. In addition, while both
Class B and Class C distribution fees are subject to the limitations on asset-
based sales charges imposed by the NASD, the Class B distribution fees are
further limited under a voluntary waiver of asset-based sales charges. See
"Purchase of Shares--Limitations on the Payment of Deferred Sales Charges".
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 Alabama income taxes as is consistent
with prudent investment management. The Fund seeks to achieve its objective
while providing investors with the opportunity to invest in a non-diversified
portfolio of securities consisting primarily of long-term obligations issued by
or on behalf of the State of Alabama, its political subdivisions, agencies and
instrumentalities and obligations of other qualifying issuers, such as issuers
located in Puerto Rico, the Virgin Islands and Guam, which pay interest exempt,
in the opinion of bond counsel to the issuer, from Federal and Alabama income
taxes. Obligations exempt from Federal income taxes are referred to herein as
"Municipal Bonds" and obligations exempt from both Federal and Alabama income
taxes are referred to as "Alabama Municipal Bonds". Unless otherwise indicated,
references to Municipal Bonds shall be deemed to include Alabama Municipal
Bonds. The Fund at all times, except during temporary defensive periods, will
maintain at least 65% of its total assets invested in Alabama 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 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, as defined herein, may present similar risks, depending on the
particular product. Certain instruments in which the Fund may invest may be
characterized as derivative instruments. See "Description of Municipal Bonds"
and "Financial Futures Transactions and Options". The interest on Municipal
Bonds may bear a fixed rate or be payable at a variable or floating rate. At
least 80% of the Municipal Bonds purchased by the Fund primarily will be what
are commonly referred to as "investment grade" securities, which are
obligations rated at the time of purchase within the four highest quality
ratings as determined by either Moody's Investors Service, Inc. ("Moody's")
(currently Aaa, Aa, A and Baa), Standard & Poor's Corporation ("Standard &
Poor's") (currently AAA, AA, A and BBB) or Fitch Investors Service, Inc.
("Fitch") (currently AAA, AA, A and BBB). If Municipal Bonds are unrated, such
securities will possess creditworthiness comparable, in the opinion of the
manager of the Fund, Fund Asset Management, L.P. (the "Manager"), to
obligations in which the Fund may invest. Municipal Bonds rated in the fourth
highest rating category, while considered "investment grade", have certain
speculative characteristics and are more likely to be downgraded to non-
investment grade than obligations rated in one of the top three rating
categories. See Appendix II--"Ratings of Municipal Bonds"--in the Statement of
Additional Information for more information regarding ratings of debt
securities. An issue of rated Municipal Bonds may cease to be rated or its
rating may be reduced below "investment grade" subsequent to its purchase by
the Fund. If an obligation is downgraded below investment grade, the Manager
will consider factors such as price, credit risk, market conditions, financial
condition of the issuer and interest rates to determine whether to continue to
hold the obligation in the Fund's portfolio.
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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
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 variable rate demand obligations
("VRDOs") and VRDOs in the form of participation interests ("Participating
VRDOs") in variable rate tax-exempt obligations held by a financial
institution. The VRDOs in which the Fund will invest are tax-exempt obligations
which contain a floating or variable interest rate adjustment formula and an
unconditional right of demand on the part of the holder thereof to receive
payment of the unpaid principal balance plus accrued interest on a short notice
period not to exceed seven days. Participating VRDOs provide the Fund with a
specified undivided interest (up to 100%) of the underlying obligation and the
right to demand payment of the unpaid principal balance plus accrued interest
on the Participating VRDOs from the financial institution on a specified number
of days' notice, not to exceed seven days. There is, however, the possibility
that because of a default or insolvency, the demand feature of VRDOs or
Participating VRDOs may not be honored. The Fund has been advised by its
counsel that the Fund should be entitled to treat the income received on
Participating VRDOs as interest from tax-exempt obligations.
VRDOs that contain an unconditional right of demand to receive payment of the
unpaid principal balance plus accrued interest on a notice period exceeding
seven days may be deemed illiquid securities. A VRDO with a demand notice
period exceeding seven days will therefore be subject to the Fund's restriction
on illiquid investments unless, in the 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 Alabama income taxes. However, to the extent that suitable
Alabama Municipal Bonds are not available for investment by the Fund, the Fund
may purchase Municipal Bonds issued by other states, their agencies and
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instrumentalities, the interest income on which is exempt, in the opinion of
bond counsel, from Federal, but not Alabama, 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 Municipal Bonds.
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 Alabama 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 and SP-2 for notes and A-1 through A-3 for VRDOs
and commercial paper (as determined by Standard & Poor's), or F-1 through F-3
for notes, VRDOs and commercial paper (as determined by Fitch) or, if unrated,
of comparable quality in the opinion of the Manager. The Fund at all times will
have at least 80% of its net assets invested in securities the interest on
which is exempt from Federal taxation. However, interest received on certain
otherwise tax-exempt securities which are classified as "private activity
bonds" (in general, bonds that benefit non-governmental entities), may be
subject to a Federal alternative minimum tax. The percentage of the Fund's net
assets invested in "private activity bonds" will vary during the year. See
"Distributions and Taxes". In addition, the Fund reserves the right to invest
temporarily a greater portion of its assets in Temporary Investments for
defensive purposes, when, in the judgment of the Manager, market conditions
warrant. The investment objective of the Fund is a fundamental policy of the
Fund which may be not changed without a vote of a majority of the outstanding
shares of the Fund. The Fund's hedging strategies, which are described in more
detail under "Financial Futures Transactions and Options", are not fundamental
policies and may be modified by the Trustees of the Trust without the approval
of the Fund's shareholders.
POTENTIAL BENEFITS
Investment in shares of the Fund offers several benefits. The Fund offers
investors the opportunity to receive income exempt from Federal and Alabama
income taxes by investing in a professionally managed portfolio consisting
primarily of long-term Alabama 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 ALABAMA MUNICIPAL BONDS
Alabama's economy has experienced a major trend toward industrialization over
the last two decades. By 1990, manufacturing accounted for 39.73% of Alabama's
Real Gross State Product (the total value of goods and services produced in
Alabama). During the 1960's and 1970's the State's industrial base became
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more diversified and balanced, moving away from primary textiles (including
apparel), chemicals, rubber and plastics. Since the early 1980's modernization
of existing facilities and an increase in direct foreign investments in the
State has made the manufacturing sector more competitive in domestic and
international markets. In recent years, the importance of service industries to
the State's economy has increased. The major service industries in the State
are the general healthcare industries, most notably represented by the
University of Alabama medical complex in Birmingham, and the high technology
research and development industries concentrated in the Huntsville area. The
financial, insurance and real estate sectors have also shown strong growth over
the last several years.
The General Fund of the State receives a significant portion of its revenues
from consumer type revenues and fees and interest income from the Heritage
Trust Fund. Accordingly, recessionary conditions have the effect of reducing
income to the State's General Fund. Because of the Balanced Budget Amendment
and the non-proration of debt service on State General Obligation Bonds payable
from the General Fund, such revenue reductions have historically had no impact
on the timely payment of State General Obligation Bonds.
Many cities in Alabama rely to a significant extent on sales tax revenues to
finance general governmental operations. Recessionary conditions could
significantly affect general governmental revenues for governmental expenses
and debt service.
The Manager does not believe that the current economic conditions in Alabama
or other factors described above will have a significant adverse effect on the
Fund's ability to invest in high quality Alabama 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 Alabama Municipal Bonds. See Appendix
I, "Economic and Financial Conditions in Alabama," in the Statement of
Additional Information.
DESCRIPTION OF MUNICIPAL BONDS
Municipal Bonds include debt obligations issued to obtain funds for various
public purposes, including construction and equipping of a wide range of public
facilities (including water, sewer, gas, electricity, solid waste, health care,
transportation, education and housing facilities), refunding of outstanding
obligations and obtaining funds for general operating expenses and loans to
other public institutions and facilities. In addition, certain types of bonds
are issued by or on behalf of public authorities to finance various privately
operated facilities, including certain facilities for the local furnishing of
electric energy or gas, sewage facilities, solid waste disposal facilities and
other specialized facilities. For purposes of this Prospectus, such obligations
are referred to as Municipal Bonds if the interest paid thereon is exempt from
Federal income tax, and, as Alabama Municipal Bonds if the interest thereon is
exempt from Federal and Alabama income taxes, even though such bonds may be
"private activity bonds" as discussed below.
The two principal classifications of Municipal Bonds are "general obligation"
bonds and "revenue" bonds which latter category includes industrial development
bonds ("IDBs") and, for bonds issued after August 15, 1986, private activity
bonds. General obligation bonds are secured by the issuer's pledge of its
faith, credit and taxing power for the payment of principal and interest. The
taxing power of any governmental entity may be limited, however, by provisions
of state constitutions or laws, and an entity's creditworthiness will depend on
many factors, including potential erosion of the tax base due to population
declines, natural disasters, declines in the state's industrial base or
inability to attract new industries, economic limits on the ability to tax
without eroding the tax base, state legislative proposals or voter initiatives
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to limit ad valorem real property taxes and the extent to which the entity
relies on Federal or state aid, access to capital markets or other factors
beyond the state or entity's control. Accordingly, the capacity of the issuer
of a general obligation bond as to the timely payment of interest and the
repayment of principal when due is affected by the issuer's maintenance of its
tax base.
Revenue bonds are payable only from the revenues derived from a particular
facility or class of facilities or, in some cases, from the proceeds of a
special excise tax or other specific revenue source such as payments from the
user of the facility being financed; accordingly, the timely payment of
interest and the repayment of principal in accordance with the terms of the
revenue or special obligation bond is a function of the economic viability of
such facility or such revenue source. As a non-fundamental policy, the Fund may
not invest more than 5% of its total assets (taken at market value at the time
of each investment) in industrial revenue bonds where the entity supplying the
revenues from which the issuer is paid, including predecessors, has a record of
less than three years of continuous business operations. Investments involving
entities with less than three years of continuous business operations may pose
somewhat greater risks due to the lack of a substantial operating history for
such entities. The Manager believes, however, that the potential benefits of
such investments outweigh the potential risks, particularly given the Fund's
limitations on such investments.
The Fund may purchase IDBs and private activity bonds. IDBs and private
activity bonds are tax-exempt securities issued by states, municipalities or
public authorities to provide funds, usually through a loan or lease
arrangement, to a private entity for the purpose of financing construction or
improvement of a facility to be used by the entity. Such bonds are secured
primarily by revenues derived from loan repayments or lease payments due from
the entity which may or may not be guaranteed by a parent company or otherwise
secured. Neither IDBs nor private activity bonds are secured by a pledge of the
taxing power of the issuer of such bonds. Therefore, an investor should be
aware that repayment of such bonds depends on the revenues of a private entity
and be aware of the risks that such an investment may entail. Continued ability
of an entity to generate sufficient revenues for the payment of principal and
interest on such bonds will be affected by many factors including the size of
the entity, capital structure, demand for its products or services,
competition, general economic conditions, governmental regulation and the
entity's dependence on revenues for the operation of the particular facility
being financed. The Fund may also invest in so-called "moral obligation" bonds.
If an issuer of such bonds is unable to meet its obligations, repayment of such
bonds becomes a moral commitment, but not a legal obligation, of the issuer.
The Fund may invest in Municipal Bonds (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. 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. 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
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to which the interest rate may vary. The Manager believes that indexed and
inverse floating obligations represent a flexible portfolio management
instrument for the Fund which allows the Manager to vary the degree of
investment leverage relatively efficiently under different market conditions.
Certain investments in such obligations may be illiquid. The Fund may not
invest in such illiquid obligations if such investments, together with other
illiquid investments, would exceed 15% of the Fund's net assets.
Also included within the general category of Municipal Bonds are
participation certificates issued by government authorities or entities to
finance the acquisition or construction of equipment, land and/or facilities.
The certificates represent participations in a lease, an installment purchase
contract or a conditional sales contract (hereinafter collectively called
"lease obligations") relating to such equipment, land or facilities. Although
lease obligations do not constitute general obligations of the issuer for which
the issuer's unlimited taxing power is pledged, a lease obligation frequently
is backed by the issuer's covenant to budget for, appropriate and make the
payments due under the lease obligation. However, certain lease obligations
contain "non-appropriation" clauses which provide that the issuer has no
obligation to make lease or installment purchase payments in future years
unless money is appropriated for such purpose on a yearly basis. Although "non-
appropriation" lease obligations are secured by the leased property,
disposition of the property in the event of foreclosure might prove difficult.
These securities represent a type of financing that has not yet developed the
depth of marketability associated with more conventional securities. Certain
investments in lease obligations may be illiquid. The Fund may not invest in
illiquid lease obligations if such investments, together with other illiquid
investments, would exceed 15% of the Fund's net assets. The Fund may, however,
invest without regard to such limitation in lease obligations which the
Manager, pursuant to guidelines which have been adopted by the Board of
Trustees and subject to the supervision of the Board, determines to be liquid.
The Manager will deem lease obligations liquid if they are publicly offered and
have received an investment grade rating of Baa or better by Moody's, or BBB or
better by Standard & Poor's or Fitch. Unrated lease obligations, or those rated
below investment grade, will be considered liquid if the obligations come to
the market through an underwritten public offering and at least two dealers are
willing to give competitive bids. In reference to the latter, the Manager must,
among other things, also review the creditworthiness of the municipality
obligated to make payment under the lease obligation and make certain specified
determinations based on such factors as the existence of a rating or credit
enhancement such as insurance, the frequency of trades or quotes for the
obligation and the willingness of dealers to make a market in the obligation.
Federal tax legislation has limited the types and volume of bonds the
interest on which qualifies for a Federal income tax exemption. As a result,
this legislation and legislation which may be enacted in the future may affect
the availability of Municipal Bonds for investment by the Fund.
WHEN-ISSUED SECURITIES AND DELAYED DELIVERY TRANSACTIONS
The Fund may purchase or sell Municipal Bonds on a delayed delivery basis or
a when-issued basis at fixed purchase terms. These transactions arise when
securities are purchased or sold by the Fund with payment and delivery taking
place in the future. The purchase will be recorded on the date the Fund enters
into the commitment and the value of the obligation will thereafter be
reflected in the calculation of the Fund's net asset value. The value of the
obligation on the delivery date may be more or less than its purchase price. A
separate account of the Fund will be established with its custodian consisting
of cash, cash equivalents or high grade, liquid Municipal Bonds having a market
value at all times at least equal to the amount of the forward commitment.
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CALL RIGHTS
The Fund may purchase a Municipal Bond issuer's right to call all or a
portion of such Municipal Bond for mandatory tender for purchase (a "Call
Right"). A holder of a Call Right may exercise such right to require a
mandatory tender for the purchase of related Municipal Bonds, subject to
certain conditions. A Call Right that is not exercised prior to the maturity of
the related Municipal Bond will expire without value. The economic effect to
holding both the Call Right and the related Municipal Bond is identical to
holding a Municipal Bond as a non-callable security. Certain investments in
such obligations may be illiquid. The Fund may not invest in such illiquid
obligations if such investments, together with other illiquid investments,
would exceed 15% of the Fund's net assets.
FINANCIAL FUTURES TRANSACTIONS AND OPTIONS
The Fund is authorized to purchase and sell certain exchange traded financial
futures contracts ("financial futures contracts") solely for the purpose of
hedging its investments in Municipal Bonds against declines in value and to
hedge against increases in the cost of securities it intends to purchase.
However, any transactions involving financial futures or options (including
puts and calls associated therewith) will be in accordance with the Fund's
investment policies and limitations. A financial futures contract obligates the
seller of a contract to deliver and the purchaser of a contract to take
delivery of the type of financial instrument covered by the contract, or in the
case of index-based futures contracts to make and accept a cash settlement, at
a specific future time for a specified price. A sale of financial futures
contracts may provide a hedge against a decline in the value of portfolio
securities because such depreciation may be offset, in whole or in part, by an
increase in the value of the position in the financial futures contracts. A
purchase of financial futures contracts may provide a hedge against an increase
in the cost of securities intended to be purchased, because such appreciation
may be offset, in whole or in part, by an increase in the value of the position
in the futures contracts. Distributions, if any, of net long-term capital gains
from certain transactions in futures or options are taxable at long-term
capital gains rates for Federal income tax purposes, regardless of the length
of time the shareholder has owned Fund shares. See "Distributions and Taxes--
Taxes".
The Fund deals in financial futures contracts traded on the Chicago Board of
Trade based on The Bond Buyer Municipal Bond Index, a price-weighted measure of
the market value of 40 large, recently issued tax-exempt bonds. There can be no
assurance, however, that a liquid secondary market will exist to terminate any
particular financial futures contract at any specific time. If it is not
possible to close a financial futures position entered into by the Fund, the
Fund would continue to be required to make daily cash payments of variation
margin in the event of adverse price movements. In such a situation, if the
Fund has insufficient cash, it may have to sell portfolio securities to meet
daily variation margin requirements at a time when it may be disadvantageous to
do so. The inability to close financial futures positions also could have an
adverse impact on the Fund's ability to hedge effectively. There is also the
risk of loss by the Fund of margin deposits in the event of bankruptcy of a
broker with whom the Fund has an open position in a financial futures contract.
The Fund may purchase and sell financial futures contracts on U.S. Government
securities and write and purchase put and call options on such futures
contracts as a hedge against adverse changes in interest rates as described
more fully in the Statement of Additional Information. With respect to U.S.
Government securities, currently there are financial futures contracts based on
long-term U.S. Treasury bonds, Treasury notes, Government National Mortgage
Association ("GNMA") Certificates and three-month U.S. Treasury bills.
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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.
Under regulations of the Commodity Futures Trading Commission, the futures
trading activities described herein will not result in the Fund being deemed to
be a "commodity pool," as defined under such regulations, provided that the
Fund adheres to certain restrictions. In particular, the Fund may purchase and
sell futures contracts and options thereon (i) for bona fide hedging purposes,
and (ii) for non-hedging purposes, if the aggregate initial margins and
premiums required to establish positions in such contracts and options does not
exceed 5% of the liquidation value of the Fund's portfolio assets after taking
into account unrealized profits and unrealized losses on any such contracts and
options. (However, as stated above, the Fund intends to engage in options and
futures transactions only for hedging purposes.) Margin deposits may consist of
cash or securities acceptable to the broker and the relevant contract market.
When the Fund purchases a futures contract, or writes a put option or
purchases a call option thereon, it will maintain an amount of cash, cash
equivalents (e.g., high grade commercial paper and daily tender adjustable
notes) or short-term, high-grade, fixed-income securities in a segregated
account with the Fund's custodian, so that the amount so segregated plus the
amount of initial and variation margin held in the account of its broker equals
the market value of the futures contracts, thereby ensuring that the use of
such futures contract is unleveraged. It is not anticipated that transactions
in futures contracts will have the effect of increasing portfolio turnover.
Although certain risks are involved in options and futures transactions, the
Manager believes that, because the Fund will engage in futures transactions
only for hedging purposes, the futures portfolio strategies of the Fund will
not subject the Fund to certain risks frequently associated with speculation in
futures transactions. The Fund must meet certain Federal income tax
requirements under the Internal Revenue Code of 1986, as amended (the "Code"),
in order to qualify for the special tax treatment afforded regulated investment
companies, including a requirement that less than 30% of its gross income be
derived from the sale or other disposition of securities held for less than
three months. Additionally, the Fund is required to meet certain
diversification requirements under the Code.
The liquidity of a secondary market in a futures contract may be adversely
affected by "daily price fluctuation limits" established by commodity exchanges
which limit the amount of fluctuation in a futures
15
<PAGE>
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.
REPURCHASE AGREEMENTS AND PURCHASE AND SALE CONTRACTS
As Temporary Investments, the Fund may invest in securities pursuant to
repurchase agreements or purchase and sale contracts. Repurchase agreements and
purchase and sale contracts may be entered into only with a member bank of the
Federal Reserve System or primary dealer in U.S. Government securities. Under
such agreements, the bank or primary dealer agrees, upon entering into the
contract, to repurchase the security at a mutually agreed upon time and price,
thereby determining the yield during the term of the agreement. This results in
a fixed rate of return insulated from market fluctuations during such period.
In the case of repurchase agreements, the prices at which the trades are
conducted do not reflect accrued interest on the underlying obligations;
whereas, in the case of purchase and sale contracts, the prices take into
account accrued interest. Such agreements usually cover short periods, such as
under one week. Repurchase agreements may be construed to be collateralized
loans by the purchaser to the seller secured by the securities transferred to
the purchaser. In the case of a repurchase agreement, the Fund will require the
seller to provide additional collateral if the market value of the securities
falls below the repurchase price at any time during the term of the repurchase
agreement; the Fund does not have the right to seek additional collateral in
the case of purchase and sale contracts. In the event of default by the seller
under the repurchase agreement construed to be a collateralized loan, the
underlying securities are not owned by the Fund but only constitute collateral
for the seller's obligation to pay the repurchase price. Therefore, the Fund
may suffer time delays and incur costs or possible losses in connection with
the disposition of the collateral. A purchase and sale contract differs from a
repurchase agreement in that the contract arrangements stipulate that the
securities are owned by the Fund. In the event of a default under such a
repurchase agreement or under a purchase and sale contract, instead of the
contractual fixed rate of return, the rate of return to the Fund shall be
dependent upon intervening fluctuations of the market value of such security
and the accrued interest on the security. In such event, the Fund would have
rights against the seller for breach of contract with respect to any losses
arising from market fluctuations following the failure of the seller to
perform. The Fund may not invest in repurchase agreements or purchase and sale
contracts maturing in more than seven days if such investments, together with
all other illiquid investments, would exceed 15% of the Fund's net assets.
INVESTMENT RESTRICTIONS
The Fund'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
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defined in the 1940 Act. Among its fundamental policies, the Fund may not: (i)
invest more than 25% of its assets, taken at market value, 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]; and (ii) borrow money, except that (a) 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), (b) the Fund may borrow up to an
additional 5% of its total assets for temporary purposes, (c) the Fund may
obtain such short-term credit as may be necessary for the clearance of
purchases and sales of portfolio securities and (d) 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 the Prospectus and
Statement of Additional Information, as they may be amended from time to time,
in connection with hedging transactions, short sales, when-issued and forward
commitment transactions and similar investment strategies.
Among its non-fundamental policies, the Fund may not (i) purchase securities
of other investment companies, except to the extent such purchases are
permitted by applicable law; (ii) 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 Fund has otherwise
determined to be liquid pursuant to applicable law]; and (iii) invest in
securities of companies having a record, together with predecessors, of less
than three years of continuous operation, if more than 5% of the Fund's total
assets would be invested in such securities. This restriction shall not apply
to mortgaged-backed securities, asset-backed securities or obligations issued
or guaranteed by the U.S. Government, its agencies or instrumentalities.
The Fund is classified as non-diversified within the meaning of the 1940 Act,
which means that the Fund is not limited by the 1940 Act in the proportion of
its assets that it may invest in obligations of a single issuer. However, the
Fund's investments will be limited so as to qualify as a "regulated investment
company" for purposes of the Internal Revenue Code. See "Taxes". To qualify,
among other requirements, the Trust will limit the Fund's investments so that,
at the close of each quarter of the taxable year, (i) not more than 25% of the
market value of the Fund's total assets will be invested in the securities of a
single issuer, and (ii) with respect to 50% of the market value of its total
assets, not more than 5% of the market value of its total assets will be
invested in the securities of a single issuer and the Fund will not own more
than 10% of the outstanding voting securities of a single issuer. For purposes
of this restriction, the Fund will regard each state and each political
subdivision, agency or instrumentality of such state and each multi-state
agency of which such state is a member and each public authority which issues
securities on behalf of a private entity as a separate issuer, except that if
the security is backed only by the assets and revenues of a non-government
entity then the entity with the ultimate responsibility for the payment of
interest and principal may be regarded as the sole issuer. These tax-related
limitations may be changed by the Trustees of the Trust to the extent necessary
to comply with changes to the Federal tax requirements. A fund which elects to
be classified as "diversified" under the 1940 Act must satisfy the foregoing 5%
and 10% requirements with respect to 75% of its total assets. To the extent
that the Fund assumes large positions in the obligations of a small number of
issuers, the Fund's total return may fluctuate to a greater extent than that of
a diversified company as a result of changes in the financial condition or in
the market's assessment of the issuers.
Investors are referred to the Statement of Additional Information for a
complete description of the Fund's investment restrictions.
17
<PAGE>
MANAGEMENT OF THE TRUST
TRUSTEES
The Trustees of the Trust consist of six individuals, five of whom are not
"interested persons" of the Trust as defined in the 1940 Act. The Trustees are
responsible for the overall supervision of the operations of the Trust and the
Fund and perform the various duties imposed on the directors or trustees of
investment companies by the 1940 Act.
The Trustees are:
Arthur Zeikel*--President and Chief Investment Officer of Fund Asset
Management, L.P. and Merrill Lynch Asset Management, L.P. ("MLAM");
President and Director of Princeton Services, Inc.; Executive Vice
President of Merrill Lynch & Co., Inc. since 1990; Executive Vice
President of Merrill Lynch, Pierce, Fenner & Smith Incorporated
("Merrill Lynch") since 1990 and a Senior Vice President thereof from
1985 to 1990; Director of Merrill Lynch Funds Distributor, Inc.
Kenneth S. Axelson--Former Executive Vice President and Director, J.C.
Penney Company, Inc.
Herbert I. London--John M. Olin Professor of Humanities, New York
University.
Robert R. Martin--Chairman, WTC Industries, Inc. and former Chairman
and Chief Executive Officer, 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
Fund Asset Management, L.P. (the "Manager"), which is an affiliate of MLAM
and is owned and controlled by Merrill Lynch & Co., Inc., a financial services
holding company, acts as the manager for the Fund and provides the Fund with
management services. The Manager or MLAM acts as the investment adviser for
more than 100 other registered investment companies. MLAM also provides
investment advisory services to individual and institutional accounts. As of
June 30, 1994, the Manager and MLAM had a total of approximately $161.4
billion in investment company and other portfolio assets under management,
including accounts of certain affiliates of the Manager.
Subject to the direction of the Trustees, the Manager is responsible for the
actual management of the Fund's portfolio and constantly reviews the Fund's
holdings in light of its own research analysis and that from other relevant
sources. The responsibility for making decisions to buy, sell or hold a
particular security rests with the Manager. The Manager performs certain of
the other administrative services and provides all the office space,
facilities, equipment and necessary personnel for management of the Fund.
Vincent R. Giordano and Kenneth A. Jacob are the Portfolio Managers for the
Fund. Vincent R. Giordano has been a Portfolio Manager of the Manager and MLAM
since 1977 and a Senior Vice President of the Manager and MLAM since 1984.
Kenneth A. Jacob has been a Vice President of the Manager and MLAM since 1984.
18
<PAGE>
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.
The Management Agreement obligates the Fund to pay certain expenses incurred
in the Fund's operations, including, among other things, the management fee,
legal and audit fees, unaffiliated Trustees' fees and expenses, registration
fees, custodian and transfer agency fees, accounting and pricing costs, and
certain of the costs of printing proxies, shareholder reports, prospectuses and
statements of additional information. Accounting services are provided to the
Fund by the Manager, and the Fund reimburses the Manager for its costs in
connection with such services. The Manager may waive all or a portion of its
management fee and may voluntarily assume all or a portion of the Fund's
expenses.
TRANSFER AGENCY SERVICES
Financial Data Services, Inc. (the "Transfer Agent"), which is a wholly-owned
subsidiary of Merrill Lynch & Co., Inc., acts as the Trust's transfer agent
pursuant to a transfer agency, dividend disbursing agency and shareholder
servicing agency agreement (the "Transfer Agency Agreement"). Pursuant to the
Transfer Agency Agreement, the Transfer Agent is responsible for the issuance,
transfer and redemption of shares and the opening and maintenance of
shareholder accounts. Pursuant to the Transfer Agency Agreement, the Fund
pays the Transfer Agent an annual fee of $11.00 per Class A or Class D
shareholder account and $14.00 per Class B or Class C shareholder account, and
the Transfer Agent is entitled to reimbursement from the Fund for out-of-pocket
expenses incurred by the Transfer Agent under the Transfer Agency Agreement.
PURCHASE OF SHARES
SUBSCRIPTION OFFERING
Merrill Lynch Funds Distributor, Inc. (the "Distributor"), an affiliate of
both MLAM and Merrill Lynch, acts as the distributor of the shares of the Fund.
The Distributor, Merrill Lynch and other securities dealers which have
entered into selected dealer agreements with the Distributor will solicit
subscriptions for shares of the Fund during a period expected to end on
November 25, 1994. The subscription period may be extended for up to an
additional 30 days upon agreement between the Trust on behalf of the Fund and
the Distributor. On the fifth business day after the conclusion of the
subscription period, the subscriptions will be payable, the Class A, Class B,
Class C and Class D shares will be issued and the Fund will commence
operations. The subscription offering may be terminated by the Trust or the
Distributor at any time, in which event no Class A, Class B, Class C and Class
D shares will be issued (and, therefore, the Fund will not commence operations
and no amounts will be payable by subscribers, and no sales charges will be
assessed) or a limited number of shares will be issued.
19
<PAGE>
The public offering price of the Class A and Class D shares during the
subscription offering is set forth in the table below:
<TABLE>
<CAPTION>
SUBSCRIPTION PERIOD
-------------------------------------------
SECURITIES DEALERS'
SALES CHARGE CONCESSION
------------------ ------------------------
PERCENTAGE* PERCENTAGE*
PUBLIC OF PUBLIC OF PUBLIC
OFFERING DOLLAR OFFERING DOLLAR OFFERING
PRICE AMOUNT PRICE AMOUNT PRICE
-------- ------ ----------- ---------- ------------
<S> <C> <C> <C> <C> <C>
Less than $25,000......... $10.417 $.417 4.00% $.417 4.00%
$25,000 but less than
$50,000.................. 10.390 .390 3.75 .390 3.75
$50,000 but less than
$100,000................. 10.336 .336 3.25 .336 3.25
$100,000 but less than
$250,000................. 10.256 .256 2.50 .256 2.50
$250,000 but less than
$1,000,000............... 10.152 .152 1.50 .152 1.50
$1,000,000 and over**.....
</TABLE>
- --------
* Rounded to the nearest one-hundredth percent.
** Purchases of $1,000,000 or more may be subject to a CDSC of 1% if the shares
are redeemed within one year after purchase. 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.
The Distributor may reallow discounts to selected dealers and retain the
balance over such discounts. At times the Distributor may reallow the entire
sales charge to such dealers. Since securities dealers selling Class A and
Class D shares of the Fund will receive a concession equal to most of the sales
charge, they may be deemed to be underwriters under the Securities Act of 1933,
as amended.
The proceeds per share to the Fund from the sale of all Class A and Class D
shares sold during the subscription period will be $10.00.
The public offering price of the Class B and Class C shares during the
subscription offering will be $10.00 per share. However, the Class B and Class
C shares may be subject to the contingent deferred sales charges described
below under "Deferred Sales Charge Alternatives--Class B and Class C Shares"
and are subject to ongoing account maintenance and distribution fees as
described below.
The minimum initial purchase for Class A, Class B, Class C and Class D shares
during the subscription period is $1,000.
CONTINUOUS OFFERING
Commencing immediately after completion of the subscription offering, Class
A, Class B, Class C and Class D shares of the Fund will be offered continuously
for sale by the Distributor and other eligible securities dealers (including
Merrill Lynch). During the continuous offering, shares of the Fund may be
purchased from securities dealers or by mailing a purchase order directly to
the Transfer Agent. The minimum initial purchase during the continuous offering
is $1,000. The minimum subsequent purchase is $50.
The Fund will offer its shares in four classes during the continuous offering
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
20
<PAGE>
Select Pricing 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 4:15 P.M., New York time, which
includes orders received after the determination of net asset value on the
previous day, the applicable offering price will be based on the net asset
value as of 4:15 P.M. on the day the order is placed with the Distributor,
provided the orders are received by the Distributor prior to 4:30 P.M., New
York time, on that day. If the purchase orders are not received prior to 4:30
P.M., New York time, 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 $4.85) to confirm a sale of shares to
such customers. Purchases directly through the Fund's Transfer Agent are not
subject to the processing fee.
----------------
The Fund issues four classes of shares under the Merrill Lynch Select Pricing
System, which permits each investor to choose the method of purchasing shares
that he or she 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
contingent deferred sales charge and ongoing distribution fees. A discussion of
the factors that investors should consider in determining the method of
purchasing shares under the Merrill Lynch Select Pricing System is set forth
under "Merrill Lynch Select Pricing System" on page 4.
Each Class A, Class B, Class C and Class D share of the Fund represents
identical interests in the investment portfolio of the Fund and has the same
rights, except that Class B, Class C and Class D shares bear the expenses of
the ongoing account maintenance fees, and Class B and Class C shares bear the
expenses of the ongoing distribution fees and the additional incremental
transfer agency costs resulting from the deferred sales charge arrangements.
The deferred sales charges 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. 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 deferred sales charges with respect to Class B and Class C shares in
that the sales charges 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
21
<PAGE>
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, which are
eligible to sell shares.
The following table sets forth a summary of the distribution arrangements
for each class of shares under the Select Pricing System.
<TABLE>
<CAPTION>
ACCOUNT
MAINTENANCE DISTRIBUTION CONVERSION
CLASS SALES CHARGE(1) FEE FEE FEATURE
----- ---------------------- ----------- ------------ ------------------------
<C> <S> <C> <C> <C>
A Maximum 4.00% initial No No No
sales charge(2)(3)
B CDSC for periods of up 0.25% 0.25% B shares convert to
to 4 years, at a rate D shares automatically
of 4.0% during the after approximately ten
first year, decreas- years(4)
ing 1.0% annually to
0.0%
C 1.0% CDSC for one year 0.25% 0.35% No
D Maximum 4.00% initial 0.10% No No
sales charge(3)
</TABLE>
- --------
(1) Initial sales charges are imposed at the time of purchase as a percentage
of the offering price. CDSCs may be imposed if the redemption occurs
within the applicable CDSC time period. The charge will be assessed on an
amount equal to the lesser of the proceeds of redemption or the cost of
the shares being redeemed.
(2) Offered only to eligible investors. See "Initial Sales Charge
Alternatives--Class A and Class D Shares--Eligible Class A Investors".
(3) Reduced for purchases of $25,000 or more. 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 CDSC if redeemed within one year.
(4) The conversion period for dividend reinvestment shares and certain
retirement plans is 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.
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.
** Purchases of $1,000,000 or more may be subject to a CDSC of 1% if
the shares are redeemed within one year after purchase. 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.
22
<PAGE>
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.
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 in a
shareholder account are entitled to purchase additional Class A shares in that
account. Certain employer sponsored retirement or savings plans, including
eligible 401(k) plans, may purchase Class A shares at net asset value provided
such plans meet the required minimum number of eligible employees or required
amount of assets advised by MLAM or any of its affiliates. Also eligible to
purchase Class A shares at net asset value are participants in certain
investment programs including TMA SM Managed Trusts to which Merrill Lynch
Trust Company provides discretionary trustee services and certain purchases
made in connection with the Merrill Lynch Mutual Fund Adviser program. In
addition, Class A shares will be offered at net asset value to Merrill Lynch &
Co., Inc. and its subsidiaries and their directors and employees and to
members of the Boards of MLAM-advised mutual funds, including the Fund.
Certain persons who acquired shares of certain MLAM-advised closed-end funds
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. For example, 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. who wish to reinvest the net
proceeds from a sale of certain of their shares of common stock of Merrill
Lynch Senior Floating Rate Fund, Inc. in shares of such 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".
Class D shares are offered at net asset value to Trustees, officers and
employees of the Fund and to Directors and employees of ML&Co. and its
subsidiaries.
Class D shares are offered at net asset value to an investor who has a
business relationship with a financial consultant who joined Merrill Lynch
from another investment firm within six months prior to the date of purchase
if certain conditions set forth in the Statement of Additional Information are
met. Class D shares may be offered at net asset value in connection with the
acquisition of assets of other investment companies. Class D shares also are
offered at net asset value, without 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, if the following
conditions are satisfied: first, the investor must purchase Class D shares
with proceeds from a redemption of shares of such other mutual fund, and such
fund imposed a sales charge either at the time of purchase or on a deferred
basis; second, such purchase of Class D shares must be made within 90 days
after such notice of termination.
Additional information concerning these reduced initial sales charges is set
forth in the Statement of Additional Information.
23
<PAGE>
DEFERRED SALES CHARGE ALTERNATIVES--CLASS B AND CLASS C SHARES
Investors choosing the deferred sales charge alternatives should consider
Class B shares if they intend to hold their shares for an extended period of
time and Class C shares if they are uncertain as to the length of time they
intend to hold their assets in MLAM-advised mutual funds.
The public offering price of Class B and Class C shares for investors
choosing the deferred sales charge alternatives is the next determined net
asset value per share without the imposition of a sales charge at the time of
purchase. As discussed below, Class B shares are subject to a four year CDSC,
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 dealer's own funds. The
combination of the CDSC and the ongoing distribution fee facilitates the
ability of the Fund to sell the Class B and Class C shares without a sales
charge being deducted at the time of purchase. 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 fee are used to compensate Merrill Lynch 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 which are
redeemed within four years of purchase may be subject to a CDSC at the rates
set forth below charged as a percentage of the dollar amount subject thereto.
The charge will be assessed on an amount equal to the lesser of the current
market value or the cost of the shares being redeemed. Accordingly, no CDSC
will be imposed on increases in net asset value above the initial purchase
price. In addition, no CDSC will be assessed on shares derived from
reinvestment of dividends or capital gains distributions.
24
<PAGE>
The following table sets forth the rates of the Class B CDSC:
<TABLE>
<CAPTION>
CLASS B
CDSC AS A
PERCENTAGE OF
YEAR SINCE DOLLAR AMOUNT
PURCHASE SUBJECT TO
PAYMENT MADE CHARGE
------------ -------------
<S> <C>
0-1........................................................ 4.0%
1-2........................................................ 3.0%
2-3........................................................ 2.0%
3-4........................................................ 1.0%
4 and thereafter........................................... None
</TABLE>
In determining whether a CDSC is applicable to a redemption, the calculation
will be determined in the manner that results in the lowest possible applicable
rate being charged. Therefore, it will be assumed that the redemption is first
of shares 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 redemption.
To provide an example, assume an investor purchased 100 Class B shares at $10
per share (at a cost of $1,000) and in the third year after purchase, the net
asset value per share is $12 and, during such time, the investor has acquired
10 additional shares upon dividend reinvestment. If at such time the investor
makes his or her first redemption of 50 shares (proceeds of $600), 10 shares
will not be subject to charge because of dividend reinvestment. With respect to
the remaining 40 shares, the CDSC is applied only to the original cost of $10
per share and not to the increase in net asset value of $2 per share.
Therefore, $400 of the $600 redemption proceeds will be charged at a rate of
2.0% (the applicable rates in the third year after purchase).
The Class B CDSC is waived on redemptions of shares in connection with
certain post-retirement withdrawals from an Individual Retirement Account
("IRA") or other retirement plan or following the death or disability (as
defined in the Internal Revenue Code of 1986, as amended) of a shareholder. The
Class B CDSC also is waived on redemptions of shares by certain eligible 401(a)
and eligible 401(k) plans and in connection with certain group plans. The CDSC
also is waived for any Class B shares which are purchased by eligible 401(k) or
eligible 401(a) plans which are rolled over into a Merrill Lynch or Merrill
Lynch Trust Company custodied IRA and held in such account at the time of
redemption. The Class B CDSC also is waived for any Class B shares which are
purchased by a Merrill Lynch rollover IRA, that was funded by a rollover from a
terminated 401(k) plan managed by the MLAM Private Portfolio Group, and held in
such account at the time of redemption. Additional information concerning the
waiver of the Class B CDSC is set forth in the Statement of Additional
Information.
Contingent Deferred Sales Charges--Class C Shares. Class C shares which 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.
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In determining whether a Class C CDSC is applicable to a redemption, the
calculation will be determined in the manner that results in the lowest
possible rate being charged. Therefore, it will be assumed that the redemption
is first of shares held for over one year or shares acquired pursuant to
reinvestment of dividends or distributions and then of shares held longest
during the one-year period. The charge will not be applied to dollar amounts
representing an increase in the net asset value since the time of purchase. A
transfer of shares from a shareholder's account to another will be assumed to
be made in the same order as a redemption.
The Class C CDSC is waived on redemptions of shares under the same
circumstances as is the case for Class B shares described above. Additional
information concerning the waiver of the Class C CDSC is set forth in the
Statement of Additional Information.
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 a 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.
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 is modified for shareholders who purchased Class B
shares through certain retirement plans which qualified for a waiver of the
CDSC normally imposed on purchases of Class B shares ("Class B Retirement
Plans"). When the first share of any MLAM-advised mutual fund purchased by a
Class B Retirement Plan has been held for ten years (i.e., ten years from the
date the relationship between MLAM-advised mutual funds and the Class B
Retirement Plan was established), all Class B shares of all MLAM-advised mutual
funds held in that Class B Retirement Plan will be converted into Class D
shares of the appropriate Funds. Subsequent to such conversion, that Class B
Retirement Plan will be sold Class D shares of the appropriate Funds.
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 Investment Company Act (each a
"Distribution Plan") with respect to the account maintenance and/or
distribution fees paid by the Fund to the Distributor with respect to such
classes. The
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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 provide
that the Fund pays the Distributor an account maintenance fee relating to the
shares of the relevant class, accrued daily and paid monthly, at the annual
rates of 0.25%, 0.25% and 0.10%, respectively, of the average daily net assets
of the Fund attributable to shares of the relevant class in order to
compensate the Distributor and Merrill Lynch (pursuant to a sub-agreement) in
connection with account maintenance activities.
The Distribution Plans for Class B and Class C shares each provide that the
Fund also pays the Distributor a distribution fee relating to the shares of
the relevant class, accrued daily and paid monthly, at the annual rate of
0.25% and 0.35%, respectively, of the average daily net assets of the Fund
attributable to the shares of the relevant class in order to compensate the
Distributor and Merrill Lynch (pursuant to a sub-agreement) for providing
shareholder and distribution services, and bearing certain distribution-
related expenses of the Fund, including payments to financial consultants for
selling Class B and Class C shares of the Fund. The Distribution Plans
relating to Class B and Class C shares are designed to permit an investor to
purchase Class B and Class C shares through dealers without the assessment of
an initial sales charge and at the same time permit the dealer to compensate
its financial consultants in connection with the sale of the Class B and Class
C shares. In this regard, the purpose and function of the ongoing distribution
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.
The 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.
LIMITATIONS ON THE PAYMENT OF DEFERRED SALES CHARGES
The maximum sales charge rule in the Rules of Fair Practice 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
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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 C Shares--
Conversion of Class B Shares to Class D Shares".
REDEMPTION OF SHARES
The Trust is required to redeem for cash all full and fractional shares of
the Fund upon receipt of a written request in proper form. The redemption
price is the net asset value per share next determined after the initial
receipt of proper notice of redemption. Except for any CDSC which may be
applicable, there will be no charge for redemption if the redemption request
is sent directly to the Transfer Agent. Shareholders liquidating their
holdings will receive upon redemption all dividends reinvested through the
date of redemption. The value of shares at the time of redemption may be more
or less than the shareholder's cost, depending on the market value of the
securities held by the Fund at such time.
REDEMPTION
A shareholder wishing to redeem shares may do so by tendering the shares
directly to the Transfer Agent, Financial Data Services, Inc., Transfer Agency
Mutual Fund Operations, P.O. Box 45289, Jacksonville, Florida 32232-5289.
Redemption requests delivered other than by mail should be delivered to
Financial Data Services, Inc., Transfer Agency Mutual Fund Operations, 4800
Deer Lake Drive East, Jacksonville, Florida 32246-6484. Proper notice of
redemption in the case of shares deposited with the Transfer Agent may be
accomplished by a written letter requesting redemption. Proper notice of
redemption in the case of shares for which certificates have been issued may
be accomplished by a written letter as noted above accompanied by certificates
for the shares to be redeemed. Redemption requests should not be sent to the
Trust. The notice in either event requires the signature(s) of all persons in
whose name(s) the shares are registered, signed exactly as such name(s)
appear(s) on the Transfer Agent's register. The signature(s) on the redemption
request must be guaranteed by an "eligible guarantor institution" as such term
is defined in Rule 17Ad-15 under the Securities Exchange Act
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of 1934, as amended, the existence and validity of which may be verified by
the Transfer Agent through the use of industry publications. Notarized
signatures are not sufficient. In certain instances, the Transfer Agent may
require additional documents such as, but not limited to, trust instruments,
death certificates, appointments as executor or administrator, or certificates
of corporate authority. For shareholders redeeming directly with the Transfer
Agent, payments will be mailed within seven days of receipt of a proper notice
of redemption.
At various times the Trust may be requested to redeem Fund shares for which
it has not yet received good payment (e.g., cash, Federal funds or certified
check drawn on a United States bank). The Trust may delay or cause to be
delayed the mailing of a redemption check until such time as it has assured
itself that good payment has been collected for the purchase of such Fund
shares, which may take up to 10 days.
REPURCHASE
The Trust also will repurchase Fund shares through a shareholder's listed
securities dealer. The Trust normally will accept orders to repurchase Fund
shares by wire or telephone from dealers for their customers at the net asset
value next computed after receipt of the order by the dealer, provided that
the request for repurchase is received by the dealer prior to the close of
business on the New York Stock Exchange on the day received and is received by
the Fund from such dealer not later than 4:30 P.M., New York time, on the same
day.
Dealers have the responsibility of submitting such repurchase requests to
the Trust not later than 4:30 P.M., New York time, in order to obtain that
day's closing price. The repurchase arrangements are for the convenience of
shareholders and do not involve a charge by the Trust (other than any
applicable CDSC). Securities firms which do not have selected dealer
agreements with the Distributor, however, may impose a charge on the
shareholder for transmitting the notice of repurchase to the Trust. Merrill
Lynch may charge its customers a processing fee (presently $4.85) to confirm a
repurchase of shares of such customers. Redemptions directly through the
Transfer Agent are not subject to the processing fee. The Trust reserves the
right to reject any order for repurchase, which right of rejection might
adversely affect shareholders seeking redemption through the repurchase
procedure. However, a shareholder whose order for repurchase is rejected by
the Trust may redeem Fund shares as set forth above.
REINSTATEMENT PRIVILEGE -- CLASS A AND CLASS D SHARES
Shareholders who have redeemed their Class A or Class D shares have a one-
time 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. The
reinstatement will be made at the net asset value per share next determined
after the notice of reinstatement is received and cannot exceed the amount of
the redemption proceeds. The reinstatement is a one-time privilege and may be
exercised by the Class A or Class D shareholder only the first time such
shareholder makes a redemption.
SHAREHOLDER SERVICES
The Trust offers a number of shareholder services and investment plans
designed to facilitate investment in shares of the Fund. Full details as to
each of such services and instructions as to how to participate in the various
services or plans, or to change options with respect thereto can be obtained
from the Trust by calling
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<PAGE>
the telephone number on the cover page hereof or from the Distributor or
Merrill Lynch. Included in such services are the following:
Investment Account. Each shareholder whose account (an "Investment Account")
is maintained at the Transfer Agent has an Investment Account and will receive
quarterly statements from the Transfer Agent. These quarterly statements will
serve as transaction confirmations for automatic investment purchases and the
reinvestment of income dividends and long-term capital gain distributions. The
quarterly 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 income dividends and long-term
capital gain distributions. A shareholder may make additions to his Investment
Account at any time by mailing a check directly to the Transfer Agent.
Shareholders may also maintain their accounts through Merrill Lynch. Upon the
transfer of shares out of a Merrill Lynch brokerage account, an Investment
Account in the transferring shareholder's name will be opened automatically,
without charge, at the Transfer Agent. Shareholders considering transferring
their Class A 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 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. If the new brokerage firm is willing to accommodate the
shareholder in this manner, the shareholder must request that he be issued
certificates for his shares and then must turn the certificates over to the new
firm for re-registration as described in the preceding sentence.
Exchange Privilege. Shareholders of each class of shares of the Fund each
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 Select Pricing 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 account in
which the exchange is made at the time of the exchange or its 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 account at the time of the exchange and is not otherwise
eligible to acquire Class A shares of the second fund, the shareholder will
receive Class D shares of the second fund as a result of the exchange. Class D
shares also may be exchanged for Class A shares of a second MLAM-advised mutual
fund at any time as long as, at the time of the exchange, the shareholder holds
Class A shares of the second fund in the account in which the exchange is made
or is otherwise eligible to purchase Class A shares of the second fund.
Exchanges of Class A and Class D shares are made on the basis of the relative
net asset values per Class A or Class D share, respectively, plus an amount
equal to the difference, if any, between the sales charge previously paid on
the Class A or Class D shares being exchanged and the sales charge payable at
the time of the exchange on the shares being acquired.
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Class B, Class C and Class D shares will be exchangeable with shares of the
same class of other MLAM-advised mutual funds.
Shares of the Fund which are subject to a CDSC will be 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 of the newly acquired
shares of the other Fund.
Class A, Class B, Class C and Class D shares also will be 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 for Federal income
tax purposes. For further information, see "Shareholder Services -- Exchange
Privilege" in the Statement of Additional Information.
The Fund's exchange privilege is modified with respect to purchases of Class
A and Class D shares under the Merrill Lynch Mutual Fund Adviser ("MFA")
program. First, the initial allocation of assets is made under the MFA program.
Then, any subsequent exchange under the MFA program of Class A or Class D
shares of a MLAM-advised mutual fund for Class A or Class D shares of the Fund
will be made solely on the basis of the relative net asset values of the shares
being exchanged. Therefore, there will not be a charge for any difference
between the sales charge previously paid on the shares of the other MLAM-
advised mutual fund and the sales charge payable on the shares of the Fund
being acquired in the exchange under the MFA program.
Automatic Reinvestment of Dividends and Capital Gains Distributions. All
dividends and capital gains distributions are reinvested automatically in full
and fractional shares of the Fund, without a sales charge, at the net asset
value per share at the close of business on the monthly payment date for such
dividends and distributions. A shareholder may at any time, by written
notification or by telephone (1-800-MER-FUND) to the Transfer Agent, elect to
have subsequent dividends or both dividends and capital gains distributions
paid in cash, rather than reinvested, in which event payment will be mailed
monthly. No CDSC will be imposed upon redemption of shares issued as a result
of the automatic reinvestment of dividends or capital gains distributions.
Systematic Withdrawal and Automatic Investment Plans. A Class A or Class D
shareholder may elect to receive systematic withdrawal payments from his
Investment Account in the form of payment by check or through automatic payment
by direct deposit to his bank account on either a monthly or quarterly basis. A
Class A or Class D shareholder whose shares are held within a CMA(R), CBA(R) or
Retirement Account may
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elect to have shares redeemed on a monthly, bimonthly, quarterly, semiannual or
annual basis through the Systematic Redemption Program, subject to certain
conditions. Regular additions of shares may be made to an investor's Investment
Account by prearranged charges of $50 or more to his regular bank account. The
Fund's Automatic Investment Program is not available to shareholders whose
shares are held in a brokerage account with Merrill Lynch. Alternatively,
investors who maintain CMA(R) accounts may arrange to have periodic investments
made in the Fund in their CMA(R) account or in certain related accounts in
amounts of $100 or more through the CMA(R) Automatic Investment Program.
PORTFOLIO TRANSACTIONS
The Trust has no obligation to deal with any dealer or group of dealers in
the execution of transactions in portfolio securities of the Fund. Municipal
Bonds and other securities in which the Fund invests are traded primarily in
the over-the-counter market. Where possible, the Trust deals directly with the
dealers who make a market in the securities involved except in those
circumstances where better prices and execution are available elsewhere. It is
the policy of the Trust to obtain the best net results in conducting portfolio
transactions for the Fund, taking into account such factors as price (including
the applicable dealer spread), the size, type and difficulty of the
transactions involved, the firm's general execution and operations facilities,
and the firm's risk in positioning the securities involved and the provision of
supplemental investment research by the firm. While reasonably competitive
spreads or commissions are sought, the Fund will not necessarily be paying the
lowest spread or commission available. The sale of shares of the Fund may be
taken into consideration as a factor in the selection of brokers or dealers to
execute portfolio transactions for the Fund. The portfolio securities of the
Fund generally are traded on a net basis and normally do not involve either
brokerage commissions or transfer taxes. The cost of portfolio securities
transactions of the Fund primarily consists of dealer or underwriter spreads.
Under the 1940 Act, persons affiliated with the Trust, including Merrill Lynch,
are prohibited from dealing with the Trust as a principal in the purchase and
sale of securities unless such trading is permitted by an exemptive order
issued by the Commission. The Trust has obtained an exemptive order permitting
it to engage in certain principal transactions with Merrill Lynch involving
high quality short-term municipal bonds subject to certain conditions. In
addition, the Trust may not purchase securities, including Municipal Bonds, for
the Fund during the existence of any underwriting syndicate of which Merrill
Lynch is a member except pursuant to procedures approved by the Trustees of the
Trust which comply with rules adopted by the Commission. Affiliated persons of
the Trust may serve as its broker in over-the-counter transactions conducted
for the Fund on an agency basis only.
DISTRIBUTIONS AND TAXES
DISTRIBUTIONS
The net investment income of the Fund is declared as dividends daily
following the normal close of trading on the New York Stock Exchange (currently
4:00 P.M.) prior to the determination of the net asset value on that day. The
net investment income of the Fund for dividend purposes consists of interest
earned on portfolio securities, less expenses, in each case computed since the
most recent determination of the net asset value. Expenses of the Fund,
including the management fees and 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.
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All net realized long- or short-term capital gains, if any, are declared and
distributed to the Fund's shareholders at least annually. Capital gains
distributions will be reinvested automatically in shares unless the shareholder
elects to receive such distributions in cash.
The per share dividends and distributions on each class of shares will be
reduced as a result of any account maintenance, distribution and transfer
agency fees applicable to that class. See "Additional Information--
Determination of Net Asset Value".
See "Shareholder Services" for information as to how to elect either dividend
reinvestment or cash payments. Portions of dividends and distributions which
are taxable to shareholders as described below are subject to income tax
whether they are reinvested in shares of the Fund or received in cash.
TAXES
The Trust intends to elect and to qualify the Fund for the special tax
treatment afforded regulated investment companies ("RICs") under the Internal
Revenue Code of 1986, as amended (the "Code"). If it so qualifies, in any
taxable year in which it distributes at least 90% of its taxable net income and
90% of its tax-exempt net income (see below), the Fund (but not its
shareholders) will not be subject to Federal income tax to the extent that it
distributes its net investment income and net realized capital gains. The Trust
intends to cause the Fund to distribute substantially all of such income.
To the extent that the dividends distributed to the Fund's Class A, 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 Alabama Municipal Bonds
will not be subject to Alabama income taxes. Shareholders subject to income
taxation by states other than Alabama will realize a lower after-tax rate of
return than Alabama 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 Alabama income tax. Interest on
indebtedness incurred or continued to purchase or carry Fund shares is not
deductible for Federal or Alabama income tax purposes to the extent
attributable to exempt-interest dividends. Persons who may be "substantial
users" (or "related persons" of substantial users) of facilities financed by
industrial development bonds or private activity bonds held by the Fund should
consult their tax advisers before purchasing Fund shares.
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 income tax purposes. Such distributions
are not eligible for the dividends received deduction for corporations.
Distributions, if any, of net long-term capital gains from the sale of
securities or from certain transactions in futures or options ("capital gain
dividends") are taxable as long-term capital gains for Federal income tax
purposes, regardless of the length of time the shareholder has owned Fund
shares. Under the Revenue Reconciliation Act of 1993, all or a portion of the
Fund's gain from the sale or redemption of tax-exempt obligations purchased at
a market
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discount will be treated as ordinary income rather than capital gain. This rule
may increase the amount of ordinary income dividends received by shareholders.
Distributions in excess of the Fund's earnings and profits will first reduce
the adjusted tax basis of a holder's shares and, after such adjusted tax basis
is reduced to zero, will constitute capital gains to such holder (assuming the
shares are held as a capital asset). Any loss upon the sale or exchange of Fund
shares held for six months or less will be treated as long-term capital loss to
the extent of any capital gain dividends received by the shareholder. In
addition, such loss will be disallowed to the extent of any exempt-interest
dividends received by the shareholder. If the Fund pays a dividend in January
which was declared in the previous October, November or December to
shareholders of record on a specified date in one of such months, then such
dividend will be treated for tax purposes as being paid by the Fund and
received by its shareholders on December 31 of the year in which such dividend
was declared.
The Code subjects interest received on certain otherwise tax-exempt
securities to an alternative minimum tax. This alternative minimum tax applies
to interest received on "private activity bonds" issued after August 7, 1986.
Private activity bonds are bonds which, although tax-exempt, are used for
purposes other than those generally performed by governmental units and which
benefit non-governmental entities (e.g., bonds used for industrial development
or housing purposes). Income received on such bonds is classified as an item of
"tax preference," which could subject investors in such bonds, including
shareholders of the Fund, to an alternative minimum tax. The Fund will purchase
such "private activity bonds," and the Trust will report to shareholders within
60 days after the Fund's taxable year-end the portion of the Fund's dividends
declared during the year which constitutes an item of tax preference for
alternative minimum tax purposes. The Code further provides that corporations
are subject to an alternative minimum tax based, in part, on certain
differences between taxable income as adjusted for other tax preferences and
the corporation's "adjusted current earnings," which more closely reflect a
corporation's economic income. Because an exempt-interest dividend paid by the
Fund will be included in adjusted current earnings, a corporate shareholder may
be required to pay alternative minimum tax on exempt-interest dividends paid by
the Fund.
The Revenue Reconciliation Act of 1993 has added new marginal tax brackets of
36% and 39.6% for individuals and has created a graduated structure of 26% and
28% for the alternative minimum tax applicable to individual taxpayers. These
rate increases may affect an individual investor's after-tax return from an
investment in the Fund as compared with such investor's return from taxable
investments.
No gain or loss will be recognized by Class B shareholders on the conversion
of their Class B shares for 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 exchanged, and the holding period of the acquired Class D shares will
include the holding period for the exchanged 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 the sales charge paid to the Fund
reduces any sales charge such shareholder would have owed upon purchase of the
new shares in the absence of the exchange privilege. Instead, such sales charge
will be treated as an amount paid for the new shares.
A loss realized on a sale or exchange of shares of the Fund will be
disallowed if other Fund shares are acquired (whether through the automatic
reinvestment of dividends or otherwise) within a 61-day period beginning 30
days before and ending 30 days after the date that the shares are disposed of.
In such a case, the basis of the shares acquired will be adjusted to reflect
the disallowed loss.
34
<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 Alabama 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 Alabama income tax laws. The Code and the Treasury regulations, as
well as the Alabama tax laws, are subject to change by legislative, judicial or
administrative action either prospectively or retroactively.
Shareholders are urged to consult their tax advisers regarding the
availability of any exemptions from state or local taxes (other than those
imposed by Alabama) and with specific questions as to Federal, foreign, state
or local taxes.
PERFORMANCE DATA
From time to time the Fund may include its average annual total return and
yield and tax equivalent yield for various specified time periods in
advertisements or information furnished to present or prospective shareholders.
Average annual total return, yield and tax equivalent yield are computed in
accordance with formulas specified by the Commission.
Average annual total return quotations for the specified periods will be
computed by finding the average annual compounded rates of return (based on net
investment income and any realized and unrealized capital gains or losses on
portfolio investments over such periods) that would equate the initial amount
invested to the redeemable value of such investment at the end of each period.
Average annual total return will be computed assuming all dividends and
distributions are reinvested and taking into account all applicable recurring
and nonrecurring expenses, including 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
35
<PAGE>
of return calculations. Aside from the impact on the performance data
calculations of including or excluding the maximum applicable sales charges,
actual annual or annualized total return data generally will be lower than
average annual total return data since the average annual rates of return
reflect compounding; aggregate total return data generally will be higher than
average annual total return data since the aggregate rates of return reflect
compounding over a longer period of time. In advertisements distributed to
investors whose purchases are subject to waiver of the CDSC in the case of
Class B and Class C shares (such as investors in certain retirement plans) or
to reduced sales charges in the case of Class A or Class D shares, the
performance data may take into account the reduced, and not the maximum, sales
charge or may not take into account the CDSC and therefore may reflect greater
total return since, due to the reduced sales charges or waiver of the CDSC, a
lower amount of expenses is deducted. See "Purchase of Shares". The Fund's
total return may be expressed either as a percentage or as a dollar amount in
order to illustrate such total return on a hypothetical $1,000 investment in
the Fund at the beginning of each specified period.
Yield quotations will be computed based on a 30-day period by dividing (a)
the net income based on the yield of each security earned during the period by
(b) the average daily number of shares outstanding during the period that were
entitled to receive dividends multiplied by the maximum offering price per
share on the last day of the period. Tax equivalent yield quotations will be
computed by dividing (a) the part of the Fund's yield that is tax-exempt by (b)
one minus a stated tax rate and (c) adding the result to that part, if any, of
the Fund's yield that is not tax-exempt.
Total return and yield figures are based on the Fund's historical performance
and are not intended to indicate future performance. The Fund's total return
and yield will vary depending on market conditions, the securities comprising
the Fund's portfolio, the Fund's operating expenses and the amount of realized
and unrealized net capital gain or losses during the period. The value of an
investment in the Fund will fluctuate and an investor's shares, when redeemed,
may be worth more or less than their original cost.
On occasion, the Fund may compare its performance to performance data
published by Lipper Analytical Services, Inc., Morningstar Publications, Inc.
("Morningstar") and CDA Investment Technology, Inc., or to data contained in
publications such as Money Magazine, U.S. News & World Report, Business Week,
Forbes Magazine and Fortune Magazine. From time to time, the Fund may include
the Fund's Morningstar risk-adjusted performance ratings in advertisements or
supplemental sales literature. As with other performance data, performance
comparisons should not be considered representative of the Fund's relative
performance for any future period.
ADDITIONAL INFORMATION
DETERMINATION OF NET ASSET VALUE
The net asset value of the shares of all classes of the Fund is determined by
the Manager once daily as of 4:15 P.M., New York time, on each day during which
the New York Stock Exchange is open for trading. The net asset value per share
is computed by dividing the sum of the value of the securities held by the Fund
plus any cash or other assets minus all liabilities by the total number of
shares outstanding at such time, rounded to the nearest cent. Expenses,
including the fees payable to the Manager and the Distributor, are accrued
daily.
The per share net asset value of the Class A shares will generally be higher
than the per share net asset value of shares of the other classes, reflecting
the daily expense accruals of the account maintenance and transfer agency fees
applicable with respect to the Class B, Class C and Class D shares; moreover,
the per
36
<PAGE>
share net asset value of the Class D shares generally will be higher than the
per share net asset value of the Class B and Class C shares, reflecting the
daily expense accruals of the distribution 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 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 an unincorporated business trust organized on August 2, 1985
under the laws of Massachusetts. On October 1, 1987, the Trust changed its name
from "Merrill Lynch Multi-State Tax-Exempt Series Trust" to "Merrill Lynch
Multi-State Municipal Bond Series Trust" and on December 22, 1987 the Trust
changed its name to "Merrill Lynch Multi-State Municipal Series Trust". The
Trust is an open-end management investment company comprised of separate series
("Series"), each of which is a separate portfolio offering shares to selected
groups of purchasers. Each of the Series is to be managed independently in
order to provide to shareholders who are residents of the state to which such
Series relates as high a level of income exempt from Federal, state and local
income taxes as is consistent with prudent investment management. The Trustees
are authorized to create an unlimited number of Series and, with respect to
each Series, to issue an unlimited number of full and fractional shares of
beneficial interest of $.10 par value of different classes. Shareholder
approval is not required for the authorization of additional Series or classes
of a Series of the Trust. At the date of this Prospectus, the shares of the
Fund are divided into Class A, 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
associated with such shares, and Class B and Class C shares bear certain
expenses related to the distribution of such shares. Each class has exclusive
voting rights with respect to matters relating to account maintenance and
distribution expenditures as applicable. See "Purchase of Shares". The Trust
has received an order (the "Order") from the Commission permitting the issuance
and sale of multiple classes of shares. The Order permits the Trust to issue
additional classes of shares of any Series if the Board of Trustees deems such
issuance to be in the best interest of the Trust.
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. Each
issued and outstanding share is entitled to participate equally in dividends
and distributions declared by the respective Series and in net assets of such
Series upon liquidation or dissolution remaining after satisfaction of
outstanding liabilities except that, as noted above, 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.
37
<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:
Financial Data Services, Inc.
Attn: TAMFO
P.O. Box 45290
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 Financial Data
Services, Inc. at 800-637-3863.
SHAREHOLDER INQUIRIES
Shareholder inquiries may be addressed to the Trust at the address or
telephone number set forth on the cover page of this Prospectus.
The Declaration of Trust establishing the Trust, dated August 2, 1985, a copy
of which together with all amendments thereto (the "Declaration"), is on file
in the office of the Secretary of the Commonwealth of Massachusetts, provides
that the name "Merrill Lynch Multi-State Municipal Series Trust" refers to the
Trustees under the Declaration collectively as Trustees, but not as individuals
or personally; and no Trustee, shareholder, officer, employee or agent of the
Trust shall be held to any personal liability, nor shall resort be had to such
person's private property for the satisfaction of any obligation or claim of
the Trust, but the "Trust Property" only shall be liable.
38
<PAGE>
MERRILL LYNCH ALABAMA MUNICIPAL BOND FUND--AUTHORIZATION FORM
- -------------------------------------------------------------------------------
NOTE: THIS FORM MAY NOT BE USED FOR PURCHASES THROUGH THE MERRILL LYNCH
BLUEPRINTSM PROGRAM. YOU MAY REQUEST A MERRILL LYNCH BLUEPRINTSM PROGRAM
APPLICATION BY CALLING (800) 637-3766.
- -------------------------------------------------------------------------------
1. SHARE PURCHASE APPLICATION
I, being of legal age, wish to purchase . . . . . . . shares of [_] Class A,
[_] Class B, [_] Class C or [_] Class D (choose one) of Merrill Lynch Alabama
Municipal Bond Fund and establish an Investment Account as described in the
Prospectus.
Basis for establishing an Investment Account:
A. I enclose a check for $ . . . . . . . payable to Financial Data
Services, Inc., as an initial investment (minimum $1,000) (subsequent
investment $50 or more). I understand that this purchase will be executed
at the applicable offering price next to be determined after this
Application is received by you.
B. I already own shares of the following Merrill Lynch mutual funds that
would qualify for the right of accumulation as outlined in the Statement of
Additional Information:
1. ....................................... 4. ...............................
2. ....................................... 5. ...............................
3. ....................................... 6. ...............................
(Please list all Funds. Use a separate sheet of paper if necessary.)
Until you are notified by me in writing, the following options with
respect to dividends and distributions are elected:
Distribution Elect [_] reinvest dividends Elect [_] reinvest capital gains
Options One [_] pay dividends in cash One[_] pay capital gains in cash
If no election is made, dividends and capital gains will be reinvested
automatically at net asset value without a sales charge.
----------------
(Please Print)
Name .............................................
First Name Initial Last Name
[_][_][_][_][_][_][_][_][_]
Name of Co-Owner (if any) ........................ Social Security
First Name Initial Last Name No. or Taxpayer
Identification
No.
Address ..........................................
.................................................. ................, 19. .
(Zip Code) Date
Occupation .............. Name and Address..................................
of Employer.......................................
..................................................
Under penalty of perjury, I certify (1) that the number set forth above is
my correct Social Security No. or Taxpayer Identification No. and (2) that I
am not subject to backup withholding (as discussed under "Distribution and
Taxes--Taxes" in the Prospectus) either because I have not been notified that
I am subject thereto as a result of a failure to report all interest or
dividends, or the Internal Revenue Service ("IRS") has notified me that I am
no longer subject thereto.
INSTRUCTION: YOU MUST STRIKE OUT THE LANGUAGE IN (2) ABOVE IF YOU HAVE BEEN
NOTIFIED THAT YOU ARE SUBJECT TO BACKUP WITHHOLDING DUE TO UNDER-REPORTING,
AND IF YOU HAVE NOT RECEIVED A NOTICE FROM THE IRS THAT BACKUP WITHHOLDING HAS
BEEN TERMINATED.
SIGNATURE OF OWNER .............. SIGNATURE OF CO-OWNER (IF ANY) ........
In the case of co-owners, a joint tenancy with right of survivorship will be
presumed unless otherwise specified.
- -------------------------------------------------------------------------------
2. LETTER OF INTENTION--CLASS A AND CLASS D SHARES ONLY (SEE TERMS AND
CONDITIONS IN THE STATEMENT OF ADDITIONAL INFORMATION)
..............., 19...
Gentlemen: Date of initial
purchase
Although I am not obligated to do so, I intend to purchase shares of Merrill
Lynch Alabama Municipal Bond Fund or any other investment company with an
initial sales charge or deferred sales charge for which the Merrill Lynch
Funds Distributor, Inc. acts as a distributor over the next 13-month period
which will equal or exceed:
[_] $25,000 [_] $50,000 [_] $100,000 [_] $250,000 [_] $1,000,000
Each purchase will be made at the then reduced offering price applicable to
the amount checked above, as described in the Fund's 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 Alabama Municipal Bond Fund held as security.
By .................................. .....................................
Signature of Owner Signature (If registered in joint
names, both must sign)
In making purchases under this letter, the following are the related
accounts on which reduced offering prices are to apply:
(1) Name ............................ (2) Name ............................
- -------------------------------------------------------------------------------
39
<PAGE>
MERRILL LYNCH ALABAMA MUNICIPAL BOND FUND--AUTHORIZATION FORM
- --------------------------------------------------------------------------------
3. SYSTEMATIC WITHDRAWAL PLAN--CLASS A AND CLASS D SHARES ONLY (SEE TERMS AND
CONDITIONS IN THE STATEMENT OF ADDITIONAL INFORMATION)
Minimum Requirements: $10,000 for monthly disbursements, $5,000 for
quarterly, of shares in Merrill Lynch Alabama Municipal Bond Fund at cost or
current offering price.
Begin systematic withdrawal on . . . . . . . . . , 19. .
[date]
Withdrawals to be made either (check
one) [_] Monthly [_] Quarterly. Quarterly withdrawals
are made on the 24th day of March, June, September
and December.
Specify withdrawal amount (check one): [_] $ . . . . . . . or [_] . . . . .% of
the current value of Class A 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):
(A) I HEREBY AUTHORIZE PAYMENT (B) I HEREBY AUTHORIZE PAYMENT
BY CHECK BY DIRECT DEPOSIT TO BANK
ACCOUNT and (if necessary) debit
entries and adjustments for any
credit entries made in error to
my account
Draw checks payable
(check one) Specify type of account (check
[_] as indicated in item 1. one): [_] checking [_] savings
[_] to the order of ............ I agree that this authorization
will remain in effect until I
provide written notification to
Financial Data Services, Inc.
amending or terminating this
service.
Name on your Account ............
Mail to (check one) Bank .....................................
[_] the address indicated in Bank # ................ Account # ........
item 1.
[_] Name (Please Print) ........ Bank Address ....................
Signature of Depositor .. Date ...........
Address .........................
Signature of Depositor (if joint
Signature of Owner............... account) ........................
NOTE: IF AUTOMATIC DIRECT
DEPOSIT IS ELECTED, YOUR BLANK,
UNSIGNED CHECK MARKED "VOID" OR
A DEPOSIT SLIP FROM YOUR SAVINGS
ACCOUNT SHOULD ACCOMPANY THIS
APPLICATION.
Signature of Co-Owner (if any)...
- --------------------------------------------------------------------------------
4. APPLICATION FOR AUTOMATIC INVESTMENT PLAN
I hereby request that Financial Data Services, Inc. draw a check or an
automated clearing house ("ACH") debit on my checking account as described
below each month to purchase . . . . . shares of [_] Class A, [_] Class B, [_]
Class C or [_] Class D (choose one) of Merrill Lynch Alabama Municipal Bond
Fund subject to the terms set forth below.
FINANCIAL DATA SERVICES, INC. AUTHORIZATION TO HONOR CHECKS OR ACH
DEBITS
You are hereby authorized to DRAWN BY FINANCIAL DATA SERVICES, INC.
draw a check or an ACH debit To ...................................Bank
each month on my bank account (Investor's Bank)
for investment in Merrill Lynch Bank Address .............................
Alabama Municipal Bond Fund as City .......... State ..... Zip Code......
indicated below:
Amount of each check or ACH
debit $ .....................
As a convenience to me, I hereby request
Account No. ................. and authorize you to pay and charge to my
Please date and invest account checks or ACH debits drawn on my
checks or draw ACH debits on account by and payable to Financial Data
the 20th of each month Services, Inc. I agree that your rights
beginning ................... in respect to each such check or debit
shall be the same as if it were a check
(Month) drawn on you and signed personally by me.
or as soon thereafter as This authority is to remain in effect un-
possible. til revoked personally by me in writing.
Until you receive such notice, you shall
I agree that you are preparing be fully protected in honoring any such
these checks or drawing these check or debit. I further agree that if
debits voluntarily at my request any such check or debit be dishonored,
and that you shall not be liable whether with or without cause and whether
for any loss arising from any intentionally or inadvertently, you shall
delay in preparing or failure to be under no liability.
prepare any such check or debit. ......... ...............................
If I change banks or desire to Date Signature of Depositor
terminate or suspend this pro- ......... ...............................
gram, I agree to notify you Bank Signature of Depositor
promptly in writing. Account (If joint account, both must
I further agree that if a check Number sign)
or debit is not honored upon NOTE: IF AUTOMATIC INVESTMENT PLAN IS
presentation, Financial Data ELECTED, YOUR BLANK, UNSIGNED CHECK
Services, Inc. is authorized to MARKED "VOID" SHOULD ACCOMPANY THIS
discontinue immediately the APPLICATION.
Automatic Investment Plan and to
liquidate sufficient shares held
in my account to offset the
purchase made with the returned
check or dishonored debit.
...... ......................
Date Signature of
Depositor
......................
Signature of
Depositor
(If joint account,
both must sign)
- --------------------------------------------------------------------------------
5. FOR DEALER ONLY
Branch Office, Address, Stamp We hereby authorize Merrill Lynch Funds
Distributor, Inc. to act as our agent in
- - connection with transactions under this au-
thorization form and agree to notify the
Distributor of any purchases made under a
Letter of Intention or Systematic With-
drawal Plan. We guarantee the Shareholder's
Signature.
- - ............................................
Dealer Name and Address
This form when completed should
be mailed to: By .........................................
Authorized Signature of Dealer
[_][_][_] [_][_][_][_] ...................
Branch- F/C No. F/C Last Name
Merrill Lynch Alabama Code
Municipal Bond Fund c/o
Financial Data Services, Inc.
Transfer Agency Mutual Fund
Operations P.O. Box [_][_][_] [_][_][_][_][_]
45289Jacksonville, FL 32232- Dealer's Customer A/C No.
5289
40
<PAGE>
[THIS PAGE INTENTIONALLY LEFT BLANK.]
41
<PAGE>
[THIS PAGE INTENTIONALLY LEFT BLANK.]
42
<PAGE>
MANAGER
Fund Asset Management, L.P.
Administrative Offices:
800 Scudders Mill Road
Plainsboro, New Jersey
Mailing Address:
P.O. Box 9011
Princeton, New Jersey 08543-9011
DISTRIBUTOR
Merrill Lynch Funds Distributor, Inc.
Administrative Offices:
800 Scudders Mill Road
Plainsboro, New Jersey
Mailing Address:
P.O. Box 9011
Princeton, New Jersey 08543-9011
CUSTODIAN
National Westminster Bank NJ
100 Wall Street
20th Floor
New York, New York 10005
TRANSFER AGENT
Financial Data Services, Inc.
Administrative Offices:
Transfer Agency Mutual Fund Operations
4800 Deer Lake Drive East
Jacksonville, Florida 32246-6484
Mailing Address:
P.O. Box 45289
Jacksonville, Florida 32232-5289
INDEPENDENT AUDITORS
COUNSEL
Brown & Wood
One World Trade Center
New York, New York 10048-0557
<PAGE>
NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY REPRE-
SENTATIONS, OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS, IN CONNECTION WITH
THE OFFER CONTAINED IN THIS PROSPECTUS, AND, IF GIVEN OR MADE, SUCH OTHER IN-
FORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED
BY THE TRUST, THE MANAGER OR THE DISTRIBUTOR. THIS PROSPECTUS DOES NOT CONSTI-
TUTE AN OFFERING IN ANY STATE IN WHICH SUCH OFFERING MAY NOT LAWFULLY BE MADE.
----------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Fee Table................................................................. 3
Merrill Lynch Select PricingSM System..................................... 4
Investment Objective and Policies......................................... 8
Potential Benefits....................................................... 10
Special and Risk Considerations Relating to Alabama Municipal Bonds...... 10
Description of Municipal Bonds........................................... 11
When-Issued Securities and Delayed Delivery Transactions................. 13
Call Rights.............................................................. 14
Financial Futures Transactions and Options............................... 14
Repurchase Agreements and Purchase and Sale Contracts.................... 16
Investment Restrictions.................................................. 16
Management of the Trust................................................... 18
Trustees................................................................. 18
Management and Advisory Arrangements..................................... 18
Transfer Agency Services................................................. 19
Purchase of Shares........................................................ 19
Subscription Offering.................................................... 19
Continuous Offering...................................................... 20
Initial Sales Charge Alternatives--Class A and Class D Shares............ 22
Deferred Sales Charge Alternative--Class B and Class C Shares............ 24
Distribution Plans....................................................... 26
Limitations on the Payment of Deferred Sales Charges..................... 27
Redemption of Shares...................................................... 28
Redemption............................................................... 28
Repurchase............................................................... 29
Reinstatement Privilege -- Class A and Class D Shares.................... 29
Shareholder Services...................................................... 29
Portfolio Transactions.................................................... 32
Distributions and Taxes................................................... 32
Distributions............................................................ 32
Taxes.................................................................... 33
Performance Data.......................................................... 35
Additional Information.................................................... 36
Determination of Net Asset Value......................................... 36
Organization of the Trust................................................ 37
Shareholder Reports...................................................... 38
Shareholder Inquiries.................................................... 38
Authorization Form........................................................ 39
</TABLE>
Code #
[LOGO]
Merrill Lynch Alabama
Municipal Bond Fund
Merrill Lynch Multi-State
Municipal Series Trust
[GRAPHIC APPEARS HERE]
PROSPECTUS
, 1994
Distributor:
Merrill Lynch
Funds Distributor, Inc.
<PAGE>
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A +
+REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE +
+SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY +
+OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT +
+BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR +
+THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE +
+SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE +
+UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF +
+ANY SUCH STATE. THIS STATEMENT OF ADDITIONAL INFORMATION DOES NOT CONSTITUTE +
+A PROSPECTUS. +
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
SUBJECT TO COMPLETION
PRELIMINARY STATEMENT OF ADDITIONAL INFORMATION DATED SEPTEMBER 20, 1994
STATEMENT OF ADDITIONAL INFORMATION
MERRILL LYNCH ALABAMA MUNICIPAL BOND FUND
MERRILL LYNCH MULTI-STATE MUNICIPAL SERIES TRUST
P.O. BOX 9011, PRINCETON, NEW JERSEY 08543-9011--PHONE NO. (609) 282-2800
--------------
Merrill Lynch Alabama 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 Alabama income taxes as is consistent with prudent
investment management. The Fund invests primarily in a non-diversified
portfolio of long-term investment grade obligations the interest on which is
exempt from Federal and Alabama income taxes in the opinion of bond counsel to
the issuer ("Alabama Municipal Bonds"). There can be no assurance that the
investment objective of the Fund will be realized.
Pursuant to the Merrill Lynch Select PricingSM System, the Fund offers four
classes of shares, each with a different combination of sales charges, ongoing
fees and other features. The Select Pricing 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 , 1994
(the "Prospectus"), which has been filed with the Securities and Exchange
Commission and can be obtained, without charge, by calling or by writing the
Fund at the above telephone number or address. This Statement of Additional
Information has been incorporated by reference into the Prospectus. Capitalized
terms used but not defined herein have the same meanings as in the Prospectus.
--------------
FUND ASSET MANAGEMENT, L.P.--MANAGER
MERRILL LYNCH FUNDS DISTRIBUTOR, INC.--DISTRIBUTOR
The date of this Statement of Additional Information is , 1994
<PAGE>
INVESTMENT OBJECTIVE AND POLICIES
The investment objective of the Fund is to provide shareholders with as high
a level of income exempt from Federal and Alabama 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 Alabama, its political subdivisions, agencies
and instrumentalities and obligations of other qualifying issuers, such as
issuers located in Puerto Rico, the Virgin Islands and Guam, which pay interest
exempt, in the opinion of bond counsel to the issuer, from Federal and Alabama
income taxes. Obligations exempt from Federal income taxes are referred to
herein as "Municipal Bonds" and obligations exempt from both Federal and
Alabama income taxes are referred to as "Alabama Municipal Bonds". Unless
otherwise indicated, references to Municipal Bonds shall be deemed to include
Alabama 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 Alabama Municipal Bonds. At times, the Fund will seek to hedge its
portfolio through the use of futures transactions to reduce volatility in the
net asset value of Fund shares. Reference is made to "Investment Objective and
Policies" in the Prospectus for a discussion of the investment objective and
policies of the Fund.
Municipal Bonds may include general obligation bonds of the State and its
political subdivisions, revenue bonds of utility systems, highways, bridges,
port and airport facilities, colleges, hospitals, housing facilities, etc., and
industrial development bonds or private activity bonds. The interest on such
obligations may bear a fixed rate or be payable at a variable or floating rate.
The Municipal Bonds purchased by the Fund will be primarily what are commonly
referred to as "investment grade" securities, which are obligations rated at
the time of purchase within the four highest quality ratings as determined by
either Moody's Investors Service, Inc. ("Moody's") (currently Aaa, Aa, A and
Baa), Standard & Poor's Corporation ("Standard & Poor's") (currently AAA, AA, A
and BBB) or Fitch Investors Service, Inc. ("Fitch") (currently AAA, AA, A and
BBB). If unrated, such securities will possess creditworthiness comparable, in
the opinion of the manager of the Fund, Fund Asset Management, 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 Alabama income taxes. However, to the extent that suitable
Alabama 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 Alabama 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 derivative instruments evidencing
interests in one or more Municipal Bonds.
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 Alabama Municipal Bonds. For temporary periods or to provide
liquidity, the Fund has the authority to invest as much as 35% of its total
assets in tax-exempt or taxable money market obligations with a maturity of one
year or less (such short-term obligations being referred to herein as
"Temporary Investments"), except that taxable Temporary Investments shall not
exceed 20% of the Fund's net assets. The Fund at all times will have at least
80% of its net assets invested in securities exempt from Federal income
taxation. However, interest received on
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certain otherwise tax-exempt securities which are classified as "private
activity bonds" (in general bonds that benefit non-governmental entities) may
be subject to an alternative minimum tax. The Fund may purchase such private
activity bonds. See "Distributions and Taxes". In addition, the Fund reserves
the right to invest temporarily a greater portion of its assets in Temporary
Investments for defensive purposes, when, in the judgment of the Manager,
market conditions warrant. The investment objective of the Fund set forth in
this paragraph is a fundamental policy of the Fund which may not be changed
without a vote of a majority of the outstanding shares of the Fund. The Fund's
hedging strategies are not fundamental policies and may be modified by the
Trustees of the Trust without the approval of the Fund's shareholders.
Municipal Bonds may at times be purchased or sold on a delayed delivery basis
or a when-issued basis. These transactions arise when securities are purchased
or sold by the Fund with payment and delivery taking place in the future, often
a month or more after the purchase. The payment obligation and the interest
rate are each fixed at the time the buyer enters into the commitment. The Fund
will make only commitments to purchase such securities with the intention of
actually acquiring the securities, but the Fund may sell these securities prior
to the settlement date if it is deemed advisable. Purchasing Municipal Bonds on
a when-issued basis involves the risk that the yields available in the market
when the delivery takes place actually may be higher than those obtained in the
transaction itself; if yields so increase, the value of the when-issued
obligations generally will decrease. The Fund will maintain a separate account
at its custodian bank consisting of cash, cash equivalents or high-grade,
liquid Municipal Bonds or Temporary Investments (valued on a daily basis) equal
at all times to the amount of the when-issued commitment.
The Fund may invest in Municipal Bonds (and Non-Municipal Tax-Exempt
Securities) the return on which is based on a particular index of value or
interest rates. For example, the Fund may invest in Municipal Bonds that pay
interest based on an index of Municipal Bond interest rates or based on the
value of gold or some other commodity. The principal amount payable upon
maturity of certain Municipal Bonds also may be based on the value of an index.
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. 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. Such securities have the effect of providing a degree of investment
leverage, since they may increase or decrease in value in response to changes,
as an illustration, in market interest rates at a rate which is a multiple
(typically two) of the rate at which fixed-rate long-term tax exempt securities
increase or decrease in response to such changes. As a result, the market
values of such securities will generally be more volatile than the market
values of fixed-rate tax exempt securities. To seek to limit the volatility of
these securities, the Fund may purchase inverse floating obligations with
shorter term maturities or which contain limitations on the extent to which the
interest rate may vary. The Manager believes that indexed and inverse floating
obligations represent a flexible portfolio management instrument for the Fund
which allows the Manager to vary the degree of investment leverage relatively
efficiently under different market conditions. Certain investments in such
obligations may be illiquid. The Fund may not invest in such illiquid
obligations if such investments, together with other illiquid investments,
would exceed 15% of the Fund's net assets.
The Fund may purchase a Municipal Bond issuer's right to call all or a
portion of such Municipal Bond for mandatory tender for purchase (a "Call
Right"). A holder of a Call Right may exercise such right to require a
mandatory tender for the purchase of related Municipal Bonds, subject to
certain conditions. A Call Right that is not exercised prior to the maturity of
the related Municipal Bond will expire without value. The economic effect of
holding both the Call Right and the related Municipal Bond is identical to
holding a
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Municipal Bond as a non-callable security. Certain investments in such
obligations may be illiquid. The Fund may not invest in such illiquid
obligations if such investments, together with other illiquid investments,
would exceed 15% of the Fund's net assets.
The Fund may invest up to 20% of its total assets in Municipal Bonds which
are rated below Baa by Moody's or below BBB by Standard & Poor's or Fitch or
which, in the Manager's judgment, possess similar credit characteristics ("high
yield securities"). See Appendix II--"Ratings of Municipal Bonds"--for
additional information regarding ratings of debt securities. The Manager
considers the ratings assigned by Standard & Poor's, Moody's or Fitch as one of
several factors in its independent credit analysis of issuers.
High yield securities are considered by Standard & Poor's, Moody's and Fitch
to have varying degrees of speculative characteristics. Consequently, although
high yield securities can be expected to provide higher yields, such securities
may be subject to greater market price fluctuations and risk of loss of
principal than lower yielding, higher rated debt securities. Investments in
high yield securities will be made only when, in the judgment of the Manager,
such securities provide attractive total return potential relative to the risk
of such securities, as compared to higher quality debt securities. The Fund
generally will not invest in debt securities in the lowest rating categories
(those rated CC or lower by Standard & Poor's or Fitch or Ca or lower by
Moody's) unless the Manager believes that the financial condition of the issuer
or the protection afforded the particular securities is stronger than would
otherwise be indicated by such low ratings. The Fund does not intend to
purchase debt securities that are in default or which the Manager believes will
be in default.
Issuers of high yield securities may be highly leveraged and may not have
available to them more traditional methods of financing. Therefore, the risks
associated with acquiring the securities of such issuers or obligors generally
are greater than is the case with higher rated securities. For example, during
an economic downturn or a sustained period of rising interest rates, issuers of
high yield securities may be more likely to experience financial stress,
especially if such issuers are highly leveraged. During periods of economic
recession, such issuers may not have sufficient revenues to meet their interest
payment obligations. The issuer's ability to service its debt obligations also
may be adversely affected by specific issuer developments, or the issuer's
inability to meet specific projected business forecasts, or the unavailability
of additional financing. The risk of loss due to default by the issuer is
significantly greater for the holders of high yield securities because such
securities may be unsecured and may be subordinated to other creditors of the
issuer.
High yield securities frequently have call or redemption features that would
permit an issuer to repurchase the security from the Fund. If a call were
exercised by the issuer during a period of declining interest rates, the Fund
likely would have to replace such called security with a lower yielding
security, thus decreasing the net investment income to the Fund and dividends
to shareholders.
The Fund may have difficulty disposing of certain high yield securities
because there may be a thin trading market for such securities. Because not all
dealers maintain markets in all high yield securities, there is no established
secondary market for many of these securities, and the Fund anticipates that
such securities could be sold only to a limited number of dealers or
institutional investors. To the extent that a secondary trading market for high
yield securities does exist, it generally is not as liquid as the secondary
market for higher rated securities. Reduced secondary market liquidity may have
an adverse impact on market price and the Fund's ability to dispose of
particular issues when necessary to meet the Fund's liquidity needs or in
response to a specific economic event such as a deterioration in the
creditworthiness of the issuer. Reduced secondary market liquidity for certain
securities also may make it more difficult for the Fund to obtain
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<PAGE>
accurate market quotations for purposes of valuing the Fund's portfolio.
Market quotations generally are available on many high yield securities only
from a limited number of dealers and may not necessarily represent firm bids
of such dealers or prices for actual sales.
It is expected that a significant portion of the high yield securities
acquired by the Fund will be purchased upon issuance, which may involve
special risks because the securities so acquired are new issues. In such
instances the Fund may be a substantial purchaser of the issue and therefore
have the opportunity to participate in structuring the terms of the offering.
Although this may enable the Fund to seek to protect itself against certain of
such risks, the considerations discussed herein would nevertheless remain
applicable.
Adverse publicity and investor perceptions, which may not be based on
fundamental analysis, also may decrease the value and liquidity of high yield
securities, particularly in a thinly traded market. Factors adversely
affecting the market value of high yield securities are likely to affect
adversely the Fund's net asset value. In addition, the Fund may incur
additional expenses to the extent that it is required to seek recovery upon a
default on a portfolio holding or participate in the restructuring of the
obligation.
DESCRIPTION OF MUNICIPAL BONDS AND TEMPORARY INVESTMENTS
Set forth below is a description of the Municipal Bonds and Temporary
Investments in which the Fund may invest. A more complete discussion
concerning futures and options transactions is set forth under "Investment
Objective and Policies" in the Prospectus. Information with respect to ratings
assigned to tax-exempt obligations which the Fund may purchase is set forth in
Appendix II to this Statement of Additional Information.
DESCRIPTION OF MUNICIPAL BONDS
Municipal Bonds include debt obligations issued to obtain funds for various
public purposes, including construction of a wide range of public facilities,
refunding of outstanding obligations and obtaining funds for general operating
expenses and loans to other public institutions and facilities. In addition,
certain types of bonds are issued by or on behalf of public authorities to
finance various privately owned or operated facilities, including certain
facilities for local furnishing of electric energy or gas, sewage facilities,
solid waste disposal facilities and other specialized facilities. Such
obligations are included within the term Municipal Bonds if the interest paid
thereon is, in the opinion of bond counsel, excluded from gross income for
Federal income tax purposes and, in the case of Alabama Municipal Bonds,
exempt from Alabama income taxes. Other types of industrial development bonds
or private activity bonds, the proceeds of which are used for the
construction, equipment or improvement of privately operated industrial or
commercial facilities, may constitute Municipal Bonds, although the current
Federal tax laws place substantial limitations on the size of such issues.
The two principal classifications of Municipal Bonds are "general
obligation" bonds and "revenue" bonds which latter category includes
industrial development bonds and, for bonds issued after August 15, 1986,
private activity bonds. General obligation bonds are secured by the issuer's
pledge of faith, credit and taxing power for the payment of principal and
interest. Revenue bonds are payable only from the revenues derived from a
particular facility or class of facilities or, in some cases, from the
proceeds of a special or limited tax or other specific revenue source such as
payments from the user of the facility being financed. Industrial development
bonds ("IDBs") and, in the case of bonds issued after April 15, 1986, private
activity bonds, are in most cases revenue bonds and generally do not
constitute the pledge of the credit or taxing power of the issuer of such
bonds. Generally, the payment of the principal of and interest on such IDBs
and private activity
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bonds depends solely on the ability of the user of the facility financed by the
bonds to meet its financial obligations and the pledge, if any, of real and
personal property so financed as security for such payment, unless a line of
credit, bond insurance or other security is furnished. The Fund also may invest
in "moral obligation" bonds, which are normally issued by special purpose
public authorities. Under a moral obligation bond, if the issuer thereof is
unable to meet its obligations, the repayment of the bond becomes a moral
commitment, but not a legal obligation, of the state or municipality in
question.
Also included within the general category of Municipal Bonds are
participation certificates issued by government authorities or entities to
finance the acquisition or construction of equipment, land and/or facilities.
The certificates represent participations in a lease, an installment purchase
contract or a conditional sales contract (hereinafter collectively called
"lease obligations") relating to such equipment, land or facilities. Although
lease obligations do not constitute general obligations of the issuer for which
the issuer's unlimited taxing power is pledged, a lease obligation is
frequently backed by the issuer's covenant to budget for, appropriate and make
the payments due under the lease obligation. Certain investments in lease
obligations may be illiquid. The Fund may not invest in illiquid lease
obligations if such investments, together with all other illiquid investments,
would exceed 15% of the Fund's net assets. The Fund may, however, invest
without regard to such limitation in lease obligations which the Manager,
pursuant to the guidelines which have been adopted by the Board of Trustees and
subject to the supervision of the Board of Trustees, determines to be liquid.
The Manager will deem lease obligations liquid if they are publicly offered and
have received an investment grade rating of Baa or better by Moody's, or BBB or
better by Standard & Poor's or Fitch. Unrated lease obligations, or those rated
below investment grade, will be considered liquid if the obligations come to
the market through an underwritten public offering and at least two dealers are
willing to give competitive bids. In reference to the latter, the Manager must,
among other things, also review the creditworthiness of the municipality
obligated to make payment under the lease obligation and make certain specified
determinations based on such factors as the existence of a rating or credit
enhancement such as insurance, the frequency of trades or quotes for the
obligation and the willingness of dealers to make a market in the obligation.
Yields on Municipal Bonds are dependent on a variety of factors, including
the general condition of the money market and of the municipal bond market, the
size of a particular offering, the financial condition of the issuer, the
general conditions of the Municipal Bond market, the maturity of the
obligation, and the rating of the issue. The ability of the Fund to achieve its
investment objective also is dependent on the continuing ability of the issuers
of the bonds in which the Fund invests to meet their obligations for the
payment of interest and principal when due. There are variations in the risks
involved in holding Municipal Bonds, both within a particular classification
and between classifications, depending on numerous factors. Furthermore, the
rights of owners of Municipal Bonds and the obligations of the issuer of such
Municipal Bonds may be subject to applicable bankruptcy, insolvency and similar
laws and court decisions affecting the rights of creditors generally.
DESCRIPTION OF TEMPORARY INVESTMENTS
The Fund may invest in short-term tax-free and taxable securities subject to
the limitations set forth under "Investment Objective and Policies". The tax-
exempt money market securities may include municipal notes, municipal
commercial paper, municipal bonds with remaining maturity of less than one
year, variable rate demand notes and participations therein. Municipal notes
include tax anticipation notes, bond anticipation notes and grant anticipation
notes. Anticipation notes are sold as interim financing in anticipation of tax
collection, bond sales, government grants or revenue receipts. Municipal
commercial paper refers to
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<PAGE>
short-term unsecured promissory notes generally issued to finance short-term
credit needs. The taxable money market securities in which the Fund may invest
as Temporary Investments consist of U.S. Government securities, U.S. Government
agency securities, domestic bank or savings institution certificates of deposit
and bankers' acceptances, short-term corporate debt securities such as
commercial paper, and repurchase agreements. These Temporary Investments must
have a stated maturity not in excess of one year from the date of purchase.
Variable rate demand obligations ("VRDOs") are tax-exempt obligations which
contain a floating or variable interest rate adjustment formula and an
unconditional right of demand on the part of the holder thereof to receive
payment of the unpaid principal balance plus accrued interest upon a short
notice period not to exceed seven days. There is, however, the possibility that
because of default or insolvency the demand feature of VRDOs and Participating
VRDOs, described below, may not be honored. The interest rates are adjustable
at intervals (ranging from daily to up to one year) to some prevailing market
rate for similar investments, such adjustment formula being calculated to
maintain the market value of the VRDO at approximately the par value of the
VRDOs on the adjustment date. The adjustments typically are set at a rate
determined by the remarketing agent or based upon the prime rate of a bank or
some other appropriate interest rate adjustment index. The Fund may invest in
all types of tax-exempt instruments currently outstanding or to be issued in
the future which satisfy the short-term maturity and quality standards of the
Fund.
The Fund also may invest in VRDOs in the form of participation interests
("Participating VRDOs") in variable rate tax-exempt obligations held by a
financial institution, typically a commercial bank. Participating VRDOs provide
the Fund with a specified undivided interest (up to 100%) of the underlying
obligation and the right to demand payment of the unpaid principal balance plus
accrued interest on the Participating VRDOs from the financial institution upon
a specified number of days' notice, not to exceed seven days. In addition, a
Participating VRDO is backed by an irrevocable letter of credit or guaranty of
the financial institution. The Fund would have an undivided interest in the
underlying obligation and thus participate on the same basis as the financial
institution in such obligation except that the financial institution typically
retains fees out of the interest paid on the obligation for servicing the
obligation, providing the letter of credit and issuing the repurchase
commitment. The Fund has been advised by its counsel that the Fund should be
entitled to treat the income received on Participating VRDOs as interest from
tax-exempt obligations.
VRDOs that contain an unconditional right of demand to receive payment of the
unpaid principal balance plus accrued interest on a notice period exceeding
seven days may be deemed to be illiquid securities. A VRDO with a demand notice
period exceeding seven days therefore will be subject to the Fund's restriction
on illiquid investments unless, in the judgment of the Trustees, such VRDO is
liquid. The Trustees may adopt guidelines and delegate to the Manager the daily
function of determining and monitoring liquidity of such VRDOs. The Trustees,
however, will retain sufficient oversight and will be ultimately responsible
for such determination.
The Trust has established the following standards with respect to money
market securities and VRDOs in which the Fund invests. Commercial paper
investments at the time of purchase must be rated "A-1" through "A-3" by
Standard & Poor's, "Prime-1" through "Prime-3" by Moody's or "F-1" through "F-
3" by Fitch or, if not rated, issued by companies having an outstanding debt
issue rated at least "A" by Standard & Poor's, Fitch or Moody's. Investments in
corporate bonds and debentures (which must have maturities at the date of
purchase of one year or less) must be rated at the time of purchase at least
"A" by Standard & Poor's, Moody's or Fitch. Notes and VRDOs at the time of
purchase must be rated SP-1/A-1 through SP-2/A-3 by Standard & Poor's, MIG-
l/VMIG-1 through MIG-4/VMIG-4 by Moody's or F-1 through F-3
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by Fitch. Temporary Investments, if not rated, must be of comparable quality to
securities rated in the above rating categories in the opinion of the Manager.
The Fund may not invest in any security issued by a commercial bank or a
savings institution unless the bank or institution is organized and operating
in the United States, has total assets of at least one billion dollars and is a
member of the Federal Deposit Insurance Corporation ("FDIC"), except that up to
10% of total assets may be invested in certificates of deposit of small
institutions if such certificates are insured fully by the FDIC.
REPURCHASE AGREEMENTS AND PURCHASE AND SALE CONTRACTS
The Fund may invest in securities pursuant to repurchase agreements or
purchase and sale contracts. Repurchase agreements and purchase and sale
contracts may be entered into only with a member bank of the Federal Reserve
System or primary dealer in U.S. Government securities. Under such agreements,
the bank or primary dealer agrees, upon entering into the contract, to
repurchase the security at a mutually agreed upon time and price, thereby
determining the yield during the term of the agreement. This results in a fixed
rate of return insulated from market fluctuations during such period. In the
case of repurchase agreements, the prices at which the trades are conducted do
not reflect accrued interest on the underlying obligations; whereas, in the
case of purchase and sale contracts, the prices take into account accrued
interest. Such agreements usually cover short periods, such as under one week.
Repurchase agreements may be construed to be collateralized loans by the
purchaser to the seller secured by the securities transferred to the purchaser.
In the case of a repurchase agreement, the Fund will require the seller to
provide additional collateral if the market value of the securities falls below
the repurchase price at any time during the term of the repurchase agreement;
the Fund does not have the right to seek additional collateral in the case of
purchase and sale contracts. In the event of default by the seller under a
repurchase agreement construed to be a collateralized loan, the underlying
securities are not owned by the Fund but only constitute collateral for the
seller's obligation to pay the repurchase price. Therefore, the Fund may suffer
time delays and incur costs or possible losses in connection with the
disposition of the collateral. A purchase and sale contract differs from a
repurchase agreement in that the contract arrangements stipulate that the
securities are owned by the Fund. In the event of a default under such a
repurchase agreement or under a purchase and sale contract, instead of the
contractual fixed rate of return, the rate of return to the Fund will depend on
intervening fluctuations of the market value of such security and the accrued
interest on the security. In such event, the Fund would have rights against the
seller for breach of contract with respect to any losses arising from market
fluctuations following the failure of the seller to perform. The Fund may not
invest in repurchase agreements or purchase and sale contracts maturing in more
than seven days if such investments, together with all other illiquid
investments, would exceed 15% of the Fund's net assets. While the substance of
purchase and sale contracts is similar to repurchase agreements, because of the
different treatment with respect to accrued interest and additional collateral,
management believes that purchase and sale contracts are not repurchase
agreements as such term is understood in the banking and brokerage community.
In general, for Federal income tax purposes, repurchase agreements are
treated as collateralized loans secured by the securities "sold". Therefore,
amounts earned under such agreements will not be considered tax-exempt
interest. The treatment of purchase and sale contracts is less certain.
However, it is likely that income from such arrangements also will not be
considered tax-exempt interest.
FINANCIAL FUTURES TRANSACTIONS AND OPTIONS
Reference is made to the discussion concerning futures transactions under
"Investment Objective and Policies" in the Prospectus. Set forth below is
additional information concerning these transactions.
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As described in the Prospectus, the Fund may purchase and sell exchange
traded financial futures contracts ("financial futures contracts") to hedge its
portfolio of Municipal Bonds against declines in the value of such securities
and to hedge against increases in the cost of securities the Fund intends to
purchase. However, any transactions involving financial futures or options (or
puts and calls associated therewith) will be in accordance with the Fund's
investment policies and limitations. See "Investment Objective and Policies--
Investment Restrictions" in the Prospectus. To hedge its portfolio, the Fund
may take an investment position in a futures contract which will move in the
opposite direction from the portfolio position being hedged. While the Fund's
use of hedging strategies is intended to moderate capital changes in portfolio
holdings and thereby reduce the volatility of the net asset value of Fund
shares, the Fund anticipates that its net asset value will fluctuate. Set forth
below is information concerning futures transactions.
Description of Futures Contracts. A futures contract is an agreement between
two parties to buy and sell a security, or in the case of an index-based
futures contract, to make and accept a cash settlement for a set price on a
future date. A majority of transactions in futures contracts, however, do not
result in the actual delivery of the underlying instrument or cash settlement,
but are settled through liquidation, i.e., by entering into an offsetting
transaction. Futures contracts have been designed by boards of trade which have
been designated "contracts markets" by the Commodity Futures Trading Commission
("CFTC").
The purchase or sale of a futures contract differs from the purchase or sale
of a security in that no price or premium is paid or received. Instead, an
amount of cash or securities acceptable to the broker and the relevant contract
market, which varies, but is generally about 5% of the contract amount, must be
deposited with the broker. This amount is known as "initial margin" and
represents a "good faith" deposit assuring the performance of both the
purchaser and seller under the futures contract. Subsequent payments to and
from the broker, called "variation margin", are required to be made on a daily
basis as the price of the futures contract fluctuates making the long and short
positions in the futures contract more or less valuable, a process known as
"mark to the market". At any time prior to the settlement date of the futures
contract, the position may be closed out by taking an opposite position which
will operate to terminate the position in the futures contract. A final
determination of variation margin is then made, additional cash is required to
be paid to or released by the broker, and the purchaser realizes a loss or
gain. In addition, a nominal commission is paid on each completed sale
transaction.
The Fund may deal in financial futures contracts based on a long-term
municipal bond index developed by the Chicago Board of Trade ("CBT") and The
Bond Buyer (the "Municipal Bond Index"). The Municipal Bond Index is comprised
of 40 tax-exempt municipal revenue and general obligations bonds. Each bond
included in the Municipal Bond Index must be rated A or higher by Moody's or
Standard & Poor's and must have a remaining maturity of 19 years or more. Twice
a month new issues satisfying the eligibility requirements are added to, and an
equal number of old issues are deleted from, the Municipal Bond Index. The
value of the Municipal Bond Index is computed daily according to a formula
based on the price of each bond in the Municipal Bond Index, as evaluated by
six dealer-to-dealer brokers.
The Municipal Bond Index futures contract is traded only on the CBT. Like
other contract markets, the CBT assures performance under futures contracts
through a clearing corporation, a nonprofit organization managed by the
exchange membership which also is responsible for handling daily accounting of
deposits or withdrawals of margin.
As described in the Prospectus, the Fund may purchase and sell financial
futures contracts on U.S. Government securities as a hedge against adverse
changes in interest rates as described below. With respect to U.S. Government
securities, currently there are financial futures contracts based on long-term
U.S.
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Treasury bonds, Treasury notes, Government National Mortgage Association
("GNMA") Certificates and three-month U.S. Treasury bills. The Fund may
purchase and write call and put options on futures contracts on U.S. Government
securities in connection with its hedging strategies.
Subject to policies adopted by the Trustees, the Fund also may engage in
other futures contracts transactions such as futures contracts on other
municipal bond indices which may become available if the Manager and the
Trustees should determine that there is normally a sufficient correlation
between the prices of such futures contracts and the Municipal Bonds in which
the Fund invests to make such hedging appropriate.
Futures Strategies. The Fund may sell a financial futures contract (i.e.,
assume a short position) in anticipation of a decline in the value of its
investments in Municipal Bonds resulting from an increase in interest rates or
otherwise. The risk of decline could be reduced without employing futures as a
hedge by selling such Municipal Bonds and either reinvesting the proceeds in
securities with shorter maturities or by holding assets in cash. This strategy,
however, entails increased transaction costs in the form of dealer spreads and
typically would reduce the average yield of the Fund's portfolio securities as
a result of the shortening of maturities. The sale of futures contracts
provides an alternative means of hedging against declines in the value of its
investments in Municipal Bonds. As such values decline, the value of the Fund's
positions in the futures contracts will tend to increase, thus offsetting all
or a portion of the depreciation in the market value of the Fund's Municipal
Bond investments which are being hedged. While the Fund will incur commission
expenses in selling and closing out futures positions, commissions on futures
transactions are lower than transaction costs incurred in the purchase and sale
of Municipal Bonds. In addition, the ability of the Fund to trade in the
standardized contracts available in the futures markets may offer a more
effective defensive position than a program to reduce the average maturity of
the portfolio securities due to the unique and varied credit and technical
characteristics of the municipal debt instruments available to the Fund.
Employing futures as a hedge also may permit the Fund to assume a defensive
posture without reducing the yield on its investments beyond any amounts
required to engage in futures trading.
When the Fund intends to purchase Municipal Bonds, the Fund may purchase
futures contracts as a hedge against any increase in the cost of such Municipal
Bonds, resulting from an increase in interest rates or otherwise, that may
occur before such purchases can be effected. Subject to the degree of
correlation between the Municipal Bonds and the futures contracts, subsequent
increases in the cost of Municipal Bonds should be reflected in the value of
the futures held by the Fund. As such purchases are made, an equivalent amount
of futures contracts will be closed out. Due to changing market conditions and
interest rate forecasts, however, a futures position may be terminated without
a corresponding purchase of portfolio securities.
Call Options on Futures Contracts. The Fund also may purchase and sell
exchange traded call and put options on financial futures contracts on U.S.
Government securities. The purchase of a call option on a futures contract is
analogous to the purchase of a call option on an individual security. Depending
on the pricing of the option compared to either the futures contract on which
it is based, or on the price of the underlying debt securities, it may or may
not be less risky than ownership of the futures contract or underlying debt
securities. Like the purchase of a futures contract, the Fund will purchase a
call option on a futures contract to hedge against a market advance when the
Fund is not fully invested.
The writing of a call option on a futures contract constitutes a partial
hedge against declining prices of the securities which are deliverable upon
exercise of the futures contract. If the futures price at expiration is below
the exercise price, the Fund will retain the full amount of the option premium
which provides a partial hedge against any decline that may have occurred in
the Fund's portfolio holdings.
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Put Options on Futures Contracts. The purchase of options on a futures
contract is analogous to the purchase of protective put options on portfolio
securities. The Fund will purchase put options on futures contracts to hedge
the Fund's portfolio against the risk of rising interest rates.
The writing of a put option on a futures contract constitutes a partial hedge
against increasing prices of the securities which are deliverable upon exercise
of the futures contract. If the futures price at expiration is higher than the
exercise price, the Fund will retain the full amount of the option premium
which provides a partial hedge against any increase in the price of Municipal
Bonds which the Fund intends to purchase.
The writer of an option on a futures contract is required to deposit initial
and variation margin pursuant to requirements similar to those applicable to
futures contracts. Premiums received from the writing of an option will be
included in initial margin. The writing of an option on a futures contract
involves risks similar to those relating to futures contracts.
----------------
The Trust has received an order from the Securities and Exchange Commission
(the "Commission") exempting it from the provisions of Section 17(f) and
Section 18(f) of the Investment Company Act of 1940, as amended (the "1940
Act"), in connection with its strategy of investing in futures contracts.
Section 17(f) relates to the custody of securities and other assets of an
investment company and may be deemed to prohibit certain arrangements between
the Trust and commodities brokers with respect to initial and variation margin.
Section 18(f) of the 1940 Act prohibits an open-end investment company such as
the Trust from issuing a "senior security" other than a borrowing from a bank.
The staff of the Commission has in the past indicated that a futures contract
may be a "senior security" under the 1940 Act.
Restrictions on Use of Futures Transactions. Regulations of the CFTC
applicable to the Fund require that all of the Fund's futures transactions
constitute bona fide hedging transactions and that the Fund purchase and sell
futures contracts and options thereon (i) for bona fide hedging purposes, and
(ii) for non-hedging purposes, if the aggregate initial margin and premiums
required to establish positions in such contracts and options does not exceed
5% of the liquidation value of the Fund's portfolio assets after taking into
account unrealized profits and unrealized losses on any such contracts and
options. (However, the Fund intends to engage in options and futures
transactions only for hedging purposes.) Margin deposits may consist of cash or
securities acceptable to the broker and the relevant contract market.
When the Fund purchases futures contracts or a call option with respect
thereto or writes a put option on a futures contract, an amount of cash, cash
equivalents or short-term, high-grade, fixed income securities will be
deposited in a segregated account with the Fund's custodian so that the amount
so segregated, plus the amount of initial and variation margin held in the
account of its broker, equals the market value of the futures contract, thereby
ensuring that the use of such futures is unleveraged.
Risk Factors in Futures Transactions and Options. Investment in futures
contracts involves the risk of imperfect correlation between movements in the
price of the futures contract and the price of the security being hedged. The
hedge will not be fully effective when there is imperfect correlation between
the movements in the prices of two financial instruments. For example, if the
price of the futures contract moves more than the price of the hedged security,
the Fund will experience either a loss or gain on the futures contract which is
not offset completely by movements in the price of the hedged securities. To
compensate for imperfect correlations, the Fund may purchase or sell futures
contracts in a greater dollar amount than the hedged securities if the
volatility of the hedged securities is historically greater than the volatility
of the futures contracts. Conversely, the Fund may purchase or sell fewer
futures contracts if the volatility of the price of the hedged securities is
historically less than that of the futures contracts.
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<PAGE>
The particular municipal bonds comprising the index underlying the Municipal
Bond Index financial futures contract may vary from the Municipal Bonds held by
the Fund. As a result, the Fund's ability to hedge effectively all or a portion
of the value of its Municipal Bonds through the use of such financial futures
contracts will depend in part on the degree to which price movements in the
index underlying the financial futures contract correlate with the price
movements of the Municipal Bonds held by the Fund. The correlation may be
affected by disparities in the average maturity, ratings, geographical mix or
structure of the Fund's investments as compared to those comprising the
Municipal Bond Index, and general economic or political factors. In addition,
the correlation between movements in the value of the Municipal Bond Index may
be subject to change over time as additions to and deletions from the Municipal
Bond Index alter its structure. The correlation between futures contracts on
U.S. Government securities and the Municipal Bonds held by the Fund may be
adversely affected by similar factors and the risk of imperfect correlation
between movements in the prices of such futures contracts and the prices of the
Municipal Bonds held by the Fund may be greater.
The Fund expects to liquidate a majority of the futures contracts it enters
into through offsetting transactions on the applicable contract market. There
can be no assurance, however, that a liquid secondary market will exist for any
particular futures contract at any specific time. Thus, it may not be possible
to close out a futures position. In the event of adverse price movements, the
Fund would continue to be required to make daily cash payments of variation
margin. In such situations, if the Fund has insufficient cash, it may be
required to sell portfolio securities to meet daily variation margin
requirements at a time when it may be disadvantageous to do so. The inability
to close out futures positions also could have an adverse impact on the Fund's
ability to hedge effectively its investments in Municipal Bonds. The Fund will
enter into a futures position only if, in the judgment of the Manager, there
appears to be an actively traded secondary market for such futures contracts.
The successful use of transactions in futures and related options also
depends on the ability of the Manager to forecast correctly the direction and
extent of interest rate movements within a given time frame. To the extent
interest rates remain stable during the period in which a futures contract or
option is held by the Fund or such rates move in a direction opposite to that
anticipated, the Fund may realize a loss on the hedging transaction which is
not fully or partially offset by an increase in the value of portfolio
securities. As a result, the Fund's total return for such period may be less
than if it had not engaged in the hedging transaction.
Because of low initial margin deposits made on the opening of a futures
position, futures transactions involve substantial leverage. As a result,
relatively small movements in the price of the futures contracts can result in
substantial unrealized gains or losses. Because the Fund will engage in the
purchase and sale of futures contracts solely for hedging purposes, however,
any losses incurred in connection therewith should, if the hedging strategy is
successful, be offset in whole or in part by increases in the value of
securities held by the Fund or decreases in the price of securities the Fund
intends to acquire.
The amount of risk the Fund assumes when it purchases an option on a futures
contract is the premium paid for the option plus related transaction costs. In
addition to the correlation risks discussed above, the purchase of an option on
a futures contract also entails the risk that changes in the value of the
underlying futures contract will not be reflected fully in the value of the
option purchased.
Municipal Bond Index futures contracts have only recently been approved for
trading and therefore have little trading history. It is possible that trading
in such futures contracts will be less liquid than that in other futures
contracts. The trading of futures contracts also is subject to certain market
risks, such as inadequate trading activity, which could at times make it
difficult or impossible to liquidate existing positions.
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<PAGE>
INVESTMENT RESTRICTIONS
The Fund has adopted the following restrictions and policies relating to the
investment of its assets and its activities, which are fundamental policies and
may not be changed without the approval of the holders of a majority of the
Fund's outstanding voting securities (which for this purpose and under the 1940
Act means the lesser of (i) 67% of the Fund's shares 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 to be part of any industry.
2. Make investments for the purpose of exercising control or management.
3. Purchase or sell real estate, except that 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 Municipal or corporate debt securities and investment in
government obligations, short-term commercial paper, certificates of deposit,
bankers' acceptances and repurchase agreements 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 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 (a) 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), (b) the Fund may borrow up to an additional 5% of its total
assets for temporary purposes, (c) the Fund may obtain such short-term credit
as may be necessary for the clearance of purchases and sales of portfolio
securities and (d) 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 the Prospectus and Statement of Additional
Information, as they may be amended from time to time, in connection with
hedging transactions, short sales, when-issued and forward commitment
transactions and similar investment strategies.
7. Underwrite securities of other issuers, except insofar as the Fund
technically may be deemed an underwriter under the Securities Act of 1933, as
amended, in selling portfolio securities.
8. Purchase or sell commodities or contracts on commodities, except to the
extent 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
Commodities Exchange Act.
13
<PAGE>
Additional non-fundamental investment restrictions adopted by the Fund, which
may be changed by the Trustees, provide that the Fund may not:
a. Purchase securities of other investment companies, except to the
extent that such purchases are permitted by applicable law. Applicable law
currently allows the Fund to purchase the securities of other investment
companies only if immediately thereafter not more than (i) 3% of the total
outstanding voting stock of such company is owned by the Fund, (ii) 5% of
the Fund's total assets, taken at market value, would be invested in any
one such company, (iii) 10% of the Fund's total assets, taken at market
value, would be invested in such securities, and (iv) the Fund, together
with other investment companies having the same investment adviser and
companies controlled by such companies, owns not more than 10% of the total
outstanding stock of any one closed-end investment company.
b. Make short sales of securities or maintain a short position except to
the extent permitted by applicable law.
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 Fund has otherwise determined
to be liquid pursuant to applicable law.
d. Invest in warrants if, at the time of acquisition, its investments in
warrants, valued at the lower of cost or market value, would exceed 5% of
the Fund's net assets; included within such limitation, but not to exceed
2% of the Fund's net assets, are warrants which are not listed on the New
York Stock Exchange or American Stock Exchange or a major foreign exchange.
For purposes of this restriction, warrants acquired by the Fund in units or
attached to securities may be deemed to be without value.
e. Invest in securities of companies having a record, together with
predecessors, of less than three years of continuous operation, if more
than 5% of the Fund's total assets would be invested in such securities.
This restriction shall not apply to mortgage-backed securities, asset-
backed securities or obligations issued or guaranteed by the U.S.
Government, its agencies or instrumentalities.
f. Purchase or retain the securities of any issuer, if those individual
officers and directors of the Fund, the Manager or any subsidiary thereof
each owning more than one-half of 1% of the securities of such issuer own
in the aggregate more than 5% of the securities of such issuer.
g. Invest in real estate limited partnership interests or interests in
oil, gas or other mineral leases, or exploration or development programs,
except that the Fund may invest in securities issued by companies that
engage in oil, gas or other mineral exploration or development activities.
h. Write, purchase or sell puts, calls, straddles, spreads or
combinations thereof, except to the extent permitted in the Fund's
Prospectus and Statement of Additional Information, as they may be amended
from time to time.
14
<PAGE>
In addition, to comply with Federal income tax requirements for qualification
as a "regulated investment company", the Fund's investments will be limited in
a manner such that, at the close of each quarter of each fiscal year, (a) no
more than 25% of the Fund's total assets are invested in the securities of a
single issuer, and (b) with regard to at least 50% of the Fund's total assets,
no more than 5% of its total assets are invested in the securities of a single
issuer. For purposes of this restriction, the Fund will regard each state and
each political subdivision, agency or instrumentality of such state and each
multi-state agency of which such state is a member and each public authority
which issues securities on behalf of a private entity as a separate issuer,
except that if the security is backed only by the assets and revenues of a non-
governmental entity then the entity with the ultimate responsibility for the
payment of interest and principal may be regarded as the sole issuer. These
tax-related limitations may be changed by the Trustees of the Trust to the
extent necessary to comply with changes to the Federal income tax requirements.
Because of the affiliation of Merrill Lynch, Pierce, Fenner & Smith
Incorporated ("Merrill Lynch") with the Trust, the Fund is prohibited from
engaging in certain transactions involving such firm or its affiliates except
for brokerage transactions permitted under the 1940 Act involving only usual
and customary commissions or transactions pursuant to an exemptive order under
the 1940 Act. Included among such restricted transactions will be purchases
from or sales to Merrill Lynch of securities in transactions in which it acts
as principal. See "Portfolio Transactions". An exemptive order has been
obtained which permits the Trust to effect principal transactions with Merrill
Lynch in high quality, short-term, tax-exempt securities subject to conditions
set forth in such order.
MANAGEMENT OF THE TRUST
TRUSTEES AND OFFICERS
The Trustees and executive officers of the Trust and their principal
occupations for at least the last five years are set forth below. Unless
otherwise noted, the address of each Trustee and executive officer is P.O. Box
9011, Princeton, New Jersey 08543-9011.
Arthur Zeikel--President and Trustee(1)(2)--President and Chief Investment
Officer of the Manager (which term, as used herein, includes the Manager's
corporate predecessor) since 1977; President of Merrill Lynch Asset Management,
L.P. (doing business as Merrill Lynch Asset Management and referred to herein,
together with its corporate predecessor, as "MLAM") since 1977 and Chief
Investment Officer thereof since 1976; President and Director of Princeton
Services, Inc. ("Princeton Services") since 1993; Executive Vice President of
Merrill Lynch & Co., Inc. since 1991; Executive Vice President of Merrill Lynch
since 1990 and a Senior Vice President thereof from 1985 to 1990; Director of
Merrill Lynch Funds Distributor, Inc. ("MLFD" or the "Distributor").
Kenneth S. Axelson--Trustee(2)--75 Jameson Point Road, Rockland, Maine 04841.
Executive Vice President and Director, J.C. Penney Company, Inc. until 1982;
Director, UNUM Corporation, Protection Mutual Insurance Company, Zurn
Industries, Inc. and, formerly, of Central Maine Power Company (until 1992),
Key Trust Company of Maine (until 1992) and Grumman Corporation (until 1994);
Trustee, The Chicago Dock and Canal Trust.
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<PAGE>
Herbert I. London--Trustee(2)--New York University--Gallatin Division, 113-
115 University Place, New York, New York 10003. John M. Olin Professor of
Humanities, New York University since 1993 and Professor thereof since 1973;
Dean, Gallatin Division of New York University from 1978 to 1993 and Director
from 1975 to 1976; Distinguished Fellow, Herman Kahn Chair, Hudson Institute
from 1984 to 1985; Trustee, Hudson Institute since 1980; Director, Damon
Corporation since 1991; Overseer, Center for Naval Analyses.
Robert R. Martin--Trustee(2)--513 Grand Hill, St. Paul, Minnesota 55102.
Chairman, WTC Industries, Inc. since 1994; Chairman and Chief Executive
Officer, Kinnard Investments, Inc. from 1990 to 1993; Executive Vice President,
Dain Bosworth from 1974 to 1989; Director, Carnegie Capital Management from
1977 to 1985 and Chairman thereof in 1979; Director, Securities Industry
Association from 1981 to 1982 and Public Securities Association from 1979 to
1980; Trustee, Northland College since 1992.
Joseph L. May--Trustee(2)--424 Church Street, Suite 2000, Nashville,
Tennessee 37219. Attorney in private practice since 1984; President, May and
Athens Hosiery Mills Division, Wayne-Gossard Corporation from 1954 to 1983;
Vice President, Wayne-Gossard Corporation from 1972 to 1983; Chairman, The May
Corporation (personal holding company) from 1972 to 1983; Director, Signal
Apparel Co. from 1972 to 1989.
Andre F. Perold--Trustee(2)--Morgan Hall, Soldiers Field, Boston,
Massachusetts 02163. Professor, Harvard Business School since 1989 and
Associate Professor from 1983 to 1989; Trustee, The Common Fund, since 1989;
Director, Quantec Investment Technology (a private United Kingdom company).
Terry K. Glenn--Executive Vice President(1)(2)--Executive Vice President of
the Manager and MLAM since 1983; Executive Vice President and Director of
Princeton Services since 1993; President of MLFD since 1986 and Director
thereof since 1991.
Vincent R. Giordano--Vice President and Portfolio Manager(1)(2)--Portfolio
Manager of the Manager and MLAM since 1977 and Senior Vice President of the
Manager and MLAM since 1984; Vice President of MLAM from 1980 to 1984; Senior
Vice President of Princeton Services since 1993.
Kenneth A. Jacob--Vice President and Portfolio Manager(1)(2)--Vice President
of the Manager and MLAM since 1984.
Donald C. Burke--Vice President(1)(2)--Vice President and Director of
Taxation of MLAM since 1990; Employee of Deloitte & Touche LLP from 1982 to
1990.
Gerald M. Richard--Treasurer(1)(2)--Senior Vice President and Treasurer of
the Manager and MLAM since 1984; Senior Vice President and Treasurer of
Princeton Services since 1993; Treasurer of MLFD since 1984 and Vice President
since 1981.
Jerry Weiss--Secretary(1)(2)--Vice President of MLAM since 1990; Attorney in
private practice from 1982 to 1990.
- --------
(1) Interested person, as defined in the 1940 Act, of the Trust.
(2) Such Trustee or officer is a director or officer of certain other
investment companies for which the Manager or MLAM acts as investment
adviser or manager.
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At , 1994, the Trustees and officers of the Trust as a group (12
persons) owned an aggregate of less than 1/4 of 1% of the outstanding shares of
Common Stock of Merrill Lynch & Co., Inc. and owned an aggregate of less than
1% of the outstanding shares of the Fund.
The Trust pays each Trustee not affiliated with the Manager a fee of $10,000
per year plus $1,000 per meeting attended, together with such Trustee's actual
out-of-pocket expenses relating to attendance at meetings. The Trust also
compensates members of its Audit Committee, which consists of all the non-
affiliated Trustees.
MANAGEMENT AND ADVISORY ARRANGEMENTS
Reference is made to "Management of the Trust--Management and Advisory
Arrangements" in the Prospectus for certain information concerning the
management and advisory arrangements of the Fund.
Securities may be held by, or be appropriate investments for, the Fund as
well as other funds or investment advisory clients of the Manager or its
affiliates. Because of different objectives or other factors, a particular
security may be bought for one or more clients when one or more clients are
selling the same security. If the Manager or its affiliates purchase or sell
securities for the Fund or other funds for which they act as manager or for
their advisory clients and such sales or purchases arise for consideration at
or about the same time, transactions in such securities will be made, insofar
as feasible, for the respective funds and clients in a manner deemed equitable
to all. To the extent that transactions on behalf of more than one client of
the Manager or its affiliates during the same period may increase the demand
for securities being purchased or the supply of securities being sold, there
may be an adverse effect on price.
Pursuant to a management agreement between the Trust on behalf of the Fund
and the Manager (the "Management Agreement"), the Manager receives for its
services to the Fund monthly compensation based upon the average daily net
assets of the Fund at the following annual rates: 0.55% of the average daily
net assets not exceeding $500 million; 0.525% of the average daily net assets
exceeding $500 million but not exceeding $1.0 billion; and 0.50% of the average
daily net assets exceeding $1.0 billion.
The Management Agreement obligates the Manager to provide investment advisory
services and to pay all compensation of and furnish office space for officers
and employees of the Trust connected with investment and economic research,
trading and investment management of the Trust, as well as the compensation of
all Trustees of the Trust who are affiliated persons of the Manager or any of
its subsidiaries. The Fund pays all other expenses incurred in its operation
and, if other Series shall be added ("Series"), a portion of the Trust's
general administrative expenses will be allocated on the basis of the asset
size of the respective 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 which will be allocated
on the basis of asset size of the respective Series include fees and expenses
of unaffiliated Trustees, state franchise taxes, costs of printing proxies and
other expenses related to shareholder meetings, and other expenses properly
payable by the Trust. The organizational expenses of the Trust were paid by the
Trust, and as additional Series are added to the
17
<PAGE>
Trust, the organizational expenses are allocated among the Series (including
the Fund) in a manner deemed equitable by the Trustees. Depending upon the
nature of a lawsuit, litigation costs may be assessed to the specific Series to
which the lawsuit relates or allocated on the basis of the asset size of the
respective Series. The Trustees have determined that this is an appropriate
method of allocation of expenses. Accounting services are provided to the Fund
by the Manager and the Fund reimburses the Manager for its costs in connection
with such services. As required by the Fund's distribution agreements, the
Distributor will pay the promotional expenses of the Fund incurred in
connection with the offering of shares of the Fund. Certain expenses in
connection with account maintenance and the distribution of shares will be
financed by the Fund pursuant to the Distribution Plans in compliance with Rule
12b-1 under the 1940 Act. See "Purchase of Shares--Distribution Plan".
The Manager is a limited partnership, the partners of which are Merrill Lynch
& Co., Inc., Fund Asset Management, Inc. and Princeton Services, Inc.
Duration and Termination. Unless earlier terminated as described 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
System: shares of Class A and Class D are sold to investors choosing the
initial sales charge alternatives, and shares of Class B and Class C are sold
to investors choosing the deferred sales charge alternatives. Each Class A,
Class B, Class C and Class D share of the Fund represents identical interests
in the investment portfolio of the Fund and has the same rights, except that
Class B, Class C and Class D shares bear the expenses of the ongoing account
maintenance fees, and Class B and Class C shares bear the expenses of the
ongoing distribution fees and the additional incremental transfer agency costs
resulting from the deferred sales charge arrangements. Class B, Class C and
Class D shares each have exclusive voting rights with respect to the Rule 12b-1
distribution plan adopted with respect to such class pursuant to which account
maintenance and/or distribution fees are paid. Each class has different
exchange privileges. See "Shareholder Services--Exchange Privilege".
The Merrill Lynch Select Pricing System is used by more than 50 mutual funds
advised by MLAM or its affiliate, the Manager. Funds advised by MLAM or the
Manager are referred to herein as "MLAM-advised mutual funds".
The Fund has entered into separate distribution agreements with the
Distributor in connection with the subscription and 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.
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<PAGE>
INITIAL SALES CHARGE ALTERNATIVES--CLASS A AND CLASS D SHARES
The term "purchase", as used in the Prospectus and this Statement of
Additional Information in connection with an investment in Class A and Class D
shares of the Fund, refers to a single purchase by an individual, or to
concurrent purchases, which in the aggregate are at least equal to the
prescribed amounts, by an individual, his spouse and their children under the
age of 21 years purchasing shares for his or their own account and to single
purchases by a trustee or other fiduciary purchasing shares for a single trust
estate or single fiduciary account although more than one beneficiary is
involved. The term "purchase" also includes purchases by any "company", as that
term is defined in the 1940 Act, but does not include purchases by any such
company which has not been in existence for at least six months or which has no
purpose other than the purchase of shares of the Fund or shares of other
registered investment companies at a discount; provided, however, that it shall
not include purchases by any group of individuals whose sole organizational
nexus is that the participants therein are credit cardholders of a company,
policyholders of an insurance company, customers of either a bank or broker-
dealer or clients of an investment adviser.
Closed-End Investment Option. Class A shares of the Fund and other MLAM-
advised mutual funds (the "Eligible Class A shares") are offered at net asset
value to shareholders of certain closed-end funds advised by the Manager or
MLAM who wish to reinvest the net proceeds of a sale of their closed-end fund
shares of common stock in Eligible Class A shares, if the conditions set forth
below are satisfied. First, the sale of closed-end fund shares must be made
through Merrill Lynch, and the net proceeds therefrom must be immediately
reinvested in Eligible Class A shares. Second, the closed-end fund shares must
have either been acquired in the initial public offering or be shares
representing dividends from shares of common stock acquired in such offering.
Third, the closed-end fund shares must have been continuously maintained in a
Merrill Lynch securities account. Fourth, there must be a minimum purchase of
$250 to be eligible for the investment option. Class A shares of the Fund are
offered at net asset value to shareholders of Merrill Lynch Senior Floating
Rate Fund, Inc. ("Senior Floating Rate Fund") who wish to reinvest the net
proceeds from a sale of certain of their shares of common stock of Senior
Floating Rate Fund in shares of the Fund. In order to exercise this investment
option, Senior Floating Rate Fund shareholders must sell their Senior Floating
Rate Fund shares to the Senior Floating Rate Fund in connection with a tender
offer conducted by the Senior Floating Rate Fund and reinvest the proceeds
immediately in the Fund. This investment option is available only with respect
to the proceeds of Senior Floating Rate Fund shares as to which no Early
Withdrawal Charge (as defined in the Senior Floating Rate Fund prospectus) is
applicable. Purchase orders from Senior Floating Rate Fund shareholders wishing
to exercise this investment option will be accepted only on the day that the
related Senior Floating Rate Fund tender offer terminates and will be effected
at the net asset value of the Fund at such day.
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,
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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 thirteen-month period starting
with the first purchase pursuant to a Letter of Intention in the form provided
in the Prospectus. The Letter of Intention is available only to investors whose
accounts are maintained at the Fund's Transfer Agent. The Letter of Intention
is not available to employee benefit plans for which Merrill Lynch provides
plan participant record-keeping services. The Letter of Intention is not a
binding obligation to purchase any amount of Class A 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 thirteen-month period
(while remaining registered in the name of the purchaser) for this purpose. The
first purchase under the Letter of Intention must be at least five percent of
the dollar amount of such Letter. If during the term of such Letter, a purchase
brings the total amount invested to an amount equal to or in excess of the
amount indicated in the Letter, the purchaser will be entitled on that purchase
and subsequent purchases to 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
Merrill Lynch Ready Assets Trust, Merrill Lynch Retirement Reserves Money Fund,
Merrill Lynch U.S. Treasury Money Fund or Merrill Lynch U.S.A. Government
Reserves into the Fund that creates a sales charge will count toward completing
a new or existing Letter of Intention from the Fund.
Employer Sponsored Non-Qualified After-Tax Savings and Investment Programs.
Class A shares are offered at net asset value to employer sponsored non-
qualified After-Tax Savings and Investment programs maintained on the Merrill
Lynch Group Employee Services system, provided the program or certain other
plans or programs sponsored by the employer has $5 million or more in existing
plan assets initially invested in portfolios, mutual funds or trusts advised by
the Fund's investment adviser or an affiliate. Class A shares are also offered
at net asset value to After-Tax Savings and Investment programs, provided the
program has accumulated $5 million or more in existing assets invested in
mutual funds advised by the Fund's investment adviser or an affiliated adviser
charging a front-end sales charge or contingent deferred sales charge. In this
case as well, assets or certain other plans sponsored by the same sponsor or an
affiliated sponsor may be aggregated. The Class A share reduced load
breakpoints also apply to these aggregated assets. After-Tax Savings and
Investment programs are also offered Class A shares at net asset value,
provided such plan initially has 1,000 or more employees eligible to
participate in the plan. Employees eligible to participate in
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such plans of the same sponsoring employer or its affiliates may be aggregated.
The minimum initial and subsequent purchase requirements are waived in
connection with all the above-referenced plans.
Purchase Privilege of Certain Persons. Trustees of the Trust, members of the
Boards of other MLAM-advised investment companies, directors and employees of
Merrill Lynch & Co., Inc. and its subsidiaries, and any trust, pension, profit-
sharing or other benefit plan for such persons, may purchase Class A shares of
the Fund at net asset value.
Class D shares of the Fund will be offered at net asset value, without sales
charge, to an investor who has a business relationship with a financial
consultant who joined Merrill Lynch from another investment firm within six
months prior to the date of purchase by such investor, if the following
conditions are satisfied. First, the investor must purchase Class D shares of
the Fund with proceeds from a redemption of shares of a mutual fund that was
sponsored by the financial consultant's previous firm and imposed a sales
charge either at the time of purchase or on a deferred basis. Second, such
redemption must have been made within 60 days prior to the investment in the
Fund, and the proceeds from the redemption must have been maintained in the
interim in cash or a money market fund.
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 which might result from an acquisition of assets having net unrealized
appreciation which is disproportionately higher at the time of acquisition than
the realized or unrealized appreciation of the Fund.
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
Investment Company Act (each a "Distribution Plan") with respect to the account
maintenance and/or distribution fees paid by the Fund to the Distributor with
respect to such classes.
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
fees and/or distribution fees paid to the Distributor. In their consideration
of each Distribution Plan, the Trustees must consider all factors they deem
relevant, including information as to the benefits of the Distribution Plan to
the Fund and its related class of shareholders. Each Distribution Plan further
provides that, so long as the Distribution Plan remains in effect, the
selection and nomination of Trustees who are not "interested persons" of the
Trust, as defined in the 1940 Act (the "Independent Trustees"), shall be
committed to the discretion of the Independent Trustees then in office. In
approving each Distribution Plan in accordance with Rule 12b-1, the Independent
Trustees concluded that there is reasonable likelihood that such Distribution
Plan will benefit the Fund and its related class of shareholders. Each
Distribution Plan can be terminated at any time, without penalty, by the vote
of a majority of the Independent Trustees or by the vote of the holders of a
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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 Rules of Fair Practice of the National
Association of Securities Dealers, Inc. ("NASD") imposes a limitation on
certain asset-based sales charges such as the distribution fee and the
contingent deferred sales charge ("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.
REDEMPTION OF SHARES
Reference is made to "Redemption of Shares" in the Prospectus for certain
information as to the redemption and repurchase of Fund shares.
The right to redeem shares or to receive payment with respect to any such
redemption may be suspended only for any period during which trading on the New
York Stock Exchange is restricted as determined by the Commission or such
Exchange is closed (other than customary weekend and holiday closings), for any
period during which an emergency exists, as defined by the Commission, as a
result of which disposal of portfolio securities or determination of the net
asset value of the Fund is not reasonably practicable, and for such other
periods as the Commission may by order permit for the protection of
shareholders of the Fund.
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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 or Class C shares redeemed within one year of
purchase are subject to a CDSC under most circumstances, the charge is waived
on redemptions of Class B or Class C shares following the death or disability
of a Class B or Class C shareholder. Redemptions for which the waiver applies
are any partial or complete redemption following the death or disability (as
defined in the Internal Revenue Code of 1986, as amended (the "Code")) of a
Class B or Class C shareholder (including one who owns the Class B or Class C
shares as joint tenant with his or her spouse), provided the redemption is
requested within one year of the death or initial determination of disability.
The CDSC is also waived for any Class B or Class C shares which are purchased
by a Merrill Lynch rollover IRA, that was funded by a rollover from a
terminated 401(k) plan managed by the MLAM Private Portfolio Group, and held in
such account at the time of redemption. The minimum initial and subsequent
purchase requirements are waived in connection with the above-referenced
Retirement Plans.
PORTFOLIO TRANSACTIONS
Reference is made to "Investment Objective and Policies" and "Portfolio
Transactions" in the Prospectus.
Under the 1940 Act, persons affiliated with the Trust are prohibited from
dealing with the Fund as a principal in the purchase and sale of securities
unless such trading is permitted by an exemptive order issued by the
Commission. Since over-the-counter transactions are usually principal
transactions, affiliated persons of the Trust, including Merrill Lynch, may not
serve as dealer in connection with transactions with the Fund. The Trust has
obtained an exemptive order permitting it to engage in certain principal
transactions with Merrill Lynch involving high quality short-term municipal
bonds subject to certain conditions. Affiliated persons of the Trust may serve
as broker for the Fund in over-the-counter transactions conducted on an agency
basis. Certain court decisions have raised questions as to the extent to which
investment companies should seek exemptions under the 1940 Act in order to seek
to recapture underwriting and dealer spreads from affiliated entities. The
Trustees have considered all factors deemed relevant, and have made a
determination not to seek such recapture at this time. The Trustees will
reconsider this matter from time to time.
As a non-fundamental restriction, the Trust will prohibit the purchase or
retention by the Fund of the securities of any issuer if the officers,
directors or trustees of the Trust or the Manager owning beneficially more than
one-half of one per cent of the securities of an issuer together own
beneficially more than five per cent of the securities of that issuer. In
addition, under the 1940 Act, the Fund may not purchase securities during the
existence of any underwriting syndicate of which Merrill Lynch is a member
except pursuant to an exemptive order or rules adopted by the Commission. Rule
10f-3 under the 1940 Act sets forth conditions under which the Fund may
purchase municipal bonds in such transactions. The rule sets forth requirements
relating to, among other things, the terms of an issue of municipal bonds
purchased by the Fund, the amount of municipal bonds which may be purchased in
any one issue and the assets of the Fund which may be invested in a particular
issue.
The Fund does not expect to use any particular dealer in the execution of
transactions but, subject to obtaining the best net results, dealers who
provide supplemental investment research (such as information concerning tax-
exempt securities, economic data and market forecasts) to the Manager may
receive orders
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for transactions by the Fund. Information so received will be in addition to
and not in lieu of the services required to be performed by the Manager under
its Management Agreement and the expenses of the Manager will not necessarily
be reduced as a result of the receipt of such supplemental information.
The Trust has no obligation to deal with any broker in the execution of
transactions for the Fund's portfolio securities. In addition, consistent with
the Rules of Fair Practice of the National Association of Securities Dealers,
Inc., and policies established by the Trustees of the Trust, the Manager may
consider sales of shares of the Fund as a factor in the selection of brokers or
dealers to execute portfolio transactions for the Fund.
Generally, the Fund does not purchase securities for short-term trading
profits. However, the Fund may dispose of securities without regard to the time
they have been held when such action, for defensive or other reasons, appears
advisable to its Manager. While it is not possible to predict turnover rates
with any certainty, at present it is anticipated that the Fund's annual
portfolio turnover rate, under normal circumstances after the Fund's portfolio
is invested in accordance with its investment objective, will be less than
100%. (The portfolio turnover rate is calculated by dividing the lesser of
purchases or sales of portfolio securities for the particular fiscal year by
the monthly average of the value of the portfolio securities owned by the Fund
during the particular fiscal year. For purposes of determining this rate, all
securities whose maturities at the time of acquisition are one year or less are
excluded.)
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 which
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 Securities and Exchange 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
The net asset value of the Fund is determined by the Manager once daily,
Monday through Friday, as of 4:15 P.M., New York City time, on each day during
which the New York Stock Exchange is open for trading. The New York Stock
Exchange is not open on New Year's Day, 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 minus all liabilities by the
total number of shares outstanding at such time, rounded to the nearest cent.
Expenses, including the fees payable to the Manager and any account maintenance
and/or distribution fees, are accrued daily. The net asset value per share of
the Class A shares and the net asset value per share of the Class B, Class C
and Class D shares are expected to be equivalent. Under certain circumstances,
however, the per share net asset value of the Class B, Class C and Class D
shares may be lower than the per share net asset value of the Class A shares
reflecting the daily expense accruals of the account maintenance, distribution
and higher transfer agency fees applicable with respect to the Class B and
Class C shares and the daily expense accruals of the account maintenance fees
applicable with respect to the Class D shares. Even under those circumstances,
the per share net asset value of the four classes will tend to converge
immediately after the payment of dividends, which will differ by approximately
the amount of the expense accrual differential between the classes.
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The Municipal Bonds, and other portfolio securities in which the Fund invests
are traded primarily in over-the-counter municipal bond and money markets and
are valued at the last available bid price in the over-the-counter market or on
the basis of yield equivalents as obtained from one or more dealers that make
markets in the securities. One bond is the "yield equivalent" of another bond
when, taking into account market price, maturity, coupon rate, credit rating
and ultimate return of principal, both bonds will theoretically produce an
equivalent return to the bondholder. Financial futures contracts and options
thereon, which are traded on exchanges, are valued at their settlement prices
as of the close of such exchanges. Short-term investments with a remaining
maturity of 60 days or less are valued on an amortized cost basis, which
approximates market value. Securities and assets for which market quotations
are not readily available are valued at fair value as determined in good faith
by or under the direction of the Trustees of the Trust, including valuations
furnished by a pricing service retained by the Trust, which may utilize a
matrix system for valuations. The procedures of the pricing service and its
valuations are reviewed by the officers of the Trust under the general
supervision of the Trustees.
SHAREHOLDER SERVICES
The Trust offers a number of shareholder services described below which are
designed to facilitate investment in shares of the Fund. Full details as to
each of such services can be obtained from the Trust, the Distributor or
Merrill Lynch.
INVESTMENT ACCOUNT
Each shareholder whose account is maintained at the Transfer Agent has an
Investment Account and will receive quarterly statements from the Transfer
Agent. These quarterly statements will serve as transaction confirmations for
automatic investment purchases and the reinvestment of income dividends and
long-term capital gain distributions. The quarterly 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
income dividends and long-term capital gain distributions. 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 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. If the new brokerage firm is willing to accommodate the
shareholder in this manner, the shareholder must request that he be issued
certificates for his shares, and then must turn the certificates over to the
new firm for re-registration as described in the preceding sentence. A
shareholder may make additions to his Investment Account at any time by mailing
a check directly to the Transfer Agent.
Share certificates are issued only for full shares and only upon the specific
request of the shareholder who has an Investment Account. Issuance of
certificates representing all or only part of the full shares in an Investment
Account may be requested by a shareholder directly from the Transfer Agent.
AUTOMATIC INVESTMENT PLAN
A shareholder may make additions to an Investment Account at any time by
purchasing Class A shares (if an eligible Class A investor as described in the
Prospectus) or Class B, Class C or Class D shares at the
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applicable public offering price either through the shareholder's securities
dealer, or by mail directly to the Transfer Agent, acting as agent for such
securities dealers. Voluntary accumulation also can be made through a service
known as the Automatic Investment Plan whereby the Fund is authorized through
pre-authorized checks or 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. The
Fund's Automatic Investment Program is not available to shareholders whose
shares are held in a brokerage account with Merrill Lynch. Alternatively,
investors who maintain CMA (R) accounts may arrange to have periodic
investments made in the Fund in their CMA (R) account or in certain related
accounts in amounts of $100 or more through the CMA (R) Automatic Investment
Program.
AUTOMATIC REINVESTMENT OF DIVIDENDS AND CAPITAL GAINS DISTRIBUTIONS
Unless specific instructions are given as to the method of payment of
dividends and capital gains distributions, dividends and distributions will be
reinvested automatically in additional shares of the Fund. Such reinvestment
will be at the net asset value of shares of the Fund as of the close of
business on the monthly payment date for such dividends and distributions.
Shareholders may elect in writing to receive either their income dividends or
capital gains distributions, or both, in cash, in which event payment will be
mailed on or about the payment date.
Shareholders may, at any time, notify the Transfer Agent in writing or by
telephone (1-800-MER-FUND) that they no longer wish to have their dividends
and/or capital gains distributions reinvested in shares of the Fund or vice
versa and, commencing ten days after the receipt by the Transfer Agent of such
notice, such instructions will be effected.
SYSTEMATIC WITHDRAWAL PLANS--CLASS A AND CLASS D SHARES
A Class A or Class D shareholder may elect to make systematic withdrawals
from an Investment Account on either a monthly or quarterly basis as provided
below. Quarterly withdrawals are available for shareholders who have acquired
Class A or Class D 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 Class A or Class D shares with such a value of
$10,000 or more.
At the time of each withdrawal payment, sufficient Class A or Class D shares
are redeemed from those on deposit in the shareholder's account to provide the
withdrawal payment specified by the shareholder. The shareholder may specify
either a dollar amount or a percentage of the value of his Class A or Class D
shares. Redemptions will be made at net asset value as determined at the normal
close of business on the New York Stock Exchange (currently 4:15 P.M., New York
City time) on the 24th day of each month or the 24th day of the last month of
each quarter, whichever is applicable. If the Exchange is not open for business
on such date, the Class A or Class D shares will be redeemed at the close of
business on the following business day. The check for the withdrawal payment
will be mailed, or the direct deposit for the withdrawal payment will be made,
on the next business day following redemption. When a shareholder is making
systematic withdrawals, dividends and distributions on all Class A or Class D
shares in the Investment Account are reinvested automatically in the Fund's
Class A or Class D shares, respectively. A shareholder's Systematic Withdrawal
Plan may be terminated at any time, without charge or penalty, by the
shareholder, the Trust, the Transfer Agent or the Distributor. Withdrawal
payments should not be considered as dividends, yield or income. Each
withdrawal is a taxable event. If periodic withdrawals continuously exceed
reinvested dividends, the shareholder's original investment may be reduced
correspondingly. Purchases of additional
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Class A or Class D shares concurrent with withdrawals are ordinarily
disadvantageous to the shareholder because of sales charges and tax
liabilities. The Trust will not knowingly accept purchase orders for Class A or
Class D shares of the Fund from investors who maintain a Systematic Withdrawal
Plan unless such purchase is equal to at least one year's scheduled withdrawals
or $1,200, whichever is greater. Periodic investments may not be made into an
Investment Account in which the shareholder has elected to make systematic
withdrawals.
A Class A or Class D shareholder whose shares are held within a CMA(R),
CBA(R) or Retirement Account may elect to have shares redeemed on a monthly,
bimonthly, quarterly, semiannual or annual basis through the Systematic
Redemption Program. The minimum fixed dollar amount redeemable is $25. The
proceeds of systematic redemptions will be posted to the shareholder's account
five business days after the date the shares are redeemed. Monthly systematic
redemptions will be made at net asset value on the first Monday of each month,
bimonthly systematic redemption will be made at net asset value on the first
Monday of every other month, and quarterly, semiannual or annual redemptions
are made at net asset value on the first Monday of months selected at the
shareholder's option. If the first Monday of the month is a holiday, the
redemption will be processed at net asset value on the next business day. The
Systematic Redemption Program is not available if Company shares are being
purchased within the account pursuant to the Automatic Investment Program. For
more information on the Systematic Redemption Program, eligible shareholders
should contact their Financial Consultant.
EXCHANGE PRIVILEGE
Shareholders of each class of shares of the Fund have an exchange privilege
with certain other MLAM-advised mutual funds listed below. Under the Select
Pricing 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 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 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
will be 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 also will be exchangeable for shares of
certain MLAM-advised money market funds specifically designated below as
available for exchange by holders of Class A, Class B, Class C or Class D
shares. 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 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
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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 the Class A and Class D 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
offers to exchange its Class B or Class C shares ("outstanding Class B or Class
C shares") for Class B or Class C shares, respectively ("new Class B or Class C
shares"), of any of the other funds on the basis of relative net asset value
per Class B or Class C share, without the payment of any CDSC that might
otherwise be due on redemption of the outstanding shares. Class B shareholders
of the Fund exercising the exchange privilege will continue to be subject to
the Fund's CDSC schedule if such schedule is higher than the CDSC schedule
relating to the new Class B shares acquired through use of the exchange
privilege. In addition, Class B shares of the Fund acquired through use of the
exchange privilege will be subject to the Fund's CDSC schedule if such schedule
is higher than the CDSC schedule relating to the Class B shares of the fund
from which the exchange has been made. For purposes of computing the sales
charge that may be payable on a disposition of the new Class B or Class C
shares, the holding period for the outstanding Class B or Class C shares is
"tacked" to the holding period of the new Class B or Class C shares. For
example, an investor may exchange Class B shares of the Fund for those of
Merrill Lynch Special Value Fund, Inc. ("Special Value Fund") after having held
the Fund's Class B shares for two and a half years. The 2% sales load that
generally would apply to a redemption would not apply to the exchange. Three
years later the investor may decide to redeem the Class B shares of 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 new Class B shares for
more than five years.
Shareholders also may exchange shares of the Fund into shares of a money
market fund 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 which 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 fund will be aggregated with previous holding periods for
purposes of reducing the CDSC. Thus, for example, an investor may exchange
Class B shares of the Fund for shares of Merrill Lynch Institutional Fund after
having held the Class B shares for two and a half years and three years later
decide to redeem the shares of Merrill Lynch Institutional Fund for cash. At
the time of this redemption, the 2% CDSC that would have been due had the Class
B shares of the Fund been redeemed for cash rather than exchanged for shares of
Merrill Lynch Institutional Fund will be payable. If, instead of such
redemption the shareholder exchanged such shares for Class B shares of a fund
which the shareholder continues to hold for an additional two and a half years,
any subsequent redemption will not incur a CDSC.
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<PAGE>
Set forth below is a description of the investment objectives of the other
funds into which exchanges can be made:
Funds issuing Class A, Class B, Class C and Class D Shares:
Merrill Lynch Adjustable
Rate Securities Fund,
Inc. ..................... High current income consistent with a policy of
limiting the degree of fluctuation in net asset
value by investing primarily in a portfolio of
adjustable rate securities, consisting
principally of mortgage-backed and asset-backed
securities.
Merrill Lynch Americas
Income Fund, Inc. ........
A high level of current income, consistent with
prudent investment risk, by investing primarily
in debt securities denominated in a currency of
a country located in the Western Hemisphere
(i.e., North and South America and the
surrounding waters).
Merrill Lynch Arizona
Limited Maturity
Municipal Bond Fund ......
A portfolio of Merrill Lynch Multi-State Limited
Maturity Municipal Series Trust, a series fund,
whose objective is to provide as high a level of
income exempt from Federal and Arizona income
taxes as is consistent with prudent investment
management through investment in a portfolio
primarily of intermediate-term investment grade
Arizona Municipal Bonds.
Merrill Lynch Arizona
Municipal Bond Fund.......
A portfolio of Merrill Lynch Multi-State
Municipal Series Trust, a series fund, whose
objective is to provide investors with as high a
level of income exempt from Federal and Arizona
income taxes as is consistent with prudent
investment management.
Merrill Lynch Balanced
Fund for Investment and
Retirement ...............
As high a level of total investment return as is
consistent with reasonable risk by investing in
common stock and other types of securities,
including fixed income securities and
convertible securities.
Merrill Lynch Basic Value
Fund, Inc. ...............
Capital appreciation and, secondarily, income
through investment in securities, primarily
equities, that are undervalued and therefore
represent basic investment value.
Merrill Lynch California
Insured Municipal Bond
Fund......................
A portfolio of Merrill Lynch California Municipal
Series Trust, a series fund, whose objective is
to provide shareholders with as high a level of
income exempt from Federal and California income
taxes as is consistent with prudent investment
management through investment in a portfolio
primarily of insured California Municipal Bonds.
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<PAGE>
Merrill Lynch California
Limited Maturity
Municipal Bond Fund.......
A portfolio of Merrill Lynch Multi-State Limited
Maturity Municipal Series Trust, a series fund,
whose objective is to provide shareholders with
as high a level of income exempt from Federal
and California income taxes as is consistent
with prudent investment management through
investment in a portfolio primarily of
intermediate-term investment grade California
Municipal Bonds.
Merrill Lynch California
Municipal Bond Fund ......
A portfolio of Merrill Lynch California Municipal
Series Trust, a series fund, whose objective is
to provide investors with as high a level of
income exempt from Federal and California income
taxes as is consistent with prudent investment
management.
Merrill Lynch Capital
Fund, Inc. ...............
The highest total investment return consistent
with prudent risk through a fully managed
investment policy utilizing equity, debt and
convertible securities.
Merrill Lynch Colorado
Municipal Bond Fund.......
A portfolio of Merrill Lynch Multi-State
Municipal Series Trust, a series fund, whose
objective is as high a level of income exempt
from Federal and Colorado income taxes as is
consistent with prudent investment management.
Merrill Lynch Connecticut
Municipal Bond Fund.......
A portfolio of Merrill Lynch Multi-State
Municipal Series Trust, a series fund, whose
objective is as high a level of income exempt
from Federal and Connecticut income taxes as is
consistent with prudent investment management.
Merrill Lynch Corporate
Bond Fund, Inc. ..........
Current income from three separate diversified
portfolios of fixed income securities.
Merrill Lynch Developing
Capital Markets Fund,
Inc. .....................
Long-term appreciation through investment in
securities, principally equities, of issuers in
countries having smaller capital markets.
Merrill Lynch Dragon Fund,
Inc. .....................
Capital appreciation primarily through investment
in equity and debt securities of issuers
domiciled in developing countries located in
Asia and the Pacific Basin, other than Japan,
Australia and New Zealand.
Merrill Lynch EuroFund.....
Capital appreciation primarily through investment
in equity securities of corporations domiciled
in Europe.
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Merrill Lynch Federal
Securities Trust .........
High current return through investments in U.S.
Government and Government agency securities,
including GNMA mortgage-backed certificates and
other mortgage-backed Government securities.
Merrill Lynch Florida
Limited Maturity
Municipal Bond Fund.......
A portfolio of Merrill Lynch Multi-State Limited
Maturity Municipal Series Trust, a series fund,
whose objective is as high a level of income
exempt from Federal income taxes as is
consistent with prudent investment management
while seeking to offer shareholders the
opportunity to own securities exempt from
Florida intangible personal property taxes
through investment in a portfolio primarily of
intermediate-term investment grade Florida
Municipal Bonds.
Merrill Lynch Florida
Municipal Bond Fund ......
A portfolio of Merrill Lynch Multi-State
Municipal Series Trust, a series fund, whose
objective is as high a level of income exempt
from Federal income taxes as is consistent with
prudent investment management while seeking to
offer shareholders the opportunity to own
securities exempt from Florida intangible
personal property taxes.
Merrill Lynch Fund For
Tomorrow, Inc.............
Long-term growth through investment in a portfo-
lio of good quality securities, primarily common
stock, potentially positioned to benefit from
demographic and cultural changes as they affect
consumer markets.
Merrill Lynch Fundamental
Growth Fund, Inc. ........
Long-term growth through investment in a
diversified portfolio of equity securities
placing particular emphasis on companies that
have exhibited above-average growth rates in
earnings.
Merrill Lynch Global
Allocation Fund, Inc......
High total return, consistent with prudent risk,
through a fully managed investment policy util-
izing United States and foreign equity, debt and
money market securities, the combination of
which will be varied from time to time both with
respect to the types of securities and markets
in response to changing market and economic
trends.
Merrill Lynch Global Bond
Fund for Investment and
Retirement................
High total investment return from investment in a
global portfolio of debt instruments denominated
in various currencies and multi-national cur-
rency units.
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<PAGE>
Merrill Lynch Global
Convertible Fund, Inc.....
High total return from investment primarily in an
internationally diversified portfolio of con-
vertible debt securities, convertible preferred
stock and "synthetic" convertible securities
consisting of a combination of debt securities
or preferred stock and warrants or options.
Merrill Lynch Global
Holdings (residents of
Arizona must meet
investor suitability
standards) ...............
The highest total investment return consistent
with prudent risk through worldwide investment
in an internationally diversified portfolio of
securities.
Merrill Lynch Global
Resources Trust...........
Long-term growth and protection of capital from
investment in securities of domestic and foreign
companies that possess substantial natural re-
source assets.
Merrill Lynch Global
SmallCap Fund, Inc. ......
Long-term growth of capital by investing primar-
ily in equity securities of companies with rela-
tively small market capitalizations located in
various foreign countries and in the United
States.
Merrill Lynch Global
Utility Fund, Inc.........
Capital appreciation and current income through
investment of at least 65% of its total assets
in equity and debt securities issued by domestic
and foreign companies which are primarily en-
gaged in the ownership or operation of facili-
ties used to generate, transmit or distribute
electricity, telecommunications, gas or water.
Merrill Lynch Growth Fund
for Investment and
Retirement................
Growth of capital and, secondarily, income from
investment in a diversified portfolio of equity
securities placing principal emphasis on those
securities which management of the fund believes
to be undervalued.
Merrill Lynch Healthcare
Fund, Inc. (residents of
Wisconsin must meet
investor suitability
standards)................
Capital appreciation through worldwide investment
in equity securities of companies that derive or
are expected to derive a substantial portion of
their sales from products and services in
healthcare.
Merrill Lynch
International Equity
Fund......................
Capital appreciation and, secondarily, income by
investing in a diversified portfolio of equity
securities of issuers located in countries other
than the United States.
Merrill Lynch Latin
America Fund, Inc. .......
Capital appreciation by investing primarily in
Latin American equity and debt securities.
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<PAGE>
Merrill Lynch Maryland
Municipal Bond Fund.......
A portfolio of Merrill Lynch Multi-State Munici-
pal Series Trust, a series fund, whose objective
is as high a level of income exempt from Federal
and Maryland income taxes as is consistent with
prudent investment management.
Merrill Lynch
Massachusetts Limited
Maturity Municipal Bond
Fund......................
A portfolio of Merrill Lynch Multi-State Limited
Maturity Municipal Series Trust, a series fund,
whose objective is as high a level of income ex-
empt from Federal and Massachusetts income taxes
as is consistent with prudent investment manage-
ment through investment in a portfolio primarily
of intermediate-term investment grade Massachu-
setts Municipal Bonds.
Merrill Lynch
Massachusetts Municipal
Bond Fund................. A portfolio of Merrill Lynch Multi-State Munici-
pal Series Trust, a series fund, whose objective
is as high a level of income exempt from Federal
and Massachusetts income taxes as is consistent
with prudent investment management.
Merrill Lynch Michigan
Limited Maturity
Municipal Bond Fund.......
A portfolio of Merrill Lynch Multi-State Limited
Maturity Municipal Series Trust, a series fund,
whose objective is as high a level of income ex-
empt from Federal and Michigan income taxes as
is consistent with prudent investment management
through investment in a portfolio primarily of
intermediate-term investment grade Michigan Mu-
nicipal Bonds.
Merrill Lynch Michigan
Municipal Bond Fund.......
A portfolio of Merrill Lynch Multi-State
Municipal Series Trust, a series fund, whose
objective is as high a level of income exempt
from Federal and Michigan income taxes as is
consistent with prudent investment management.
Merrill Lynch Minnesota
Municipal Bond Fund.......
A portfolio of Merrill Lynch Multi-State Munici-
pal Series Trust, a series fund, whose objective
is as high a level of income exempt from Federal
and Minnesota income taxes as is consistent with
prudent investment management.
Merrill Lynch Municipal
Bond Fund, Inc............
Tax-exempt income from three separate diversified
portfolios of municipal bonds.
Merrill Lynch Municipal
Intermediate Term Fund....
Currently the only portfolio of Merrill Lynch Mu-
nicipal Series Trust, a series fund, whose ob-
jective is to provide as high a level as possi-
ble of income exempt from Federal income taxes
by investing in investment grade obligations
with a dollar weighted average maturity of five
to twelve years.
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<PAGE>
Merrill Lynch New Jersey
Limited Maturity Munici-
pal Bond Fund.............
A portfolio of Merrill Lynch Multi-State Limited
Maturity Municipal Series Trust, a series fund,
whose objective is as high a level of income ex-
empt from Federal and New Jersey income taxes as
is consistent with prudent investment management
through a portfolio primarily of intermediate-
term investment grade New Jersey Municipal
Bonds.
Merrill Lynch New Jersey
Municipal Bond Fund.......
A portfolio of Merrill Lynch Multi-State Munici-
pal Series Trust, a series fund, whose objective
is as high a level of income exempt from Federal
and New Jersey income taxes as is consistent
with prudent investment management.
Merrill Lynch New Mexico
Municipal Bond Fund.......
A portfolio of Merrill Lynch Multi-State Munici-
pal Series Trust, a series fund, whose objective
is as high a level of income exempt from Federal
and New Mexico income taxes as is consistent
with prudent investment management.
Merrill Lynch New York
Limited Maturity Munici-
pal Bond Fund.............
A portfolio of Merrill Lynch Multi-State Limited
Maturity Municipal Series Trust, a series fund,
whose objective is as high a level of income ex-
empt from Federal, New York State and New York
City income taxes as is consistent with prudent
investment management through investment in a
portfolio primarily of intermediate-term invest-
ment grade New York Municipal Bonds.
Merrill Lynch New York Mu-
nicipal Bond Fund.........
A portfolio of Merrill Lynch Multi-State Munici-
pal Series Trust, a series fund, whose objective
is as high a level of income exempt from Feder-
al, New York State and New York City income
taxes as is consistent with prudent investment
management.
Merrill Lynch North Caro-
lina Municipal Bond Fund..
A portfolio of Merrill Lynch Multi-State Munici-
pal Series Trust, a series fund, whose objective
is as high a level of income exempt from Federal
and North Carolina income taxes as is consistent
with prudent investment management.
Merrill Lynch Ohio Munici-
pal Bond Fund.............
A portfolio of Merrill Lynch Multi-State Munici-
pal Series Trust, a series fund, whose objective
is as high a level of income exempt from Federal
and Ohio income taxes as is consistent with pru-
dent investment management.
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<PAGE>
Merrill Lynch Oregon Mu-
nicipal Bond Fund.........
A portfolio of Merrill Lynch Multi-State Munici-
pal Series Trust, a series fund, whose objective
is as high a level of income exempt from Federal
and Oregon income taxes as is consistent with
prudent investment management.
Merrill Lynch Pacific
Fund, Inc.................
Capital appreciation by investing in equity secu-
rities of corporations domiciled in Far Eastern
and Western Pacific countries, including Japan,
Australia, Hong Kong and Singapore.
Merrill Lynch Pennsylvania
Limited Maturity Munici-
pal Bond Fund.............
A portfolio of Merrill Lynch Multi-State Limited
Maturity Municipal Series Trust, a series fund,
whose objective is to provide as high a level of
income exempt from Federal and Pennsylvania in-
come taxes as is consistent with prudent invest-
ment management through investment in a portfo-
lio of intermediate-term investment grade Penn-
sylvania Municipal Bonds.
Merrill Lynch Pennsylvania
Municipal Bond Fund.......
A portfolio of Merrill Lynch Multi-State Munici-
pal Series Trust, a series fund, whose objective
is as high a level of income exempt from Federal
and Pennsylvania income taxes as is consistent
with prudent investment management.
Merrill Lynch Phoenix
Fund, Inc.................
Long-term growth of capital by investing in eq-
uity and fixed income securities, including tax-
exempt securities, of issuers in weak financial
condition or experiencing poor operating results
believed to be undervalued relative to the cur-
rent or prospective condition of such issuer.
Merrill Lynch Short-Term
Global Income Fund, Inc...
As high a level of current income as is consis-
tent with prudent investment management from a
global portfolio of high quality debt securities
denominated in various currencies and multina-
tional currency units and having remaining matu-
rities not exceeding three years.
Merrill Lynch Special
Value Fund, Inc...........
Long-term growth of capital from investments in
securities, primarily equities, of relatively
small companies believed to have special invest-
ment value and emerging growth companies regard-
less of size.
Merrill Lynch Strategic
Dividend Fund.............
Long-term total return from investment in divi-
dend paying common stocks which yield more than
Standard & Poor's 500 Composite Stock Price In-
dex.
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<PAGE>
Merrill Lynch Technology
Fund, Inc.................
Capital appreciation through worldwide investment
in equity securities of companies that derive or
are expected to derive a substantial portion of
their sales from products and services in tech-
nology.
Merrill Lynch Texas
Municipal Bond Fund.......
A portfolio of Merrill Lynch Multi-State Munici-
pal Series Trust, a series fund, whose objective
is as high a level of income exempt from Federal
income taxes as is consistent with prudent in-
vestment management by investing primarily in a
portfolio of long-term, investment grade obliga-
tions issued by the State of Texas, its politi-
cal subdivisions, agencies and instrumentali-
ties.
Merrill Lynch Utility In-
come Fund, Inc............
High current income through investment in equity
and debt securities issued by companies which
are primarily engaged in the ownership or opera-
tion of facilities used to generate, transmit or
distribute electricity, telecommunications, gas
or water.
Merrill Lynch World Income
Fund, Inc. ...............
High current income by investing in a global
portfolio of fixed income securities denominated
in various currencies, including multinational
currencies.
Class A Share Money Market Funds:
Merrill Lynch Ready Assets
Trust.....................
Preservation of capital, liquidity and the high-
est possible current income consistent with the
foregoing objectives from the short-term money
market securities in which the Trust invests.
Merrill Lynch Retirement
Reserves Money Fund
(available only if the
exchange occurs within
certain retirement
plans)....................
Currently the only portfolio of Merrill Lynch Re-
tirement Series Trust, a series fund, whose ob-
jectives are current income, preservation of
capital and liquidity available from investing
in a diversified portfolio of short-term money
market securities.
Merrill Lynch U.S.A.
Government Reserves.......
Preservation of capital, current income and li-
quidity available from investing in direct obli-
gations of the U.S. Government and repurchase
agreements relating to such securities.
Merrill Lynch U.S.
Treasury Money Fund.......
Preservation of capital, liquidity and current
income through investment exclusively in a di-
versified portfolio of short-term marketable se-
curities which are direct obligations of the
U.S. Treasury.
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<PAGE>
Class B, Class C and Class D Share Money Market Funds:
Merrill Lynch Government
Fund......................
A portfolio of Merrill Lynch Funds For Institu-
tions Series, a series fund, whose objective is
to provide current income consistent with li-
quidity and security of principal from invest-
ment in securities issued or guaranteed by the
U.S. Government, its agencies and instrumentali-
ties and in repurchase agreements secured by
such obligations.
Merrill Lynch
Institutional Fund........
A portfolio of Merrill Lynch Funds For Institu-
tions Series, a series fund, whose objective is
to provide maximum current income consistent
with liquidity and the maintenance of a high
quality portfolio of money market securities.
Merrill Lynch
Institutional Tax-Exempt
Fund......................
A portfolio of Merrill Lynch Funds for Institu-
tions Series, a series fund, whose objective is
to provide current income exempt from Federal
income taxes, preservation of capital and li-
quidity available from investing in a diversi-
fied portfolio of short-term, high quality mu-
nicipal bonds.
Merrill Lynch Treasury A portfolio of Merrill Lynch Funds For Institu-
Fund...................... tions Series, a series fund, whose objective is
to provide current income consistent with li-
quidity and security of principal from invest-
ment in direct obligations of the U.S. Treasury
and up to 10% of its total assets in repurchase
agreements secured by such obligations.
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, shareholders should contact their Merrill
Lynch financial consultant, who will advise the Fund of the exchange.
Shareholders of the Fund, and shareholders of the other funds described above
with shares for which certificates have not been issued, may exercise the
exchange privilege by wire through their securities dealers. The Fund reserves
the right to require a properly completed Exchange Application. This exchange
privilege may be modified or terminated at any time in accordance with the
rules of the Commission. The Fund reserves the right to limit the number of
times an investor may exercise the exchange privilege. Certain funds may
suspend the continuous offering of their shares to the general public at any
time and may thereafter resume such offering from time to time. The exchange
privilege is available only to U.S. shareholders in states where the exchange
legally may be made.
DISTRIBUTIONS AND TAXES
The Trust intends to elect and to qualify the Fund for the special tax
treatment afforded regulated investment companies ("RICs") under the Internal
Revenue Code of 1986, as amended (the "Code"). If it so qualifies, in any
taxable year in which it distributes at least 90% of its taxable net income and
90% of its tax-exempt net income (see below), the Fund (but not its
shareholders) will not be subject to Federal income tax to the extent that it
distributes its net investment income and net realized capital gains. The Trust
intends to cause the Fund to distribute substantially all of such income.
37
<PAGE>
As discussed in the Fund's Prospectus, the Trust has established other
series in addition to the Fund (together with the Fund, the "Series"). Each
Series of the Trust is treated as a separate corporation for Federal income
tax purposes. Each Series, therefore, is considered to be a separate entity in
determining its treatment under the rules for RICs described in the
Prospectus. Losses in one Series do not offset gains in another Series, and
the requirements (other than certain organizational requirements) for
qualifying for RIC status are determined at the Series level rather than at
the Trust level.
The Code requires a RIC to pay a nondeductible 4% excise tax to the extent
the RIC does not distribute, during each calendar year, 98% of its ordinary
income, determined on a calendar year basis, and 98% of its capital gains,
determined, in general, on an October 31 year end, plus certain undistributed
amounts from previous years. The required distributions, however, are based
only on the taxable income of a RIC. The excise tax, therefore, generally will
not apply to the tax-exempt income of a RIC, such as the Fund, that pays
exempt-interest dividends.
The Trust intends to qualify the Fund to pay "exempt-interest dividends" as
defined in Section 852(b)(5) of the Code. Under such section if, at the close
of each quarter of the Fund's taxable year, at least 50% of the value of the
Fund's total assets consists of obligations exempt from Federal income tax
("tax-exempt obligations") under Section 103(a) of the Code (relating
generally to obligations of a state or local governmental unit), the Fund
shall be qualified to pay exempt-interest dividends to its Class A, Class B,
Class C and Class D shareholders (together, the "shareholders"). Exempt-
interest dividends are dividends or any part thereof paid by the Fund which
are attributable to interest on tax-exempt obligations and designated by the
Trust as exempt-interest dividends in a written notice mailed to the Fund's
shareholders within 60 days after the close of the Fund's taxable year. For
this purpose, the Fund will allocate interest from tax-exempt obligations (as
well as ordinary income, capital gains and tax preference items, discussed
below) among the Class A, Class B, Class C and Class D shareholders according
to a method (which it believes is consistent with the Commission's exemptive
order 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 Alabama 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 Alabama Municipal Bonds will also be exempt from
Alabama income tax. Shareholders subject to income taxation in states other
than Alabama will realize a lower after-tax rate of return than Alabama
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
38
<PAGE>
the Fund's distributions which constitutes exempt-interest dividends and the
portion which is exempt from Alabama income taxes. The Trust will allocate
exempt-interest dividends among Class A, Class B, Class C and Class D
shareholders for Alabama income tax purposes based on a method similar to that
described above for Federal income tax purposes.
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 income tax purposes. Such distributions
are not eligible for the dividends received deduction for corporations.
Distributions, if any, of net long-term capital gains from the sale of
securities or from certain transactions in futures or options ("capital gain
dividends") are taxable as long-term capital gains for Federal income tax
purposes, regardless of the length of time the shareholder has owned Fund
shares. Under the Revenue Reconciliation Act of 1993, all or a portion of the
Fund's gain from the sale or redemption of tax-exempt obligations purchased at
a market discount will be treated as ordinary income rather than capital gain.
This rule may increase the amount of ordinary income dividends received by
shareholders. Distributions in excess of the Fund's earnings and profits will
first reduce the adjusted tax basis of a holder's shares and, after such
adjusted tax basis is reduced to zero, will constitute capital gains to such
holder (assuming the shares are held as a capital asset). Any loss upon the
sale or exchange of Fund shares held for six months or less, however, will be
treated as long-term capital loss to the extent of capital gain dividends
received by the shareholder. In addition, such loss will be disallowed to the
extent of any exempt-interest dividends received by the shareholder. If the
Fund pays a dividend in January which was declared in the previous October,
November or December to shareholders of record on a specific date in one of
such months, then such dividend will be treated for tax purposes as being paid
by the Fund and received by its shareholders on December 31 of the year in
which such dividend was declared.
The Code subjects interest received on certain otherwise tax-exempt
securities to an alternative minimum tax. The alternative minimum tax applies
to interest received on "private activity bonds" issued after August 7, 1986.
Private activity bonds are bonds which, although tax-exempt, are used for
purposes other than those generally performed by governmental units and which
benefit non-governmental entities (e.g., bonds used for industrial development
or housing purposes). Income received on such bonds is classified as an item
of "tax preference," which could subject investors in such bonds, including
shareholders of the Fund, to an alternative minimum tax. The Fund will
purchase such "private activity bonds," and the Trust will report to
shareholders within 60 days after the Fund's taxable year-end the portion of
the Fund's dividends declared during the year which constitutes an item of tax
preference for alternative minimum tax purposes. The Code further provides
that corporations are subject to an alternative minimum tax based, in part, on
certain differences between taxable income as adjusted for other tax
preferences and the corporation's "adjusted current earnings," which more
closely reflect a corporation's economic income. Because an exempt-interest
dividend paid by the Fund will be included in adjusted current earnings, a
corporate shareholder may be required to pay alternative minimum tax on
exempt-interest dividends paid by the Fund.
The Revenue Reconciliation Act of 1993 has added new marginal tax brackets
of 36% and 39.6% for individuals and has created a graduated structure of 26%
and 28% for the alternative minimum tax applicable to individual taxpayers.
These rate increases may affect an individual investor's after-tax return from
an investment in the Fund as compared with such investor's return from taxable
investments.
No gain or loss will be recognized by Class B shareholders on the conversion
of their Class B shares for Class D shares. A shareholder's basis in the Class
D shares acquired will be the same as such shareholder's
39
<PAGE>
basis in the Class B shares exchanged, and the holding period of the acquired
Class D shares will include the holding period for the exchanged 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 the sales charge paid to the Fund
reduces any sales charge such shareholder would have owed upon purchase of the
new shares in the absence of the exchange privilege. Instead, such sales charge
will be treated as an amount paid for the new shares.
A loss realized on a sale or exchange of shares of the Fund will be
disallowed if other Fund shares are acquired (whether through the automatic
reinvestment of dividends or otherwise) within a 61-day period beginning 30
days before and ending 30 days after the date that the shares are disposed of.
In such a case, the basis of the shares acquired will be adjusted to reflect
the disallowed loss.
Ordinary income dividends paid by the Fund to shareholders who are
nonresident aliens or foreign entities will be subject to a 30% United States
withholding tax under existing provisions of the Code applicable to foreign
individuals and entities unless a reduced rate of withholding or a withholding
exemption is provided under applicable treaty law. Nonresident shareholders are
urged to consult their own tax advisers concerning the applicability of the
United States withholding tax.
Under certain provisions of the Code, some shareholders may be subject to a
31% withholding tax on certain ordinary income dividends and on capital gain
dividends and redemption payments ("backup withholding"). Generally,
shareholders subject to backup withholding will be those for whom no certified
taxpayer identification number is on file with the Trust or who, to the Trust's
knowledge, have furnished an incorrect number. When establishing an account, an
investor must certify under penalty of perjury that such number is correct and
that such 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.
ENVIRONMENTAL TAX
The Code imposes a deductible tax (the "Environmental Tax") on a
corporation's modified alternative minimum taxable income (computed without
regard to the alternative tax net operating loss deduction and the deduction
for the Environmental Tax) at a rate of $12 per $10,000 (0.12%) of alternative
minimum taxable income in excess of $2,000,000. The Environmental Tax is
imposed for taxable years beginning after December 31, 1986 and before January
1, 1996. The Environmental Tax is imposed even if the corporation is not
required to pay an alternative minimum tax because the corporation's regular
income tax liability exceeds its minimum tax liability. The Code provides,
however, that a RIC, such as the Fund, is not subject to the Environmental Tax.
However, exempt-interest dividends paid by the Fund that create alternative
minimum tax preferences for corporate shareholders under the Code (as described
above) may subject corporate shareholders of the Fund to the Environmental Tax.
TAX TREATMENT OF OPTIONS AND FUTURES TRANSACTIONS
The Fund may purchase or sell municipal bond index futures contracts and
interest rate futures contracts on U.S. Government securities ("financial
futures contracts"). The Fund may also purchase and write call
40
<PAGE>
and put options on such financial futures contracts. In general, unless an
election is available to the Fund or an exception applies, such options and
financial futures contracts that are "Section 1256 contracts" will be "marked
to market" for Federal income tax purposes at the end of each taxable year,
i.e., each such option or financial futures contract will be treated as sold
for its fair market value on the last day of the taxable year, and any gain or
loss attributable to Section 1256 contracts will be 60% long-term and 40%
short-term capital gain or loss. Application of these rules to Section 1256
contracts held by the Fund may alter the timing and character of distributions
to shareholders.
Code Section 1092, which applies to certain "straddles," may affect the
taxation of the Fund's transactions in options and financial futures contracts.
Under Section 1092, the Fund may be required to postpone recognition for tax
purposes of losses incurred in certain closing transactions in options and
financial futures contracts.
One of the requirements for qualification as a RIC is that less than 30% of
the Fund's gross income must be derived from gains from the sale or other
disposition of securities held for less than three months. Accordingly, the
Fund may be restricted in effecting closing transactions within three months
after entering into an option or financial futures contract.
----------------
The foregoing is a general and abbreviated summary of the applicable
provisions of the Code, Treasury regulations and Alabama 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 Alabama tax laws. The Code and the Treasury regulations, as well as
the Alabama tax laws, are subject to change by legislative or administrative
action either prospectively or retroactively.
Shareholders are urged to consult their own tax advisers regarding the
availability of any exemptions from state or local taxes (other than those
imposed by Alabama) and with specific questions as to Federal, state, local or
foreign taxes.
PERFORMANCE DATA
From time to time the Fund may include its average annual total return and
other total return data, as well as yield and tax-equivalent yield, in
advertisements or information furnished to present or prospective shareholders.
Total return and yield and tax-equivalent yield figures are based on the Fund's
historical performance and are not intended to indicate future performance.
Average annual total return and yield are determined separately for Class A,
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.
41
<PAGE>
The Fund also may quote annual, average annual and annualized total return
and aggregate total return performance data, both as a percentage and as a
dollar amount based on a hypothetical $1,000 investment, for various periods
other than those noted below. Such data will be computed as described above,
except that (1) as required by the periods of the quotations, actual annual,
annualized or aggregate data, rather than average annual data, may be quoted
and (2) the maximum applicable sales charges will not be included with respect
to annual or annualized rates of return calculations. Aside from the impact on
the performance data calculations of including or excluding the maximum
applicable sales charges, actual annual or annualized total return data
generally will be lower than average annual total return data since the average
rates of return reflect compounding of return; aggregate total return data
generally will be higher than average annual total return data since the
aggregate rates of return reflect compounding over a longer period of time.
In order to reflect the reduced sales charges in the case of Class A or Class
D shares or the waiver of the CDSC in the case of Class B or Class C shares
applicable to certain investors, as described under "Purchase of Shares" and
"Redemption of Shares", respectively, the total return data quoted by the Fund
in advertisements directed to such investors may take into account the reduced,
and not the maximum, sales charge or may take into account the CDSC and
therefore may reflect greater total return since, due to the reduced sales
charge or the waiver of sales charges, a lower amount of expenses is deducted.
GENERAL INFORMATION
DESCRIPTION OF SHARES
The Declaration of Trust provides that the Trust shall be comprised of
separate Series each of which will consist of a separate portfolio which will
issue separate shares. The Trust is presently comprised of the Fund, Merrill
Lynch Arizona Municipal Bond Fund, Merrill Lynch Colorado Municipal Bond Fund,
Merrill Lynch Connecticut Municipal Bond Fund, Merrill Lynch Florida Municipal
Bond Fund, Merrill Lynch Maryland Municipal Bond Fund, Merrill Lynch
Massachusetts Municipal Bond Fund, Merrill Lynch Michigan Municipal Bond Fund,
Merrill Lynch Minnesota Municipal Bond Fund, Merrill Lynch New Jersey Municipal
Bond Fund, Merrill Lynch New Mexico Municipal Bond Fund, Merrill Lynch New York
Municipal Bond Fund, Merrill Lynch North Carolina Municipal Bond Fund, Merrill
Lynch Ohio Municipal Bond Fund, Merrill Lynch Oregon Municipal Bond Fund,
Merrill Lynch Pennsylvania Municipal Bond Fund and Merrill Lynch Texas
Municipal Bond Fund. The Trustees are authorized to create an unlimited number
of Series and, with respect to each Series, to issue an unlimited number of
full and fractional shares of beneficial interest, par value $.10 per share, of
different classes and to divide or combine the shares into a greater or lesser
number of shares without thereby changing the proportionate beneficial
interests in the Series. Shareholder approval is not necessary for the
authorization of additional Series or classes of a Series of the Trust. At the
date of this Statement of Additional Information, the shares of the Fund are
divided into Class A, Class B, Class C and Class D shares. Class A, Class B,
Class C and Class D shares represent an interest in the same assets of the Fund
and are identical in all respects except that the 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 Trust has received an order ("the Order") from the Commission permitting
the issuance and sale of multiple classes of shares. The Order permits the
Trust to issue additional classes of shares of any Series if the Board of
Trustees deems such issuance to be in the best interest of the Trust.
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<PAGE>
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 being borne solely by such class. Each
issued and outstanding share is entitled to one vote and to participate equally
in dividends and distributions declared by the Fund and in the net assets of
such Series upon liquidation or dissolution remaining after satisfaction of
outstanding liabilities, except that, as noted above, expenses related to the
account maintenance and/or distribution of the Class B, Class C and Class D
shares will be borne solely by such class. There normally will be no meeting of
shareholders for the purposes of electing Trustees unless and until such time
as less than a majority of the Trustees holding office have been elected by
shareholders, at which time the Trustees then in office will call a
shareholders' meeting for the election of Trustees. Shareholders may, in
accordance with the terms of the Declaration of Trust, cause a meeting of
shareholders to be held for the purpose of voting on the removal of Trustees.
Also, the Trust will be required to call a special meeting of shareholders in
accordance with the requirements of the 1940 Act to seek approval of new
management and advisory arrangements, of a material increase in distribution
fees or of a change in the fundamental policies, objectives or restrictions of
a Series.
The obligations and liabilities of a particular Series are restricted to the
assets of that Series and do not extend to the assets of the Trust generally.
The shares of each Series, when issued, will be fully paid and nonassessable,
have no preference, preemptive, conversion, exchange or similar rights, and are
freely transferable. Holders of shares of any Series are entitled to redeem
their shares as set forth elsewhere herein and in the Prospectus. Shares do not
have cumulative voting rights and the holders of more than 50% of the shares of
the Trust voting for the election of Trustees can elect all of the Trustees if
they choose to do so and in such event the holders of the remaining shares
would not be able to elect any Trustees. No amendments may be made to the
Declaration of Trust without the affirmative vote of a majority of the
outstanding shares of the Trust.
The Manager provided the initial capital for the Fund by purchasing 10,000
shares of the Fund for $100,000. Such shares were acquired for investment and
can only be disposed of by redemption. The organizational expenses of the Fund
(estimated at approximately $ ) will be paid by the Fund and amortized
over a period not exceeding five years. The proceeds realized by the Manager
(or any subsequent holder) upon the redemption of any of the shares initially
purchased by it will be reduced by the proportionate amount of unamortized
organizational expenses which the number of shares redeemed bears to the number
of shares initially purchased. Such organizational expenses include certain of
the initial organizational expenses of the Trust which have been allocated to
the Fund by the Trustees. If additional Series are added to the Trust, the
organizational expenses will be allocated among the Series in a manner deemed
equitable by the Trustees.
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<PAGE>
COMPUTATION OF OFFERING PRICE PER SHARE
An illustration of the computation of the offering price for Class A, Class
B, Class C and Class D shares of the Fund based on the projected value of the
Fund's estimated net assets and projected number of shares outstanding on the
date its shares are first offered for sale to public investors is as follows:
TABLE*
<TABLE>
<CAPTION>
CLASS A CLASS B CLASS C CLASS D
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Net Assets...................... $25,000.00 $25,000.00 $25,000.00 $25,000.00
Number of Shares Outstanding.... 2,500 2,500 2,500 2,500
========== ========== ========== ==========
Net Asset Value Per Share (net
assets divided by number of
shares outstanding)............ $ 10.00 $ 10.00 $ 10.00 $ 10.00
Sales Charge (for Class A and
Class D shares: 4.00% of offer-
ing price (4.17% of net asset
value per share))*............. $ .42 $ ** $ ** $ .42
---------- ---------- ---------- ----------
Offering Price.................. $ 10.42 $ 10.00 $ 10.00 $ 10.42
========== ========== ========== ==========
</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. See "Purchase of Shares--Deferred
Sales Charge Alternatives--Class B and Class C Shares" in the Prospectus.
INDEPENDENT AUDITORS
, has been selected as the independent
auditors of the Fund. The selection of independent auditors is subject to
ratification by the shareholders of the Fund. In addition, the employment of
such auditors may be terminated without any penalty by vote of a majority of
the outstanding shares of the Trust at a meeting called for the purpose of
terminating such employment. The independent auditors are responsible for
auditing the annual financial statements of the Fund.
CUSTODIAN
National Westminster Bank NJ, 100 Wall Street, 20th Floor, New York, New York
10005, acts as the custodian of the Fund's assets. The custodian is responsible
for safeguarding and controlling the Fund's cash and securities, handling the
delivery of securities and collecting interest on the Fund's investments.
TRANSFER AGENT
Financial Data Services, Inc., 4800 Deer Lake Drive East, Jacksonville,
Florida 32246-6484, acts as the Trust's transfer agent. The Transfer Agent is
responsible for the issuance, transfer and redemption of shares and the
opening, maintenance and servicing of shareholder accounts. See "Management of
the Trust--Transfer Agency Services" in the Prospectus.
LEGAL COUNSEL
Brown & Wood, One World Trade Center, New York, New York 10048-0557, is
counsel for the Trust.
REPORTS TO SHAREHOLDERS
The fiscal year of the Fund ends on July 31 of each year. The Trust sends to
shareholders of the Fund at least semi-annually reports showing the Fund's
portfolio and other information. An annual report, containing
44
<PAGE>
financial statements audited by independent auditors, is sent to shareholders
each year. After the end of each year shareholders will receive Federal income
tax information regarding dividends and capital gains distributions.
ADDITIONAL INFORMATION
The Prospectus and this Statement of Additional Information do not contain
all the information set forth in the Registration Statement and the exhibits
relating thereto, which the Trust has filed with the Securities and Exchange
Commission, Washington, D.C., under the Securities Act of 1933 and the
Investment Company Act of 1940, to which reference is hereby made.
To the knowledge of the Fund, no person or entity owned beneficially 5% or
more of the Fund's shares on July 31, 1994.
The Declaration of Trust establishing the Trust dated August 2, 1985, a copy
of which, together with all amendments thereto (the "Declaration") is on file
in the office of the Secretary of The Commonwealth of Massachusetts, provides
that the name "Merrill Lynch Multi-State Municipal Series Trust" refers to the
Trustees under the Declaration collectively as Trustees, but not as individuals
or personally; and no Trustee, shareholder, officer, employee or agent of the
Trust shall be held to any personal liability; nor shall resort be had to any
such person's private property for the satisfaction of any obligation or claim
of the Trust but the "Trust Property" only shall be liable.
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<PAGE>
APPENDIX I
ECONOMIC AND FINANCIAL CONDITIONS IN ALABAMA
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 the 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.
GENERAL INFORMATION
The economy of the State has been shifting from dependence on agriculture
toward increasing reliance on service and manufacturing industries. Major
manufactured products produced in the State include primary metals, chemicals,
textiles, paper, processed foods, transportation equipment, wood products and
electrical equipment. Agricultural activities and the extraction of mineral
resources also contribute significantly to the State's economy.
POPULATION
According to the 1990 Federal census, the State had a population of
4,040,567. The population density of the State in 1990 was on average
approximately 79.13 persons for each of its 51,060 square miles of land area
(as compared to 63.14 persons per square mile for the United States).
ECONOMY
Alabama's economy has experienced a major trend toward industrialization over
the last two decades. By 1990, manufacturing accounted for 39.73% of Alabama's
Real Gross State Product (the total value of goods and services produced in
Alabama). During the 1960's and 1970's the State's industrial base became more
diversified and balanced, moving away from primary textiles (including
apparel), chemicals, rubber and plastics. Since the early 1980's modernization
of existing facilities and an increase in direct foreign investments in the
State has made the manufacturing sector more competitive in domestic and
international markets.
Among the leading manufacturing industries have been pulp and paper and
chemicals, the development and growth of which have been made possible by
abundant rainfall (the mean annual average of which varies between 52 and 68
inches) and a high pulpwood growth rate (averaging approximately one-half cord
per acre per year). In recent years Alabama has ranked as the fifth largest
producer of timber in the nation. Alabama has fresh water availability of
twenty times present usage.
Mining, oil and gas production, textiles and apparel, rubber and plastics,
printing and publishing, steel, machinery and service industries are also
important to Alabama's economy.
In recent years, the importance of service industries to the State's economy
has increased. The major service industries in the State are the general
healthcare industries, most notably represented by the University of Alabama
medical complex in Birmingham, and the high technology research and development
industries concentrated in the Huntsville area. The financial, insurance and
real estate sectors have also shown strong growth over the last several years.
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<PAGE>
LIMITATION ON DEBT
Pursuant to Section 213 of the Constitution of Alabama of 1901, as amended by
Amendment 26, which was ratified by the electorate in 1933, the State is
constitutionally prohibited from incurring general obligation debt, and the
only method by which general obligation debt of the State can be incurred is by
an amendment to the Constitution. Although conventions proposed by the
Legislature and approved by the electorate may be called for the purpose of
amending the Alabama Constitution, all amendments have historically been
adopted through a procedure which requires them to be proposed by a favorable
vote of three-fifths of all the members of each house of the Legislature and
thereafter approved by a majority of the voters of the State in a statewide
election.
Limited obligation debt may be authorized by the Legislature without an
amendment to the Alabama Constitution. The State has followed the practice of
financing certain improvement programs--principally for highways and
education--payable solely out of certain taxes and revenues specially pledged
for their payment. Such bonds are not general obligation bonds and are payable
solely from specific taxes or revenues.
STATE INDEBTEDNESS
As of September 30, 1993, the State had outstanding $348,560,000 principal
amount of general obligation bonds issued as current interest paying bonds and
$124,908,999.65 original principal amount of capital appreciation bonds. The
principal amount of serial limited obligation bonds was $1,099,025,000, and the
original principal amount of outstanding limited obligation bonds issued as
capital appreciation bonds was $57,916,114.75.
BOND RATINGS
State General Obligation Bonds are currently rated Aa by Moody's Investors
Service, AA by Standard and Poor's, and AA by Fitch Investors Service.
In the absence of bond insurance or other credit enhancement, a significant
number of the debt instruments of Alabama issuers, including cities, counties,
water and sewer boards, are unrated.
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<PAGE>
APPENDIX II
RATINGS OF MUNICIPAL BONDS
DESCRIPTION OF MOODY'S INVESTORS SERVICE, INC.'S ("MOODY'S") MUNICIPAL BOND
RATINGS
Aaa Bonds which are rated Aaa are judged to be of the best quality. They
carry the smallest degree of investment risk and are generally referred
to as "gilt edge". Interest payments are protected by a large or by an
exceptionally stable margin and principal is secure. While the various
protective elements are likely to change, such changes as can be
visualized are most unlikely to impair the fundamentally strong
position of such issues.
Aa Bonds which are rated Aa are judged to be of high quality by all
standards. Together with the Aaa group they comprise what are generally
known as high grade bonds. They are rated lower than the best bonds
because margins of protection may not be as large as in Aaa securities
or fluctuation of protective elements may be of greater amplitude or
there may be other elements present which make the long-term risks
appear somewhat larger than in Aaa securities.
A Bonds which are rated A possess many favorable investment attributes
and are to be considered as upper medium grade obligations. Factors
giving security to principal and interest are considered adequate, but
elements may be present which suggest a susceptibility to impairment
sometime in the future.
Baa Bonds which are rated Baa are considered as medium grade obligations,
i.e., they are neither highly protected nor poorly secured. Interest
payment and principal security appear adequate for the present but
certain protective elements may be lacking or may be characteristically
unreliable over any great length of time. Such bonds lack outstanding
investment characteristics and in fact have speculative characteristics
as well.
Ba Bonds which are rated Ba are judged to have speculative elements; their
future cannot be considered as well assured. Often the protection of
interest and principal payments may be very moderate and thereby not
well safeguarded during both good and bad times over the future.
Uncertainty of position characterizes bonds in this class.
B Bonds which are rated B generally lack characteristics of the desirable
investment. Assurance of interest and principal payments or of
maintenance of other terms of the contract over any long period of time
may be small.
Caa Bonds which are rated Caa are of poor standing. Such issues may be in
default or there may be present elements of danger with respect to
principal or interest.
Ca Bonds which are rated Ca represent obligations which are speculative in
a high degree. Such issues are often in default or have other marked
shortcomings.
C Bonds which are rated C are the lowest rated class of bonds, and issues
so rated can be regarded as having extremely poor prospects of ever
attaining any real investment standing.
Note: Those bonds in the Aa, A, Baa, Ba and B groups which Moody's believes
possess the strongest investment attributes are designated by the symbols Aa1,
A1, Baa1, Ba1 and B1.
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<PAGE>
Short-term Notes: The four ratings of Moody's for short-term notes are MIG
1/VMIG1, MIG 2/VMIG2, MIG 3/VMIG3 and MIG 4/VMIG4; MIG 1/VMIG1 denotes "best
quality . . . strong protection by established cash flows"; MIG 2/VMIG2 denotes
"high quality" with ample margins of protection; MIG 3/VMIG3 notes are of
"favorable quality . . . but . . . lacking the undeniable strength of the
preceding grades"; MIG 4/VMIG4 notes are of "adequate quality . . .
[p]rotection commonly regarded as required of an investment security is
present . . . there is specific risk."
DESCRIPTION OF MOODY'S CORPORATE BOND RATINGS
Excerpts from Moody's description of its corporate bond ratings: Aaa--judged
to be the best quality, carry the smallest degree of investment risk; Aa--
judged to be of high quality by all standards; A--possess many favorable
investment attributes and are to be considered as upper medium grade
obligations.
DESCRIPTION OF MOODY'S COMMERCIAL PAPER RATINGS
Moody's Commercial Paper ratings are opinions of the ability of issuers to
repay punctually promissory obligations not having an original maturity in
excess of nine months. Moody's employs the following three designations, all
judged to be investment grade, to indicate the relative repayment capacity of
rated issuers:
Issuers rated Prime-1 (or related supporting institutions) have a superior
capacity for repayment of short-term promissory obligations. Prime-1 repayment
capacity will normally be evidenced by the following characteristics: leading
market positions in well established industries; high rates of return on funds
employed; conservative capitalization structures with moderate reliance on debt
and ample asset protection; broad margins in earning coverage of fixed
financial charges and high internal cash generation; and well established
access to a range of financial markets and assured sources of alternate
liquidity.
Issuers rated Prime-2 (or related supporting institutions) have a strong
capacity for repayment of short-term promissory obligations. This will normally
be evidenced by many of the characteristics cited above but to a lesser degree.
Earnings trends and coverage ratios, while sound, will be more subject to
variation. Capitalization characteristics, while still appropriate, may be more
affected by external conditions. Ample alternate liquidity is maintained.
Issuers rated Prime-3 (or related supporting institutions) have an acceptable
capacity for repayment of short-term promissory obligations. The effects of
industry characteristics and market composition may be more pronounced.
Variability in earnings and profitability may result in changes in the level of
debt protection measurements and the requirement for relatively high financial
leverage. Adequate alternate liquidity is maintained.
Issuers rated Not Prime do not fall within any of the Prime rating
categories.
DESCRIPTION OF STANDARD & POOR'S CORPORATION'S ("STANDARD & POOR'S") MUNICIPAL
DEBT RATINGS
A Standard & Poor's municipal debt rating is a current assessment of the
creditworthiness of an obligor with respect to a specific obligation. This
assessment may take into consideration obligors such as guarantors, insurers,
or lessees.
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<PAGE>
The debt rating is not a recommendation to purchase, sell or hold a security,
inasmuch as it does not comment as to market price or suitability for a
particular investor.
The ratings are based on current information furnished by the issuer or
obtained by Standard & Poor's from other sources Standard & Poor's considers
reliable. Standard & Poor's does not perform an audit in connection with any
rating and may, on occasion, rely on unaudited financial information. The
ratings may be changed, suspended or withdrawn as a result of changes in, or
unavailability of, such information, or for other circumstances.
The ratings are based, in varying degrees, on the following considerations:
I. Likelihood of default--capacity and willingness of the obligor as
to the timely payment of interest and repayment of principal in
accordance with the terms of the obligation;
II. Nature of and provisions of the obligations;
III. Protection afforded by, and relative position of, the obligation
in the event of bankruptcy, reorganization or other arrangement
under the laws of bankruptcy and other laws affecting creditors'
rights.
AAA Debt rated "AAA" has the highest rating assigned by Standard &
Poor's. Capacity to pay interest and repay principal is
extremely strong.
AA Debt rated "AA" has a very strong capacity to pay interest and
repay principal and differs from the higher-rated issues only
in small degree.
A Debt rated "A" has a strong capacity to pay interest and repay
principal although it is somewhat more susceptible to the
adverse effects of changes in circumstances and economic
conditions than debt in higher-rated categories.
BBB Debt rated "BBB" is regarded as having an adequate capacity to
pay interest and repay principal. Whereas it normally exhibits
adequate protection parameters, adverse economic conditions or
changing circumstances are more likely to lead to a weakened
capacity to pay interest and repay principal for debt in this
category than for debt in higher rated categories.
BB,B,CCC,CC, C Debt rated "BB", "B", "CCC", "CC" and "C" is regarded, on
balance, as predominately speculative with respect to capacity
to pay interest and repay principal in accordance with the
terms of the obligations. "BB" indicates the lowest degree of
speculation and "C" the highest degree of speculation. While
such debt will likely have some quality and protective
characteristics, these are outweighed by large uncertainties
or major exposures to adverse conditions.
CI The rating "CI" is reserved for income bonds on which no
interest is being paid.
D Debt rated "D" is in payment default. The "D" rating category
is used when interest payments or principal payments are not
made on the date due even if the applicable grace period has
not expired, unless Standard & Poor's believes that such
payments will be made during such grace period. The "D" rating
also will be used upon the filing of a bankruptcy petition if
debt service payments are jeopardized.
Plus (+) or Minus (-): The ratings from "AA" to "CCC" may be modified by the
addition of a plus or minus sign to show relative standing within the major
rating categories.
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<PAGE>
DESCRIPTION OF STANDARD & POOR'S CORPORATE BOND RATINGS
A Standard & Poor's corporate debt rating is a current assessment of the
creditworthiness of an obligor with respect to specific obligation. Debt rated
"AAA" has the highest rating assigned by Standard & Poor's. Capacity to pay
interest and repay principal is extremely strong. Debt rated "AA" has a very
strong capacity to pay interest and to repay principal and differs from the
highest rated issues only in small degree. Debt rated "A" has a strong capacity
to pay interest and repay principal although it is somewhat more susceptible to
the adverse effects of changes in circumstances and economic conditions than
debt of a higher rated category. Debt rated "BBB" is regarded as having an
adequate capacity to pay interest and repay principal. Whereas it normally
exhibits adequate protection parameters, adverse economic conditions or
changing circumstances are more likely to lead to a weakened capacity to pay
interest and repay principal for debt in this category than in higher rated
categories.
The ratings from "AA" to "BBB" may be modified by the addition of a plus or
minus sign to show relative standing within the major rating categories.
DESCRIPTION OF STANDARD & POOR'S COMMERCIAL PAPER RATINGS
A Standard & Poor's Commercial Paper Rating is a current assessment of the
likelihood of timely payment of debt having an original maturity of no more
than 365 days. Ratings are graded into four categories, ranging from "A" for
the highest quality obligations to "D" for the lowest. Ratings are applicable
to both taxable and tax-exempt commercial paper. Issues assigned the highest
rating are regarded as having the greatest capacity for timely payment. Issues
in this category are further refined with the designation 1, 2 and 3 to
indicate the relative degree of safety. The three designations in the "A"
category are as follows:
A-1
This designation indicates that the degree of safety regarding timely
payment is either overwhelming or very strong. Those issues determined
to possess extremely strong safety characteristics are denoted with a
plus sign (+) designation.
A-2
Capacity for timely payment on issues with this designation is strong.
However, the relative degree of safety is not as overwhelming as for
issues designated "A-1".
A-3
Issues carrying this designation have a satisfactory capacity for
timely payment. They are, however, somewhat more vulnerable to the
adverse effects of changes in circumstances than obligations carrying
the higher designations.
B
Issues rated "B" are regarded as having only speculative capacity for
timely payment.
C
This rating is assigned to short-term debt obligations with a doubtful
capacity for payment.
D
Debt rated "D" is in payment default. The "D" rating category is used
when interest payments or principal payments are not made on the date
due, even if the applicable grace period has not expired, unless S&P
believes that such payments will be made during such grace period.
A Commercial Paper Rating is not a recommendation to purchase or sell a
security. The ratings are based on current information furnished to Standard &
Poor's by the issuer and obtained by Standard & Poor's from other sources it
considers reliable. The ratings may be changed, suspended, or withdrawn as a
result of changes in, or unavailability of, such information.
A Standard & Poor's note rating reflects the liquidity concerns and market
access risks unique to notes. Notes due in 3 years or less will likely receive
a note rating. Notes maturing beyond 3 years will most likely receive a long-
term debt rating. The following criteria will be used in making that
assessment.
51
<PAGE>
--Amortization schedule (the larger the final maturity relative to other
maturities, the more likely it will be treated as a note).
--Source of payment (the more dependent the issue is on the market for its
refinancing, the more likely it will be treated as a note).
Note rating symbols are as follows:
SP-1 A very strong or strong capacity to pay principal and interest. Those
issues determined to possess overwhelming safety characteristics will
be given a "+" designation.
SP-2 A satisfactory capacity to pay principal and interest.
SP-3 A speculative capacity to pay principal and interest.
Standard & Poor's may continue to rate note issues with a maturity greater
than three years in accordance with the same rating scale currently employed
for municipal bond ratings.
Unrated: Where no rating has been assigned or where a rating has been
suspended or withdrawn, it may be for reasons unrelated to the quality of the
issue.
Should no rating be assigned, the reason may be one of the following:
1. An application for rating was not received or accepted.
2. The issue or issuers belongs to a group of securities that are not
rated as a matter of policy.
3. There is a lack of essential data pertaining to the issue or issuer.
4. The issue was privately placed, in which case the rating is not
published in Moody's publications.
Suspension or withdrawal may occur if new and material circumstances arise, the
effects of which preclude satisfactory analysis; if there is no longer
available reasonable up-to-date information to permit a judgment to be formed;
if a bond is called for redemption; or for other reasons.
DESCRIPTION OF FITCH INVESTORS SERVICE, INC.'S ("FITCH") INVESTMENT GRADE BOND
RATINGS
Fitch investment grade bond ratings provide a guide to investors in
determining the credit risk associated with a particular security. The ratings
represent Fitch's assessment of the issuer's ability to meet the obligations of
a specific debt issue or class of debt in a timely manner.
The rating takes into consideration special features of the issue, its
relationship to other obligations of the issuer, the current and prospective
financial condition and operating performance of the issuer and of any
guarantor, as well as the economic and political environment that might affect
the issuer's future financial strength and credit quality.
Fitch ratings do not reflect any credit enhancement that may be provided by
insurance policies or financial guaranties unless otherwise indicated.
Bonds that have the same rating are of similar but not necessarily identical
credit quality since the rating categories do not fully reflect small
differences in the degrees of credit risk.
Fitch ratings are not recommendations to buy, sell, or hold any security.
Ratings do not comment on the adequacy of market price, the suitability of any
security for a particular investor, or the tax-exempt nature or taxability of
payments made in respect of any security.
52
<PAGE>
Fitch ratings are based on information obtained from issuers, other obligors,
underwriters, their experts, and other sources Fitch believes to be reliable.
Fitch does not audit or verify the truth or accuracy of such information.
Ratings may be changed, suspended, or withdrawn as a result of changes in, or
the unavailability of, information or for any other reasons.
AAA Bonds considered to be investment grade and of the highest
credit quality. The obligor has an exceptionally strong
ability to pay interest and repay principal, which is unlikely
to be affected by reasonably foreseeable events.
AA Bonds considered to be investment grade and of very high
credit quality. The obligor's ability to pay interest and
repay principal is very strong, although not quite as strong
as bonds rated "AAA". Because bonds rated in the "AAA" and
"AA" categories are not significantly vulnerable to
foreseeable future developments, short-term debt of these
issuers is generally rated "F-1+".
A Bonds considered to be investment grade and of high credit
quality. The obligor's ability to pay interest and repay
principal is considered to be strong, but may be more
vulnerable to adverse changes in economic conditions and
circumstances than bonds with higher ratings.
BBB Bonds considered to be investment grade and of satisfactory
credit quality. The obligor's ability to pay interest and
repay principal is considered to be adequate. Adverse changes
in economic conditions and circumstances, however, are more
likely to have adverse impact on these bonds, and therefore,
impair timely payment. The likelihood that the ratings of
these bonds will fall below investment grade is higher than
for bonds with higher ratings.
Plus (+) or Minus (-): Plus and minus signs are used with a rating symbol to
indicate the relative position of a credit within the rating category. Plus and
minus signs, however, are not used in the "AAA" category.
Credit Trend Indicator: Credit trend indicators show whether credit
fundamentals are improving, stable, declining, or uncertain, as follows:
Improving UP ARROW
Stable LEFT/RIGHT ARROW
Declining DOWN ARROW
Uncertain UP/DOWN ARROW
Credit trend indicators are not predictions that any rating change will occur,
and have a longer-term time frame than issues placed on FitchAlert.
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.
53
<PAGE>
WITHDRAWN A rating will be withdrawn when an issue matures or is called
or refinanced and, at Fitch's discretion, when an issuer
fails to furnish proper and timely information.
FITCHALERT Ratings are placed on FitchAlert to notify investors of an
occurrence that is likely to result in a rating change and
the likely direction of such change. These are designated as
"Positive," indicating a potential upgrade, "Negative," for
potential downgrade, or "Evolving," where ratings may be
raised or lowered. FitchAlert is relatively short-term, and
should be resolved within 12 months.
DESCRIPTION OF FITCH SPECULATIVE GRADE BOND RATINGS
Fitch speculative grade bond ratings provide a guide to investors in
determining the credit risk associated with a particular security. The ratings
("BB" to "C") represent Fitch's assessment of the likelihood of timely payment
of principal and interest in accordance with the terms of obligation for bond
issues not in default. For defaulted bonds, the rating ("DDD" to "D") is an
assessment of the ultimate recovery value through reorganization or
liquidation.
The rating takes into consideration special features of the issue, its
relationship to other obligations of the issuer, the current and prospective
financial condition and operating performance of the issuer and any guarantor,
as well as the economic and political environment that might affect the
issuer's future financial strength.
Bonds that have the same rating are of similar but not necessarily identical
credit quality since rating categories cannot fully reflect the differences in
degrees of credit risk.
BB Bonds are considered speculative. The obligor's ability to pay
interest and repay principal may be affected over time by
adverse economic changes. However, business and financial
alternatives can be identified which could assist the obligor
in satisfying its debt service requirements.
B Bonds are considered highly speculative. While bonds in this
class are currently meeting debt service requirements, the
probability of continued timely payment of principal and
interest reflects the obligor's limited margin of safety and
the need for reasonable business and economic activity
throughout the life of the issue.
CCC Bonds have certain identifiable characteristics which, if not
remedied, may lead to default. The ability to meet obligations
requires an advantageous business and economic environment.
CC Bonds are minimally protected. Default in payment of interest
and/or principal seems probable over time.
C Bonds are in imminent default in payment of interest or
principal.
DDD, DD and D Bonds are in default on interest and/or principal payments.
Such bonds are extremely speculative and should be valued on
the basis of their ultimate recovery value in liquidation or
reorganization of the obligor. "DDD" represents the highest
potential for recovery on these bonds, and "D" represents the
lowest potential for recovery.
Plus (+) or Minus (-): Plus and minus signs are used with a rating symbol to
indicate the relative position of a credit within the rating category. Plus and
minus signs, however, are not used in the "DDD", "DD", or "D" categories.
54
<PAGE>
DESCRIPTION OF FITCH INVESTMENT GRADE SHORT-TERM RATINGS
Fitch's short-term ratings apply to debt obligations that are payable on
demand or have original maturities of generally up to three years, including
commercial paper, certificates of deposit, medium-term notes, and municipal and
investment notes.
The short-term rating places greater emphasis than a long-term rating on the
existence of liquidity necessary to meet the issuer's obligations in a timely
manner.
Fitch short-term ratings are as follows:
F-1+ Exceptionally Strong Credit Quality. Issues assigned this
rating are regarded as having the strongest degree of
assurance for timely payment.
F-1 Very Strong Credit Quality. Issues assigned this rating
reflect an assurance of timely payment only slightly less in
degree than issues rated "F-1+".
F-2 Good Credit Quality. Issues assigned this rating have a
satisfactory degree of assurance for timely payment, but the
margin of safety is not as great as for issues assigned "F-1+"
and "F-1" ratings.
F-3 Fair Credit Quality. Issues assigned this rating have
characteristics suggesting that the degree of assurance for
timely payment is adequate, however, near-term adverse changes
could cause these securities to be rated below investment
grade.
F-S Weak Credit Quality. Issues assigned this rating have
characteristics suggesting a minimal degree of assurance for
timely payment and are vulnerable to near-term adverse changes
in financial and economic conditions.
D Default. Issues assigned this rating are in actual or imminent
payment default.
LOC The symbol "LOC" indicates that the rating is based on a
letter of credit issued by a commercial bank.
INS The symbol "INS" indicates that the rating is based on an
insurance policy or financial guaranty issued by an insurance
company.
55
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Trustees and Shareholder,
Merrill Lynch Alabama Municipal Bond Fund of
Merrill Lynch Multi-State Municipal Series Trust:
We have audited the accompanying statement of assets and liabilities of Merrill
Lynch Alabama Municipal Bond Fund of Merrill Lynch Multi-State Municipal Series
Trust as of , 1994. This financial statement is the responsibility of
the Fund's management. Our responsibility is to express an opinion on this
financial statement based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statement is free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statement. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, such statement of assets and liabilities presents fairly, in
all material respects, the financial position of Merrill Lynch Alabama
Municipal Bond Fund of Merrill Lynch Multi-State Municipal Series Trust as of
, 1994, in conformity with generally accepted accounting principles.
Princeton, New Jersey
, 1994
56
<PAGE>
MERRILL LYNCH ALABAMA MUNICIPAL BOND FUND
MERRILL LYNCH MULTI-STATE MUNICIPAL SERIES TRUST
STATEMENT OF ASSETS AND LIABILITIES
, 1994
<TABLE>
<CAPTION>
<S> <C>
Assets:
Cash in bank.................................................... $
Prepaid registration fees (Note 3)..............................
Deferred organization expenses (Note 4).........................
--------
Total Assets......................................................
Liabilities-Accrued expenses......................................
--------
Net Assets (equivalent to $10.00 per share on 2,500 Class A Shares
of beneficial interest (par value $0.10), 2,500 Class B Shares of
beneficial interest (par value $0.10), 2,500 Class C Shares of
beneficial interest (par value $0.10) and 2,500 Class D Shares of
beneficial interest (par value $0.10) outstanding with an unlim-
ited number of shares authorized) (Note 1)........................ $
========
</TABLE>
- --------
Notes to Statement of Assets and Liabilities:
(1) Merrill Lynch Multi-State Municipal Series Trust (the "Trust") was
organized as a Massachusetts business trust on August 2, 1985. To date,
Merrill Lynch Alabama Municipal Bond Fund (the "Fund") has not had any
transactions other than those relating to organizational matters and the
sale of 2,500 Class A shares, 2,500 Class B shares, 2,500 Class C shares
and 2,500 Class D shares of beneficial interest of the Fund to Fund Asset
Management, L.P. (the "Manager"). The Trust is registered under the
Investment Company Act of 1940 as an open-end management investment
company.
(2) The Trust has entered into a Management Agreement with the Manager and
separate Class A,Class B, Class C and Class D Distribution Agreements and
Distribution Plans with Merrill Lynch Funds Distributor, Inc. (the
"Distributor") on behalf of the Fund. (See "Management of the Trust--
Management and Advisory Arrangements" in the Prospectus and Statement of
Additional Information.) Certain officers and/or Trustees of the Trust are
officers and/or directors of the Manager and the Distributor.
(3) Prepaid registration fees are charged to income as the related shares are
issued.
(4) Deferred organization expenses will be amortized over a period from the
date the Fund commences operations not exceeding five years. In the event
that the Manager (or any subsequent holder) redeems any of its original
shares prior to the end of the five-year period, the proceeds of the
redemption payable in respect of such shares shall be reduced by the pro
rata share (based on the proportionate share of the original shares
redeemed to the total number of original shares outstanding at the time of
redemption) of the unamortized deferred organization expenses as of the
date of such redemption. In the event that the Fund is liquidated prior to
the end of the five-year period, the Manager (or any subsequent holder)
shall bear the unamortized deferred organization expenses.
57
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58
<PAGE>
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59
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Investment Objective and Policies......................................... 2
Description of Municipal Bonds and Temporary
Investments.............................................................. 5
Description of Municipal Bonds........................................... 5
Description of Temporary Investments..................................... 6
Repurchase Agreements and Purchase and Sale Contracts.................... 8
Financial Futures Transactions and Options............................... 8
Investment Restrictions................................................... 13
Management of the Trust................................................... 15
Trustees and Officers.................................................... 15
Management and Advisory Arrangements..................................... 17
Purchase of Shares........................................................ 18
Initial Sales Charge Alternatives--Class A and Class D Shares............ 19
Reduced Initial Sales Charges............................................ 19
Distribution Plans........................................................ 21
Limitations on the Payment of Deferred Sales Charges...................... 22
Redemption of Shares...................................................... 22
Deferred Sales Charges--Class B and Class C Shares....................... 23
Portfolio Transactions.................................................... 23
Determination of Net Asset Value.......................................... 24
Shareholder Services...................................................... 25
Investment Account....................................................... 25
Automatic Investment Plan................................................ 25
Automatic Reinvestment of Dividends and Capital Gains Distributions...... 26
Systematic Withdrawal Plans--Class A and Class D Shares.................. 26
Exchange Privilege....................................................... 27
Distributions and Taxes................................................... 37
Environmental Tax........................................................ 40
Tax Treatment of Options and Futures Transactions........................ 40
Performance Data.......................................................... 41
General Information....................................................... 42
Description of Shares.................................................... 42
Computation of Offering Price Per Share.................................. 44
Independent Auditors..................................................... 44
Custodian................................................................ 44
Transfer Agent........................................................... 44
Legal Counsel............................................................ 44
Reports to Shareholders.................................................. 44
Additional Information................................................... 45
Appendix I--Economic and Financial Conditions In Alabama.................. 46
Appendix II--Ratings of Municipal Bonds................................... 48
Independent Auditors' Report.............................................. 56
Statement of Assets and Liabilities....................................... 57
</TABLE>
Code #
[LOGO]
Merrill Lynch Alabama
Municipal Bond Fund
Merrill Lynch Multi-State
Municipal Series Trust
[ART]
STATEMENT OF
ADDITIONAL
INFORMATION
, 1994
Distributor:
Merrill Lynch
Funds Distributor, Inc.
<PAGE>
PART C. OTHER INFORMATION
ITEM 24. FINANCIAL STATEMENTS AND EXHIBITS.
(a)FINANCIAL STATEMENTS
Contained in Part B:
Statement of Assets and Liabilities as of , 1994.
(b) EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER
-------
<C> <S>
1(a) --Declaration of Trust of the Registrant, dated August 2, 1985.
(a)
(b) --Amendment to Declaration of Trust, dated October 3, 1988. (b)
(c) --Instrument establishing Merrill Lynch Alabama Municipal Bond
Fund (the "Fund") as a series of Registrant. (e)
(d) --Instrument establishing Class A, Class B, Class C and Class D
shares of beneficial interest of the Fund. (e)
2 --By-Laws of Registrant. (a)
3 --None.
4(a) --Portions of the Declaration of Trust, Establishment and
Designation and By-Laws of the Registrant defining the rights of
holders of the Fund as a series of the Registrant. (c)
(b) --Specimen share certificates for Class A, Class B, Class C and
Class D shares. (e)
5(a) --Management Agreement between Registrant and Fund Asset
Management, L.P. (e)
(b) --Supplement to Investment Advisory Agreement with Fund Asset
Management. (e)
6(a) --Class A Shares Distribution Agreement between Registrant and
Merrill Lynch Funds Distributor, Inc. (e)
(b) --Class B Shares Distribution Agreement between Registrant and
Merrill Lynch Funds Distributor, Inc. (e)
(c) --Class C Shares Distribution Agreement between Registrant and
Merrill Lynch Funds Distributor, Inc. (e)
(d) --Class D Shares Distribution Agreement between Registrant and
Merrill Lynch Funds Distributor, Inc. (e)
7 --None.
8 --Form of Letter Amendment to the Custody Agreement between
Registrant and National Westminster Bank NJ. (e)
9 --Form of Letter Amendment to the Transfer Agency, Dividend
Disbursing Agency and Shareholder Servicing Agency Agreement
between Registrant and Financial Data Services, Inc. (e)
10 --Opinion of Brown & Wood, counsel for the Registrant. (e)
11 --Consent of , independent auditors for the Registrant.
(e)
12 --None.
13 --Certificate of Fund Asset Management, L.P. (e)
14 --None.
15(a) --Class B Shares Distribution Plan and Class B Shares Distribution
Plan
Sub-Agreement of the Registrant. (e)
(b) --Class C Shares Distribution Plan and Class C Shares Distribution
Plan Sub-Agreement of the Registrant. (e)
(c) --Class D Shares Distribution Plan and Class D Shares Distribution
Plan Sub-Agreement of the Registrant. (e)
16 --None.
</TABLE>
C-1
<PAGE>
- --------
(a) Filed on August 6, 1985 as an Exhibit to the Registration Statement on Form
N-1A (File No. 2-99473) under the Securities Act of 1933 of Merrill Lynch
New York Municipal Bond Fund, a series of the Registrant.
(b) Filed on October 11, 1988 as an Exhibit to Post-Effective Amendment No. 4
to the Registration Statement on Form N-1A (File No. 2-99473) under the
Securities Act of 1933 of Merrill Lynch New York Municipal Bond Fund, a
series of the Registrant.
(c) Reference is made to Article II, Section 2.3 and Articles V, VI, VIII, IX,
X and XI of the Registrant's Declaration of Trust, previously filed as
Exhibit 1(a) to the Registration Statement referred to in paragraph (a)
above; to the Certificates of Establishment and Designation establishing
the Fund as a series of the Registrant and establishing Class A and Class B
shares of beneficial interest of the Fund, which will be filed as Exhibits
1(c) and 1(d), respectively, to the Registration Statement; and to Articles
I, V and VI of the Registrant's By-Laws, previously filed as Exhibit 2 to
the Registration Statement referred to in paragraph (a) above.
(d) The Custody Agreement between Registrant and National Westminster Bank,
dated November 1, 1985, was filed on March 18, 1986 as an Exhibit to Post-
Effective Amendment No. 1 to the Registration Statement on Form N-1A (File
No. 2-99473) under the Securities Act of 1933 of Merrill Lynch New York
Municipal Bond Fund, a series of the Registrant, and is incorporated by
reference herein.
(e) To be filed by amendment.
ITEM 25. PERSONS CONTROLLED BY OR UNDER COMMON CONTROL WITH REGISTRANT.
Prior to the effective date of this Registration Statement, the Registrant
will sell 2,500 Class A shares of beneficial interest, 2,500 Class B shares of
beneficial interest, 2,500 Class C shares of beneficial interest and 2,500
Class D shares of beneficial interest of the Fund to Fund Asset Management,
L.P. for an aggregate of $100,000.
ITEM 26. NUMBER OF HOLDERS OF SECURITIES.
<TABLE>
<CAPTION>
NUMBER OF RECORD
HOLDERS AT
TITLE OF CLASS , 1994
-------------- ----------------
<S> <C>
Class A shares of beneficial interest par value $0.10
per share.............................................
Class B shares of beneficial interest par value $0.10
per share.............................................
Class C shares of beneficial interest par value $0.10
per share.............................................
Class D shares of beneficial interest par value $0.10
per share.............................................
</TABLE>
ITEM 27. INDEMNIFICATION.
Section 5.3 of the Registrant's Declaration of Trust provides as follows:
"The Trust shall indemnify each of its Trustees, officers, employees and
agents (including persons who serve at its request as directors, officers or
trustees of another organization in which it has any interest as a shareholder,
creditor or otherwise) against all liabilities and expenses (including amounts
paid in satisfaction of judgments, in compromise, as fines and penalties and as
counsel fees) reasonably incurred by him in connection with the defense or
disposition of any action, suit or other proceeding, whether civil or criminal,
in which he may be involved or with which he may be threatened, while in office
or thereafter, by reason of his being or having been such a trustee, officer,
employee or agent, except with respect to any matter as to which he shall have
been adjudicated to have acted in bad faith, willful misfeasance, gross
negligence or reckless disregard of his duties; provided, however, that as to
any matter disposed of by a compromise payment by such person, pursuant to a
consent decree or otherwise, no indemnification either for said payment or for
any other expenses shall be provided unless the Trust shall have received a
written opinion
C-2
<PAGE>
from independent legal counsel approved by the Trustees to the effect that if
either the matter of willful misfeasance, gross negligence or reckless
disregard of duty, or the matter of good faith and reasonable belief as to the
best interests of the Trust, had been adjudicated, it would have been
adjudicated in favor of such person. The rights accruing to any Person under
these provisions shall not exclude any other right to which he may be lawfully
entitled; provided that no person may satisfy any right in indemnity or
reimbursement granted herein or in Section 5.1 or to which he may be otherwise
entitled except out of the property of the Trust, and no Shareholder shall be
personally liable to any Person with respect to any claim for indemnity or
reimbursement or otherwise. The Trustees may make advance payments in
connection with indemnification under this Section 5.3, provided that the
indemnified person shall have given a written undertaking to reimburse the
Trust in the event it is subsequently determined that he is not entitled to
such indemnification."
Insofar as the conditional advancing of indemnification monies for actions
based upon the Investment Company Act of 1940, as amended may be concerned,
such payments will be made only on the following conditions: (i) the advances
must be limited to amounts used, or to be used, for the preparation or
presentation of a defense to the action, including costs connected with the
preparation of a settlement; (ii) advances may be made only upon receipt of a
written promise by, or on behalf of, the recipient to repay that amount of the
advance which exceeds the amount to which it is ultimately determined that he
is entitled to receive from the Registrant by reason of indemnification; and
(iii) (a) such promise must be secured by a surety bond, other suitable
insurance or an equivalent form of security which assures that any repayments
may be obtained by the Registrant without delay or litigation, which bond,
insurance or other form of security must be provided by the recipient of the
advance, or (b) a majority of a quorum of the Registrant's disinterested, non-
party Trustees, or an independent legal counsel in a written opinion, shall
determine, based upon a review of readily available facts that the recipient of
the advance ultimately will be found entitled to indemnification.
In Section 9 of the Distribution Agreements relating to the securities being
offered hereby, the Registrant agrees to indemnify the Distributor and each
person, if any, who controls the Distributor within the meaning of the
Securities Act of 1933 ("1933 Act"), against certain types of civil liabilities
arising in connection with the Registration Statement or Prospectus and
Statement of Additional Information.
Insofar as indemnification for liabilities arising under the 1933 Act may be
permitted to Trustees, officers and controlling persons of the Registrant and
the principal underwriter pursuant to the foregoing provisions or otherwise,
the Registrant has been advised that in the opinion of the Securities and
Exchange Commission such indemnification is against public policy as expressed
in the 1933 Act and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by the
Registrant of expenses incurred or paid by a Trustee, officer, or controlling
person of the Registrant and the principal underwriter in connection with the
successful defense of any action, suit or proceeding) is asserted by such
Trustee, officer or controlling person or the principal underwriter in
connection with the shares being registered, the Registrant will, unless in the
opinion of its counsel the matter has been settled by controlling precedent,
submit to a court of appropriate jurisdiction the question whether such
indemnification by it is against public policy as expressed in the 1933 Act and
will be governed by the final adjudication of such issue.
ITEM 28. BUSINESS AND OTHER CONNECTIONS OF INVESTMENT ADVISER.
Fund Asset Management, L.P. (the "Manager") acts as the investment adviser
for the following registered investment companies: Apex Municipal Fund, Inc.,
CBA Money Fund, CMA Government Securities Fund, CMA Money Fund, CMA Multi-State
Municipal Series Trust, CMA Tax-Exempt Fund, CMA Treasury Fund, The Corporate
Fund Accumulation Program, Inc., Corporate High Yield Fund, Inc., Corporate
High Yield Fund II, Inc., Emerging Tigers Fund, Inc., Financial Institutions
Series Trust, Income Opportunities Fund 1999, Inc., Income Opportunities Fund
2000, Inc., Merrill Lynch Basic Value Fund,
C-3
<PAGE>
Inc., Merrill Lynch California Municipal Series Trust, Merrill Lynch Corporate
Bond 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.,
MuniAssets Fund, Inc., MuniBond Income Fund, Inc., The Municipal Fund
Accumulation Program, Inc., MuniEnhanced Fund, Inc., MuniInsured Fund, Inc.,
MuniVest Fund, Inc., MuniVest Fund II, Inc., MuniVest California Insured Fund,
Inc., MuniVest Florida Fund, MuniVest Michigan Insured Fund, Inc., MuniVest New
Jersey Fund, Inc., MuniVest New York Insured Fund, Inc., MuniVest Pennsylvania
Insured Fund, MuniYield Arizona Fund, Inc., MuniYield Arizona Fund II, Inc.,
MuniYield California Fund, Inc., MuniYield California Insured Fund, Inc.,
MuniYield California Insured Fund II, Inc., MuniYield Florida Fund, MuniYield
Florida Insured Fund, MuniYield Fund, Inc., MuniYield Insured Fund, Inc.,
MuniYield Insured Fund II, Inc., MuniYield Michigan Fund, Inc., MuniYield
Michigan Insured Fund, Inc., MuniYield New Jersey Fund, Inc., MuniYield New
Jersey Insured Fund, Inc., MuniYield New York Insured Fund, Inc., MuniYield New
York Insured Fund II, Inc., MuniYield New York Insured Fund III, Inc.,
MuniYield Pennsylvania Fund, MuniYield Quality Fund, Inc., MuniYield Quality
Fund II, Inc., Senior High Income Portfolio, Inc., Senior High Income Portfolio
II, Inc., Senior Strategic Income Fund, Inc., Taurus MuniCalifornia Holdings,
Inc., Taurus MuniNew York 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 companies: Convertible
Holdings, Inc., Merrill Lynch Adjustable Rate Securities Fund, Inc., Merrill
Lynch Americas Income Fund, Inc., Merrill Lynch Balanced Fund for Investment
and Retirement, Merrill Lynch Capital Fund, Inc., Merrill Lynch Developing
Capital Markets Fund, Inc., Merrill Lynch Dragon Fund, Inc., Merrill Lynch
EuroFund, Merrill Lynch Fundamental Growth Fund, Inc., Merrill Lynch Fund For
Tomorrow, Inc., Merrill Lynch Global Bond Fund for Investment and Retirement,
Merrill Lynch Global Allocation Fund, Inc., Merrill Lynch Global Convertible
Fund, Inc., Merrill Lynch Global Holdings, Merrill Lynch Global Resources
Trust, Merrill Lynch Global SmallCap Fund, Inc., Merrill Lynch Global Utility
Fund, Inc., Merrill Lynch Growth Fund for Investment and Retirement, Merrill
Lynch Healthcare Fund, Inc., Merrill Lynch High Income Municipal Bond Fund,
Inc., Merrill Lynch Institutional Fund, Merrill Lynch Institutional Tax-Exempt
Fund, Merrill Lynch International Equity Fund, Merrill Lynch Latin America
Fund, Inc., Merrill Lynch Municipal Series Trust, Merrill Lynch Pacific Fund,
Inc., Merrill Lynch Ready Assets Trust, Merrill Lynch Retirement Series Trust,
Merrill Lynch Senior Floating Rate Fund, Inc., Senior Strategic Income Fund,
Inc., 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 Worldwide DollarVest Fund, Inc. The address of
each of these investment companies is Box 9011, Princeton, New Jersey 08543-
9011, except that the address of Merrill Lynch Funds for Institutions Series,
Merrill Lynch Institutional Tax-Exempt Fund and Merrill Lynch Institutional
Intermediate Fund is One Financial Center, 15th Floor, Boston, Massachusetts
02111-2646. The address of the Manager and MLAM is also Box 9011, Princeton,
New Jersey 08543-9011. The address of Merrill Lynch, Pierce, Fenner & Smith
Incorporated ("Merrill Lynch") and Merrill Lynch & Co., Inc. ("ML & Co.") is
World Financial Center, North Tower, 250 Vesey Street, New York, New York
10281.
Set forth below is a list of each executive officer and partner of the
Manager indicating each business, profession, vocation or employment of a
substantial nature in which each such person or entity has been engaged since
December 31, 1991 for his or its own account or in the capacity of director,
officer, partner or trustee. In addition, Mr. Zeikel is President and Director,
Mr. Richard is Treasurer and Mr. Glenn is
C-4
<PAGE>
Executive Vice President of substantially all of the investment companies
described in the preceding paragraph and also hold the same positions with all
or substantially all of the investment companies advised by MLAM as they do
with those advised by the Manager, and Messrs. Durnin, Giordano, Harvey,
Hewitt, and Monagle are directors or officers of one or more of such companies.
OFFICERS AND PARTNERS OF FAM ARE SET FORTH AS FOLLOWS:
<TABLE>
<CAPTION>
OTHER SUBSTANTIAL
POSITION(S) WITH BUSINESS, PROFESSION,
NAME THE MANAGER VOCATION OR EMPLOYMENT
---- ---------------- ----------------------
<S> <C> <C>
ML & Co. ............... Limited Partner Financial Services Holding Company
Fund Asset Management,
Inc. .................. Limited Partner Investment Advisory Services
Princeton Services, General Partner General Partner of MLAM
Inc. ..................
("Princeton Services")
Arthur Zeikel........... President President of MLAM; President and Di-
rector of Princeton Services; Direc-
tor of MLFD; Executive Vice President
of ML & Co.; Executive Vice President
of Merrill Lynch
Terry K. Glenn.......... Executive Vice President Executive Vice President of MLAM; Ex-
and Director ecutive Vice President and Director
of Princeton Services; President and
Director of MLFD; Director of Finan-
cial Data Services, Inc.; President
of Princeton Administrators, L.P.
Bernard J. Durnin....... Senior Vice President Senior Vice President of MLAM; Senior
Vice President of Princeton Services
Vincent R. Giordano..... Senior Vice President Senior Vice President of MLAM; Senior
Vice President of Princeton Services
Elizabeth Griffin....... Senior Vice President Senior Vice President of MLAM
Norman R. Harvey........ Senior Vice President Senior Vice President of MLAM; Senior
Vice President of Princeton Services
N. John Hewitt.......... Senior Vice President Senior Vice President of MLAM; Senior
Vice President of Princeton Services
Philip L. Kirstein...... Senior Vice President, Senior Vice President, General Counsel
General Counsel and and Secretary of MLAM; Senior Vice
Secretary President, General Counsel and Direc-
tor of Princeton Services; Director
of MLFD
Ronald M. Kloss......... Senior Vice President Senior Vice President and Controller
and Controller of MLAM; Senior Vice President and
Controller of Princeton Services
Joseph T. Monagle, Jr. . Senior Vice President Senior Vice President of MLAM; Senior
Vice President of Princeton Services
Gerald M. Richard....... Senior Vice President Senior Vice President and Treasurer of
and Treasurer MLAM; Senior Vice President and Trea-
surer of Princeton Services; Vice
President and Treasurer of MLFD
Richard L. Rufener...... Senior Vice President Senior Vice President of MLAM; Senior
Vice President of Princeton Services;
Vice President of MLFD
Ronald L. Welburn....... Senior Vice President Senior Vice President of MLAM; Senior
Vice President of Princeton Services
Anthony Wiseman......... Senior Vice President Senior Vice President of MLAM; Senior
Vice President of Princeton Services
</TABLE>
C-5
<PAGE>
ITEM 29. PRINCIPAL UNDERWRITERS.
(a) MLFD acts as the principal underwriter for the Registrant and, for each
of the open-end investment companies referred to in the first paragraph of Item
28 except Apex Municipal Fund, Inc., CBA Money Fund, CMA Government Securities
Fund, CMA Money Fund, CMA Multi-State Municipal Series Trust, CMA Tax-Exempt
Fund, CMA Treasury Fund, Convertible Holdings, Inc., The Corporate Fund
Accumulation Program, Inc., Corporate High Yield Fund, Inc., Corporate High
Yield Fund II, Inc., Emerging Tigers Fund, Inc., Income Opportunities Fund
1999, Inc., Income Opportunities Fund 2000, Inc., MuniAssets Fund, Inc.,
MuniBond Income Fund, Inc., The Municipal Fund Accumulation Program, Inc.,
MuniEnhanced Fund, Inc., MuniInsured Fund, Inc., MuniVest Fund, Inc., MuniVest
Fund II, Inc., MuniVest California Insured Fund, Inc., MuniVest Florida Fund,
MuniVest Michigan Insured Fund, Inc., MuniVest New Jersey Fund, Inc., MuniVest
New York Insured Fund, Inc., MuniVest Pennsylvania Insured Fund, MuniYield
Arizona Fund, Inc., MuniYield Arizona Fund II, Inc., MuniYield California Fund,
Inc., MuniYield California Insured Fund, Inc., MuniYield California Insured
Fund II, Inc., MuniYield Florida Fund, MuniYield Florida Insured Fund,
MuniYield Fund, Inc., MuniYield Insured Fund, Inc., MuniYield Insured Fund II,
Inc., MuniYield Michigan Fund, Inc., MuniYield Michigan Insured Fund, Inc.,
MuniYield New Jersey Fund, Inc., MuniYield New Jersey Insured Fund, Inc.,
MuniYield New York Insured Fund, Inc., MuniYield New York Insured Fund II,
Inc., MuniYield New York Insured Fund III, Inc., MuniYield Pennsylvania Fund,
MuniYield Quality Fund, Inc., MuniYield Quality Fund II, Inc., Senior High
Income Portfolio, Inc., Senior High Income Portfolio II, Inc., Senior Strategic
Income Fund, Inc., Taurus MuniCalifornia Holdings, Inc., Taurus MuniNewYork
Holdings, Inc. and Worldwide DollarVest Fund, Inc.
(b) Set forth below is information concerning each director and officer of
MLFD. The principal business address of each such person is Box 9011,
Princeton, New Jersey 08543-9011, except that the address of Messrs. Aldrich,
Breen, Crook, Graczyk, Fatseas and Wasel is One Financial Center, 15th Floor,
Boston, Massachusetts 02111-2646.
<TABLE>
<CAPTION>
POSITION(S) AND OFFICES POSITION(S) AND OFFICES
NAME WITH MLFD WITH REGISTRANT
---- ----------------------- -----------------------
<S> <C> <C>
Terry K. Glenn........ President and Director Executive Vice President
Arthur Zeikel......... Director President and Trustee
Philip L. Kirstein.... Director None
William E. Aldrich.... Senior Vice President None
Robert W. Crook....... Senior Vice President None
Kevin P. Boman........ Vice President None
Michael J. Brady...... Vice President None
William M. Breen...... Vice President None
Sharon Creveling...... Vice President and Assistant
Treasurer None
Mark A. DeSario....... Vice President None
James T. Fatseas...... Vice President None
Stanley Graczyk....... Vice President None
Michelle T. Lau....... Vice President None
Gerald M. Richard..... Vice President and Treasurer Treasurer
Richard L. Rufener.... Vice President None
Salvatore Venezia..... Vice President None
William Wasel......... Vice President None
Robert Harris......... Secretary None
</TABLE>
(c) Not applicable.
C-6
<PAGE>
ITEM 30. LOCATION OF ACCOUNTS AND RECORDS.
All accounts, books and other documents required to be maintained by Section
31(a) of the Investment Company Act of 1940, as amended and the Rules
thereunder are maintained at the offices of the Registrant and Financial Data
Services, Inc.
ITEM 31. MANAGEMENT SERVICES.
Other than as set forth under the caption "Management of the Trust--
Management and Advisory Arrangements" in the Prospectus constituting Part A of
the Registration Statement and under "Management of the Trust--Management and
Advisory Arrangements" in the Statement of Additional Information constituting
Part B of the Registration Statement, Registrant is not a party to any
management-related service contract.
ITEM 32. UNDERTAKINGS.
The Registrant undertakes to file a post-effective amendment, using financial
statements which need not be certified, within four to six months from the
effective date of Registrant's registration statement under the Securities Act
of 1933, as amended.
C-7
<PAGE>
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933 AND THE INVESTMENT
COMPANY ACT OF 1940, THE REGISTRANT HAS DULY CAUSED THIS REGISTRATION STATEMENT
TO BE SIGNED ON ITS BEHALF BY THE UNDERSIGNED, THEREUNTO DULY AUTHORIZED, IN
THE TOWNSHIP OF PLAINSBORO, AND STATE OF NEW JERSEY, ON THE 19TH DAY OF
SEPTEMBER, 1994.
Merrill Lynch Multi-State Municipal
Series Trust
(Registrant)
/s/ Arthur Zeikel
By___________________________________
(Arthur Zeikel, President)
EACH PERSON WHOSE SIGNATURE APPEARS BELOW HEREBY AUTHORIZES ARTHUR ZEIKEL,
GERALD M. RICHARD AND TERRY K. GLENN, OR ANY OF THEM, AS ATTORNEY-IN-FACT, TO
SIGN ON HIS BEHALF, INDIVIDUALLY AND IN EACH CAPACITY STATED BELOW, ANY
AMENDMENTS TO THIS REGISTRATION STATEMENT (INCLUDING POST-EFFECTIVE AMENDMENTS)
AND TO FILE THE SAME, WITH ALL EXHIBITS THERETO, WITH THE SECURITIES AND
EXCHANGE COMMISSION.
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THIS REGISTRATION
STATEMENT HAS BEEN SIGNED BELOW BY THE FOLLOWING PERSONS IN THE CAPACITIES AND
ON THE DATES INDICATED.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<S> <C> <C>
/s/ Arthur Zeikel President and Trustee September 19, 1994
- ------------------------------------ (Principal Executive
(Arthur Zeikel) Officer)
/s/ Gerald M. Richard Treasurer (Principal September 19, 1994
- ------------------------------------ Financial and
(Gerald M. Richard) Accounting Officer)
/s/ Kenneth S. Axelson Trustee September 19, 1994
- ------------------------------------
(Kenneth S. Axelson)
/s/ Herbert I. London Trustee September 19, 1994
- ------------------------------------
(Herbert I. London)
Trustee
- ------------------------------------
(Robert R. Martin)
/s/ Joseph L. May Trustee September 19, 1994
- ------------------------------------
(Joseph L. May)
/s/ Andre F. Perold Trustee September 19, 1994
- ------------------------------------
(Andre F. Perold)
</TABLE>
C-8
<PAGE>
GRAPHICS APPENDIX LIST
PAGE WHERE
GRAPHIC
APPEARS DESCRIPTION OF GRAPHIC OR CROSS REFERENCE
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PRO BC Two Compass faces.
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SAI BC Two Compass faces.
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