<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON NOVEMBER 24, 1997
SECURITIES ACT FILE NO. 333-37349
INVESTMENT COMPANY ACT FILE NO. 811-2688
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
----------------
FORM N-14
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
----------------
[X] PRE-EFFECTIVE AMENDMENT NO. 1 [_] POST-EFFECTIVE AMENDMENT NO.
(CHECK APPROPRIATE BOX OR BOXES)
----------------
MERRILL LYNCH MUNICIPAL BOND FUND, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
----------------
(609) 282-2800
(AREA CODE AND TELEPHONE NUMBER)
----------------
800 SCUDDERS MILL ROAD
PLAINSBORO, NEW JERSEY 08536
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES:
NUMBER, STREET, CITY, STATE, ZIP CODE)
----------------
ARTHUR ZEIKEL
MERRILL LYNCH MUNICIPAL BOND FUND, INC.
800 SCUDDERS MILL ROAD, PLAINSBORO, NEW JERSEY 08536
MAILING ADDRESS: P.O. BOX 9011, PRINCETON, NEW JERSEY 08543-9011
(NAME AND ADDRESS OF AGENT FOR SERVICE)
----------------
COPIES TO:
LEONARD B. MACKEY, JR., ESQ. JOHN A. MACKINNON, ESQ. PHILIP L. KIRSTEIN, ESQ.
ROGERS & WELLS BROWN & WOOD LLP MERRILL LYNCH ASSET
200 PARK AVENUE ONE WORLD TRADE CENTER MANAGEMENT
NEW YORK, NY 10166 NEW YORK, NY 10048-0557 800 SCUDDERS MILL ROAD
PLAINSBORO, NJ 08536
----------------
APPROXIMATE DATE OF PROPOSED PUBLIC OFFERING: As soon as practicable after
the Registration Statement becomes effective under the Securities Act of 1933.
----------------
Title of Securities to Be Registered: Common Stock, par value $.10 per share
No filing fee is required because of reliance on Section 24(f) of the
Investment Company Act of 1940. The notice required for such Rule for the
Registrant's most recent fiscal year end was filed on August 25, 1997.
Pursuant to Rule 429, this Registration Statement relates to shares previously
registered on Form N-1A (File No. 2-57354).
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
<PAGE>
MERRILL LYNCH MUNICIPAL BOND FUND, INC.
CROSS REFERENCE SHEET
PURSUANT TO RULE 481(A) UNDER THE SECURITIES ACT OF 1933
<TABLE>
<CAPTION>
FORM N-14 ITEM NO. PROXY STATEMENT AND PROSPECTUS CAPTION
------------------ --------------------------------------
<C> <S> <C>
PART A
Item 1. Beginning of
Registration Statement
and Outside Front Cover Registration Statement Cover Page; Proxy
Page of Prospectus..... Statement and Prospectus Cover Page
Item 2. Beginning and Outside
Back Cover Page of
Prospectus............. Table of Contents
Item 3. Fee Table, Synopsis
Information and Risk Summary; Risk Factors and Special
Factors................ Considerations
Item 4. Information about the Summary; The Reorganization--Agreement and
Transaction............ Plan of Reorganization
Item 5. Information about the Proxy Statement and Prospectus Cover Page;
Registrant............. Summary; Comparison of the State Funds
and Limited Maturity Portfolio;
Additional Information
Item 6. Information about the
Company Being Proxy Statement and Prospectus Cover Page;
Acquired............... Summary; Comparison of the State Funds
and Limited Maturity Portfolio;
Additional Information
Item 7. Voting Information...... Notice of Special Meeting of Stockholders;
Introduction; Summary; Comparison of the
State Funds and Limited Maturity
Portfolio; Information Concerning the
Special Meeting; Additional Information
Item 8. Interest of Certain
Persons and Experts.... Not Applicable
Item 9. Additional Information
Required for Reoffering
by Persons Deemed to be
Underwriters........... Not Applicable
PART B
Item 10. Cover Page.............. Cover Page
Item 11. Table of Contents....... Table of Contents
Item 12. Additional Information
about the Registrant... General Information
Item 13. Additional Information
about the Company Being
Acquired............... General Information
Item 14. Financial Statements.... Financial Statements
</TABLE>
PART C
Information required to be included in Part C is set forth under the
appropriate Item, so numbered, in Part C to this Registration Statement.
<PAGE>
[Proxy Card Front]
MERRILL LYNCH ARIZONA LIMITED MATURITY MUNICIPAL BOND FUND
OF MERRILL LYNCH MULTI-STATE LIMITED MATURITY MUNICIPAL SERIES TRUST
P.O. BOX 9011
PRINCETON, NEW JERSEY 08543-9011
P R O X Y
This proxy is solicited on behalf of the Board of Trustees
The undersigned hereby appoints Arthur Zeikel, Terry K. Glenn and Lawrence
A. Rogers as proxies, each with the power to appoint his substitute, and hereby
authorizes each of them to represent and to vote, as designated on the reverse
hereof, all of the shares of beneficial interest of Merrill Lynch Arizona
Limited Maturity Municipal Bond Fund of Merrill Lynch Multi-State Limited
Maturity Municipal Series Trust (the "Fund") held of record by the undersigned
on October 10, 1997 at a Special Meeting of Stockholders of the Fund to be held
on December 9, 1997, or any adjournment thereof.
THIS PROXY WHEN PROPERLY EXECUTED WILL BE VOTED IN THE MANNER HEREIN
DIRECTED BY THE UNDERSIGNED STOCKHOLDER. IF NO DIRECTION IS MADE, THIS PROXY
WILL BE VOTED FOR PROPOSAL 1.
(Continued and to be signed on the reverse side)
[Proxy Card Reverse]
1. To consider and act upon a proposal to approve the Agreement and Plan of
Reorganization between the Merrill Lynch Multi-State Limited Maturity
Municipal Series Trust and Merrill Lynch Municipal Bond Fund, Inc.
FOR [_] AGAINST [_] ABSTAIN [_]
2. In the discretion of such proxies, upon such other business as properly may
come before the meeting or any adjournment thereof.
Please sign exactly as name appears hereon. When shares
are held by joint tenants, both should sign. When
signing as attorney or as executor, administrator,
trustee or guardian, please give full title as such. If
a corporation, please sign in full corporate name by
president or other authorized officer. If a partnership,
please sign in partnership name by authorized persons.
Dated: _________________, 1997
X
----------------------------
Signature
X
----------------------------
Signature, if held jointly
PLEASE MARK BOXES /X/ OR [X] IN BLUE OR BLACK INK. SIGN, DATE AND RETURN THE
PROXY CARD PROMPTLY USING THE ENCLOSED ENVELOPE.
<PAGE>
[Proxy Card Front]
MERRILL LYNCH MASSACHUSETTS LIMITED MATURITY MUNICIPAL BOND FUND
OF MERRILL LYNCH MULTI-STATE LIMITED MATURITY MUNICIPAL SERIES TRUST
P.O. BOX 9011
PRINCETON, NEW JERSEY 08543-9011
P R O X Y
This proxy is solicited on behalf of the Board of Trustees
The undersigned hereby appoints Arthur Zeikel, Terry K. Glenn and Lawrence
A. Rogers as proxies, each with the power to appoint his substitute, and hereby
authorizes each of them to represent and to vote, as designated on the reverse
hereof, all of the shares of beneficial interest of Merrill Lynch Massachusetts
Limited Maturity Municipal Bond Fund of Merrill Lynch Multi-State Limited
Maturity Municipal Series Trust (the "Fund") held of record by the undersigned
on October 10, 1997 at a Special Meeting of Stockholders of the Fund to be held
on December 9, 1997, or any adjournment thereof.
THIS PROXY WHEN PROPERLY EXECUTED WILL BE VOTED IN THE MANNER HEREIN
DIRECTED BY THE UNDERSIGNED STOCKHOLDER. IF NO DIRECTION IS MADE, THIS PROXY
WILL BE VOTED FOR PROPOSAL 1.
(Continued and to be signed on the reverse side)
[Proxy Card Reverse]
1. To consider and act upon a proposal to approve the Agreement and Plan of
Reorganization between the Merrill Lynch Multi-State Limited Maturity
Municipal Series Trust and Merrill Lynch Municipal Bond Fund, Inc.
FOR [_] AGAINST [_] ABSTAIN [_]
2. In the discretion of such proxies, upon such other business as properly may
come before the meeting or any adjournment thereof.
Please sign exactly as name appears hereon. When shares
are held by joint tenants, both should sign. When
signing as attorney or as executor, administrator,
trustee or guardian, please give full title as such. If
a corporation, please sign in full corporate name by
president or other authorized officer. If a partnership,
please sign in partnership name by authorized persons.
Dated: _________________, 1997
X
----------------------------
Signature
X
----------------------------
Signature, if held jointly
PLEASE MARK BOXES /X/ OR [X] IN BLUE OR BLACK INK. SIGN, DATE AND RETURN THE
PROXY CARD PROMPTLY USING THE ENCLOSED ENVELOPE.
<PAGE>
[Proxy Card Front]
MERRILL LYNCH MICHIGAN LIMITED MATURITY MUNICIPAL BOND FUND
OF MERRILL LYNCH MULTI-STATE LIMITED MATURITY MUNICIPAL SERIES TRUST
P.O. BOX 9011
PRINCETON, NEW JERSEY 08543-9011
P R O X Y
This proxy is solicited on behalf of the Board of Trustees
The undersigned hereby appoints Arthur Zeikel, Terry K. Glenn and Lawrence
A. Rogers as proxies, each with the power to appoint his substitute, and hereby
authorizes each of them to represent and to vote, as designated on the reverse
hereof, all of the shares of beneficial interest of Merrill Lynch Michigan
Limited Maturity Municipal Bond Fund of Merrill Lynch Multi-State Limited
Maturity Municipal Series Trust (the "Fund") held of record by the undersigned
on October 10, 1997 at a Special Meeting of Stockholders of the Fund to be held
on December 9, 1997, or any adjournment thereof.
THIS PROXY WHEN PROPERLY EXECUTED WILL BE VOTED IN THE MANNER HEREIN
DIRECTED BY THE UNDERSIGNED STOCKHOLDER. IF NO DIRECTION IS MADE, THIS PROXY
WILL BE VOTED FOR PROPOSAL 1.
(Continued and to be signed on the reverse side)
[Proxy Card Reverse]
1. To consider and act upon a proposal to approve the Agreement and Plan of
Reorganization between the Merrill Lynch Multi-State Limited Maturity
Municipal Series Trust and Merrill Lynch Municipal Bond Fund, Inc.
FOR [_] AGAINST [_] ABSTAIN [_]
2. In the discretion of such proxies, upon such other business as properly may
come before the meeting or any adjournment thereof.
Please sign exactly as name appears hereon. When shares
are held by joint tenants, both should sign. When
signing as attorney or as executor, administrator,
trustee or guardian, please give full title as such. If
a corporation, please sign in full corporate name by
president or other authorized officer. If a partnership,
please sign in partnership name by authorized persons.
Dated: _________________, 1997
X
----------------------------
Signature
X
----------------------------
Signature, if held jointly
PLEASE MARK BOXES /X/ OR [X] IN BLUE OR BLACK INK. SIGN, DATE AND RETURN THE
PROXY CARD PROMPTLY USING THE ENCLOSED ENVELOPE.
<PAGE>
[Proxy Card Front]
MERRILL LYNCH NEW JERSEY LIMITED MATURITY MUNICIPAL BOND FUND
OF MERRILL LYNCH MULTI-STATE LIMITED MATURITY MUNICIPAL SERIES TRUST
P.O. BOX 9011
PRINCETON, NEW JERSEY 08543-9011
P R O X Y
This proxy is solicited on behalf of the Board of Trustees
The undersigned hereby appoints Arthur Zeikel, Terry K. Glenn and Lawrence
A. Rogers as proxies, each with the power to appoint his substitute, and hereby
authorizes each of them to represent and to vote, as designated on the reverse
hereof, all of the shares of beneficial interest of Merrill Lynch New Jersey
Limited Maturity Municipal Bond Fund of Merrill Lynch Multi-State Limited
Maturity Municipal Series Trust (the "Fund") held of record by the undersigned
on October 10, 1997 at a Special Meeting of Stockholders of the Fund to be held
on December 9, 1997, or any adjournment thereof.
THIS PROXY WHEN PROPERLY EXECUTED WILL BE VOTED IN THE MANNER HEREIN
DIRECTED BY THE UNDERSIGNED STOCKHOLDER. IF NO DIRECTION IS MADE, THIS PROXY
WILL BE VOTED FOR PROPOSAL 1.
(Continued and to be signed on the reverse side)
[Proxy Card Reverse]
1. To consider and act upon a proposal to approve the Agreement and Plan of
Reorganization between the Merrill Lynch Multi-State Limited Maturity
Municipal Series Trust and Merrill Lynch Municipal Bond Fund, Inc.
FOR [_] AGAINST [_] ABSTAIN [_]
2. In the discretion of such proxies, upon such other business as properly may
come before the meeting or any adjournment thereof.
Please sign exactly as name appears hereon. When shares
are held by joint tenants, both should sign. When
signing as attorney or as executor, administrator,
trustee or guardian, please give full title as such. If
a corporation, please sign in full corporate name by
president or other authorized officer. If a partnership,
please sign in partnership name by authorized persons.
Dated: _________________, 1997
X
----------------------------
Signature
X
----------------------------
Signature, if held jointly
PLEASE MARK BOXES /X/ OR [X] IN BLUE OR BLACK INK. SIGN, DATE AND RETURN THE
PROXY CARD PROMPTLY USING THE ENCLOSED ENVELOPE.
<PAGE>
[Proxy Card Front]
MERRILL LYNCH NEW YORK LIMITED MATURITY MUNICIPAL BOND FUND
OF MERRILL LYNCH MULTI-STATE LIMITED MATURITY MUNICIPAL SERIES TRUST
P.O. BOX 9011
PRINCETON, NEW JERSEY 08543-9011
P R O X Y
This proxy is solicited on behalf of the Board of Trustees
The undersigned hereby appoints Arthur Zeikel, Terry K. Glenn and Lawrence
A. Rogers as proxies, each with the power to appoint his substitute, and hereby
authorizes each of them to represent and to vote, as designated on the reverse
hereof, all of the shares of beneficial interest of Merrill Lynch New York
Limited Maturity Municipal Bond Fund of Merrill Lynch Multi-State Limited
Maturity Municipal Series Trust (the "Fund") held of record by the undersigned
on October 10, 1997 at a Special Meeting of Stockholders of the Fund to be held
on December 9, 1997, or any adjournment thereof.
THIS PROXY WHEN PROPERLY EXECUTED WILL BE VOTED IN THE MANNER HEREIN
DIRECTED BY THE UNDERSIGNED STOCKHOLDER. IF NO DIRECTION IS MADE, THIS PROXY
WILL BE VOTED FOR PROPOSAL 1.
(Continued and to be signed on the reverse side)
[Proxy Card Reverse]
1. To consider and act upon a proposal to approve the Agreement and Plan of
Reorganization between the Merrill Lynch Multi-State Limited Maturity
Municipal Series Trust and Merrill Lynch Municipal Bond Fund, Inc.
FOR [_] AGAINST [_] ABSTAIN [_]
2. In the discretion of such proxies, upon such other business as properly may
come before the meeting or any adjournment thereof.
Please sign exactly as name appears hereon. When shares
are held by joint tenants, both should sign. When
signing as attorney or as executor, administrator,
trustee or guardian, please give full title as such. If
a corporation, please sign in full corporate name by
president or other authorized officer. If a partnership,
please sign in partnership name by authorized persons.
Dated: _________________, 1997
X
----------------------------
Signature
X
----------------------------
Signature, if held jointly
PLEASE MARK BOXES /X/ OR [X] IN BLUE OR BLACK INK. SIGN, DATE AND RETURN THE
PROXY CARD PROMPTLY USING THE ENCLOSED ENVELOPE.
<PAGE>
[Proxy Card Front]
MERRILL LYNCH PENNSYLVANIA LIMITED MATURITY MUNICIPAL BOND FUND
OF MERRILL LYNCH MULTI-STATE LIMITED MATURITY MUNICIPAL SERIES TRUST
P.O. BOX 9011
PRINCETON, NEW JERSEY 08543-9011
P R O X Y
This proxy is solicited on behalf of the Board of Trustees
The undersigned hereby appoints Arthur Zeikel, Terry K. Glenn and Lawrence
A. Rogers as proxies, each with the power to appoint his substitute, and hereby
authorizes each of them to represent and to vote, as designated on the reverse
hereof, all of the shares of beneficial interest of Merrill Lynch Pennsylvania
Limited Maturity Municipal Bond Fund of Merrill Lynch Multi-State Limited
Maturity Municipal Series Trust (the "Fund") held of record by the undersigned
on October 10, 1997 at a Special Meeting of Stockholders of the Fund to be held
on December 9, 1997, or any adjournment thereof.
THIS PROXY WHEN PROPERLY EXECUTED WILL BE VOTED IN THE MANNER HEREIN
DIRECTED BY THE UNDERSIGNED STOCKHOLDER. IF NO DIRECTION IS MADE, THIS PROXY
WILL BE VOTED FOR PROPOSAL 1.
(Continued and to be signed on the reverse side)
[Proxy Card Reverse]
1. To consider and act upon a proposal to approve the Agreement and Plan of
Reorganization between the Merrill Lynch Multi-State Limited Maturity
Municipal Series Trust and Merrill Lynch Municipal Bond Fund, Inc.
FOR [_] AGAINST [_] ABSTAIN [_]
2. In the discretion of such proxies, upon such other business as properly may
come before the meeting or any adjournment thereof.
Please sign exactly as name appears hereon. When shares
are held by joint tenants, both should sign. When
signing as attorney or as executor, administrator,
trustee or guardian, please give full title as such. If
a corporation, please sign in full corporate name by
president or other authorized officer. If a partnership,
please sign in partnership name by authorized persons.
Dated: _________________, 1997
X
----------------------------
Signature
X
----------------------------
Signature, if held jointly
PLEASE MARK BOXES /X/ OR [X] IN BLUE OR BLACK INK. SIGN, DATE AND RETURN THE
PROXY CARD PROMPTLY USING THE ENCLOSED ENVELOPE.
<PAGE>
MERRILL LYNCH MULTI-STATE LIMITED MATURITY MUNICIPAL SERIES TRUST
P.O. BOX 9011
PRINCETON, NEW JERSEY 08543-9011
NOTICE OF SPECIAL MEETING OF STOCKHOLDERS
TO BE HELD ON JANUARY 5, 1998
TO THE STOCKHOLDERS OF MERRILL LYNCH MULTI-STATELIMITED MATURITY MUNICIPAL
SERIES TRUST holding shares of
Merrill Lynch Arizona Limited Maturity Municipal Bond Fund
Merrill Lynch Massachusetts Limited Maturity Municipal Bond Fund
Merrill Lynch Michigan Limited Maturity Municipal Bond Fund
Merrill Lynch New Jersey Limited Maturity Municipal Bond Fund
Merrill Lynch New York Limited Maturity Municipal Bond Fund
Merrill Lynch Pennsylvania Limited Maturity Municipal Bond Fund
NOTICE IS HEREBY GIVEN that a special meeting of stockholders (the
"Meeting") of Merrill Lynch Multi-State Limited Maturity Municipal Series
Trust (the "Trust") will be held at the offices of Merrill Lynch Asset
Management, L.P., 800 Scudders Mill Road, Plainsboro, New Jersey, on Monday,
January 5, 1998 at 9:00 a.m., New York time, for the following purposes:
(1) To approve or disapprove an Agreement and Plan of Reorganization (the
"Agreement and Plan of Reorganization") contemplating the acquisition of
substantially all of the assets of, and the assumption of substantially all
of the liabilities of, Merrill Lynch Arizona Limited Maturity Municipal
Bond Fund, Merrill Lynch Massachusetts Limited Maturity Municipal Bond
Fund, Merrill Lynch Michigan Limited Maturity Municipal Bond Fund, Merrill
Lynch New Jersey Limited Maturity Municipal Bond Fund, Merrill Lynch New
York Limited Maturity Municipal Bond Fund and Merrill Lynch Pennsylvania
Limited Maturity Municipal Bond Fund, each a series of the Trust
(collectively, the "State Funds") by Limited Maturity Portfolio (the
"Limited Maturity Portfolio"), a series of Merrill Lynch Municipal Bond
Fund, Inc. (the "Municipal Bond Fund"), in exchange solely for an equal
aggregate value of newly-issued shares of Common Stock of Limited Maturity
Portfolio (the "Limited Maturity Portfolio Common Stock"), the distribution
of such Limited Maturity Portfolio Common Stock to the holders of shares of
beneficial interest of the State Funds and the termination of the State
Funds as series of the Trust (collectively, the "Reorganization"); and
(2) To transact such other business as properly may come before the
Meeting or any adjournment thereof.
If the proposed Reorganization is approved by the stockholders at the
Meeting and effected by the State Funds, any stockholder (1) who files with
the applicable State Fund before the taking of the vote on the approval of
such Agreement and Plan of Reorganization, written objection to the proposed
Reorganization stating that he or she intends to demand payment for his or her
shares if the Reorganization takes place and (2) whose shares are not voted in
favor of such Agreement and Plan of Reorganization has or may have the right
to demand in writing from Limited Maturity Portfolio, within twenty days after
the date of mailing to him or her of notice in writing that the Reorganization
has become effective, payment for his or her shares and an appraisal of the
value thereof. Limited Maturity Portfolio and any such stockholders shall in
such cases have the rights and duties and shall follow the procedure set forth
in sections 88 to 98, inclusive, of chapter 156B of the General Laws of
Massachusetts. See "The Reorganization--Agreement and Plan of Reorganization--
Appraisal Rights" in the Proxy Statement, particularly with respect to the
intention of Limited Maturity Portfolio to petition a court to determine
whether this right of appraisal has been superseded by a rule of the
Securities and Exchange Commission, in the event that any stockholder elects
to exercise such right.
<PAGE>
The Board of Trustees of the Trust has fixed the close of business on
November 10, 1997 as the record date for the determination of stockholders
entitled to notice of, and to vote at, the Meeting or any adjournment thereof.
A complete list of the stockholders of each State Fund entitled to vote at
the Meeting will be available and open to the examination of any stockholder
of such State Fund for any purpose germane to the Meeting during ordinary
business hours from and after December 22, 1997, at the offices of the Trust,
800 Scudders Mill Road, Plainsboro, New Jersey.
You are cordially invited to attend the Meeting. Stockholders who do not
expect to attend the Meeting in person are requested to complete, date and
sign the enclosed form of proxy applicable to their State Fund and return it
promptly in the envelope provided for that purpose. The enclosed proxy is
being solicited on behalf of the Board of Trustees of the Trust.
By Order of the Board of Trustees,
LAWRENCE A. ROGERS
Secretary
Plainsboro, New Jersey
Dated: November 24, 1997
<PAGE>
MERRILL LYNCH MULTI-STATE LIMITED MATURITY MUNICIPAL SERIES TRUST
MERRILL LYNCH MUNICIPAL BOND FUND, INC.
P.O. BOX 9011, PRINCETON, NEW JERSEY 08543-9011
(609) 282-2800
SPECIAL MEETING OF STOCKHOLDERS
OF MERRILL LYNCH MULTI-STATE LIMITED MATURITY MUNICIPAL SERIES TRUST
JANUARY 5, 1998
This Joint Proxy Statement and Prospectus (this "Proxy Statement and
Prospectus") is furnished in connection with the solicitation of proxies on
behalf of the Board of Trustees of Merrill Lynch Multi-State Limited Maturity
Municipal Series Trust, a Massachusetts business trust (the "Trust"), for use
at the Special Meeting of Stockholders (the "Meeting") called to approve or
disapprove the proposed reorganization whereby Limited Maturity Portfolio (the
"Limited Maturity Portfolio"), a series of Merrill Lynch Municipal Bond Fund,
Inc., a Maryland corporation (the "Municipal Bond Fund"), will acquire
substantially all of the assets, and will assume substantially all of the
liabilities, of Merrill Lynch Arizona Limited Maturity Municipal Bond Fund
(the "Arizona Fund"), Merrill Lynch Massachusetts Limited Maturity Municipal
Bond Fund (the "Massachusetts Fund"), Merrill Lynch Michigan Limited Maturity
Municipal Bond Fund (the "Michigan Fund"), Merrill Lynch New Jersey Limited
Maturity Municipal Bond Fund (the "New Jersey Fund"), Merrill Lynch New York
Limited Maturity Municipal Bond Fund (the "New York Fund") and Merrill Lynch
Pennsylvania Limited Maturity Municipal Bond Fund (the "Pennsylvania Fund"),
each a series of the Trust (collectively, the "State Funds"), in exchange
solely for an equal aggregate value of newly-issued shares of Common Stock of
Limited Maturity Portfolio (the "Limited Maturity Portfolio Common Stock"),
with a par value of $.10 per share, the subsequent distribution of Limited
Maturity Portfolio Common Stock to the stockholders of the State Funds in
exchange for their shares of beneficial interest of the State Funds, each with
a par value of $.10 per share, and the termination of the State Funds as
series of the Trust (collectively, the "Reorganization").
This Proxy Statement and Prospectus serves as a prospectus of the Municipal
Bond Fund under the Securities Act of 1933, as amended (the "Securities Act"),
in connection with the issuance of Limited Maturity Portfolio Common Stock in
the Reorganization.
Holders of Class A shares of each of the State Funds will be entitled to
receive Class A shares of Limited Maturity Portfolio Common Stock. Holders of
Class B, Class C and Class D shares of each of the State Funds will be
entitled to receive Class D shares of Limited Maturity Portfolio Common Stock.
The aggregate net asset value of Limited Maturity Portfolio Common Stock to be
received by each stockholder of each of the State Funds will equal the
aggregate net asset value of the State Fund shares owned by such stockholder
as set forth in the Agreement and Plan of Reorganization.
Both the Trust and the Municipal Bond Fund are open-end management
investment companies with similar, though not identical, investment
objectives. Specifically, each State Fund seeks to provide stockholders with
as high a level of income exempt from Federal income taxes and personal income
taxes imposed by the designated state (and, in certain instances, state
intangible personal property taxes, corporate income or local personal income
taxes and local personal property taxes) as is consistent with prudent
investment management. Limited Maturity Portfolio seeks to provide
stockholders with as high a level of income exempt from Federal income taxes
as is consistent with prudent investment management. Each State Fund seeks to
achieve its objective by investing primarily in a portfolio of intermediate-
term investment grade obligations of the designated state or its political
subdivisions, agencies or instrumentalities, or certain other jurisdictions,
that pay interest exempt, in the opinion of bond counsel to the issuer, from
Federal income taxes and personal income taxes of the designated state and,
where applicable, state intangible personal property taxes, local personal
property taxes and local personal income taxes in the designated state.
Limited Maturity Portfolio seeks to achieve its objective by investing
primarily in a portfolio of short-term investment grade obligations issued by
or on behalf of states, territories and possessions of the United States and
the District of Columbia and their political subdivisions, agencies and
instrumentalities, the interest on which is exempt from Federal income taxes.
There can be no assurance that, after the Reorganization, Limited Maturity
Portfolio will achieve its investment objective.
The current prospectus relating to Municipal Bond Fund, dated October 7,
1997 (the "Municipal Bond Fund Prospectus") accompanies this Proxy Statement
and Prospectus and is incorporated herein by reference. The Annual Report to
Stockholders of the Municipal Bond Fund for the fiscal year ended June 30,
1997 also accompanies this Proxy Statement and Prospectus. A statement of
additional information relating to Municipal Bond Fund, dated October 7, 1997
(the "Municipal Bond Fund Statement"), a prospectus relating to the Trust,
dated November 27, 1996 (the "Limited Maturity Trust Prospectus") and a
statement of additional information relating to the Trust, dated November 27,
1996 (the "Limited Maturity Trust Statement"), have been filed with the
Securities and Exchange Commission (the "Commission"). Such documents may be
obtained, without charge, by writing either Municipal Bond Fund or the Trust
at the address above, or by calling 1-800-456-4587, ext. 123.
--------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES
AND EXCHANGE COMMISSION, NOR HAS THE COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROXY STATEMENT AND PROSPECTUS.
ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL
OFFENSE.
--------------
This Proxy Statement and Prospectus sets forth concisely the information
about the Municipal Bond Fund that stockholders of the State Funds should know
before considering the Reorganization and should be retained for future
reference. The Trust has authorized the solicitation of proxies in connection
with the Reorganization solely on the basis of this Proxy Statement and
Prospectus and the accompanying documents.
A statement of additional information relating to the Reorganization (the
"Statement of Additional Information"), including pro forma combined financial
statements of the Trust and Municipal Bond Fund, is on file with the
Commission. It is available from Municipal Bond Fund, without charge, upon
oral request by calling the telephone number set forth above or upon written
request by writing Municipal Bond Fund at its principal executive offices. The
Statement of Additional Information, dated November 24, 1997, is incorporated
by reference into this Proxy Statement and Prospectus. The Commission
maintains a Web site (http://www.sec.gov) that contains the Statement of
Additional Information, the Limited Maturity Trust Prospectus, the Limited
Maturity Trust Statement, the Municipal Bond Fund Prospectus, the Municipal
Bond Fund Statement, other material incorporated by reference and other
information regarding the Municipal Bond Fund and the Trust.
The address of the principal executive offices of both the Trust and
Municipal Bond Fund is 800 Scudders Mill Road, Plainsboro, New Jersey 08536,
and the telephone number is (609) 282-2800.
--------------
THE DATE OF THIS PROXY STATEMENT AND PROSPECTUS IS NOVEMBER 24, 1997.
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
-----
<S> <C>
INTRODUCTION............................................................. 3
THE REORGANIZATION....................................................... 3
SUMMARY.................................................................. 3
RISK FACTORS AND SPECIAL CONSIDERATIONS.................................. 16
Portfolio Management................................................... 16
Maturity............................................................... 16
COMPARISON OF THE STATE FUNDS AND LIMITED MATURITY PORTFOLIO............. 17
Financial Highlights................................................... 17
Investment Objective and Policies...................................... 25
Description of Municipal Bonds......................................... 28
Other Investment Policies.............................................. 28
Information Regarding Options and Futures Transactions................. 29
Investment Restrictions................................................ 31
Portfolio Composition.................................................. 32
Portfolio Transactions................................................. 34
Portfolio Turnover..................................................... 34
Additional Information................................................. 35
Management............................................................. 36
Purchase of Shares..................................................... 37
Redemption of Shares................................................... 37
Voting Rights.......................................................... 37
Stockholder Inquiries.................................................. 38
Dividends and Distributions............................................ 38
Taxation of Limited Maturity Portfolio, State Funds and Their
Stockholders.......................................................... 38
State of Organization.................................................. 40
AGREEMENT AND PLAN OF REORGANIZATION..................................... 41
General................................................................ 41
Procedure.............................................................. 42
Terms of the Agreement and Plan of Reorganization...................... 42
Potential Benefits to Stockholders of the State Funds as a Result of
the Reorganization.................................................... 43
Tax Consequences of the Reorganization................................. 45
Appraisal Rights....................................................... 46
Capitalization......................................................... 47
INFORMATION CONCERNING THE SPECIAL MEETING............................... 48
Date, Time and Place of Meeting........................................ 48
Solicitation, Revocation and Use of Proxies............................ 48
Record Date and Outstanding Shares..................................... 48
Security Ownership of Certain Beneficial Owners and Management of the
State Funds and Limited Maturity Portfolio............................ 49
Voting Rights and Required Vote........................................ 49
ADDITIONAL INFORMATION................................................... 50
LEGAL PROCEEDINGS........................................................ 51
LEGAL OPINIONS........................................................... 51
EXPERTS.................................................................. 51
STOCKHOLDER PROPOSALS.................................................... 51
EXHIBIT I AGREEMENT AND PLAN OF REORGANIZATION........................... I-1
EXHIBIT II RATINGS OF MUNICIPAL BONDS.................................... II-1
EXHIBIT III SECTIONS 86 THROUGH 98 OF CHAPTER 156B OF THE MASSACHUSETTS
GENERAL LAWS (THE MASSACHUSETTS BUSINESS CORPORATION LAW)............... III-1
</TABLE>
2
<PAGE>
INTRODUCTION
This Proxy Statement and Prospectus is furnished in connection with the
solicitation of proxies on behalf of the Board of Trustees of the Trust with
respect to the State Funds for use at the Meeting to be held at the offices of
Merrill Lynch Asset Management, L.P. ("MLAM"), 800 Scudders Mill Road,
Plainsboro, New Jersey, on January 5, 1998, at 9:00 a.m., New York time. The
mailing address for the Trust is P.O. Box 9011, Princeton, New Jersey 08543-
9011. The approximate mailing date of this Proxy Statement and Prospectus is
November 28, 1997.
Any person giving a proxy may revoke it at any time prior to its exercise by
executing a superseding proxy, by giving written notice of the revocation to
the Secretary of the Trust at the address indicated above or by voting in
person at the Meeting. All properly executed proxies received prior to the
Meeting will be voted at the Meeting in accordance with the instructions
marked thereon or otherwise as provided therein. Unless instructions to the
contrary are marked, proxies will be voted "FOR" the proposal to approve the
Agreement and Plan of Reorganization between the Trust on behalf of each of
the State Funds and Municipal Bond Fund on behalf of Limited Maturity
Portfolio. Approval of the Agreement and Plan of Reorganization will require
the affirmative vote of stockholders representing more than 50% of the
outstanding shares of beneficial interest of each of the State Funds voting
separately as a class. See "Information Concerning the Special Meeting."
The Board of Trustees of the Trust knows of no business other than that
discussed in the proposal above that will be presented for consideration at
the Meeting. If any other matter is properly presented, it is the intention of
the persons named in the enclosed proxy to vote in accordance with their best
judgment.
The class of stockholders solicited and entitled to vote on each proposal is
outlined in the chart below:
<TABLE>
<CAPTION>
PROPOSAL TO APPROVE THE
AGREEMENT AND PLAN
FUND OF REORGANIZATION
-------------------------------------------
<S> <C>
Arizona Fund* Yes
Massachusetts Fund* Yes
Michigan Fund* Yes
New Jersey Fund* Yes
New York Fund* Yes
Pennsylvania Fund* Yes
</TABLE>
- --------
* All classes of the Fund's shares of beneficial interest may vote on the
proposal together as a single class.
THE REORGANIZATION
SUMMARY
The following is a summary of certain information contained elsewhere in
this Proxy Statement and Prospectus and is qualified in its entirety by
reference to the more complete information contained herein and in the
Agreement and Plan of Reorganization, attached hereto as Exhibit I.
In this Proxy Statement and Prospectus, the term "Reorganization" refers
collectively to (i) the acquisition of substantially all of the assets, and
the assumption of substantially all of the liabilities, of each of the State
Funds by Limited Maturity Portfolio of the Municipal Bond Fund and the
subsequent distribution of Limited Maturity Portfolio Common Stock to the
holders of shares of beneficial interest of each of the State Funds and (ii)
the subsequent termination of each of the State Funds as series of the Trust.
At a meeting of the Board of Trustees of the Trust held on September 26,
1997, the Board of Trustees of the Trust approved a proposal that Limited
Maturity Portfolio of the Municipal Bond Fund acquire substantially
3
<PAGE>
all of the assets, and assume substantially all of the liabilities, of each of
the State Funds in exchange solely for Limited Maturity Portfolio Common Stock
to be distributed to the stockholders of each of the State Funds.
Based upon their evaluation of all relevant information, the Trustees of the
Trust determined that the Reorganization will potentially benefit the holders
of shares of beneficial interest of the State Funds. Specifically, after the
Reorganization, stockholders of each of the State Funds will remain invested
in an open-end fund that has an investment objective and policies similar, but
not identical, to those of the State Funds. In addition, it is anticipated
that stockholders of the State Funds will be subject to a reduced overall
operating expense ratio based on the combined assets of the surviving entity
after the Reorganization. See "The Reorganization--Agreement and Plan of
Reorganization--Potential Benefits to State Fund Stockholders as a Result of
the Reorganization."
In deciding to recommend the Reorganization, the Board of Trustees of the
Trust took into account the investment objective and policies of the State
Funds and of Limited Maturity Portfolio, the expenses incurred both due to the
Reorganization and on an ongoing basis by the new and existing stockholders of
Limited Maturity Portfolio and the potential benefits, including economies of
scale, to the holders of shares of beneficial interest of the State Funds as a
result of the Reorganization. The Trustees also considered the effect of the
Reorganization on the holders of the shares of beneficial interest of Merrill
Lynch California Limited Maturity Municipal Bond Fund and Merrill Lynch
Florida Limited Maturity Municipal Bond Fund, the two series of the Trust that
are not participating in the Reorganization. The Board of Trustees of the
Trust, including all of the Trustees who are not "interested persons," as
defined in the Investment Company Act of 1940, as amended (the "Investment
Company Act"), of the Trust have determined that the Reorganization is in the
best interests of each of the State Funds and of the holders of shares of
beneficial interest of the State Funds and that the interests of such
stockholders will not be diluted as a result of effecting the Reorganization.
If all of the requisite approvals are obtained, it is anticipated that the
Reorganization will occur as soon as practicable after such approval, provided
that the State Funds and Limited Maturity Portfolio have obtained prior to
that time a favorable private letter ruling from the Internal Revenue Service
(the "IRS") concerning the tax consequences of the Reorganization as set forth
in the Agreement and Plan of Reorganization. Under the Agreement and Plan of
Reorganization, however, the Board of Trustees of the Trust or the Board of
Directors of Municipal Bond Fund may cause the Reorganization to be postponed
or abandoned should either Board determine that it is in the best interests of
the stockholders of either the Trust or Municipal Bond Fund, respectively, to
do so. The Agreement and Plan of Reorganization may be terminated, and the
Reorganization abandoned, whether before or after approval by the stockholders
of the State Funds, at any time prior to the Exchange Date (as defined below),
(i) by mutual consent of the Board of Trustees of the Trust and the Board of
Directors of Municipal Bond Fund; (ii) by the Board of Trustees of the Trust
if any condition to the Trust's obligations has not been fulfilled or waived
by such Board; or (iii) by the Board of Directors of Municipal Bond Fund if
any condition to Municipal Bond Fund's obligations has not been fulfilled or
waived by such Board.
4
<PAGE>
PRO FORMA FEE TABLE FOR CLASS A AND CLASS B STOCKHOLDERS OF THE STATE FUNDS,
LIMITED MATURITY PORTFOLIO
AND THE COMBINED ENTITY FOR THE YEAR ENDED JULY 31, 1997 (UNAUDITED)
<TABLE>
<CAPTION>
CLASS A SHARES (a) CLASS B SHARES (b)
------------------------------- ----------------------------------------
ACTUAL ACTUAL
------------------- --------------------------
ALL LIMITED ALL LIMITED
STATE MATURITY PRO FORMA STATE MATURITY PRO FORMA
FUNDS PORTFOLIO COMBINED FUNDS PORTFOLIO COMBINED
----- --------- --------- ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
STOCKHOLDER TRANSACTION
EXPENSES:
Maximum Sales Charge
Imposed on Purchases
(as a percentage of of-
fering price).......... 1.00%(c) 1.00%(c) 1.00%(c) None None None
Sales Charge Imposed on
Dividend Reinvestment.. None None None None None None
Deferred Sales Charge
(as a percentage of
original purchase price
or redemption proceeds,
whichever is lower).... None(d) None(d) None(d) 1.0% during 1.0% during 1.0% during
the first the first the first
year year, year,
decreasing decreasing decreasing
to 0.0% to 0.0% to 0.0%
after the after the after the
first year(e) first year(e) first
year(e)
Exchange Fee........... None None None None None None
</TABLE>
- ----
(a) Class A shares are sold to a limited group of investors including existing
Class A stockholders and certain participants in fee-based programs. See
"The Reorganization--Comparison of the State Funds and Limited Maturity
Portfolio--Purchase of Shares."
(b) Class B shares convert to Class D shares automatically approximately ten
years after initial purchase and cease being subject to distribution fees
and are subject to lower account maintenance fees. See "The
Reorganization--Comparison of the State Funds and Limited Maturity
Portfolio--Purchase of Shares."
(c) Reduced for purchases of $100,000 and over and waived for purchases of
Class A shares by certain fee-based programs. Class A purchases of
$1,000,000 or more may not be subject to an initial sales charge. See "The
Reorganization--Comparison of the State Funds and Limited Maturity
Portfolio--Purchase of Shares."
(d) Class A shares are not subject to a contingent deferred sales charge
("CDSC"), except that certain purchases of $1,000,000 or more which are
not subject to an initial sales charge may instead be subject to a CDSC of
0.20% of amounts redeemed within the first year after purchase. Such CDSC
may be waived in connection with certain fee-based programs.
(e) The CDSC may be modified in connection with certain fee-based programs.
5
<PAGE>
PRO FORMA FEE TABLE FOR CLASS A AND CLASS B STOCKHOLDERS OF THE STATE FUNDS,
LIMITED
MATURITY PORTFOLIO AND THE COMBINED ENTITY FOR THE YEAR ENDED JULY 31, 1997
(UNAUDITED)--(CONTINUED)
<TABLE>
<CAPTION>
CLASS A SHARES (a)
-----------------------------------------------------------------------------------
ACTUAL
-------------------------------------------------------------------------
LIMITED
ARIZONA MASSACHUSETTS MICHIGAN NEW JERSEY NEW YORK PENNSYLVANIA MATURITY PRO FORMA
FUND FUND FUND FUND FUND FUND PORTFOLIO COMBINED
------- ------------- -------- ---------- -------- ------------ --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
ANNUAL FUND OPERATING
EXPENSES (AS A PERCENT-
AGE OF AVERAGE NET AS-
SETS):
Investment Advisory
Fees(c)................ 0.35% 0.35% 0.35% 0.35% 0.35% 0.35% 0.33% 0.33%
12b-1 fees(d):
Account Maintenance
Fees................... None None None None None None None None
Distribution Fees...... None None None None None None None None
Other Expenses.......... 2.86% 2.17% 3.15% 1.30% 0.81% 1.40% 0.08% 0.08%
---- ---- ---- ---- ---- ---- ---- ----
Total Fund Operating
Expenses(e)............. 3.21% 2.52% 3.50% 1.65% 1.16% 1.75% 0.41% 0.41%
==== ==== ==== ==== ==== ==== ==== ====
</TABLE>
<TABLE>
<CAPTION>
CLASS B SHARES (b)
-----------------------------------------------------------------------------------
ACTUAL
-------------------------------------------------------------------------
LIMITED PRO FORMA
ARIZONA MASSACHUSETTS MICHIGAN NEW JERSEY NEW YORK PENNSYLVANIA MATURITY COMBINED
FUND FUND FUND FUND FUND FUND PORTFOLIO (f)
------- ------------- -------- ---------- -------- ------------ --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Investment Advisory
Fees(c)................. 0.35% 0.35% 0.35% 0.35% 0.35% 0.35% 0.33% 0.33%
12b-1 fees(d):
Account Maintenance
Fees................... 0.15% 0.15% 0.15% 0.15% 0.15% 0.15% 0.15% 0.15%
Distribution Fees...... 0.20% 0.20% 0.20% 0.20% 0.20% 0.20% 0.20% 0.20%
Other Expenses.......... 2.86% 2.14% 3.16% 1.30% 0.82% 1.41% 0.08% 0.08%
---- ---- ---- ---- ---- ---- ---- ----
Total Fund Operating
Expenses(e)............. 3.56% 2.84% 3.86% 2.00% 1.52% 2.11% 0.76% 0.76%
==== ==== ==== ==== ==== ==== ==== ====
</TABLE>
(a) Class A shares are sold to a limited group of investors including existing
Class A stockholders and certain participants in fee-based programs.
(b) Class B shares convert to Class D shares automatically approximately ten
years after initial purchase and cease being subject to distribution fees
and are subject to lower account maintenance fees.
(c) See "The Reorganization--Comparison of the State Funds and Limited
Maturity Portfolio--Management."
(d) See "The Reorganization--Comparison of the State Funds and Limited
Maturity Portfolio--Purchase of Shares."
(e) Currently, Fund Asset Management, L.P. ("FAM") has voluntarily waived all
of the advisory fees due from each of the State Funds and has voluntarily
reimbursed each of the State Funds for a portion of other expenses
(excluding Rule 12b-1 fees). The Total Fund Operating Expenses in the fee
table above have been restated to assume the absence of any such waiver or
reimbursement because FAM may discontinue or reduce such waiver of fees
and/or assumption of expenses at any time without notice. The actual Total
Fund Operating Expenses, net of the waiver, is provided below for the year
ended July 31, 1997:
<TABLE>
<CAPTION>
ADVISORY FEES
WAIVED AND
EXPENSES TOTAL OPERATING EXPENSES AFTER
REIMBURSED WAIVER AND REIMBURSEMENT
--------------- --------------------------------
CLASS A CLASS B CLASS A CLASS B
------- ------- --------------- ---------------
<S> <C> <C> <C> <C>
Arizona Fund............... 2.27% 2.26% 0.94% 1.30%
Massachusetts Fund......... 1.53% 1.49% 0.99% 1.35%
Michigan Fund.............. 2.56% 2.55% 0.94% 1.31%
New Jersey Fund............ 0.71% 0.70% 0.94% 1.30%
New York Fund.............. 0.46% 0.47% 0.70% 1.05%
Pennsylvania Fund.......... 0.76% 0.76% 0.99% 1.35%
</TABLE>
(f) Holders of Class B shares of the State Funds will receive Class D shares
of Limited Maturity Portfolio in the Reorganization and will be subject to
the expenses relating to Class D shares. See "Pro Forma Fee Table for
Class C and Class D Stockholders" on page 9.
6
<PAGE>
CUMULATIVE EXPENSES PAID ON CLASS A AND CLASS B SHARES FOR THE PERIODS
INDICATED:
EXAMPLE:
<TABLE>
<CAPTION>
CLASS A SHARES CLASS B SHARES
------------------------------- -------------------------------
1 YEAR 3 YEARS 5 YEARS 10 YEARS 1 YEAR 3 YEARS 5 YEARS 10 YEARS
------ ------- ------- -------- ------ ------- ------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
An investor would pay
the following expenses
on a $1,000 investment,
including the maximum
sales load of $10.00
(Class A shares only)
and assuming (1) the
Total Fund Operating
Expenses set forth above
for the relevant
portfolio, (2) a 5%
annual return throughout
the periods and (3)
redemption at the end of
the period (including
any applicable CDSC for
Class B shares):
Arizona Fund........... $42 $108 $176 $358 $46 $109 $185 $383
Massachusetts Fund..... 35 88 143 293 39 88 150 317
Michigan Fund.......... 45 116 190 384 49 118 199 409
New Jersey Fund........ 27 62 99 204 30 63 108 233
New York Fund.......... 22 46 73 149 25 48 83 181
Pennsylvania Fund...... 28 65 104 214 31 66 113 244
Limited Maturity
Portfolio.............. 14 23 33 61 18 24 42 94
Combined Entity+....... 14 23 33 61 18 24 42 94
An investor would pay
the following expenses
on the same $1,000
investment assuming no
redemption at the end of
the period:
Arizona Fund........... $42 $108 $176 $358 $36 $109 $185 $383
Massachusetts Fund..... 35 88 143 293 29 88 150 317
Michigan Fund.......... 45 116 190 384 39 118 199 409
New Jersey Fund........ 27 62 99 204 20 63 108 233
New York Fund.......... 22 46 73 149 15 48 83 181
Pennsylvania Fund...... 28 65 104 214 21 66 113 244
Limited Maturity
Portfolio.............. 14 23 33 61 8 24 42 94
Combined Entity+....... 14 23 33 61 8 24 42 94
</TABLE>
- -----
+Assuming the Reorganization had taken place on August 1, 1996 (the first day
of the year ended July 31, 1997).
7
<PAGE>
PRO FORMA FEE TABLE FOR CLASS C AND CLASS D STOCKHOLDERS OF THE STATE FUNDS,
LIMITED MATURITY PORTFOLIO
AND THE COMBINED ENTITY FOR THE YEAR ENDED JULY 31, 1997 (UNAUDITED)
<TABLE>
<CAPTION>
CLASS C SHARES* CLASS D SHARES
---------------------------------- ----------------------------
ACTUAL ACTUAL
---------------------- ------------------
ALL LIMITED ALL LIMITED
STATE MATURITY PRO FORMA STATE MATURITY PRO FORMA
FUNDS PORTFOLIO COMBINED FUNDS PORTFOLIO COMBINED
---------- ---------- ---------- ------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
STOCKHOLDER TRANSACTION
EXPENSES:
Maximum Sales Charge
Imposed on Purchases
(as a percentage of
offering price)........ None None None 1.00%(a) 1.00%(a) 1.00%(a)
Sales Charge Imposed on
Dividend Reinvestment.. None None None None None None
Deferred Sales Charge
(as a percentage of
original purchase price
or redemption proceeds, 1.0% for 1.0% for 1.0% for
whichever is lower).... one year(c) one year(c) one year(c) None(b) None(b) None(b)
Exchange Fee........... None None None None None None
</TABLE>
- ----
(a) Reduced for purchases of $100,000 and over. Like Class A purchases,
certain Class D purchases of $1,000,000 or more may not be subject to an
initial sales charge. See "The Reorganization--Comparison of the State
Funds and Limited Maturity Portfolio--Purchase of Shares."
(b) Like Class A shares, Class D shares are not subject to a CDSC, except that
certain purchases of $1,000,000 or more which are not subject to an
initial sales charge may instead be subject to a CDSC of 0.20% of amounts
redeemed within the first year after purchase.
(c) The CDSC may be waived in connection with certain fee-based programs.
* Class C shares of the State Funds, Limited Maturity Portfolio and the
Combined Fund are, or will be, available only through the exchange
privilege. See "The Reorganization--Comparison of the State Funds and
Limited Maturity Portfolio--Additional Information--Stockholder Services."
8
<PAGE>
PRO FORMA FEE TABLE FOR CLASS C AND CLASS D STOCKHOLDERS OF THE STATE FUNDS,
LIMITED
MATURITY PORTFOLIO AND THE COMBINED ENTITY FOR THE YEAR ENDED JULY 31, 1997
(UNAUDITED)--(CONTINUED)
<TABLE>
<CAPTION>
CLASS C SHARES
-------------------------------------------------------------------------------------
ACTUAL
-------------------------------------------------------------------------
LIMITED
ARIZONA MASSACHUSETTS MICHIGAN NEW JERSEY NEW YORK PENNSYLVANIA MATURITY PRO FORMA
FUND FUND FUND FUND FUND FUND PORTFOLIO COMBINED(d)
------- ------------- -------- ---------- -------- ------------ --------- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
ANNUAL FUND OPERATING
EXPENSES (AS A PERCENT-
AGE OF AVERAGE NET AS-
SETS):
Investment Advisory
Fees(a)................ 0.35% 0.35% 0.35% 0.35% 0.35% 0.35% 0.33% 0.33%
12b-1 fees(b):
Account Maintenance
Fees................... 0.15% 0.15% 0.15% 0.15% 0.15% 0.15% 0.15% 0.15%
Distribution Fees...... 0.20% 0.20% 0.20% 0.20% 0.20% 0.20% 0.20% 0.20%
Other Expenses......... 2.65% 1.99% 3.11% 1.10% 0.62% 1.32% 0.08% 0.08%
----- ----- ----- ----- ----- ----- ----- -----
Total Fund Operating
Expenses(c)............ 3.35% 2.69% 3.81% 1.80% 1.32% 2.02% 0.76% 0.76%
===== ===== ===== ===== ===== ===== ===== =====
<CAPTION>
CLASS D SHARES
-------------------------------------------------------------------------------------
ACTUAL
-------------------------------------------------------------------------
LIMITED
ARIZONA MASSACHUSETTS MICHIGAN NEW JERSEY NEW YORK PENNSYLVANIA MATURITY PRO FORMA
FUND FUND FUND FUND FUND FUND PORTFOLIO COMBINED
------- ------------- -------- ---------- -------- ------------ --------- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
ANNUAL FUND OPERATING
EXPENSES (AS A PERCENT-
AGE OF AVERAGE NET AS-
SETS):
Investment Advisory
Fees(a)................ 0.35% 0.35% 0.35% 0.35% 0.35% 0.35% 0.33% 0.33%
12b-1 fees(b):
Account Maintenance
Fees................... 0.10% 0.10% 0.10% 0.10% 0.10% 0.10% 0.10% 0.10%
Distribution Fees...... None None None None None None None None
Other Expenses......... 2.84% 2.17% 3.03% 1.33% 0.81% 1.40% 0.08% 0.08%
----- ----- ----- ----- ----- ----- ----- -----
Total Fund Operating
Expenses(c)............ 3.29% 2.62% 3.48% 1.78% 1.26% 1.85% 0.51% 0.51%
===== ===== ===== ===== ===== ===== ===== =====
</TABLE>
- ----
(a) See "The Reorganization--Comparison of the State Funds and Limited
Maturity Portfolio--Management."
(b) See "The Reorganization--Comparison of the State Funds and Limited
Maturity Portfolio--Purchase of Shares."
(c) Currently, FAM has voluntarily waived all of the advisory fees due from
each of the State Funds and has voluntarily reimbursed each of the State
Funds for a portion of other expenses (excluding Rule 12b-1 fees). The
Total Fund Operating Expenses in the fee table above have been restated to
assume the absence of any such waiver or reimbursement because FAM may
discontinue or reduce such waiver of fees and/or assumption of expenses at
any time without notice. The actual Total Fund Operating Expenses, net of
the waiver, is provided below for the year ended July 31, 1997:
<TABLE>
<CAPTION>
ADVISORY FEES WAIVED
AND EXPENSES TOTAL OPERATING EXPENSES
REIMBURSED AFTER WAIVER AND REIMBURSEMENT
---------------------- --------------------------------
CLASS C CLASS D CLASS C CLASS D
---------- ---------- --------------- ---------------
<S> <C> <C> <C> <C>
Arizona Fund............ 2.24% 2.25% 1.11% 1.04%
Massachusetts Fund...... 1.54% 1.53% 1.15% 1.09%
Michigan Fund........... 2.49% 2.44% 1.32% 1.04%
New Jersey Fund......... 0.70% 0.74% 1.10% 1.04%
New York Fund........... 0.46% 0.46% 0.86% 0.80%
Pennsylvania Fund....... 0.74% 0.76% 1.28% 1.09%
</TABLE>
(d) Holders of Class C shares of the State Funds will receive Class D shares
of Limited Maturity Portfolio in the Reorganization and will be subject to
the expenses relating to Class D shares. See "Class D Shares."
9
<PAGE>
CUMULATIVE EXPENSES PAID ON CLASS C AND CLASS D SHARES FOR THE PERIODS
INDICATED:
EXAMPLE:
<TABLE>
<CAPTION>
CLASS C SHARES CLASS D SHARES
------------------------------- -------------------------------
1 YEAR 3 YEARS 5 YEARS 10 YEARS 1 YEAR 3 YEARS 5 YEARS 10 YEARS
------ ------- ------- -------- ------ ------- ------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
An investor would pay
the following expenses
on a $1,000 investment,
including the maximum
sales load of $10.00
(Class D shares only)
and assuming (1) the
Total Fund Operating
Expenses set forth above
for the relevant
portfolio, (2) a 5%
annual return throughout
the periods and (3)
redemption at the end of
the period (including
any applicable CDSC for
Class C shares):
Arizona Fund........... $44 $103 $175 $364 $43 $110 $180 $365
Massachusetts Fund..... 37 84 142 302 36 91 148 302
Michigan Fund.......... 48 116 196 404 45 116 189 382
New Jersey Fund........ 28 57 97 212 28 65 105 217
New York Fund.......... 23 42 72 159 23 50 78 161
Pennsylvania Fund...... 31 63 109 235 29 68 109 225
Limited Maturity
Portfolio.............. 18 24 42 94 15 26 38 73
Combined Entity+....... 18 24 42 94 15 26 38 73
An investor would pay
the following expenses
on the same $1,000
investment assuming no
redemption at the end of
the period:
Arizona Fund........... $34 $103 $175 $364 $43 $110 $180 $365
Massachusetts Fund..... 27 84 142 302 36 91 148 302
Michigan Fund.......... 38 116 196 404 45 116 189 382
New Jersey Fund........ 18 57 97 212 28 65 105 217
New York Fund.......... 13 42 72 159 23 50 78 161
Pennsylvania Fund...... 21 63 109 235 29 68 109 225
Limited Maturity
Portfolio.............. 8 24 42 94 15 26 38 73
Combined Entity+....... 8 24 42 94 15 26 38 73
</TABLE>
- -----
+ Assuming the Reorganization had taken place on August 1, 1996 (the first day
of the year ended July 31, 1997).
10
<PAGE>
The foregoing Fee Tables are intended to assist investors in understanding
the costs and expenses that a stockholder of each of the State Funds and of
Limited Maturity Portfolio will bear directly or indirectly without giving
effect to the Reorganization as compared to the costs and expenses that would
be borne by such investors taking into account the Reorganization. The
Examples set forth above assume reinvestment of all dividends and
distributions and utilize a 5% annual rate of return as mandated by Commission
regulations. THE EXAMPLES 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 EXAMPLES.
See "The Reorganization--Summary," "--Agreement and Plan of Reorganization--
Potential Benefits to Stockholders of the State Funds as a Result of the
Reorganization," "--Comparison of the State Funds and Limited Maturity
Portfolio--Management," "--Purchase of Shares" and "--Redemption of Shares."
BUSINESS OF THE TRUST
The Trust was organized under the laws of the
Commonwealth of Massachusetts on February 14,
1991 and commenced operations on November 26,
1993. The Trust is a non-diversified open-end
management investment company. As of July 31,
1997, the State Funds had net assets as
follows:
<TABLE>
<S> <C>
Arizona Fund....... $ 3,357,395
Massachusetts
Fund.............. $ 5,135,751
Michigan Fund...... $ 4,251,345
New Jersey Fund.... $ 6,322,601
New York Fund...... $14,565,335
Pennsylvania Fund.. $ 7,738,657
</TABLE>
BUSINESS OF MUNICIPAL BOND
FUND Municipal Bond Fund was incorporated under the
laws of the State of Maryland on September 30,
1976 and commenced operations on October 21,
1977. Limited Maturity Portfolio commenced
operations on November 2, 1979. Municipal Bond
Fund is a diversified, open-end management
investment company.
As of July 31, 1997, the three portfolios of
Municipal Bond Fund had aggregate net assets of
$4,031,606,977; Limited Maturity Portfolio had
net assets of $413,877,781.
COMPARISON OF THE STATE
FUNDS AND LIMITED MATURITY
PORTFOLIO
Investment Objectives. Each State Fund seeks to
provide stockholders with as high a level of
income exempt from Federal income taxes and
personal income taxes imposed by the designated
state (and, in certain instances, state
intangible personal property taxes, local
personal property taxes and corporate income or
local personal income taxes) as is consistent
with prudent investment management.
Limited Maturity Portfolio seeks to provide
stockholders with as high a level of income
exempt from Federal income taxes as is
consistent with its investment policies and
prudent investment management.
Investment Policies. Each State Fund seeks to
achieve its objective through a policy of
investing primarily in a portfolio of
intermediate term investment grade obligations
of the designated state or its political
subdivisions, agencies or instrumentalities, or
certain other jurisdictions, that pay interest
exempt, in the opinion of bond counsel to the
issuer, from Federal income taxes and personal
11
<PAGE>
income taxes of the designated state and, where
applicable, state intangible personal property
taxes, and corporate income or local personal
income taxes in the designated state.
Limited Maturity Portfolio seeks to achieve its
objective by investing in a portfolio primarily
of short-term investment grade obligations
issued by or on behalf of states, territories
and possessions of the United States and the
District of Columbia and their political
subdivisions, agencies and instrumentalities,
the interest on which is exempt from Federal
income taxes.
Advisory Fees. The investment adviser for both
the Trust and Municipal Bond Fund is Fund Asset
Management, L.P. ("FAM"). FAM is responsible
for the management of the investment portfolio
of each of the State Funds and of Limited
Maturity Portfolio and for providing
administrative services to each of the State
Funds and to Limited Maturity Portfolio.
The portfolio managers for the State Funds are
Edward S. Andrews, Peter J. Hayes and Helen M.
Sheehan. Peter J. Hayes is the portfolio
manager for Limited Maturity Portfolio.
Pursuant to separate management agreements
between the Trust and FAM on behalf of each of
the State Funds, each State Fund pays FAM a
monthly fee based upon the average daily net
assets of that State Fund at the annual rate of
0.35% of the average daily net assets of that
State Fund. Municipal Bond Fund's investment
advisory agreement with FAM provides that as
compensation for FAM's services to Limited
Maturity Portfolio, FAM receives at the end of
each month a fee determined based on the annual
rates set forth in the table below. These rates
are applied to the average daily net assets of
each of the three portfolios of Municipal Bond
Fund to the extent that the aggregate of the
average daily net assets of the three combined
portfolios of Municipal Bond Fund exceeds $250
million, $400 million, $550 million and $1.5
billion, respectively (each such amount being a
breakpoint level). The portion of the assets of
a portfolio to which the rate at each
breakpoint level applies will be determined on
a "uniform percentage" basis. The uniform
percentage applicable to a breakpoint level is
determined by dividing the amount of the
aggregate of the average daily net assets of
the three combined portfolios of the Municipal
Bond Fund that falls within that breakpoint
level by the aggregate of the average daily net
assets of the three combined portfolios. The
amount of the fee for a portfolio at each
breakpoint level is determined by multiplying
the average daily net assets of that portfolio
by the uniform percentage applicable to that
breakpoint level and multiplying the product by
the advisory fee rate.
<TABLE>
<CAPTION>
ADVISORY FEE
RATE OF
AGGREGATE OF AVERAGE DAILY NET LIMITED MATURITY
ASSETS OF THE THREE COMBINED PORTFOLIOS PORTFOLIO
--------------------------------------- ----------------
<S> <C>
Not exceeding $250 million................ 0.40 %
In excess of $250 million but not exceed-
ing $400 million......................... 0.375
In excess of $400 million but not exceed-
ing $550 million......................... 0.35
In excess of $550 million but not exceed-
ing $1.5 billion......................... 0.325
In excess of $1.5 billion................. 0.325
</TABLE>
12
<PAGE>
See "The Reorganization--Summary--Pro Forma Fee
Tables" and "--Comparison of the State Funds
and Limited Maturity Portfolio--Management."
As of October 31, 1997, the three portfolios of
Municipal Bond Fund had aggregate net assets of
$3,934,278,239; Limited Maturity Portfolio had
net assets of $398,404,439. At this asset level
the advisory fee rate of Limited Maturity
Portfolio would be 0.33%.
Class Structure. Like each of the State Funds,
Limited Maturity Portfolio offers four classes
of shares under the Merrill Lynch Select
PricingSM System. The Class A, Class B, Class C
and Class D shares issued by Limited Maturity
Portfolio are identical in all respects to the
Class A, Class B, Class C and Class D shares
issued by the State Funds except that they
represent ownership interests in a different
investment portfolio. See "The Reorganization--
Comparison of the State Funds and Limited
Maturity Portfolio--Purchase of Shares."
Overall Expense Ratio. The overall operating
expense ratio for the year ended July 31, 1997
for Class A shares was 0.41% for Limited
Maturity Portfolio and for each of the State
Funds was as set forth below:
<TABLE>
<CAPTION>
BEFORE GIVING EFFECT
TO ANY WAIVER OF AFTER GIVING EFFECT TO
ADVISORY FEES OR WAIVER OF ADVISORY FEES
REIMBURSEMENT OF AND REIMBURSEMENT OF
EXPENSES EXPENSES
-------------------- -----------------------
<S> <C> <C>
Arizona Fund............ 3.21% .94%
Massachusetts Fund...... 2.52% .99%
Michigan Fund........... 3.50% .94%
New Jersey Fund......... 1.65% .94%
New York Fund........... 1.16% .70%
Pennsylvania Fund....... 1.75% .99%
</TABLE>
If the Reorganization had taken place on August
1, 1996 (the first day of the year ended July
31, 1997), the overall operating expense ratio
for Class A shares for the combined entity on a
pro forma basis would have been 0.41%.
The above ratios would differ for Class B,
Class C and Class D shares as a result of class
specific distribution and account maintenance
expenditures. See "The Reorganization--
Summary--Pro Forma Fee Tables."
Purchase of Shares. Shares of Limited Maturity
Portfolio are offered continuously for sale to
the public in substantially the same manner as
the shares of each of the State Funds. See "The
Reorganization--Comparison of the State Funds
and Limited Maturity Portfolio--Purchase of
Shares."
Redemption of Shares. The redemption procedures
for shares of Limited Maturity Portfolio are
the same as the redemption procedures for
shares of each of the State Funds. See "The
Reorganization--Comparison of the State Funds
and Limited Maturity Portfolio--Redemption of
Shares."
Dividends and Distributions. The policies of
each State Fund with respect to dividends and
distributions are identical to those of
13
<PAGE>
Limited Maturity Portfolio. See "The
Reorganization--Comparison of the State Funds
and Limited Maturity Portfolio--Dividends and
Distributions."
Net Asset Value. The State Funds and Limited
Maturity Portfolio each determines the net
asset value of each class of its shares once
daily 15 minutes after the close of business on
the New York Stock Exchange (the "NYSE")
(generally, 4:00 p.m., New York time), on each
day during which the NYSE is open for trading.
The State Funds and Limited Maturity Portfolio
each compute net asset value per share in the
same manner. See "The Reorganization--
Comparison of the State Funds and Limited
Maturity Portfolio--Additional Information--Net
Asset Value."
Voting Rights. The corresponding voting rights
of the holders of shares of beneficial interest
of the Trust and shares of Common Stock of
Municipal Bond Fund are substantially the same.
See "The Reorganization--Comparison of the
State Funds and Limited Maturity Portfolio--
Capital Stock."
Stockholder Services. Stockholder services,
including exchange privileges, available to the
State Funds and Limited Maturity Portfolio are
substantially the same. See "The
Reorganization--Comparison of the State Funds
and Limited Maturity Portfolio--Additional
Information--Stockholder Services." An
automatic dividend reinvestment plan is
available both to the holders of shares of
beneficial interest of the Trust and the
holders of shares of Common Stock of Municipal
Bond Fund. The plans are identical. See "The
Reorganization--Comparison of the State Funds
and Limited Maturity Portfolio--Automatic
Dividend Reinvestment Plan." Other stockholder
services, including the provision of annual and
semi-annual reports, are the same for the Trust
and Municipal Bond Fund. See "The
Reorganization--Comparison of the State Funds
and Limited Maturity Portfolio--Additional
Information--Stockholder Services."
State of Organization. The Trust is organized
as a business trust under the laws of the
Commonwealth of Massachusetts and the Municipal
Bond Fund is organized as a corporation under
the laws of the State of Maryland. See "The
Reorganization--Comparison of the State Funds
and Limited Maturity Portfolio--State of
Organization" for a summary of certain
differences between the Trust's Declaration of
Trust, By-laws and Massachusetts law and the
Municipal Bond Fund's Articles of
Incorporation, By-laws and Maryland law.
TAX CONSIDERATIONS The State Funds and Limited Maturity Portfolio
have jointly requested a private letter ruling
from the IRS with respect to the Reorganization
to the effect that, among other things, neither
the State Funds nor Limited Maturity Portfolio
will recognize gain or loss on the transaction
and stockholders of the State Funds will not
recognize gain or loss on the exchange of their
shares of beneficial interest for shares of
Limited Maturity Portfolio Common Stock. The
consummation of the Reorganization is subject
to the receipt of
14
<PAGE>
such ruling. The Reorganization will not affect
the status of Limited Maturity Portfolio as a
regulated investment company ("RIC") under the
Internal Revenue Code of 1986, as amended
("Code"). Each State Fund will liquidate
pursuant to the Reorganization and will
terminate as a series of the Trust.
After the Reorganization, the distributions
received from Limited Maturity Portfolio will
be exempt from Federal income tax but generally
will not be exempt to any significant degree
from personal income tax at the state level.
Currently, the portion of a State Fund's exempt
interest dividends paid from interest received
by the State Fund from municipal bonds of the
designated state is also exempt from personal
income tax in the designated state and, where
applicable, corporate income or local personal
income taxes. Currently, shares of a State Fund
may also be exempt from state intangible
personal property tax in the designated state.
15
<PAGE>
RISK FACTORS AND SPECIAL CONSIDERATIONS
Since the State Funds and Limited Maturity Portfolio invest primarily in a
portfolio of Municipal Bonds, any risks inherent in such investments are
equally applicable to the State Funds and Limited Maturity Portfolio and will
be similarly pertinent to the combined fund after the Reorganization. It is
expected that the Reorganization itself will not adversely affect the rights
of holders of shares of beneficial interest of the State Funds or shares of
Limited Maturity Portfolio Common Stock or create additional risks.
PORTFOLIO MANAGEMENT
Each State Fund ordinarily will invest at least 65% (80% in the case of the
New Jersey Fund) of its total assets in its respective State Municipal Bonds
and, therefore, is more susceptible to factors adversely affecting issuers of
Municipal Bonds in such state than is a tax-exempt mutual fund that is not
concentrated in issuers of a particular state's Municipal Bonds to this
degree, such as Limited Maturity Portfolio. Limited Maturity Portfolio
currently contemplates that it will not invest more than 25% of its total
assets (taken at market value) in Municipal Bonds of issuers that are located
in the same state. Certain special considerations and risk factors specific to
each State Fund are described in the Limited Maturity Trust Prospectus. FAM
does not believe that the current economic conditions described in the Limited
Maturity Trust Prospectus will have a significant adverse effect on the
ability of any State Fund to invest in investment grade State Municipal Bonds.
MATURITY
Limited Maturity Portfolio may not invest in Municipal Bonds with a
remaining term exceeding four years. The State Funds invest primarily in
Municipal Bonds with remaining maturities of between one and ten years.
Because the State Funds hold Municipal Bonds with maturities which exceed the
permitted maturity for investments by Limited Maturity Portfolio, prior to the
Reorganization, the State Funds will dispose of all portfolio securities that
have maturities greater than four years. FAM believes that such disposition
will not affect the receipt of a favorable private letter ruling from the IRS
with respect to the tax-free status of the Reorganization.
TAX CONSIDERATIONS
The distributions to stockholders of Limited Maturity Portfolio are, and
after the Reorganization will be, exempt from Federal income tax but not, to
any significant degree, from personal income tax at the state level. The
distributions to stockholders of the State Funds, however, are currently
exempt from Federal income taxes and personal income taxes imposed by the
designated state (and, in certain instances, corporate income or local
personal income taxes) and may also provide exemption of State Fund shares
from state intangible personal income taxes. See "Comparison of the State
Funds and Limited Maturity Portfolio--Taxation of Limited Maturity Portfolio,
State Funds and Their Stockholders" and "Agreement and Plan of
Reorganization--Tax Consequences of the Reorganization."
Stockholders should consult their tax advisers regarding the effect of the
Reorganization on their investment.
16
<PAGE>
COMPARISON OF THE STATE FUNDS AND LIMITED MATURITY PORTFOLIO
FINANCIAL HIGHLIGHTS
Limited Maturity Portfolio
The financial information in the table below has been audited in conjunction
with the annual audits of the financial statements of the Municipal Bond Fund
by Deloitte & Touche llp, independent auditors. The following per share data
and ratios have been derived from information provided in the financial
statements of the Municipal Bond Fund.
<TABLE>
<CAPTION>
LIMITED MATURITY PORTFOLIO
--------------------------------------------------------------------------------------------------
CLASS A
--------------------------------------------------------------------------------------------------
FOR THE YEAR ENDED JUNE 30,
--------------------------------------------------------------------------------------------------
1997 1996 1995 1994 1993 1992 1991 1990 1989 1988
-------- -------- -------- -------- -------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Increase (Decrease) in
Net Asset Value:
PER SHARE OPERATING PER-
FORMANCE:
Net asset value, begin-
ning of year............ $ 9.91 $ 9.92 $ 9.87 $ 10.01 $ 9.91 $ 9.75 $ 9.71 $ 9.73 $ 9.75 $ 9.83
-------- -------- -------- -------- -------- -------- -------- -------- -------- --------
Investment income--net.. .39 .38 .38 .37 .41 .50 .57 .60 .58 .53
Realized and unrealized
gain (loss) on invest-
ments--net.............. .04 (.01) .05 (.14) .10 .16 .04 (.02) (.02) (.07)
-------- -------- -------- -------- -------- -------- -------- -------- -------- --------
Total from investment
operations.............. .43 .37 .43 .23 .51 .66 .61 .58 .56 .46
-------- -------- -------- -------- -------- -------- -------- -------- -------- --------
Less dividends and dis-
tributions:
Investment income--
net.................... (.39) (.38) (.38) (.37) (.41) (.50) (.57) (.60) (.58) (.53)
Realized gain on in-
vestments--net......... (.02) -- -- -- -- -- -- -- -- (.01)
-------- -------- -------- -------- -------- -------- -------- -------- -------- --------
Total dividends and dis-
tributions: (.41) (.38) (.38) (.37) (.41) (.50) (.57) (.60) (.58) (.54)
-------- -------- -------- -------- -------- -------- -------- -------- -------- --------
Net asset value, end of
year.................... $ 9.93 $ 9.91 $ 9.92 $ 9.87 $ 10.01 $ 9.91 $ 9.75 $ 9.71 $ 9.73 $ 9.75
======== ======== ======== ======== ======== ======== ======== ======== ======== ========
TOTAL INVESTMENT RE-
TURN:*
Based on net asset value
per share............... 4.40% 3.75% 4.53% 2.30% 5.28% 6.93% 6.45% 6.16% 5.96% 4.83%
======== ======== ======== ======== ======== ======== ======== ======== ======== ========
RATIOS TO AVERAGE NET
ASSETS:
Expenses................ .39% .44% .41% .40% .41% .40% .40% .40% .41% .40%
======== ======== ======== ======== ======== ======== ======== ======== ======== ========
Investment income--net.. 3.93% 3.83% 3.86% 3.68% 4.13% 5.02% 5.88% 6.21% 6.00% 5.42%
======== ======== ======== ======== ======== ======== ======== ======== ======== ========
SUPPLEMENTAL DATA:
Net assets, end of year
(in thousands).......... $343,641 $417,097 $536,474 $790,142 $846,736 $613,407 $350,549 $352,005 $385,794 $567,158
======== ======== ======== ======== ======== ======== ======== ======== ======== ========
Portfolio turnover...... 61.90% 88.32% 37.33% 45.67% 65.43% 96.32% 93.06% 106.44% 228.78% 146.01%
======== ======== ======== ======== ======== ======== ======== ======== ======== ========
</TABLE>
- ----
* Total investment returns exclude the effect of sales loads.
17
<PAGE>
<TABLE>
<CAPTION>
LIMITED MATURITY PORTFOLIO
------------------------------------------------------------------------------------------------------
CLASS B CLASS C CLASS D
---------------------------------------------- ------------------------- --------------------------
FOR THE FOR THE FOR THE
PERIOD PERIOD PERIOD
NOV. 2, FOR THE YEAR OCT. 21, FOR THE YEAR OCT. 21,
FOR THE YEAR ENDED JUNE 30, 1992+ TO ENDED JUNE 30, 1994+ TO ENDED JUNE 30, 1994+ TO
------------------------------------ JUNE 30, --------------- JUNE 30, ---------------- JUNE 30,
1997 1996 1995 1994 1993 1997 1996 1995 1997 1996 1995
------- ------- -------- -------- -------- ------- ------- -------- ------- ------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Increase (Decrease) in
Net Asset Value:
PER SHARE OPERATING PER-
FORMANCE:
Net asset value, begin-
ning of period......... $ 9.91 $ 9.92 $ 9.87 $ 10.01 $ 9.93 $ 9.88 $ 9.92 $ 9.83 $ 9.91 $ 9.93 $ 9.83
------- ------- -------- -------- ------- ------ ------- ------ ------- ------- -------
Investment income--net.. .36 .35 .35 .33 .24 .35 .34 .25 .38 .37 .26
Realized and unrealized
gain (loss) on
investments--net....... .05 (.01) .05 (.14) .08 .05 (.04) .09 .05 (.02) .10
------- ------- -------- -------- ------- ------ ------- ------ ------- ------- -------
Total from investment
operations............. .41 .34 .40 .19 .32 .40 .30 .34 .43 .35 .36
------- ------- -------- -------- ------- ------ ------- ------ ------- ------- -------
Less dividends and dis-
tributions:
Investment income--
net................... (.36) (.35) (.35) (.33) (.24) (.35) (.34) (.25) (.38) (.37) (.26)
Realized gain on in-
vestment--net......... (.02) -- -- -- -- (.02) -- -- (.02) -- --
------- ------- -------- -------- ------- ------ ------- ------ ------- ------- -------
Total dividends and dis-
tributions............. (.38) (.35) (.35) (.33) (.24) (.37) (.34) (.25) (.40) (.37) (.26)
------- ------- -------- -------- ------- ------ ------- ------ ------- ------- -------
Net asset value, end of
period................. $ 9.94 $ 9.91 $ 9.92 $ 9.87 $ 10.01 $ 9.91 $ 9.88 $ 9.92 $ 9.94 $ 9.91 $ 9.93
======= ======= ======== ======== ======= ====== ======= ====== ======= ======= =======
TOTAL INVESTMENT RE-
TURN:**
Based on net asset value
per share.............. 4.13% 3.37% 4.14% 1.98% 3.26%# 4.11% 2.97% 3.52%# 4.40% 3.55% 3.73%#
======= ======= ======== ======== ======= ====== ======= ====== ======= ======= =======
RATIOS TO AVERAGE NET
ASSETS:
Expenses................ .75% .80% .78% .76% .76%* .75% .80% .70%* .48% .54% .53%*
======= ======= ======== ======== ======= ====== ======= ====== ======= ======= =======
Investment income--net.. 3.58% 3.46% 3.50% 3.33% 3.60%* 3.57% 3.41% 3.61%* 3.84% 3.71% 3.78%*
======= ======= ======== ======== ======= ====== ======= ====== ======= ======= =======
SUPPLEMENTAL DATA:
Net assets, end of pe-
riod (in thousands).... $54,275 $71,075 $129,581 $145,534 $95,179 $ 108 $ 94 $3,965 $20,383 $15,886 $11,258
======= ======= ======== ======== ======= ====== ======= ====== ======= ======= =======
Portfolio turnover...... 61.90% 88.32% 37.33% 45.67% 65.43% 61.90% 88.32% 37.33% 61.90% 88.32% 37.33%
======= ======= ======== ======== ======= ====== ======= ====== ======= ======= =======
</TABLE>
- ------
* Annualized.
** Total investment returns exclude the effects of sales loads.
+ Commencement of operations.
# Aggregate total investment return.
18
<PAGE>
The State Funds
The financial information in the tables below has been audited in
conjunction with the annual audits of the financial statements of the Trust by
Deloitte & Touche LLP, independent auditors. Financial statements for the year
ended July 31, 1997 and the independent auditors' report thereon are included
in the Trust's Annual Report to Stockholders for the fiscal year ended July
31, 1997. The following per share data and ratios have been derived from
information provided in such audited financial statements.
<TABLE>
<CAPTION>
ARIZONA FUND
----------------------------------------------------------------------------------------------
CLASS A CLASS B CLASS C
-------------------------------- -------------------------------- --------------------------
FOR THE FOR THE FOR THE
PERIOD PERIOD PERIOD
FOR THE YEAR ENDED NOV. 26, FOR THE YEAR ENDED NOV. 26, FOR THE YEAR OCT. 21,
JULY 31, 1993+ TO JULY 31, 1993+ TO ENDED JULY 31, 1994+ TO
---------------------- JULY 31, ---------------------- JULY 31, ---------------- JULY 31,
1997 1996 1995 1994 1997 1996 1995 1994 1997 1996 1995
------ ------ ------ -------- ------ ------ ------ -------- ------- ------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Increase
(Decrease) in
Net Asset Value:
PER SHARE
OPERATING
PERFORMANCE:
Net asset value,
beginning of
period.......... $10.08 $10.17 $ 9.97 $10.00 $10.08 $10.16 $ 9.97 $10.00 $ 10.08 $ 10.17 $ 9.89
------ ------ ------ ------ ------ ------ ------ ------ ------- ------- ------
Investment
income-net...... .37 .41 .43 .23 .33 .37 .39 .20 .35 .37 .29
Realized and
unrealized gain
(loss) on
investments-
net............. .09 (.09) .20 (.03) .09 (.08) .19 (.03) .10 (.09) .28
------ ------ ------ ------ ------ ------ ------ ------ ------- ------- ------
Total from
investment
operations...... .46 .32 .63 .20 .42 .29 .58 .17 .45 .28 .57
------ ------ ------ ------ ------ ------ ------ ------ ------- ------- ------
Less dividends
from investment
income-net...... (.37) (.41) (.43) (.23) (.33) (.37) (.39) (.20) (.35) (.37) (.29)
------ ------ ------ ------ ------ ------ ------ ------ ------- ------- ------
Net asset value,
end of period... $10.17 $10.08 $10.17 $ 9.97 $10.17 $10.08 $10.16 $ 9.97 $ 10.18 $ 10.08 $10.17
====== ====== ====== ====== ====== ====== ====== ====== ======= ======= ======
TOTAL INVESTMENT
RETURN: **
Based on net
asset value per
share........... 4.62% 3.16% 6.47% 2.02%# 4.25% 2.88% 5.99% 1.78%# 4.55% 2.78% 5.90%#
====== ====== ====== ====== ====== ====== ====== ====== ======= ======= ======
RATIOS TO
AVERAGE NET
ASSETS:
Expenses, net of
reimbursements.. .94% .74% .35% .02%* 1.30% 1.09% .72% .38%* 1.11% 1.03% 1.05%*
====== ====== ====== ====== ====== ====== ====== ====== ======= ======= ======
Expenses........ 3.21% 2.27% 2.05% 1.82%* 3.56% 2.61% 2.44% 2.18%* 3.35% 2.80% 2.79%*
====== ====== ====== ====== ====== ====== ====== ====== ======= ======= ======
Investment
income-net...... 3.64% 4.01% 4.31% 3.37%* 3.28% 3.65% 3.95% 3.02%* 3.48% 3.86% 3.80%*
====== ====== ====== ====== ====== ====== ====== ====== ======= ======= ======
SUPPLEMENTAL
DATA:
Net assets, end
of period (in
thousands)...... $709 $813 $1,054 $2,103 $2,135 $2,885 $5,191 $5,575 $36 $135 $1
====== ====== ====== ====== ====== ====== ====== ====== ======= ======= ======
Portfolio
turnover........ 38.21% 43.53% 182.58% 142.37% 38.21% 43.53% 182.58% 142.37% 38.21% 43.53% 182.58%
====== ====== ====== ====== ====== ====== ====== ====== ======= ======= ======
<CAPTION>
ARIZONA FUND
---------------------------
CLASS D
--------------------------
FOR THE
PERIOD
FOR THE YEAR OCT. 21,
ENDED JULY 31, 1994+ TO
---------------- JULY 31,
1997 1996 1995
------- ------- --------
<S> <C> <C> <C>
Increase
(Decrease) in
Net Asset Value:
PER SHARE
OPERATING
PERFORMANCE:
Net asset value,
beginning of
period.......... $ 10.08 $ 10.17 $ 9.89
------- ------- ------
Investment
income-net...... .36 .40 .33
Realized and
unrealized gain
(loss) on
investments-
net............. .10 (.09) .28
------- ------- ------
Total from
investment
operations...... .46 .31 .61
------- ------- ------
Less dividends
from investment
income-net...... (.36) (.40) (.33)
------- ------- ------
Net asset value,
end of period... $ 10.18 $ 10.08 $10.17
======= ======= ======
TOTAL INVESTMENT
RETURN: **
Based on net
asset value per
share........... 4.62% 3.05% 6.34%#
======= ======= ======
RATIOS TO
AVERAGE NET
ASSETS:
Expenses, net of
reimbursements.. 1.04% .90% .55%*
======= ======= ======
Expenses........ 3.29% 2.42% 2.39%*
======= ======= ======
Investment
income-net...... 3.56% 3.88% 4.31%*
======= ======= ======
SUPPLEMENTAL
DATA:
Net assets, end
of period (in
thousands)...... $477 $619 $19
======= ======= ======
Portfolio
turnover........ 38.21% 43.53% 182.58%
======= ======= ======
</TABLE>
- ----
* Annualized.
** Total investment returns exclude the effects of sales loads.
+ Commencement of operations.
# Aggregate total investment return.
19
<PAGE>
<TABLE>
<CAPTION>
MASSACHUSETTS FUND
----------------------------------------------------------------------------------------------
CLASS A CLASS B CLASS C
--------------------------------- --------------------------------- ------------------------
FOR THE FOR THE FOR THE
PERIOD PERIOD FOR THE YEAR PERIOD
FOR THE YEAR ENDED NOV. 26, FOR THE YEAR ENDED NOV. 26, ENDED OCT. 21,
JULY 31, 1993+ TO JULY 31, 1993+ TO JULY 31, 1994+ TO
----------------------- JULY 31, ----------------------- JULY 31, -------------- JULY 31,
1997 1996 1995 1994 1997 1996 1995 1994 1997 1996 1995
------ ------ ------ -------- ------ ------ ------ -------- ------ ------ --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
INCREASE (DE-
CREASE) IN NET
ASSET VALUE:
PER SHARE OPER-
ATING PERFOR-
MANCE:
Net asset value,
beginning of
period......... $ 9.96 $ 9.96 $ 9.95 $10.00 $ 9.96 $ 9.96 $ 9.95 $10.00 $ 9.95 $ 9.96 $ 9.82
------ ------ ------ ------ ------ ------ ------ ------ ------ ------ ------
Investment
income-net..... .39 .40 .44 .25 .36 .37 .40 .22 .38 .39 .33
Realized and
unrealized gain
(loss) on
investments-
net............ .08 -- ++ .02 (.05) .08 -- ++ .02 (.05) .08 (.01) .15
------ ------ ------ ------ ------ ------ ------ ------ ------ ------ ------
Total from in-
vestment opera-
tions.......... .47 .40 .46 .20 .44 .37 .42 .17 .46 .38 .48
------ ------ ------ ------ ------ ------ ------ ------ ------ ------ ------
Less dividends
and distribu-
tions:
Investment
income-net..... (.39) (.40) (.44) (.25) (.36) (.37) (.40) (.22) (.38) (.39) (.33)
Realized gain on
investments-
net............ -- -- (.01) -- -- -- (.01) -- -- -- (.01)
------ ------ ------ ------ ------ ------ ------ ------ ------ ------ ------
Total dividends
and distribu-
tions.......... (.39) (.40) (.45) (.25) (.36) (.37) (.41) (.22) (.38) (.39) (.34)
====== ====== ====== ====== ====== ====== ====== ====== ====== ====== ======
Net asset value,
end of period.. $10.04 $ 9.96 $ 9.96 $ 9.95 $10.04 $ 9.96 $ 9.96 $ 9.95 $10.03 $ 9.95 $ 9.96
====== ====== ====== ====== ====== ====== ====== ====== ====== ====== ======
TOTAL INVESTMENT
RETURN:**
Based on net as-
set value per
share.......... 4.86% 4.08% 4.79% 2.01%# 4.49% 3.70% 4.41% 1.77%# 4.70% 3.81% 5.00%#
====== ====== ====== ====== ====== ====== ====== ====== ====== ====== ======
RATIOS TO AVER-
AGE NET ASSETS:
Expenses, net of
reimbursement.. .99% .77% .37% .03%* 1.35% 1.16% .74% .38%* 1.15% .94% .67%*
====== ====== ====== ====== ====== ====== ====== ====== ====== ====== ======
Expenses........ 2.52% 2.15% 1.71% 1.17%* 2.84% 2.61% 2.08% 1.54%* 2.69% 2.37% 2.23%*
====== ====== ====== ====== ====== ====== ====== ====== ====== ====== ======
Investment in-
come-net....... 3.95% 4.04% 4.45% 3.69%* 3.58% 3.66% 4.08% 3.28%* 3.80% 3.88% 4.32%*
====== ====== ====== ====== ====== ====== ====== ====== ====== ====== ======
SUPPLEMENTAL DA-
TA:
Net assets, end
of period (in
thousands)..... $1,356 $1,719 $4,453 $8,097 $2,807 $4,577 $4,800 $8,046 $ 275 $ 210 $ 413
====== ====== ====== ====== ====== ====== ====== ====== ====== ====== ======
Portfolio turn-
over........... 22.93% 22.71% 89.96% 57.80% 22.93% 22.71% 89.96% 57.80% 22.93% 22.71% 89.96%
====== ====== ====== ====== ====== ====== ====== ====== ====== ====== ======
<CAPTION>
MASSACHUSETTS FUND
--------------------------
CLASS D
-------------------------
FOR THE
FOR THE YEAR PERIOD
ENDED OCT. 21,
JULY 31, 1994+ TO
-------------- JULY 31,
1997 1996 1995
------ ------ --------
<S> <C> <C> <C>
INCREASE (DE-
CREASE) IN NET
ASSET VALUE:
PER SHARE OPER-
ATING PERFOR-
MANCE:
Net asset value,
beginning of
period......... $ 9.96 $ 9.96 $ 9.82
------ ------ ------
Investment
income-net..... .38 .39 .34
Realized and
unrealized gain
(loss) on
investments-
net............ .08 -- ++ .15
------ ------ ------
Total from in-
vestment opera-
tions.......... .46 .39 .49
------ ------ ------
Less dividends
and distribu-
tions:
Investment
income-net..... (.38) (.39) (.34)
Realized gain on
investments-
net............ -- -- (.01)
------ ------ ------
Total dividends
and distribu-
tions.......... (.38) (.39) (.35)
====== ====== ======
Net asset value,
end of period.. $10.04 $ 9.96 $ 9.96
====== ====== ======
TOTAL INVESTMENT
RETURN:**
Based on net as-
set value per
share.......... 4.76% 3.97% 5.09%#
====== ====== ======
RATIOS TO AVER-
AGE NET ASSETS:
Expenses, net of
reimbursement.. 1.09% .93% .70%*
====== ====== ======
Expenses........ 2.62% 2.42% 2.31%*
====== ====== ======
Investment in-
come-net....... 3.85% 3.89% 4.21%*
====== ====== ======
SUPPLEMENTAL DA-
TA:
Net assets, end
of period (in
thousands)..... $ 698 $ 890 $ 253
====== ====== ======
Portfolio turn-
over........... 22.93% 22.71% 89.96%
====== ====== ======
</TABLE>
- ------
* Annualized.
** Total investment returns exclude the effects of sales loads.
+ Commencement of operations.
# Aggregate total investment return.
++ Amount is less than $.01 per share.
20
<PAGE>
<TABLE>
<CAPTION>
MICHIGAN FUND
------------------------------------------------------------------------------------------------
CLASS A CLASS B CLASS C
--------------------------------- --------------------------------- --------------------------
FOR THE FOR THE FOR THE
PERIOD PERIOD PERIOD
FOR THE YEAR ENDED NOV. 26, FOR THE YEAR ENDED NOV. 26, FOR THE YEAR OCT. 21,
JULY 31, 1993+ TO JULY 31, 1993+ TO ENDED JULY 31, 1994+ TO
----------------------- JULY 31, ----------------------- JULY 31, ----------------- JULY 31,
1997 1996 1995 1994 1997 1996 1995 1994 1997 1996 1995
------ ------ ------ -------- ------ ------ ------ -------- ------- ------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Increase
(Decrease) in
Net Asset Value:
PER SHARE
OPERATING
PERFORMANCE:
Net asset value,
beginning of
period.......... $ 9.94 $ 9.98 $ 9.92 $10.00 $ 9.94 $ 9.98 $ 9.92 $10.00 $ 9.94 $ 9.98 $9.76
------ ------ ------ ------ ------ ------ ------ ------ ------- ------ -----
Investment
income--net.... .39 .41 .44 .24 .36 .37 .40 .22 .36 .36 .30
Realized and
unrealized gain
(loss) on
investments--
net............ .15 (.04) .06 (.08) .15 (.04) .06 (.08) .15 (.04) .22
------ ------ ------ ------ ------ ------ ------ ------ ------- ------ -----
Total from
investment
operations...... .54 .37 .50 .16 .51 .33 .46 .14 .51 .32 .52
------ ------ ------ ------ ------ ------ ------ ------ ------- ------ -----
Less dividends
and
distributions:
Investment
income--net.... (.39) (.41) (.44) (.24) (.36) (.37) (.40) (.22) (.36) (.36) (.30)
In excess of
realized gain
on
investments--
net............ -- ++ -- -- -- -- ++ -- -- -- -- ++ -- --
------ ------ ------ ------ ------ ------ ------ ------ ------- ------ -----
Total dividends
and
distributions... (.39) (.41) (.44) (.24) (.36) (.37) (.40) (.22) (.36) (.36) (.30)
------ ------ ------ ------ ------ ------ ------ ------ ------- ------ -----
Net asset value,
end of period... $10.09 $ 9.94 $ 9.98 $ 9.92 $10.09 $ 9.94 $ 9.98 $ 9.92 $ 10.09 $ 9.94 $9.98
====== ====== ====== ====== ====== ====== ====== ====== ======= ====== =====
TOTAL INVESTMENT
RETURN:**
Based on net
asset value per
share........... 5.61% 3.71% 5.16% 1.66%# 5.22% 3.32% 4.78% 1.42%# 5.22% 3.20% 5.40%#
====== ====== ====== ====== ====== ====== ====== ====== ======= ====== =====
RATIOS TO AVERAGE
NET ASSETS:
Expenses, net of
reimbursements.. .94% .74% .27% .02%* 1.31% 1.10% .65% .38%* 1.32% 1.24% .96%*
====== ====== ====== ====== ====== ====== ====== ====== ======= ====== =====
Expenses......... 3.50% 2.78% 2.18% 2.01%* 3.86% 3.14% 2.56% 2.38%* 3.81% 3.31% 2.90%*
====== ====== ====== ====== ====== ====== ====== ====== ======= ====== =====
Investment
income--net..... 3.93% 4.06% 4.42% 3.59%* 3.56% 3.70% 4.09% 3.21%* 3.56% 3.57% 3.80%*
====== ====== ====== ====== ====== ====== ====== ====== ======= ====== =====
SUPPLEMENTAL
DATA:
Net assets, end
of period (in
thousands)...... $1,368 $1,641 $2,302 $3,435 $1,411 $1,842 $2,494 $2,411 $ 1 $ 1 $ 1
====== ====== ====== ====== ====== ====== ====== ====== ======= ====== =====
Portfolio
turnover........ 13.24% 32.92% 93.08% 204.15% 13.24% 32.92% 93.08% 204.15% 13.24% 32.92% 93.08%
====== ====== ====== ====== ====== ====== ====== ====== ======= ====== =====
<CAPTION>
MICHIGAN FUND
--------------------------
CLASS D
--------------------------
FOR THE
PERIOD
FOR THE YEAR OCT. 21,
ENDED JULY 31, 1994+ TO
----------------- JULY 31,
1997 1996 1995
------- ------- --------
<S> <C> <C> <C>
Increase
(Decrease) in
Net Asset Value:
PER SHARE
OPERATING
PERFORMANCE:
Net asset value,
beginning of
period.......... $ 9.94 $ 9.97 $9.76
------- ------ -----
Investment
income--net.... .38 .40 .34
Realized and
unrealized gain
(loss) on
investments--
net............ .14 (.03) .21
------- ------ -----
Total from
investment
operations...... .52 .37 .55
------- ------ -----
Less dividends
and
distributions:
Investment
income--net.... (.38) (.40) (.34)
In excess of
realized gain
on
investments--
net............ -- ++ -- --
------- ------ -----
Total dividends
and
distributions... (.38) (.40) (.34)
------- ------ -----
Net asset value,
end of period... $ 10.08 $ 9.94 $9.97
======= ====== =====
TOTAL INVESTMENT
RETURN:**
Based on net
asset value per
share........... 5.40% 3.71% 5.72%#
======= ====== =====
RATIOS TO AVERAGE
NET ASSETS:
Expenses, net of
reimbursements.. 1.04% .87% .44%*
======= ====== =====
Expenses......... 3.48% 3.06% 2.38%*
======= ====== =====
Investment
income--net..... 3.83% 3.94% 4.47%*
======= ====== =====
SUPPLEMENTAL
DATA:
Net assets, end
of period (in
thousands)...... $ 1,471 $ 541 $ 254
======= ====== =====
Portfolio
turnover........ 13.24% 32.92% 93.08%
======= ====== =====
</TABLE>
- ------
* Annualized.
** Total investment returns exclude the effects of sales loads.
+ Commencement of operations.
++ Amount is less than $.01 per share.
# Aggregate total investment return.
21
<PAGE>
<TABLE>
<CAPTION>
NEW JERSEY FUND
----------------------------------------------------------------------------------------------
CLASS A CLASS B CLASS C
-------------------------------- -------------------------------- --------------------------
FOR THE FOR THE FOR THE
PERIOD PERIOD PERIOD
FOR THE YEAR ENDED NOV. 26, FOR THE YEAR ENDED NOV. 26, FOR THE YEAR OCT. 21,
JULY 31, 1993+ TO JULY 31, 1993+ TO ENDED JULY 31, 1994+ TO
---------------------- JULY 31, ---------------------- JULY 31, ---------------- JULY 31,
1997 1996 1995 1994 1997 1996 1995 1994 1997 1996 1995
------ ------ ------ -------- ------ ------ ------ -------- ------- ------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Increase
(Decrease) in
Net Asset Value:
PER SHARE
OPERATING
PERFORMANCE:
Net asset value,
beginning of
period.......... $10.11 $10.15 $ 9.94 $10.00 $10.11 $10.16 $ 9.95 $10.00 $ 9.16 $ 9.20 $ 9.86
------ ------ ------ ------ ------ ------ ------ ------ ------- ------- ------
Investment
income--net.... .38 .41 .42 .23 .35 .37 .38 .20 .33 .34 .26
Realized and
unrealized gain
(loss) on
investments--
net............ .03 (.04) .21 (.06) .04 (.05) .21 (.05) .03 (.04) (.66)
------ ------ ------ ------ ------ ------ ------ ------ ------- ------- ------
Total from
investment
operations...... .41 .37 .63 .17 .39 .32 .59 .15 .36 .30 (.40)
------ ------ ------ ------ ------ ------ ------ ------ ------- ------- ------
Less dividends
from investment
income--net..... (.38) (.41) (.42) (.23) (.35) (.37) (.38) (.20) (.33) (.34) (.26)
------ ------ ------ ------ ------ ------ ------ ------ ------- ------- ------
Net asset value,
end of period... $10.14 $10.11 $10.15 $ 9.94 $10.15 $10.11 $10.16 $ 9.95 $ 9.19 $ 9.16 $ 9.20
====== ====== ====== ====== ====== ====== ====== ====== ======= ======= ======
TOTAL INVESTMENT
RETURN:**
Based on net
asset value per
share........... 4.19% 3.68% 6.45% 1.73%# 3.92% 3.21% 6.07% 1.59%# 4.06% 3.24% (4.01%)#
====== ====== ====== ====== ====== ====== ====== ====== ======= ======= ======
RATIOS TO AVERAGE
NET ASSETS:
Expenses, net of
reimbursements.. .94% .76% .34% .03%* 1.30% 1.10% .73% .38%* 1.10% 1.00% .55%*
====== ====== ====== ====== ====== ====== ====== ====== ======= ======= ======
Expenses......... 1.65% 1.78% 1.69% 1.14%* 2.00% 2.12% 2.15% 1.52%* 1.80% 2.04% 2.22%*
====== ====== ====== ====== ====== ====== ====== ====== ======= ======= ======
Investment
income--net..... 3.82% 4.02% 4.10% 3.45%* 3.46% 3.67% 3.80% 3.04%* 3.66% 3.82% 4.06%*
====== ====== ====== ====== ====== ====== ====== ====== ======= ======= ======
SUPPLEMENTAL
DATA:
Net assets, end
of period (in
thousands)...... $1,735 $2,663 $2,401 $5,933 $4,109 $5,152 $7,593 $7,885 $ 241 $ 272 $ 1
====== ====== ====== ====== ====== ====== ====== ====== ======= ======= ======
Portfolio
turnover........ 32.89% 6.57% 131.56% 205.04% 32.89% 6.57% 131.56% 205.04% 32.89% 6.57% 131.56%
====== ====== ====== ====== ====== ====== ====== ====== ======= ======= ======
<CAPTION>
NEW JERSEY FUND
--------------------------
CLASS D
--------------------------
FOR THE
PERIOD
FOR THE YEAR OCT. 21,
ENDED JULY 31, 1994+ TO
---------------- JULY 31,
1997 1996 1995
------- ------- --------
<S> <C> <C> <C>
Increase
(Decrease) in
Net Asset Value:
PER SHARE
OPERATING
PERFORMANCE:
Net asset value,
beginning of
period.......... $ 10.11 $ 10.16 $ 9.85
------- ------- ------
Investment
income--net.... .37 .40 .32
Realized and
unrealized gain
(loss) on
investments--
net............ .04 (.05) .31
------- ------- ------
Total from
investment
operations...... .41 .35 .63
------- ------- ------
Less dividends
from investment
income--net..... (.37) (.40) (.32)
------- ------- ------
Net asset value,
end of period... $ 10.15 $ 10.11 $10.16
======= ======= ======
TOTAL INVESTMENT
RETURN:**
Based on net
asset value per
share........... 4.18% 3.48% 6.51%#
======= ======= ======
RATIOS TO AVERAGE
NET ASSETS:
Expenses, net of
reimbursements.. 1.04% .84% .62%*
======= ======= ======
Expenses......... 1.78% 1.86% 2.07%*
======= ======= ======
Investment
income--net..... 3.75% 3.93% 4.17%*
======= ======= ======
SUPPLEMENTAL
DATA:
Net assets, end
of period (in
thousands)...... $ 238 $ 540 $ 437
======= ======= ======
Portfolio
turnover........ 32.89% 6.57% 131.56%
======= ======= ======
</TABLE>
- ------
* Annualized.
** Total investment returns exclude the effects of sales loads.
+ Commencement of operations.
# Aggregate total investment return.
22
<PAGE>
<TABLE>
<CAPTION>
NEW YORK FUND
-----------------------------------------------------------------------------------------------
CLASS A CLASS B CLASS C
-------------------------------- --------------------------------- --------------------------
FOR THE FOR THE FOR THE
PERIOD PERIOD PERIOD
FOR THE YEAR ENDED NOV. 26, FOR THE YEAR ENDED NOV. 26, FOR THE YEAR OCT. 21,
JULY 31, 1993+ TO JULY 31, 1993+ TO ENDED JULY 31, 1994+ TO
---------------------- JULY 31, ----------------------- JULY 31, ---------------- JULY 31,
1997 1996 1995 1994 1997 1996 1995 1994 1997 1996 1995
------ ------ ------ -------- ------ ------- ------ -------- ------- ------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Increase
(Decrease) in
Net Asset
Value:
PER SHARE
OPERATING
PERFORMANCE:
Net asset value,
beginning of
period......... $10.06 $10.05 $ 9.91 $10.00 $10.06 $ 10.05 $ 9.91 $10.00 $ 10.06 $ 10.05 $ 9.78
------ ------ ------ ------ ------ ------- ------ ------ ------- ------- ------
Investment
income-net..... .43 .43 .44 .25 .39 .40 .41 .22 .41 .42 .30
Realized and
unrealized gain
(loss) on
investments-
net............ .17 .01 .14 (.09) .17 .01 .14 (.09) .17 .01 .27
------ ------ ------ ------ ------ ------- ------ ------ ------- ------- ------
Total from
investment
operations..... .60 .44 .58 .16 .56 .41 .55 .13 .58 .43 .57
------ ------ ------ ------ ------ ------- ------ ------ ------- ------- ------
Less dividends
from investment
income-net..... (.43) (.43) (.44) (.25) (.39) (.40) (.41) (.22) (.41) (.42) (.30)
------ ------ ------ ------ ------ ------- ------ ------ ------- ------- ------
Net asset value,
end of period.. $10.23 $10.06 $10.05 $ 9.91 $10.23 $ 10.06 $10.05 $ 9.91 $ 10.23 $ 10.06 $10.05
====== ====== ====== ====== ====== ======= ====== ====== ======= ======= ======
TOTAL INVESTMENT
RETURN:**
Based on net
asset value per
share.......... 6.09% 4.46% 6.03% 1.61%# 5.71% 4.08% 5.66% 1.37%# 5.91% 4.28% 5.97%#
====== ====== ====== ====== ====== ======= ====== ====== ======= ======= ======
RATIOS TO
AVERAGE NET
ASSETS:
Expenses, net of
reimbursements.. .70% .50% .33% .03%* 1.05% .87% .69% .38%* .86% .71% .63%*
====== ====== ====== ====== ====== ======= ====== ====== ======= ======= ======
Expenses........ 1.16% 1.38% 1.30% 1.24%* 1.52% 1.75% 1.65% 1.60%* 1.32% 1.59% 1.63%*
====== ====== ====== ====== ====== ======= ====== ====== ======= ======= ======
Investment
income-net..... 4.24% 4.28% 4.49% 3.68%* 3.88% 3.91% 4.11% 3.31%* 4.05% 4.06% 4.21%*
====== ====== ====== ====== ====== ======= ====== ====== ======= ======= ======
SUPPLEMENTAL
DATA:
Net assets, end
of period (in
thousands)..... $2,605 $3,723 $4,811 $5,290 $8,209 $10,071 $8,822 $9,743 $ 68 $ 214 $ 38
====== ====== ====== ====== ====== ======= ====== ====== ======= ======= ======
Portfolio
turnover....... 36.53% 51.47% 139.16% 152.73% 36.53% 51.47% 139.16% 152.73% 36.53% 51.47% 139.16%
====== ====== ====== ====== ====== ======= ====== ====== ======= ======= ======
<CAPTION>
NEW YORK FUND
--------------------------
CLASS D
--------------------------
FOR THE
PERIOD
FOR THE YEAR OCT. 21,
ENDED JULY 31, 1994+ TO
---------------- JULY 31,
1997 1996 1995
------- ------- --------
<S> <C> <C> <C>
Increase
(Decrease) in
Net Asset
Value:
PER SHARE
OPERATING
PERFORMANCE:
Net asset value,
beginning of
period......... $ 10.06 $ 10.05 $ 9.78
------- ------- ------
Investment
income-net..... .42 .42 .34
Realized and
unrealized gain
(loss) on
investments-
net............ .17 .01 .27
------- ------- ------
Total from
investment
operations..... .59 .43 .61
------- ------- ------
Less dividends
from investment
income-net..... (.42) (.42) (.34)
------- ------- ------
Net asset value,
end of period.. $ 10.23 $ 10.06 $10.05
======= ======= ======
TOTAL INVESTMENT
RETURN:**
Based on net
asset value per
share.......... 5.98% 4.35% 6.37%#
======= ======= ======
RATIOS TO
AVERAGE NET
ASSETS:
Expenses, net of
reimbursements.. .80% .62% .48%*
======= ======= ======
Expenses........ 1.26% 1.49% 1.48%*
======= ======= ======
Investment
income-net..... 4.14% 4.16% 4.47%*
======= ======= ======
SUPPLEMENTAL
DATA:
Net assets, end
of period (in
thousands)..... $ 3,683 $ 3,912 $2,306
======= ======= ======
Portfolio
turnover....... 36.53% 51.47% 139.16%
======= ======= ======
</TABLE>
- ------
* Annualized.
** Total investment returns exclude the effects of sales loads.
+ Commencement of operations.
# Aggregate total investment return.
23
<PAGE>
<TABLE>
<CAPTION>
PENNSYLVANIA FUND
----------------------------------------------------------------------------------------------
CLASS A CLASS B CLASS C
-------------------------------- -------------------------------- --------------------------
FOR THE FOR THE FOR THE
PERIOD PERIOD PERIOD
FOR THE YEAR ENDED NOV. 26, FOR THE YEAR ENDED NOV. 26, FOR THE YEAR OCT. 21,
JULY 31, 1993+ TO JULY 31, 1993+ TO ENDED JULY 31, 1994+ TO
---------------------- JULY 31, ---------------------- JULY 31, ---------------- JULY 31,
1997 1996 1995 1994 1997 1996 1995 1994 1997 1996 1995
------ ------ ------ -------- ------ ------ ------ -------- ------- ------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Increase
(Decrease) in
Net Asset Value:
PER SHARE
OPERATING
PERFORMANCE:
Net asset value,
beginning of
period.......... $10.11 $10.10 $ 9.95 $10.00 $10.11 $10.10 $ 9.95 $10.00 $ 10.15 $ 10.10 $ 9.84
------ ------ ------ ------ ------ ------ ------ ------ ------- ------- ------
Investment
income--net.... .38 .41 .42 .23 .34 .37 .39 .21 .35 .38 .29
Realized and
unrealized gain
(loss) on
investments--
net............ .12 .01 .15 (.05) .12 .01 .15 (.05) .12 .05 .26
------ ------ ------ ------ ------ ------ ------ ------ ------- ------- ------
Total from
investment
operations...... .50 .42 .57 .18 .46 .38 .54 .16 .47 .43 .55
------ ------ ------ ------ ------ ------ ------ ------ ------- ------- ------
Less dividends
from investment
income--net..... (.38) (.41) (.42) (.23) (.34) (.37) (.39) (.21) (.35) (.38) (.29)
------ ------ ------ ------ ------ ------ ------ ------ ------- ------- ------
Net asset value,
end of period... $10.23 $10.11 $10.10 $ 9.95 $10.23 $10.11 $10.10 $ 9.95 $ 10.27 $ 10.15 $10.10
====== ====== ====== ====== ====== ====== ====== ====== ======= ======= ======
TOTAL INVESTMENT
RETURN:**
Based on net
asset value per
share........... 5.04% 4.18% 5.89% 1.85%# 4.66% 3.80% 5.51% 1.61%# 4.68% 4.28% 5.68%#
====== ====== ====== ====== ====== ====== ====== ====== ======= ======= ======
RATIOS TO AVERAGE
NET ASSETS:
Expenses, net of
reimbursements.. .99% .80% .38% .02%* 1.35% 1.15% .73% .38%* 1.28% .97% 1.05%*
====== ====== ====== ====== ====== ====== ====== ====== ======= ======= ======
Expenses......... 1.75% 1.63% 1.90% 1.48%* 2.11% 1.99% 2.25% 1.83%* 2.02% 1.83% 2.55%*
====== ====== ====== ====== ====== ====== ====== ====== ======= ======= ======
Investment
income--net..... 3.74% 4.01% 4.25% 3.46%* 3.38% 3.65% 3.87% 3.05%* 3.46% 3.84% 3.77%*
====== ====== ====== ====== ====== ====== ====== ====== ======= ======= ======
SUPPLEMENTAL
DATA:
Net assets, end
of period (in
thousands)...... $ 736 $ 833 $ 943 $ 990 $5,134 $6,264 $7,414 $9,532 $ 8 $ 1 $ 1
====== ====== ====== ====== ====== ====== ====== ====== ======= ======= ======
Portfolio
turnover........ 20.88% 30.90% 141.52% 237.47% 20.88% 30.90% 141.52% 237.47% 20.88% 30.90% 141.52%
====== ====== ====== ====== ====== ====== ====== ====== ======= ======= ======
<CAPTION>
PENNSYLVANIA FUND
--------------------------
CLASS D
--------------------------
FOR THE
PERIOD
FOR THE YEAR OCT. 21,
ENDED JULY 31, 1994+ TO
---------------- JULY 31,
1997 1996 1995
------- ------- --------
<S> <C> <C> <C>
Increase
(Decrease) in
Net Asset Value:
PER SHARE
OPERATING
PERFORMANCE:
Net asset value,
beginning of
period.......... $ 10.11 $ 10.10 $ 9.84
------- ------- ------
Investment
income--net.... .37 .40 .33
Realized and
unrealized gain
(loss) on
investments--
net............ .13 .01 .26
------- ------- ------
Total from
investment
operations...... .50 .41 .59
------- ------- ------
Less dividends
from investment
income--net..... (.37) (.40) (.33)
------- ------- ------
Net asset value,
end of period... $ 10.24 $ 10.11 $10.10
======= ======= ======
TOTAL INVESTMENT
RETURN:**
Based on net
asset value per
share........... 5.04% 4.07% 6.10%#
======= ======= ======
RATIOS TO AVERAGE
NET ASSETS:
Expenses, net of
reimbursements.. 1.09% .96% .57%*
======= ======= ======
Expenses......... 1.85% 1.71% 2.08%*
======= ======= ======
Investment
income--net..... 3.64% 3.84% 4.30%*
======= ======= ======
SUPPLEMENTAL
DATA:
Net assets, end
of period (in
thousands)...... $ 1,861 $ 1,807 $ 382
======= ======= ======
Portfolio
turnover........ 20.88% 30.90% 141.52%
======= ======= ======
</TABLE>
- ------
* Annualized.
** Total investment returns exclude the effects of sales loads.
+ Commencement of operations.
# Aggregate total investment return.
24
<PAGE>
Set forth below for each State Fund and for Limited Maturity Portfolio is
the 30-day yield as of July 31, 1997, the tax-equivalent yield, which treats
income as exempt from Federal income taxes, and the maximum tax-equivalent
yield, which treats income as exempt from all Federal income and applicable
state taxes (and New York City taxes, in the case of the New York Fund). All
yields are calculated utilizing formulas specified by the Commission.
<TABLE>
<CAPTION>
30 DAY FEDERAL EXEMPT MAXIMUM
YIELD AS OF TAX-EQUIVALENT TAX-EQUIVALENT
FUND NAME CLASS 7/31/97 YIELD * YIELD**
- --------- ------- ----------- -------------- --------------
<S> <C> <C> <C> <C>
Arizona Fund................. Class A 3.37% 4.68% 4.94%
Class B 3.04% 4.22% 4.45%
Class C 3.22% 4.47% 4.72%
Class D 3.27% 4.54% 4.79%
Massachusetts Fund........... Class A 3.59% 4.99% 5.67%
Class B 3.26% 4.53% 5.15%
Class C 3.47% 4.82% 5.48%
Class D 3.49% 4.85% 5.51%
Michigan Fund................ Class A 3.62% 5.03% 5.26%
Class B 3.28% 4.56% 4.77%
Class C 3.12% 4.33% 4.53%
Class D 3.52% 4.89% 5.11%
New Jersey Fund.............. Class A 3.32% 4.61% 4.92%
Class B 2.99% 4.15% 4.44%
Class C 3.20% 4.44% 4.75%
Class D 3.22% 4.47% 4.78%
New York Fund................ Class A 3.86% 5.36% 6.04%
Class B 3.54% 4.92% 5.54%
Class C 3.72% 5.17% 5.82%
Class D 3.77% 5.24% 5.90%
Pennsylvania Fund............ Class A 3.41% 4.74% 4.89%
Class B 3.08% 4.28% 4.40%
Class C 3.15% 4.38% 4.50%
Class D 3.31% 4.60% 4.73%
Limited Maturity Portfolio... Class A 3.78% 5.25% 5.25%
Class B 3.46% 4.81% 4.81%
Class C 3.45% 4.79% 4.79%
Class D 3.68% 5.11% 5.11%
</TABLE>
- --------
* Figures are based on Federal tax rate of 28%.
** With respect to the State Funds, the figures represent the maximum tax-
equivalent yield for an individual who is a resident of the designated
state.
INVESTMENT OBJECTIVE AND POLICIES
The structure, organization and investment policies of the State Funds and
Limited Maturity Portfolio are similar, but not identical. The State Funds and
Limited Maturity Portfolio are sometimes referred to herein collectively as
the "Funds" and individually as a "Fund." Certain of the significant
differences are discussed below.
The investment objective of each State Fund is to provide stockholders with
as high a level of income exempt from Federal income taxes, the designated
state's personal income taxes and, where applicable, state
25
<PAGE>
intangible personal property tax, and corporate income or local personal
income taxes as is consistent with prudent investment management. The
investment objective of Limited Maturity Portfolio is to provide stockholders
with as high a level of income exempt from Federal income taxes as is
consistent with its investment policies and prudent investment management.
There can be no assurance that after the Reorganization, Limited Maturity
Portfolio will achieve its investment objective.
Each State Fund seeks to achieve its objective by providing investors with
the opportunity to invest in a portfolio of securities consisting primarily of
intermediate-term investment grade obligations issued by or on behalf of the
designated state or its political subdivisions, agencies or instrumentalities,
and obligations of other qualifying issuers, such as issuers located in Puerto
Rico, the U.S. Virgin Islands and Guam. Limited Maturity Portfolio seeks to
achieve its objective by investing in a diversified portfolio consisting
primarily of short-term investment grade obligations issued by or on behalf of
states, territories and possessions of the United States and the District of
Columbia and their political subdivisions, agencies and instrumentalities, the
interest from which is exempt from Federal income taxes (such obligations are
herein referred to as "Municipal Bonds"). The investment objective of each of
the State Funds and of Limited Maturity Portfolio is a fundamental policy that
may not be changed without a vote of a majority of that Fund's outstanding
voting securities. At times, the State Funds and Limited Maturity Portfolio
may seek to hedge their portfolios through the use of futures contracts and
options transactions thereon to reduce volatility in the net asset value of
their shares.
Each State Fund will maintain at all times, except during temporary
defensive periods, at least 65% of its total assets invested in its respective
State Municipal Bonds/1/; the New Jersey Fund will maintain at least 80% of
its total assets invested in New Jersey State Municipal Bonds.
Limited Maturity Portfolio invests in a portfolio consisting primarily of
short-term investment grade Municipal Bonds. Municipal Bonds in Limited
Maturity Portfolio will be either Municipal Bonds with remaining maturities of
less than four years or short-term municipal notes, which typically are issued
with a maturity of not more than one year. Municipal notes include tax
anticipation notes, bond anticipation notes and revenue anticipation notes.
Interest rates on short-term Municipal Bonds may fluctuate more widely from
time to time than interest rates on long-term Municipal Bonds. However,
because of the shorter maturities, the market value of the Municipal Bonds
held by Limited Maturity Portfolio can be expected to fluctuate less as a
result of changes in interest rates.
Each State Fund will invest primarily in Municipal Bonds with remaining
maturities of between one and ten years, and may not invest in Municipal Bonds
with remaining maturities of greater than ten years. For cash management and
temporary defensive purposes, each State Fund may invest in Municipal Bonds
with remaining maturities of less than one year. It is anticipated that,
depending on market conditions, the dollar weighted average maturity of each
State Fund's portfolio will not exceed five years. For purposes of these
investment policies, a bond will be treated as having a maturity earlier than
its stated maturity date if such bond has technical features which, in the
judgment of FAM, will result in the bond being valued in the market as though
it has such earlier maturity. Interest rates on shorter-term Municipal Bonds
may fluctuate more widely from time to time than interest rates on longer-term
Municipal Bonds. However, because of their limited maturities, the market
value of the Municipal Bonds held by each State Fund can be expected to
fluctuate less as a result of changes in interest rates.
The investment grade Municipal Bonds in which the State Funds and Limited
Maturity Portfolio invest are those Municipal Bonds rated at the date of
purchase within the four highest ratings as determined by either Moody's
Investors Service, Inc. ("Moody's") (currently "Aaa", "Aa", "A" and "Baa"),
Standard & Poor's Ratings Services ("S&P") (currently AAA, AA, A and BBB) or
Fitch Investors Service, Inc. ("Fitch") (currently AAA, AA, A and BBB) or, if
unrated, are considered to be of comparable quality by FAM. See Exhibit II--
"Ratings of Municipal Bonds."
- --------
/1/ State Municipal Bonds are obligations that pay interest exempt from
Federal income taxes, state personal income taxes in the designated state
and, where applicable, corporate income or local personal income taxes
and/or state intangible personal property taxes.
26
<PAGE>
Limited Maturity Portfolio may invest in variable rate demand notes
("VRDNs") which are tax-exempt obligations containing a floating or variable
interest rate adjustment formula and an unconditional right of demand to
receive payment of the unpaid principal balance plus accrued interest upon a
short notice period not to exceed seven days. The interest rates are
adjustable at intervals ranging from daily to up to six months based on some
prevailing market rate for similar investments, such adjustment formula being
calculated to maintain the market value of the VRDN at approximately the par
value of the VRDN upon the adjustment date. The adjustments are typically
based upon the prime rate of a bank or some other appropriate interest rate
adjustment index.
Limited Maturity Portfolio may also invest in VRDNs in the form of
participation interests ("Participating VRDNs") in variable rate tax-exempt
obligations held by a financial institution, typically a commercial bank
("institution"). Participating VRDNs provide Limited Maturity Portfolio with a
specified undivided interest (up to 100%) in the underlying obligation and the
right to demand payment of the unpaid principal balance plus accrued interest
on the Participating VRDNs from the institution upon a specified number of
days' notice, not to exceed seven days. In addition, the Participating VRDN is
backed by an irrevocable letter of credit or guaranty of the institution.
Limited Maturity Portfolio has an undivided interest in the underlying
obligation and thus participates on the same basis as the institution in such
obligation except that the 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.
Limited Maturity Portfolio has been advised by its counsel that the interest
received on Participating VRDNs will be treated as interest from tax-exempt
obligations as long as Limited Maturity Portfolio does not invest more than a
limited amount (not more than 20%) of its total assets in such investments and
certain other conditions are met. It is contemplated that Limited Maturity
Portfolio will not invest more than a limited amount of its total assets in
Participating VRDNs. The State Funds may also invest in VRDNs and
Participating VRDNs. See the Municipal Bond Fund Prospectus for information
about investment in such securities.
Each State Fund may invest up to 20% of its total assets in Municipal Bonds
that are rated below "Baa" by Moody's or below BBB by S&P or Fitch. 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, a State Fund will rely on FAM's
judgment, analysis and experience in evaluating the creditworthiness of the
issuer of such securities. FAM 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 Objectives and Policies" in the
Limited Maturity Trust Statement for a more detailed discussion of the
pertinent risk factors involved in investing in "high yield" or "junk" bonds
and Exhibit II--"Ratings of Municipal Bonds" for additional information
regarding ratings of debt securities. None of the State Funds intends to
purchase debt securities that are in default or which FAM believes will be in
default.
On a temporary basis, each Fund may invest in short-term tax-exempt or
taxable securities (Limited Maturity Portfolio may only invest in taxable
securities), short-term U.S. Government securities, repurchase agreements or
cash. Such securities or cash will not exceed 20% of each Fund's net assets
except during interim periods pending investment of the net proceeds from
public offerings of the Fund's securities and temporary defensive periods
when, in the opinion of FAM, prevailing market or economic conditions warrant.
Each State Fund is classified as non-diversified within the meaning of the
Investment Company Act, which means that it is not limited by such Act in the
proportion of its total assets that it may invest in securities of a single
issuer. However, each State Fund's investments are limited so as to qualify
the State Fund for the special tax treatment afforded RICs under the Code. See
"The Reorganization--Agreement and Plan of Reorganization--Tax Consequences of
the Reorganization." To qualify, among other requirements, each State Fund
limits its
27
<PAGE>
investments so that, at the close of each quarter of the taxable year, (i) not
more than 25% of the market value of the State Fund's total assets are
invested in the securities (other than U.S. Government 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 are invested in the
securities (other than U.S. Government securities) of a single issuer. Limited
Maturity Portfolio is classified as diversified. A fund which elects to be
classified as "diversified" under the Investment Company Act must satisfy the
foregoing 5% requirement with respect to 75% of its total assets. To the
extent that a State Fund assumes large positions in the securities of a small
number of issuers, that Fund's yield may fluctuate to a greater extent than
that of a diversified fund as a result of changes in the financial condition
or in the market's assessment of the issuers.
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 industrial development bonds are issued by or on behalf of
public authorities to finance various privately operated facilities, including
pollution control facilities. For purposes of this Proxy Statement and
Prospectus, such obligations are Municipal Bonds if the interest paid thereon
is exempt from Federal income tax, 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" or "special obligation" 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 or special
obligation bonds are payable only from the revenues derived from a particular
facility or class of facilities or, in some cases, from the proceeds from a
special excise tax or other specific revenue source such as from the user of
the facility being financed. Industrial development 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. The payment of the principal and
interest on such industrial development 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. Municipal Bonds also may include "moral
obligation" bonds, which normally are issued by special purpose public
authorities. If an issuer of moral obligation bonds is unable to meet its
obligations, the repayment of such bonds becomes a moral commitment but not a
legal obligation of the state or municipality in question.
Each Fund may purchase Municipal Bonds classified as "private activity
bonds" (in general, bonds that benefit non-governmental entities). Interest
received on certain tax-exempt securities that are classified as "private
activity bonds" may subject certain investors in a Fund to an alternative
minimum tax. There is no limitation on the percentage of each Fund's assets
that may be invested in Municipal Bonds that may subject certain investors to
an alternative minimum tax. See the discussion under "Taxes" in the Municipal
Bond Fund Prospectus and the Limited Maturity Trust Prospectus.
Federal tax legislation has limited the types and volume of bonds the
interest on which qualifies for a Federal income tax exemption. As a result,
this legislation and legislation that may be enacted in the future may affect
the availability of Municipal Bonds for investment by the Funds.
OTHER INVESTMENT POLICIES
The State Funds and Limited Maturity Portfolio have each adopted certain
other policies as set forth below:
Borrowings. Notwithstanding a less restrictive fundamental policy permitting
borrowings of up to 33 1/3% of total assets, as a matter of operating policy,
the Municipal Bond Fund does not intend to have Limited Maturity Portfolio (or
any other portfolio) borrow amounts in excess of 10% of the total assets of
Limited Maturity Portfolio, taken at market value, and then only from banks as
a temporary measure for extraordinary or emergency purposes such as the
redemption of shares of Limited Maturity Portfolio. No State Fund may borrow
28
<PAGE>
amounts in excess of 20% of its total assets, taken at market value (excluding
the amount borrowed), and then only from banks as a temporary measure for
extraordinary or emergency purposes such as to meet redemption requests.
Neither the State Funds nor Limited Maturity Portfolio will purchase
securities while borrowings are outstanding.
When-Issued Securities and Delayed Delivery Transactions. The State Funds
and Limited Maturity Portfolio may purchase or sell Municipal Bonds on a
delayed delivery basis or on a when-issued basis at fixed purchase or sale
terms. These transactions arise when securities are purchased or sold with
payment and delivery taking place in the future. The value of the obligation
on the delivery date may be more or less than its purchase price. A separate
account will be established with the respective Fund's custodian consisting of
cash, cash equivalents or liquid securities having a market value at all times
at least equal to the amount of the commitment.
Indexed and Inverse Floating Obligations. The State Funds and Limited
Maturity Portfolio may utilize indexed and inverse floating obligations in
connection with their investment strategies. See the Municipal Bond Fund
Prospectus and Limited Maturity Trust Prospectus for a detailed discussion of
these policies. Limited Maturity Portfolio may not invest in such illiquid
obligations if such investments, together with other illiquid investments,
would exceed 10% of its total assets; for each of the State Funds, this
limitation is 15%.
Call Rights. Each State Fund may purchase, either directly from the issuer
or from a third party, a Municipal Bond issuer's contractual right to call all
or a portion of such Municipal Bond for mandatory tender for purchase (a "Call
Right"). A State Fund purchasing a Call Right may or may not own the related
Municipal Bond. A holder of a Call Right may exercise such right to require a
mandatory tender for the purchase of the related Municipal Bonds, subject to
certain conditions. A Call Right that is not exercised prior to the maturity
of the related Municipal Bond will expire without value. The economic effect
of holding both the Call Right and the related Municipal Bond is identical to
holding a Municipal Bond as a non-callable security. A State Fund may not
invest in such illiquid obligations if such investments, together with other
illiquid investments, would exceed 15% of that Fund's total assets.
Forward Commitments. Limited Maturity Portfolio may purchase Municipal Bonds
on a forward commitment basis at fixed purchase terms. The purchase will be
recorded on the date Limited Maturity Portfolio enters into the commitment and
the value of the security will hereafter be reflected in the calculation of
Limited Maturity Portfolio's net asset value. The value of the security on the
delivery date may be more or less than its purchase price. A separate account
of Limited Maturity Portfolio will be established with its custodian
consisting of cash or liquid Municipal Bonds having a market value at all
times at least equal to the amount of the forward commitment.
INFORMATION REGARDING OPTIONS AND FUTURES TRANSACTIONS
Financial Futures Contracts and Options Thereon. The State Funds and Limited
Maturity Portfolio are authorized to purchase and sell certain financial
futures contracts ("financial futures contracts") and options thereon.
Financial futures contracts and options thereon are used solely for the
purposes of hedging a Fund's investments in Municipal Bonds against declines
in value and hedging against increases in the cost of securities it intends to
purchase. 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
financial futures contracts, to make and accept a cash settlement, at a
specific future time for a specified price. A sale of financial futures
contracts or options thereon 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 or options. A purchase of financial futures contracts or
options thereon 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
financial futures contracts or options.
The purchase or sale of a financial futures contract or option thereon
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
29
<PAGE>
the broker effecting the transaction equal to approximately 5% of the contract
amount must be deposited with the broker. This amount is known as initial
margin. Subsequent payments to and from the broker, called variation margin,
are made on a daily basis as the price of the financial futures contract or
option thereon fluctuates making the long and short positions in the financial
futures contract or option thereon more or less valuable.
Each Fund may purchase and sell financial futures contracts based on The
Bond Buyer Municipal Bond Index, a price-weighted measure of the market value
of 40 large tax-exempt issues, and purchase and sell put and call options on
such financial futures contracts for the purpose of hedging Municipal Bonds
that the Fund holds or anticipates purchasing against adverse changes in
interest rates.
Each State Fund also may purchase and sell financial futures contracts on
U.S. Government securities and write and purchase put and call options on such
financial futures contracts as a hedge against adverse changes in interest
rates as described more fully in the Limited Maturity Trust Statement. With
respect to U.S. Government securities, currently there are financial futures
contracts based on long-term U.S. Treasury bonds, U.S. Treasury notes, GNMA
Certificates and three-month U.S. Treasury bills.
Subject to policies adopted by the Trustees of the Trust, the State Funds
also may enter into other financial futures transactions, such as financial
futures contracts or options on other municipal bond indices which may become
available, if FAM and the Trustees of the Trust should determine that there is
normally a sufficient correlation between the prices of such financial futures
contracts or options thereon and the Municipal Bonds in which a Fund invests
to make such hedging appropriate.
Risk Factors in Financial Futures Contracts and Options Thereon. Utilization
of financial futures contracts and options thereon involves the risk of
imperfect correlation in movements in the price of financial futures contracts
and options thereon and movements in the price of the security that is the
subject of the hedge. If the price of the financial futures contract or option
thereon moves more or less than the price of the security that is the subject
of the hedge, a Fund will experience a gain or loss that will not be
completely offset by movements in the price of such security. There is a risk
of imperfect correlation where the securities underlying financial futures
contracts or options thereon have different maturities, ratings, geographic
compositions or other characteristics than the security being hedged. In
addition, the correlation may be affected by additions to or deletions from
the index that serves as a basis for a financial futures contract or option
thereon. Finally, in the case of financial futures contracts on U.S.
Government securities and options on such financial futures contracts, the
anticipated correlation of price movements between the U.S. Government
securities underlying the financial futures contracts or options and Municipal
Bonds may be adversely affected by economic, political, legislative or other
developments that 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 a Fund's being deemed a
"commodity pool," as defined under such regulations, provided that the Fund
adheres to certain restrictions. In particular, the Fund may purchase and sell
futures contracts and options thereon (i) for bona fide hedging purposes, and
(ii) for non-hedging purposes, if the aggregate initial margin and premiums
required to establish positions in such contracts and options does not exceed
5% of the liquidation value of the Fund's portfolio, after taking into account
unrealized profits and unrealized losses on any such contracts and options.
Margin deposits may consist of cash or securities acceptable to the broker and
the relevant contract market.
When a Fund purchases a financial futures contract, or writes a put option
or purchases a call option thereon, it will maintain an amount of cash, cash
equivalents (e.g., commercial paper and daily tender adjustable notes) or
other liquid securities in a segregated account with the Fund's custodian, so
that the amount so segregated plus the amount of initial and variation margin
held in the account of its broker equals the market value of the financial
futures contract, thereby ensuring that the use of such financial futures
contract is unleveraged.
Although certain risks are involved in financial futures contracts and
options thereon, FAM believes that, because each Fund will engage in
transactions involving financial futures contracts and options thereon only
for
30
<PAGE>
hedging purposes, the options and futures portfolio strategies of a Fund will
not subject the Fund to certain risks frequently associated with speculation
in financial futures contracts and options thereon. A Fund may be restricted
in engaging in transactions involving financial futures contracts and options
thereon due to the Federal tax requirement that less than 30% of its gross
income in each taxable year be derived from the sale or other disposition of
securities held for less than three months. Under recently enacted
legislation, this requirement will no longer apply to Limited Maturity
Portfolio after its fiscal year ending June 30, 1998 or to the State Funds
after their fiscal years ending July 31, 1998.
The volume of trading in the exchange markets with respect to Municipal Bond
options may be limited, and it is impossible to predict the amount of trading
interest that may exist in such options. In addition, there can be no
assurance that viable exchange markets will continue to be available.
Each Fund intends to enter into financial futures contracts and options
thereon, on an exchange or in the over-the-counter market, only if there
appears to be a liquid secondary market for such financial futures contracts
or options. There can be no assurance, however, that a liquid secondary market
will exist at any specific time. Thus, it may not be possible to close a
financial futures contract position or the related option. The inability to
close financial futures contract positions or the related options also could
have an adverse impact on a Fund's ability to hedge effectively its portfolio.
There is also the risk of loss by a Fund of margin deposits or collateral in
the event of bankruptcy of a broker with which the Fund has an open position
in a financial futures contract or the related option.
The liquidity of a secondary market in a financial futures contract or
option thereon may be adversely affected by "daily price fluctuation limits"
established by commodity exchanges which limit the amount of fluctuation in a
financial futures contract price during a single trading day. Once the daily
limit has been reached in the contract, no trades may be entered into at a
price beyond the limit, thus preventing the liquidation of open futures
positions. Prices in the past have reached or exceeded the daily limit on a
number of consecutive trading days.
The successful use of financial futures contracts and options thereon also
depends on the ability of FAM 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 financial futures contract or
related option is held by a Fund or moves in a direction opposite to that
anticipated, the Fund may realize a loss on the hedging transaction that is
not fully or partially offset by an increase in the value of portfolio
securities. As a result, a Fund's total return for such period may be less
than if it had not engaged in the hedging transaction. Furthermore, each State
Fund only will engage in hedging transactions from time to time and may not
necessarily be engaging in hedging transactions when movements in interest
rates occur.
INVESTMENT RESTRICTIONS
Other than as noted above under "The Reorganization--Comparison of the State
Funds and Limited Maturity Portfolio--Investment Objectives and Policies" and
"--Other Investment Policies," each of the State Funds and Limited Maturity
Portfolio have identical investment restrictions. See "Investment
Restrictions" in the Municipal Bond Fund Statement and "Investment
Restrictions" in the Limited Maturity Trust Statement.
31
<PAGE>
PORTFOLIO COMPOSITION
The following table sets forth certain information with respect to the
composition of the investment portfolio of Limited Maturity Portfolio and of
each of the State Funds as of July 31, 1997.
Limited Maturity Portfolio
<TABLE>
<CAPTION>
VALUE
S&P* MOODY'S* NUMBER OF ISSUES (IN THOUSANDS) PERCENT
---- ---------- ---------------- -------------- -------
<S> <C> <C> <C> <C>
AAA "Aaa" 27 $154,821 41.6%
AA "Aa" 22 116,609 31.3
A "A" 8 49,198 13.2
BBB "Baa" 2 17,742 4.8
NR NR 0 0 0
SP1 VMIG1/MIG1 6 33,664 9.1
--- -------- -----
65 $372,034 100.0%
=== ======== =====
</TABLE>
State Funds
Arizona Fund
<TABLE>
<CAPTION>
VALUE
S&P* MOODY'S* NUMBER OF ISSUES (IN THOUSANDS) PERCENT
---- -------- ---------------- -------------- -------
<S> <C> <C> <C> <C>
AAA "Aaa" 5 $1,251 54.2%
AA "Aa" 4 892 38.7
A "A" 1 163 7.1
BBB "Baa" 0 0 0
NR NR 0 0 0
--- ------ -----
10 $2,306 100.0%
=== ====== =====
</TABLE>
Massachusetts Fund
<TABLE>
<CAPTION>
VALUE
S&P* MOODY'S* NUMBER OF ISSUES (IN THOUSANDS) PERCENT
---- -------- ---------------- -------------- -------
<S> <C> <C> <C> <C>
AAA "Aaa" 9 $2,117 44.4%
AA "Aa" 3 646 13.5
A "A" 5 2,010 42.1
BBB "Baa" 0 0 0
NR NR 0 0 0
--- ------ -----
17 $4,773 100.0%
=== ====== =====
</TABLE>
Michigan Fund
<TABLE>
<CAPTION>
VALUE
S&P* MOODY'S* NUMBER OF ISSUES (IN THOUSANDS) PERCENT
---- -------- ---------------- -------------- -------
<S> <C> <C> <C> <C>
AAA "Aaa" 13 $2,644 64.3%
AA "Aa" 6 1,471 35.7
A "A" 0 0 0
BBB "Baa" 0 0 0
NR NR 0 0 0
--- ------ -----
19 $4,115 100.0%
=== ====== =====
</TABLE>
(footnote on next page)
32
<PAGE>
New Jersey Fund
<TABLE>
<CAPTION>
VALUE
S&P* MOODY'S* NUMBER OF ISSUES (IN THOUSANDS) PERCENT
---- -------- ---------------- -------------- -------
<S> <C> <C> <C> <C>
AAA "Aaa" 9 $3,838 89.8%
AA "Aa" 1 436 10.2
A "A" 0 0 0
BBB "Baa" 0 0 0
NR NR 0 0 0
--- ------ -----
10 $4,274 100.0%
=== ====== =====
</TABLE>
New York Fund
<TABLE>
<CAPTION>
VALUE
S&P* MOODY'S* NUMBER OF ISSUES (IN THOUSANDS) PERCENT
---- -------- ---------------- -------------- -------
<S> <C> <C> <C> <C>
AAA "Aaa" 8 $ 5,570 42.4%
AA "Aa" 6 3,748 28.5
A "A" 4 2,730 20.8
BBB "Baa" 2 1,092 8.3
NR NR 0 0 0
--- ------- -----
20 $13,140 100.0%
=== ======= =====
</TABLE>
Pennsylvania Fund
<TABLE>
<CAPTION>
VALUE
S&P* MOODY'S* NUMBER OF ISSUES (IN THOUSANDS) PERCENT
---- -------- ---------------- -------------- -------
<S> <C> <C> <C> <C>
AAA "Aaa" 5 $2,583 42.5%
AA "Aa" 3 1,709 28.1
A "A" 2 1,791 29.4
BBB "Baa" 0 0 0
NR NR 0 0 0
--- ------ -----
10 $6,083 100.0%
=== ====== =====
</TABLE>
- --------
* Ratings: Using the higher of S&P's or Moody's rating on the Fund's municipal
obligations. S&P's rating categories may be modified further by a plus (+)
or minus (-) in AA, A, BBB, BB, B and C ratings. Moody's rating categories
may be modified further by a 1, 2 or 3 in "Aa," "A," "Baa," "Ba" and "B"
ratings. See Exhibit II--"Ratings of Municipal Bonds."
33
<PAGE>
PORTFOLIO TRANSACTIONS
The procedures for engaging in portfolio transactions are the same for each
State Fund and Limited Maturity Portfolio. Subject to policies established by
the Board of Trustees of the Trust and the Board of Directors of Municipal
Bond Fund. FAM is primarily responsible for the execution of the portfolio
transactions for the State Funds and Limited Maturity Portfolio. In executing
such transactions, FAM seeks to obtain the best results for each entity,
taking into account such factors as price (including the applicable brokerage
commission or dealer spread), size of order, difficulty of execution and
operational facilities of the firm involved and the firm's risk in positioning
a block of securities. While FAM generally seeks reasonably competitive
commission rates, the State Funds and Limited Maturity Portfolio do not
necessarily pay the lowest commission or spread available.
Neither any State Fund nor Limited Maturity Portfolio has any obligation to
deal with any broker or dealer in the execution of transactions in portfolio
securities. Subject to obtaining the best price and execution, securities
firms that provide supplemental investment research to FAM, including Merrill
Lynch, Pierce, Fenner & Smith Incorporated ("Merrill Lynch"), may receive
orders for transactions by a Fund. Information so received will be in addition
to, and not in lieu of, the services required to be performed by FAM under its
investment advisory agreements with the Trust and the Municipal Bond Fund, and
the expenses of FAM will not necessarily be reduced as a result of the receipt
of such supplemental information.
The securities in which each State Fund and Limited Maturity Portfolio
primarily invest are traded in the over-the-counter markets, and the State
Funds and Limited Maturity Portfolio normally deal directly with the dealers
who make markets in the securities involved, except in those circumstances
where better prices and execution are available elsewhere. Under the
Investment Company Act, except as permitted by exemptive order, persons
affiliated with a State Fund or Limited Maturity Portfolio are prohibited from
dealing with that fund as principals in the purchase and sale of securities.
Since transactions in the over-the-counter markets usually involve
transactions with dealers acting as principals for their own account, a State
Fund or Limited Maturity Portfolio will not deal with affiliated persons,
including Merrill Lynch and its affiliates, in connection with such
transactions, except that pursuant to an exemptive order obtained by FAM, a
State Fund or Limited Maturity Portfolio may engage in principal transactions
with Merrill Lynch in high quality, short-term, tax-exempt securities. In
addition, the Funds may not purchase securities, including Municipal Bonds,
during the existence of an underwriting syndicate of which Merrill Lynch is a
member or in a private placement in which Merrill Lynch serves as placement
agent except pursuant to procedures approved by the Board that either comply
with rules adopted by the Commission or interpretations of the Commission
staff. An affiliated person of a State Fund or Limited Maturity Portfolio may
serve as its broker in over-the-counter transactions conducted on an agency
basis.
The Board of Trustees of the Trust and the Board of Directors of the
Municipal Bond Fund have considered the possibility of recapturing for the
benefit of the Trust or the Municipal Bond Fund brokerage commissions, dealer
spreads and other expenses of possible portfolio transactions, such as
underwriting commissions, by conducting portfolio transactions through
affiliated entities, including Merrill Lynch. For example, brokerage
commissions received by Merrill Lynch could be offset against the investment
advisory fees paid by the State Funds or Limited Maturity Portfolio to FAM.
After considering all factors deemed relevant, the respective Trustees and
Directors made a determination not to seek such recapture. The Boards will
reconsider this matter from time to time.
PORTFOLIO TURNOVER
Generally, neither the State Funds nor Limited Maturity Portfolio purchases
securities for short-term trading profits. However, any State Fund or Limited
Maturity Portfolio may dispose of securities without regard to the time that
they have been held when such action, for defensive or other reasons, appears
advisable to FAM. However, the Funds monitor their trading so as to comply
with the Federal tax requirement that less than 30% of gross income be derived
from the sale or other disposition of securities held for less than three
months. Under recently enacted legislation, this requirement will no longer
apply to Limited Maturity Portfolio after its fiscal year ending June 30, 1998
or to the State Funds after their fiscal years ending July 31, 1998. As a
result of the
34
<PAGE>
investment policies of the State Funds and of Limited Maturity Portfolio,
their portfolio turnover rates may be higher than that of other investment
companies; however, it is extremely difficult to predict portfolio turnover
rates with any degree of accuracy. (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 a fund during the particular fiscal year. For purposes of
determining this rate, all securities whose maturities at the time of
acquisition are one year or less are excluded.) The portfolio turnover rate of
Limited Maturity Portfolio for the fiscal years ended June 30, 1997 and 1996
was 61.90% and 88.32%, respectively. For the fiscal years ended July 31, 1997
and 1996, the portfolio turnover rates for each of the State Funds were as
follows:
<TABLE>
<CAPTION>
FISCAL YEAR
ENDED JULY 31,
----------------
FUND 1997 1996
---- ------- -------
<S> <C> <C>
Arizona Fund............................................ 38.21% 43.53%
Massachusetts Fund...................................... 22.93 22.71
Michigan Fund........................................... 13.24 32.92
New Jersey Fund......................................... 32.89 6.57
New York Fund........................................... 36.53 51.47
Pennsylvania Fund....................................... 20.88 30.90
</TABLE>
ADDITIONAL INFORMATION
Net Asset Value. The net asset value per share for each of the State Funds
and for Limited Maturity Portfolio is determined as of 15 minutes after the
close of business on the NYSE (generally, 4:00 p.m., New York time) on each
day during which the NYSE is open for trading. For purposes of determining the
net asset value of a share of beneficial interest of the State Funds or a
share of Common Stock of Limited Maturity Portfolio, the value of the
securities held plus any cash or other assets (including interest and
dividends accrued but not yet received) minus all liabilities (including
accrued expenses) is divided by the total number of shares outstanding at such
time rounded to the nearest cent. Expenses, including the fees payable to FAM,
and any account maintenance and/or distribution fees are accrued daily.
Stockholder Services. Limited Maturity Portfolio offers a number of
stockholder services and investment plans designed to facilitate investment in
its shares. In addition, U.S. stockholders of each class of shares of Limited
Maturity Portfolio have an exchange privilege with certain other MLAM-advised
mutual funds. Stockholder services, including exchange privileges, available
to stockholders of the State Funds and Limited Maturity Portfolio are
substantially the same. For a description of these services, see "Stockholder
Services" in the Municipal Bond Fund Prospectus.
Custodian. The Bank of New York, 90 Washington Street, 12th Floor, New York,
New York 10286, acts as custodian of the cash and securities of the State
Funds and Limited Maturity Portfolio.
Transfer Agent, Dividend Disbursing Agent and Registrar. Merrill Lynch
Financial Data Services, Inc., 4800 Deer Lake Drive East, Jacksonville,
Florida 32246-6484, serves as the transfer agent, dividend disbursing agent
and registrar with respect to each State Fund and Limited Maturity Portfolio
(the "Transfer Agent"), at the same rate, pursuant to separate registrar,
transfer agency and service agreements with the Trust on behalf of each of the
State Funds and with the Municipal Bond Fund on behalf of Limited Maturity
Portfolio.
Capital Stock. The Board of Trustees of the Trust is 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 $0.10
par value of different classes. Each of the State Funds constitutes a series
of the Trust. The shares of each series are divided into four classes
designated Class A, Class B, Class C and Class D shares.
35
<PAGE>
The Municipal Bond Fund has an authorized capital of 3,850,000,000 shares of
common stock, divided into three series, each of which is divided into four
classes, having a par value of $0.10 per share. The shares of each series are
divided into four classes, designated Class A, Class B, Class C and Class D as
follows:
<TABLE>
<CAPTION>
LIMITED
INSURED NATIONAL MATURITY
CLASS PORTFOLIO PORTFOLIO PORTFOLIO
----- ----------- ----------- -----------
<S> <C> <C> <C>
A..................................... 500,000,000 375,000,000 150,000,000
B..................................... 375,000,000 375,000,000 150,000,000
C..................................... 375,000,000 375,000,000 150,000,000
D..................................... 500,000,000 375,000,000 150,000,000
</TABLE>
The rights, preferences and expenses attributable to the Class A, Class B,
Class C and Class D shares of the State Funds are substantially the same as
those of the Class A, Class B, Class C and Class D shares of Limited Maturity
Portfolio.
MANAGEMENT
Directors. The Board of Directors of the Municipal Bond Fund currently
consists of six persons, five of whom are not "interested persons," as defined
in the Investment Company Act. The Directors are responsible for the overall
supervision of the operations of the Municipal Bond Fund and perform the
various duties imposed on the directors of investment companies by the
Investment Company Act and under applicable Maryland law. Arthur Zeikel is a
Director of Municipal Bond Fund and a Trustee of the Trust. There is otherwise
no overlap between the Boards.
The Directors of the Municipal Bond Fund are:
ARTHUR ZEIKEL*--President of FAM and its affiliate, MLAM; President and
Director of Princeton Services, Inc. ("Princeton Services"); and Executive
Vice President of Merrill Lynch & Co., Inc. ("ML & Co.").
RONALD W. FORBES--Professor of Finance, School of Business, State University
of New York at Albany.
CYNTHIA A. MONTGOMERY--Professor of Competition and Strategy, Harvard
Business School.
CHARLES C. REILLY--Self-employed financial consultant; former President and
Chief Investment Officer of Verus Capital, Inc.; former Senior Vice President
of Arnhold and S. Bleichroeder, Inc.
KEVIN A. RYAN--Professor of Education, Boston University; Founder and
current Director of The Boston University Center for Advancement of Ethics and
Character.
RICHARD R. WEST--Dean Emeritus, New York University Leonard N. Stern School
of Business Administration.
- --------
* Interested person, as defined in the Investment Company Act, of the
Municipal Bond Fund.
Management and Advisory Arrangements. Pursuant to separate management
agreements between the Trust and FAM on behalf of each State Fund, each State
Fund pays FAM a monthly fee at the annual rate of 0.35% of the average daily
net assets of that State Fund. The Municipal Bond Fund's investment advisory
agreement with FAM provides that as compensation for FAM's services to Limited
Maturity Portfolio, FAM receives at the end of each month a fee determined
based on the annual rates set forth in the table below. These fee rates are
applied to the average daily net assets of each of the three portfolios of the
Municipal Bond Fund to the extent that the aggregate of the average daily net
assets of the three combined portfolios of the Municipal Bond Fund exceeds
$250 million, $400 million, $550 million and $1.5 billion, respectively (each
such amount being a breakpoint level). The portion of the assets of a
portfolio to which the rate at each breakpoint level applies will be
36
<PAGE>
determined on a "uniform percentage" basis. The uniform percentage applicable
to a breakpoint level is determined by dividing the amount of the aggregate of
the average daily net assets of the three combined portfolios of the Municipal
Bond Fund that falls within that breakpoint level by the aggregate of the
average daily net assets of the three combined portfolios. The amount of the
fee for a portfolio at each breakpoint level is determined by multiplying the
average daily net assets of that portfolio by the uniform percentage
applicable to that breakpoint level and multiplying that product by the
advisory fee rate.
<TABLE>
<CAPTION>
RATE OF ADVISORY FEE
--------------------
AGGREGATE OF AVERAGE DAILY NET ASSETS OF THE
THREE COMBINED PORTFOLIOS OF THE MUNICIPAL BOND LIMITED
FUND MATURITY PORTFOLIO
----------------------------------------------- --------------------
<S> <C>
Not exceeding $250 million......................... 0.40 %
In excess of $250 million but not exceeding $400
million........................................... 0.375
In excess of $400 million but not exceeding $550
million........................................... 0.35
In excess of $550 million but not exceeding $1.5
billion........................................... 0.325
In excess of $1.5 billion.......................... 0.325
</TABLE>
At July 31, 1997, the average daily net assets of the three portfolios of
Municipal Bond Fund aggregated approximately $3.9 billion. At that date, the
average daily net assets of Limited Maturity Portfolio were $415.5 million and
the advisory fee rate of Limited Maturity Portfolio was 0.33%. For the fiscal
year ended June 30, 1997, FAM received $1,552,369 from Limited Maturity
Portfolio in advisory fees.
As of October 31, 1997, the three portfolios of Municipal Bond Fund had
aggregate net assets of $3,934,278,239; Limited Maturity Portfolio had net
assets of $398,404,439. At this asset level, the advisory fee rate of Limited
Maturity Portfolio would be 0.33%.
PURCHASE OF SHARES
The class structure and purchase and distribution procedures for shares of
the State Funds is substantially the same as those of Limited Maturity
Portfolio. For a complete discussion of the four classes of shares and the
purchase and distribution procedures related thereto, see "Merrill Lynch
Select Pricing SM System" and "Purchase of Shares" in either the Municipal
Bond Fund Prospectus or the Limited Maturity Trust Prospectus.
REDEMPTION OF SHARES
The procedure for redeeming shares of Limited Maturity Portfolio is
substantially the same as the procedure for redeeming shares of the State
Funds. For purposes of computing any CDSC that may be payable upon disposition
of Limited Maturity Portfolio Common Stock acquired by State Fund stockholders
in the Reorganization, the holding period of State Fund shares outstanding on
the date the Reorganization takes place will be tacked onto the holding period
of Limited Maturity Portfolio Common Stock acquired in the Reorganization.
Only Class A and Class D shares of Limited Maturity Portfolio Common Stock
will be issued in the Reorganization. Class A and Class D shares are not
subject to a CDSC except that certain purchases of $1,000,000 or more which
are not subject to an initial sales charge may instead be subject to a CDSC of
0.20% of amounts redeemed within the first year after purchase. Such CDSC may
be waived in connection with certain fee-based programs and will be waived
with respect to Class A or Class D shares of Limited Maturity Portfolio Common
Stock issued in the Reorganization.
VOTING RIGHTS
Stockholders of Limited Maturity Portfolio are entitled to one vote for each
share held and fractional votes for fractional shares held and will vote on
the election of Directors and any other matter submitted to a stockholder
vote. The Municipal Bond Fund does not intend to hold meetings of stockholders
in any year in which the Investment Company Act does not require stockholders
to act upon any of the following matters: (i) election of Directors; (ii)
approval of an investment advisory agreement; (iii) approval of distribution
arrangements; and (iv) ratification of selection of independent accountants.
Voting rights for Directors are not cumulative. Limited Maturity Portfolio
Common Stock to be issued to the State Funds in the Reorganization and
thereafter distributed to the State Fund stockholders will be fully paid and
non-assessable, will have no
37
<PAGE>
preemptive rights, and will have the conversion rights described in this
Prospectus and Proxy Statement and in the Municipal Bond Fund Prospectus. Each
share of Limited Maturity Portfolio Common Stock is entitled to participate
equally in dividends and distributions declared with respect to Limited
Maturity Portfolio and in the net assets of Limited Maturity Portfolio on
liquidation or dissolution after satisfaction of outstanding liabilities,
except that Class B, Class C and Class D shares bear certain additional
expenses. Rights attributable to shares of the State Funds are substantially
the same as those described above.
STOCKHOLDER INQUIRIES
Stockholder inquiries with respect to the State Funds and Limited Maturity
Portfolio may be addressed by telephone at (609) 282-2800 or at the address
set forth on the cover page of this Proxy Statement and Prospectus.
DIVIDENDS AND DISTRIBUTIONS
The Trust's current policy with respect to dividends and distributions is
substantially the same as Municipal Bond Fund's policy. It is the intention of
the State Funds and of Limited Maturity Portfolio to distribute all of their
net investment income, if any. In addition, each of the State Funds and
Limited Maturity Portfolio declares and distributes all net realized capital
gains, if any, to stockholders at least annually. Capital gains distributions
will be automatically reinvested in shares unless the stockholder elects to
receive such distributions in cash.
See "Automatic Dividend Reinvestment Plan" below for information as to
electing either dividend reinvestment or cash payments. Any portions of
dividends and distributions which are taxable to stockholders are subject to
income tax whether they are reinvested in shares of such fund or received in
cash.
TAXATION OF LIMITED MATURITY PORTFOLIO, STATE FUNDS AND THEIR STOCKHOLDERS
The tax consequences associated with investment in shares of Limited
Maturity Portfolio Common Stock are substantially similar to the tax
consequences associated with investment in shares of the State Funds. Limited
Maturity Portfolio and the State Funds have elected and qualified for the
special tax treatment afforded RICs under the Code. Consequently, the Funds
(but not their stockholders) are not subject to Federal income tax on the part
of their net ordinary income and net realized capital gains which they
distribute to their Class A, Class B, Class C and Class D stockholders
(together, the "Stockholders"). The Funds have distributed substantially all
of such income in taxable years prior to the Reorganization and Limited
Maturity Portfolio intends to distribute substantially all of such income in
taxable years following the Reorganization.
Each Fund has qualified, and Limited Maturity Portfolio intends to continue
to qualify, 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 a Fund's
taxable year, at least 50% of the value of its total assets consists of
obligations exempt from Federal income tax ("tax-exempt obligations") under
Section 103 of the Code (relating generally to obligations of a state or local
governmental unit), the Fund is qualified to pay exempt-interest dividends to
its Stockholders. Exempt-interest dividends are dividends or any part thereof
paid by a Fund which are attributable to interest on tax-exempt obligations
and designated as exempt-interest dividends in a written notice mailed to
Stockholders within 60 days after the close of its taxable year. To the extent
that the dividends distributed to a Fund's Stockholders 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 Stockholder'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 Limited Maturity Portfolio, will not be deductible by
the investor for purposes of Federal income taxes or state personal income
taxes, where applicable, to the extent attributable to exempt-interest
dividends. Stockholders are advised to consult their tax advisers with respect
to whether exempt-interest dividends retain the exclusion under Code Section
103(a) if a Stockholder 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 Limited Maturity Portfolio.
38
<PAGE>
For investors in each of the State Funds, the portion of a Fund's exempt-
interest dividends paid from interest received by the Fund from the municipal
bonds of the designated state is also exempt from personal income tax in the
designated state and, where applicable, corporate income or local personal
income taxes. Currently, shares of a State Fund may also be exempt from state
intangible personal property tax in the designated state. Stockholders subject
to income taxation by states other than the designated state realize a lower
after tax rate of return than Stockholders resident in the designated state
since the dividends distributed by the particular State Fund generally are not
exempt, to any significant degree, from income taxation by such other states.
Stockholders of the State Funds should be aware that after the Reorganization,
the distributions they receive from Limited Maturity Portfolio will be exempt
from Federal income tax but generally will not be exempt to any significant
degree from personal income tax at the state level.
To the extent that a Fund's distributions are derived from interest on
taxable securities or from an excess of net short-term capital gains over net
long-term capital losses ("ordinary income dividends"), such distributions are
considered ordinary income for Federal and state income tax purposes.
Distributions, if any, from an excess of net long-term capital gains over net
short-term capital losses derived from the sale of securities or from certain
transactions in futures or options ("capital gain dividends") are taxable as
long-term capital gains for Federal income tax purposes, regardless of the
length of time a Stockholder has owned Fund shares, and for state income tax
purposes, generally are treated as capital gains which are taxed at ordinary
income tax rates. Recent legislation creates additional categories of capital
gains taxable at different rates. Not later than 60 days after the close of
its taxable year, each Fund will provide its shareholders with a written
notice designating the amounts of any exempt-interest dividends, ordinary
income dividends or capital gain dividends, as well as the amount of capital
gain dividends in the different categories of capital gain referred to above.
Distributions by a Fund, whether from exempt-interest income, ordinary income
or capital gains, are not eligible for the dividends received deduction
allowed to corporations under the Code.
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 certain investors in such bonds,
including Stockholders of Limited Maturity Portfolio, to an alternative
minimum tax. The Funds report to Stockholders 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 a Fund will be included in
adjusted current earnings, a corporate stockholder may be required to pay
alternative minimum tax on exempt-interest dividends paid by a Fund.
Under certain provisions of the Code, some Stockholders may be subject to a
31% withholding tax on certain ordinary income dividends and on capital gain
dividends and redemption payments ("backup withholding"). Generally,
Stockholders subject to backup withholding will be those for whom no taxpayer
identification number is on file with a Fund or who, to the Fund'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 Stockholder is not otherwise subject to backup withholding.
Ordinary income dividends paid to Stockholders who are nonresident aliens or
foreign entities are 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.
A loss realized on a sale or exchange of shares of a Fund is disallowed if
other Fund shares are acquired (whether under the Automatic Dividend
Reinvestment Plan or otherwise) within a 61-day period beginning 30
39
<PAGE>
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.
The Code provides that every Stockholder 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 Funds) during the taxable
year.
STATE OF ORGANIZATION
The Trust is a Massachusetts business trust and is governed by its
Declaration of Trust, By-laws and applicable Massachusetts law. The Municipal
Bond Fund is a Maryland corporation and is governed by its Articles of
Incorporation, By-laws and Maryland corporation law. Certain differences
between the two forms of organization are summarized below. Stockholders of
the State Funds entitled to vote at the Meeting may obtain a copy of the
Trust's Declaration of Trust and By-laws or Municipal Bond Fund's Articles of
Incorporation and By-laws, without charge, on written request to the Trust or
Municipal Bond Fund, as the case may be.
Shares of Capital Stock. The Declaration of Trust permits the Trustees to
issue an unlimited number of shares and to divide such shares into an
unlimited number of series or classes, all without stockholder approval. The
Trust currently has eight series (including the State Funds) each of which is
divided into four classes. The authorized capital stock of the Municipal Bond
Fund consists of 3,850,000,000 shares of Common Stock, divided into three
series (of which the Limited Maturity Portfolio is one), each of which is
divided into four classes. The Directors of the Municipal Bond Fund may,
without stockholder approval, increase the number of shares authorized and may
classify and reclassify the shares of the Municipal Bond Fund into additional
series or classes at a future date.
Voting Requirements. The By-laws of the Municipal Bond Fund and the Maryland
General Corporation Law (the "Maryland Code") provide that a special meeting
of stockholders must be called upon the written request of stockholders
representing 25% of the votes entitled to be cast at the meeting. The
Declaration of Trust provides that special meetings of stockholders must be
called upon the written request of holders of at least 10% of the outstanding
shares of any series of the Trust.
No amendments may be made to the Declaration of Trust, other than amendments
necessary to conform the Declaration to certain laws or regulations, to change
the name of the Trust, or to make certain non-material changes, without the
affirmative vote of the holders of not less than a majority of the Trust's
outstanding shares or of the affected series or class, as applicable. Under
the Articles of Incorporation of the Municipal Bond Fund and the Maryland
Code, the Articles of Incorporation of the Municipal Bond Fund may be amended
upon adoption of a resolution to that effect by the Directors of the Municipal
Bond Fund and approval of such resolution by the holders of a majority of the
outstanding shares of the Municipal Bond Fund.
Stockholder Meetings. Like the Trust, the Municipal Bond Fund will not be
required to hold annual meetings of its stockholders. The initial Board of
Trustees of the Trust and the initial Board of Directors of the Municipal Bond
Fund were elected by the sole stockholder of the Trust and the Municipal Bond
Fund, respectively, at the time of its organization and have served and will
continue to serve as Trustees or Directors until they resign, die or are
removed. The Trustees of the Trust may be removed for cause by a written
instrument signed by at least two-thirds of the remaining Trustees or by vote
of stockholders of the Trust holding not less than two-thirds of the shares
then outstanding, cast in person or by proxy at any meeting called for the
purpose. The By-laws of the Municipal Bond Fund permit removal of a Director
by the holders of a majority of the outstanding shares of the Municipal Bond
Fund.
Stockholder Liability. Under Massachusetts law, stockholders of the Trust
may, under certain circumstances, be held personally liable as partners for
the Trust's obligations. However, the risk of a stockholder incurring
financial loss on account of stockholder liability is limited to circumstances
in which both inadequate insurance existed and the Trust itself was unable to
meet its obligations. As a Maryland corporation, the stockholders of the
Municipal Bond Fund have no personal liability to the Municipal Bond Fund or
its creditors
40
<PAGE>
with respect to their stock, except that a stockholder may be liable to the
extent that (1) the subscription price or other agreed consideration for the
stock has not been paid; or (2) liability is imposed under any other provision
of Maryland law.
Liability of Directors and Trustees. Maryland law provides that in addition
to any other liabilities imposed by law, a Director may be liable to the
Municipal Bond Fund for voting or assenting to the declaration of any dividend
or other distribution of assets to Municipal Bond Fund stockholders that is
contrary to Maryland law if it is established that the Director did not act in
good faith, in a manner he or she reasonably believed to be in the best
interest of the Municipal Bond Fund, and with the care that an ordinarily
prudent person in a like position would use under similar circumstances. In
the event of any litigation against the Directors or officers of the Municipal
Bond Fund, Maryland law permits, and the Municipal Bond Fund's By-laws
require, the Municipal Bond Fund to indemnify a Director or officer for
certain expenses and to advance money for such expenses only if he or she
demonstrates that he or she acted in good faith and reasonably believed that
his or her conduct was in, or not opposed to, the best interest of the
Municipal Bond Fund and, with respect to a criminal proceeding, he or she had
no reasonable cause to believe such conduct was unlawful. Under the
Declaration of Trust, the Trustees would be personally liable only for willful
misfeasance, bad faith, gross negligence or reckless disregard of their
duties. Under the Declaration of Trust, Trustees, officers, agents and
employees will be indemnified 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 them in connection with
the defense or disposition of any action, suit or other proceeding, whether
civil or criminal, in which they may be involved or with which they may be
threatened, while in office or thereafter, by reason of their being or having
been such a Trustee, officer, employee or agent, except with respect to any
matter as to which they have been adjudicated to have acted in bad faith or
with willful misfeasance, gross negligence or reckless disregard of their
duties, provided, however, that as to any matter disposed of by a compromise
payment, pursuant to a consent decree or otherwise, no indemnification either
for that payment or for any other expenses may be provided unless the Trust
has received a written opinion from independent legal counsel approved by the
Trustees to the effect that if either the matter of willful misfeasance, gross
negligence or reckless disregard of duty, or the matter of good faith and
reasonable belief as to the best interests of the Trust, had been adjudicated,
it would have been adjudicated in favor of the person seeking indemnification.
The Trustees may make advance payments in connection with indemnification,
provided that the indemnified person has given a written undertaking to
reimburse the Trust in the event it is subsequently determined that he or she
is not entitled to such indemnification.
The foregoing is only a summary of certain of the differences between the
Municipal Bond Fund's Articles of Incorporation and By-laws and Maryland law
and the Trust's Declaration of Trust and By-laws and Massachusetts law. It is
not a complete list of differences. Stockholders should refer to the
provisions of such Articles of Incorporation, By-laws, Maryland law, and the
Declaration of Trust, By-laws and Massachusetts law directly for a more
thorough comparison.
AGREEMENT AND PLAN OF REORGANIZATION
GENERAL
Under the Agreement and Plan of Reorganization (attached hereto as Exhibit
I), Limited Maturity Portfolio will acquire substantially all of the assets,
and will assume substantially all of the liabilities, of the State Funds, in
exchange solely for an equal aggregate value of Limited Maturity Portfolio
Common Stock. Upon receipt by the Trust of such shares of Common Stock, the
Trust will distribute the shares to the stockholders of the State Funds in
exchange for their shares of beneficial interest of the State Funds, as
described below.
Generally, the assets transferred by each State Fund to Limited Maturity
Portfolio will equal all investments of such State Fund held in its portfolio
as of the Valuation Time (as defined in the Agreement and Plan of
Reorganization) and all other assets of such State Fund as of such time,
except for any cash or cash equivalents reserved by such State Fund to
discharge its unpaid or contingent liabilities existing at the Valuation Time.
Any unexpended portion of the foregoing funds retained by each State Fund will
be disbursed by such State Fund pro
41
<PAGE>
rata to its stockholders of record as of the date of the Reorganization upon
consummation of the Reorganization as a final liquidating dividend.
The Trust will distribute Limited Maturity Portfolio Common Stock received
by it pro rata to the stockholders of each State Fund in exchange for such
stockholders' proportional interests in such State Fund. Stockholders of each
State Fund who hold Class A shares as of the Valuation Time will receive Class
A shares of Limited Maturity Portfolio Common Stock and stockholders of each
State Fund who hold Class B, Class C or Class D shares as of the Valuation
Time will receive Class D shares of Limited Maturity Portfolio Common Stock;
such shares of Limited Maturity Portfolio Common Stock will have the same
aggregate net asset value as each such stockholder's interest in such State
Fund as of the Valuation Time. (See "Terms of the Agreement and Plan of
Reorganization--Valuation of Assets and Liabilities" below in this section for
information concerning the calculation of net asset value.) The distribution
will be accomplished by opening new accounts on the books of Limited Maturity
Portfolio in the names of all stockholders of each State Fund, including
stockholders holding such State Fund shares in certificate form, and
transferring to each stockholder's account Limited Maturity Portfolio Common
Stock representing such stockholder's interest previously credited to the
account of such State Fund. Stockholders holding State Fund shares in
certificate form may receive certificates representing Limited Maturity
Portfolio Common Stock credited to their account in respect of such State Fund
shares by sending the certificates to the Transfer Agent accompanied by a
written request for such exchange.
Since Limited Maturity Portfolio Common Stock would be issued at net asset
value in exchange for the net assets of each State Fund having a value equal
to the aggregate net asset value of those shares of such State Fund, the net
asset value per share of Limited Maturity Portfolio should remain virtually
unchanged solely as a result of the Reorganization. Thus, the Reorganization
should result in virtually no dilution of net asset value of Limited Maturity
Portfolio immediately following consummation of the Reorganization. However,
as a result of the Reorganization, a stockholder of each State Fund likely
would hold a reduced percentage of ownership in Limited Maturity Portfolio
than he or she did in such State Fund prior to the Reorganization.
PROCEDURE
On September 26, 1997, the Board of Trustees of the Trust, including all of
the Trustees who are not "interested persons," as defined in the Investment
Company Act, of the Trust, approved the Agreement and Plan of Reorganization
and the submission of such Agreement and Plan of Reorganization to the State
Funds' stockholders for approval. The Board of Directors of the Municipal Bond
Fund, including all of the Directors present at the meeting who are not
"interested persons," approved the Agreement and Plan of Reorganization on
September 18, 1997.
If the stockholders of each State Fund approve the Reorganization at the
Meeting and certain conditions are met or waived, the Reorganization will take
place as early as possible in calendar year 1998.
THE BOARD OF TRUSTEES OF THE TRUST RECOMMENDS THAT THE STOCKHOLDERS OF THE
STATE FUNDS APPROVE THE AGREEMENT AND PLAN OF REORGANIZATION.
TERMS OF THE AGREEMENT AND PLAN OF REORGANIZATION
The following is a summary of the significant terms of the Agreement and
Plan of Reorganization. This summary is qualified in its entirety by reference
to the Agreement and Plan of Reorganization, attached hereto as Exhibit I.
Valuation of Assets and Liabilities. The respective assets of the State
Funds and Limited Maturity Portfolio will be valued as of the Valuation Time.
The assets in each State Fund and in Limited Maturity Portfolio will be valued
according to the procedures set forth under "Additional Information--
Determination of Net Asset Value" in the Municipal Bond Fund Prospectus.
Purchase orders for any State Fund shares that have not been confirmed as of
the Valuation Time will be treated as assets of such State Fund for purposes
of the Reorganization; redemption requests that have not settled as of the
Valuation Time will be treated as liabilities for purposes of the
Reorganization.
42
<PAGE>
Distribution of Limited Maturity Portfolio Common Stock. On the next full
business day following the Valuation Time (the "Exchange Date"), the Municipal
Bond Fund will issue to the Trust a number of shares of Limited Maturity
Portfolio Common Stock the aggregate net asset value of which will equal the
aggregate net asset value of shares of each of the State Funds as of the
Valuation Time. Each holder of shares of beneficial interest of each State
Fund will receive, in exchange for his or her proportionate interest in such
State Fund, Limited Maturity Portfolio Common Stock having the same aggregate
net asset value as the shares of such State Fund held by such stockholder as
of the Valuation Time. Holders of Class A shares of the State Funds will
receive Class A shares of Limited Maturity Portfolio Common Stock; holders of
Class B, Class C or Class D shares of the State Funds will receive Class D
shares of Limited Maturity Portfolio Common Stock.
Expenses. The Agreement and Plan of Reorganization provides for the
allocation of the expenses of the Reorganization between the State Funds and
the Limited Maturity Portfolio. FAM has informed the Funds that it intends to
pay all expenses relating to the Reorganization.
Required Approvals. Under the Trust's Declaration of Trust (as amended to
date) and relevant Massachusetts law, stockholder approval of the Agreement
and Plan of Reorganization requires the affirmative vote of stockholders of
each State Fund voting separately and representing a majority of the
outstanding shares of each State Fund entitled to be voted thereon.
Amendments and Conditions. The Agreement and Plan of Reorganization may be
amended at any time prior to the Exchange Date with respect to any of the
terms therein. The obligations of the Trust and Municipal Bond Fund pursuant
to the Agreement and Plan of Reorganization are subject to various conditions,
including a registration statement on Form N-14 being declared effective by
the Commission, approval of the Reorganization by the stockholders of the
State Funds, a favorable IRS ruling being received as to tax matters, an
opinion of counsel as to securities matters being received and the continuing
accuracy of various representations and warranties of the Trust and Municipal
Bond Fund being confirmed by the respective parties.
Postponement, Termination. Under the Agreement and Plan of Reorganization,
the Board of Trustees of the Trust and the Board of Directors of the Municipal
Bond Fund, respectively, may cause the Reorganization to be postponed or
abandoned should either Board determine that it is in the best interests of
the stockholders of any State Fund or Limited Maturity Portfolio,
respectively, to do so. The Agreement and Plan of Reorganization may be
terminated, and the Reorganization abandoned, at any time, whether before or
after adoption thereof by the stockholders of the State Funds, prior to the
Exchange Date, or the Exchange Date may be postponed: (i) by mutual consent of
the Board of Trustees of the Trust and the Board of Directors of the Municipal
Bond Fund; (ii) the Board of Trustees of the Trust if any condition to the
Trust's obligations has not been fulfilled or waived by such Board; or (iii)
by the Board of Directors of the Municipal Bond Fund if any condition to the
Municipal Bond Fund's obligations has not been fulfilled or waived by such
Board.
POTENTIAL BENEFITS TO STOCKHOLDERS OF THE STATE FUNDS AS A RESULT OF THE
REORGANIZATION
The Board of Trustees of the Trust has identified certain potential benefits
to stockholders of the State Funds that are likely to result from the
Reorganization. First, following the Reorganization, State Fund stockholders
will remain invested in an open-end fund that has an investment objective
similar to that of the State Funds, although not identical. In addition, State
Fund stockholders are likely to experience certain additional benefits,
including lower expenses per share, economies of scale and greater flexibility
in portfolio management.
Specifically, after the Reorganization, on a pro forma combined basis,
Limited Maturity Portfolio would pay an advisory fee to FAM at a lower annual
rate than that currently due from the State Funds. If the aggregate assets of
the three portfolios decreases, however, the advisory fee rate of the Limited
Maturity Portfolio could increase to a level that is higher than the advisory
fee rate currently applicable to the State Funds. Also, the total operating
expenses of Limited Maturity Portfolio after the Reorganization, as a
percentage of net assets, would be less than the current operating expenses
for each of the State Funds. However, since inception, FAM has voluntarily
waived the advisory fees payable by each of the State Funds and has reimbursed
each State Fund for
43
<PAGE>
a portion of its expenses (excluding 12b-1 plan fees). There can be no
assurance that FAM will not discontinue or modify this waiver of fees or
reimbursement of expenses at any time. In addition, certain fixed costs, such
as costs of printing stockholder reports and proxy statements, legal expenses,
audit fees, registration fees, mailing costs and other expenses, would be
spread across a larger asset base, thereby lowering the expense ratio borne by
stockholders of the State Funds. To illustrate the potential economies of
scale, the table below shows, for the year ended July 31, 1997, the total
operating expense ratio for the Class A shares of each of the State Funds, of
Limited Maturity Portfolio and of Limited Maturity Portfolio on a pro forma
basis as if the Reorganization had taken place on August 1, 1996 (the first
day of the year ended July 31, 1997).
<TABLE>
<CAPTION>
PRO FORMA
-----------------------
TOTAL BASED ON TOTAL
OPERATING NET ASSETS OPERATING BASED ON
EXPENSE AS OF EXPENSE NET
RATIO(%)(a)(b) 7/31/97($) RATIO(%)(c) ASSETS($)
-------------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Arizona Fund............ 3.21 3,357,395 -- --
Massachusetts Fund...... 2.52 5,135,751 -- --
Michigan Fund........... 3.50 4,251,345 -- --
New Jersey Fund......... 1.65 6,322,601 -- --
New York Fund........... 1.16 14,565,335 -- --
Pennsylvania Fund....... 1.75 7,738,657 -- --
Limited Maturity
Portfolio.............. 0.41 413,877,781 0.41 455,248,865
</TABLE>
- --------
(a) FAM has in the past voluntarily waived all of the advisory fees due from
each of the State Funds and voluntarily reimbursed each State Fund for a
portion of its other expenses (excluding Rule 12b-1 plan fees). The Total
Operating Expense Ratio does not give effect to any such waiver or
reimbursement because FAM may discontinue or reduce such waiver of fees
and/or assumption of expenses at any time without notice. The actual Total
Operating Expense Ratio for the year ended July 31, 1997, net of the
waiver of fees and/or assumption of expenses, would be:
<TABLE>
<CAPTION>
TOTAL OPERATING EXPENSE RATIO
AFTER WAIVER AND REIMBURSEMENT(%)
---------------------------------
<S> <C>
Arizona Fund............................... .94
Massachusetts Fund......................... .99
Michigan Fund.............................. .94
New Jersey Fund............................ .94
New York Fund.............................. .70
Pennsylvania Fund.......................... .99
</TABLE>
(b) Class A share ratios are shown because Class A shares are not subject to
class specific distribution and account maintenance fees.
(c) Assumes Reorganization had taken place on August 1, 1996 (the first day of
the year ended July 31, 1997).
The following table sets forth the approximate average net assets of each of
the State Funds and of Limited Maturity Portfolio for each entity's last three
fiscal years.
<TABLE>
<CAPTION>
NET ASSETS($)
--------------------------------------------------------------------
ARIZONA MASSACHUSETTS MICHIGAN NEW JERSEY NEW YORK PENNSYLVANIA
PERIOD FUND FUND FUND FUND FUND FUND
------ --------- ------------- --------- ---------- ---------- ------------
<S> <C> <C> <C> <C> <C> <C>
Year ended 7/31/97...... 3,791,000 6,323,000 4,279,000 7,284,000 16,470,000 8,502,000
Year ended 7/31/96...... 6,131,000 8,782,000 4,689,000 9,649,000 16,570,000 8,627,000
Year ended 7/31/95...... 7,562,000 11,856,000 5,508,000 11,323,000 14,904,000 9,829,000
</TABLE>
<TABLE>
<CAPTION>
PERIOD LIMITED MATURITY PORTFOLIO($)
------ -----------------------------
<S> <C>
Year ended 6/30/97................................ 467,286,826
Year ended 6/30/96................................ 575,561,212
Year ended 6/30/95................................ 822,018,788
</TABLE>
44
<PAGE>
The preceding table illustrates that (i) the net assets of each of the State
Funds (other than the New York Fund which experienced an increase in 1996 over
1995) and of Limited Maturity Portfolio have generally been decreasing over
the past several years and (ii) in all cases (other than the New York Fund),
average net assets for the most recent fiscal year, are below the net asset
levels achieved for the 1995 fiscal year. FAM anticipates that if this
decrease in net assets were to continue, the State Funds and Limited Maturity
Portfolio might experience increasingly higher operating expense ratios.
Conversely, FAM anticipates that the State Funds and Limited Maturity
Portfolio as a combined entity might experience certain economies of scale,
which might in turn result in a reduction in the entity's overall operating
expense ratio. The State Funds alone might experience the opposite result,
that is, a higher operating expense ratio due to continuing reductions in
already relatively small asset bases. Although there can be no assurance that
the foregoing would in fact occur, FAM believes that the economies of scale
that may be realized as a result of the Reorganization would be beneficial to
stockholders of each of the State Funds.
The Board of Trustees of the Trust also considered the difference in the
risks associated with certain of the investment strategies used by Limited
Maturity Portfolio that are not used by the State Funds.
Based on the foregoing, the Board concluded that the Reorganization presents
no significant risks or costs (including legal, accounting and administrative
costs) that would outweigh the benefits discussed above. In approving the
Reorganization, the Board of Trustees of the Trust determined that the
interests of existing stockholders of the State Funds would not be diluted as
a result of the Reorganization.
TAX CONSEQUENCES OF THE REORGANIZATION
General. The Reorganization has been structured with the intention that it
qualify for Federal income tax purposes as a tax-free reorganization under
Section 368(a)(1)(C) of the Code. The State Funds and Limited Maturity
Portfolio have elected and qualified for the special tax treatment afforded
"regulated investment companies" under the Code, and the Limited Maturity
Portfolio intends to continue to so qualify after the Reorganization. The
State Funds and Limited Maturity Portfolio have jointly requested a private
letter ruling from the IRS to the effect that for Federal income tax purposes:
(i) the Reorganization, as described, will constitute a reorganization within
the meaning of Section 368(a)(1)(C) of the Code, and each State Fund and
Limited Maturity Portfolio will be deemed a "party" to the Reorganization
within the meaning of Section 368(b) of the Code; (ii) in accordance with
Section 361(a) of the Code, no gain or loss will be recognized to any State
Fund as a result of the asset transfer or on the distribution of Limited
Maturity Portfolio Common Stock to stockholders of each State Fund under
Section 361(c)(1) of the Code; (iii) under Section 1032 of the Code, no gain
or loss will be recognized to Limited Maturity Portfolio as a result of
receipt of assets of the State Funds in exchange for shares of Limited
Maturity Portfolio; (iv) in accordance with Section 354(a)(1) of the Code, no
gain or loss will be recognized to the stockholders of any State Fund on the
receipt of Limited Maturity Portfolio Common Stock in exchange for their
shares of such State Fund; (v) in accordance with Section 362(b) of the Code,
the tax basis of the assets of each State Fund in the hands of Limited
Maturity Portfolio will be the same as the tax basis of such assets in the
hands of such State Fund immediately prior to the consummation of the
Reorganization; (vi) in accordance with Section 358 of the Code, immediately
after the Reorganization, the tax basis of Limited Maturity Portfolio Common
Stock received by the stockholders of each State Fund in the Reorganization
will be equal, in the aggregate, to the tax basis of the shares of each State
Fund surrendered in exchange; (vii) in accordance with Section 1223 of the
Code, a stockholder's holding period for Limited Maturity Portfolio Common
Stock will be determined by including the period for which such stockholder
held the shares of the State Fund exchanged therefor, provided that such State
Fund shares were held as a capital asset; (viii) in accordance with Section
1223 of the Code, Limited Maturity Portfolio's holding period with respect to
the assets transferred by each State Fund will include the period for which
the assets were held by such State Fund; and (ix) the taxable year of each
State Fund will end on the effective date of the Reorganization, and pursuant
to Section 381(a) of the Code and regulations thereunder, Limited Maturity
Portfolio will succeed to and take into account certain tax attributes of such
State Fund, such as earnings and profits, capital loss carryovers and method
of accounting.
45
<PAGE>
Stockholders of the State Funds should be aware that after the
Reorganization, the distributions they receive from Limited Maturity Portfolio
will be exempt from Federal income tax but generally will not be exempt to any
significant degree from personal income tax at the state level.
Stockholders should consult their tax advisers regarding the effect of the
Reorganization in light of their individual circumstances. As the foregoing
relates only to Federal income tax consequences, stockholders also should
consult their tax advisers as to the foreign, state and local tax consequences
of the Reorganization.
Status as a Regulated Investment Company. The Reorganization will not affect
the status of Limited Maturity Portfolio as a RIC under the Code. Each State
Fund will terminate as a series of the Trust pursuant to the Reorganization.
APPRAISAL RIGHTS
A stockholder of any of the State Funds who does not vote in favor of the
Reorganization may have the right under Massachusetts law to object to the
Reorganization and demand payment for his or her shares from the applicable
State Fund and an appraisal thereof upon compliance with the procedures
specified in Sections 86 through 98 of the Massachusetts Business Corporation
Law (the "Massachusetts Business Corporation Law"), which are set forth in
Exhibit III hereto. A vote against the Reorganization or the execution of a
proxy directing such a vote will not satisfy the requirements of those
provisions. A failure to vote against the Reorganization will not constitute a
waiver of such rights. The State Funds take the position that, if available,
this statutory right of appraisal may be exercised only by stockholders of
record.
Section 92 of the Massachusetts Business Corporation Law provides that for
purposes of payment to any stockholder who elects to exercise his or her
statutory right of appraisal, the value of shares of such stockholder is to be
determined as of the day preceding the date of the stockholders' vote
approving the Agreement and Plan of Reorganization. However, the Commission's
Division of Investment Management has taken the position that such valuation
procedures would constitute violation of Rule 22c-1 under the Investment
Company Act (the "forward pricing" rule which in substance prohibits a
registered investment company from redeeming its shares except at a price
based on the net asset value of such shares next computed after such shares
have been tendered for redemption) and that Rule 22c-1 supersedes contrary
provisions of state statutes. Under the terms of the Agreement and Plan of
Reorganization, Limited Maturity Portfolio will assume the obligations of each
of the State Funds, if any, with respect to statutory rights of appraisal. In
the event that any stockholder elects to exercise his or her statutory right
of appraisal under Massachusetts law, it is the present intention of Limited
Maturity Portfolio to petition a court of competent jurisdiction to determine
whether such right of appraisal has been superseded by the provisions of Rule
22c-1. In such event a dissenting stockholder may not receive any payment
until disposition of any such court proceeding.
For federal income tax purposes, dissenting stockholders obtaining payment
for their shares will recognize gain or loss measured by the difference
between any such payment and the tax basis for their shares. Stockholders are
advised to consult their personal tax advisers as to the tax consequences of
dissenting.
Stockholders of the State Funds will, of course, continue to be able to
redeem their shares of the applicable State Fund at the current net asset
value until the close of business on the day five business days prior to the
effective date of the Reorganization. Redemption requests received by the
State Funds thereafter will be treated as requests for the redemption of
shares of Limited Maturity Portfolio Common Stock received by the stockholder
in the Reorganization.
46
<PAGE>
CAPITALIZATION
The following table sets forth as of July 31, 1997 (i) the capitalization of
each State Fund, (ii) the capitalization of Limited Maturity Portfolio and
(iii) the pro forma capitalization of Limited Maturity Portfolio as adjusted
to give effect to the Reorganization.
PRO FORMA CAPITALIZATION OF THE STATE FUNDS, LIMITED MATURITY PORTFOLIO AND
THE COMBINED FUND*
AS OF JULY 31, 1997
<TABLE>
<CAPTION>
ARIZONA FUND
---------------------------------------------
CLASS A CLASS B CLASS C CLASS D
------------ ----------- -------- -----------
<S> <C> <C> <C> <C>
Total Net Assets................. $ 709,319 $ 2,135,376 $ 36,084 $ 476,616
Shares Outstanding............... 69,741 209,967 3,545 46,841
Net Asset Value Per Share........ $ 10.17 $ 10.17 $ 10.18 $ 10.18
<CAPTION>
MASSACHUSETTS FUND
---------------------------------------------
CLASS A CLASS B CLASS C CLASS D
------------ ----------- -------- -----------
<S> <C> <C> <C> <C>
Total Net Assets................. $ 1,355,818 $ 2,806,894 $274,926 $ 698,113
Shares Outstanding............... 135,068 279,567 27,406 69,563
Net Asset Value Per Share........ $ 10.04 $ 10.04 $ 10.03 $ 10.04
<CAPTION>
MICHIGAN FUND
---------------------------------------------
CLASS A CLASS B CLASS C CLASS D
------------ ----------- -------- -----------
<S> <C> <C> <C> <C>
Total Net Assets................. $ 1,368,162 $ 1,410,732 $ 1,231 $ 1,471,220
Shares Outstanding............... 135,574 139,786 122 145,888
Net Asset Value Per Share........ $ 10.09 $ 10.09 $ 10.09 $ 10.08
<CAPTION>
NEW JERSEY FUND
---------------------------------------------
CLASS A CLASS B CLASS C CLASS D
------------ ----------- -------- -----------
<S> <C> <C> <C> <C>
Total Net Assets................. $ 1,734,544 $ 4,108,454 $241,191 $ 238,412
Shares Outstanding............... 170,998 404,782 26,241 23,497
Net Asset Value Per Share........ $ 10.14 $ 10.15 $ 9.19 $ 10.15
<CAPTION>
NEW YORK FUND
---------------------------------------------
CLASS A CLASS B CLASS C CLASS D
------------ ----------- -------- -----------
<S> <C> <C> <C> <C>
Total Net Assets................. $ 2,605,219 $ 8,209,327 $ 67,418 $ 3,683,371
Shares Outstanding............... 254,768 802,714 6,593 360,094
Net Asset Value Per Share........ $ 10.23 $ 10.23 $ 10.23 $ 10.23
<CAPTION>
PENNSYLVANIA FUND
---------------------------------------------
CLASS A CLASS B CLASS C CLASS D
------------ ----------- -------- -----------
<S> <C> <C> <C> <C>
Total Net Assets................. $ 735,726 $ 5,134,207 $ 7,869 $ 1,860,855
Shares Outstanding............... 71,902 501,850 766 181,770
Net Asset Value Per Share........ $ 10.23 $ 10.23 $ 10.27 $ 10.24
<CAPTION>
LIMITED MATURITY PORTFOLIO
---------------------------------------------
CLASS A CLASS B CLASS C CLASS D
------------ ----------- -------- -----------
<S> <C> <C> <C> <C>
Total Net Assets................. $340,141,818 $53,107,866 $128,373 $20,499,724
Shares Outstanding............... 34,147,124 5,330,319 12,913 2,056,678
Net Asset Value Per Share........ $ 9.96 $ 9.96 $ 9.94 $ 9.97
</TABLE>
47
<PAGE>
<TABLE>
<CAPTION>
COMBINED FUND*
---------------------------------------------
ADJUSTED** CLASS A CLASS B CLASS C CLASS D
---------- ------------ ----------- -------- -----------
<S> <C> <C> <C> <C>
Total Net Assets................. $348,647,168 $53,107,866 $128,373 $53,349,184
Shares Outstanding............... 35,000,983 5,330,319 12,913 5,352,369
Net Asset Value Per Share........ $ 9.96 $ 9.96 $ 9.94 $ 9.97
</TABLE>
- --------
* Combined Fund refers to Limited Maturity Portfolio after giving effect to
the Reorganization.
** Total Net Assets and Net Asset Value Per Share include the aggregate value
of each State Fund's net assets which would have been transferred to
Limited Maturity Portfolio had the Reorganization been consummated on July
31, 1997. Data does not take into account expenses incurred in connection
with the Reorganization or the actual number of shares that would have been
issued. No assurance can be given as to how many shares of Limited Maturity
Portfolio the stockholders of the State Funds will receive on the date the
Reorganization takes place, and the foregoing should not be relied upon to
reflect the number of shares of Limited Maturity Portfolio that actually
will be received on or after such date.
INFORMATION CONCERNING THE SPECIAL MEETING
DATE, TIME AND PLACE OF MEETING
The Meeting will be held on January 5, 1998 at the offices of MLAM, 800
Scudders Mill Road, Plainsboro, New Jersey, at 9:00 a.m., New York time.
SOLICITATION, REVOCATION AND USE OF PROXIES
A stockholder executing and returning a proxy has the power to revoke it at
any time prior to its exercise by executing a superseding proxy or by
submitting a notice of revocation to the Secretary of the Trust. Although mere
attendance at the Meeting will not revoke a proxy, a stockholder present at
the Meeting may withdraw his proxy and vote in person.
All shares represented by properly executed proxies, unless such proxies
previously have been revoked, will be voted at the Meeting in accordance with
the directions on the proxies; if no direction is indicated, the shares will
be voted "FOR" the approval of the Agreement and Plan of Reorganization.
It is not anticipated that any matters other than the adoption of the
Agreement and Plan of Reorganization will be brought before the Meeting. If,
however, any other business properly is brought before the Meeting, proxies
will be voted in accordance with the judgment of the persons designated on
such proxies.
RECORD DATE AND OUTSTANDING SHARES
The Board of Trustees of the Trust has fixed the close of business on
November 10, 1997 as the record date (the "Record Date") for the determination
of stockholders entitled to notice of, and to vote at, the Meeting or any
adjournment thereof. Stockholders on the Record Date will be entitled to one
vote for each share held, with no shares having cumulative voting rights. As
of the Record Date, for each State Fund there were issued and outstanding the
number of shares of beneficial interest, par value $.10 per share, listed
below:
<TABLE>
<CAPTION>
SHARES OUTSTANDING
ON THE RECORD
DATE
------------------
<S> <C>
Arizona Fund........................................... 344,230
Massachusetts Fund..................................... 431,791
Michigan Fund.......................................... 404,691
New Jersey Fund........................................ 609,963
New York Fund.......................................... 1,562,395
Pennsylvania Fund...................................... 706,519
</TABLE>
48
<PAGE>
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT OF THE STATE
FUNDS AND LIMITED MATURITY PORTFOLIO
To the knowledge of the management of the Trust, no person owned
beneficially 5% or more of the outstanding shares of any State Fund or of any
class of shares of any State Fund at the Record Date.
To the knowledge of the Municipal Bond Fund, at the date hereof, no person
or entity owns beneficially 5% or more of any class of shares of Limited
Maturity Portfolio or of all classes of Limited Maturity Portfolio in the
aggregate.
On the Record Date, the Trustees and officers of the Trust as a group (12
persons) owned an aggregate of less than 1% of the outstanding shares of any
State Fund. On the Record Date, Mr. Zeikel, a Trustee and officer of the
Trust, and the other officers of the Trust owned an aggregate of less than 1%
of the outstanding shares of Common Stock of ML & Co.
On the Record Date, the Directors and officers of the Municipal Bond Fund as
a group (12 persons) owned an aggregate of less than 1% of the outstanding
shares of Limited Maturity Portfolio Common Stock. On the Record Date, Mr.
Zeikel, a Director and officer of the Municipal Bond Fund, and the other
officers of Municipal Bond Fund owned an aggregate of less than 1% of the
outstanding shares of Common Stock of ML & Co.
VOTING RIGHTS AND REQUIRED VOTE
For purposes of this Proxy Statement and Prospectus, each share of each
class of each State Fund is entitled to one vote. Approval of the Agreement
and Plan of Reorganization requires the affirmative vote of stockholders
representing more than 50% of the outstanding shares of each State Fund. See
Exhibit III--"Sections 86 through 98 of Chapter 156B of the Massachusetts
General Laws (the Massachusetts Business Corporation Law)" for a discussion of
dissenters' rights under Massachusetts law.
If, by the time scheduled for the Meeting, sufficient votes in favor of the
Agreement and Plan of Reorganization are not received from the stockholders of
the applicable State Fund, the persons named as proxies may propose one or
more adjournments of the Meeting to permit further solicitation of proxies
from stockholders. Any such adjournment will require the affirmative vote of a
majority of the shares of the applicable State Fund present in person or by
proxy and entitled to vote at the session of the Meeting to be adjourned. The
persons named as proxies will vote in favor of any such adjournment if they
determine that adjournment and additional solicitation are reasonable and in
the interests of the applicable State Fund's stockholders.
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ADDITIONAL INFORMATION
The expenses of preparation, printing and mailing of the enclosed form of
proxy, the accompanying Notice and this Proxy Statement and Prospectus will be
borne by the State Funds and Limited Maturity Portfolio pro rata according to
the aggregate net assets of the State Fund or Limited Maturity Portfolio on
the date of the Reorganization. Such expenses are currently estimated to be
$255,000. FAM has informed the Funds that it intends to pay all expenses
relating to the Reorganization.
The State Funds will reimburse banks, brokers and others for their
reasonable expenses in forwarding proxy solicitation materials to the
beneficial owners of shares of the State Funds and certain persons that the
State Funds may employ for their reasonable expenses in assisting in the
solicitation of proxies from such beneficial owners of shares of the State
Funds.
In order to obtain the necessary vote at the Meeting, supplementary
solicitation may be made by mail, telephone, telegraph or personal interview
by officers of the Trust. It is expected that the cost of such supplementary
solicitation, if any, will be nominal. The Funds have retained Tritech
Services, an affiliate of ML & Co., with offices at 4 Corporate Place,
Piscataway, New Jersey, to aid in the solicitation of proxies from holders of
shares held in nominee or "street" name at a cost to be borne by FAM of
approximately $12,000, plus out-of-pocket expenses.
Broker-dealer firms, including Merrill Lynch, holding State Fund shares in
"street name" for the benefit of their customers and clients will request the
instructions of such customers and clients on how to vote their shares on each
proposal before the Meeting. Broker-dealer firms, including Merrill Lynch,
will not be permitted to grant voting authority without instructions with
respect to the approval of the Agreement and Plan of Reorganization. The Trust
will include shares held of record by broker-dealers as to which such
authority has been granted in its tabulation of the total number of shares
present for purposes of determining whether the necessary quorum of
stockholders of each State Fund exists. Properly executed proxies that are
returned, but that are marked "abstain" or on which a broker-dealer has
declined to vote on any proposal ("broker non-votes") will be counted as
present for the purposes of determining a quorum. Since approval of the
Agreement and Plan of Reorganization requires the affirmative vote of
stockholders of each State Fund voting separately and representing a majority
of the outstanding shares of each State Fund, abstentions and broker non-votes
will have the same effect as a vote against the Agreement and Plan of
Reorganization.
This Proxy Statement and Prospectus does not contain all of the information
set forth in the registration statements and the exhibits relating thereto
that the Municipal Bond Fund has filed with the Commission under the
Securities Act and the Investment Company Act, to which reference is hereby
made.
The Trust and the Municipal Bond Fund both file reports and other
information with the Commission. Reports, proxy statements, registration
statements and other information filed by the Trust and the Municipal Bond
Fund can be inspected and copied at the public reference facilities of the
Commission in Washington, D.C. and at the New York Regional Office of the
Commission at Seven World Trade Center, New York, New York 10048. Copies of
such materials also can be obtained by mail from the Public Reference Branch,
Office of Consumer Affairs and Information Services, Securities and Exchange
Commission, Washington, D.C. 20549, at prescribed rates. The Commission
maintains a Web site (http://www.sec.gov) that contains the Statement of
Additional Information, the Limited Maturity Trust Prospectus, the Limited
Maturity Trust Statement, the Municipal Bond Fund Prospectus, the Municipal
Bond Fund Statement, other material incorporated by reference and other
information regarding the Funds.
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LEGAL PROCEEDINGS
There are no material legal proceedings to which the Trust or the Municipal
Bond Fund is a party.
LEGAL OPINIONS
Certain legal matters in connection with the Reorganization will be passed
upon for the Trust by Brown & Wood LLP, One World Trade Center, New York, New
York, and for the Municipal Bond Fund by Rogers & Wells, 200 Park Avenue, New
York, New York. Brown & Wood LLP will rely as to matters of Massachusetts law
on the opinion of Bingham Dana LLP. Rogers & Wells will rely as to matters of
Maryland law on the opinion of Wilmer, Cutler & Pickering.
EXPERTS
The financial highlights of each of the State Funds and of Limited Maturity
Portfolio included in this Proxy Statement and Prospectus have been so
included in reliance on the reports of Deloitte & Touche LLP, independent
auditors, given on their authority as experts in auditing and accounting. The
principal business address of Deloitte & Touche LLP is 117 Campus Drive,
Princeton, New Jersey 08540.
STOCKHOLDER PROPOSALS
A stockholder proposal intended to be presented at any subsequent meeting of
stockholders of the Trust must be received by the Trust a reasonable time
before the Board of Trustees solicitation relating to such meeting is to be
made in order to be considered in the Trust's proxy statement and form of
proxy relating to that meeting.
By Order of the Board of Trustees,
Lawrence A. Rogers
Secretary
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EXHIBIT I
AGREEMENT AND PLAN OF REORGANIZATION
THIS AGREEMENT AND PLAN OF REORGANIZATION (this "Agreement") is made as of
the 24th day of November, 1997, by and between Merrill Lynch Multi-State
Limited Maturity Municipal Series Trust, a Massachusetts business trust (the
"Limited Maturity Trust"), and Merrill Lynch Municipal Bond Fund, Inc., a
Maryland corporation (the "Municipal Bond Fund").
PLAN OF REORGANIZATION
The reorganization will comprise the acquisition by Limited Maturity
Portfolio (the "Limited Maturity Portfolio"), a series of the Municipal Bond
Fund, of substantially all of the assets, and the assumption of substantially
all of the liabilities, of Merrill Lynch Arizona Limited Maturity Municipal
Bond Fund (the "Arizona Fund"), Merrill Lynch Massachusetts Limited Maturity
Municipal Bond Fund (the "Massachusetts Fund"), Merrill Lynch Michigan Limited
Maturity Municipal Bond Fund (the "Michigan Fund"), Merrill Lynch New Jersey
Limited Maturity Municipal Bond Fund (the "New Jersey Fund"), Merrill Lynch
New York Limited Maturity Municipal Bond Fund (the "New York Fund") and
Merrill Lynch Pennsylvania Limited Maturity Municipal Bond Fund (the
"Pennsylvania Fund"), each a series of the Limited Maturity Trust
(collectively, the "State Funds"), in exchange solely for an equal aggregate
value of newly issued shares of Limited Maturity Portfolio's common stock,
with a par value of $.10 per share (the "Limited Maturity Portfolio Common
Stock"), and the subsequent distribution of Corresponding Shares (defined
below) of Limited Maturity Portfolio to the stockholders of the State Funds in
exchange for their shares of beneficial interest of the State Funds, each with
a par value of $.10 per share, all upon and subject to the terms hereinafter
set forth (the "Reorganization").
In the course of the Reorganization, shares of Limited Maturity Portfolio
will be distributed to the stockholders of the State Funds as follows: each
holder of Class A shares of each of the State Funds will be entitled to
receive Class A shares of Limited Maturity Portfolio Common Stock. Holders of
Class B, Class C and Class D shares of each of the State Funds will be
entitled to receive Class D shares of Limited Maturity Portfolio Common Stock.
(The exchanged shares discussed above shall be referred to as "Corresponding
Shares"). The aggregate net asset value of Limited Maturity Portfolio to be
received by each stockholder of each of the State Funds will equal the
aggregate net asset value of the State Fund shares owned by such stockholder
on the Exchange Date (as defined in Section 7 of this Agreement). In
consideration therefor, on the Exchange Date, Limited Maturity Portfolio shall
acquire substantially all of the assets of each of the State Funds and assume
substantially all of the obligations and liabilities then existing, whether
absolute, accrued, contingent or otherwise of each of the State Funds. It is
intended that the Reorganization described in this Plan shall be a
reorganization within the meaning of Section 368(a)(1)(C) of the Internal
Revenue Code of 1986, as amended (the "Code"), and any successor provision.
As promptly as practicable after the consummation of the Reorganization, the
Trustees of the Limited Maturity Trust shall take such action necessary to
terminate the designation of the series of the Limited Maturity Trust
representing each State Fund in accordance with the laws of the Commonwealth
of Massachusetts.
AGREEMENT
In order to consummate the Reorganization and in consideration of the
premises and the covenants and agreements hereinafter set forth, and intending
to be legally bound, the Limited Maturity Trust and the Municipal Bond Fund
hereby agree as follows:
1. Representations and Warranties of the Limited Maturity Trust.
The Limited Maturity Trust represents and warrants to, and agrees with, the
Municipal Bond Fund that:
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(a) The Limited Maturity Trust is a trust with transferable shares duly
organized, validly existing and in good standing in conformity with the
laws of the Commonwealth of Massachusetts, and has the power to own all of
its assets and to carry out this Agreement. The Limited Maturity Trust has
all necessary Federal, state and local authorizations to carry on its
business as it is now being conducted and to carry out this Agreement.
(b) The Limited Maturity Trust is duly registered under the Investment
Company Act of 1940, as amended (the "1940 Act"), as a non-diversified,
open-end management investment company (File No. 811-6282), and such
registration has not been revoked or rescinded and is in full force and
effect. The Limited Maturity Trust has elected and qualified each State
Fund for the special tax treatment afforded regulated investment companies
("RICs") under Sections 851-855 of the Code at all times since inception
and intends to continue to so qualify for the taxable year in which the
Exchange Date occurs.
(c) As used in this Agreement, the term "Investments" shall mean (i) the
investments of each of the State Funds shown on the schedule of its
investments as of the Valuation Time (as defined in Section 3(c) of this
Agreement) furnished to the Municipal Bond Fund, with such additions
thereto and deletions therefrom as may have arisen in the course of each
State Fund's business up to the Valuation Time; and (ii) all other assets
owned by each State Fund or liabilities incurred as of the Valuation Time,
except that each State Fund shall retain cash, bank deposits or cash
equivalent securities in an estimated amount necessary to (1) discharge its
unpaid liabilities on its books at the Valuation Time (including, but not
limited to, its income dividend and capital gains distributions, if any,
payable for the period prior to the Valuation Time), and (2) pay such
contingent and other liabilities as the Trustees of the Limited Maturity
Trust reasonably shall deem to exist against such State Fund, if any, at
the Valuation Time, for which contingent and other appropriate liability
reserves shall be established on such State Fund's books. Each State Fund
also shall retain any and all rights which it may have over and against any
other person which may have accrued up to the Valuation Time. Any
unexpended portion of the foregoing funds retained by each State Fund shall
be disbursed by such State Fund pro rata to its stockholders upon
consummation of the Reorganization as a final liquidating dividend.
(d) The Limited Maturity Trust has full power and authority to enter into
and perform its obligations under this Agreement. The execution, delivery
and performance of this Agreement has been duly authorized by all necessary
action of its Board of Trustees, and this Agreement constitutes a valid and
binding contract enforceable in accordance with its terms, subject to the
effects of bankruptcy, insolvency, moratorium, fraudulent conveyance and
similar laws relating to or affecting creditors' rights generally and court
decisions with respect thereto.
(e) The Municipal Bond Fund has been furnished with a statement of assets
and liabilities and a schedule of investments of each State Fund, each as
of July 31, 1997, said financial statements having been examined by
Deloitte & Touche llp, independent public accountants. An unaudited
statement of assets and liabilities of each State Fund and an unaudited
schedule of investments of each State Fund, each as of the Valuation Time,
will be furnished to the Municipal Bond Fund at or prior to the Exchange
Date for the purpose of determining the number of shares of Limited
Maturity Portfolio to be issued pursuant to Section 4 of this Agreement;
and each will fairly present the financial position of the applicable State
Fund as of the Valuation Time in conformity with generally accepted
accounting principles applied on a consistent basis.
(f) The Municipal Bond Fund has been furnished with the Limited Maturity
Trust's Annual Report to Stockholders for the year ended July 31, 1997 and
any subsequent Semi-Annual Report to Stockholders which may be available,
and the financial statements appearing in such reports fairly present the
financial position of the Limited Maturity Trust and of each State Fund as
of the respective dates indicated, in conformity with generally accepted
accounting principles applied on a consistent basis.
(g) The Municipal Bond Fund has been furnished with the prospectus and
statement of additional information of the Limited Maturity Trust with
respect to the State Funds, dated November 27, 1996, and said prospectus
and statement of additional information do not contain any untrue statement
of a material
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fact or omit to state any material fact necessary to make the statements
therein, in the light of the circumstances under which they were made, not
misleading.
(h) There are no material legal, administrative or other proceedings
pending or, to the knowledge of the Limited Maturity Trust, threatened
against it or any State Fund which assert liability on the part of the
Limited Maturity Trust or any State Fund or which materially affect their
financial condition or their ability to consummate the Reorganization.
Neither the Limited Maturity Trust nor any State Fund is charged with or,
to the best of the knowledge of the Limited Maturity Trust, threatened with
any violation or investigation of any possible violation of any provisions
of any Federal, state or local law or regulation or administrative ruling
relating to any aspect of its business.
(i) There are no material contracts outstanding to which the Limited
Maturity Trust is a party that have not been disclosed in the N-14
Registration Statement (as defined in subsection (o) below) or will not
otherwise be disclosed to the Municipal Bond Fund prior to the Valuation
Time.
(j) The Limited Maturity Trust is not a party to or obligated under any
provision of its Declaration of Trust, as amended, or its by-laws, as
amended, or any contract or other commitment or obligation, and is not
subject to any order or decree which would be violated by its execution of
or performance under this Agreement.
(k) No State Fund has any known liabilities of a material amount,
contingent or otherwise, other than those shown on its statements of assets
and liabilities referred to above, those incurred in the ordinary course of
its business as a series of an investment company since July 31, 1997, and
those incurred in connection with the Reorganization. As of the Valuation
Time, the Limited Maturity Trust will advise the Municipal Bond Fund in
writing of all known liabilities, contingent or otherwise, whether or not
incurred in the ordinary course of business, existing or accrued as of such
time with respect to each State Fund.
(l) The Limited Maturity Trust has filed, or has obtained extensions to
file, all Federal, state and local tax returns which are required to be
filed by it, and has paid or has obtained extensions to pay, all Federal,
state and local taxes shown on said returns to be due and owing and all
assessments received by it, up to and including the taxable year in which
the Exchange Date occurs. All tax liabilities of the Limited Maturity Trust
and of each State Fund have been adequately provided for on its books, and
no tax deficiency or liability of the Limited Maturity Trust or any State
Fund has been asserted and no question with respect thereto has been raised
by the Internal Revenue Service or by any state or local tax authority for
taxes in excess of those already paid, up to and including the taxable year
in which the Exchange Date occurs.
(m) At both the Valuation Time and the Exchange Date, the Limited
Maturity Trust will have full right, power and authority to sell, assign,
transfer and deliver the Investments. At the Exchange Date, subject only to
the delivery of the Investments as contemplated by this Agreement, the
Limited Maturity Trust will have good and marketable title to all of the
Investments, and the Municipal Bond Fund will acquire all of the
Investments free and clear of any encumbrances, liens or security interests
and without any restrictions upon the transfer thereof (except those
imposed by the Federal or state securities laws and those imperfections of
title or encumbrances as do not materially detract from the value or use of
the Investments or materially affect title thereto).
(n) No consent, approval, authorization or order of any court or
governmental authority is required for the consummation by the Limited
Maturity Trust of the Reorganization, except such as may be required under
the Securities Act of 1933, as amended (the "Securities Act"), the
Securities Exchange Act of 1934, as amended (the "1934 Act"), and the 1940
Act or state securities laws (which term as used herein shall include the
laws of the District of Columbia and Puerto Rico).
(o) The registration statement filed by the Municipal Bond Fund on Form
N-14 relating to the shares of Limited Maturity Portfolio to be issued
pursuant to this Agreement which includes the proxy statement of the
Limited Maturity Trust with respect to the State Funds and the prospectus
of the Municipal Bond Fund with respect to the transaction contemplated
herein, and any supplement or amendment thereto or to the documents therein
(as amended, the "N-14 Registration Statement"), on the effective date of
the N-14 Registration Statement, at the time of the stockholders' meeting
referred to in Section 6(a) of this Agreement
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and on the Exchange Date, insofar as it relates to the State Funds (i)
complied or will comply in all material respects with the provisions of the
1933 Act, the 1934 Act and the 1940 Act and the rules and regulations
thereunder, and (ii) did not or will not contain any untrue statement of a
material fact or omit to state any material fact required to be stated
therein or necessary to make the statements therein not misleading; and the
prospectus included therein did not or will not contain any untrue
statement of a material fact or omit to state any material fact necessary
to make the statements therein, in the light of the circumstances under
which they were made, not misleading; provided, however, that the
representations and warranties in this subsection shall apply only to
statements in or omissions from the N-14 Registration Statement made in
reliance upon and in conformity with information furnished by the Limited
Maturity Trust with respect to the State Funds for use in the N-14
Registration Statement as provided in Section 7 of this Agreement.
(p) The Limited Maturity Trust is authorized to create an unlimited
number of series and, with respect to each series, to issue an unlimited
number of shares of beneficial interest, par value $.10 per share, of
different classes, each outstanding share of which is fully paid, and
nonassessable and has full voting rights.
(q) The books and records of the Limited Maturity Trust with respect to
the State Funds made available to the Municipal Bond Fund and/or its
counsel are substantially true and correct and contain no material
misstatements or omissions with respect to the operations of the State
Funds.
(r) The Limited Maturity Trust will not sell or otherwise dispose of any
of the shares of Limited Maturity Portfolio to be received in the
Reorganization, except in distribution to the stockholders of the State
Funds.
(s) At or prior to the Exchange Date, the Limited Maturity Trust will
have obtained any and all regulatory, Trustee and stockholder approvals
with respect to each State Fund, necessary to effect the Reorganization as
set forth herein.
2. Representations and Warranties of the Municipal Bond Fund.
The Municipal Bond Fund represents and warrants to, and agrees with, the
Limited Maturity Trust that:
(a) The Municipal Bond Fund is a corporation duly organized, validly
existing and in good standing in conformity with the laws of the State of
Maryland, and has the power to own all of its assets and to carry out this
Agreement. The Municipal Bond Fund has all necessary Federal, state and
local authorizations to carry on its business as it is now being conducted
and to carry out this Agreement.
(b) The Municipal Bond Fund is duly registered under the 1940 Act as a
diversified, open-end management investment company (File No. 811-2688),
and such registration has not been revoked or rescinded and is in full
force and effect. The Municipal Bond Fund has elected and qualified Limited
Maturity Portfolio for the special tax treatment afforded RICs under
Sections 851-855 of the Code at all times since inception, and intends to
continue to qualify the Limited Maturity Portfolio both until consummation
of the Reorganization and thereafter.
(c) The Municipal Bond Fund has full power and authority to enter into
and perform its obligations under this Agreement. The execution, delivery
and performance of this Agreement has been duly authorized by all necessary
action of its Board of Directors and this Agreement constitutes a valid and
binding contract enforceable in accordance with its terms, subject to the
effects of bankruptcy, insolvency, moratorium, fraudulent conveyance and
similar laws relating to or affecting creditors' rights generally and court
decisions with respect thereto.
(d) The Limited Maturity Trust has been furnished with a statement of
assets and liabilities and a schedule of investments of Limited Maturity
Portfolio, each as of June 30, 1997, said financial statements having been
examined by Deloitte & Touche llp, independent public accountants. An
unaudited statement of assets and liabilities of Limited Maturity Portfolio
and an unaudited schedule of investments of Limited Maturity Portfolio,
each as of the Valuation Time, will be furnished to the Limited Maturity
Trust at or prior to the Exchange Date for the purpose of determining the
number of shares of Limited Maturity Portfolio to be issued pursuant to
Section 4 of this Agreement; and each will fairly present the financial
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position of Limited Maturity Portfolio as of the Valuation Time in
conformity with generally accepted accounting principles applied on a
consistent basis.
(e) The Limited Maturity Trust has been furnished with the Municipal Bond
Fund's Annual Report to Stockholders for the year ended June 30, 1997 and
any subsequent Semi-Annual Reports to Stockholders which may be available,
and the financial statements appearing therein fairly present the financial
position of the Municipal Bond Fund and Limited Maturity Portfolio as of
the respective dates indicated, in conformity with generally accepted
accounting principles applied on a consistent basis.
(f) The Limited Maturity Trust has been furnished with the prospectus and
statement of additional information of the Municipal Bond Fund with respect
to Limited Maturity Portfolio, dated October 7, 1997 and said prospectus
and statement of additional information do not contain any untrue statement
of a material fact or omit to state any material fact necessary to make the
statements therein, in the light of the circumstances under which they were
made, not misleading.
(g) There are no material legal, administrative or other proceedings
pending or, to the knowledge of the Municipal Bond Fund, threatened against
it or Limited Maturity Portfolio which assert liability on the part of the
Municipal Bond Fund or Limited Maturity Portfolio or which materially
affect their financial condition or their ability to consummate the
Reorganization. Neither the Municipal Bond Fund nor Limited Maturity
Portfolio is charged with or, to the best of the knowledge of the Municipal
Bond Fund, threatened with any violation or investigation of any possible
violation of any provisions of any Federal, state or local law or
regulation or administrative ruling relating to any aspect of its business.
(h) There are no material contracts outstanding to which the Municipal
Bond Fund is a party that have not been disclosed in the N-14 Registration
Statement or will not otherwise be disclosed to the Limited Maturity Trust
prior to the Valuation Time.
(i) The Municipal Bond Fund is not a party to or obligated under any
provision of its Articles of Incorporation, as amended, or its by-laws, as
amended, or any contract or other commitment or obligation, and is not
subject to any order or decree which would be violated by its execution of
or performance under this Agreement.
(j) Limited Maturity Portfolio has no known liabilities of a material
amount, contingent or otherwise, other than those shown on Limited Maturity
Portfolio's statements of assets and liabilities referred to above, those
incurred in the ordinary course of its business as a series of an
investment company since June 30, 1997 and those incurred in connection
with the Reorganization. As of the Valuation Time, the Municipal Bond Fund
will advise the Limited Maturity Trust in writing of all known liabilities,
contingent or otherwise, whether or not incurred in the ordinary course of
business, existing or accrued as of such time with respect to Limited
Maturity Portfolio.
(k) No consent, approval, authorization or order of any court or
governmental authority is required for the consummation by the Municipal
Bond Fund of the Reorganization, except such as may be required under the
1933 Act, the 1934 Act, the 1940 Act or state securities laws.
(l) The N-14 Registration Statement, on its effective date, at the time
of the stockholders' meeting referred to in Section 6(a) of this Agreement
and at the Exchange Date, insofar as it relates to Limited Maturity
Portfolio (i) complied or will comply in all material respects with the
provisions of the 1933 Act, the 1934 Act and the 1940 Act and the rules and
regulations thereunder and (ii) did not or will not contain any untrue
statement of a material fact or omit to state any material fact required to
be stated therein or necessary to make the statements therein not
misleading; and the prospectus included therein did not or will not contain
any untrue statement of a material fact or omit to state any material fact
necessary to make the statements therein, in the light of the circumstances
under which they were made, not misleading; provided, however, that the
representations and warranties in this subsection only shall apply to
statements in or omissions from the N-14 Registration Statement made in
reliance upon and in conformity with information furnished by the Municipal
Bond Fund with respect to Limited Maturity Portfolio for use in the N-14
Registration Statement as provided in Section 7 of this Agreement.
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(m) The Municipal Bond Fund is authorized to issue 3,850,000,000 shares
of common stock, par value $.10 per share, divided into three series,
including Limited Maturity Portfolio, each of which is divided into four
classes, designated Class A, Class B, Class C and Class D Common Stock.
Class A, Class B, Class C and Class D of Limited Maturity Portfolio each
consist of 150,000,000 shares, each outstanding share of which is fully
paid and nonassessable and has full voting rights.
(n) Limited Maturity Portfolio shares to be issued to the Limited
Maturity Trust for distribution to the stockholders of the State Funds
pursuant to this Agreement will have been duly authorized and, when issued
and delivered pursuant to this Agreement, will be legally and validly
issued and will be fully paid and nonassessable and will have full voting
rights, and no stockholder of the Municipal Bond Fund will have any
preemptive right of subscription or purchase in respect thereof.
(o) At or prior to the Exchange Date, Limited Maturity Portfolio shares
to be transferred to the Limited Maturity Trust for distribution to the
stockholders of the State Funds on the Exchange Date will be duly qualified
for offering to the public in all states of the United States in which the
sale of shares of Limited Maturity Portfolio presently are qualified, and
there are a sufficient number of such shares registered under the 1933 Act
and with each pertinent state securities commission to permit the transfers
contemplated by this Agreement to be consummated.
(p) At or prior to the Exchange Date, the Municipal Bond Fund will have
obtained any and all regulatory, Director and stockholder approvals with
respect to Limited Maturity Portfolio, necessary to issue the shares of
Limited Maturity Portfolio to the Limited Maturity Trust for distribution
to the stockholders of the State Funds.
3. The Reorganization.
(a) Subject to receiving the requisite approval of the stockholders of
each of the State Funds, and to the other terms and conditions contained
herein, the Limited Maturity Trust agrees to convey, transfer and deliver
to the Municipal Bond Fund for the benefit of Limited Maturity Portfolio,
and the Municipal Bond Fund agrees to acquire from the Limited Maturity
Trust for the benefit of Limited Maturity Portfolio, on the Exchange Date
all of the Investments (including interest accrued as of the Valuation Time
on debt instruments), and cause Limited Maturity Portfolio to assume
substantially all of the liabilities of each of the State Funds, in
exchange solely for that number of shares of Limited Maturity Portfolio
provided in Section 4 of this Agreement. Pursuant to this Agreement, as
soon as practicable the Limited Maturity Trust will distribute all shares
of Limited Maturity Portfolio received by it to the stockholders of each of
the State Funds in exchange for their corresponding State Fund shares. Such
distribution shall be accomplished by the opening of stockholder accounts
on the stock ledger records of Limited Maturity Portfolio in the amounts
due the stockholders of each of the State Funds based on their respective
holdings in such State Fund as of the Valuation Time.
(b) The Limited Maturity Trust will pay or cause to be paid to the
Municipal Bond Fund for the benefit of Limited Maturity Portfolio any
interest it receives on or after the Exchange Date with respect to the
Investments transferred to the Municipal Bond Fund for the benefit of
Limited Maturity Portfolio hereunder.
(c) The Valuation Time shall be 4:00 p.m., New York time, on February 13,
1998, or such earlier or later day and time as may be mutually agreed upon
in writing (the "Valuation Time").
(d) Limited Maturity Portfolio will acquire substantially all of the
assets of, and assume substantially all of the known liabilities of, each
of the State Funds, except that recourse for such liabilities will be
limited to the net assets of each of the State Funds acquired by Limited
Maturity Portfolio. The known liabilities of each of the State Funds as of
the Valuation Time shall be confirmed in writing to the Municipal Bond Fund
by the Limited Maturity Trust pursuant to Section 1(k) of this Agreement.
(e) The existence of each of the State Funds will terminate following the
distribution referred to in subparagraph (a) above and a majority of the
Trustees shall execute and lodge among the records of the Trust an
instrument in writing setting forth the fact of such termination and cause
a copy thereof to be filed in the Office of the Secretary of State of The
Commonwealth of Massachusetts.
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4. Issuance and Valuation of Shares of the Limited Maturity Portfolio in the
Reorganization.
Full shares of Limited Maturity Portfolio, and to the extent necessary, any
fractional shares of Limited Maturity Portfolio, of an aggregate net asset
value equal to the net asset value of the assets of each of the State Funds
acquired, determined as hereinafter provided, reduced by the amount of
liabilities of each State Fund assumed by Limited Maturity Portfolio, shall be
issued by the Municipal Bond Fund in exchange for such assets of each of the
State Funds. The net asset value of each of the State Funds and Limited
Maturity Portfolio shall be determined in accordance with the procedures
described in the Municipal Bond Fund Prospectus with respect to Limited
Maturity Portfolio as of the Valuation Time. Such valuation and determination
shall be made by the Municipal Bond Fund in cooperation with the Limited
Maturity Trust. The Municipal Bond Fund shall issue Class A shares and Class D
shares of Limited Maturity Portfolio to the Limited Maturity Trust in
certificates or share deposit receipts registered in the name of the Limited
Maturity Trust. The Limited Maturity Trust shall redeliver such certificates
to Merrill Lynch Financial Data Services, Inc. and shall distribute the Class
A and Class D shares of Limited Maturity Portfolio so received to the
stockholders of the State Funds as follows: holders of Class A shares of each
of the State Funds will receive Class A shares of Limited Maturity Portfolio
and holders of Class B, Class C and Class D shares of each of the State Funds
will receive Class D shares of Limited Maturity Portfolio.
5. Payment of Expenses.
(a) With respect to expenses incurred in connection with the Reorganization,
(i) the Municipal Bond Fund shall cause Limited Maturity Portfolio to pay all
expenses incurred which are attributable solely to Limited Maturity Portfolio
and the conduct of its business, (ii) the Limited Maturity Trust shall cause
each State Fund to pay all expenses incurred which are attributable solely to
each such State Fund and the conduct of its business, and (iii) the Municipal
Bond Fund and the Limited Maturity Trust shall cause Limited Maturity
Portfolio and the State Funds, respectively, to pay, subsequent to the
Exchange Date and pro rata according to net assets of Limited Maturity
Portfolio and each of the State Funds on the Exchange Date, all expenses
incurred in connection with the Reorganization, including, but not limited to,
all costs related to the preparation and distribution of the N-14 Registration
Statement. Such fees and expenses shall include legal and accounting fees,
printing costs, filing fees, portfolio transfer taxes (if any), and any
similar expenses incurred in connection with the Reorganization. The Limited
Maturity Trust shall pay all expenses associated with the termination of each
of the State Funds under Massachusetts law.
(b) If for any reason the Reorganization is not consummated, no party shall
be liable to any other party for any damages resulting therefrom, including,
without limitation, consequential damages.
6. Covenants of the Limited Maturity Trust and the Municipal Bond Fund.
(a) The Limited Maturity Trust agrees to call special meetings of
stockholders of each of the State Funds as soon as is practicable after the
effective date of the N-14 Registration Statement for the purpose of
considering the Reorganization as described in this Agreement, and it shall be
a condition to the obligations of each of the parties hereto that the holders
of a majority of the shares of each of the State Funds issued and outstanding
and entitled to vote thereon, shall have approved this Agreement at such a
meeting at or prior to the Valuation Time.
(b) The Limited Maturity Trust and the Municipal Bond Fund each covenants to
operate the business of the State Funds and Limited Maturity Portfolio,
respectively, as presently conducted between the date hereof and the Exchange
Date.
(c) The Limited Maturity Trust agrees that following the consummation of the
Reorganization, (i) it will terminate each State Fund in accordance with the
laws of the Commonwealth of Massachusetts and any other applicable law, (ii)
it will not make any distributions of any shares of Limited Maturity Portfolio
other than to the stockholders of the State Funds and without first paying or
adequately providing for the payment of all of the State Funds' liabilities
not assumed by Limited Maturity Portfolio, if any, and (iii) on and after the
Exchange Date it shall not conduct any business with respect to each of the
State Funds except in connection with such State Fund's termination.
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<PAGE>
(d) The Municipal Bond Fund will file the N-14 Registration Statement with
the Securities and Exchange Commission (the "Commission") and will use its
best efforts to provide that the N-14 Registration Statement becomes effective
as promptly as practicable. The Limited Maturity Trust and the Municipal Bond
Fund agree to cooperate fully with each other, and each will furnish to the
other the information relating to the State Funds and Limited Maturity
Portfolio, respectively, to be set forth in the N-14 Registration Statement as
required by the 1933 Act, the 1934 Act, the 1940 Act, and the rules and
regulations thereunder and the applicable state securities laws, if any.
(e) The Limited Maturity Trust and the Municipal Bond Fund each agrees that
by the Exchange Date all of the Federal and other tax returns and reports
required to be filed on or before such date by the State Funds and Limited
Maturity Portfolio, respectively, shall have been filed and all taxes shown as
due on said returns either have been paid or adequate liability reserves have
been provided for the payment of such taxes. In connection with this covenant,
the Funds agree to cooperate with each other in filing any tax return, amended
return or claim for refund, determining a liability for taxes or a right to a
refund of taxes or participating in or conducting any audit or other
proceeding in respect of taxes. The Municipal Bond Fund agrees to retain for a
period of ten (10) years following the Exchange Date all returns, schedules
and work papers and all material records or other documents relating to tax
matters of each State Fund for its taxable period first ending after the
Exchange Date and for all prior taxable periods. Any information obtained
under this subsection shall be kept confidential except as otherwise may be
necessary in connection with the filing of returns or claims for refund or in
conducting an audit or other proceeding. After the Exchange Date, the Limited
Maturity Trust shall prepare, or cause its agents to prepare, any Federal,
state or local tax returns, including any Forms 1099, required to be filed by
or with respect to each State Fund with respect to such State Fund's final
taxable year ending with its termination and for any prior periods or taxable
years and further shall cause such tax returns and Forms 1099 to be duly filed
with the appropriate taxing authorities. Notwithstanding the aforementioned
provisions of this subsection, any expenses incurred by the Limited Maturity
Trust (other than for payment of taxes) in connection with the preparation and
filing of said tax returns and Forms 1099 for any State Fund after the
Exchange Date shall be borne by such State Fund to the extent such expenses
have been accrued by such State Fund in the ordinary course without regard to
the Reorganization; any excess expenses shall be borne by Fund Asset
Management, L.P. ("FAM") at the time such tax returns and Forms 1099 are
prepared.
(f) The Limited Maturity Trust agrees to mail to stockholders of record of
each State Fund entitled to vote at the special meeting of stockholders at
which action is to be considered regarding this Agreement, in sufficient time
to comply with requirements as to notice thereof, a combined Proxy Statement
and Prospectus which complies in all material respects with the applicable
provisions of Section 14(a) of the 1934 Act and Section 20(a) of the 1940 Act,
and the rules and regulations, respectively, thereunder.
(g) Following the consummation of the Reorganization, Limited Maturity
Portfolio expects to stay in existence and continue its business as a series
of an open-end management investment company registered under the 1940 Act.
7. Exchange Date.
(a) Delivery of the assets of the State Funds to be transferred, together
with any other Investments, and the shares of Limited Maturity Portfolio to be
issued, shall be made at the offices of Brown & Wood LLP, One World Trade
Center, New York, New York 10048, at 10:00 a.m. on the next full business day
following the Valuation Time, or at such other place, time and date agreed to
by the Limited Maturity Trust and the Municipal Bond Fund, the date and time
upon which such delivery is to take place being referred to herein as the
"Exchange Date." To the extent that any Investments, for any reason, are not
transferable on the Exchange Date, the Limited Maturity Trust shall cause such
Investments to be transferred to the Municipal Bond Fund's account with The
Bank of New York at the earliest practicable date thereafter.
(b) The Limited Maturity Trust will deliver to the Municipal Bond Fund on
the Exchange Date confirmations or other adequate evidence as to the tax basis
of each of the Investments delivered to the Municipal Bond Fund hereunder,
certified by Deloitte & Touche llp.
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(c) As soon as practicable after the close of business on the Exchange Date,
Limited Maturity Trust shall deliver to Municipal Bond Fund a list of the
names and addresses of all of the stockholders of record of each State Fund on
the Exchange Date and the number of shares of such State Fund owned by each
such stockholder, certified to the best of their knowledge and belief by the
transfer agent for Limited Maturity Trust or by its President.
8. The Limited Maturity Trust Conditions.
The obligations of the Limited Maturity Trust hereunder shall be subject to
the following conditions:
(a) That this Agreement shall have been adopted, and the Reorganization
shall have been approved, by the affirmative vote of the holders of a majority
of the shares of each of the State Funds, issued and outstanding and entitled
to vote thereon, voting separately as a class, and by the Board of Directors
of the Municipal Bond Fund; and that the Municipal Bond Fund shall have
delivered to the Limited Maturity Trust a copy of the resolution approving
this Agreement adopted by the Municipal Bond Fund's Board of Directors,
certified by the Secretary of the Municipal Bond Fund.
(b) That the Municipal Bond Fund shall have furnished to the Limited
Maturity Trust a statement of Limited Maturity Portfolio's assets and
liabilities, with values determined as provided in Section 4 of this
Agreement, together with a schedule of its investments, all as of the
Valuation Time, certified on Municipal Bond Fund's behalf by its President (or
any Vice President) and its Treasurer, and a certificate signed by Municipal
Bond Fund's President (or any Vice President) and its Treasurer, dated as of
the Exchange Date, certifying that as of the Valuation Time and as of the
Exchange Date there has been no material adverse change in the financial
position of Limited Maturity Portfolio since June 30, 1997, other than changes
in its portfolio securities since that date or changes in the market value of
its portfolio securities.
(c) That Municipal Bond Fund shall have furnished to Limited Maturity Trust
a certificate signed by Municipal Bond Fund's President (or any Vice
President) and its Treasurer, dated as of the Exchange Date, certifying that,
as of the Valuation Time and as of the Exchange Date all representations and
warranties of Municipal Bond Fund made in this Agreement are true and correct
in all material respects with the same effect as if made at and as of such
dates, and that Municipal Bond Fund has complied with all of the agreements
and satisfied all of the conditions on its part to be performed or satisfied
at or prior to each of such dates.
(d) That there shall not be any material litigation pending with respect to
the matters contemplated by this Agreement.
(e) That the Limited Maturity Trust shall have received an opinion as to
Maryland law of Wilmer, Cutler & Pickering, Maryland counsel to the Municipal
Bond Fund, in form satisfactory to Limited Maturity Trust and dated the
Exchange Date, to the effect that (i) Municipal Bond Fund is a corporation
duly organized, validly existing and in good standing in conformity with the
laws of the State of Maryland; (ii) the Corresponding Shares of Limited
Maturity Portfolio to be delivered to stockholders of the State Funds as
provided for by this Agreement are duly authorized and, upon delivery, will be
validly issued and outstanding and fully paid and nonassessable by Municipal
Bond Fund, and no stockholder of Municipal Bond Fund has any preemptive right
to subscription or purchase in respect thereof (pursuant to the Articles of
Incorporation, as amended, or the by-laws of Municipal Bond Fund or, to the
best of such counsel's knowledge, otherwise); (iii) this Agreement has been
duly authorized, executed and delivered by Municipal Bond Fund, and represents
a valid and binding contract, enforceable in accordance with its terms,
subject to the effects of bankruptcy, insolvency, moratorium, fraudulent
conveyance and similar laws relating to or affecting creditors' rights
generally and court decisions with respect thereto; provided, that such
counsel shall express no opinion with respect to the application of equitable
principles in any proceeding, whether at law or in equity; (iv) the execution
and delivery of this Agreement does not, and the consummation of the
Reorganization will not, violate the Articles of Incorporation, as amended,
the by-laws of Municipal Bond Fund or Maryland law; (v) no consent, approval,
authorization or order of any Maryland court or governmental authority is
required for the consummation by Municipal Bond Fund of the Reorganization,
except such as have been obtained under Maryland law; and (vi) such opinion is
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<PAGE>
solely for the benefit of Limited Maturity Trust and its Trustees and
officers. In giving the opinion set forth above, Wilmer, Cutler & Pickering
may state that it is relying on certificates of officers of Limited Maturity
Trust and Municipal Bond Fund with regard to matters of fact and certain
certificates and written statements of government officials with respect to
the good standing of Limited Maturity Trust and Municipal Bond Fund.
(f) That Limited Maturity Trust shall have received an opinion of Rogers &
Wells, as counsel to Municipal Bond Fund, in form satisfactory to Limited
Maturity Trust and dated the Exchange Date, to the effect that (i) no consent,
approval, authorization or order of any United States Federal court or
governmental authority is required for the consummation by Municipal Bond Fund
of the Reorganization, except such as have been obtained under the 1933 Act,
the 1934 Act and the 1940 Act and the published rules and regulations of the
Commission thereunder and under applicable state securities laws, if any; (ii)
the N-14 Registration Statement has become effective under the 1933 Act, no
stop order suspending the effectiveness of the N-14 Registration Statement has
been issued and no proceedings for that purpose have been instituted or are
pending or contemplated under the 1933 Act, and the N-14 Registration
Statement, and each amendment or supplement thereto, as of their respective
effective dates, appear on their face to be appropriately responsive in all
material respects to the requirements of the 1933 Act, the 1934 Act and the
1940 Act and the published rules and regulations of the Commission thereunder;
(iii) the descriptions in the N-14 Registration Statement of statutes, legal
and governmental proceedings and contracts and other documents are accurate
and fairly present the information required to be shown; and (iv) such counsel
does not know of any statutes, legal or governmental proceedings or contracts
or other documents related to the Reorganization of a character required to be
described in the N-14 Registration Statement which are not described therein
or, if required to be filed, filed as required; (v) the execution and delivery
of this Agreement does not, and the consummation of the Reorganization will
not, violate any material provision of any agreement (known to such counsel)
to which Municipal Bond Fund is a party or by which Municipal Bond Fund is
bound; (vi) Municipal Bond Fund, to the knowledge of such counsel, is not
required to qualify to do business as a foreign corporation in any
jurisdiction, except as may be required by state securities laws, and except
where each has so qualified or the failure so to qualify would not have a
material adverse effect on Municipal Bond Fund, or its stockholders; (vii)
such counsel does not have actual knowledge of any material suit, action or
legal or administrative proceeding pending or threatened against Municipal
Bond Fund, the unfavorable outcome of which would materially and adversely
affect Municipal Bond Fund; and (viii) all corporate actions required to be
taken by Municipal Bond Fund to authorize this Agreement and to effect the
Reorganization have been duly authorized by all necessary corporate actions on
the part of Municipal Bond Fund. Such opinion also shall state that (x) while
such counsel cannot make any representation as to the accuracy or completeness
of statements of fact in the N-14 Registration Statement or any amendment or
supplement thereto, nothing has come to its attention that would lead it to
believe that, on the respective effective dates of the N-14 Registration
Statement and any amendment or supplement thereto, (1) the N-14 Registration
Statement or any amendment or supplement thereto contained any untrue
statement of a material fact or omitted to state any material fact required to
be stated therein or necessary to make the statements therein not misleading;
and (2) the prospectus included in the N-14 Registration Statement contained
any untrue statement of a material fact or omitted to state any material fact
necessary to make the statements therein, in the light of the circumstances
under which they were made, not misleading; and (y) such counsel does not
express any opinion or belief as to the financial statements or other
financial or statistical data relating to Limited Maturity Portfolio contained
or incorporated by reference in the N-14 Registration Statement. In giving the
opinion set forth above, Rogers & Wells may state that it is relying on
certificates of officers of the Municipal Bond Fund with regard to matters of
fact and certain certificates and written statements of governmental officials
with respect to the good standing of the Municipal Bond Fund and on the
opinion of Wilmer, Cutler & Pickering as to matters of Maryland law.
(g) That the Municipal Bond Fund on behalf of Limited Maturity Portfolio
shall have received a private letter ruling from the Internal Revenue Service
to the effect that for Federal income tax purposes (i) the transfer of
substantially all of the Investments to Limited Maturity Portfolio in exchange
solely for shares of Limited Maturity Portfolio as provided in this Agreement
will constitute a reorganization within the meaning of Section 368(a)(1)(C) of
the Code, and each State Fund and Limited Maturity Portfolio will be deemed to
be a "party" to the Reorganization within the meaning of Section 368(b); (ii)
in accordance with Section 361(a) of the Code,
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<PAGE>
no gain or loss will be recognized to any State Fund as a result of the asset
transfer solely in exchange for shares of Limited Maturity Portfolio or on the
distribution of Limited Maturity Portfolio stock to stockholders of the
respective State Fund under Section 361(c)(1); (iii) under Section 1032 of the
Code, no gain or loss will be recognized to Limited Maturity Portfolio on the
receipt of assets of the State Funds in exchange for shares of Limited
Maturity Portfolio; (iv) in accordance with Section 354(a)(1) of the Code, no
gain or loss will be recognized to the stockholders of any State Fund on the
receipt of Corresponding Shares of Limited Maturity Portfolio in exchange for
their shares of such State Fund; (v) in accordance with Section 362(b) of the
Code, the tax basis of the assets of each State Fund in the hands of Limited
Maturity Portfolio will be the same as the tax basis of such assets in the
hands of such State Fund immediately prior to the consummation of the
Reorganization; (vi) in accordance with Section 358 of the Code, immediately
after the Reorganization, the tax basis of the Corresponding Shares of Limited
Maturity Portfolio received by the stockholders of each State Fund in the
Reorganization will be equal, in the aggregate, to the tax basis of the shares
of such State Fund surrendered in exchange; (vii) in accordance with Section
1223 of the Code, a stockholder's holding period for the Corresponding Shares
of Limited Maturity Portfolio will be determined by including the period for
which such stockholder held the shares of the State Fund exchanged therefor,
provided, that such State Fund shares were held as a capital asset; (viii) in
accordance with Section 1223 of the Code, Limited Maturity Portfolio's holding
period with respect to the assets transferred by each State Fund will include
the period for which the assets were held by such State Fund; and (ix) the
taxable year of each State Fund will end on the effective date of the
Reorganization, and pursuant to Section 381(a) of the Code and regulations
thereunder, Limited Maturity Portfolio will succeed to and take into account
certain tax attributes of such State Fund, such as earnings and profits,
capital loss carryovers and method of accounting.
(h) That all proceedings taken by the Municipal Bond Fund and its counsel in
connection with the Reorganization and all documents incidental thereto shall
be satisfactory in form and substance to the Limited Maturity Trust.
(i) That the N-14 Registration Statement shall have become effective under
the 1933 Act, and no stop order suspending such effectiveness shall have been
instituted or, to the knowledge of the Municipal Bond Fund, contemplated by
the Commission.
(j) That the Limited Maturity Trust shall have received from Deloitte &
Touche llp a letter dated as of the effective date of the N-14 Registration
Statement and a similar letter dated within five days prior to the Exchange
Date, in form and substance satisfactory to the Limited Maturity Trust, to the
effect that (i) they are independent public accountants with respect to the
Municipal Bond Fund within the meaning of the 1933 Act and the applicable
published rules and regulations thereunder; (ii) in their opinion, the
financial statements and supplementary information of Limited Maturity
Portfolio included or incorporated by reference in the N-14 Registration
Statement and reported on by them comply as to form in all material respects
with the applicable accounting requirements of the 1933 Act and the published
rules and regulations thereunder; and (iii) on the basis of limited procedures
agreed upon by the Limited Maturity Trust and the Municipal Bond Fund and
described in such letter (but not an examination in accordance with generally
accepted auditing standards) consisting of a reading of any unaudited interim
financial statements and unaudited supplementary information of Limited
Maturity Portfolio included in the N-14 Registration Statement, and inquiries
of certain officials of the Municipal Bond Fund responsible for financial and
accounting matters, nothing came to its attention that caused them to believe
that (a) such unaudited financial statements and related unaudited
supplementary information do not comply as to form in all material respects
with the applicable accounting requirements of the 1933 Act and the published
rules and regulations thereunder, (b) such unaudited financial statements are
not fairly presented in conformity with generally accepted accounting
principles, applied on a basis substantially consistent with that of the
audited financial statements, or (c) such unaudited supplementary information
is not fairly stated in all material respects in relation to the unaudited
financial statements taken as a whole; and (iv) on the basis of limited
procedures agreed upon by the Limited Maturity Trust and the Municipal Bond
Fund and described in such letter (but not an examination in accordance with
generally accepted auditing standards), the information relating to Limited
Maturity Portfolio appearing in the N-14 Registration Statement, which
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<PAGE>
information is expressed in dollars (or percentages derived from such dollars)
(with the exception of performance comparisons, if any), if any, has been
obtained from the accounting records of the Municipal Bond Fund or from
schedules prepared by officials of the Municipal Bond Fund having
responsibility for financial and reporting matters and such information is in
agreement with such records, schedules or computations made therefrom.
(k) That the Commission shall not have issued an unfavorable advisory report
under Section 25(b) of the 1940 Act, nor instituted or threatened to institute
any proceeding seeking to enjoin consummation of the Reorganization under
Section 25(c) of the 1940 Act, and no other legal, administrative or other
proceeding shall be instituted or threatened which would materially affect the
financial condition of the Municipal Bond Fund or would prohibit the
Reorganization.
(l) That the Limited Maturity Trust shall have received from the Commission
such orders or interpretations as Brown & Wood llp, as counsel to the Limited
Maturity Trust, deems reasonably necessary or desirable under the 1933 Act and
the 1940 Act in connection with the Reorganization, provided, that such
counsel shall have requested such orders as promptly as practicable, and all
such orders shall be in full force and effect.
9. The Municipal Bond Fund Conditions.
The obligations of the Municipal Bond Fund hereunder shall be subject to the
following conditions:
(a) That this Agreement shall have been adopted, and the Reorganization
shall have been approved, by the Board of Trustees of the Limited Maturity
Trust and by the affirmative vote of the holders of a majority of the shares
of beneficial interest of each of the State Funds issued and outstanding and
entitled to vote thereon, voting separately as a class; and that the Limited
Maturity Trust shall have delivered to the Municipal Bond Fund a copy of the
resolution approving this Agreement adopted by the Limited Maturity Trust's
Board of Trustees, and a certificate setting forth the vote of the
stockholders of each State Fund obtained, each certified by the Secretary of
the Limited Maturity Trust.
(b) That the Limited Maturity Trust shall have furnished to the Municipal
Bond Fund a statement of each State Fund's assets and liabilities, with values
determined as provided in Section 4 of this Agreement, together with a
schedule of investments with their respective dates of acquisition and tax
costs, all as of the Valuation Time, certified on the Limited Maturity Trust's
behalf by its President (or any Vice President) and its Treasurer, and a
certificate of both such officers, dated the Exchange Date, certifying that as
of the Valuation Time and as of the Exchange Date there has been no material
adverse change in the financial position of each State Fund since July 31,
1997, other than changes in the Investments since that date or changes in the
market value of the Investments.
(c) That the Limited Maturity Trust shall have furnished to the Municipal
Bond Fund a certificate signed by the Limited Maturity Trust's President (or
any Vice President) and its Treasurer, dated the Exchange Date, certifying
that as of the Valuation Time and as of the Exchange Date all representations
and warranties of the Limited Maturity Trust made in this Agreement are true
and correct in all material respects with the same effect as if made at and as
of such dates and the Limited Maturity Trust has complied with all of the
agreements and satisfied all of the conditions on its part to be performed or
satisfied at or prior to such dates.
(d) That the Limited Maturity Trust shall have delivered to the Municipal
Bond Fund a letter from Deloitte & Touche llp, dated the Exchange Date,
stating that such firm has performed a limited review of the Federal, state
and local income tax returns of the Limited Maturity Trust with respect to
each State Fund for the period ended July 31, 1997 (which returns originally
were prepared and filed by the Limited Maturity Trust), and that based on such
limited review, nothing came to their attention which caused them to believe
that such returns did not properly reflect, in all material respects, the
Federal, state and local income taxes of the Limited Maturity Trust for the
period covered thereby; and that for the period from August 1, 1997, to and
including the Exchange Date and for any taxable year of the Limited Maturity
Trust ending upon the termination of the last State Fund to be so terminated,
such firm has performed a limited review to ascertain the amount of applicable
Federal, state and local taxes, and has determined that either such amount has
been paid or reserves established for
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payment of such taxes, this review to be based on unaudited financial data;
and that based on such limited review, nothing has come to their attention
which caused them to believe that the taxes paid or reserves set aside for
payment of such taxes were not adequate in all material respects for the
satisfaction of Federal, state and local taxes for the period from August 1,
1997, to and including the Exchange Date and for any taxable year of the
Limited Maturity Trust ending upon the termination of the last State Fund to
be so terminated or that the Limited Maturity Trust would not continue to
qualify as a regulated investment company for Federal income tax purposes.
(e) That there shall not be any material litigation pending with respect to
the matters contemplated by this Agreement.
(f) That the Municipal Bond Fund shall have received an opinion of Bingham
Dana llp, Massachusetts counsel to the Limited Maturity Trust, in form
satisfactory to the Municipal Bond Fund and dated the Exchange Date, to the
effect that (i) the Limited Maturity Trust is a trust with transferable shares
validly existing and in good standing in conformity with the laws of the
Commonwealth of Massachusetts; (ii) this Agreement has been duly authorized,
executed and delivered by the Limited Maturity Trust, and represents a valid
and binding contract, enforceable in accordance with its terms, subject to the
effects of bankruptcy, insolvency, moratorium, fraudulent conveyance and
similar laws relating to or affecting creditors' rights generally and court
decisions with respect thereto, provided, that such counsel shall express no
opinion with respect to the application of equitable principles in any
proceeding, whether at law or in equity; (iii) the Limited Maturity Trust has
the power to sell, assign, transfer and deliver the assets transferred by it
hereunder and, upon consummation of the Reorganization in accordance with the
terms of this Agreement, the Limited Maturity Trust will have duly transferred
such assets and liabilities in accordance with this Agreement; (iv) the
execution and delivery of this Agreement does not, and the consummation of the
Reorganization will not, violate the Declaration of Trust, as amended, the by-
laws of the Limited Maturity Trust or Massachusetts law; (v) no consent,
approval, authorization or order of any Massachusetts court or governmental
authority is required for the consummation by the Limited Maturity Trust of
the Reorganization, except such as have been obtained under Massachusetts law;
and (vi) such opinion is solely for the benefit of the Municipal Bond Fund and
its Directors and officers. In giving the opinion set forth above, Bingham
Dana llp may state that it is relying on certificates of officers of the
Limited Maturity Trust and the Municipal Bond Fund with regard to matters of
fact and certain certificates and written statements of government officials
with respect to the good standing of the Limited Maturity Trust.
(g) That the Municipal Bond Fund shall have received an opinion of Brown &
Wood llp, as counsel to the Limited Maturity Trust, in form satisfactory to
the Municipal Bond Fund and dated the Exchange Date, with respect to the
matters specified in Section 8(f) of this Agreement and such other matters as
the Municipal Bond Fund reasonably may deem necessary or desirable.
(h) That the Municipal Bond Fund shall have received a private letter ruling
from the Internal Revenue Service with respect to the matters specified in
Section 8(g) of this Agreement.
(i) That the Investments to be transferred to the Municipal Bond Fund shall
not include any assets or liabilities which the Municipal Bond Fund, by reason
of charter limitations or otherwise, may not properly acquire or assume.
(j) That all proceedings taken by the Limited Maturity Trust and its counsel
in connection with the Reorganization and all documents incidental thereto
shall be satisfactory in form and substance to the Municipal Bond Fund.
(k) That the N-14 Registration Statement shall have become effective under
the 1933 Act and no stop order suspending such effectiveness shall have been
instituted or, to the knowledge of the Limited Maturity Trust, contemplated by
the Commission.
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<PAGE>
(l) That the Municipal Bond Fund shall have received from Deloitte & Touche
llp a letter dated as of the effective date of the N-14 Registration Statement
and a similar letter dated within five days prior to the Exchange Date, in
form and substance satisfactory to the Municipal Bond Fund, to the effect that
(i) they are independent public accountants with respect to the Limited
Maturity Trust within the meaning of the 1933 Act and the applicable published
rules and regulations thereunder; (ii) in their opinion, the financial
statements and supplementary information of each State Fund included or
incorporated by reference in the N-14 Registration Statement and reported on
by them comply as to form in all material respects with the applicable
accounting requirements of the 1933 Act and the published rules and
regulations thereunder; (iii) on the basis of limited procedures agreed upon
by the Limited Maturity Trust and the Municipal Bond Fund and described in
such letter (but not an examination in accordance with generally accepted
auditing standards) consisting of a reading of any unaudited interim financial
statements and unaudited supplementary information of each State Fund included
in the N-14 Registration Statement, and inquiries of certain officials of the
Limited Maturity Trust responsible for financial and accounting matters,
nothing came to their attention that caused them to believe that (a) such
unaudited financial statements and related unaudited supplementary information
do not comply as to form in all material respects with the applicable
accounting requirements of the 1933 Act and the published rules and
regulations thereunder, (b) such unaudited financial statements are not fairly
presented in conformity with generally accepted accounting principles, applied
on a basis substantially consistent with that of the audited financial
statements, or (c) such unaudited supplementary information is not fairly
stated in all material respects in relation to the unaudited financial
statements taken as a whole; and (iv) on the basis of limited procedures
agreed upon by the Limited Maturity Trust and the Municipal Bond Fund and
described in such letter (but not an examination in accordance with generally
accepted auditing standards), the information relating to each State Fund
appearing in the N-14 Registration Statement, which information is expressed
in dollars (or percentages derived from such dollars) (with the exception of
performance comparisons, if any), if any, has been obtained from the
accounting records of the Limited Maturity Trust or from schedules prepared by
officials of the Limited Maturity Trust having responsibility for financial
and reporting matters and such information is in agreement with such records,
schedules or computations made therefrom.
(m) That the Commission shall not have issued an unfavorable advisory report
under Section 25(b) of the 1940 Act, nor instituted or threatened to institute
any proceeding seeking to enjoin consummation of the Reorganization under
Section 25(c) of the 1940 Act, and no other legal, administrative or other
proceeding shall be instituted or threatened which would materially affect the
financial condition of the Limited Maturity Trust or would prohibit the
Reorganization.
(n) That the Municipal Bond Fund shall have received from the Commission
such orders or interpretations as Rogers & Wells, as counsel to the Municipal
Bond Fund, deems reasonably necessary or desirable under the 1933 Act and the
1940 Act in connection with the Reorganization, provided, that such counsel
shall have requested such orders as promptly as practicable, and all such
orders shall be in full force and effect.
(o) That prior to the Exchange Date, the Limited Maturity Trust shall have
declared a dividend or dividends which, together with all such previous
dividends, shall have the effect of distributing to stockholders of each State
Fund all of such State Fund's investment company taxable income for the period
from August 1, 1997 to and including the Exchange Date, if any (computed
without regard to any deduction for dividends paid), and all of such State
Fund's net capital gain, if any, realized for the period from August 1, 1997
to and including the Exchange Date.
10. Termination, Postponement and Waivers.
(a) Notwithstanding anything contained in this Agreement to the contrary,
this Agreement may be terminated and the Reorganization abandoned at any time
(whether before or after adoption thereof by the stockholders of each State
Fund) prior to the Exchange Date, or the Exchange Date may be postponed, (i)
by mutual consent of the Board of Trustees of the Limited Maturity Trust and
the Board of Directors of the Municipal Bond Fund; (ii) by the Board of
Trustees of the Limited Maturity Trust if any condition of the Limited
I-14
<PAGE>
Maturity Trust's obligations set forth in Section 8 of this Agreement has not
been fulfilled or waived by such Board; or (iii) by the Board of Directors of
the Municipal Bond Fund if any condition of the Municipal Bond Fund's
obligations set forth in Section 9 of this Agreement has not been fulfilled or
waived by such Board.
(b) If the transactions contemplated by this Agreement have not been
consummated by August 31, 1998, this Agreement automatically shall terminate
on that date, unless a later date is mutually agreed to by the Board of
Trustees of the Limited Maturity Trust and the Board of Directors of the
Municipal Bond Fund.
(c) In the event of termination of this Agreement pursuant to the provisions
hereof, the same shall become void and have no further effect, and there shall
not be any liability on the part of either the Limited Maturity Trust or the
Municipal Bond Fund or persons who are their trustees, directors, officers,
agents or stockholders in respect of this Agreement.
(d) At any time prior to the Exchange Date, any of the terms or conditions
of this Agreement may be waived by the Board of Trustees of the Limited
Maturity Trust or the Board of Directors of the Municipal Bond Fund,
respectively (whichever is entitled to the benefit thereof), if, in the
judgment of such Board after consultation with its counsel, such action or
waiver will not have a material adverse effect on the benefits intended under
this Agreement to the stockholders of each State Fund and Limited Maturity
Portfolio, respectively, on behalf of which such action is taken. In addition,
the Board of Trustees of the Limited Maturity Trust and the Board of Directors
of the Municipal Bond Fund have delegated to FAM the ability to make non-
material changes to the transaction if it deems it to be in the best interests
of the Limited Maturity Trust and the Municipal Bond Fund to do so.
(e) The respective representations and warranties contained in Sections 1
and 2 of this Agreement shall expire with, and be terminated by, the
consummation of the Reorganization, and neither the Limited Maturity Trust nor
the Municipal Bond Fund nor any of their officers, directors or trustees,
agents or stockholders shall have any liability with respect to such
representations or warranties after the Exchange Date. This provision shall
not protect any officer, director or trustee, agent or stockholder of the
Limited Maturity Trust or the Municipal Bond Fund against any liability to the
entity for which that officer, director or trustee, agent or stockholder so
acts or to its stockholders, to which that officer, director or trustee, agent
or stockholder otherwise would be subject by reason of willful misfeasance,
bad faith, gross negligence, or reckless disregard of the duties in the
conduct of such office.
(f) If any order or orders of the Commission with respect to this Agreement
shall be issued prior to the Exchange Date and shall impose any terms or
conditions which are determined by action of the Board of Trustees of the
Limited Maturity Trust and the Board of Directors of the Municipal Bond Fund
to be acceptable, such terms and conditions shall be binding as if a part of
this Agreement without further vote or approval of the stockholders of the
State Funds unless such terms and conditions shall result in a change in the
method of computing the number of shares of Limited Maturity Portfolio to be
issued to the Limited Maturity Trust for distribution to the stockholders of
the State Funds in which event, unless such terms and conditions shall have
been included in the proxy solicitation materials furnished to the
stockholders of the State Funds prior to the meetings at which the
Reorganization shall have been approved, this Agreement shall not be
consummated and shall terminate unless the Limited Maturity Trust promptly
shall call a special meeting of stockholders of each State Fund at which such
conditions so imposed shall be submitted for approval.
11. Indemnification.
(a) The Limited Maturity Trust hereby agrees to indemnify and hold the
Municipal Bond Fund harmless from all loss, liability and expense (including
reasonable counsel fees and expenses in connection with the contest of any
claim) which the Municipal Bond Fund may incur or sustain by reason of the
fact that (i) the Municipal Bond Fund shall be required to pay any corporate
obligation of the Limited Maturity Trust, whether consisting of tax
deficiencies or otherwise, based upon a claim or claims against the Limited
Maturity Trust or the State Funds which were omitted or not fairly reflected
in the financial statements to be delivered to the
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<PAGE>
Municipal Bond Fund in connection with the Reorganization; (ii) any
representations or warranties made by the Limited Maturity Trust in this
Agreement should prove to be false or erroneous in any material respect; (iii)
any covenant of the Limited Maturity Trust has been breached in any material
respect; or (iv) any claim is made alleging that (a) the N-14 Registration
Statement included any untrue statement of a material fact or omitted to state
any material fact required to be stated therein or necessary to make the
statements therein not misleading or (b) the Proxy Statement and Prospectus
delivered to the stockholders of the State Funds and forming a part of the N-
14 Registration Statement included any untrue statement of a material fact or
omitted to state any material fact necessary to make the statements therein,
in the light of the circumstances under which they were made, not misleading,
except insofar as such claim is based on information with respect to the
Municipal Bond Fund.
(b) The Municipal Bond Fund hereby agrees to indemnify and hold the Limited
Maturity Trust harmless from all loss, liability and expenses (including
reasonable counsel fees and expenses in connection with the contest of any
claim) which the Limited Maturity Trust may incur or sustain by reason of the
fact that (i) any representations or warranties made by the Municipal Bond
Fund in this Agreement should prove false or erroneous in any material
respect, (ii) any covenant of the Municipal Bond Fund has been breached in any
material respect, or (iii) any claim is made alleging that (a) the N-14
Registration Statement included any untrue statement of a material fact or
omitted to state any material fact required to be stated therein or necessary
to make the statements therein, not misleading or (b) the Proxy Statement and
Prospectus delivered to stockholders of the State Funds and forming a part of
the N-14 Registration Statement included any untrue statement of a material
fact or omitted to state any material fact necessary to make the statements
therein, in the light of the circumstances under which they were made, not
misleading, except insofar as such claim is based on information with respect
to Limited Maturity Trust.
(c) In the event that any claim is made against the Municipal Bond Fund in
respect of which indemnity may be sought by the Municipal Bond Fund from the
Limited Maturity Trust under Section 11(a) of this Agreement, or in the event
that any claim is made against the Limited Maturity Trust in respect of which
indemnity may be sought by the Limited Maturity Trust from the Municipal Bond
Fund under Section 11(b) of this Agreement, then the party seeking
indemnification (the "Indemnified Party"), with reasonable promptness and
before payment of such claim, shall give written notice of such claim to the
other party (the "Indemnifying Party"). If no objection as to the validity of
the claim is made in writing to the Indemnified Party by the Indemnifying
Party within thirty (30) days after the giving of notice hereunder, then the
Indemnified Party may pay such claim and shall be entitled to reimbursement
therefor, pursuant to this Agreement. If, prior to the termination of such
thirty-day period, objection in writing as to the validity of such claim is
made to the Indemnified Party, the Indemnified Party shall withhold payment
thereof until the validity of such claim is established (i) to the
satisfaction of the Indemnifying Party, or (ii) by a final determination of a
court of competent jurisdiction, whereupon the Indemnified Party may pay such
claim and shall be entitled to reimbursement thereof, pursuant to this
Agreement, or (iii) with respect to any tax claims, within seven (7) calendar
days following the earlier of (A) an agreement between the Limited Maturity
Trust and the Municipal Bond Fund that an indemnity amount is payable, (B) an
assessment of a tax by a taxing authority, or (c) a "determination" as defined
in Section 1313(a) of the Code. For purposes of this Section 11, the term
"assessment" shall have the same meaning as used in Chapter 63 of the Code and
Treasury Regulations thereunder, or any comparable provision under the laws of
the appropriate taxing authority. In the event of any objection by the
Indemnifying Party, the Indemnifying Party promptly shall investigate the
claim, and if it is not satisfied with the validity thereof, the Indemnifying
Party shall conduct the defense against such claim. All costs and expenses
incurred by the Indemnifying Party in connection with such investigation and
defense of such claim shall be borne by it. These indemnification provisions
are in addition to, and not in limitation of, any other rights the parties may
have under applicable law.
12. Other Matters.
(a) Pursuant to Rule 145 under the 1933 Act, and in connection with the
issuance of any shares to any person who at the time of the Reorganization is,
to its knowledge, an affiliate of a party to the Reorganization
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<PAGE>
pursuant to Rule 145(c), the Municipal Bond Fund will cause to be affixed upon
the certificate(s) issued to such person (if any) a legend as follows:
THESE SHARES ARE SUBJECT TO RESTRICTIONS ON TRANSFER UNDER THE
SECURITIES ACT OF 1933 AND MAY NOT BE SOLD OR OTHERWISE
TRANSFERRED EXCEPT TO MERRILL LYNCH MUNICIPAL BOND FUND, INC. (OR
ITS STATUTORY SUCCESSOR) OR ITS PRINCIPAL UNDERWRITER UNLESS (I) A
REGISTRATION STATEMENT WITH RESPECT THERETO IS EFFECTIVE UNDER THE
SECURITIES ACT OF 1933 OR (II) IN THE OPINION OF COUNSEL
REASONABLY SATISFACTORY TO THE FUND, SUCH REGISTRATION IS NOT
REQUIRED.
and, further, that stop transfer instructions will be issued to the Municipal
Bond Fund's transfer agent with respect to such shares. The Limited Maturity
Trust will provide the Municipal Bond Fund on the Exchange Date with the name
of any stockholder of any State Fund who is to the knowledge of the Limited
Maturity Trust an affiliate of it on such date.
(b) All covenants, agreements, representations and warranties made under
this Agreement and any certificates delivered pursuant to this Agreement shall
be deemed to have been material and relied upon by each of the parties,
notwithstanding any investigation made by them or on their behalf.
(c) Any notice, report or demand required or permitted by any provision of
this Agreement shall be in writing and shall be made by hand delivery, prepaid
certified mail or overnight service, addressed to the Limited Maturity Trust
or the Municipal Bond Fund, in either case at 800 Scudders Mill Road,
Plainsboro, New Jersey 08536, Attn: Arthur Zeikel, President.
(d) This Agreement supersedes all previous correspondence and oral
communications between the parties regarding the Reorganization, constitutes
the only understanding with respect to the Reorganization, may not be changed
except by a letter of agreement signed by each party and shall be governed by
and construed in accordance with the laws of the State of New York applicable
to agreements made and to be performed in said state.
(e) A copy of the Limited Maturity Trust's Declaration of Trust is on file
with the Secretary of State of The Commonwealth of Massachusetts. The
Municipal Bond Fund acknowledges that the obligations of or arising out of
this instrument are not binding upon any of the Limited Maturity Trust's
trustees, officers, employees, agents or stockholders individually, but are
binding solely upon the assets and property of the Limited Maturity Trust. The
Municipal Bond Fund further acknowledges that the assets and liabilities of
each series of the Limited Maturity Trust are separate and distinct and that
the obligations of or arising out of this instrument are binding solely upon
the assets or property of the series on whose behalf the Limited Maturity
Trust has executed this Agreement.
(f) Copies of the Articles of Incorporation, as amended, of the Municipal
Bond Fund are on file with the Department of Assessments and Taxation of the
State of Maryland and notice is hereby given that this instrument is executed
on behalf of the Directors of the Municipal Bond Fund.
This Agreement may be executed in any number of counterparts, each of which,
when executed and delivered, shall be deemed to be an original but all such
counterparts together shall constitute but one instrument.
I-17
<PAGE>
Merrill Lynch Multi-State Limited
Maturity Municipal Series Trust
/s/ Terry K. Glenn
By: _________________________________
Attest:
/s/ Lawrence A. Rogers
_____________________________________
Merrill Lynch Municipal Bond Fund,
Inc.
/s/ Terry K. Glenn
By: _________________________________
Attest:
/s/ Lawrence A. Rogers
_____________________________________
I-18
<PAGE>
EXHIBIT II
RATINGS OF MUNICIPAL BONDS
DESCRIPTION OF MOODY'S INVESTORS SERVICE, INC. ("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 some time in
the future.
BAA Bonds which are rated Baa are considered as medium grade obligations,
i.e., they are neither highly protected nor poorly secured. Interest
payment and principal security appear adequate for the present but
certain protective elements may be lacking or may be characteristically
unreliable over any great length of time. Such bonds lack outstanding
investment characteristics and in fact have speculative characteristics
as well.
BA Bonds which are rated Ba are judged to have speculative elements; their
future cannot be considered as well assured. Often the protection of
interest and principal payments may be very moderate and thereby not
well safeguarded during both good and bad times over the future.
Uncertainty of position characterizes bonds in this class.
B Bonds which are rated B generally lack characteristics of the desirable
investment. Assurance of interest and principal payments or of
maintenance of other terms of the contract over any long period of time
may be small.
CAA Bonds which are rated Caa are of poor standing. Such issues may be in
default or there may be present elements of danger with respect to
principal or interest.
CA Bonds which are rated Ca represent obligations which are speculative in
a high degree. Such issues are often in default or have other marked
shortcomings.
C Bonds which are rated C are the lowest rated class of bonds, and issues
so rated can be regarded as having extremely poor prospects of ever
attaining any real investment standing.
Note: Those bonds in the Aa, A, Baa, Ba and B groups which Moody's believes
possess the strongest investment attributes are designated by the symbols Aa1,
A1, Baa1, Ba1 and B1.
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Short-term Notes: The four ratings of Moody's for short-term notes are
MIG1/VMIG1, MIG2/VMIG2, MIG3/VMIG3 and MIG4/VMIG4; MIG1/VMIG1 denotes "best
quality . . . strong protection by established cash flows"; MIG2/VMIG2 denotes
"high quality" with ample margins of protection; MIG3/VMIG3 notes are of
"favorable quality . . . but . . . lacking the undeniable strength of the
preceding grades"; MIG4/VMIG4 notes are of "adequate quality . . .
[p]rotection commonly regarded as required of an investment security is
present . . . there is specific risk".
DESCRIPTION OF MOODY'S COMMERCIAL PAPER RATINGS
Moody's Commercial Paper ratings are opinions of the ability of issuers to
repay punctually promissory obligations not having an original maturity in
excess of nine months. Moody's employs the following three designations, all
judged to be investment grade, to indicate the relative repayment ability of
rated issuers:
Issuers rated Prime-1 (or supporting institutions) have a superior ability
for repayment of short-term promissory obligations. Prime-1 repayment ability
will often be evidenced by many of the following characteristics: leading
market positions in well-established industries; high rates of return on funds
employed; conservative capitalization structure with moderate reliance on debt
and ample asset protection; broad margins in earning coverage of fixed
financial charges and high internal cash generation; and well-established
access to a range of financial markets and assured sources of alternate
liquidity.
Issuers rated Prime-2 (or supporting institutions) have a strong ability for
repayment of short-term promissory obligations. This will normally be
evidenced by many of the characteristics cited above but to a lesser degree.
Earnings trends and coverage ratios, while sound, may be more subject to
variation. Capitalization characteristics, while still appropriate, may be
more affected by external conditions. Ample alternate liquidity is maintained.
Issuers rated Prime-3 (or supporting institutions) have an acceptable
ability for repayment of short-term promissory obligations. The effect of
industry characteristics and market compositions may be more pronounced.
Variability in earnings and profitability may result in changes in the level
of debt protection measurements and may require relatively high financial
leverage. Adequate alternate liquidity is maintained.
Issuers rated Not Prime do not fall within any of the Prime rating
categories.
DESCRIPTION OF STANDARD & POOR'S RATINGS SERVICES ("STANDARD & POOR'S")
MUNICIPAL DEBT RATINGS
A Standard & Poor's municipal debt rating is a current opinion of the
creditworthiness of an obligor with respect to a specific financial
obligation, a specific class of financial obligations, or a specific financial
program. It takes into consideration the creditworthiness of guarantors,
insurers or other forms of credit enhancement on the obligation.
The debt rating is not a recommendation to purchase, sell or hold a
financial obligation, inasmuch as it does not comment as to market price or
suitability for a particular investor.
The ratings are based on current information furnished by the obligors or
obtained by Standard & Poor's from other sources it considers reliable.
Standard & Poor's does not perform an audit in connection with any rating and
may, on occasion, rely on unaudited financial information. The ratings may be
changed, suspended, or withdrawn as a result of changes in, or unavailability
of, such information, or based on other circumstances.
The ratings are based, in varying degrees, on the following considerations:
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I. Likelihood of payment--capacity and willingness of the obligor to meet
its financial commitment on an obligation in accordance with the terms
of the obligation;
II. Nature of and provisions of the obligation; and
III.Protection afforded by, and relative position of, the obligation in the
event of bankruptcy, reorganization or other arrangement under the laws
of bankruptcy and other laws affecting creditors' rights.
AAA Debt rated "AAA" has the highest rating assigned by Standard & Poor's.
Capacity to meet its financial commitment on the obligation is extremely
strong.
AA Debt rated "AA" differs from the highest-rated obligations only in small
degree. The obligor's capacity to meet its financial commitment on the
obligation is very strong.
A Debt rated "A" is somewhat more susceptible to the adverse effects of
changes in circumstances and economic conditions than debt in higher-
rated categories. However, the obligor's capacity to meet its financial
commitment on the obligation is still strong.
BBB Debt rated "BBB" exhibits adequate protection parameters. However,
adverse economic conditions or changing circumstances are more likely to
lead to a weakened capacity of the obligor to meet its financial
commitment on the obligation.
BB Debt rated "BB", "B", "CCC", "CC" and "C" are regarded as having
B significant speculative characteristics. "BB" indicates the least degree
of speculation and "C" the highest degree of speculation. While such
CCC bonds will likely have some quality and protective characteristics,
CC these may be outweighed by large uncertainties or major exposures to
C adverse conditions.
D Debt rated "D" is in payment default. The "D" rating category is used
when payments on an obligation are not made on the date due even if the
applicable grace period has not expired, unless Standard & Poor's
believes that such payments will be made during such grace period. The
"D" rating also will be used upon the filing of a bankruptcy petition or
the taking of a similar action if payments on an obligation are
jeopardized.
Plus (+) or Minus (--): The ratings from "AA" to "CCC" may be modified by
the addition of a plus or minus sign to show relative standing within the
major rating categories.
DESCRIPTION OF STANDARD & POOR'S COMMERCIAL PAPER RATINGS
A Standard & Poor's Commercial Paper Rating is a current assessment of the
likelihood of timely payment of debt having an original maturity of no more
than 365 days. Ratings are graded into several categories, ranging from "A"
for the highest-quality obligations to "D" for the lowest. These categories
are as follows:
A-1 This designation indicates that the degree of safety regarding timely
payment is strong. Those issues determined to possess extremely strong
safety characteristics are denoted with a plus sign (+) designation.
A-2
Capacity for timely payment on issues with this designation is
satisfactory. However, the relative degree of safety is not as high as
for issues designated "A-1".
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<PAGE>
A-3 Issues carrying this designation have an adequate capacity for timely
payment. They are, however, more vulnerable to the adverse effects of
changes in circumstances than obligations carrying the higher
designations.
B Issues rated "B" are regarded as having only speculative capacity for
timely payment.
C This rating is assigned to short-term debt obligations with a doubtful
capacity for payment.
D Debt rated "D" is in payment default. The "D" rating category is used
when interest payments or principal payments are not made on the date
due, even if the applicable grace period has not expired, unless
Standard & Poor's believes that such payments will be made during such
grace period.
A Commercial Paper rating is not a recommendation to purchase or sell a
security. The ratings are based on current information furnished to Standard &
Poor's by the issuer and obtained by Standard & Poor's from other sources it
considers reliable. The ratings may be changed, suspended or withdrawn as a
result of changes in, or unavailability of, such information.
DESCRIPTION OF STANDARD & POOR'S SHORT-TERM ISSUE CREDIT RATINGS
A Standard & Poor's note rating reflects the liquidity factors and market
access risks unique to notes. Notes due in three years or less will likely
receive a note rating. Notes maturing beyond three years will most likely
receive a long-term debt rating. The following criteria will be used in making
that assessment:
. Amortization schedule--the larger the final maturity relative to other
maturities, the more likely it will be treated as a note.
. Source of payment--the more dependent the issue is on the market for
its refinancing, the more likely it will be treated as a note.
Note rating symbols are as follows:
SP-1 Strong capacity to pay principal and interest. An issue determined to
possess a very strong capacity to pay debt service is given a plus (+)
designation.
SP-2 Satisfactory capacity to pay principal and interest, with some
vulnerability to adverse financial and economic changes over the term of
the notes.
SP-3 Speculative capacity to pay principal and interest.
DESCRIPTION OF FITCH INVESTORS SERVICE, INC. ("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.
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Fitch ratings do not reflect any credit enhancement that may be provided by
insurance policies or financial guaranties unless otherwise indicated.
Bonds carrying the same rating are of similar but not necessarily identical
credit quality since the rating categories do not fully reflect small
differences in the degrees of credit risk.
Fitch ratings are not recommendations to buy, sell or hold any security.
Ratings do not comment on the adequacy of market price, the suitability of any
security for a particular investor or the tax-exempt nature or taxability of
payments made in respect of any security.
Fitch ratings are based on information obtained from issuers, other
obligors, underwriters, their experts and other sources Fitch believes to be
reliable. Fitch does not audit or verify the truth or accuracy of such
information. Ratings may be changed, suspended, or withdrawn as a result of
changes in, or the unavailability of, information or for 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.
NR Indicates that Fitch does not rate the specific issue.
CONDITIONAL A conditional rating is premised on the successful completion of a
project or the occurrence of a specific event.
SUSPENDED A rating is suspended when Fitch deems the amount of information
available from the issuer to be inadequate for rating purposes.
WITHDRAWN
A rating will be withdrawn when an issue matures or is called or
refinanced and, at Fitch's discretion, when an issuer fails to
furnish proper and timely information.
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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.
Ratings Outlook: An outlook is used to describe the most likely direction of
any rating change over the intermediate term. It is described as "Positive" or
"Negative". The absence of a designation indicates a stable outlook.
DESCRIPTION OF FITCH SPECULATIVE GRADE BOND RATINGS
Fitch speculative grade bond ratings provide a guide to investors in
determining the credit risk associated with a particular security. The ratings
("BB" to "C") represent Fitch's assessment of the likelihood of timely payment
of principal and interest in accordance with the terms of obligation for bond
issues not in default. For defaulted bonds, the rating ("DDD" to "D") is an
assessment of the ultimate recovery value through reorganization or
liquidation.
The rating takes into consideration special features of the issue, its
relationship to other obligations of the issuer, the current and prospective
financial condition and operating performance of the issuer and any guarantor,
as well as the economic and political environment that might affect the
issuer's future financial strength.
Bonds that have the same rating are of similar but not necessarily identical
credit quality since rating categories cannot fully reflect the differences in
degrees of credit risk.
BB Bonds are considered speculative. The obligor's ability to pay interest
and repay principal may be affected over time by adverse economic
changes. However, business and financial alternatives can be identified
which could assist the obligor in satisfying its debt service
requirements.
B Bonds are considered highly speculative. While bonds in this class are
currently meeting debt service requirements, the probability of
continued timely payment of principal and interest reflects the
obligor's limited margin of safety and the need for reasonable business
and economic activity throughout the life of the issue.
CCC Bonds have certain identifiable characteristics which, if not remedied,
may lead to default. The ability to meet obligations requires an
advantageous business and economic environment.
CC Bonds are minimally protected. Default in payment of interest and/or
principal seems probable over time.
C Bonds are in imminent default in payment of interest or principal.
Bonds are in default on interest and/or principal payments. Such bonds
DDD are extremely speculative and should be valued on the basis of their
DD ultimate recovery value in liquidation or reorganization of the obligor.
D "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.
II-6
<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.
II-7
<PAGE>
EXHIBIT III
SECTIONS 86 THROUGH 98 OF CHAPTER 156B
OF THE MASSACHUSETTS GENERAL LAWS
(THE MASSACHUSETTS BUSINESS CORPORATION LAW)
(S) 86. SECTIONS APPLICABLE TO APPRAISAL; PREREQUISITES
If a corporation proposes to take a corporate action as to which any section
of this chapter provides that a stockholder who objects to such action shall
have the right to demand payment for his shares and an appraisal thereof,
sections eighty-seven to ninety-eight, inclusive, shall apply except as
otherwise specifically provided in any section of this chapter. Except as
provided in sections eighty-two and eighty-three, no stockholder shall have
such right unless (1) he files with the corporation before the taking of the
vote of the shareholders on such corporate action, written objection to the
proposed action stating that he intends to demand payment for his shares if
the action is taken and (2) his shares are not voted in favor of the proposed
action.
(S) 87. STATEMENT OF RIGHTS OF OBJECTING STOCKHOLDERS IN NOTICE OF MEETING;
FORM
The notice of the meeting of stockholders at which the approval of such
proposed action is to be considered shall contain a statement of the rights of
objecting stockholders. The giving of such notice shall not be deemed to
create any rights in any stockholder receiving the same to demand payment for
his stock, and the directors may authorize the inclusion in any such notice of
a statement of opinion by the management as to the existence or non-existence
of the right of the stockholders to demand payment for their stock on account
of the proposed corporate action. The notice may be in such form as the
directors or officers calling the meeting deem advisable, but the following
form of notice shall be sufficient to comply with this section:
"If the action proposed is approved by the stockholders at the meeting and
effected by the corporation, any stockholder (1) who files with the
corporation before the taking of the vote on the approval of such action,
written objection to the proposed action stating that he intends to demand
payment for his shares if the action is taken and (2) whose shares are not
voted in favor of such action has or may have the right to demand in writing
from the corporation (or, in the case of a consolidation or merger, the name
of the resulting or surviving corporation shall be inserted), within twenty
days after the date of mailing to him of notice in writing that the corporate
action has become effective, payment for his shares and an appraisal of the
value thereof. Such corporation and any such stockholder shall in such cases
have the rights and duties and shall follow the procedure set forth in
sections 88 to 98, inclusive, of chapter 156B of the General Laws of
Massachusetts."
(S) 88. NOTICE OF EFFECTIVENESS OF ACTION OBJECTED TO
The corporation taking such action, or in the case of a merger or
consolidation the surviving or resulting corporation, shall, within ten days
after the date on which such corporate action became effective, notify each
stockholder who filed a written objection meeting the requirements of section
eighty-six and whose shares were not voted in favor of the approval of such
action, that the action approved at the meeting of the corporation of which he
is a stockholder has become effective. The giving of such notice shall not be
deemed to create any rights in any stockholder receiving the same to demand
payment for his stock. The notice shall be sent by registered or certified
mail, addressed to the stockholder at his last known address as it appears in
the records of the corporation.
(S) 89. DEMAND FOR PAYMENT; TIME FOR PAYMENT
If within twenty days after the date of mailing of a notice under subsection
(e) of section eighty-two, subsection (f) of section eighty-three, or section
eighty-eight, any stockholder to whom the corporation was required to give
such notice shall demand in writing from the corporation taking such action,
or in the case of a consolidation or merger from the resulting or surviving
corporation, payment for his stock, the corporation upon which such demand is
made shall pay to him the fair value of his stock within thirty days after the
expiration of the period during which such demand may be made.
III-1
<PAGE>
(S) 90. DEMAND FOR DETERMINATION OF VALUE; BILL IN EQUITY; VENUE
If during the period of thirty days provided for in section eighty-nine the
corporation upon which such demand is made and any such objecting stockholder
fail to agree as to the value of such stock, such corporation or any such
stockholder may within four months after the expiration of such thirty-day
period demand a determination of the value of the stock of all such objecting
stockholders by a bill in equity filed in the superior court in the county
where the corporation in which such objecting stockholder held stock had or
has its principal office in the commonwealth.
(S) 91. PARTIES TO SUIT TO DETERMINE VALUE; SERVICE
If the bill is filed by the corporation, it shall name as parties respondent
all stockholders who have demanded payment for their shares and with whom the
corporation has not reached agreement as to the value thereof. If the bill is
filed by a stockholder, he shall bring the bill in his own behalf and in
behalf of all other stockholders who have demanded payment for their shares
and with whom the corporation has not reached agreement as to the value
thereof, and service of the bill shall be made upon the corporation by
subpoena with a copy of the bill annexed. The corporation shall file with its
answer a duly verified list of all such other stockholders, and such
stockholders shall thereupon be deemed to have been added as parties to the
bill. The corporation shall give notice in such form and returnable on such
date as the court shall order to each stockholder party to the bill by
registered or certified mail, addressed to the last known address of such
stockholder as shown in the records of the corporation, and the court may
order such additional notice by publication or otherwise as it deems
advisable. Each stockholder who makes demand as provided in section eighty-
nine shall be deemed to have consented to the provisions of this section
relating to notice, and the giving of notice by the corporation to any such
stockholder in compliance with the order of the court shall be a sufficient
service of process on him. Failure to give notice to any stockholder making
demand shall not invalidate the proceedings as to other stockholders to whom
notice was properly given, and the court may at any time before the entry of a
final decree make supplementary orders of notice.
(S) 92. DECREE DETERMINING VALUE AND ORDERING PAYMENT; VALUATION DATE
After hearing the court shall enter a decree determining the fair value of
the stock of those stockholders who have become entitled to the valuation of
and payment for their shares, and shall order the corporation to make payment
of such value, together with interest, if any, as hereinafter provided, to the
stockholders entitled thereto upon the transfer by them to the corporation of
the certificates representing such stock if certificated or, if
uncertificated, upon receipt of an instruction transferring such stock to the
corporation. For this purpose, the value of the shares shall be determined as
of the day preceding the date of the vote approving the proposed corporate
action and shall be exclusive of any element of value arising from the
expectation or accomplishment of the proposed corporate action.
(S) 93. REFERENCE TO SPECIAL MASTER
The court in its discretion may refer the bill or any question arising
thereunder to a special master to hear the parties, make findings and report
the same to the court, all in accordance with the usual practice in suits in
equity in the superior court.
(S) 94. NOTATION ON STOCK CERTIFICATES OF PENDENCY OF BILL
On motion the court may order stockholder parties to the bill to submit
their certificates of stock to the corporation for notation thereon of the
pendency of the bill and may order the corporation to note such pendency in
its records with respect to any uncertificated shares held by such stockholder
parties, and may on motion dismiss the bill as to any stockholder who fails to
comply with such order.
III-2
<PAGE>
(S) 95. COSTS; INTEREST
The costs of the bill, including the reasonable compensation and expenses of
any master appointed by the court, but exclusive of fees of counsel or of
experts retained by any party, shall be determined by the court and taxed upon
the parties to the bill, or any of them, in such manner as appears to be
equitable, except that all costs of giving notice to stockholders as provided
in this chapter shall be paid by the corporation. Interest shall be paid upon
any award from the date of the vote approving the proposed corporate action,
and the court may on application of any interested party determine the amount
of interest to be paid in the case of any stockholder.
(S) 96. DIVIDENDS AND VOTING RIGHTS AFTER DEMAND FOR PAYMENT
Any stockholder who has demanded payment for his stock as provided in this
chapter shall not thereafter be entitled to notice of any meeting of
stockholders or to vote such stock for any purpose and shall not be entitled
to the payment of dividends or other distribution on the stock (except
dividends or other distributions payable to stockholders of record at a date
which is prior to the date of the vote approving the proposed corporate
action) unless:
(1) A bill shall not be filed within the time provided in section ninety;
(2) A bill, if filed, shall be dismissed as to such stockholder; or
(3) Such stockholder shall with the written approval of the corporation,
or in the case of a consolidation or merger, the resulting or surviving
corporation, deliver to it a written withdrawal of his objections to and an
acceptance of such corporate action.
Notwithstanding the provision of clauses (1) to (3), inclusive, said
stockholder shall have only the rights of a stockholder who did not so demand
payment for his stock as provided in this chapter.
(S) 97. STATUS OF SHARES PAID FOR
The shares of the corporation paid for by the corporation pursuant to the
provisions of this chapter shall have the status of treasury stock, or in the
case of a consolidation or merger the shares or the securities of the
resulting or surviving corporation into which the shares of such objecting
stockholder would have been converted had he not objected to such
consolidation or merger shall have the status of treasury stock or securities.
(S) 98. EXCLUSIVE REMEDY; EXCEPTION
The enforcement by a stockholder of his right to receive payment for his
shares in the manner provided in this chapter shall be an exclusive remedy
except that this chapter shall not exclude the right of such stockholder to
bring or maintain an appropriate proceeding to obtain relief on the ground
that such corporate action will be or is illegal or fraudulent as to him.
III-3
<PAGE>
STATEMENT OF ADDITIONAL INFORMATION
MERRILL LYNCH MULTI-STATE LIMITED MATURITY MUNICIPAL SERIES TRUST
MERRILL LYNCH MUNICIPAL BOND FUND, INC.
P.O. BOX 9011
PRINCETON, NEW JERSEY 08543-9011
(609) 282-2800
This Statement of Additional Information is not a prospectus and should be
read in conjunction with the Proxy Statement and Prospectus of Merrill Lynch
Multi-State Limited Maturity Municipal Series Trust (the "Trust") and Merrill
Lynch Municipal Bond Fund, Inc. (the "Municipal Bond Fund") dated November 24,
1997 (the "Proxy Statement and Prospectus"), which has been filed with the
Securities and Exchange Commission and can be obtained, without charge, by
calling at 1-800-456-4587, ext. 123 or by writing to Municipal Bond Fund at
the above address. This Statement of Additional Information has been
incorporated by reference into the Proxy Statement and Prospectus.
Further information about Limited Maturity Portfolio is contained in and
incorporated by reference to the Municipal Bond Fund's Prospectus, dated
October 7, 1997 and Municipal Bond Fund's Statement of Additional Information,
dated October 7, 1997 which are incorporated by reference into this Statement
of Additional Information. The Municipal Bond Fund's Statement of Additional
Information accompanies this Statement of Additional Information.
Further information about each of the State Funds is contained in and
incorporated by reference to the Trust's Prospectus, dated November 27, 1996,
and the Trust's Statement of Additional Information, dated November 27, 1996,
which are incorporated by reference into this Statement of Additional
Information. The Trust's Statement of Additional Information accompanies this
Statement of Additional Information.
The Commission maintains a Web site (http://www.sec.gov) that contains
material incorporated by reference and other information regarding the Trust
and the Municipal Bond Fund.
THE DATE OF THIS STATEMENT OF ADDITIONAL INFORMATION IS NOVEMBER 24, 1997
<PAGE>
TABLE OF CONTENTS
<TABLE>
<S> <C>
General Information...................................................... 2
Financial Statements..................................................... 2
Pro Forma Combined Schedule of Investments for the Municipal Bond Fund
and the Trust as of July 31, 1997 (unaudited)........................... F-1
Pro Forma Combined Statement of Assets and Liabilities for the Municipal
Bond Fund and the Trust as of July 31, 1997 (unaudited)................. F-19
Pro Forma Combined Statement of Operations for the Municipal Bond Fund
and the Trust as of July 31, 1997 (unaudited)........................... F-23
</TABLE>
GENERAL INFORMATION
The stockholders of the Trust holding shares of Merrill Lynch Arizona
Limited Maturity Municipal Bond Fund, Merrill Lynch Massachusetts Limited
Maturity Municipal Bond Fund, Merrill Lynch Michigan Limited Maturity
Municipal Bond Fund, Merrill Lynch New Jersey Limited Maturity Municipal Bond
Fund, Merrill Lynch New York Limited Maturity Municipal Bond Fund and Merrill
Lynch Pennsylvania Limited Maturity Municipal Bond Fund (collectively referred
to herein as the "State Funds") are being asked to approve the acquisition of
substantially all of the assets of the State Funds, and the assumption of
substantially all of the liabilities of the State Funds by Limited Maturity
Portfolio (the "Limited Maturity Portfolio"), a series of the Municipal Bond
Fund in exchange solely for an equal aggregate value of shares of Limited
Maturity Portfolio and the subsequent termination of the State Funds as series
of the Trust (the "Reorganization"). The Municipal Bond Fund is an open-end
management investment company organized as a Maryland corporation. A Special
Meeting of Stockholders of the State Funds to consider the Reorganization will
be held at 800 Scudders Mill Road, Plainsboro, New Jersey, on Monday, January
5, 1998, at 9:00 a.m., New York time.
For detailed information about the Reorganization, stockholders of the State
Funds should refer to the Proxy Statement and Prospectus. For further
information about Limited Maturity Portfolio, State Fund stockholders should
refer to Municipal Bond Fund's Statement of Additional Information, dated
October 7, 1997, which accompanies this Statement of Additional Information
and is incorporated by reference herein. For further information about the
State Funds, stockholders should refer to the Statement of Additional
Information of the Trust, dated November 27, 1996, which accompanies this
Statement of Additional Information and is incorporated by reference herein.
FINANCIAL STATEMENTS
Pro forma financial statements reflecting consummation of the Reorganization
are included herein.
LIMITED MATURITY PORTFOLIO
Audited financial statements and accompanying notes for the year ended June
30, 1997, and the independent auditors' report thereon, dated August 15, 1997,
of Limited Maturity Portfolio are contained in the Municipal Bond Fund's
Statement of Additional Information, dated October 7, 1997, which accompanies
this Statement of Additional Information and is incorporated by reference
herein.
STATE FUNDS
Audited financial statements and accompanying notes for the year ended July
31, 1997, and the independent auditor's report thereon, dated September 12,
1997, of the Trust (including statements for each State Fund) are contained in
the Trust's Annual Report for the fiscal year ended July 31, 1997, which
accompanies this Statement of Additional Information and is incorporated by
reference herein.
2
<PAGE>
PRO FORMA COMBINED SCHEDULE OF INVESTMENTS FOR MERRILL LYNCH MUNICIPAL BOND
FUND, INC. AND MERRILL LYNCH MULTI-STATE LIMITED MATURITY MUNICIPAL SERIES
TRUST
JULY 31, 1997
(UNAUDITED)
SCHEDULE OF INVESTMENTS
<TABLE>
<CAPTION>
NEW NEW
LIMITED ARIZONA MASSACHUSETTS MICHIGAN JERSEY YORK
MATURITY LIMITED LIMITED LIMITED LIMITED LIMITED
PORTFOLIO MATURITY MATURITY MATURITY MATURITY MATURITY
TOTAL --------- --------- ------------- --------- --------- ---------
S&P MOODY'S FACE VALUE VALUE VALUE VALUE VALUE VALUE
STATE RATINGS RATINGS AMOUNT ISSUE (NOTE 1a) (NOTE 1a) (NOTE 1a) (NOTE 1a) (NOTE 1a) (NOTE 1a)
<C> <C> <C> <C> <S> <C> <C> <C> <C> <C> <C>
- -------------------------------------------------------------------------------------------------------------------------
ALABAMA- A1+ NR* $ 2,400 Birmingham,
0.5% Alabama, Medical
Clinic Board
Revenue Bonds
(U.A.H.S.F.),
VRDN, 5.50% due
12/01/2026 (b).. $ 2,400 -- -- -- -- --
- -------------------------------------------------------------------------------------------------------------------------
ARIZONA- A-1 P1 100 Apache County,
0.6% Arizona, IDA,
IDR (Tucson
Electric Power-
Springerville
Project), VRDN,
Series C, 3.75%
due 12/15/2018
(b)............. -- $ 100 -- -- -- --
A1+ VMIG1# 100 Arizona Health
Facilities
Authority
Revenue Bonds
(Arizona
Voluntary
Hospital
Federation),
VRDN, Series B,
3.70% due
10/01/2015
(b)(f).......... -- 100 -- -- -- --
AAA Aaa 200 Arizona State
Transportation
Board, Excise
Tax Revenue
Bonds (Maricopa
County Regional
Area Roads),
Series A, 5.75%
due 7/01/2004
(c)............. -- 217 -- -- -- --
NR* Aaa 100 Arizona Water
Infrastructure,
Finance
Authority
Revenue Bonds
(Water Quality
Financial
Assistance),
Series A, 4.50%
due 7/01/2003
(d)............. -- 101 -- -- -- --
AA- A1 200 Central Arizona
Water
Conservation
District,
Contract Revenue
Bonds (Central
Arizona
Project), Series
B, 6.50% due
5/01/2001 (a)... -- 220 -- -- -- --
NR* VMIG1# 120 Chandler,
Arizona, IDA,
IDR, Refunding
(SMP II, LP),
VRDN, 3.50% due
12/01/2015 (b).. -- 120 -- -- -- --
A1+ P1 100 Maricopa County,
Arizona,
Pollution
Control
Corporation,
PCR, Refunding
(Arizona Public
Service
Company), VRDN,
Series B, 3.55%
due 5/01/2029
(b)............. -- 100 -- -- -- --
AAA Aaa 480 Phoenix,
Arizona, Airport
Revenue
Refunding Bonds,
AMT, Series C,
5.70% due
7/01/2003 (d)... -- 512 -- -- -- --
<CAPTION>
PRO FORMA
PENNSYLVANIA FOR
LIMITED COMBINED
MATURITY FUND
TOTAL ------------ ---------
S&P MOODY'S FACE VALUE VALUE
STATE RATINGS RATINGS AMOUNT ISSUE (NOTE 1a) (NOTE 1a)
<C> <C> <C> <C> <S> <C> <C>
- ------------------------------------------------------------------------------------
ALABAMA- A1+ NR* $ 2,400 Birmingham,
0.5% Alabama, Medical
Clinic Board
Revenue Bonds
(U.A.H.S.F.),
VRDN, 5.50% due
12/01/2026 (b).. -- $ 2,400
- ------------------------------------------------------------------------------------
ARIZONA- A-1 P1 100 Apache County,
0.6% Arizona, IDA,
IDR (Tucson
Electric Power-
Springerville
Project), VRDN,
Series C, 3.75%
due 12/15/2018
(b)............. -- 100
A1+ VMIG1# 100 Arizona Health
Facilities
Authority
Revenue Bonds
(Arizona
Voluntary
Hospital
Federation),
VRDN, Series B,
3.70% due
10/01/2015
(b)(f).......... -- 100
AAA Aaa 200 Arizona State
Transportation
Board, Excise
Tax Revenue
Bonds (Maricopa
County Regional
Area Roads),
Series A, 5.75%
due 7/01/2004
(c)............. -- 217
NR* Aaa 100 Arizona Water
Infrastructure,
Finance
Authority
Revenue Bonds
(Water Quality
Financial
Assistance),
Series A, 4.50%
due 7/01/2003
(d)............. -- 101
AA- A1 200 Central Arizona
Water
Conservation
District,
Contract Revenue
Bonds (Central
Arizona
Project), Series
B, 6.50% due
5/01/2001 (a)... -- 220
NR* VMIG1# 120 Chandler,
Arizona, IDA,
IDR, Refunding
(SMP II, LP),
VRDN, 3.50% due
12/01/2015 (b).. -- 120
A1+ P1 100 Maricopa County,
Arizona,
Pollution
Control
Corporation,
PCR, Refunding
(Arizona Public
Service
Company), VRDN,
Series B, 3.55%
due 5/01/2029
(b)............. -- 100
AAA Aaa 480 Phoenix,
Arizona, Airport
Revenue
Refunding Bonds,
AMT, Series C,
5.70% due
7/01/2003 (d)... -- 512
</TABLE>
F-1
<PAGE>
PRO FORMA COMBINED SCHEDULE OF INVESTMENTS FOR MERRILL LYNCH MUNICIPAL BOND
FUND, INC. AND
MERRILL LYNCH MULTI-STATE LIMITED MATURITY MUNICIPAL SERIES TRUST--(CONTINUED)
JULY 31, 1997
(UNAUDITED)
<TABLE>
<CAPTION>
NEW NEW
LIMITED ARIZONA MASSACHUSETTS MICHIGAN JERSEY YORK
MATURITY LIMITED LIMITED LIMITED LIMITED LIMITED
PORTFOLIO MATURITY MATURITY MATURITY MATURITY MATURITY
TOTAL --------- --------- ------------- --------- --------- ---------
S&P MOODY'S FACE VALUE VALUE VALUE VALUE VALUE VALUE
STATE RATINGS RATINGS AMOUNT ISSUE (NOTE 1a) (NOTE 1a) (NOTE 1a) (NOTE 1a) (NOTE 1a) (NOTE 1a)
<C> <C> <C> <C> <S> <C> <C> <C> <C> <C> <C>
- -------------------------------------------------------------------------------------------------------------------------
ARIZONA AA- Aa $ 200 Phoenix,
(CONCLUDED) Arizona, Civic
Improvement
Corporation,
Water System
Revenue Bonds,
Junior Lien, 5%
due 7/01/2006... -- $ 208 -- -- -- --
AA+ Aa1 250 Phoenix,
Arizona,
Refunding, UT,
5.70% due
7/01/1999....... -- 258 -- -- -- --
A+ Aa 200 Pima County,
Arizona,
Refunding,
Series A, 5.60%
due 7/01/1999... -- 206 -- -- -- --
AAA Aaa 200 Pima County,
Arizona, Sewer
Revenue Bonds,
6.20% due
7/01/2002 (a)
(c)............. -- 220 -- -- -- --
A1+ P1 100 Pinal County,
Arizona, IDA,
PCR, (Magma
Copper/Newmont
Mining
Corporation),
VRDN, 3.70% due
12/01/2009 (b).. -- 100 -- -- -- --
A1+ NR* 100 Tempe, Arizona,
IDA, M/F Revenue
Bonds (Elliots
Crossing), VRDN,
3.754% due
10/01/2008 (b).. -- 100 -- -- -- --
A+ A1 150 Tucson, Arizona,
Street and
Highway User
Revenue
Refunding Bonds,
5.90%
7/01/2003....... -- 163 -- -- -- --
AAA Aaa 200 Yuma County,
Arizona, Jail
District Revenue
Bonds, 4.30% due
7/01/1999 (c)... -- 201 -- -- -- --
- -------------------------------------------------------------------------------------------------------------------------
ARKANSAS- NR* Aa 460 Arkansas State
0.1% Student Loan
Authority
Revenue Bonds,
AMT, Senior
Series A-1,
5.50% due
12/01/1998...... $ 469 -- -- -- -- --
- -------------------------------------------------------------------------------------------------------------------------
CALIFORNIA- SP1+ MIG1# 5,000 Los Angeles
5.5% County,
California,
Local
Educational
Agencies, COP,
TRAN, Series B,
4.50% due
9/30/1998 (e)... 5,032 -- -- -- -- --
SP1+ MIG1# 7,500 Los Angeles,
California,
Unified School
District, TRAN,
Series B, 4.50%
due 10/01/1998.. 7,552 -- -- -- -- --
SP1+ MIG1# 7,500 Sacramento,
California, GO,
UT, TRAN, 4.50%
due 9/30/1998... 7,554 -- -- -- -- --
SP1+ NR* 5,000 Santa Barbara
County,
California,
TRAN, Series A,
4.50% due
10/01/1998...... 5,034 -- -- -- -- --
- -------------------------------------------------------------------------------------------------------------------------
<CAPTION>
PRO FORMA
PENNSYLVANIA FOR
LIMITED COMBINED
MATURITY FUND
TOTAL ------------ ---------
S&P MOODY'S FACE VALUE VALUE
STATE RATINGS RATINGS AMOUNT ISSUE (NOTE 1a) (NOTE 1a)
<C> <C> <C> <C> <S> <C> <C>
- ----------------------------------------------------------------------------------------------------
ARIZONA AA- Aa $ 200 Phoenix,
(CONCLUDED) Arizona, Civic
Improvement
Corporation,
Water System
Revenue Bonds,
Junior Lien, 5%
due 7/01/2006... -- $ 208
AA+ Aa1 250 Phoenix,
Arizona,
Refunding, UT,
5.70% due
7/01/1999....... -- 258
A+ Aa 200 Pima County,
Arizona,
Refunding,
Series A, 5.60%
due 7/01/1999... -- 206
AAA Aaa 200 Pima County,
Arizona, Sewer
Revenue Bonds,
6.20% due
7/01/2002 (a)
(c)............. -- 220
A1+ P1 100 Pinal County,
Arizona, IDA,
PCR, (Magma
Copper/Newmont
Mining
Corporation),
VRDN, 3.70% due
12/01/2009 (b).. -- 100
A1+ NR* 100 Tempe, Arizona,
IDA, M/F Revenue
Bonds (Elliots
Crossing), VRDN,
3.754% due
10/01/2008 (b).. -- 100
A+ A1 150 Tucson, Arizona,
Street and
Highway User
Revenue
Refunding Bonds,
5.90%
7/01/2003....... -- 163
AAA Aaa 200 Yuma County,
Arizona, Jail
District Revenue
Bonds, 4.30% due
7/01/1999 (c)... -- 201
- ----------------------------------------------------------------------------------------------------
ARKANSAS- NR* Aa 460 Arkansas State
0.1% Student Loan
Authority
Revenue Bonds,
AMT, Senior
Series A-1,
5.50% due
12/01/1998...... -- 469
- ----------------------------------------------------------------------------------------------------
CALIFORNIA- SP1+ MIG1# 5,000 Los Angeles
5.5% County,
California,
Local
Educational
Agencies, COP,
TRAN, Series B,
4.50% due
9/30/1998 (e)... -- 5,032
SP1+ MIG1# 7,500 Los Angeles,
California,
Unified School
District, TRAN,
Series B, 4.50%
due 10/01/1998.. -- 7,552
SP1+ MIG1# 7,500 Sacramento,
California, GO,
UT, TRAN, 4.50%
due 9/30/1998... -- 7,554
SP1+ NR* 5,000 Santa Barbara
County,
California,
TRAN, Series A,
4.50% due
10/01/1998...... -- 5,034
- ---------------------------------------------------------------------------------------------------
</TABLE>
F-2
<PAGE>
PRO FORMA COMBINED SCHEDULE OF INVESTMENTS FOR MERRILL LYNCH MUNICIPAL BOND
FUND, INC. AND
MERRILL LYNCH MULTI-STATE LIMITED MATURITY MUNICIPAL SERIES TRUST--(CONTINUED)
JULY 31, 1997
(UNAUDITED)
<TABLE>
<CAPTION>
NEW NEW
LIMITED ARIZONA MASSACHUSETTS MICHIGAN JERSEY YORK
MATURITY LIMITED LIMITED LIMITED LIMITED LIMITED
PORTFOLIO MATURITY MATURITY MATURITY MATURITY MATURITY
TOTAL --------- --------- ------------- --------- --------- ---------
S&P MOODY'S FACE VALUE VALUE VALUE VALUE VALUE VALUE
STATE RATINGS RATINGS AMOUNT ISSUE (NOTE 1A) (NOTE 1A) (NOTE 1A) (NOTE 1A) (NOTE 1A) (NOTE 1A)
<C> <C> <C> <C> <S> <C> <C> <C> <C> <C> <C>
- -------------------------------------------------------------------------------------------------------------------------
CONNECTICUT- AAA Aaa $ 2,160 Bridgeport,
2.5% Connecticut,
Refunding, GO,
UT, Series A,
4.40% due
9/01/1998 (c)... $ 2,172 -- -- -- -- --
AAA Aaa 8,900 Connecticut
State Special
Assessment
Revenue
Refunding Bonds
(Unemployment
Compensation
Advance Fund),
Series A, 5.50%
due
5/15/2001 (c)... 9,329 -- -- -- -- --
- -------------------------------------------------------------------------------------------------------------------------
DISTRICT OF A1+ VMIG1# 10,000 District of
COLUMBIA-2.2% Columbia,
General Fund
Recovery Bonds,
VRDN, Series B-
2, 5.25% due
6/01/2003 (b)... 10,000 -- -- -- -- --
- -------------------------------------------------------------------------------------------------------------------------
FLORIDA-1.2% AAA Aaa 4,000 Florida School
Boards
Association
Inc., Lease
Revenue Bonds
(Orange County
School Board
Project) 6.80%
due 7/01/1998
(c)............. 4,109 -- -- -- -- --
A1+ VMIG1# 1,500 Hillsborough
County, Florida,
IDA, PCR,
Refunding (Tampa
Electric Company
Project), VRDN,
4% due 5/15/2018
(b)............. 1,500 -- -- -- -- --
- -------------------------------------------------------------------------------------------------------------------------
GEORGIA-2.7% Burke County,
Georgia,
Development
Authority, PCR
(Plant Vogtle
Project):
A-1 VMIG1# 1,600 (Georgia Power
Company), VRDN,
2nd Series,
4.30% due
8/12/1997 (b).. 1,600 -- -- -- -- --
A NR* 6,410 (Oglethorpe
Power Company),
Series B, 3.95%
due 1/01/1999... 6,409 -- -- -- -- --
AAA Aaa 4,000 Georgia
Municipal
Electric
Authority,
General Power
Revenue
Refunding Bonds,
Series D, 6% due
1/01/2000 (c)... 4,178 -- -- -- -- --
- -------------------------------------------------------------------------------------------------------------------------
HAWAII-1.9% AAA Aaa 3,200 Hawaii State,
GO, Refunding,
Series CO, 5%
due 3/01/2001
(f)............. 3,395 -- -- -- -- --
A+ Aa3 5,250 Hawaii State,
GO, UT, Series
CH, 4.75% due
11/01/1999...... 5,333 -- -- -- -- --
- -------------------------------------------------------------------------------------------------------------------------
ILLINOIS-5.8% AA- NR* 10,000 Chicago,
Illinois, Board
of Education,
COP (School
Reform Equipment
Acquisition),
4.60% due
12/01/1999...... 10,085 -- -- -- -- --
<CAPTION>
PRO FORMA
PENNSYLVANIA FOR
LIMITED COMBINED
MATURITY FUND
TOTAL ------------ ---------
S&P MOODY'S FACE VALUE VALUE
STATE RATINGS RATINGS AMOUNT ISSUE (NOTE 1A) (NOTE 1A)
<C> <C> <C> <C> <S> <C> <C>
- -----------------------------------------------------------------------------------------------------
CONNECTICUT- AAA Aaa $ 2,160 Bridgeport,
2.5% Connecticut,
Refunding, GO,
UT, Series A,
4.40% due
9/01/1998 (c)... -- $ 2,172
AAA Aaa 8,900 Connecticut
State Special
Assessment
Revenue
Refunding Bonds
(Unemployment
Compensation
Advance Fund),
Series A, 5.50%
due
5/15/2001 (c)... -- 9,329
- -----------------------------------------------------------------------------------------------------
DISTRICT OF A1+ VMIG1# 10,000 District of
COLUMBIA-2.2% Columbia,
General Fund
Recovery Bonds,
VRDN, Series B-
2, 5.25% due
6/01/2003 (b)... -- 10,000
- -----------------------------------------------------------------------------------------------------
FLORIDA-1.2% AAA Aaa 4,000 Florida School
Boards
Association
Inc., Lease
Revenue Bonds
(Orange County
School Board
Project) 6.80%
due 7/01/1998
(c)............. -- 4,109
A1+ VMIG1# 1,500 Hillsborough
County, Florida,
IDA, PCR,
Refunding (Tampa
Electric Company
Project), VRDN,
4% due 5/15/2018
(b)............. -- 1,500
- -----------------------------------------------------------------------------------------------------
GEORGIA-2.7% Burke County,
Georgia,
Development
Authority, PCR
(Plant Vogtle
Project):
A-1 VMIG1# 1,600 (Georgia Power
Company), VRDN,
2nd Series,
4.30% due
8/12/1997 (b).. -- 1,600
A NR* 6,410 (Oglethorpe
Power Company),
Series B, 3.95%
due 1/01/1999... -- 6,409
AAA Aaa 4,000 Georgia
Municipal
Electric
Authority,
General Power
Revenue
Refunding Bonds,
Series D, 6% due
1/01/2000 (c)... -- 4,178
- ----------------------------------------------------------------------------------------------------
HAWAII-1.9% AAA Aaa 3,200 Hawaii State,
GO, Refunding,
Series CO, 5%
due 3/01/2001
(f)............. -- 3,395
A+ Aa3 5,250 Hawaii State,
GO, UT, Series
CH, 4.75% due
11/01/1999...... -- 5,333
- ----------------------------------------------------------------------------------------------------
ILLINOIS-5.8% AA- NR* 10,000 Chicago,
Illinois, Board
of Education,
COP (School
Reform Equipment
Acquisition),
4.60% due
12/01/1999...... -- 10,085
</TABLE>
F-3
<PAGE>
PRO FORMA COMBINED SCHEDULE OF INVESTMENTS FOR MERRILL LYNCH MUNICIPAL BOND
FUND, INC. AND
MERRILL LYNCH MULTI-STATE LIMITED MATURITY MUNICIPAL SERIES TRUST--(CONTINUED)
JULY 31, 1997
(UNAUDITED)
<TABLE>
<CAPTION>
NEW NEW
LIMITED ARIZONA MASSACHUSETTS MICHIGAN JERSEY YORK
MATURITY LIMITED LIMITED LIMITED LIMITED LIMITED
PORTFOLIO MATURITY MATURITY MATURITY MATURITY MATURITY
TOTAL --------- --------- ------------- --------- --------- ---------
S&P MOODY'S FACE VALUE VALUE VALUE VALUE VALUE VALUE
STATE RATINGS RATINGS AMOUNT ISSUE (NOTE 1A) (NOTE 1A) (NOTE 1A) (NOTE 1A) (NOTE 1A) (NOTE 1A)
<C> <C> <C> <C> <S> <C> <C> <C> <C> <C> <C>
- --------------------------------------------------------------------------------------------------------------------------
ILLINOIS AA- Baa1 $ 5,000 Chicago,
(CONCLUDED) Illinois, School
Financing
Authority, 7.25%
due 6/01/1998... $ 5,106 -- -- -- -- --
AAA Aaa 3,000 Cook County,
Illinois, High
School District
No. 205, Revenue
Refunding Bonds
(Thorton
Township), UT,
5.60% due
6/01/1998
(f)(g).......... 3,046 -- -- -- -- --
Illinois State,
Refunding, UT:
AA Aa3 4,600 3.90% due
12/01/1998...... 4,597 -- -- -- -- --
AAA Aaa 3,500 5.125% due
12/01/1999 (f).. 3,588 -- -- -- -- --
- --------------------------------------------------------------------------------------------------------------------------
KENTUCKY- Kentucky State
2.0% Property and
Buildings
Commission,
Revenue
Refunding Bonds:
A+ A 5,000 (Project No.
55), 4.10% due
9/01/1998....... 5,011 -- -- -- -- --
A+ A 4,000 (Project No.
56), 5% due
11/01/1998...... 4,051 -- -- -- -- --
- --------------------------------------------------------------------------------------------------------------------------
LOUISIANA- A1+ VMIG1# 5,000 Louisiana State
5.4% Recovery
District Sales
Tax Revenue
Bonds, 4.25%
due 7/01/1998
(d)(g).......... 5,024 -- -- -- -- --
AAA Aaa 19,230 Louisiana State
Refunding,
Series A, 5.50%
due 8/01/1998
(f)............. 19,542 -- -- -- -- --
- --------------------------------------------------------------------------------------------------------------------------
MASSACHUSETTS- NR* A1 285 Boston,
3.3% Massachusetts,
Economic
Development and
Industrial
Corporation,
Public Parking
Facility, Series
1990, 5% due
7/01/2015....... -- -- $ 290 -- -- --
AAA Aaa 250 Boston
Massachusetts,
GO, UT, Series A
5% due
11/01/2004 (f).. -- -- 259 -- -- --
AAA Aaa 300 Chelsea,
Massachusetts,
School Project
Loan Act of
1948, UT, 6% due
6/15/2002 (c)... -- -- 323 -- -- --
AAA Aaa 215 Fall River,
Massachusetts,
GO, 6.30% due
6/01/1988 (d)... -- -- 219 -- -- --
NR* Aa3 225 Framingham,
Massachusetts,
GO, 4.50% due
7/15/2005....... -- -- 227 -- -- --
AAA Aaa 200 Lynn,
Massachusetts,
Water and Sewer
Commission,
Refunding, 4.95%
due 12/01/2002
(f)............. -- -- 206 -- -- --
<CAPTION>
PRO FORMA
PENNSYLVANIA FOR
LIMITED COMBINED
MATURITY FUND
TOTAL ------------ ---------
S&P MOODY'S FACE VALUE VALUE
STATE RATINGS RATINGS AMOUNT ISSUE (NOTE 1A) (NOTE 1A)
<C> <C> <C> <C> <S> <C> <C>
- ------------------------------------------------------------------------------------------------------
ILLINOIS AA- Baa1 $ 5,000 Chicago,
(CONCLUDED) Illinois, School
Financing
Authority, 7.25%
due 6/01/1998... -- $ 5,106
AAA Aaa 3,000 Cook County,
Illinois, High
School District
No. 205, Revenue
Refunding Bonds
(Thorton
Township), UT,
5.60% due
6/01/1998
(f)(g).......... -- 3,046
Illinois State,
Refunding, UT:
AA Aa3 4,600 3.90% due
12/01/1998...... -- 4,597
AAA Aaa 3,500 5.125% due
12/01/1999 (f).. -- 3,588
- ------------------------------------------------------------------------------------------------------
KENTUCKY- Kentucky State
2.0% Property and
Buildings
Commission,
Revenue
Refunding Bonds:
A+ A 5,000 (Project No.
55), 4.10% due
9/01/1998....... -- 5,011
A+ A 4,000 (Project No.
56), 5% due
11/01/1998...... -- 4,051
- ------------------------------------------------------------------------------------------------------
LOUISIANA- A1+ VMIG1# 5,000 Louisiana State
5.4% Recovery
District Sales
Tax Revenue
Bonds, 4.25%
due 7/01/1998
(d)(g).......... -- 5,024
AAA Aaa 19,230 Louisiana State
Refunding,
Series A, 5.50%
due 8/01/1998
(f)............. -- 19,542
- ------------------------------------------------------------------------------------------------------
MASSACHUSETTS- NR* A1 285 Boston,
3.3% Massachusetts,
Economic
Development and
Industrial
Corporation,
Public Parking
Facility, Series
1990, 5% due
7/01/2015....... -- 290
AAA Aaa 250 Boston
Massachusetts,
GO, UT, Series A
5% due
11/01/2004 (f).. -- 259
AAA Aaa 300 Chelsea,
Massachusetts,
School Project
Loan Act of
1948, UT, 6% due
6/15/2002 (c)... -- 323
AAA Aaa 215 Fall River,
Massachusetts,
GO, 6.30% due
6/01/1988 (d)... -- 219
NR* Aa3 225 Framingham,
Massachusetts,
GO, 4.50% due
7/15/2005....... -- 227
AAA Aaa 200 Lynn,
Massachusetts,
Water and Sewer
Commission,
Refunding, 4.95%
due 12/01/2002
(f)............. -- 206
</TABLE>
F-4
<PAGE>
PRO FORMA COMBINED SCHEDULE OF INVESTMENTS FOR MERRILL LYNCH MUNICIPAL BOND
FUND, INC. AND
MERRILL LYNCH MULTI-STATE LIMITED MATURITY MUNICIPAL SERIES TRUST--(CONTINUED)
JULY 31, 1997
(UNAUDITED)
<TABLE>
<CAPTION>
NEW NEW
LIMITED ARIZONA MASSACHUSETTS MICHIGAN JERSEY YORK
MATURITY LIMITED LIMITED LIMITED LIMITED LIMITED
PORTFOLIO MATURITY MATURITY MATURITY MATURITY MATURITY
TOTAL --------- --------- ------------- --------- --------- ---------
S&P MOODY'S FACE VALUE VALUE VALUE VALUE VALUE VALUE
STATE RATINGS RATINGS AMOUNT ISSUE (NOTE 1A) (NOTE 1A) (NOTE 1A) (NOTE 1A) (NOTE 1A) (NOTE 1A)
<C> <C> <C> <C> <S> <C> <C> <C> <C> <C> <C>
- -------------------------------------------------------------------------------------------------------------------------
MASSACHUSETTS A+ A1 $ 100 Massachusetts
(CONTINUED) Bay
Transportation
Authority,
Massachusetts
General
Transportation
System, Series
A, 4.90% due
3/01/2004....... -- -- $ 102 -- -- --
AAA Aaa 250 Massachusetts
Education Loan
Authority,
Education Loan
Revenue
Refunding Bonds,
AMT, Issue E,
Series B, 5.50%
due 7/01/2001
(c)............. -- -- 261 -- -- --
A+ A1 750 Massachusetts
State GO,
Refunding Series
B, 6.25% due
8/01/2001....... -- -- 806 -- -- --
Massachusetts
State Health and
Educational
Facilities
Authority
Revenue Bonds:
A1+ VMIG1# 200 (Capital Asset
Program), VRDN,
Series B, 3.45%
due 7/01/2005
(b)(d).......... -- -- 200 -- -- --
A1+ VMIG1# 100 (Capital Asset
Program), VRDN,
Series C, 3.50%
due 7/01/2005
(b)(d)......... -- -- 100 -- -- --
AAA Aaa 200 Refunding
(Baystate
Medical Center),
Series D, 4.60%
due 7/01/2002
(f)............. -- -- 202 -- -- --
NR* MIG1# 100 Massachusetts
State Industrial
Finance Agency,
Health Care
Facility Revenue
Bonds (Beverly
Enterprises-
DEDHM), VRDN,
3.65% due
4/01/2009 (b)... -- -- 100 -- -- --
AAA Aaa 200 Massachusetts
State Industrial
Finance Agency,
Revenue
Refunding Bonds
(Worcester
Polytechnic),
Series II, 4.50%
due 9/01/2002
(d)............. -- -- 202 -- -- --
AA A1 300 Massachusetts
State Special
Obligation
Revenue Bonds
(Highway
Improvement
Loan), Series A,
5.90% due
6/01/2001....... -- -- 318 -- -- --
AAA Aaa 250 Massachusetts
State Water
Resource
Authority,
Series A, 6.75%
due
7/15/2002 (a)... -- -- 282 -- -- --
NR* Aaa 150 Nantucket,
Massachusetts,
GO, 5.75% due
7/15/2005 (d)... -- -- 163 -- -- --
<CAPTION>
PRO FORMA
PENNSYLVANIA FOR
LIMITED COMBINED
MATURITY FUND
TOTAL ------------ ---------
S&P MOODY'S FACE VALUE VALUE
STATE RATINGS RATINGS AMOUNT ISSUE (NOTE 1A) (NOTE 1A)
<C> <C> <C> <C> <S> <C> <C>
- ---------------------------------------------------------------------------------------------------
MASSACHUSETTS A+ A1 $ 100 Massachusetts
(CONTINUED) Bay
Transportation
Authority,
Massachusetts
General
Transportation
System, Series
A, 4.90% due
3/01/2004....... -- $ 102
AAA Aaa 250 Massachusetts
Education Loan
Authority,
Education Loan
Revenue
Refunding Bonds,
AMT, Issue E,
Series B, 5.50%
due 7/01/2001
(c)............. -- 261
A+ A1 750 Massachusetts
State GO,
Refunding Series
B, 6.25% due
8/01/2001....... -- 806
Massachusetts
State Health and
Educational
Facilities
Authority
Revenue Bonds:
A1+ VMIG1# 200 (Capital Asset
Program), VRDN,
Series B, 3.45%
due 7/01/2005
(b)(d).......... -- 200
A1+ VMIG1# 100 (Capital Asset
Program), VRDN,
Series C, 3.50%
due 7/01/2005
(b)(d)......... -- 100
AAA Aaa 200 Refunding
(Baystate
Medical Center),
Series D, 4.60%
due 7/01/2002
(f)............. -- 202
NR* MIG1# 100 Massachusetts
State Industrial
Finance Agency,
Health Care
Facility Revenue
Bonds (Beverly
Enterprises-
DEDHM), VRDN,
3.65% due
4/01/2009 (b)... -- 100
AAA Aaa 200 Massachusetts
State Industrial
Finance Agency,
Revenue
Refunding Bonds
(Worcester
Polytechnic),
Series II, 4.50%
due 9/01/2002
(d)............. -- 202
AA A1 300 Massachusetts
State Special
Obligation
Revenue Bonds
(Highway
Improvement
Loan), Series A,
5.90% due
6/01/2001....... -- 318
AAA Aaa 250 Massachusetts
State Water
Resource
Authority,
Series A, 6.75%
due
7/15/2002 (a)... -- 282
NR* Aaa 150 Nantucket,
Massachusetts,
GO, 5.75% due
7/15/2005 (d)... -- 163
</TABLE>
F-5
<PAGE>
PRO FORMA COMBINED SCHEDULE OF INVESTMENTS FOR MERRILL LYNCH MUNICIPAL BOND
FUND, INC. AND
MERRILL LYNCH MULTI-STATE LIMITED MATURITY MUNICIPAL SERIES TRUST--(CONTINUED)
JULY 31, 1997
(UNAUDITED)
<TABLE>
<CAPTION>
NEW NEW
LIMITED ARIZONA MASSACHUSETTS MICHIGAN JERSEY YORK
MATURITY LIMITED LIMITED LIMITED LIMITED LIMITED
PORTFOLIO MATURITY MATURITY MATURITY MATURITY MATURITY
TOTAL --------- --------- ------------- --------- --------- ---------
S&P MOODY'S FACE VALUE VALUE VALUE VALUE VALUE VALUE
STATE RATINGS RATINGS AMOUNT ISSUE (NOTE 1A) (NOTE 1A) (NOTE 1A) (NOTE 1A) (NOTE 1A) (NOTE 1A)
<C> <C> <C> <C> <S> <C> <C> <C> <C> <C> <C>
- ---------------------------------------------------------------------------------------------------------------------------
MASSACHUSETTS NR* A1 $ 500 New England
(CONCLUDED) Education Loan
Marketing
Corporation,
Massachusetts
Student Loan
Revenue Bonds,
AMT, Sub-Issue
F, 6.60% due
9/01/2002....... -- -- $ 536 -- -- --
A- A1 10,160 New England
Education Loan
Marketing
Corporation
Refunding Bonds
Massachusetts
Student Loan),
Series D, 4.75%
due 7/01/1998... $ 10,226 -- -- -- -- --
AA Aa1 100 Peabody,
Massachusetts,
GO, Series A,
4.50% due
8/01/2000....... -- -- 101 -- -- --
- ---------------------------------------------------------------------------------------------------------------------------
MICHIGAN- AAA Aaa 200 Anchor Bay,
4.1% Michigan, School
District, UT,
6.30% due
5/01/2004 (d)... -- -- -- $ 222 -- --
AA Aa2 110 Ann Arbor
Michigan, School
District, Public
Schools,
Refunding, UT,
4.75%
due 5/01/2000... -- -- -- 112 -- --
AAA Aaa 105 Chelsea,
Michigan, School
District, UT,
6.75% due
5/01/2002 (f)... -- -- -- 116 -- --
AAA Aaa 150 Chippewa Valley,
Michigan,
Schools,
Refunding, UT,
4.90% due
5/01/2004 (f)... -- -- -- 154 -- --
AAA Aaa 250 Dearborn,
Michigan,
Economic
Development
Corporation,
Hospital Revenue
Bonds (Oakwood
Obligated
Group), Series
A, 6.95% due
8/15/2001 (a)(d).. -- -- -- 280 -- --
Detroit,
Michigan,
Distributable
State Aid (c):
AAA Aaa 8,000 7.20% due
5/01/2009 (a)... 8,583 -- -- -- -- --
AAA Aaa 200 Refunding, UT,
5.70% due
5/01/2001....... -- -- -- 210 -- --
AAA Aaa 250 Detroit,
Michigan, Water
Supply System,
Revenue
Refunding Bonds,
6.20%
due 7/01/2004
(f)............. -- -- -- 274 -- --
AAA Aaa 200 Eastern Michigan
University,
General Revenue
Refunding Bonds,
5.40% due
6/01/1998 (c)... -- -- -- 203 -- --
<CAPTION>
PRO FORMA
PENNSYLVANIA FOR
LIMITED COMBINED
MATURITY FUND
TOTAL ------------ ---------
S&P MOODY'S FACE VALUE VALUE
STATE RATINGS RATINGS AMOUNT ISSUE (NOTE 1A) (NOTE 1A)
<C> <C> <C> <C> <S> <C> <C>
- -------------------------------------------------------------------------------------------------------
MASSACHUSETTS NR* A1 $ 500 New England
(CONCLUDED) Education Loan
Marketing
Corporation,
Massachusetts
Student Loan
Revenue Bonds,
AMT, Sub-Issue
F, 6.60% due
9/01/2002....... -- $ 536
A- A1 10,160 New England
Education Loan
Marketing
Corporation
Refunding Bonds
Massachusetts
Student Loan),
Series D, 4.75%
due 7/01/1998... -- 10,226
AA Aa1 100 Peabody,
Massachusetts,
GO, Series A,
4.50% due
8/01/2000....... -- 101
- -------------------------------------------------------------------------------------------------------
MICHIGAN- AAA Aaa 200 Anchor Bay,
4.1% Michigan, School
District, UT,
6.30% due
5/01/2004 (d)... -- 222
AA Aa2 110 Ann Arbor
Michigan, School
District, Public
Schools,
Refunding, UT,
4.75%
due 5/01/2000... -- 112
AAA Aaa 105 Chelsea,
Michigan, School
District, UT,
6.75% due
5/01/2002 (f)... -- 116
AAA Aaa 150 Chippewa Valley,
Michigan,
Schools,
Refunding, UT,
4.90% due
5/01/2004 (f)... -- 154
AAA Aaa 250 Dearborn,
Michigan,
Economic
Development
Corporation,
Hospital Revenue
Bonds (Oakwood
Obligated
Group), Series
A, 6.95% due
8/15/2001 (a)(d).. -- 280
Detroit,
Michigan,
Distributable
State Aid (c):
AAA Aaa 8,000 7.20% due
5/01/2009 (a)... -- 8,583
AAA Aaa 200 Refunding, UT,
5.70% due
5/01/2001....... -- 210
AAA Aaa 250 Detroit,
Michigan, Water
Supply System,
Revenue
Refunding Bonds,
6.20%
due 7/01/2004
(f)............. -- 274
AAA Aaa 200 Eastern Michigan
University,
General Revenue
Refunding Bonds,
5.40% due
6/01/1998 (c)... -- 203
</TABLE>
F-6
<PAGE>
PRO FORMA COMBINED SCHEDULE OF INVESTMENTS FOR MERRILL LYNCH MUNICIPAL BOND
FUND, INC. AND
MERRILL LYNCH MULTI-STATE LIMITED MATURITY MUNICIPAL SERIES TRUST--(CONTINUED)
JULY 31, 1997
(UNAUDITED)
<TABLE>
<CAPTION>
NEW NEW
LIMITED ARIZONA MASSACHUSETTS MICHIGAN JERSEY YORK
MATURITY LIMITED LIMITED LIMITED LIMITED LIMITED
PORTFOLIO MATURITY MATURITY MATURITY MATURITY MATURITY
TOTAL --------- --------- ------------- --------- --------- ---------
S&P MOODY'S FACE VALUE VALUE VALUE VALUE VALUE VALUE
STATE RATINGS RATINGS AMOUNT ISSUE (NOTE 1A) (NOTE 1A) (NOTE 1A) (NOTE 1A) (NOTE 1A) (NOTE 1A)
<C> <C> <C> <C> <S> <C> <C> <C> <C> <C> <C>
- ------------------------------------------------------------------------------------------------------------------------
MICHIGAN AAA Aaa $ 200 Gull Lake,
(CONCLUDED) Michigan,
Community School
District, GO,
UT, 6.80% due
5/01/2001
(a)(f).......... -- -- -- $ 222 -- --
Michigan
Municipal Bond
Authority
Revenue Bonds:
AAA Aaa 200 (Local
Government Loan
Program),
Series C, 5.50%
due 5/01/2003
(d)............. -- -- -- 212 -- --
AA Aa2 450 Refunding
(Local
Government-
Qualified
School), Series
A, 6% due
5/01/2001....... -- -- -- 478 -- --
AA+ Aa1 200 (State
Revolving Fund),
7% due
10/01/2004
(g)............. -- -- -- 231 -- --
Michigan State
Building
Authority,
Revenue
Refunding Bonds,
Series I:
AA- A1 6,000 5.80% due
10/01/1998...... $ 6,128 -- -- -- -- --
AA- A1 200 6.40% due
10/01/2004...... -- -- -- 218 -- --
AA- A1 200 Michigan State
Comprehensive
Transportation,
Revenue
Refunding Bonds,
Series B, 5.625%
due 5/15/2003... -- -- -- 213 -- --
NR* Aaa 100 Michigan State
Hospital Finance
Authority
Revenue Bonds
(McLaren
Obligated
Group), Series
A, 7.50% due
9/15/2001 (a)... -- -- -- 114 -- --
AA Aa2 200 Michigan State
Recreation
Program, GO, 6%
due 11/01/2004.. -- -- -- 219 -- --
AAA Aaa 160 Michigan State,
Underground
Storage Tank
Financial
Assurance
Authority,
Revenue
Refunding Bonds,
Series I, 6% due
5/01/2004 (c)... -- -- -- 175 -- --
AAA Aaa 235 Royal Oak,
Michigan,
Refunding, UT,
4% due
10/01/1997 (c).. -- -- -- 235 -- --
- ------------------------------------------------------------------------------------------------------------------------
MINNESOTA- AAA Aaa 2,385 Metropolitan
1.2% Council,
Minnesota (St.
Paul
Metropolitan
Area Transit),
UT, Series C,
4.75% due
2/01/2000....... 2,427 -- -- -- -- --
AAA Aaa 2,965 Minnesota State,
HFA (Rental
Housing),
Refunding Bonds,
Series D, 4.50%
due 8/01/1999
(d)............. 2,991 -- -- -- -- --
- ------------------------------------------------------------------------------------------------------------------------
<CAPTION>
PRO FORMA
PENNSYLVANIA FOR
LIMITED COMBINED
MATURITY FUND
TOTAL ------------ ---------
S&P MOODY'S FACE VALUE VALUE
STATE RATINGS RATINGS AMOUNT ISSUE (NOTE 1A) (NOTE 1A)
<C> <C> <C> <C> <S> <C> <C>
- ---------------------------------------------------------------------------------------------------
MICHIGAN AAA Aaa $ 200 Gull Lake,
(CONCLUDED) Michigan,
Community School
District, GO,
UT, 6.80% due
5/01/2001
(a)(f).......... -- $ 222
Michigan
Municipal Bond
Authority
Revenue Bonds:
AAA Aaa 200 (Local
Government Loan
Program),
Series C, 5.50%
due 5/01/2003
(d)............. -- 212
AA Aa2 450 Refunding
(Local
Government-
Qualified
School), Series
A, 6% due
5/01/2001....... -- 478
AA+ Aa1 200 (State
Revolving Fund),
7% due
10/01/2004
(g)............. -- 231
Michigan State
Building
Authority,
Revenue
Refunding Bonds,
Series I:
AA- A1 6,000 5.80% due
10/01/1998...... -- 6,128
AA- A1 200 6.40% due
10/01/2004...... -- 218
AA- A1 200 Michigan State
Comprehensive
Transportation,
Revenue
Refunding Bonds,
Series B, 5.625%
due 5/15/2003... -- 213
NR* Aaa 100 Michigan State
Hospital Finance
Authority
Revenue Bonds
(McLaren
Obligated
Group), Series
A, 7.50% due
9/15/2001 (a)... -- 114
AA Aa2 200 Michigan State
Recreation
Program, GO, 6%
due 11/01/2004.. -- 219
AAA Aaa 160 Michigan State,
Underground
Storage Tank
Financial
Assurance
Authority,
Revenue
Refunding Bonds,
Series I, 6% due
5/01/2004 (c)... -- 175
AAA Aaa 235 Royal Oak,
Michigan,
Refunding, UT,
4% due
10/01/1997 (c).. -- 235
- ---------------------------------------------------------------------------------------------------
MINNESOTA- AAA Aaa 2,385 Metropolitan
1.2% Council,
Minnesota (St.
Paul
Metropolitan
Area Transit),
UT, Series C,
4.75% due
2/01/2000....... -- 2,427
AAA Aaa 2,965 Minnesota State,
HFA (Rental
Housing),
Refunding Bonds,
Series D, 4.50%
due 8/01/1999
(d)............. -- 2,991
- ---------------------------------------------------------------------------------------------------
</TABLE>
F-7
<PAGE>
PRO FORMA COMBINED SCHEDULE OF INVESTMENTS FOR MERRILL LYNCH MUNICIPAL BOND
FUND, INC. AND
MERRILL LYNCH MULTI-STATE LIMITED MATURITY MUNICIPAL SERIES TRUST--(CONTINUED)
JULY 31, 1997
(UNAUDITED)
<TABLE>
<CAPTION>
NEW NEW
LIMITED ARIZONA MASSACHUSETTS MICHIGAN JERSEY YORK
MATURITY LIMITED LIMITED LIMITED LIMITED LIMITED
PORTFOLIO MATURITY MATURITY MATURITY MATURITY MATURITY
TOTAL --------- --------- ------------- --------- --------- ---------
S&P MOODY'S FACE VALUE VALUE VALUE VALUE VALUE VALUE
STATE RATINGS RATINGS AMOUNT ISSUE (NOTE 1A) (NOTE 1A) (NOTE 1A) (NOTE 1A) (NOTE 1A) (NOTE 1A)
<C> <C> <C> <C> <S> <C> <C> <C> <C> <C> <C>
- -------------------------------------------------------------------------------------------------------------------------
MISSISSIPPI- NR* Aaa $10,000 Mississippi
2.2% Higher Education
Assistance
Corporation,
Student Loan
Revenue Bonds,
AMT, Series B,
4.80% due
9/01/1998....... $ 10,076 -- -- -- -- --
- -------------------------------------------------------------------------------------------------------------------------
NEBRASKA- A+ A1 6,250 Nebraska Public
1.4% Power District
Revenue Bonds
(Consumer Public
Power District),
4.90% due
7/01/1998....... 6,309 -- -- -- -- --
- -------------------------------------------------------------------------------------------------------------------------
NEW JERSEY- NR* Aaa 300 Bergen County,
4.4% New Jersey,
General
Improvement
Bonds, UT, 5.20%
due 10/01/1999.. -- -- -- -- $ 308 --
NR* NR* 400 East Orange, New
Jersey, BAN
(Water and
Sewer), GO, UT,
4.75% due
8/28/1997....... -- -- -- -- 400 --
AAA Aaa 600 Elizabeth, New
Jersey, General
Improvement and
Sewer Utility,
Refunding, GO,
UT, 6% due
8/15/2004 (c)... -- -- -- -- 659 --
SP1+ VMIG1# 300 Mercer County,
New Jersey,
Improvement
Authority
Revenue Bonds,
VRDN, 3.35% due
11/01/1998 (b).. -- -- -- -- 300 --
AA+ Aaa 400 Monmouth County,
New Jersey,
General
Improvement
Bonds, GO, UT,
6.625% due
8/01/2000....... -- -- -- -- 419 --
AAA Aaa 300 Morris County,
New Jersey,
General
Improvement
Bonds, GO,
4.625% due
8/15/2003....... -- -- -- -- 307 --
NR* NR* 195 New Brunswick,
New Jersey,
Temporary Notes,
UT, 4% due
12/09/1997...... -- -- -- -- 195 --
AAA Aaa 1,000 New Jersey EDA,
Market
Transition
Facility Revenue
Bonds, Senior
Lien, Series A,
7% due 7/01/2004
(d)............. -- -- -- -- 1,148 --
A1+ VMIG1# 300 New Jersey EDA,
Natural Gas
Facilities
Revenue Bonds
(NUI Corporation
Project), VRDN,
AMT, Series A,
3.30% due
6/01/2026
(b)(c).......... -- -- -- -- 300 --
<CAPTION>
PRO FORMA
PENNSYLVANIA FOR
LIMITED COMBINED
MATURITY FUND
TOTAL ------------ ---------
S&P MOODY'S FACE VALUE VALUE
STATE RATINGS RATINGS AMOUNT ISSUE (NOTE 1A) (NOTE 1A)
<C> <C> <C> <C> <S> <C> <C>
- ---------------------------------------------------------------------------------------------------
MISSISSIPPI- NR* Aaa $10,000 Mississippi
2.2% Higher Education
Assistance
Corporation,
Student Loan
Revenue Bonds,
AMT, Series B,
4.80% due
9/01/1998....... -- $10,076
- ---------------------------------------------------------------------------------------------------
NEBRASKA- A+ A1 6,250 Nebraska Public
1.4% Power District
Revenue Bonds
(Consumer Public
Power District),
4.90% due
7/01/1998....... -- 6,309
- ---------------------------------------------------------------------------------------------------
NEW JERSEY- NR* Aaa 300 Bergen County,
4.4% New Jersey,
General
Improvement
Bonds, UT, 5.20%
due 10/01/1999.. -- 308
NR* NR* 400 East Orange, New
Jersey, BAN
(Water and
Sewer), GO, UT,
4.75% due
8/28/1997....... -- 400
AAA Aaa 600 Elizabeth, New
Jersey, General
Improvement and
Sewer Utility,
Refunding, GO,
UT, 6% due
8/15/2004 (c)... -- 659
SP1+ VMIG1# 300 Mercer County,
New Jersey,
Improvement
Authority
Revenue Bonds,
VRDN, 3.35% due
11/01/1998 (b).. -- 300
AA+ Aaa 400 Monmouth County,
New Jersey,
General
Improvement
Bonds, GO, UT,
6.625% due
8/01/2000....... -- 419
AAA Aaa 300 Morris County,
New Jersey,
General
Improvement
Bonds, GO,
4.625% due
8/15/2003....... -- 307
NR* NR* 195 New Brunswick,
New Jersey,
Temporary Notes,
UT, 4% due
12/09/1997...... -- 195
AAA Aaa 1,000 New Jersey EDA,
Market
Transition
Facility Revenue
Bonds, Senior
Lien, Series A,
7% due 7/01/2004
(d)............. -- 1,148
A1+ VMIG1# 300 New Jersey EDA,
Natural Gas
Facilities
Revenue Bonds
(NUI Corporation
Project), VRDN,
AMT, Series A,
3.30% due
6/01/2026
(b)(c).......... -- 300
</TABLE>
F-8
<PAGE>
PRO FORMA COMBINED SCHEDULE OF INVESTMENTS FOR MERRILL LYNCH MUNICIPAL BOND
FUND, INC. AND
MERRILL LYNCH MULTI-STATE LIMITED MATURITY MUNICIPAL SERIES TRUST--(CONTINUED)
JULY 31, 1997
(UNAUDITED)
<TABLE>
<CAPTION>
NEW NEW
LIMITED ARIZONA MASSACHUSETTS MICHIGAN JERSEY YORK
MATURITY LIMITED LIMITED LIMITED LIMITED LIMITED
PORTFOLIO MATURITY MATURITY MATURITY MATURITY MATURITY
TOTAL --------- --------- ------------- --------- --------- ---------
S&P MOODY'S FACE VALUE VALUE VALUE VALUE VALUE VALUE
STATE RATINGS RATINGS AMOUNT ISSUE (NOTE 1A) (NOTE 1A) (NOTE 1A) (NOTE 1A) (NOTE 1A) (NOTE 1A)
<C> <C> <C> <C> <S> <C> <C> <C> <C> <C> <C>
- ----------------------------------------------------------------------------------------------------------------------------
NEW JERSEY NR* NR* $ 3,000 New Jersey, EDA,
(CONTINUED) Economic Growth
Revenue Bonds
(Greater Mercer
County), VRDN,
Series C, 4.25%
due
11/01/2011 (b).. $ 3,000 -- -- -- -- --
A1+ Aaa 200 New Jersey EDA,
Water Facilities
Revenue
Refunding Bonds
(United Water of
New Jersey, Inc.
Project), VRDN,
AMT, Series A,
3% due
11/01/2026 (b)(c).. -- -- -- -- $ 200 --
A1+ VMIG1# 200 New Jersey
Sports and
Exposition
Authority
Revenue Bonds
(State
Contract), VRDN,
Series C, 3.45%
due 9/01/2024
(b)(d).......... -- -- -- -- 200 --
AAA Aaa 5,715 New Jersey State
Educational
Facilities
Authority
Revenue Bonds
(Higher
Educational
Facilities Trust
Fund), Series A,
5.125% due
9/01/1999 (c)... 5,844 -- -- -- -- --
AAA Aaa 300 New Jersey State
Educational
Facilities
Authority
Revenue Bonds
(Princeton
University),
Series E, 4.05%
due 7/01/2000... -- -- -- -- 301 --
AA+ Aa1 4,250 New Jersey
State,
Refunding, UT,
Series O, 5.10%
due 2/15/2000... 4,361 -- -- -- -- --
NR* Aaa 200 New Jersey State
Transportation
Trust Fund
Authority
(Transportation
System), Series
A, 5.40% due
12/15/2002 (g).. -- -- -- -- 212 --
AAA VMIG1# 300 New Jersey State
Turnpike
Authority,
Turnpike Revenue
Refunding Bonds,
VRDN, Series D,
3.30% due
1/01/2018
(b)(f).......... -- -- -- -- 300 --
NR* Aa2 400 Ocean County,
New Jersey,
Utilities
Authority,
Wastewater
Revenue Bonds,
Series A, 6.125%
due 1/01/2003... -- -- -- -- 436 --
A1+ VMIG1# 300 Port Authority
of New York and
New Jersey,
Special
Obligation
Revenue Bonds
(Versatile
Structure
Obligation),
VRDN, Series 3,
3.55% due
6/01/2020 (b)... -- -- -- -- 300 --
<CAPTION>
PRO FORMA
PENNSYLVANIA FOR
LIMITED COMBINED
MATURITY FUND
TOTAL ------------ ---------
S&P MOODY'S FACE VALUE VALUE
STATE RATINGS RATINGS AMOUNT ISSUE (NOTE 1A) (NOTE 1A)
<C> <C> <C> <C> <S> <C> <C>
- ---------------------------------------------------------------------------------------------------------
NEW JERSEY NR* NR* $ 3,000 New Jersey, EDA,
(CONTINUED) Economic Growth
Revenue Bonds
(Greater Mercer
County), VRDN,
Series C, 4.25%
due
11/01/2011 (b).. -- $ 3,000
A1+ Aaa 200 New Jersey EDA,
Water Facilities
Revenue
Refunding Bonds
(United Water of
New Jersey, Inc.
Project), VRDN,
AMT, Series A,
3% due
11/01/2026 (b)(c).. -- 200
A1+ VMIG1# 200 New Jersey
Sports and
Exposition
Authority
Revenue Bonds
(State
Contract), VRDN,
Series C, 3.45%
due 9/01/2024
(b)(d).......... -- 200
AAA Aaa 5,715 New Jersey State
Educational
Facilities
Authority
Revenue Bonds
(Higher
Educational
Facilities Trust
Fund), Series A,
5.125% due
9/01/1999 (c)... -- 5,844
AAA Aaa 300 New Jersey State
Educational
Facilities
Authority
Revenue Bonds
(Princeton
University),
Series E, 4.05%
due 7/01/2000... -- 301
AA+ Aa1 4,250 New Jersey
State,
Refunding, UT,
Series O, 5.10%
due 2/15/2000... -- 4,361
NR* Aaa 200 New Jersey State
Transportation
Trust Fund
Authority
(Transportation
System), Series
A, 5.40% due
12/15/2002 (g).. -- 212
AAA VMIG1# 300 New Jersey State
Turnpike
Authority,
Turnpike Revenue
Refunding Bonds,
VRDN, Series D,
3.30% due
1/01/2018
(b)(f).......... -- 300
NR* Aa2 400 Ocean County,
New Jersey,
Utilities
Authority,
Wastewater
Revenue Bonds,
Series A, 6.125%
due 1/01/2003... -- 436
A1+ VMIG1# 300 Port Authority
of New York and
New Jersey,
Special
Obligation
Revenue Bonds
(Versatile
Structure
Obligation),
VRDN, Series 3,
3.55% due
6/01/2020 (b)... -- 300
</TABLE>
F-9
<PAGE>
PRO FORMA COMBINED SCHEDULE OF INVESTMENTS FOR MERRILL LYNCH MUNICIPAL BOND
FUND, INC. AND
MERRILL LYNCH MULTI-STATE LIMITED MATURITY MUNICIPAL SERIES TRUST--(CONTINUED)
JULY 31, 1997
(UNAUDITED)
<TABLE>
<CAPTION>
NEW NEW
LIMITED ARIZONA MASSACHUSETTS MICHIGAN JERSEY YORK
MATURITY LIMITED LIMITED LIMITED LIMITED LIMITED
PORTFOLIO MATURITY MATURITY MATURITY MATURITY MATURITY
TOTAL --------- --------- ------------- --------- --------- ---------
S&P MOODY'S FACE VALUE VALUE VALUE VALUE VALUE VALUE
STATE RATINGS RATINGS AMOUNT ISSUE (NOTE 1A) (NOTE 1A) (NOTE 1A) (NOTE 1A) (NOTE 1A) (NOTE 1A)
<C> <C> <C> <C> <S> <C> <C> <C> <C> <C> <C>
- -------------------------------------------------------------------------------------------------------------------------
NEW JERSEY AAA Aaa $ 125 Somerset County,
(CONCLUDED) New Jersey, GO,
UT, 5.875% due
12/01/2001...... -- -- -- -- $ 134 --
A1+ P1 200 Union County,
New Jersey,
Industrial
Pollution
Control
Financing
Authority,
Refunding Bonds
(Exxon Project),
3.10% due
10/01/2024...... -- -- -- -- 200 --
AA+ Aaa 340 Union County,
New Jersey,
Refunding, GO,
UT, 5.875% due
3/01/1999....... -- -- -- -- 350 --
- -------------------------------------------------------------------------------------------------------------------------
NEW MEXICO- AA Aa2 5,000 New Mexico State
1.1% Severance Tax
Revenue Bonds,
4.50% due
7/01/1999....... $ 5,051 -- -- -- -- --
- -------------------------------------------------------------------------------------------------------------------------
NEW YORK- AAA Aaa 600 Clifton Park,
13.1% New York, Water
Authority, Water
System Revenue
Bonds, Series A,
6.375%
due 10/01/2002
(a)(f).......... -- -- -- -- -- $ 671
Nassau County,
New York,
General
Improvement
Bonds, UT (f):
AAA Aaa 400 Series O,
5.625% due
8/01/2004....... -- -- -- -- -- 430
AAA Aaa 700 Series Q, 5.10%
due 8/01/2003... -- -- -- -- -- 729
AAA Aaa 750 New York City,
New York, IDA,
Civic Facilities
Revenue Bonds
(USTA
National Tennis
Center Project),
6% due
11/15/2002 (e).. -- -- -- -- -- 819
New York City,
New York,
Municipal
Assistance
Corporation:
AA- Aa2 4,550 Refunding
Bonds, Series E,
5.50% due
7/01/2000....... 4,732 -- -- -- -- --
AA Aa2 800 Series 68,
7.10% due
7/01/2000....... -- -- -- -- 860
New York City,
New York,
Municipal Water
Finance
Authority, Water
and Sewer System
Revenue Bonds,
VRDN (b)(f):
A1+ VMIG1# 600 Series A, 3.60%
due 6/15/2025... -- -- -- -- -- 600
A1+ VMIG1# 1,600 Series G, 3.65%
due 6/15/2024... 1,500 -- -- -- -- 100
<CAPTION>
PRO FORMA
PENNSYLVANIA FOR
LIMITED COMBINED
MATURITY FUND
TOTAL ------------ ---------
S&P MOODY'S FACE VALUE VALUE
STATE RATINGS RATINGS AMOUNT ISSUE (NOTE 1A) (NOTE 1A)
<C> <C> <C> <C> <S> <C> <C>
- ---------------------------------------------------------------------------------------------------
NEW JERSEY AAA Aaa $ 125 Somerset County,
(CONCLUDED) New Jersey, GO,
UT, 5.875% due
12/01/2001...... -- $ 134
A1+ P1 200 Union County,
New Jersey,
Industrial
Pollution
Control
Financing
Authority,
Refunding Bonds
(Exxon Project),
3.10% due
10/01/2024...... -- 200
AA+ Aaa 340 Union County,
New Jersey,
Refunding, GO,
UT, 5.875% due
3/01/1999....... -- 350
- ---------------------------------------------------------------------------------------------------
NEW MEXICO- AA Aa2 5,000 New Mexico State
1.1% Severance Tax
Revenue Bonds,
4.50% due
7/01/1999....... -- 5,051
- ---------------------------------------------------------------------------------------------------
NEW YORK- AAA Aaa 600 Clifton Park,
13.1% New York, Water
Authority, Water
System Revenue
Bonds, Series A,
6.375%
due 10/01/2002
(a)(f).......... -- 671
Nassau County,
New York,
General
Improvement
Bonds, UT (f):
AAA Aaa 400 Series O,
5.625% due
8/01/2004....... -- 430
AAA Aaa 700 Series Q, 5.10%
due 8/01/2003... -- 729
AAA Aaa 750 New York City,
New York, IDA,
Civic Facilities
Revenue Bonds
(USTA
National Tennis
Center Project),
6% due
11/15/2002 (e).. -- 819
New York City,
New York,
Municipal
Assistance
Corporation:
AA- Aa2 4,550 Refunding
Bonds, Series E,
5.50% due
7/01/2000....... -- 4,732
AA Aa2 800 Series 68,
7.10% due
7/01/2000....... -- 860
New York City,
New York,
Municipal Water
Finance
Authority, Water
and Sewer System
Revenue Bonds,
VRDN (b)(f):
A1+ VMIG1# 600 Series A, 3.60%
due 6/15/2025... -- 600
A1+ VMIG1# 1,600 Series G, 3.65%
due 6/15/2024... -- 1,600
</TABLE>
F-10
<PAGE>
PRO FORMA COMBINED SCHEDULE OF INVESTMENTS FOR MERRILL LYNCH MUNICIPAL BOND
FUND, INC. AND
MERRILL LYNCH MULTI-STATE LIMITED MATURITY MUNICIPAL SERIES TRUST--(CONTINUED)
JULY 31, 1997
(UNAUDITED)
<TABLE>
<CAPTION>
NEW NEW
LIMITED ARIZONA MASSACHUSETTS MICHIGAN JERSEY YORK
MATURITY LIMITED LIMITED LIMITED LIMITED LIMITED
PORTFOLIO MATURITY MATURITY MATURITY MATURITY MATURITY
TOTAL --------- --------- ------------- --------- --------- ---------
S&P MOODY'S FACE VALUE VALUE VALUE VALUE VALUE VALUE
STATE RATINGS RATINGS AMOUNT ISSUE (NOTE 1A) (NOTE 1A) (NOTE 1A) (NOTE 1A) (NOTE 1A) (NOTE 1A)
<C> <C> <C> <C> <S> <C> <C> <C> <C> <C> <C>
- -------------------------------------------------------------------------------------------------------------------------
NEW YORK BBB+ Baa1 $ 610 New York City,
(CONTINUED) New York,
Refunding, UT,
Series A, 6% due
8/01/2000....... -- -- -- -- -- $ 641
A- A2 11,820 New York State
Crossover
Refunding, 7.80%
due 11/15/1998.. $ 12,391 -- -- -- -- --
New York State
Dormitory
Revenue Bonds:
AAA Aaa 500 (College and
University
Education
Loans), AMT,
6.30% due
7/01/2002 (d)... -- -- -- -- -- 547
BBB Baa1 6,675 (Consolidated
City University
System) Series
A, 4.50% due
7/01/1998....... 6,714 -- -- -- -- --
BBB Baa1 10,885 (Consolidated
City University
System), Series
A, 4.75% due
7/01/1999....... 11,028 -- -- -- -- --
AA Aa 700 Refunding
(Cornell
University), 5%
due 7/01/2005.. -- -- -- -- -- 732
AAA Aaa 3,000 (State
University
Educational)
Series A,
7.125% due
5/15/2017(a).... 3,220 -- -- -- -- --
A- Aa 400 New York State
Environmental
Facilities
Corporation,
PCR, State Water
Revolving Fund
(New York City
Municipal Water
Finance
Authority
Project), Series
E, 5.60% due
6/15/1999....... -- -- -- -- -- 412
A- A2 600 New York State
Environmental
Quality, GO, 6%
due 12/01/2004.. -- -- -- -- -- 658
New York State,
GO:
A- A2 505 6% due
7/15/2006....... -- -- -- -- -- 559
A- A2 735 Refunding,
Series B, 6.25%
due 8/15/2004.. -- -- -- -- -- 815
New York State
Local Government
Assistance
Corporation (a):
A A3 625 Series A, 7%
due 4/01/2001... -- -- -- -- -- 698
AAA Aaa 600 Series D, 7%
due 4/01/2002... -- -- -- -- -- 682
<CAPTION>
PRO FORMA
PENNSYLVANIA FOR
LIMITED COMBINED
MATURITY FUND
TOTAL ------------ ---------
S&P MOODY'S FACE VALUE VALUE
STATE RATINGS RATINGS AMOUNT ISSUE (NOTE 1A) (NOTE 1A)
<C> <C> <C> <C> <S> <C> <C>
- --------------------------------------------------------------------------------
NEW YORK BBB+ Baa1 $ 610 New York City,
(CONTINUED) New York,
Refunding, UT,
Series A, 6% due
8/01/2000....... -- $ 641
A- A2 11,820 New York State
Crossover
Refunding, 7.80%
due 11/15/1998.. -- 12,391
New York State
Dormitory
Revenue Bonds:
AAA Aaa 500 (College and
University
Education
Loans), AMT,
6.30% due
7/01/2002 (d)... -- 547
BBB Baa1 6,675 (Consolidated
City University
System) Series
A, 4.50% due
7/01/1998....... -- 6,714
BBB Baa1 10,885 (Consolidated
City University
System), Series
A, 4.75% due
7/01/1999....... -- 11,028
AA Aa 700 Refunding
(Cornell
University), 5%
due 7/01/2005.. -- 732
AAA Aaa 3,000 (State
University
Educational)
Series A,
7.125% due
5/15/2017(a).... -- 3,220
A- Aa 400 New York State
Environmental
Facilities
Corporation,
PCR, State Water
Revolving Fund
(New York City
Municipal Water
Finance
Authority
Project), Series
E, 5.60% due
6/15/1999....... -- 412
A- A2 600 New York State
Environmental
Quality, GO, 6%
due 12/01/2004.. -- 658
New York State,
GO:
A- A2 505 6% due
7/15/2006....... -- 559
A- A2 735 Refunding,
Series B, 6.25%
due 8/15/2004.. -- 815
New York State
Local Government
Assistance
Corporation (a):
A A3 625 Series A, 7%
due 4/01/2001... -- 698
AAA Aaa 600 Series D, 7%
due 4/01/2002... -- 682
</TABLE>
F-11
<PAGE>
PRO FORMA COMBINED SCHEDULE OF INVESTMENTS FOR MERRILL LYNCH MUNICIPAL BOND
FUND, INC. AND
MERRILL LYNCH MULTI-STATE LIMITED MATURITY MUNICIPAL SERIES TRUST--(CONTINUED)
JULY 31, 1997
(UNAUDITED)
<TABLE>
<CAPTION>
NEW NEW
LIMITED ARIZONA MASSACHUSETTS MICHIGAN JERSEY YORK
MATURITY LIMITED LIMITED LIMITED LIMITED LIMITED
PORTFOLIO MATURITY MATURITY MATURITY MATURITY MATURITY
TOTAL --------- --------- ------------- --------- --------- ---------
S&P MOODY'S FACE VALUE VALUE VALUE VALUE VALUE VALUE
STATE RATINGS RATINGS VALUE ISSUE (NOTE 1A) (NOTE 1A) (NOTE 1A) (NOTE 1A) (NOTE 1A) (NOTE 1A)
<C> <C> <C> <C> <S> <C> <C> <C> <C> <C> <C>
- -------------------------------------------------------------------------------------------------------------------------
NEW YORK New York State
(CONCLUDED) Medical Care
Facilities
Finance Agency,
Revenue Bonds,
Series A:
AAA Aaa $ 725 (Mental Health
Services
Facilities),
7.75% due
2/15/2001 (a)... -- -- -- -- -- $ 825
AA Aa 650 (Secured
Mortgage
Program, Adult
Day Care), 6%
due 11/15/2003
(i)............. -- -- -- -- -- 702
AA NR* 675 New York State
Tax Exempt
Revenue Bonds
(Rochester
Museum of
Science), 5.60%
due 12/01/2015.. -- -- -- -- -- 679
AAA VMIG1# 100 New York State
Thruway
Authority,
General Revenue
Bonds, VRDN,
3.60% due
1/01/2024 (b)
(f)............. -- -- -- -- -- 100
BBB Aaa 5,000 New York State
Urban
Development
Corporation,
Revenue Bonds
(State
Facilities),
7.60 due
4/01/2020 (a)... $ 5,668 -- -- -- -- --
BBB Baa1 450 New York State
Urban
Development
Corporation,
Revenue
Refunding Bonds
(Center for
Industrial
Innovation
Project), 4.60%
due 1/01/1998... -- -- -- -- -- 451
AAA Aaa 760 Port Authority
of New York and
New Jersey,
Refunding, AMT
UT, Consolidated
97th Series,
7.10% due
7/15/2003 (f)... -- -- -- -- -- 867
A1+ VMIG1# 200 Syracuse, New
York, IDA, Civic
Facility Revenue
Bonds (Multi-
Model Syracuse
University
Project), VRDN,
3.50% due
3/01/2023 (b)... -- -- -- -- -- 200
Triborough
Bridge and
Tunnel
Authority, New
York, Revenue
Bonds:
A+ Aa 340 Series R, 6.90%
due 1/01/2000... -- -- -- -- -- 363
A1+ VMIG1# 200 Special
Obligation,
VRDN, 3.60% due
1/01/2024 (b)
(f)............. -- -- -- -- -- 200
- -------------------------------------------------------------------------------------------------------------------------
<CAPTION>
PRO FORMA
PENNSYLVANIA FOR
LIMITED COMBINED
MATURITY FUND
TOTAL ------------ ---------
S&P MOODY'S FACE VALUE VALUE
STATE RATINGS RATINGS VALUE ISSUE (NOTE 1A) (NOTE 1A)
<C> <C> <C> <C> <S> <C> <C>
- -----------------------------------------------------------------------------------
NEW YORK New York State
(CONCLUDED) Medical Care
Facilities
Finance Agency,
Revenue Bonds,
Series A:
AAA Aaa $ 725 (Mental Health
Services
Facilities),
7.75% due
2/15/2001 (a)... -- $ 825
AA Aa 650 (Secured
Mortgage
Program, Adult
Day Care), 6%
due 11/15/2003
(i)............. -- 702
AA NR* 675 New York State
Tax Exempt
Revenue Bonds
(Rochester
Museum of
Science), 5.60%
due 12/01/2015.. -- 679
AAA VMIG1# 100 New York State
Thruway
Authority,
General Revenue
Bonds, VRDN,
3.60% due
1/01/2024 (b)
(f)............. -- 100
BBB Aaa 5,000 New York State
Urban
Development
Corporation,
Revenue Bonds
(State
Facilities),
7.60 due
4/01/2020 (a)... -- 5,668
BBB Baa1 450 New York State
Urban
Development
Corporation,
Revenue
Refunding Bonds
(Center for
Industrial
Innovation
Project), 4.60%
due 1/01/1998... -- 451
AAA Aaa 760 Port Authority
of New York and
New Jersey,
Refunding, AMT
UT, Consolidated
97th Series,
7.10% due
7/15/2003 (f)... -- 867
A1+ VMIG1# 200 Syracuse, New
York, IDA, Civic
Facility Revenue
Bonds (Multi-
Model Syracuse
University
Project), VRDN,
3.50% due
3/01/2023 (b)... -- 200
Triborough
Bridge and
Tunnel
Authority, New
York, Revenue
Bonds:
A+ Aa 340 Series R, 6.90%
due 1/01/2000... -- 363
A1+ VMIG1# 200 Special
Obligation,
VRDN, 3.60% due
1/01/2024 (b)
(f)............. -- 200
- -----------------------------------------------------------------------------------
</TABLE>
F-12
<PAGE>
PRO FORMA COMBINED SCHEDULE OF INVESTMENTS FOR MERRILL LYNCH MUNICIPAL BOND
FUND, INC. AND
MERRILL LYNCH MULTI-STATE LIMITED MATURITY MUNICIPAL SERIES TRUST--(CONTINUED)
JULY 31, 1997
(UNAUDITED)
<TABLE>
<CAPTION>
NEW NEW
LIMITED ARIZONA MASSACHUSETTS MICHIGAN JERSEY YORK
MATURITY LIMITED LIMITED LIMITED LIMITED LIMITED
PORTFOLIO MATURITY MATURITY MATURITY MATURITY MATURITY
TOTAL --------- --------- ------------- --------- --------- ---------
S&P MOODY'S FACE VALUE VALUE VALUE VALUE VALUE VALUE
STATE RATINGS RATINGS AMOUNT ISSUE (NOTE 1A) (NOTE 1A) (NOTE 1A) (NOTE 1A) (NOTE 1A) (NOTE 1A)
<C> <C> <C> <C> <S> <C> <C> <C> <C> <C> <C>
- -------------------------------------------------------------------------------------------------------------------------
OHIO-8.2% AAA Aaa $ 2,000 Cincinnati,
Ohio, City
School District,
TAN, Series B,
5% due
12/01/1998 (c).. $ 2,028 -- -- -- -- --
NR* Aa1 6,000 Franklin County,
Ohio, Hospital
Revenue
Refunding Bonds
(US Health
Corp.), Series
B, 4.50% due
12/01/2020...... 6,065 -- -- -- -- --
A+ VMIG1# 7,000 Ohio State Air
Quality
Development
Authority,
Revenue
Refunding Bonds
(Ohio Edison
Project), Series
A, 4.35% due
2/01/2014....... 7,021 -- -- -- -- --
AAA Aa1 12,400 Ohio State
Highway, GO,
Series V, 4.70%
due 5/15/2000... 12,623 -- -- -- -- --
AAA Aaa 3,500 Ohio State
Public
Facilities
Commission
(Higher
Education
Capital
Facilities),
Series II-A,
4.375% due
11/01/1999 (d).. 3,530 -- -- -- -- --
NR* Aaa 6,000 Student Loan
Funding
Corporation,
Cincinnati,
Ohio, Student
Loan Revenue
Refunding Bonds,
AMT, Series C,
5.70% due
7/01/1999....... 6,156 -- -- -- -- --
- -------------------------------------------------------------------------------------------------------------------------
OKLAHOMA- AA Aa 2,400 Tulsa, Oklahoma,
0.5% GO, UT, 5.125%
due 5/01/1999... 2,448 -- -- -- -- --
- -------------------------------------------------------------------------------------------------------------------------
OREGON-0.7% A1+ VMIG1# 3,000 Port Saint
Helens, Oregon,
PCR (Portland
General Electric
Company
Project), VRDN,
Series A, 3.35%
due 4/01/2010
(b)............. 3,000 -- -- -- -- --
- -------------------------------------------------------------------------------------------------------------------------
PENNSYLVANIA- NR* VMIG1# 100 Allegheny
5.1% County,
Pennsylvania,
Hospital
Development
Authority
Revenue Bonds
(Presbyterian
University
Hospital), ACES,
Series B1, 3.60%
due 3/01/2018
(b)............. -- -- -- -- -- --
AAA Aaa 400 Beaver County,
Pennsylvania,
Hospital
Authority,
Revenue
Refunding Bonds
(Medical Center
of Beaver
County, Inc.),
5.70% due
7/01/1999 (a)... -- -- -- -- -- --
<CAPTION>
PRO FORMA
PENNSYLVANIA FOR
LIMITED COMBINED
MATURITY FUND
TOTAL ------------ ---------
S&P MOODY'S FACE VALUE VALUE
STATE RATINGS RATINGS AMOUNT ISSUE (NOTE 1A) (NOTE 1A)
<C> <C> <C> <C> <S> <C> <C>
- --------------------------------------------------------------------------------
OHIO-8.2% AAA Aaa $ 2,000 Cincinnati,
Ohio, City
School District,
TAN, Series B,
5% due
12/01/1998 (c).. -- $ 2,028
NR* Aa1 6,000 Franklin County,
Ohio, Hospital
Revenue
Refunding Bonds
(US Health
Corp.), Series
B, 4.50% due
12/01/2020...... -- 6,065
A+ VMIG1# 7,000 Ohio State Air
Quality
Development
Authority,
Revenue
Refunding Bonds
(Ohio Edison
Project), Series
A, 4.35% due
2/01/2014....... -- 7,021
AAA Aa1 12,400 Ohio State
Highway, GO,
Series V, 4.70%
due 5/15/2000... -- 12,623
AAA Aaa 3,500 Ohio State
Public
Facilities
Commission
(Higher
Education
Capital
Facilities),
Series II-A,
4.375% due
11/01/1999 (d).. -- 3,530
NR* Aaa 6,000 Student Loan
Funding
Corporation,
Cincinnati,
Ohio, Student
Loan Revenue
Refunding Bonds,
AMT, Series C,
5.70% due
7/01/1999....... -- 6,156
- --------------------------------------------------------------------------------
OKLAHOMA- AA Aa 2,400 Tulsa, Oklahoma,
0.5% GO, UT, 5.125%
due 5/01/1999... -- 2,448
- --------------------------------------------------------------------------------
OREGON-0.7% A1+ VMIG1# 3,000 Port Saint
Helens, Oregon,
PCR (Portland
General Electric
Company
Project), VRDN,
Series A, 3.35%
due 4/01/2010
(b)............. 3,000
- --------------------------------------------------------------------------------
PENNSYLVANIA- NR* VMIG1# 100 Allegheny
5.1% County,
Pennsylvania,
Hospital
Development
Authority
Revenue Bonds
(Presbyterian
University
Hospital), ACES,
Series B1, 3.60%
due 3/01/2018
(b)............. $ 100 100
AAA Aaa 400 Beaver County,
Pennsylvania,
Hospital
Authority,
Revenue
Refunding Bonds
(Medical Center
of Beaver
County, Inc.),
5.70% due
7/01/1999 (a)... 412 412
</TABLE>
F-13
<PAGE>
PRO FORMA COMBINED SCHEDULE OF INVESTMENTS FOR MERRILL LYNCH MUNICIPAL BOND
FUND, INC. AND
MERRILL LYNCH MULTI-STATE LIMITED MATURITY MUNICIPAL SERIES TRUST--(CONTINUED)
JULY 31, 1997
(UNAUDITED)
<TABLE>
<CAPTION>
NEW NEW
LIMITED ARIZONA MASSACHUSETTS MICHIGAN JERSEY YORK
MATURITY LIMITED LIMITED LIMITED LIMITED LIMITED
PORTFOLIO MATURITY MATURITY MATURITY MATURITY MATURITY
TOTAL --------- --------- ------------- --------- --------- ---------
S&P MOODY'S FACE VALUE VALUE VALUE VALUE VALUE VALUE
STATE RATINGS RATINGS AMOUNT ISSUE (NOTE 1A) (NOTE 1A) (NOTE 1A) (NOTE 1A) (NOTE 1A) (NOTE 1A)
<C> <C> <C> <C> <S> <C> <C> <C> <C> <C> <C>
- -------------------------------------------------------------------------------------------------------------------------
PENNSYLVANIA- AA Aa $ 1,000 Bucks County,
(CONTINUED) Pennsylvania,
UT, Series A,
5.95% due
3/01/2000....... -- -- -- -- -- --
NR* NR* 300 Emmaus,
Pennsylvania,
General
Authority
Revenue Bonds,
VRDN, Sub-Series
E-9, 3.70% due
3/01/2024 (b)... -- -- -- -- -- --
A1+ NR* 300 Harrisburg,
Pennsylvania,
Authority
Revenue Bonds
(Pooled
Financing Fund),
VRDN, 3.85% due
7/01/2021 (b)... -- -- -- -- -- --
A1+ Aaa 150 Lehigh County,
Pennsylvania,
Authority Water
Revenue Bonds,
VRDN, 3.60% due
11/01/2004
(b)(f).......... -- -- -- -- -- --
NR* VMIG1# 300 Pennsylvania
Energy
Development
Authority,
Energy
Development
Revenue Bonds
(B&W Ebensburg
Project), VRDN,
AMT, 3.70% due
12/01/2011 (b).. -- -- -- -- -- --
Pennsylvania
State Higher
Educational
Facilities
Authority,
College and
University
Revenue
Refunding Bonds,
Series A: -- -- -- -- --
A+ Aa3 380 (Thomas
Jefferson
University),
5.75% due
8/15/1998....... -- -- -- -- -- --
AA Aa2 275 (University of
Pennsylvania),
4.70% due
9/01/1997...... -- -- -- -- -- --
AAA Aaa 8,675 Pennsylvania
State, Refunding
Bonds, GO, UT,
5.25% due
11/15/1998 (f).. $ 8,821 -- -- -- -- --
AAA Aaa 255 Pennsylvania
State Turnpike
Commission,
Turnpike Revenue
Refunding Bonds,
Series O, 5.35%
due 12/01/2002
(f)............. -- -- -- -- -- --
Philadelphia,
Pennsylvania,
Hospitals and
Higher Education
Facilities
Authority,
Hospital Revenue
Bonds:
A1+ VMIG1# 3,600 (Children's
Hospital of
Pennsylvania
Project), 3.65%
due 8/01/1997
(a)............. 3,600 -- -- -- -- --
<CAPTION>
PRO FORMA
PENNSYLVANIA FOR
LIMITED COMBINED
MATURITY FUND
TOTAL ------------ ---------
S&P MOODY'S FACE VALUE VALUE
STATE RATINGS RATINGS AMOUNT ISSUE (NOTE 1A) (NOTE 1A)
<C> <C> <C> <C> <S> <C> <C>
- --------------------------------------------------------------------------------
PENNSYLVANIA- AA Aa $ 1,000 Bucks County,
(CONTINUED) Pennsylvania,
UT, Series A,
5.95% due
3/01/2000....... $1,047 $ 1,047
NR* NR* 300 Emmaus,
Pennsylvania,
General
Authority
Revenue Bonds,
VRDN, Sub-Series
E-9, 3.70% due
3/01/2024 (b)... 300 300
A1+ NR* 300 Harrisburg,
Pennsylvania,
Authority
Revenue Bonds
(Pooled
Financing Fund),
VRDN, 3.85% due
7/01/2021 (b)... 300 300
A1+ Aaa 150 Lehigh County,
Pennsylvania,
Authority Water
Revenue Bonds,
VRDN, 3.60% due
11/01/2004
(b)(f).......... 150 150
NR* VMIG1# 300 Pennsylvania
Energy
Development
Authority,
Energy
Development
Revenue Bonds
(B&W Ebensburg
Project), VRDN,
AMT, 3.70% due
12/01/2011 (b).. 300 300
Pennsylvania
State Higher
Educational
Facilities
Authority,
College and
University
Revenue
Refunding Bonds,
Series A:
A+ Aa3 380 (Thomas
Jefferson
University),
5.75% due
8/15/1998....... 387 387
AA Aa2 275 (University of
Pennsylvania),
4.70% due
9/01/1997...... 275 275
AAA Aaa 8,675 Pennsylvania
State, Refunding
Bonds, GO, UT,
5.25% due
11/15/1998 (f).. -- 8,821
AAA Aaa 255 Pennsylvania
State Turnpike
Commission,
Turnpike Revenue
Refunding Bonds,
Series O, 5.35%
due 12/01/2002
(f)............. 269 269
Philadelphia,
Pennsylvania,
Hospitals and
Higher Education
Facilities
Authority,
Hospital Revenue
Bonds:
A1+ VMIG1# 3,600 (Children's
Hospital of
Pennsylvania
Project), 3.65%
due 8/01/1997
(a)............. -- 3,600
</TABLE>
F-14
<PAGE>
PRO FORMA COMBINED SCHEDULE OF INVESTMENTS FOR MERRILL LYNCH MUNICIPAL BOND
FUND, INC. AND
MERRILL LYNCH MULTI-STATE LIMITED MATURITY MUNICIPAL SERIES TRUST--(CONTINUED)
JULY 31, 1997
(UNAUDITED)
<TABLE>
<CAPTION>
NEW NEW
LIMITED ARIZONA MASSACHUSETTS MICHIGAN JERSEY YORK
MATURITY LIMITED LIMITED LIMITED LIMITED LIMITED
PORTFOLIO MATURITY MATURITY MATURITY MATURITY MATURITY
TOTAL --------- --------- ------------- --------- --------- ---------
S&P MOODY'S FACE VALUE VALUE VALUE VALUE VALUE VALUE
STATE RATINGS RATINGS AMOUNT ISSUE (NOTE 1A) (NOTE 1A) (NOTE 1A) (NOTE 1A) (NOTE 1A) (NOTE 1A)
<C> <C> <C> <C> <S> <C> <C> <C> <C> <C> <C>
- -------------------------------------------------------------------------------------------------------------------------
PENNSYLVANIA- NR* Aaa $ 1,000 (Children's
(CONCLUDED) Hospital of
Philadelphia
Project), Series
A, 6.50% due
2/15/2002 (a)... -- -- -- -- -- --
A- NR* 650 (Children's
Seashore House),
Series B, 7% due
8/15/2003....... -- -- -- -- -- --
SP1+ MIG1# 300 Philadelphia,
Pennsylvania,
TRAN, Series A,
4.50% due
6/30/1998....... -- -- -- -- --
AAA Aaa 4,145 Pittsburgh,
Pennsylvania,
Refunding, UT,
Series A, 5% due
3/01/2000 (d)... $ 4,235 -- -- -- -- --
AAA Aaa 400 Union County,
Pennsylvania,
Higher
Educational
Facilities
Financing
Authority,
Revenue
Refunding Bonds
(Bucknell
University), 6%
due 4/01/2002
(d)............. -- -- -- -- -- --
AAA Aaa 325 Washington
County,
Pennsylvania,
Lease Authority,
Municipal
Facility Pooled
Capital Revenue
Bonds (Shadyside
Hospital
Project), Series
C, Sub-Series
C1-A, 7.45% due
6/15/2000
(a)(c)(g)....... -- -- -- -- -- --
- -------------------------------------------------------------------------------------------------------------------------
SOUTH AA A1 8,250 Greenville
CAROLINA- County, South
1.8% Carolina, School
District, UT, 4%
due 3/01/1999... 8,261 -- -- -- -- --
- -------------------------------------------------------------------------------------------------------------------------
TENNESSEE- AA NR* 11,885 Clarksville,
2.6% Tennessee,
Public Building
Authority,
Revenue
Refunding Bonds
(Pooled Loan
Program), 4.40%
due 12/01/1998.. 11,945 -- -- -- -- --
- -------------------------------------------------------------------------------------------------------------------------
TEXAS-6.1% Brazos, Texas,
Higher Education
Authority Inc.,
Student Loan
Revenue
Refunding Bonds,
AMT:
NR* Aaa 2,200 Senior Lien,
Series A-2,
5.45% due
6/01/1998...... 2,225 -- -- -- -- --
NR* Aa 5,135 Series C-1,
5.60% due
11/01/1997...... 5,155 -- -- -- -- --
AA Aa 2,900 Fort Worth,
Texas, Water and
Sewer Revenue
Bonds, 5.90% due
2/15/2001....... 3,067 -- -- -- -- --
<CAPTION>
PRO FORMA
PENNSYLVANIA FOR
LIMITED COMBINED
MATURITY FUND
TOTAL ------------ ---------
S&P MOODY'S FACE VALUE VALUE
STATE RATINGS RATINGS AMOUNT ISSUE (NOTE 1A) (NOTE 1A)
<C> <C> <C> <C> <S> <C> <C>
- -------------------------------------------------------------------------------------------
PENNSYLVANIA- NR* Aaa $ 1,000 (Children's
(CONCLUDED) Hospital of
Philadelphia
Project), Series
A, 6.50% due
2/15/2002 (a)... $1,109 $ 1,109
A- NR* 650 (Children's
Seashore House),
Series B, 7% due
8/15/2003....... 724 724
SP1+ MIG1# 300 Philadelphia,
Pennsylvania,
TRAN, Series A,
4.50% due
6/30/1998....... 301 301
AAA Aaa 4,145 Pittsburgh,
Pennsylvania,
Refunding, UT,
Series A, 5% due
3/01/2000 (d)... -- 4,235
AAA Aaa 400 Union County,
Pennsylvania,
Higher
Educational
Facilities
Financing
Authority,
Revenue
Refunding Bonds
(Bucknell
University), 6%
due 4/01/2002
(d)............. 430 430
AAA Aaa 325 Washington
County,
Pennsylvania,
Lease Authority,
Municipal
Facility Pooled
Capital Revenue
Bonds (Shadyside
Hospital
Project), Series
C, Sub-Series
C1-A, 7.45% due
6/15/2000
(a)(c)(g)....... 363 363
- -------------------------------------------------------------------------------------------
SOUTH AA A1 8,250 Greenville
CAROLINA- County, South
1.8% Carolina, School
District, UT, 4%
due 3/01/1999... -- 8,261
- -------------------------------------------------------------------------------------------
TENNESSEE- AA NR* 11,885 Clarksville,
2.6% Tennessee,
Public Building
Authority,
Revenue
Refunding Bonds
(Pooled Loan
Program), 4.40%
due 12/01/1998.. -- 11,945
- -------------------------------------------------------------------------------------------
TEXAS-6.1% Brazos, Texas,
Higher Education
Authority Inc.,
Student Loan
Revenue
Refunding Bonds,
AMT:
NR* Aaa 2,200 Senior Lien,
Series A-2,
5.45% due
6/01/1998...... -- 2,225
NR* Aa 5,135 Series C-1,
5.60% due
11/01/1997...... -- 5,155
AA Aa 2,900 Fort Worth,
Texas, Water and
Sewer Revenue
Bonds, 5.90% due
2/15/2001....... -- 3,067
</TABLE>
F-15
<PAGE>
PRO FORMA COMBINED SCHEDULE OF INVESTMENTS FOR MERRILL LYNCH MUNICIPAL BOND
FUND, INC. AND
MERRILL LYNCH MULTI-STATE LIMITED MATURITY MUNICIPAL SERIES TRUST--(CONTINUED)
JULY 31, 1997
(UNAUDITED)
<TABLE>
<CAPTION>
NEW NEW
LIMITED ARIZONA MASSACHUSETTS MICHIGAN JERSEY YORK
MATURITY LIMITED LIMITED LIMITED LIMITED LIMITED
PORTFOLIO MATURITY MATURITY MATURITY MATURITY MATURITY
TOTAL --------- --------- ------------- --------- --------- ---------
S&P MOODY'S FACE VALUE VALUE VALUE VALUE VALUE VALUE
STATE RATINGS RATINGS AMOUNT ISSUE (NOTE 1A) (NOTE 1A) (NOTE 1A) (NOTE 1A) (NOTE 1A) (NOTE 1A)
<C> <C> <C> <C> <S> <C> <C> <C> <C> <C> <C>
- -------------------------------------------------------------------------------------------------------------------------
TEXAS Harris County,
(CONCLUDED) Texas, Health
Facilities
Development
Corporation,
Hospital Revenue
Bonds, VRDN (b):
A1+ NR* $ 9,000 (Methodist
Hospital), 5.50%
due 12/01/2025.. $ 9,000 -- -- -- -- --
A1+ NR* 1,000 (Saint Luke's
Episcopal
Hospital),
Series B, 5.50%
due 2/15/2016
(a)............. 1,000 -- -- -- -- --
AAA Aaa 2,600 Houston, Texas,
Water and Sewer
Systems, Revenue
Refunding Bonds,
Junion Lien,
Series C, 5.90%
due 12/01/1999
(c)............. 2,707 -- -- -- -- --
NR* Aaa 2,455 Panhandle-
Plains, Texas,
Higher Education
Authority Inc.,
Student Loan
Revenue
Refunding Bonds,
Series C, 4.15%
due 9/01/1997... 2,456 -- -- -- -- --
A+ A2 2,000 Texas Municipal
Power Agency,
Revenue
Refunding Bonds,
GO, Series A,
4.25% due
9/01/1997....... 2,001 -- -- -- -- --
- -------------------------------------------------------------------------------------------------------------------------
UTAH-1.0% AAA Aaa 4,700 Utah State,
Building and
Highway Revenue
Bonds, GO, UT,
4.40% due
7/01/1999....... 4,742 -- -- -- -- --
- -------------------------------------------------------------------------------------------------------------------------
VIRGINIA-2.2% AAA Aaa 7,060 Virginia State,
GO, UT, 5% due
6/01/2001....... 7,303 -- -- -- -- --
AA Aa 2,555 Virginia State
Transportation
Board,
Transportation
Contract Revenue
Bonds (US Route
58 Corridor),
Series B, 5% due
5/15/2000....... 2,618 -- -- -- -- --
- -------------------------------------------------------------------------------------------------------------------------
WASHINGTON- AAA Aaa 5,000 Seattle,
3.2% Washington,
Metropolitan
Seattle
Municipality
Sewer Revenue
Bonds, Series U,
6.60% due
1/01/2032
(a)(f).......... 5,483 -- -- -- -- --
Washington
State, Refunding
Bonds, Motor
Vehicle Fuel
Tax:
AA Aa+ 2,000 Series R-94B,
4.20% due
9/01/1998....... 2,007 -- -- -- -- --
AA Aa+ 2,285 Series R-96A,
5% due
7/01/1998....... 2,310 -- -- -- -- --
AA Aa+ 4,655 Series R-96B,
5% due
7/01/1998....... 4,705 -- -- -- -- --
- -------------------------------------------------------------------------------------------------------------------------
<CAPTION>
PRO FORMA
PENNSYLVANIA FOR
LIMITED COMBINED
MATURITY FUND
TOTAL ------------ ---------
S&P MOODY'S FACE VALUE VALUE
STATE RATINGS RATINGS AMOUNT ISSUE (NOTE 1A) (NOTE 1A)
<C> <C> <C> <C> <S> <C> <C>
- --------------------------------------------------------------------------------
TEXAS Harris County,
(CONCLUDED) Texas, Health
Facilities
Development
Corporation,
Hospital Revenue
Bonds, VRDN (b):
A1+ NR* $ 9,000 (Methodist
Hospital), 5.50%
due 12/01/2025.. -- $ 9,000
A1+ NR* 1,000 (Saint Luke's
Episcopal
Hospital),
Series B, 5.50%
due 2/15/2016
(a)............. -- 1,000
AAA Aaa 2,600 Houston, Texas,
Water and Sewer
Systems, Revenue
Refunding Bonds,
Junion Lien,
Series C, 5.90%
due 12/01/1999
(c)............. -- 2,707
NR* Aaa 2,455 Panhandle-
Plains, Texas,
Higher Education
Authority Inc.,
Student Loan
Revenue
Refunding Bonds,
Series C, 4.15%
due 9/01/1997... -- 2,456
A+ A2 2,000 Texas Municipal
Power Agency,
Revenue
Refunding Bonds,
GO, Series A,
4.25% due
9/01/1997....... -- 2,001
- -----------------------------------------------------------------------------------
UTAH-1.0% AAA Aaa 4,700 Utah State,
Building and
Highway Revenue
Bonds, GO, UT,
4.40% due
7/01/1999....... -- 4,742
- -----------------------------------------------------------------------------------
VIRGINIA-2.2% AAA Aaa 7,060 Virginia State,
GO, UT, 5% due
6/01/2001....... -- 7,303
AA Aa 2,555 Virginia State
Transportation
Board,
Transportation
Contract Revenue
Bonds (US Route
58 Corridor),
Series B, 5% due
5/15/2000....... -- 2,618
- -----------------------------------------------------------------------------------
WASHINGTON- AAA Aaa 5,000 Seattle,
3.2% Washington,
Metropolitan
Seattle
Municipality
Sewer Revenue
Bonds, Series U,
6.60% due
1/01/2032
(a)(f).......... -- 5,483
Washington
State, Refunding
Bonds, Motor
Vehicle Fuel
Tax:
AA Aa+ 2,000 Series R-94B,
4.20% due
9/01/1998....... -- 2,007
AA Aa+ 2,285 Series R-96A,
5% due
7/01/1998....... -- 2,310
AA Aa+ 4,655 Series R-96B,
5% due
7/01/1998....... -- 4,705
- -----------------------------------------------------------------------------------
</TABLE>
F-16
<PAGE>
PRO FORMA COMBINED SCHEDULE OF INVESTMENTS FOR MERRILL LYNCH MUNICIPAL BOND
FUND, INC. AND
MERRILL LYNCH MULTI-STATE LIMITED MATURITY MUNICIPAL SERIES TRUST--(CONTINUED)
JULY 31, 1997
(UNAUDITED)
<TABLE>
<CAPTION>
NEW NEW
LIMITED ARIZONA MASSACHUSETTS MICHIGAN JERSEY YORK
MATURITY LIMITED LIMITED LIMITED LIMITED LIMITED
PORTFOLIO MATURITY MATURITY MATURITY MATURITY MATURITY
TOTAL --------- --------- ------------- --------- --------- ---------
S&P MOODY'S FACE VALUE VALUE VALUE VALUE VALUE VALUE
STATE RATINGS RATINGS VALUE ISSUE (NOTE 1A) (NOTE 1A) (NOTE 1A) (NOTE 1A) (NOTE 1A) (NOTE 1A)
<C> <C> <C> <C> <S> <C> <C> <C> <C> <C> <C>
- -------------------------------------------------------------------------------------------------------------------------
WISCONSIN- NR* VMIG1# $ 4,000 Mequon,
7.8% Wisconsin, BAN,
4.10% due
11/01/1998...... $ 4,001 -- -- -- -- --
AA+ Aa1 6,510 Milwaukee,
Wisconsin,
Metropolitan
Sewer District,
GO, UT, Series A
4.25% due
10/01/2000...... 6,548 -- -- -- -- --
A A1 2,795 Wisconsin
Housing and
Economic
Development
Authority,
Housing Revenue
Refunding Bonds,
Series C, 4.30%
due 11/01/1997.. 2,800 -- -- -- -- --
AA Aa2 4,385 Wisconsin State,
GO, Series C,
5.50% due
5/01/2000....... 4,550 -- -- -- -- --
AAA NR* 5,720 Wisconsin State
Health and
Educational
Facilities
Authority
Revenue Bonds
(Medical College
of Wisconsin),
Series D, 7.35%
due 12/01/15.... 6,372 -- -- -- -- --
AA Aa2 11,000 Wisconsin State,
GO, UT,
Refunding,
Series 3, 4.25%
due 11/01/1999.. 11,068 -- -- -- -- --
- -------------------------------------------------------------------------------------------------------------------------
PUERTO RICO- A1+ VMIG1# 100 Puerto Rico
0.4% Commonwealth,
Government
Development
Bank, Refunding,
VRDN,
3.25% due
12/01/2015 (b).. -- $ 100 -- -- -- --
A- Baa1 1,000 Puerto Rico
Municipal
Finance Agency,
GO, UT, Series
A, 5.80% due
7/01/2004....... -- -- -- -- -- --
Puerto Rico
Public Buildings
Authority,
Guaranteed
Public Education
and Health
Facilities:
A Baa1 250 Refunding,
Series K, 6.60%
due 7/01/2004.. -- -- $ 276 -- -- --
AAA Aaa 200 Series L,
6.875% due
7/01/2002 (a)... -- -- -- $ 227 -- --
- -------------------------------------------------------------------------------------------------------------------------
<CAPTION>
PRO FORMA
PENNSYLVANIA FOR
LIMITED COMBINED
MATURITY FUND
TOTAL ------------ ---------
S&P MOODY'S FACE VALUE VALUE
STATE RATINGS RATINGS VALUE ISSUE (NOTE 1A) (NOTE 1A)
<C> <C> <C> <C> <S> <C> <C>
- ------------------------------------------------------------------------------------
WISCONSIN- NR* VMIG1# $ 4,000 Mequon,
7.8% Wisconsin, BAN,
4.10% due
11/01/1998...... -- $ 4,001
AA+ Aa1 6,510 Milwaukee,
Wisconsin,
Metropolitan
Sewer District,
GO, UT, Series A
4.25% due
10/01/2000...... -- 6,548
A A1 2,795 Wisconsin
Housing and
Economic
Development
Authority,
Housing Revenue
Refunding Bonds,
Series C, 4.30%
due 11/01/1997.. -- 2,800
AA Aa2 4,385 Wisconsin State,
GO, Series C,
5.50% due
5/01/2000....... -- 4,550
AAA NR* 5,720 Wisconsin State
Health and
Educational
Facilities
Authority
Revenue Bonds
(Medical College
of Wisconsin),
Series D, 7.35%
due 12/01/15.... -- 6,372
AA Aa2 11,000 Wisconsin State,
GO, UT,
Refunding,
Series 3, 4.25%
due 11/01/1999.. -- 11,068
- -------------------------------------------------------------------------------------
PUERTO RICO- A1+ VMIG1# 100 Puerto Rico 100
0.4% Commonwealth,
Government
Development
Bank, Refunding,
VRDN,
3.25% due
12/01/2015 (b).. --
A- Baa1 1,000 Puerto Rico
Municipal
Finance Agency,
GO, UT, Series
A, 5.80% due
7/01/2004....... $1,067 1,067
Puerto Rico
Public Buildings
Authority,
Guaranteed
Public Education
and Health
Facilities:
A Baa1 250 Refunding,
Series K, 6.60%
due 7/01/2004.. -- 276
AAA Aaa 200 Series L,
6.875% due
7/01/2002 (a)... -- 227
- -------------------------------------------------------------------------------------
</TABLE>
F-17
<PAGE>
PRO FORMA COMBINED SCHEDULE OF INVESTMENTS FOR MERRILL LYNCH MUNICIPAL BOND
FUND, INC. AND
MERRILL LYNCH MULTI-STATE LIMITED MATURITY MUNICIPAL SERIES TRUST--(CONTINUED)
JULY 31, 1997
(UNAUDITED)
<TABLE>
<CAPTION>
NEW NEW
LIMITED ARIZONA MASSACHUSETTS MICHIGAN JERSEY YORK PENNSYLVANIA
MATURITY LIMITED LIMITED LIMITED LIMITED LIMITED LIMITED
PORTFOLIO MATURITY MATURITY MATURITY MATURITY MATURITY MATURITY
--------- --------- ------------- --------- --------- --------- ------------
VALUE VALUE VALUE VALUE VALUE VALUE VALUE
(NOTE 1A) (NOTE 1A) (NOTE 1A) (NOTE 1A) (NOTE 1A) (NOTE 1A) (NOTE 1A)
<S> <C> <C> <C> <C> <C> <C> <C>
- --------------------------------------------------------------------------------------------------------------------------
Total $418,216 $3,026 $5,173 $4,115 $6,669 $14,340 $7,534
Investments
(Cost
$454,952)--
100.8%..........
Liabilities in
Excess of Other
Assets --
(0.8%)..........
Net Assets --
100.0%.........
- --------------------------------------------------------------------------------------------------------------------------
<CAPTION>
PRO FORMA
FOR
COMBINED
FUND
----------
VALUE
(NOTE 1A)
- ----------------------------------------------------------------
<S> <C>
Total
Investments
(Cost
$454,952)--
100.8%.......... $459,073
Liabilities in
Excess of Other
Assets --
(0.8%).......... (3,824)
Net Assets -- ----------
100.0%......... $455,249
==========
- ----------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------------------------
</TABLE>
(a) Prerefunded.
(b) The interest rate is subject to change periodically based upon prevailing
market rates. The interest rate shown is the rate in effect at July 31,
1997.
(c) AMBAC Insured.
(d) MBIA Insured.
(e) FSA Insured.
(f) FGIC Insured.
(g) Escrowed to maturity.
(h) The interest rate is subject to change periodically and inversely based
upon prevailing market rates. The interest rate shown is the rate in
effect at July 31, 1997.
(i) SONYMA Insured.
* Not rated.
# Highest short-term rating by Moody's Investors Service, Inc.
See Notes to Financial Statements.
F-18
<PAGE>
The following unaudited pro forma Combined Statement of Assets and
Liabilities for the Combined Fund has been derived from the Statements of
Assets and Liabilities of the Funds at July 31, 1997 and such information has
been adjusted to give effect to the Reorganization as if the Reorganization
had occurred at July 31, 1997. The pro forma Combined Statement of Assets and
Liabilities is presented for informational purposes only and does not purport
to be indicative of the financial condition that actually would have resulted
if the Reorganization had been consummated at July 31, 1997. The pro forma
Combined Statement of Assets and Liabilities should be read in conjunction
with the Funds' financial statements and related notes thereto which are
incorporated by reference in this Statement of Additional Information.
MERRILL LYNCH MUNICIPAL BOND FUND, INC. AND
MERRILL LYNCH MULTI-STATE LIMITED MATURITY MUNICIPAL SERIES TRUST
PRO FORMA COMBINED STATEMENT OF ASSETS AND LIABILITIES (UNAUDITED)
<TABLE>
<CAPTION>
AS OF JULY 31, 1997
-------------------------------------------------------------
LIMITED ARIZONA MASSACHUSETTS MICHIGAN NEW JERSEY
MATURITY LIMITED LIMITED LIMITED LIMITED
PORTFOLIO MATURITY MATURITY MATURITY MATURITY
------------ ---------- ------------- ---------- ----------
<S> <C> <C> <C> <C> <C>
ASSETS:
Investments, at value*
(Note 1a).............. $418,215,979 $3,025,568 $5,173,140 $4,115,441 $6,668,628
Cash.................... 59,153 323,206 59,786 90,032 50,867
Receivables:
Interest............... 4,495,525 15,409 60,377 58,775 85,004
Capital shares sold.... 380,598 -- -- -- --
Securities sold........ 100,281 101,366 -- -- 52,156
Investment advisor
(Note 2).............. -- 16,241 21,354 23,142 2,475
Deferred organization
expenses (Note 1e)..... -- -- 2,615 2,302 3,758
Prepaid registration
fees and other assets
(Note 1e).............. 35,641 11,380 7,698 243 7,803
------------ ---------- ---------- ---------- ----------
Total assets............ 423,287,177 3,493,170 5,324,970 4,289,935 6,870,691
------------ ---------- ---------- ---------- ----------
LIABILITIES:
Payables:
Securities purchased... 6,556,147 101,467 101,326 -- 441,227
Capital shares
redeemed.............. 2,176,323 -- 36,244 -- 68,809
Dividends to
shareholders (Note
1f)................... 434,370 2,974 5,338 4,454 5,671
Investment adviser
(Note 2).............. 117,997 -- -- -- --
Distributor (Note 2)... 17,816 680 942 548 1,286
Accrued expenses and
other liabilities 106,743 30,654 45,369 33,588 31,097
------------ ---------- ---------- ---------- ----------
Total liabilities....... 9,409,396 135,775 189,219 38,590 548,090
------------ ---------- ---------- ---------- ----------
NET ASSETS:
Net assets.............. $413,877,781 $3,357,395 $5,135,751 $4,251,345 $6,322,601
============ ========== ========== ========== ==========
NET ASSETS CONSIST OF:
Class A Common Stock,
$0.10 par value+....... $ 3,414,712 $ 6,974 $ 13,507 $ 13,557 $ 17,100
Class B Common Stock,
$0.10 par value++...... 533,032 20,997 27,957 13,979 40,478
Class C Common Stock,
$0.10 par value+++..... 1,291 355 2,741 12 2,624
Class D Common Stock,
$0.10 par value++++.... 205,668 4,684 6,956 14,589 2,350
Paid-in capital in
excess of par.......... 411,724,853 3,221,545 5,218,428 4,198,169 6,241,536
Undistributed
(accumulated) realized
capital gains (losses)
on investments--net
(Note 5)............... (4,763,818) 16,274 (300,979) (150,077) (167,187)
Accumulated
distributions in excess
of realized gain on
investments--net (Note
1f).................... -- -- -- (1,779) --
Unrealized appreciation
on investments--net.... 2,762,043 86,566 167,141 162,895 185,700
------------ ---------- ---------- ---------- ----------
Net assets.............. $413,877,781 $3,357,395 $5,135,751 $4,251,345 $6,322,601
============ ========== ========== ========== ==========
NET ASSET VALUE:
Class A:
Net assets............. $340,141,818 $ 709,319 $1,355,818 $1,368,162 $1,734,544
------------ ---------- ---------- ---------- ----------
Shares outstanding..... 34,147,124 69,741 135,068 135,574 170,998
------------ ---------- ---------- ---------- ----------
Net asset value and
redemption price per
share................. $ 9.96 $ 10.17 $ 10.04 $ 10.09 $ 10.14
============ ========== ========== ========== ==========
Class B:
Net assets............. $ 53,107,866 $2,135,376 $2,806,894 $1,410,732 $4,108,454
------------ ---------- ---------- ---------- ----------
Shares outstanding..... 5,330,319 209,967 279,567 139,786 404,782
------------ ---------- ---------- ---------- ----------
Net asset value and
redemption price per
share................. $ 9.96 $ 10.17 $ 10.04 $ 10.09 $ 9.19
============ ========== ========== ========== ==========
Class C:
Net assets............. $ 128,373 $ 36,084 $ 274,926 $ 1,231 $ 241,191
------------ ---------- ---------- ---------- ----------
Shares outstanding..... 12,913 3,545 27,406 122 26,241
------------ ---------- ---------- ---------- ----------
Net asset value and
redemption price per
share................. $ 9.94 $ 10.18 $ 10.03 $ 10.09 $ 9.19
============ ========== ========== ========== ==========
</TABLE>
F-19
<PAGE>
(continued)
<TABLE>
<CAPTION>
AS OF JULY 31, 1997
-----------------------------------------------------------
LIMITED ARIZONA MASSACHUSETTS MICHIGAN NEW JERSEY
MATURITY LIMITED LIMITED LIMITED LIMITED
PORTFOLIO MATURITY MATURITY MATURITY MATURITY
------------ ---------- ------------- ---------- ----------
<S> <C> <C> <C> <C> <C>
Class D:
Net assets............. $ 20,499,724 $ 476,616 $ 698,113 $1,471,220 $ 238,412
------------ ---------- ---------- ---------- ----------
Shares outstanding..... 2,056,678 46,841 69,563 145,888 23,497
------------ ---------- ---------- ---------- ----------
Net asset value and
redemption price per
share................. $ 9.97 $ 10.18 $ 10.04 $ 10.08 $ 10.15
============ ========== ========== ========== ==========
- --------
* Identified cost....... $415,453,936 $2,939,002 $5,005,999 $3,952,546 $6,482,928
============ ========== ========== ========== ==========
+ Authorized shares-
Class A................ 150,000,000
++ Authorized shares-
Class B................ 150,000,000
+++ Authorized shares-
Class C................ 150,000,000
++++ Authorized shares-
Class D................ 150,000,000
</TABLE>
See Notes to Financial Statements.
F-20
<PAGE>
The following unaudited pro forma Combined Statement of Assets and
Liabilities for the Combined Fund has been derived from the Statements of
Assets and Liabilities of the Funds at July 31, 1997 and such information has
been adjusted to give effect to the Reorganization as if the Reorganization
had occurred at July 31, 1997. The pro forma Combined Statement of Assets and
Liabilities is presented for informational purposes only and does not purport
to be indicative of the financial condition that actually would have resulted
if the Reorganization had been consummated at July 31, 1997. The pro forma
Combined Statement of Assets and Liabilities should be read in conjunction
with the Funds' financial statements and related notes thereto which are
incorporated by reference in this Statement of Additional Information.
MERRILL LYNCH MUNICIPAL BOND FUND, INC. AND
MERRILL LYNCH MULTI-STATE LIMITED MATURITY MUNICIPAL SERIES TRUST
PRO FORMA COMBINED STATEMENT OF ASSETS AND LIABILITIES (UNAUDITED)--
(CONTINUED)
<TABLE>
<CAPTION>
AS OF JULY 31, 1997
-------------------------------------------------------
NEW YORK PENNSYLVANIA PRO FORMA
LIMITED LIMITED FOR COMBINED
MATURITY MATURITY ADJUSTMENTS FUND
----------- ------------ ------------ ------------
<S> <C> <C> <C> <C>
ASSETS:
Investments, at value*
(Note 1a);............. $14,340,013 $7,534,238 $459,073,007
Cash.................... 63,618 30,350 $ 16,314 (1) 693,326
Receivables:
Interest............... 190,115 117,057 5,022,262
Capital shares sold.... 12,515 84,550 477,663
Securities sold........ -- 100,010 353,813
Investment advisor
(Note 2).............. 5,218 9,090 77,520
Deferred organization
expenses (Note 1e)..... 4,123 3,516 (16,314)(1) --
Prepaid registration
fees and other assets
(Note 1e).............. 7,385 5,267 75,417
----------- ---------- ------------ ------------
Total assets............ 14,622,987 7,884,078 -- 465,773,008
----------- ---------- ------------ ------------
LIABILITIES:
Payables:
Securities purchased... -- 100,000 7,300,167
Capital shares
redeemed.............. 619 4,035 2,286,030
Dividends to
shareholders (Note
1f)................... 15,836 7,338 16,274 (2) 492,255
Investment adviser
(Note 2).............. -- -- 117,997
Distributor (Note 2)... 2,764 1,677 25,713
Accrued expenses and
other liabilities...... 38,433 32,371 318,255
----------- ---------- ------------ ------------
Total liabilities....... 57,652 145,421 16,274 10,540,417
----------- ---------- ------------ ------------
NET ASSETS:
Net assets.............. $14,565,335 $7,738,657 $ (16,274) $455,232,591
=========== ========== ============ ============
NET ASSETS CONSIST OF:
Class A Common Stock,
$0.10 par value+....... $ 25,477 $ 7,190 $ 1,581 (3) $ 3,500,098
Class B Common Stock,
$0.10 par value++...... 80,271 50,185 (233,867)(3) 533,032
Class C Common Stock,
$0.10 par value+++..... 659 77 (6,468)(3) 1,291
Class D Common Stock,
$0.10 par value++++.... 36,009 18,177 246,804 (3) 535,237
Paid-in capital in
excess of par.......... 14,108,036 7,509,162 (8,050)(3) 452,213,679
Undistributed
(accumulated) realized
capital gains (losses)
on
investments-net (Note
5)..................... (224,431) (63,042) (16,274) (5,669,534)
Accumulated
distributions in excess
of realized gain on
investments-net (Note
1f).................... -- -- (1,779)
Unrealized appreciation
on investments-net..... 539,314 216,908 4,120,567
----------- ---------- ------------ ------------
Net assets.............. $14,565,335 $7,738,657 $ (16,274) $455,232,591
=========== ========== ============ ============
NET ASSET VALUE:
Class A:
Net assets............. $ 2,605,219 $ 735,726 $ (3,438)(3) $348,647,168
----------- ---------- ------------ ------------
Shares outstanding..... 254,768 71,902 15,808 (3) 35,000,983
----------- ---------- ------------ ------------
Net asset value and
redemption price per
share................. $ 10.23 $ 10.23 $ 9.96
=========== ========== ============
Class B:
Net assets............. $ 8,209,327 $5,134,207 $(23,804,990)(3) $ 53,107,866
----------- ---------- ------------ ------------
Shares outstanding..... 802,714 501,850 (2,338,666)(3) 5,330,319
----------- ---------- ------------ ------------
Net asset value and
redemption price per
share................. $ 10.23 $ 10.23 $ 9.96
=========== ========== ============
Class C:
Net assets............. $ 67,418 $ 7,869 $ (628,719)(3) $ 128,373
----------- ---------- ------------ ------------
Shares outstanding..... 6,593 766 (64,673)(3) 12,913
----------- ---------- ------------ ------------
Net asset value and
redemption price per
share................. $ 10.23 $ 10.27 $ 9.94
=========== ========== ============
</TABLE>
F-21
<PAGE>
(continued)
<TABLE>
<CAPTION>
AS OF JULY 31, 1997
-----------------------------------------------------
NEW YORK PENNSYLVANIA PRO FORMA
LIMITED LIMITED FOR COMBINED
MATURITY MATURITY ADJUSTMENTS FUND
----------- ------------ ----------- ------------
<S> <C> <C> <C> <C>
Class D:
Net assets.............. $ 3,683,371 $1,860,855 $24,420,873 (3) $ 53,349,184
----------- ---------- ----------- ------------
Shares outstanding...... 360,094 181,770 2,468,038 (3) 5,352,369
----------- ---------- ----------- ------------
Net asset value and
redemption price per
share.................. $ 10.23 $ 10.24 9.97
=========== ========== ============
- --------
*Identified cost......... $13,800,699 $7,317,330 $454,952,440
----------- ---------- ------------
</TABLE>
(1) Reimbursement of the remaining unamortized deferred organization costs by
the original shareholder.
(2) Reflects payment of undistributed capital gains.
(3) Reflects the estimated conversion ratio. Holders of Class B and Class C
will receive shares of Class D of the Combined Fund.
See Notes to Financial Statements.
F-22
<PAGE>
The following unaudited pro forma combined statement of operations for the
Combined Fund has been derived from the statements of operations of the Funds
for the twelve months ended July 31, 1997, and such information has been
adjusted to give effect to the Reorganization as if the Reorganization has
occurred on August 1, 1996. The pro forma combined statement of operations is
presented for informational purposes only and does not purport to be
indicative of the results of operations that actually would have resulted if
the Reorganization had been consummated on August 1, 1996 nor which may result
from future operations. The pro forma combined statement of operations should
be read in conjunction with the Funds' financial statements and related notes
thereto which are incorporated by reference in this Statement of Additional
Information.
MERRILL LYNCH MUNICIPAL BOND FUND, INC AND
MERRILL LYNCH MULTI-STATE LIMITED MATURITY MUNICIPAL SERIES TRUST
PRO FORMA COMBINED STATEMENT OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
FOR THE TWELVE MONTHS ENDED JULY 31, 1997
--------------------------------------------------------
LIMITED ARIZONA MASSACHUSETTS MICHIGAN NEW JERSEY
MATURITY LIMITED LIMITED LIMITED LIMITED
PORTFOLIO MATURITY MATURITY MATURITY MATURITY
----------- -------- ------------- -------- ----------
<S> <C> <C> <C> <C> <C>
INVESTMENT INCOME (NOTE
1D):
Interest and
amortization of premium
and discount earned..... $19,889,679 $173,856 $312,359 $208,473 $347,105
EXPENSES:
Investment advisory fees
(Note 2)................ 1,528,848 13,268 22,132 14,977 25,494
Account maintenance and
distribution fees--Class
B (Note 2).............. 217,923 8,883 13,723 5,934 15,927
Accounting services
(Note 2)................ 40,044 33,811 48,536 41,011 26,609
Professional fees....... 20,115 34,098 44,247 39,131 35,447
Registration fees (Note
le)..................... 6,444 22,601 21,398 22,074 16,112
Transfer agent fees--
Class A (Note 2)........ 79,565 503 606 634 805
Printing and shareholder
reports................. 26,442 5,160 6,388 5,905 --
Custodian fees.......... 42,801 2,727 2,369 1,853 3,205
Transfer agent fees--
Class B (Note 2)........ 18,000 1,885 2,061 952 2,147
Directors' fees and
expenses................ 5,437 2,403 3,557 2,071 3,919
Pricing services........ 11,589 2,247 2,512 3,369 1,913
Account maintenance
fees--Class D (Note 2).. 17,953 373 717 1,085 409
Amortization of
organization expenses
(Note le)............... -- -- 1,984 1,743 2,852
Transfer agent fees--
Class D (Note 2)........ 3,589 239 307 442 164
Account maintenance and
distribution fees--Class
C (Note 2).............. 608 157 402 1 402
Transfer agent fees--
Class C (Note 2)........ 66 81 130 4 118
Other................... 4,924 2,695 2,069 14,366 1,694
----------- -------- -------- -------- --------
Total expenses before
reimbursement........... 2,024,348 131,131 173,138 155,552 137,217
Reimbursement of
expenses................ -- (85,705) (95,062) (107,880) (51,282)
----------- -------- -------- -------- --------
Total expenses after
reimbursement........... 2,024,348 45,426 78,076 47,672 85,935
----------- -------- -------- -------- --------
Investment income--net.. 17,865,331 128,430 234,283 160,801 261,170
----------- -------- -------- -------- --------
</TABLE>
F-23
<PAGE>
<TABLE>
<CAPTION>
FOR THE TWELVE MONTHS ENDED JULY 31, 1997
-------------------------------------------------------
LIMITED ARIZONA MASSACHUSETTS MICHIGAN NEW JERSEY
MATURITY LIMITED LIMITED LIMITED LIMITED
PORTFOLIO MATURITY MATURITY MATURITY MATURITY
----------- -------- ------------- -------- ----------
<S> <C> <C> <C> <C> <C>
REALIZED & UNREALIZED
GAIN (LOSS) ON
INVESTMENTS--NET (NOTES
1D & 3):
Realized gain (loss) on
investments............ 1,679,262 87,712 51,279 21,697 126,030
Change in unrealized
appreciation on
investments--net....... 624,270 (58,065) (12,363) 38,238 (105,889)
----------- -------- -------- -------- --------
NET INCREASE IN NET
ASSETS RESULTING FROM
OPERATIONS............. $20,168,863 $158,077 $273,199 $220,736 $281,311
=========== ======== ======== ======== ========
</TABLE>
See Notes to Financial Statements.
F-24
<PAGE>
The following unaudited pro forma combined statement of operations for the
Combined Fund has been derived from the statements of operations of the Funds
for the twelve months ended July 31, 1997, and such information has been
adjusted to give effect to the Reorganization as if the Reorganization has
occurred on August 1, 1996. The pro forma combined statement of operations is
presented for informational purposes only and does not purport to be
indicative of the results of operations that actually would have resulted if
the Reorganization had been consummated on August 1, 1996 nor which may result
from future operations. The pro forma combined statement of operations should
be read in conjunction with the Funds' financial statements and related notes
thereto which are incorporated by reference in this Statement of Additional
Information.
MERRILL LYNCH MUNICIPAL BOND FUND, INC. AND
MERRILL LYNCH MULTI-STATE LIMITED MATURITY MUNICIPAL SERIES TRUST
PRO FORMA COMBINED STATEMENT OF OPERATIONS--(CONTINUED)
(UNAUDITED)
<TABLE>
<CAPTION>
FOR THE TWELVE MONTHS ENDED JULY 31, 1997
-------------------------------------------------
PRO FORMA
NEW YORK PENNSYLVANIA FOR
LIMITED LIMITED COMBINED
MATURITY MATURITY ADJUSTMENTS(1) FUND
-------- ------------ -------------- -----------
<S> <C> <C> <C> <C>
INVESTMENT INCOME (NOTE 1D):
Interest and amortization of
premium and discount
earned...................... $812,885 $402,719 $22,147,076
EXPENSES:
Investment advisory fees
(Note 2).................... 57,645 29,758 1,692,122
Account maintenance and
distribution fees-Class B
(Note 2).................... 32,533 20,568 315,491
Accounting services (Note
2).......................... 34,860 42,078 (220,000) 46,949
Professional fees........... 34,696 38,410 (206,951) 39,193
Registration fees (Note
1e)......................... 20,605 16,392 125,626
Transfer agent fees-Class A
(Note 2).................... 848 280 83,241
Printing and shareholder
reports..................... 19,539 4,570 (33,000) 35,004
Custodian fees.............. 3,614 2,902 59,471
Transfer agent fees-Class B
(Note 2).................... 3,545 2,641 31,231
Directors' fees and
expenses.................... 8,418 4,231 (21,000) 9,036
Pricing services............ 3,925 2,379 27,934
Account maintenance fees-
Class D (Note 2)............ 4,216 1,831 26,584
Amortization of organization
expenses (Note 1e).......... 3,123 2,668 12,370
Transfer agent fees-Class D
(Note 2).................... 1,276 651 6,668
Account maintenance and
distribution fees-Class C
(Note 2).................... 234 7 1,811
Transfer agent fees-Class C
(Note 2).................... 75 9 483
Other....................... -- 2,196 27,944
-------- -------- --------- -----------
Total expenses before
reimbursement............... 229,152 171,571 (480,951) 2,541,158
Reimbursement of expenses... (76,880) (64,142) 480,951 --
-------- -------- --------- -----------
Total expenses after
reimbursement............... 152,272 107,429 -- 2,541,158
-------- -------- --------- -----------
Investment income-net....... 660,613 295,290 -- 19,605,918
-------- -------- --------- -----------
REALIZED & UNREALIZED GAIN
ON INVESTMENTS-NET
(NOTES 1D & 3):
Realized gain on
investments................. 36,848 37,824 2,040,652
Change in unrealized
appreciation on investments-
net......................... 214,688 56,086 756,965
-------- -------- --------- -----------
NET INCREASE IN NET ASSETS
RESULTING FROM OPERATIONS... $912,149 $389,200 $ -- $22,403,535
======== ======== ========= ===========
</TABLE>
- ----
(1) Reflects the anticipated savings of the combination.
See Notes to Financial Statements.
F-25
<PAGE>
MERRILL LYNCH MUNICIPAL BOND FUND, INC. AND
MERRILL LYNCH MULTI-STATE LIMITED MATURITY MUNICIPAL SERIES TRUST
NOTES TO PRO FORMA FINANCIAL STATEMENTS
(UNAUDITED)
1. SIGNIFICANT ACCOUNTING POLICIES:
Merrill Lynch Municipal Bond Fund, Inc. ("the Fund") is registered under the
Investment Company Act of 1940 as a diversified, open-end management
investment company. These unaudited financial statements reflect all
adjustments which are, in the opinion of management, necessary to a fair
statement of the results for the interim period presented. All such
adjustments are of a normal recurring nature. The Fund's Portfolios offer four
classes of shares under the Merrill Lynch Select PricingSM System. Shares of
Class A and Class D are sold with a front-end sales charge. Shares of Class B
and Class C may be subject to a contingent deferred sales charge. All classes
of shares have identical voting, dividend, liquidation and other rights and
the same terms and conditions, except that Class B, Class C and Class D shares
bear certain expenses related to the account maintenance of such shares, and
Class B and Class C shares also bear certain expenses related to the
distribution of such shares. Each class has exclusive voting rights with
respect to matters relating to its account maintenance and distribution
expenditures. The following is a summary of significant accounting policies
followed by the Fund.
(a) Valuation of investments--Municipal bonds and money market securities
are traded primarily in the over-the-counter markets and are valued at the
most recent bid price or yield equivalent as obtained from dealers that make
markets in such securities. Positions in future contracts and options thereon,
which are traded on exchanges, are valued at closing prices as of the close of
such exchanges. Assets for which market quotations are not readily available
are valued at fair value on a consistent basis using methods determined in
good faith by the combined Portfolios' Board of Directors, including
valuations furnished by a pricing service retained by the Fund, which may
utilize a matrix system for valuations. The procedures of the pricing service
and its valuations are reviewed by the officers of the Fund under the general
supervision of the Board of Directors.
(b) Derivative financial instruments--The combined portfolio may engage in
various portfolio strategies to seek to increase its return by hedging its
portfolio against adverse movements in the debt markets. Losses may arise due
to changes in the value of the contract or if the counterparty does not
perform under the contract.
. Financial futures contracts--The combined Portfolio may purchase or sell
interest rate futures contracts and options on such futures contracts for
the purpose of hedging the market risk on existing securities or the
intended purchase of securities. Futures contracts are contracts for
delayed delivery of securities at a specific future date and at a
specific price or yield. Upon entering into a contract, the combined
Portfolio deposits and maintains as collateral such initial margin as
required by the exchange on which the transaction is effected. Pursuant
to the contract, the combined Portfolio agrees to receive from or pay to
the broker an amount of cash equal to the daily fluctuation in value of
the contract. Such receipts or payments are known as variation margin and
are recorded by the combined Portfolio as unrealized gains or losses.
When the contract is closed, the combined Portfolio records a realized
gain or loss equal to the difference between the value of the contract at
the time it was opened and the value at the time it was closed.
(c) Income taxes--It is the combined Portfolio's policy to comply with the
requirements of the Internal Revenue Code applicable to regulated investment
companies and to distribute substantially all of its taxable income to its
shareholders. Therefore, no Federal income tax provision is required.
(d) Security transactions and investment income--Security transactions are
recorded on the dates the transactions are entered into (the trade dates).
Interest income is recognized on the accrual basis. Discounts and market
premiums are amortized into interest income. Realized gains and losses on
security transactions are determined on the identified cost basis.
(e) Deferred organization expenses and prepaid registration fees--Deferred
organization expenses are charged to expense on a straight-line basis over a
five-year period. Prepaid registration fees are charged to expenses as the
related shares are issued.
F-26
<PAGE>
MERRILL LYNCH MUNICIPAL BOND FUND, INC. AND
MERRILL LYNCH MULTI-STATE LIMITED MATURITY MUNICIPAL SERIES TRUST
NOTES TO PRO FORMA FINANCIAL STATEMENTS--(CONTINUED)
(UNAUDITED)
(f) Dividends and distributions--Dividends from net investment income are
declared daily and paid monthly. Distributions of capital gains are recorded
on the ex-dividend dates. Distributions in excess of realized capital gains
are due primarily to differing tax treatments for post-October losses.
2. INVESTMENT ADVISORY AGREEMENT AND TRANSACTIONS WITH AFFILIATES:
The combined Portfolio has entered into an Investment Advisory Agreement
with Fund Asset Management, L.P. ("FAM"). The general partner of FAM is
Princeton Services, Inc. ("PSI"), an indirect wholly-owned subsidiary of
Merrill Lynch & Co., Inc. ("ML & Co."), which is the limited partner. The
combined Portfolio has also entered into a Distribution Agreement and
Distribution Plans with Merrill Lynch Funds Distributor, Inc. ("MLFD" or
"Distributor"), a wholly-owned subsidiary of Merrill Lynch Group, Inc.
FAM is responsible for the management of the Fund's portfolios and provides
the necessary personnel, facilities, equipment and certain other services
necessary to the operation of the Fund. For such services, the Limited
Maturity Portfolio pays a monthly fee based upon the aggregate daily value of
the net assets of the Portfolio and the Fund's Insured Portfolio and National
Portfolio at the following annual rates: 0.40% of these Portfolios' aggregate
average daily net assets not exceeding $250 million; 0.375% of such average
daily net assets in excess of $250 million but not exceeding $400 million;
0.35% of such average daily net assets in excess of $400 million but not
exceeding $550 million; and 0.325% of such average daily net assets in excess
of $550 million. Also, Arizona Limited Maturity, Massachusetts Limited
Maturity, Michigan Limited Maturity, New Jersey Limited Maturity, New York
Limited Maturity, and Pennsylvania Limited Maturity pay a monthly fee at the
annual rate of 0.35% of that Fund's average daily net assets.
For the twelve months ended July 31, 1997 FAM had voluntarily waived
management fees and reimbursed each Portfolio for additional expenses as
follows:
<TABLE>
<CAPTION>
ARIZONA MASSACHUSETTS MICHIGAN
LIMITED MATURITY LIMITED MATURITY LIMITED MATURITY
---------------- ---------------- ----------------
<S> <C> <C> <C>
Management fee.......... $13,268 $22,132 $14,977
Additional expenses..... $72,437 $72,930 $92,903
<CAPTION>
NEW JERSEY NEW YORK PENNSYLVANIA
LIMITED MATURITY LIMITED MATURITY LIMITED MATURITY
---------------- ---------------- ----------------
<S> <C> <C> <C>
Management fee.......... $25,494 $57,645 $29,758
Additional expenses..... $25,788 $19,235 $34,384
</TABLE>
Pursuant to the distribution plans (the "Distribution Plans") adopted by the
combined Portfolio in accordance with Rule 12b-1 under the Investment Company
Act of 1940, the combined Portfolio pays the Distributor ongoing account
maintenance and distribution fees. The fees are accrued daily and paid monthly
at annual rates based upon the average daily net assets of the shares as
follows:
<TABLE>
<CAPTION>
ACCOUNT MAINTENANCE FEES DISTRIBUTION FEES
------------------------ -----------------
<S> <C> <C>
Class B....................... 0.15% 0.20%
Class C....................... 0.15% 0.20%
Class D....................... 0.10%
</TABLE>
Pursuant to a sub-agreement with the Distributor, Merrill Lynch, Pierce,
Fenner & Smith Inc. ("MLPF&S"), a subsidiary of ML & Co., also provides
account maintenance and distribution services to the combined Portfolio. The
ongoing account maintenance fee compensates the Distributor and MLPF&S for
F-27
<PAGE>
MERRILL LYNCH MUNICIPAL BOND FUND, INC. AND
MERRILL LYNCH MULTI-STATE LIMITED MATURITY MUNICIPAL SERIES TRUST
NOTES TO PRO FORMA FINANCIAL STATEMENTS--(CONTINUED)
(UNAUDITED)
providing account maintenance services to Class B, Class C and Class D
shareholders. The ongoing distribution fee compensates the Distributor and
MLPF&S for providing shareholder and distribution-related services to Class B
and Class C shareholders.
For the twelve months ended July 31, 1997, MLFD earned underwriting
discounts and direct commissions and MLPF&S earned dealer concessions on sales
of the combined Portfolio's Class A and Class D shares as follows:
<TABLE>
<CAPTION>
LIMITED ARIZONA MASSACHUSETTS
MATURITY LIMITED LIMITED
PORTFOLIO MATURITY MATURITY
--------- -------- -------------
<S> <C> <C> <C>
Class A:
MLFD.................................... $ 1,097 $ 7 $ --
MLPF&S.................................. 9,522 194 --
Class D:
MLFD.................................... $ 1,630 $ 199 $ 9
MLPF&S.................................. 18,560 2,172 205
</TABLE>
<TABLE>
<CAPTION>
NEW
MICHIGAN JERSEY NEW YORK PENNSYLVANIA
LIMITED LIMITED LIMITED LIMITED
MATURITY MATURITY MATURITY MATURITY
-------- -------- -------- ------------
<S> <C> <C> <C> <C>
Class A:
MLFD............................. $ 8 $-- $ -- $ --
MLPF&S........................... 68 -- 5 --
Class D:
MLFD............................. $ 46 $ 2 $ 70 $ 5
MLPF&S........................... 350 48 767 210
</TABLE>
MLPF&S received contingent deferred sales charges relating to transactions
in Class B shares of beneficial interest as follows:
<TABLE>
<CAPTION>
CLASS B SHARES
--------------
<S> <C>
Limited Maturity Portfolio.... $ 3,200
Arizona Limited Maturity...... 427
Massachusetts Limited
Maturity..................... 3,151
Michigan Limited Maturity..... 397
New Jersey Limited Maturity... 4,461
New York Limited Maturity..... 18,743
Pennsylvania Limited
Maturity..................... 878
</TABLE>
Merrill Lynch Financial Data Services, Inc. ("MLFDS"), a wholly-owned
subsidiary of ML & Co., is the combined Portfolio's transfer agent.
Accounting services are provided to the combined Portfolio by FAM at cost.
Certain officers and/or directors of the combined Portfolio are officers
and/or directors of FAM, PSI, MLFD, MLFDS, and/or ML & Co.
F-28
<PAGE>
PART C
OTHER INFORMATION
ITEM 15. INDEMNIFICATION.
Section 2-418 of the General Corporation Law of the State of Maryland,
Article VI of the Registrant's Articles of Incorporation, Article VI of the
Registrant's By-Laws and the Registrant's Investment Advisory Agreement with
Fund Asset Management, Inc. (now known as Fund Asset Management, L.P.; the
"Investment Adviser") provide for indemnification.
Insofar as indemnification for liabilities arising under the Securities Act
of 1933, as amended (the "Securities Act"), may be provided to directors,
officers and controlling persons of each Fund, pursuant to the foregoing
provisions or otherwise, each Fund has been advised that in the opinion of the
Securities and Exchange Commission, such indemnification is against public
policy as expressed in the Securities Act and, therefore, is unenforceable. In
the event that a claim for indemnification against such liabilities (other
than the payment by a Fund of expenses incurred or paid by a director, officer
or controlling person of the Registrant in connection with any successful
defense of any action, suit or proceeding) is asserted by such director,
officer or controlling person in connection with the securities being
registered, the Registrant, unless in the opinion of its counsel the matter
has been settled by controlling precedent, will submit to a court of
appropriate jurisdiction the question whether such indemnification by it is
against public policy as expressed in the Securities Act and will be governed
by the final adjudication of such issue.
Reference is made to (i) Section Six of the Purchase Agreement relating to
the Registrant's Common Stock, a form of which previously was filed as an
exhibit to the Common Stock Registration Statement (as defined below), and
(ii) Section Seven of the Purchase Agreement relating to the Registrant's
AMPS, a form of which previously was filed as an exhibit to the AMPS
Registration Statement (as defined below), for provisions relating to the
indemnification of the underwriter.
ITEM 16. EXHIBITS.
<TABLE>
<S> <C>
(1)(a) --Articles of Incorporation (incorporated by reference to Exhibit 1 to Post-Effective Amendment No.
4
to Registrant's Registration Statement on Form N-1, filed October 31, 1980 ("Post-Effective
Amendment No. 4")).
(1)(b) --Articles of Amendment (incorporated by reference to Exhibit 1 to Post-Effective Amendment No. 13
to Registrant's Registration Statement on Form N-1A, filed October 12, 1988 ("Post-Effective
Amendment No. 13")).
(1)(c) --Articles Supplementary to the Articles of Incorporation increasing the authorized capital stock of
the
Insured Portfolio (incorporated by reference to Exhibit 1(c) to Post-Effective Amendment No. 15 to
Registrant's Registration Statement on Form N-1A, filed October 29, 1990).
(1)(d) --Articles Supplementary to the Articles of Incorporation establishing Class B Common Stock of
Limited Maturity Portfolio (incorporated by reference to Exhibit 1(d) to Post-Effective Amendment
No. 16 to Registrant's Registration Statement on Form N-1A, filed September 1, 1992).
(2) --By-Laws of the Registrant (incorporated by reference to Exhibit 2 to Post-Effective Amendment
No. 13).
(3) --Not applicable.
(4) --Form of Agreement and Plan of Reorganization between the Registrant and Merrill Lynch
Multi-State Limited Maturity Municipal Series Trust(a).
(5) --Specimen certificates for Class A shares of Limited Maturity Portfolio Series Common Stock of
Registrant (incorporated by reference to Exhibit 4 to Post-Effective Amendment No. 4).
</TABLE>
C-1
<PAGE>
<TABLE>
<C> <S>
(6) --Advisory Agreement between the Registrant and Fund Asset Management,
Inc. (incorporated by
reference to Exhibit 5 to Post-Effective Amendment No. 4).
(7)(a) --Form of Amended Class A Shares Distribution Agreement between the
Registrant and Merrill Lynch
Funds Distributor, Inc. (including Form of Selected Dealers
Agreement) (incorporated by reference
to Exhibit 6 to Post-Effective Amendment No. 20 to the Registrant's
Registration Statement on Form
N-1A, filed October 31, 1995 ("Post-Effective Amendment No. 20")).
(7)(b) --Form of Class B Shares Distribution Agreement between the Registrant
and Merrill Lynch Funds
Distributor, Inc. (including Form of Selected Dealers Agreement)
(incorporated by reference to
Exhibit 6 to Post-Effective Amendment No. 20).
(7)(c) --Form of Class C Shares Distribution Agreement between Registrant and
Merrill Lynch Funds
Distributor, Inc. (incorporated by reference to Exhibit 6 to Post-
Effective Amendment No. 20).
(7)(d) --Form of Class D Shares Distribution Agreement between Registrant and
Merrill Lynch Funds
Distributor, Inc. (incorporated by reference to Exhibit 6 to Post-
Effective Amendment No. 20).
(8) --None.
(9) --Custodian Agreement between the Registrant and The Bank of New York
(incorporated by reference
to Exhibit 8 to Post-Effective amendment No. 13).
(10)(a) --Amended and Restated Class B Shares Distribution Plan of Registrant
(including Class B Shares
Distribution Plan Sub-Agreement of the Registrant) (incorporated by
reference to Exhibit 15 to Post-
Effective Amendment No. 20).
(10)(b) --Form of Class C Shares Distribution Plan of Registrant (including
Class C Shares Distribution Plan
Sub-Agreement) (incorporated by reference to Exhibit 15 to Post-
Effective Amendment No. 20).
(10)(c) --Form of Class D Shares Distribution Plan of Registrant (including
Class D Shares Distribution Plan
Sub-Agreement) (incorporated by reference to Exhibit 15 to Post-
Effective Amendment No. 20).
(11) --Opinion and Consent of Rogers & Wells, counsel for the Registrant.
(12) --Private Letter Ruling from the Internal Revenue Service(b).
(13) --Not applicable.
(14)(a) --Consent of Deloitte & Touche llp, independent auditors for the
Registrant, as to Merrill Lynch Municipal Bond Fund, Inc.
(14)(b) --Consent of Deloitte & Touche llp, independent auditors for the
Registrant, as to Merrill Lynch Multi-State Limited Maturity
Municipal Series Trust.
(15) --Not applicable.
(16) --Power of Attorney (Included on the signature page of the
Registration Statement).
(17)(a) --Declaration pursuant to Rule 24f-2 under the Investment Company Act
of 1940 of the Registrant
(incorporated by reference to Registrant's Requisition Statement on
Form N-1, filed September 16,
1977).
(17)(b) --Prospectus dated October 7, 1997, and Statement of Additional
Information dated October 7,
1997, of the Registrant.
(17)(c) --Prospectus dated November 27, 1996, and Statement of Additional
Information dated November 27, 1996, of Merrill Lynch Multi-State
Limited Maturity Municipal Series Trust.
(17)(d) --Annual Report to Stockholders of Merrill Lynch Multi-State Limited
Maturity Municipal Series
Trust for the fiscal year ended July 31, 1997.
(17)(e) --Annual Report to Stockholders of Merrill Lynch Municipal Bond Fund,
Inc. for the fiscal year ended
June 30, 1997.
</TABLE>
- --------
(a)Included in Exhibit I to the Proxy Statement and Prospectus contained in
this Registration Statement.
(b)To be filed by amendment.
ITEM 17. Undertakings.
(a) The Registrant undertakes to suspend offering of the shares of Common
Stock covered hereby until it amends its Prospectus contained herein if (1)
subsequent to the effective date of this Registration Statement, its net asset
value per share of Common Stock declines more than 10 percent from its net
asset value per share of Common Stock as of the effective date of this
Registration Statement, or (2) its net asset value per share of Common Stock
increases to an amount greater than its net proceeds as stated in the
Prospectus contained herein.
C-2
<PAGE>
(b) The Registrant undertakes that:
(1) For the purpose of determining any liability under the Securities
Act, the information omitted from the form of prospectus filed as part of a
registration statement in reliance upon Rule 430A and contained in the form
of prospectus filed by the Registrant pursuant to Rule 497(h) under the
Securities Act shall be deemed to be a part of the registration statement
as of the time it was declared effective.
(2) For the purpose of determining any liability under the Securities
Act, each post-effective amendment that contains a form of prospectus shall
be deemed to be a new registration statement relating to the securities
offered therein, and the offering of such securities at that time shall be
deemed to be the initial bona fide offering thereof.
(3) Registrant undertakes to file, by post-effective amendment, a copy of
the Internal Revenue Service private letter ruling applied for, within a
reasonable time after receipt of such ruling.
C-3
<PAGE>
SIGNATURES
AS REQUIRED BY THE SECURITIES ACT OF 1933, THIS AMENDMENT TO THE
REGISTRATION STATEMENT HAS BEEN SIGNED ON BEHALF OF THE REGISTRANT, IN THE
TOWNSHIP OF PLAINSBORO AND STATE OF NEW JERSEY, ON THE 24TH DAY OF NOVEMBER,
1997.
MERRILL LYNCH MUNICIPAL BOND FUND,
INC.
(Registrant)
/s/ Terry K. Glenn
___________________________________
(TERRY K. GLENN, EXECUTIVE VICE
PRESIDENT)
AS REQUIRED BY THE SECURITIES ACT OF 1933, THIS AMENDMENT TO THE
REGISTRATION STATEMENT HAS BEEN SIGNED BY THE FOLLOWING PERSONS IN THE
CAPACITIES AND ON THE DATES INDICATED.
SIGNATURES TITLE DATE
President (Principal
Arthur Zeikel* Executive Officer)
- ------------------------------------- and Director
(ARTHUR ZEIKEL)
Treasurer (Principal
Gerald M. Richard* Financial and
- ------------------------------------- Accounting Officer)
(GERALD M. RICHARD)
Director
Ronald W. Forbes*
- -------------------------------------
(RONALD W. FORBES)
Director
Cynthia Montgomery*
- -------------------------------------
(CYNTHIA A. MONTGOMERY)
Director
Charles C. Reilly*
- -------------------------------------
(CHARLES C. REILLY)
Director
Kevin A. Ryan*
- -------------------------------------
(KEVIN A. RYAN)
Director
Richard R. West*
- -------------------------------------
(RICHARD R. WEST)
/s/ Terry K. Glenn November 24,
1997
By: ____________________________
(TERRY K. GLENN, ATTORNEY-IN-FACT)
C-4
<PAGE>
EXHIBIT 11
ROGERS & WELLS
200 PARK AVENUE
NEW YORK, NEW YORK 10166
TELEPHONE: (212) 878-8000
FACSIMILE: (212) 878-8375
November 24, 1997
Merrill Lynch Municipal Bond Fund, Inc.
P.O. Box 9011
Princeton, New Jersey 08543-9011
Ladies and Gentlemen:
We have acted as counsel for Merrill Lynch Municipal Bond Fund, Inc., a
Maryland corporation (the "Fund"), in connection with the preparation and
filing with the Securities and Exchange Commission under the Securities Act of
1933, as amended, of a Registration Statement on Form N-14 (File Nos. 333-
37349 and 811-2688) (the "Registration Statement") relating to the issuance by
the Fund of its shares of Limited Maturity Portfolio Common Stock, par value
$0.10 per share (the "Shares"), in exchange for substantially all of the
assets of, and the assumption of substantially all of the liabilities of,
Merrill Lynch Arizona Limited Maturity Municipal Bond Fund, Merrill Lynch
Massachusetts Limited Maturity Municipal Bond Fund, Merrill Lynch Michigan
Limited Maturity Municipal Bond Fund, Merrill Lynch New Jersey Limited
Maturity Municipal Bond Fund, Merrill Lynch New York Limited Maturity
Municipal Bond Fund and Merrill Lynch Pennsylvania Limited Maturity Municipal
Bond Fund, each a series (collectively, the "State Funds") of Merrill Lynch
Multi-State Limited Maturity Municipal Series Trust, a Massachusetts business
trust (the "Trust").
In so acting, we have examined and relied upon originals or copies,
certified or otherwise identified to our satisfaction, of such corporate
records, documents, certificates and other instruments as in our judgment are
necessary or appropriate to enable us to render the opinions expressed below.
Based upon the foregoing, and such examination of law as we have deemed
necessary, we are of the opinion that:
1. The Fund has been duly incorporated and is a validly existing
corporation in good standing under the laws of the State of Maryland.
2. The issuance of the Shares in consideration for the acquisition by the
Fund of substantially all of the assets of, and the assumption by the Fund
of substantially all of the liabilities of, the State Funds in the
transaction described in the Registration Statement have been duly
authorized and, when issued as contemplated in the Registration Statement,
the Shares will be legally issued, fully paid and non-assessable.
We hereby consent to the filing of this opinion with the Securities and
Exchange Commission as an Exhibit to the Registration Statement. In giving
this consent, we do not admit that we are within the category of persons whose
consent is required under Section 7 of the Securities Act of 1933, as amended,
or the Rules and Regulations of the Securities and Exchange Commission
thereunder.
Our opinion is limited to the laws of the State of New York, the corporate
laws of the State of Maryland and the federal laws of the United States of
America. As to certain matters governed by the laws of the State of Maryland,
we have relied on the opinion of Wilmer, Cutler & Pickering.
Very truly yours,
/s/ Rogers & Wells
<PAGE>
INDEPENDENT AUDITORS' CONSENT
Merrill Lynch Municipal Bond Fund, Inc.:
We consent to the incorporation by reference in this Registration Statement
on Form N-14 of our report dated August 15, 1997 appearing in the annual
report to shareholders of the Merrill Lynch Municipal Bond Fund, Inc. for the
year ended June 30, 1997, which is included in the Merrill Lynch Municipal
Bond Fund, Inc. Statement of Additional Information dated October 7, 1997, and
to the references to us under the captions "Comparison of the State Funds and
Limited Maturity Portfolio--Financial Highlights" and "Experts" appearing in
the Proxy Statement and Prospectus, which is part of such Registration
Statement.
Deloitte & Touche LLP
Princeton, New Jersey
November 24, 1997
<PAGE>
EXHIBIT 14(b)
INDEPENDENT AUDITORS' CONSENT
Merrill Lynch Multi-State Limited Maturity Municipal Series Trust:
We consent to the incorporation by reference in this Registration Statement
on Form N-14 of our report dated September 12, 1997 appearing in the annual
report to shareholders of the Merrill Lynch Multi-State Limited Maturity
Municipal Series Trust for the year ended July 31, 1997, and to the references
to us under the captions "Comparison of the State Funds and Limited Maturity
Portfolio--Financial Highlights" and "Experts" appearing in the Proxy
Statement and Prospectus, which is part of such Registration Statement.
Deloitte & Touche LLP
Princeton, New Jersey
November 24, 1997
<PAGE>
EXHIBIT 17(b)
PROSPECTUS
OCTOBER 7, 1997
MERRILL LYNCH MUNICIPAL BOND FUND, INC.
P.O. BOX 9011, PRINCETON, NEW JERSEY 08543-9011 - PHONE NO. (609) 282-2800
------------------------
Merrill Lynch Municipal Bond Fund, Inc. (the "Fund") is a professionally
managed, diversified, open-end investment company that seeks to provide
shareholders with as high a level of income exempt from Federal income taxes as
is consistent with the investment policies of each of its Portfolios and prudent
investment management. The Fund is a series fund and is comprised of three
separate Portfolios, each of which invests primarily in a diversified portfolio
of tax-exempt Municipal Bonds, principally consisting of state, municipal and
public authority securities. Each of the Portfolios pursues its investment
objective through the separate investment policies described below:
Insured Portfolio invests primarily in long-term, investment grade Municipal
Bonds, each of which is covered by portfolio insurance guaranteeing the timely
payment of principal at maturity and interest.
National Portfolio invests primarily in long-term medium to lower grade
Municipal Bonds offering higher yields than the Insured Portfolio but also
subject to greater risks than investment grade Municipal Bonds.
Limited Maturity Portfolio invests primarily in investment grade Municipal
Bonds with a maximum maturity not to exceed four years and, depending on market
conditions, an average maturity of less than two years is anticipated. The
Limited Maturity Portfolio can be expected to offer the lowest yield of the
three Portfolios, but it will be subject to less market risk than the
longer-term Portfolios.
For more information on the Fund's investment objective and policies, please
see "Investment Objective and Policies" on page 19.
------------------------
Each Portfolio is, in effect, a separate fund issuing its own shares.
Pursuant to the Merrill Lynch Select Pricing(SM) System, each Portfolio of the
Fund offers four classes of shares, each with a different combination of sales
charges, ongoing fees and other features. Class C shares of the Limited Maturity
Portfolio are available only through the Exchange Privilege. The Merrill Lynch
Select Pricing(SM) System permits an investor to choose the method of purchasing
shares that the investor believes is most beneficial given the amount of the
purchase, the length of time the investor expects to hold the shares and other
relevant circumstances. See "Merrill Lynch Select Pricing(SM) System" on page 8.
Class A and Class D shares of the Fund's Portfolios may be purchased
directly from Merrill Lynch Funds Distributor, Inc. (the "Distributor"), P.O.
Box 9081, Princeton, New Jersey 08543-9081 ((609) 282-2800), or from securities
dealers that have entered into selected dealer agreements with the Distributor,
including Merrill Lynch, Pierce, Fenner & Smith Incorporated ("Merrill Lynch").
Class B and Class C shares of the Fund's Portfolios may only be purchased either
directly from the Distributor or Merrill Lynch. See "Purchase of Shares" below.
The minimum initial purchase for shares of each Portfolio is $1,000, and the
minimum subsequent purchase in each Portfolio is $50 except that for
participants in certain fee-based programs the minimum initial purchase is $500
and the minimum subsequent purchase is $50. Merrill Lynch may charge its
customers a processing fee (presently $5.35) for confirming purchases and
repurchases. Purchases and redemptions made directly through the Fund's transfer
agent are not subject to the processing fee. See "Purchase of Shares" and
"Redemption of Shares." The net investment income of each Portfolio is declared
daily and paid monthly.
------------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES
AND EXCHANGE COMMISSION NOR HAS THE COMMISSION PASSED UPON THE ACCURACY
OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
------------------------
This Prospectus sets forth in concise form the information about the Fund
that a prospective investor should know before investing in the Fund. Investors
should read and retain this Prospectus for future reference. Additional
information about the Fund has been filed with the Securities and Exchange
Commission (the "Commission") in a Statement of Additional Information, dated
October 7, 1997, and is available upon request and without charge, by calling or
writing the Fund at the address and telephone number set forth above. The
Commission maintains a Web site (http://www.sec.gov) that contains the Statement
of Additional Information, material incorporated by reference and other
information regarding the Fund. The Statement of Additional Information is
hereby incorporated by reference into this Prospectus.
<PAGE>
------------------------
FUND ASSET MANAGEMENT--INVESTMENT ADVISER
MERRILL LYNCH FUNDS DISTRIBUTOR, INC.--DISTRIBUTOR
INSURED PORTFOLIO
FEE TABLE
A general comparison of the sales arrangements and other nonrecurring and
recurring expenses applicable to shares of the Fund follows:
<TABLE>
<CAPTION>
CLASS A(a) CLASS B(b) CLASS C CLASS D
----------- ----------------------- -------------- ---------
<S> <C> <C> <C> <C>
SHAREHOLDER TRANSACTION EXPENSES:
Maximum Sales Charge Imposed on Purchases
(as a percentage of offering price)...... 4.00%(c) None None 4.00%(c)
Sales Charge Imposed on Dividend
Reinvestments............................ None None None None
Deferred Sales Charge (as a percentage of
original purchase price or redemption
proceeds, whichever is lower)............ None(d) 4.00% during the first 1.00% for one None(d)
year, decreasing 1.00% year(f)
annually thereafter to
0.0% after the fourth
year(e)
Exchange Fee............................... None None None None
ANNUAL FUND OPERATING EXPENSES (AS A
PERCENTAGE OF AVERAGE NET ASSETS):
Investment Advisory Fees(g)................ 0.36% 0.36% 0.36% 0.36%
12b-1 Fees(h):
Account Maintenance Fees................... None 0.25% 0.25% 0.25%
Distribution Fees.......................... None 0.50% 0.55% 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........................... 0.01% 0.01% 0.01% 0.01%
Shareholder Servicing Costs(i)........... 0.03% 0.04% 0.05% 0.03%
Other.................................... 0.04% 0.03% 0.03% 0.04%
------ ----- ----- -----
Total Other Expenses................... 0.08% 0.08% 0.09% 0.08%
------ ----- ----- -----
Total Fund Operating Expenses.............. 0.44% 1.19% 1.25% 0.69%
====== ===== ===== =====
</TABLE>
- ---------------
(a) Class A shares are sold to a limited group of investors including existing
Class A shareholders and participants in certain fee-based programs. See
"Purchase of Shares -- Initial Sales Charge Alternatives -- Class A and
Class D Shares" -- page 33.
(b) Class B shares convert to Class D shares automatically approximately ten
years after initial purchase. See "Purchase of Shares -- Deferred Sales
Charge Alternatives -- Class B and Class C Shares" -- page 36.
(c) Reduced for purchases of $25,000 and over and waived for purchases of Class
A shares in connection with certain fee-based programs. Class A or Class D
purchases of $1,000,000 or more may not be subject to an initial sales
charge. See "Purchase of Shares -- Initial Sales Charge
Alternatives -- Class A and Class D Shares" -- page 33.
(d) Class A and Class D shares are not subject to a contingent deferred sales
charge ("CDSC"), except that certain purchases of $1,000,000 or more that
are not subject to an initial sales charge may instead be subject to a CDSC
of 1.00% of amounts redeemed within the first year after purchase. Such CDSC
may be waived in connection with certain fee-based programs. See
"Shareholder Services -- Fee-Based Programs" -- page 45.
(e) The CDSC may be modified in connection with certain fee-based programs. See
"Shareholder Services -- Fee-Based Programs" -- page 45.
(f) The CDSC may be waived in connection with certain fee-based programs. See
"Shareholder Services -- Fee-Based Programs" -- page 45.
(g) See "Management of the Fund -- Management and Advisory
Arrangements" -- page 28.
(h) See "Purchase of Shares -- Distribution Plans" -- page 39.
(i) See "Management of the Fund -- Transfer Agency Services" -- page 29.
2
<PAGE>
INSURED PORTFOLIO
EXAMPLE:
<TABLE>
<CAPTION>
CUMULATIVE EXPENSES PAID
FOR THE PERIOD OF:
-------------------------------------
1 YEAR 3 YEARS 5 YEARS 10 YEARS
------ ------- ------- --------
<S> <C> <C> <C> <C>
An investor would pay the following expenses on a $1,000
investment including the maximum $40 initial sales charge
(Class A and Class D shares only) and assuming (1) the Total
Fund Operating Expenses for each class set forth on page 2,
(2) a 5% annual return throughout the periods and (3)
redemption at the end of the period (including any applicable
CDSC for Class B and Class C shares):
Class A................................................... $ 44 $ 54 $ 64 $ 93
Class B................................................... $ 52 $ 58 $ 65 $144
Class C................................................... $ 23 $ 40 $ 69 $151
Class D................................................... $ 47 $ 61 $ 77 $122
An investor would pay the following expenses on the same $1,000
investment assuming no redemption at the end of the period:
Class A................................................... $ 44 $ 54 $ 64 $ 93
Class B................................................... $ 12 $ 38 $ 65 $144
Class C................................................... $ 13 $ 40 $ 69 $151
Class D................................................... $ 47 $ 61 $ 77 $122
</TABLE>
The foregoing Fee Table is intended to assist investors in understanding
the costs and expenses that a shareholder in the Fund investing in the Insured
Portfolio will bear directly or indirectly. The Example set forth above assumes
reinvestment of all dividends and distributions and utilizes a 5% annual rate of
return as mandated by Commission regulations. THE EXAMPLE SHOULD NOT BE
CONSIDERED A REPRESENTATION OF PAST OR FUTURE EXPENSES OR ANNUAL RATES OF
RETURN, AND ACTUAL EXPENSES OR ANNUAL RATES OF RETURN MAY BE MORE OR LESS THAN
THOSE ASSUMED FOR PURPOSES OF THE EXAMPLE. Class B and Class C shareholders who
hold their shares for an extended period of time may pay more in Rule 12b-1
distribution fees than the economic equivalent of the maximum front-end sales
charge permitted under the Conduct Rules of the National Association of
Securities Dealers, Inc. ("NASD"). Merrill Lynch may charge its customers a
processing fee (presently $5.35) for confirming purchases and redemptions.
Purchases and redemptions made directly through the Fund's transfer agent are
not subject to the processing fee. See "Purchase of Shares" and "Redemption of
Shares."
3
<PAGE>
NATIONAL PORTFOLIO
FEE TABLE
A general comparison of the sales arrangements and other nonrecurring and
recurring expenses applicable to shares of the Fund follows:
<TABLE>
<CAPTION>
CLASS A(a) CLASS B(b) CLASS C CLASS D
---------- ----------------------- -------------- ---------
<S> <C> <C> <C> <C>
SHAREHOLDER TRANSACTION EXPENSES:
Maximum Sales Charge Imposed on Purchases
(as a percentage of offering price)....... 4.00%(c) None None 4.00%(c)
Sales Charge Imposed on Dividend
Reinvestments............................. None None None None
Deferred Sales Charge (as a percentage of
original purchase price or redemption
proceeds, whichever is lower)............. None(d) 4.00% during the first 1.0% for one None(d)
year, decreasing 1.00% year(f)
annually thereafter to
0.0% after the fourth
year(e)
Exchange Fee................................ None None None None
ANNUAL FUND OPERATING EXPENSES (AS A
PERCENTAGE OF AVERAGE NET ASSETS):
Investment Advisory Fees(g)................. 0.48% 0.48% 0.48% 0.48%
12b-1 Fees(h):
Account Maintenance Fees.................. None 0.25% 0.25% 0.25%
Distribution Fees......................... None 0.50% 0.55% 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............................ 0.01% 0.01% 0.01% 0.01%
Shareholder Servicing Costs(i)............ 0.04% 0.05% 0.05% 0.04%
Other..................................... 0.02% 0.02% 0.02% 0.02%
------ ----- ----- -----
Total Other Expenses.................... 0.07% 0.08% 0.08% 0.07%
------ ----- ----- -----
Total Fund Operating Expenses............. 0.55% 1.31% 1.36% 0.80%
====== ===== ===== =====
</TABLE>
- ---------------
(a) Class A shares are sold to a limited group of investors including existing
Class A shareholders and participants in certain fee-based programs. See
"Purchase of Shares -- Initial Sales Charge Alternatives -- Class A and
Class D Shares" -- page 33.
(b) Class B shares convert to Class D shares automatically approximately ten
years after initial purchase. See "Purchase of Shares -- Deferred Sales
Charge Alternatives -- Class B and Class C Shares" -- page 36.
(c) Reduced for purchases of $25,000 and over and waived for purchases of Class
A shares in connection with certain fee-based programs. Class A and Class D
purchases of $1,000,000 or more may not be subject to an initial sales
charge. See "Purchases of Shares -- Initial Sales Charge Alternatives
-- Class A and Class D Shares" -- page 33.
(d) Class A and Class D shares are not subject to a contingent deferred sales
charge ("CDSC"), except that certain purchases of $1,000,000 or more that
are not subject to an initial sales charge may instead be subject to a CDSC
of 1.0% of amounts redeemed within the first year after purchase. Such CDSC
may be waived in connection with certain fee-based programs. See
"Shareholder Services -- Fee-Based Programs" -- page 45.
(e) The CDSC may be modified in connection with certain fee-based programs. See
"Shareholder Services -- Fee-Based Programs" -- page 45.
(f) The CDSC may be waived in connection with certain fee-based programs. See
"Shareholder Services -- Fee-Based Programs" -- page 45.
(g) See "Management of the Fund -- Management and Advisory Arrangements" -- page
28.
(h) See "Purchase of Shares -- Distribution Plans" -- page 39.
(i) See "Management of the Fund -- Transfer Agency Services" -- page 29.
4
<PAGE>
NATIONAL PORTFOLIO
EXAMPLE:
<TABLE>
<CAPTION>
CUMULATIVE EXPENSES PAID
FOR THE PERIOD OF:
-------------------------------------
1 YEAR 3 YEARS 5 YEARS 10 YEARS
------ ------- ------- --------
<S> <C> <C> <C> <C>
An investor would pay the following expenses on a $1,000
investment including the maximum $40 initial sales charge
(Class A and Class D shares only) and assuming (1) the Total
Fund Operating Expenses for each class set forth on page 4,
(2) a 5% annual return throughout the periods and (3)
redemption at the end of the period (including any applicable
CDSC for Class B and Class C shares):
Class A................................................... $ 45 $ 57 $ 70 $106
Class B................................................... $ 53 $ 62 $ 72 $158
Class C................................................... $ 24 $ 43 $ 74 $164
Class D................................................... $ 48 $ 65 $ 83 $135
An investor would pay the following expenses on the same $1,000
investment assuming no redemption at the end of the period:
Class A................................................... $ 45 $ 57 $ 70 $106
Class B................................................... $ 13 $ 42 $ 72 $158
Class C................................................... $ 14 $ 43 $ 74 $164
Class D................................................... $ 48 $ 65 $ 83 $135
</TABLE>
The foregoing Fee Table is intended to assist investors in understanding
the costs and expenses that a shareholder in the Fund investing in the National
Portfolio will bear directly or indirectly. The Example set forth above assumes
reinvestment of all dividends and distributions and utilizes a 5% annual rate of
return as mandated by Commission regulations. THE EXAMPLE SHOULD NOT BE
CONSIDERED A REPRESENTATION OF PAST OR FUTURE EXPENSES OR ANNUAL RATES OF
RETURN, AND ACTUAL EXPENSES OR ANNUAL RATES OF RETURN MAY BE MORE OR LESS THAN
THOSE ASSUMED FOR PURPOSES OF THE EXAMPLE. Class B and Class C shareholders who
hold their shares for an extended period of time may pay more in Rule 12b-1
distribution fees than the economic equivalent of the maximum front-end sales
charge permitted under the Conduct Rules of the NASD. Merrill Lynch may charge
its customers a processing fee (presently $5.35) for confirming purchases and
redemptions. Purchases and redemptions made directly through the Fund's transfer
agent are not subject to the processing fee. See "Purchase of Shares" and
"Redemption of Shares."
5
<PAGE>
LIMITED MATURITY PORTFOLIO
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)...... 1.00%(c) None None 1.00%(c)
Sales Charge Imposed on Dividend
Reinvestments............................ None None None None
Deferred Sales Charge (as a percentage of
original purchase price or redemption
proceeds, whichever is lower)............ None(d) 1.00% during the first 1.00% for one None(d)
year, decreasing to year(f)
0.0% after the first
year(e)
Exchange Fee............................... None None None None
ANNUAL FUND OPERATING EXPENSES (AS A
PERCENTAGE OF AVERAGE NET ASSETS):
Investment Advisory Fee(g)................. 0.33% 0.33% 0.33% 0.33%
12b-1 Fees(h):
Account Maintenance Fees................. None 0.15% 0.15% 0.10%
Distribution Fees(g)..................... None 0.20% 0.20% 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........................... 0.01% 0.01% 0.01% 0.01%
Shareholder Servicing Costs(i)........... 0.02% 0.03% 0.04% 0.02%
Other.................................... 0.03% 0.03% 0.02% 0.02%
------ ----- ----- -----
Total Other Expenses................... 0.06% 0.07% 0.07% 0.05%
------ ----- ----- -----
Total Fund Operating Expenses.............. 0.39% 0.75% 0.75% 0.48%
====== ===== ===== =====
</TABLE>
- ---------------
(a) Class A shares are sold to a limited group of investors including existing
Class A shareholders and participants in certain fee-based programs. See
"Purchase of Shares -- Initial Sales Charge Alternatives -- Class A and
Class D Shares" -- page 33.
(b) Class B shares convert to Class D shares automatically approximately ten
years after initial purchase. See "Purchase of Shares -- Deferred Sales
Charge Alternatives -- Class B and Class C Shares" -- page 36.
(c) Reduced for purchases of $100,000 and over and waived for purchases of
Class A shares in connection with certain fee-based programs. Class A and
Class D purchases of $100,000,000 or more may not be subject to an initial
sales charge. See "Purchases of Shares -- Initial Sales Charge
Alternatives -- Class A and Class D Shares" -- page 33.
(d) Class A and Class D shares are not subject to a contingent deferred sales
charge ("CDSC"), except that certain purchases of $1,000,000 or more that
are not subject to an initial sales charge may instead be subject to a CDSC
of 0.20% of amounts redeemed within the first year after purchase. Such CDSC
may be waived in connection with certain fee-based programs. See
"Shareholder Services -- Fee-Based Programs" -- page 45.
(e) The CDSC may be modified in connection with certain fee-based programs. See
"Shareholder Services -- Fee-Based Programs" -- page 45.
(f) The CDSC may be waived in connection with certain fee-based programs. See
"Shareholder Services -- Fee-Based Programs" -- page 45.
(g) See "Management of the Fund -- Management and Advisory
Arrangements" -- page 28.
(h) See "Purchase of Shares -- Distribution Plans" -- page 39.
(i) See "Management of the Fund -- Transfer Agency Services" -- page 29.
* Class C shares of the Limited Maturity Portfolio are available only through
the Exchange Privilege. See page 46.
6
<PAGE>
LIMITED MATURITY PORTFOLIO
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 $10 initial sales charge
(Class A and Class D shares only) and assuming (1) the Total
Fund Operating Expenses for each class set forth on page 6,
(2) a 5% annual return throughout the periods and (3)
redemption at the end of the period (including any applicable
CDSC for Class B and Class C shares):
Class A................................................... $ 14 $ 22 $ 32 $ 59
Class B................................................... $ 18 $ 24 $ 42 $ 93
Class C*.................................................. $ 18 $ 24 $ 42 $ 93
Class D................................................... $ 15 $ 25 $ 37 $ 70
An investor would pay the following expenses on the same $1,000
investment assuming no redemption at the end of the period:
Class A................................................... $ 14 $ 22 $ 32 $ 59
Class B................................................... $ 8 $ 24 $ 42 $ 93
Class C*.................................................. $ 8 $ 24 $ 42 $ 93
Class D................................................... $ 15 $ 25 $ 37 $ 70
</TABLE>
- ---------------
* Class C shares of the Limited Maturity Portfolio are available only through
the Exchange Privilege.
The foregoing Fee Table is intended to assist investors in understanding
the costs and expenses that a shareholder in the Fund investing in the Limited
Maturity Portfolio will bear directly or indirectly. The Example set forth above
assumes reinvestment of all dividends and distributions and utilizes a 5% annual
rate of return as mandated by Commission regulations. THE EXAMPLE SHOULD NOT BE
CONSIDERED A REPRESENTATION OF PAST OR FUTURE EXPENSES OR ANNUAL RATES OF
RETURN, AND ACTUAL EXPENSES OR ANNUAL RATES OF RETURN MAY BE MORE OR LESS THAN
THOSE ASSUMED FOR PURPOSES OF THE EXAMPLE. Class B and Class C shareholders who
hold their shares for an extended period of time may pay more in Rule 12b-1
distribution fees than the economic equivalent of the maximum front-end sales
charge permitted under the Conduct Rules of the NASD. Merrill Lynch may charge
its customers a processing fee (presently $5.35) for confirming purchases and
redemptions. Purchases and redemptions made directly through the Fund's transfer
agent are not subject to the processing fee. See "Purchase of Shares" and
"Redemption of Shares."
7
<PAGE>
MERRILL LYNCH SELECT PRICING(SM) SYSTEM
Each Portfolio of the Fund offers four classes of shares under the Merrill
Lynch Select Pricing(SM) System. The shares of each class may be purchased at a
price equal to the next determined net asset value per share subject to the
sales charges and ongoing fee arrangements described below. Shares of Class A
and Class D are sold to investors choosing the initial sales charge
alternatives, and shares of Class B, and for the Insured Portfolio and National
Portfolio only, shares of Class C are sold to investors choosing the deferred
sales charge alternatives. Class C shares of the Limited Maturity Portfolio are
offered only through the exchange privilege and may not be purchased except
through exchange of Class C shares of another Portfolio or another Fund. The
Merrill Lynch Select Pricing(SM) System is used by more than 50 registered
investment companies advised by Merrill Lynch Asset Management, L.P. ("MLAM") or
Fund Asset Management, L.P. ("FAM" or the "Investment Adviser"), an affiliate of
MLAM. Funds advised by MLAM or FAM that utilize the Merrill Lynch Select
Pricing(SM) System are referred to herein as "MLAM-advised mutual funds."
Each Class A, Class B, Class C or Class D share of the Fund's Portfolios
represents an identical interest in the investment portfolio of the applicable
Portfolio and has the same rights, except that Class B, Class C and Class D
shares bear the expenses of the ongoing account maintenance fees and Class B and
Class C shares bear the expenses of the ongoing distribution fees and the
additional incremental transfer agency costs resulting from the deferred sales
charge arrangements. The CDSCs, distribution fees and account maintenance fees
that are imposed on Class B and Class C shares of a Portfolio, 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 relevant
Portfolio 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 a Portfolio 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 Privileges."
Investors should understand that the purpose and function of the initial
sales charges with respect to the Class A and Class D shares are the same as
those of the CDSCs and distribution fees with respect to the Class B and Class C
shares in that the sales charges and distribution fees applicable to each class
provide for the financing of the distribution of the shares of the Fund. The
distribution-related revenues paid with respect to a class will not be used to
finance the distribution expenditures of another class. Sales personnel may
receive different compensation for selling different classes of shares.
The following table sets forth a summary of the distribution arrangements
for each class of shares under the Merrill Lynch Select Pricing(SM) System,
followed by a more detailed description of each class and a discussion of the
factors that investors should consider in determining the method of purchasing
shares under the Merrill Lynch Select Pricing(SM) System that the investor
believes is most beneficial under his or her particular circumstances. More
detailed information as to each class of shares is set forth under "Purchase of
Shares."
8
<PAGE>
INSURED AND NATIONAL PORTFOLIOS
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------
ACCOUNT
MAINTENANCE DISTRIBUTION CONVERSION
CLASS SALES CHARGE(1) FEE FEE FEATURE
<S> <C> <C> <C> <C>
- -------------------------------------------------------------------------------------------------
A Maximum 4.00% initial No No No
sales charge(2)(3)
- -------------------------------------------------------------------------------------------------
B CDSC for a period of 4 0.25% 0.50% B shares convert to D shares
years, automatically after
at a rate of 4.00% during approximately ten years(5)
the
first year, decreasing 1.00%
annually to 0.0%(4)
- -------------------------------------------------------------------------------------------------
C 1.00% CDSC for one year 0.25% 0.55% No
decreasing to 0.0% after
the first year(6)
- -------------------------------------------------------------------------------------------------
D Maximum 4.00% initial 0.25% No No
sales charge(3)
- -------------------------------------------------------------------------------------------------
</TABLE>
LIMITED MATURITY PORTFOLIO
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------
ACCOUNT
MAINTENANCE DISTRIBUTION CONVERSION
CLASS SALES CHARGE(1) FEE FEE FEATURE
<S> <C> <C> <C> <C>
- -------------------------------------------------------------------------------------------------
A Maximum 1.00% initial No No No
sales charge(2)(3)
- -------------------------------------------------------------------------------------------------
B CDSC at a rate of 1.00% 0.15% 0.20% B shares convert to
during the first year, D shares automatically
decreasing to 0.0% after after approximately
the first year(4) ten years(5)
- -------------------------------------------------------------------------------------------------
C* 1.00% CDSC for one year 0.15% 0.20% No
decreasing to 0.0% after
the first year(6)
- -------------------------------------------------------------------------------------------------
D Maximum 1.00% initial 0.10% No No
sales charge(3)
- -------------------------------------------------------------------------------------------------
</TABLE>
- ---------------
(1) Initial sales charges are imposed at the time of purchase as a percentage of
the offering price. CDSCs are imposed if the redemption occurs within the
applicable CDSC time period. The charge will be assessed on an amount equal
to the lesser of the proceeds of redemption or the cost of the shares being
redeemed.
(2) Offered only to eligible investors. See "Purchase of Shares -- Initial Sales
Charge Alternatives -- Class A and Class D Shares -- Eligible Class A
Investors."
(3) Reduced for purchases of $25,000 or more for the Insured and National
Portfolios and $100,000 or more for the Limited Maturity Portfolio and
waived for purchases of Class A shares in connection with certain fee-based
programs. Class A and Class D share purchases of $1,000,000 or more may not
be subject to an initial sales charge but instead may be subject to a 1.0%
CDSC for the Insured and National Portfolios and a 0.20% CDSC for the
Limited Maturity Portfolio, if redeemed within one year. See "Class A" and
"Class D" below.
(4) The CDSC may be modified in connection with certain fee-based programs.
(5) The conversion period for dividend reinvestment shares and the conversion
and holding periods for certain retirement plans was modified. Also, Class B
shares of certain other MLAM-advised mutual funds into which exchanges may
be made have an eight year conversion period. If Class B shares of the Fund
are exchanged for Class B shares of another MLAM-advised mutual fund, the
conversion period applicable to the Class B shares acquired in the exchange
will apply, and the holding period for the shares exchanged will be tacked
onto the holding period for the shares acquired.
(6) The CDSC may be waived in connection with certain fee-based programs.
* Class C shares of the Limited Maturity Portfolio are available only through
the Exchange Privilege. See page 46.
9
<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 who
currently own Class A shares of a Portfolio in a shareholder account are
entitled to purchase additional Class A shares of that Portfolio in that
account. Other eligible investors include participants in certain
fee-based programs. In addition, Class A shares will be offered at net
asset value to Merrill Lynch & Co., Inc. ("ML & Co.") and its
subsidiaries (the term "subsidiaries," when used herein with respect to
ML & Co., includes MLAM, FAM and certain other entities directly or
indirectly wholly owned and controlled by ML & Co.) and their directors
and employees and to members of the Boards of MLAM-advised mutual funds.
The maximum initial sales charge is 4.00% for the Insured and National
Portfolios and 1.00% for the Limited Maturity Portfolio and is reduced
for purchases of $25,000 and over for the Insured and National
Portfolios and of $100,000 or over for the Limited Maturity Portfolio,
and waived for purchases by participants in certain fee-based programs.
Purchases of $1,000,000 or more may not be subject to an initial sales
charge but such purchases may be subject to a CDSC of 1.00% (for the
Insured and National Portfolios) or 0.20% (for the Limited Maturity
Portfolio) if the shares are redeemed within one year after purchase.
Such CDSC may be waived in connection with certain fee-based programs.
Sales charges also are reduced under a right of accumulation that takes
into account the investors'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% (in the
case of the Insured Portfolio and the National Portfolio) and 0.15% (in
the case of the Limited Maturity Portfolio) of the Portfolio's average
net assets attributable to the Class B shares and an ongoing
distribution fee of 0.50% (in the case of the Insured Portfolio and the
National Portfolio) and 0.20% (in the case of the Limited Maturity
Portfolio) of the Portfolio's average net assets attributable to Class B
shares. Class B shares are also subject to a CDSC if they are redeemed
within four years of purchase (in the case of the Insured Portfolio and
National Portfolio) or within one year of purchase (in the case of the
Limited Maturity Portfolio). Such CDSC may be modified in connection
with certain fee-based programs. Approximately ten years after issuance,
Class B shares of the Portfolio will convert automatically into Class D
shares of the Portfolio, which are subject to an account maintenance fee
but 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 a Portfolio 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. 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 is modified as
10
<PAGE>
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% (in the
case of the Insured Portfolio and the National Portfolio) and 0.15% (in
the case of the Limited Maturity Portfolio) of average net assets and an
ongoing distribution fee of 0.55% (in the case of the Insured Portfolio
and the National Portfolio) and 0.20% (in the case of the Limited
Maturity Portfolio) of average net assets. Class C shares are also
subject to a 1.00% CDSC if they are redeemed within one year of
purchase. Such CDSC may be waived in connection with certain fee-based
programs. Although Class C shares are subject to a CDSC for only one
year (as compared to four years for Class B of the Insured Portfolio and
National Portfolio), Class C shares have no conversion feature and,
accordingly, an investor who purchases Class C shares will be subject to
account maintenance fees and higher distribution fees that will be
imposed on Class C shares for an indefinite period subject to annual
approval by the Fund's Board of Directors and regulatory limitations.
Class C shares of the Limited Maturity Portfolio are available only
through the Exchange Privilege. See "Shareholder Services -- Exchange
Privileges."
Class D:Class D shares incur an initial sales charge when they are purchased and
are subject to an ongoing account maintenance fee of 0.25% (in the case
of the Insured Portfolio and the National Portfolio) and 0.10% (in the
case of the Limited Maturity Portfolio) of average net assets. The
maximum initial sales charge is 4.00% (for the Insured Portfolio and the
National Portfolio) and 1.00% (for the Limited Maturity Portfolio) and
is reduced for purchases of $25,000 or more for the Insured Portfolio or
for the National Portfolio, and is reduced for purchases of $100,000 or
more for the Limited Maturity Portfolio. Class D shares are not subject
to an ongoing distribution fee or any CDSC when they are redeemed.
Purchases of $1,000,000 or more may not be subject to an initial sales
charge but such purchase may be subject to a CDSC of 1.00% (for the
Insured and National Portfolios) or 0.20% (for the Limited Maturity
Portfolio) if the shares are redeemed within one year after purchase.
Such CDSC may be waived in connection with certain fee-based programs.
The schedule of initial sales charges and reductions for Class D shares
is the same as the schedule for Class A shares, except that there is no
waiver for purchases in connection with certain fee-based programs.
Class D shares also will be issued upon conversion of Class B shares as
described above under "Class B." See "Purchase of Shares -- Initial
Sales Charge Alternatives -- Class A and Class D Shares."
The following is a discussion of the factors that investors should consider
in determining the method of purchasing shares under the Merrill Lynch Select
Pricing(SM) System that the investor believes is most beneficial under his or
her 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
11
<PAGE>
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 who previously purchased Class A shares may no
longer be eligible to purchase Class A shares of other MLAM-advised mutual
funds, those previously purchased Class A shares, together with Class B, Class C
and Class D share holdings, will count toward a right of accumulation that may
qualify the investor for reduced initial sales charges on new initial sales
charge purchases. In addition, the ongoing Class B and Class C account
maintenance and distribution fees will cause Class B and Class C shares to have
higher expense ratios, pay lower dividends and have lower total returns than the
initial sales charge shares. The ongoing Class D account maintenance fees will
cause Class D shares to have a higher expense ratio, pay lower dividends and
have a lower total return than Class A shares.
Deferred Sales Charge Alternatives. Because no initial sales charges are
deducted at the time of purchase, Class B and Class C shares provide the benefit
of putting all of the investor's dollars to work from the time the investment is
made. The deferred sales charge alternatives may be particularly appealing to
investors who do not qualify for a reduction in initial sales charges. Both
Class B and Class C shares are subject to ongoing account maintenance fees and
distribution fees; however, the ongoing account maintenance and distribution
fees potentially may be offset to the extent any return is realized on the
additional funds initially invested in Class B or Class C shares. In addition,
Class B shares of a Portfolio will be converted into Class D shares of that
Portfolio after a conversion period of approximately ten years, and thereafter
investors will be subject to lower ongoing fees.
Certain investors may elect to purchase Class B shares if they determine it
to be most advantageous to have all their funds invested initially and intend to
hold their shares for an extended period of time. Investors in Class B shares
should take into account whether they intend to redeem their shares within the
CDSC period and, if not, whether they intend to remain invested until the end of
the conversion period and thereby take advantage of the reduction in ongoing
fees resulting from the conversion into Class D shares. Other investors,
however, may elect to purchase Class C shares if they determine that it is
advantageous to have all their assets invested initially and they are uncertain
as to the length of time they intend to hold their assets in MLAM-advised mutual
funds. Although Class C shareholders are subject to a shorter CDSC period at a
lower rate, they 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."
12
<PAGE>
FINANCIAL HIGHLIGHTS
The financial information in the table below in connection with shares of the
Insured Portfolio, National Portfolio and the Limited Maturity Portfolio has
been audited in conjunction with the annual audits of the financial statements
of the Portfolios by Deloitte & Touche LLP, independent auditors. Financial
statements for the fiscal year ended June 30, 1997 and the independent auditors'
report thereon are included in the Statement of Additional Information. Further
information about the performance of the Fund is contained in the Fund's most
recent annual report to shareholders, which may be obtained, without charge, by
calling or by writing the Fund at the telephone number or address on the front
cover of this Prospectus.
The following per share data and ratios have been derived from information
provided in the financial statements:
<TABLE>
<CAPTION>
INSURED PORTFOLIO
----------------------------------------------------------------------------------------
CLASS A
----------------------------------------------------------------------------------------
FOR THE YEAR ENDED JUNE 30,
----------------------------------------------------------------------------------------
1997 1996 1995 1994 1993 1992 1991
---------- ---------- ---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
Increase (Decrease) in Net Asset Value:
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of year....... $ 7.91 $ 7.92 $ 7.88 $ 8.64 $ 8.26 $ 7.92 $ 7.86
---------- ---------- ---------- ---------- ---------- ---------- ----------
Investment income -- net................ .45 .44 .46 .47 .50 .52 .54
Realized and unrealized gain (loss) on
investments -- net.................... .15 (.01) .18 (.53) .49 .41 .12
---------- ---------- ---------- ---------- ---------- ---------- ----------
Total from investment operations......... .60 .43 .64 (.06) .99 .93 .66
---------- ---------- ---------- ---------- ---------- ---------- ----------
LESS DIVIDENDS AND DISTRIBUTIONS:
Investment income -- net................ (.45) (.44) (.46) (.47) (.50) (.52) (.54)
Realized gain on investments -- net..... -- -- (.14) (.23) (.11) (.07) (.06)
---------- ---------- ---------- ---------- ---------- ---------- ----------
Total dividends and distributions........ (.45) (.44) (.60) (.70) (.61) (.59) (.60)
---------- ---------- ---------- ---------- ---------- ---------- ----------
Net asset value, end of year............. $ 8.06 $ 7.91 $ 7.92 $ 7.88 $ 8.64 $ 8.26 $ 7.92
========== ========== ========== ========== ========== ========== ==========
TOTAL INVESTMENT RETURN:*
Based on net asset value per share....... 7.72% 5.51% 8.60% (1.08%) 12.41% 12.11% 8.84%
========== ========== ========== ========== ========== ========== ==========
RATIOS TO AVERAGE NET ASSETS:
Expenses................................. .44% .43% .43% .42% .42% .44% .45%
========== ========== ========== ========== ========== ========== ==========
Investment income -- net................. 5.58% 5.55% 5.78% 5.53% 5.94% 6.44% 6.90%
========== ========== ========== ========== ========== ========== ==========
SUPPLEMENTAL DATA:
Net assets, end of year (in thousands)... $1,441,785 $1,572,835 $1,706,064 $1,941,741 $2,225,188 $2,062,591 $1,984,307
========== ========== ========== ========== ========== ========== ==========
Portfolio turnover....................... 74.40% 78.49% 35.61% 28.34% 43.86% 22.50% 33.12%
========== ========== ========== ========== ========== ========== ==========
</TABLE>
<TABLE>
<CAPTION>
1990 1989 1988
---------- ---------- ----------
<S> <C> <C> <C>
Increase (Decrease) in Net Asset Value:
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of year....... $ 7.97 $ 7.69 $ 7.79
---------- ---------- ----------
Investment income -- net................ .55 .58 .57
Realized and unrealized gain (loss) on
investments -- net.................... (.11) .28 .00
---------- ---------- ----------
Total from investment operations......... .44 .86 .57
---------- ---------- ----------
LESS DIVIDENDS AND DISTRIBUTIONS:
Investment income -- net................ (.55) (.58) (.57)
Realized gain on investments -- net..... -- -- (.10)
---------- ---------- ----------
Total dividends and distributions........ (.55) (.58) (.67)
---------- ---------- ----------
Net asset value, end of year............. $ 7.86 $ 7.97 $ 7.69
========== ========== ==========
TOTAL INVESTMENT RETURN:*
Based on net asset value per share....... 5.76% 11.62% 7.75%
========== ========== ==========
RATIOS TO AVERAGE NET ASSETS:
Expenses................................. .46% .49% .52%
========== ========== ==========
Investment income -- net................. 7.03% 7.46% 7.55%
========== ========== ==========
SUPPLEMENTAL DATA:
Net assets, end of year (in thousands)... $2,019,166 $2,013,219 $1,982,997
========== ========== ==========
Portfolio turnover....................... 23.20% 45.49% 33.98%
========== ========== ==========
</TABLE>
- ---------------
* Total investment returns exclude the effects of sales loads.
13
<PAGE>
FINANCIAL HIGHLIGHTS (CONTINUED)
The following per share data and ratios have been derived from information
provided in the financial statements:
<TABLE>
<CAPTION>
INSURED PORTFOLIO
----------------------------------------------------------------------------------------------
CLASS B
----------------------------------------------------------------------------------------------
FOR THE YEAR ENDED JUNE 30, FOR THE PERIOD
------------------------------------------------------------------------------ OCT. 21, 1988+
TO JUNE 30,
1997 1996 1995 1994 1993 1992 1991 1990 1989
-------- -------- -------- -------- -------- -------- -------- -------- --------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Increase (Decrease) in Net
Asset Value:
PER SHARE OPERATING
PERFORMANCE:
Net asset value, beginning
of period................. $ 7.91 $ 7.92 $ 7.87 $ 8.63 $ 8.26 $ 7.92 $ 7.86 $ 7.97 $ 7.81
-------- -------- -------- -------- -------- -------- -------- -------- ------
Investment
income -- net........... .39 .38 .40 .40 .44 .46 .48 .49 .36
Realized and unrealized
gain (loss) on
investments -- net...... .14 (.01) .19 (.53) .48 .41 .12 (.11) .16
-------- -------- -------- -------- -------- -------- -------- -------- ------
Total from investment
operations................ .53 .37 .59 (.13) .92 .87 .60 .38 .52
-------- -------- -------- -------- -------- -------- -------- -------- ------
LESS DIVIDENDS AND
DISTRIBUTIONS:
Investment
income -- net........... (.39) (.38) (.40) (.40) (.44) (.46) (.48) (.49) (.36)
Realized gain on
investments -- net...... -- -- (.14) (.23) (.11) (.07) (.06) -- --
-------- -------- -------- -------- -------- -------- -------- -------- ------
Total dividends and
distributions............. (.39) (.38) (.54) (.63) (.55) (.53) (.54) (.49) (.36)
-------- -------- -------- -------- -------- -------- -------- -------- ------
Net asset value, end of
period.................... $ 8.05 $ 7.91 $ 7.92 $ 7.87 $ 8.63 $ 8.26 $ 7.92 $ 7.86 $ 7.97
======== ======== ======== ======== ======== ======== ======== ======== =============
TOTAL INVESTMENT RETURN:**
Based on net asset value
per share................. 6.78% 4.71% 7.91% (1.81%) 11.44% 11.27% 8.02% 4.98% 6.88%#
======== ======== ======== ======== ======== ======== ======== ======== =============
RATIOS TO AVERAGE NET
ASSETS:
Expenses................... 1.19% 1.19% 1.19% 1.17% 1.18% 1.19% 1.20% 1.22% 1.23%*
======== ======== ======== ======== ======== ======== ======== ======== =============
Investment income -- net... 4.82% 4.80% 5.03% 4.78% 5.17% 5.69% 6.13% 6.27% 6.58%*
======== ======== ======== ======== ======== ======== ======== ======== =============
SUPPLEMENTAL DATA:
Net assets, end of period
(in thousands)............ $560,105 $723,090 $782,748 $866,193 $911,307 $706,016 $537,755 $408,641 $175,707
======== ======== ======== ======== ======== ======== ======== ======== =============
Portfolio turnover......... 74.40% 78.49% 35.61% 28.34% 43.86% 22.50% 33.12% 23.20% 45.49%
======== ======== ======== ======== ======== ======== ======== ======== =============
</TABLE>
<TABLE>
<CAPTION>
CLASS C CLASS D
-------------------------------------- --------------------------------------
FOR THE FOR THE FOR THE PERIOD FOR THE FOR THE FOR THE PERIOD
YEAR ENDED YEAR ENDED OCT. 21, 1994+ YEAR ENDED YEAR ENDED OCT. 21, 1994+
JUNE 30, JUNE 30, TO JUNE 30, JUNE 30, JUNE 30, TO JUNE 30,
1997 1996 1995 1997 1996 1995
---------- ---------- -------------- ---------- ---------- --------------
<S> <C> <C> <C> <C> <C> <C>
Increase (Decrease) in Net
Asset Value:
PER SHARE OPERATING
PERFORMANCE:
Net asset value, beginning
of period................. $ 7.91 $ 7.92 $ 7.68 $ 7.91 $ 7.92 $ 7.68
----- ----- ----- ----- ----- -----
Investment
income -- net........... .38 .38 .27 .43 .42 .29
Realized and unrealized
gain (loss) on
investments -- net...... .15 (.01) .38 .15 (.01) .38
----- ----- ----- ----- ----- -----
Total from investment
operations................ .53 .37 .65 .58 .41 .67
----- ----- ----- ----- ----- -----
LESS DIVIDENDS AND
DISTRIBUTIONS:
Investment
income -- net........... (.38) (.38) (.27) (.43) (.42) (.29)
Realized gain on
investments -- net...... -- -- (.14) -- -- (.14)
----- ----- ----- ----- ----- -----
Total dividends and
distributions............. (.38) (.38) (.41) (.43) (.42) (.43)
----- ----- ----- ----- ----- -----
Net asset value, end of
period.................... $ 8.06 $ 7.91 $ 7.92 $ 8.06 $ 7.91 $ 7.92
========== ========== ============= ========== ========== =============
TOTAL INVESTMENT RETURN:**
Based on net asset value
per share................. 6.86% 4.65% 8.83%# 7.46% 5.25% 9.24%#
========== ========== ============= ========== ========== =============
RATIOS TO AVERAGE NET
ASSETS:
Expenses................... 1.25% 1.24% 1.23%* 69% .68% .68%*
========== ========== ============= ========== ========== =============
Investment income -- net... 4.77% 4.75% 4.93% 5.33% 5.31% 5.50%*
========== ========== ============= ========== ========== =============
SUPPLEMENTAL DATA:
Net assets, end of period
(in thousands)............ $ 11,922 $ 18,936 $7,756 $ 38,422 $ 51,772 $ 26,015
========== ========== ============= ========== ========== =============
Portfolio turnover......... 74.40% 78.49% 35.61% 74.40% 78.49% 35.61%
========== ========== ============= ========== ========== =============
</TABLE>
- ---------------
* Annualized.
** Total investment returns exclude the effects of sales loads.
+ Commencement of Operations.
# Aggregate total investment return.
14
<PAGE>
FINANCIAL HIGHLIGHTS (CONTINUED)
The following per share data and ratios have been derived from information
provided in the financial statements:
<TABLE>
<CAPTION>
NATIONAL PORTFOLIO
------------------------------------------------------------------------------------
CLASS A
------------------------------------------------------------------------------------
FOR THE YEAR ENDED JUNE 30,
------------------------------------------------------------------------------------
1997 1996 1995 1994 1993 1992 1991
-------- -------- ---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
Increase (Decrease) in Net Asset Value:
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of year.......... $ 10.11 $ 10.02 $ 10.08 $ 11.02 $ 10.64 $ 10.17 $ 10.12
-------- -------- ---------- ---------- ---------- ---------- ----------
Investment income -- net................... .60 .60 .60 .62 .67 .71 .73
Realized and unrealized gain(loss) on
investments -- net....................... .27 .09 .15 (.64) .57 .58 .05
-------- -------- ---------- ---------- ---------- ---------- ----------
TOTAL FROM INVESTMENT OPERATIONS............ .87 .69 .75 (.02) 1.24 1.29 .78
-------- -------- ---------- ---------- ---------- ---------- ----------
LESS DIVIDENDS AND DISTRIBUTIONS:
Investment income -- net................... (.60) (.60) (.60) (.62) .67 .71 .73
Realized gain on investments -- net........ -- -- (.19) (.30) (.19) (.11) --
In excess of realized gain on
investments -- net....................... -- -- (.02) -- -- -- --
-------- -------- ---------- ---------- ---------- ---------- ----------
Total dividends and distributions........... (.60) (.60) (.81) (.92) (.86) (.82) (.73)
-------- -------- ---------- ---------- ---------- ---------- ----------
Net asset value, end of year................ $ 10.38 $ 10.11 $ 10.02 $ 10.08 $ 11.02 $ 10.64 $ 10.17
======== ======== ========== ========== ========== ========== ==========
TOTAL INVESTMENT RETURN:*
Based on net asset value per share.......... 8.84% 6.98% 7.89% (.47)% 12.19% 13.09% 7.94%
======== ======== ========== ========== ========== ========== ==========
RATIOS TO AVERAGE NET ASSETS:
Expenses.................................... .55% .56% .56% .55% .55% .55% .55%
======== ======== ========== ========== ========== ========== ==========
Investment income -- net.................... 5.86% 5.89% 6.01% 5.72% 6.23% 6.80% 7.20%
======== ======== ========== ========== ========== ========== ==========
SUPPLEMENTAL DATA:
Net assets, end of period (in thousands).... $983,650 $983,550 $1,059,440 $1,203,181 $1,353,805 $1,278,055 $1,255,820
======== ======== ========== ========== ========== ========== ==========
Portfolio turnover.......................... 99.52% 95.09% 103.65% 73.33% 65.43% 50.94% 75.25%
======== ======== ========== ========== ========== ========== ==========
</TABLE>
<TABLE>
<CAPTION>
1990 1989 1988
---------- ---------- ----------
<S> <C> <C> <C>
Increase (Decrease) in Net Asset Value:
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of year.......... $ 10.31 $ 9.94 $ 10.12
---------- ---------- ----------
Investment income -- net................... .74 .77 .76
Realized and unrealized gain(loss) on
investments -- net....................... (.19) .37 (.11)
---------- ---------- ----------
TOTAL FROM INVESTMENT OPERATIONS............ .55 1.14 .65
---------- ---------- ----------
LESS DIVIDENDS AND DISTRIBUTIONS:
Investment income -- net................... .74 .77 .76
Realized gain on investments -- net........ -- -- (.07)
In excess of realized gain on
investments -- net....................... -- -- --
---------- ---------- ----------
Total dividends and distributions........... (.74) (.77) (.83)
---------- ---------- ----------
Net asset value, end of year................ $ 10.12 $ 10.31 $ 9.94
========== ========== ==========
TOTAL INVESTMENT RETURN:*
Based on net asset value per share.......... 5.53% 11.89% 6.89%
========== ========== ==========
RATIOS TO AVERAGE NET ASSETS:
Expenses.................................... .55% .55% .55%
========== ========== ==========
Investment income -- net.................... 7.27% 7.63% 7.79%
========== ========== ==========
SUPPLEMENTAL DATA:
Net assets, end of period (in thousands).... $1,365,541 $1,445,116 $1,467,982
========== ========== ==========
Portfolio turnover.......................... 48.80% 76.73% 72.77%
========== ========== ==========
</TABLE>
- ---------------
* Total investment returns exclude the effects of sales loads.
15
<PAGE>
FINANCIAL HIGHLIGHTS (CONTINUED)
The following per share data and ratios have been derived from information
provided in the financial statements:
<TABLE>
<CAPTION>
NATIONAL PORTFOLIO
----------------------------------------------------------------------------------------------
CLASS B
----------------------------------------------------------------------------------------------
FOR THE
FOR THE YEAR ENDED JUNE 30, PERIOD
------------------------------------------------------------------------------ OCT. 21, 1988+
TO JUNE 30,
1997 1996 1995 1994 1993 1992 1991 1990 1989
-------- -------- -------- -------- -------- -------- -------- -------- --------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Increase (Decrease) in Net Asset
Value:
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of
period.............................. $ 10.11 $ 10.02 $ 10.07 $ 11.02 $ 10.63 $ 10.16 $ 10.11 $ 10.30 $ 10.14
-------- -------- -------- -------- -------- -------- -------- -------- -------
Investment income -- net............ .52 .52 .52 .54 .59 .63 .65 .66 .48
Realized and unrealized gain (loss)
on investments -- net............. .26 .09 .16 (.65) .58 .58 .05 (.19) .16
-------- -------- -------- -------- -------- -------- -------- -------- -------
Total from investment operations..... .78 .61 .68 (.11) 1.17 1.21 .70 .47 .64
-------- -------- -------- -------- -------- -------- -------- -------- -------
LESS DIVIDENDS AND DISTRIBUTIONS:
Investment income -- net............ (.52) (.52) (.52) (.54) (.59) (.63) (.65) (.66) (.48)
Realized gain on
investments -- net................ -- -- (.19) (.30) (.19) (.11) -- -- --
In excess of realized gain on
investments -- net................ -- -- (.02) -- -- -- -- -- --
-------- -------- -------- -------- -------- -------- -------- -------- -------
Total dividends and distributions.... (.52) (.52) (.73) (.84) (.78) (.74) (.65) (.66) (.48)
-------- -------- -------- -------- -------- -------- -------- -------- -------
Net asset value, end of period....... $ 10.37 $ 10.11 $ 10.02 $ 10.07 $ 11.02 $ 10.63 $ 10.16 $ 10.11 $ 10.30
======== ======== ======== ======== ======== ======== ======== ======== =======
TOTAL INVESTMENT RETURN:**
Based on net asset value per share... 7.92% 6.17% 7.28% (1.39%) 11.45% 12.25% 7.14% 4.74% 6.48%#
======== ======== ======== ======== ======== ======== ======== ======== =======
RATIOS TO AVERAGE NET ASSETS:
Expenses............................. 1.31% 1.32% 1.32% 1.30% 1.31% 1.31% 1.31% 1.31% 1.31%*
======== ======== ======== ======== ======== ======== ======== ======== =======
Investment income -- net............. 5.10% 5.13% 5.25% 4.97% 5.46% 6.03% 6.43% 6.52% 6.74%*
======== ======== ======== ======== ======== ======== ======== ======== =======
SUPPLEMENTAL DATA:
Net assets, end of period (in
thousands).......................... $415,103 $399,341 $419,933 $459,169 $424,071 $286,375 $213,581 $179,362 $ 97,196
======== ======== ======== ======== ======== ======== ======== ======== =======
Portfolio turnover................... 99.52% 95.09% 103.65% 73.33% 65.43% 50.94% 75.25% 48.80% 76.73%
======== ======== ======== ======== ======== ======== ======== ======== =======
<CAPTION>
CLASS C CLASS D
-------------------------------------- --------------------------------------
FOR THE FOR THE
FOR THE FOR THE PERIOD FOR THE FOR THE PERIOD
YEAR ENDED YEAR ENDED OCT. 21, 1994+ YEAR ENDED YEAR ENDED OCT. 21, 1994+
JUNE 30, JUNE 30, TO JUNE 30, JUNE 30, JUNE 30, TO JUNE 30,
1997 1996 1995 1997 1996 1995
---------- ---------- -------------- ---------- ---------- --------------
<S> <C> <C> <C> <C> <C> <C>
Increase (Decrease) in Net Asset
Value:
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of
period.............................. $ 10.11 $ 10.03 $ 9.85 $ 10.12 $ 10.03 $ 9.85
------- ------- ------ ------- ------- -------
Investment income -- net............ .52 .52 .36 .58 .57 .40
Realized and unrealized gain (loss)
on investments -- net............. .27 .08 .39 .27 .09 .39
------- ------- ------ ------- ------- -------
Total from investment operations..... .79 .60 .75 .85 .66 .79
------- ------- ------ ------- ------- -------
LESS DIVIDENDS AND DISTRIBUTIONS:
Investment income -- net............ (.52) (.52) (.36) (.58) (.57) (.40)
Realized gain on
investments -- net................ -- -- (.19) -- -- (.19)
In excess of realized gain on
investments -- net................ -- -- (.02) -- -- (.02)
------- ------- ------ ------- ------- -------
Total dividends and distributions.... (.52) (.52) (.57) (.58) (.57) (.61)
------- ------- ------ ------- ------- -------
Net asset value, end of period....... $ 10.38 $ 10.11 $ 10.03 $ 10.39 $ 10.12 $ 10.03
======= ======= ====== ======= ======= =======
TOTAL INVESTMENT RETURN:**
Based on net asset value per share... 7.97% 6.01% 7.97%# 8.57% 6.71% 8.37%#
======= ======= ====== ======= ======= =======
RATIOS TO AVERAGE NET ASSETS:
Expenses............................. 1.36% 1.37% 1.37%* .80% .81% .81%*
======= ======= ====== ======= ======= =======
Investment income -- net............. 5.04% 5.08% 5.21%* 5.60% 5.64% 5.78%*
======= ======= ====== ======= ======= =======
SUPPLEMENTAL DATA:
Net assets, end of period (in
thousands).......................... $ 28,096 $ 13,291 $ 5,195 $ 51,038 $ 43,884 $ 19,656
======= ======= ====== ======= ======= =======
Portfolio turnover................... 99.52% 95.09% 103.65% 99.52% 95.09% 103.65%
======= ======= ====== ======= ======= =======
</TABLE>
- ---------------
* Annualized.
** Total investment returns exclude the effects of sales loads.
+ Commencement of operations.
# Aggregate total investment return.
16
<PAGE>
FINANCIAL HIGHLIGHTS (CONTINUED)
The following per share data and ratios have been derived from information
provided in the financial statements:
<TABLE>
<CAPTION>
LIMITED MATURITY PORTFOLIO
-------------------------------------------------------------------------------------
CLASS A
-------------------------------------------------------------------------------------
FOR THE YEAR ENDED JUNE 30,
-------------------------------------------------------------------------------------
1997 1996 1995 1994 1993 1992 1991 1990
-------- -------- -------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Increase (Decrease) in Net Asset Value:
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of year...... $ 9.91 $ 9.92 $ 9.87 $ 10.01 $ 9.91 $ 9.75 $ 9.71 $ 9.73
-------- -------- -------- -------- -------- -------- -------- --------
Investment income -- net............... .39 .38 .38 .37 .41 .50 .57 .60
Realized and unrealized gain (loss) on
investments -- net................... .04 (.01) .05 (.14) .10 .16 .04 (.02)
-------- -------- -------- -------- -------- -------- -------- --------
Total from investment operations........ .43 .37 .43 .23 .51 .66 .61 .58
-------- -------- -------- -------- -------- -------- -------- --------
LESS DIVIDENDS AND DISTRIBUTIONS:
Investment income -- net............... (.39) (.38) (.38) (.37) (.41) (.50) (.57) (.60)
Realized gain on investments -- net.... (.02) -- -- -- -- -- -- --
-------- -------- -------- -------- -------- -------- -------- --------
Total dividends and distributions:...... (.41) (.38) (.38) (.37) (.41) (.50) (.57) (.60)
-------- -------- -------- -------- -------- -------- -------- --------
Net asset value, end of year............ $ 9.93 $ 9.91 $ 9.92 $ 9.87 $ 10.01 $ 9.91 $ 9.75 $ 9.71
======== ======== ======== ======== ======== ======== ======== ========
TOTAL INVESTMENT RETURN:*
Based on net asset value per share...... 4.40% 3.75% 4.53% 2.30% 5.28% 6.93% 6.45% 6.16%
======== ======== ======== ======== ======== ======== ======== ========
RATIOS TO AVERAGE NET ASSETS:
Expenses................................ .39% .44% .41% .40% .41% .40% .40% .40%
======== ======== ======== ======== ======== ======== ======== ========
Investment income -- net................ 3.93% 3.83% 3.86% 3.68% 4.13% 5.02% 5.88% 6.21%
======== ======== ======== ======== ======== ======== ======== ========
SUPPLEMENTAL DATA:
Net assets, end of year (in
thousands)............................. $343,641 $417,097 $536,474 $790,142 $846,736 $613,407 $350,549 $352,005
======== ======== ======== ======== ======== ======== ======== ========
Portfolio turnover...................... 61.90% 88.32% 37.33% 45.67% 65.43% 96.32% 93.06% 106.44%
======== ======== ======== ======== ======== ======== ======== ========
</TABLE>
1989 1988
-------- --------
Increase (Decrease) in Net Asset Value:
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of year...... $ 9.75 $ 9.83
-------- --------
Investment income -- net............... .58 .53
Realized and unrealized gain (loss) on
investments -- net................... (.02) (.07)
-------- --------
Total from investment operations........ .56 .46
-------- --------
LESS DIVIDENDS AND DISTRIBUTIONS:
Investment income -- net............... (.58) (.53)
Realized gain on investments -- net.... -- (.01)
-------- --------
Total dividends and distributions:...... (.58) (.54)
-------- --------
Net asset value, end of year............ $ 9.73 $ 9.75
======== ========
TOTAL INVESTMENT RETURN:*
Based on net asset value per share...... 5.96% 4.83%
======== ========
RATIOS TO AVERAGE NET ASSETS:
Expenses................................ .41% .40%
======== ========
Investment income -- net................ 6.00% 5.42%
======== ========
SUPPLEMENTAL DATA:
Net assets, end of year (in
thousands)............................. $385,794 $567,158
======== ========
Portfolio turnover...................... 228.78% 146.01%
======== ========
- ---------------
* Total investment returns exclude the effects of sales loads.
17
<PAGE>
FINANCIAL HIGHLIGHTS (CONTINUED)
The following per share data and ratios have been deferred from the
information provided in the financial statements.
<TABLE>
<CAPTION>
LIMITED MATURITY PORTFOLIO
---------------------------------------------------------------------------------
CLASS B CLASS C
------------------------------------------------------- -----------------------
FOR THE
FOR THE YEAR ENDED JUNE 30, PERIOD FOR THE FOR THE
--------------------------------------- NOV. 2, 1992+ YEAR ENDED YEAR ENDED
TO JUNE 30, JUNE 30, JUNE 30,
1997 1996 1995 1994 1993 1997 1996
------- ------- -------- -------- ------------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
Increase (Decrease) in Net Asset Value:
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period............. $ 9.91 $ 9.92 $ 9.87 $ 10.01 $ 9.93 9.88 $ 9.92
----- ------- -------- -------- ------- ------- -----
Investment income -- net......................... .36 .35 .35 .33 .24 .35 .34
Realized and unrealized gain (loss) on
investments -- net.............................. .05 (.01) .05 (.14) .08 .05 (.04)
----- ------- -------- -------- ------- ------- -----
Total from investment operations................. .41 .34 .40 .19 .32 .40 .30
----- ------- -------- -------- ------- ------- -----
LESS DIVIDENDS AND DISTRIBUTIONS:
Investment income -- net........................ (.36) (.35) (.35) (.33) (.24) (.35) (.34)
Realized gain on investments -- net............. (.02) -- -- -- -- (.02) --
----- ------- -------- -------- ------- ------- -----
Total dividends and distributions................ (.38) (.35) (.35) (.33) (.24) (.37) (.34)
----- ------- -------- -------- ------- ------- -----
Net asset value, end of period................... $ 9.94 $ 9.91 $ 9.92 $ 9.87 $ 10.01 $ 9.91 $ 9.88
===== ======= ======== ======== ======= ======= =====
TOTAL INVESTMENT RETURN:**
Based on net asset value per share............... 4.13% 3.37% 4.14% 1.98% 3.26%# 4.11% 2.97%
===== ======= ======== ======== ======= ======= =====
RATIOS TO AVERAGE NET ASSETS:
Expenses........................................ .75% .80% .78% .76% .76%# .75% .80%
===== ======= ======== ======== ======= ======= =====
Investment income -- net......................... 3.58% 3.46% 3.50% 3.33% 3.60%* 3.57% 3.41%
===== ======= ======== ======== ======= ======= =====
SUPPLEMENTAL DATA:
Net assets, end of period (in thousands)......... $54,275 $71,075 $129,581 $145,534 $95,179 $ 108 $ 94
===== ======= ======== ======== ======= ======= =====
Portfolio turnover............................... 61.90% 88.32% 37.33% 45.67% 65.43% 61.90% 88.32%
===== ======= ======== ======== ======= ======= =====
</TABLE>
<TABLE>
<CAPTION>
CLASS D
----------------------------------------
FOR THE FOR THE
PERIOD FOR THE FOR THE PERIOD
OCT. 21, 1994+ YEAR ENDED YEAR ENDED OCT. 21, 1994+
TO JUNE 30, JUNE 30, JUNE 30, TO JUNE 30,
1995 1997 1996 1995
-------------- ---------- ---------- --------------
<S> <C> <C> <C> <C>
Increase (Decrease) in Net Asset Value:
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period............. $ 9.83 $ 9.91 $ 9.93 $ 9.83
------ ----- ------- -------
Investment income -- net......................... .25 .38 .37 .26
Realized and unrealized gain (loss) on
investments -- net.............................. .09 .05 (.02) .10
------ ----- ------- -------
Total from investment operations................. .34 .43 .35 .36
------ ----- ------- -------
LESS DIVIDENDS AND DISTRIBUTIONS:
Investment income -- net........................ (.25) (.38) (.37) (.26)
Realized gain on investments -- net............. -- (.02) -- --
------ ----- ------- -------
Total dividends and distributions................ (.25) (.40) (.37) (.26)
------ ----- ------- -------
Net asset value, end of period................... $ 9.92 $ 9.94 $ 9.91 $ 9.93
====== ===== ======= =======
TOTAL INVESTMENT RETURN:**
Based on net asset value per share............... 3.52%# 4.40% 3.55% 3.73%#
====== ===== ======= =======
RATIOS TO AVERAGE NET ASSETS:
Expenses........................................ .70%* .48% .54% .53%*
====== ===== ======= =======
Investment income -- net......................... 3.61%* 3.84% 3.71% 3.78%*
====== ===== ======= =======
SUPPLEMENTAL DATA:
Net assets, end of period (in thousands)......... $3,965 $ 20,383 $ 15,886 $ 11,258
====== ===== ======= =======
Portfolio turnover............................... 37.33% 61.90% 88.32% 37.33%
====== ===== ======= =======
</TABLE>
- ---------------
*Annualized.
**Total investment returns exclude the effects of sales loads.
+Commencement of Operations.
#Aggregate total investment return.
18
<PAGE>
INVESTMENT OBJECTIVE AND POLICIES
The investment objective of the Fund is to provide shareholders with as
high a level of income exempt from Federal income taxes as is consistent with
the investment policies of each Portfolio and prudent investment management. The
Fund is comprised of three separate portfolios, Insured Portfolio, National
Portfolio and Limited Maturity Portfolio (collectively, the "Portfolios" and
each, a "Portfolio"), each of which is, in effect, a separate fund issuing its
own shares. Each Portfolio seeks to achieve its objective by investing in a
diversified portfolio of obligations issued by or on behalf of states,
territories and possessions of the United States and their political
subdivisions, agencies and instrumentalities, the interest on which is exempt
from Federal income tax (such obligations are herein referred to as "Municipal
Bonds"). Municipal Bonds include general obligations bonds, revenue or special
obligation bonds, industrial development bonds, variable rate demand notes, and
short-term tax-exempt municipal obligations such as tax anticipation notes. Each
Portfolio at all times, except during temporary defensive periods, maintains at
least 80% of its net assets invested in Municipal Bonds. In addition, each
Portfolio may not purchase securities other than Municipal Bonds and Temporary
Investments described below. These are fundamental policies of each Portfolio
and may not be changed without a vote of the majority of the outstanding shares
of the Portfolio. Each Portfolio currently contemplates that it will not invest
more than 25% of its total assets (taken at market value) in Municipal Bonds
whose issuers are located in the same state. There can be no assurance that the
objective of any Portfolio can be attained.
While the Fund does not intend to realize taxable investment income, each
Portfolio has the authority to invest as much as 20% of its net assets on a
temporary basis in taxable money market securities with remaining maturities not
in excess of one year from the date of purchase ("Temporary Investments") for
liquidity purposes or as a temporary investment of cash pending investment of
such cash in Municipal Bonds. 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 Investment Adviser, market
conditions warrant. Temporary Investments consist of U.S. Government securities,
U.S. Government agency securities, domestic bank certificates of deposit and
bankers' acceptances, short-term corporate debt securities such as commercial
paper, and repurchase agreements. From time to time, the Fund may realize
capital gains that will constitute taxable income. In addition, the Fund may
invest in certain tax-exempt securities that are classified as "private activity
bonds," which may subject certain investors to an alternative minimum tax. (At
June 30, 1997, approximately 16.9% of the Insured Portfolio's, approximately
14.4% of the National Portfolio's and approximately 7.47% of the Limited
Maturity Portfolio's net assets were invested in "private activity bonds.")
These figures should not be considered representative of the respective
Portfolio's private activity bond positions for any future period. See
"Dividends, Distributions and Taxes."
Certain instruments in which the Fund may invest may be characterized as
derivative instruments. The Insured Portfolio, the National Portfolio and the
Limited Maturity Portfolio are authorized to engage in transactions in financial
futures contracts only for hedging purposes. For a more complete description of
futures transactions, see "Financial Futures Contracts and Derivatives" below
and the Statement of Additional Information.
Investment in the Fund offers several benefits. The Fund offers investors
the opportunity to receive income exempt from Federal income taxes from a
diversified, professionally managed portfolio of 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 are at least partially offset by the fact
that there are expenses in operating an investment company. Such expenses
19
<PAGE>
consist primarily of the investment advisory fee and operational expenses,
including, in the case of the Insured Portfolio, premiums for insurance on
portfolio securities.
INVESTMENT POLICIES OF THE PORTFOLIOS
Each Portfolio pursues its investment objective through the separate
investment policies described below. These policies differ with respect to the
maturity and quality of portfolio securities in which a Portfolio may invest,
and these policies can be expected to affect the yield on each Portfolio and the
degree of market, financial and interest rate risk to which the Portfolio is
subject. Generally, Municipal Bonds with longer maturities tend to produce
higher yields and are subject to greater market fluctuations as a result of
changes in interest rates ("market risk") than are Municipal Bonds with shorter
maturities. In addition, lower rated Municipal Bonds generally will provide a
higher yield than higher rated Municipal Bonds of similar maturity but are
subject to greater market risk and are also subject to a greater degree of risk
with respect to the ability of the issuer to meet its principal and interest
obligations ("financial risk"). A Portfolio's net asset value may fall when
interest rates rise and rise when interest rates fall. In general, Municipal
Bonds with longer maturities will be subject to greater volatility resulting
from interest rate fluctuation than will Municipal Bonds with shorter maturities
("interest rate risk"). See "Appendix -- Description of Ratings" for information
with respect to ratings assigned to Municipal Bonds and Temporary Investments by
rating agencies.
INSURED PORTFOLIO
The Insured Portfolio may invest in investment grade Municipal Bonds
covered by portfolio insurance guaranteeing the timely payment of principal at
maturity and interest. Investment grade Municipal Bonds are those rated at the
date of purchase in the four highest rating categories of Standard & Poor's
Ratings Services ("S&P") (AAA, AA, A and BBB) or Moody's Investors Service, Inc.
("Moody's") (Aaa, Aa, A and Baa) in the case of long-term debt, rated MIG 1
through MIG 4 by Moody's or in the four highest bond ratings of, or rated SP-1+
through SP-2 by, S&P in the case of short-term notes, and rated P-1 or P-2 in
the case of Moody's or A-1+ through A-2 by S&P in the case of tax-exempt
commercial paper. Depending on market conditions, it is expected that Municipal
Bonds with maturities beyond five years will comprise a major portion of this
Portfolio.
The Insured Portfolio may invest only in Municipal Bonds that, at the time
of purchase, either (1) are insured under an insurance policy purchased by the
Fund or (2) are insured under an insurance policy obtained by the issuer thereof
or any other party from an insurance carrier meeting the criteria of the Fund
set forth below. The Fund has purchased from AMBAC Indemnity Corporation
("AMBAC"), Municipal Bond Investors Assurance Corporation ("MBIA") and Financial
Security Assurance Inc. ("FSA"), separate Mutual Fund Insurance Policies (the
"Policies"), each of which guarantees the payment of principal and interest on
specified eligible Municipal Bonds purchased by the Insured Portfolio ("Insured
Municipal Bonds"). Consequently, some of the Insured Municipal Bonds in the
Insured Portfolio may be insured by AMBAC, while others may be insured by MBIA
or FSA. The Policies generally have the same characteristics and features. A
Municipal Bond is eligible for coverage if it meets certain requirements of the
insurance company set forth in a Policy. Additional information regarding these
eligibility requirements is set forth in the Statement of Additional
Information. In the event interest or principal on an Insured Municipal Bond is
not paid when due, AMBAC or MBIA or FSA (depending on which Policy covers the
bond) is obligated under its Policy to make payment not later than 30 days after
it has been notified by, and provided with documentation from, the Fund that
such nonpayment has occurred. The insurance feature reduces financial
20
<PAGE>
risk, but the cost thereof and the restrictions on investments imposed by the
guidelines in the insurance policy reduce the yield to shareholders.
The Policies will be effective only as to Insured Municipal Bonds
beneficially owned by the Insured Portfolio. In the event of a sale of any
Municipal Bonds held by the Insured Portfolio, the issuer of the relevant Policy
is liable only for those payments of interest and principal that are then due
and owing. The Policies do not guarantee the market value of the Insured
Municipal Bonds or the value of the shares of the Insured Portfolio. It is the
intention of the Insured Portfolio, however, to retain any insured securities
that are in default or in significant risk of default and to place a value on
the insurance, which ordinarily will be the difference between the market value
of the defaulted security and the market value of similar securities that are
not in default. In certain circumstances, however, the Fund's management may
determine that an alternative value for the insurance, such as the difference
between the market value of the defaulted security and its par value, is more
appropriate. As the result of the value placed on the insurance with respect to
securities held in the Insured Portfolio that were in default at the end of the
Fund's last fiscal year, such securities were effectively valued at par. The
Insured Portfolio's ability to manage its portfolio will be limited to the
extent it holds defaulted securities, which may limit its ability in certain
circumstances to purchase other Municipal Bonds. See "Net Asset Value" in the
Statement of Additional Information for a more complete description of the
Insured Portfolio's method of valuing defaulted securities and securities that
have a significant risk of default. Further information with respect to
portfolio insurance is also set forth in the Statement of Additional
Information.
AMBAC, MBIA and FSA may not withdraw coverage on securities insured by
their Policies and held by the Insured Portfolio so long as they remain in the
Insured Portfolio. AMBAC, MBIA and FSA may not cancel their Policies for any
reason except failure to pay premiums when due. AMBAC and FSA have reserved the
right at any time upon written notice to the Fund to refuse to insure any
additional municipal securities purchased by the Insured Portfolio after the
effective date of such notice. The Board of Directors of the Fund has reserved
the right to terminate any of the Policies if it determines that the benefits to
the Insured Portfolio of having its portfolio insured are not justified by the
expense involved.
The premiums for the Policies are paid by the Insured Portfolio and the
yield on the Portfolio is reduced thereby. The Investment Adviser estimates that
the current cost of the annual premiums will range from approximately 0.08% to
0.20% of the average net assets of the Insured Portfolio. The estimate is based
on the expected composition of the Portfolio.
NATIONAL PORTFOLIO
The National Portfolio invests primarily in a portfolio of medium to lower
grade Municipal Bonds with maturities beyond five years. This Portfolio normally
can be expected to offer the highest yields of the three Portfolios, but also be
subject to the highest market and financial risks. Because an investment in the
National Portfolio entails relatively greater risks, it may not be an
appropriate investment for all investors.
Although the investment policies of the National Portfolio are not governed
by specific rating categories, the Fund will seek to invest primarily in medium
and lower grade Municipal Bonds, including short-term tax-exempt notes,
tax-exempt commercial paper and variable rate tax-exempt demand notes. Medium
grade long-term debt obligations are those rated A and BBB by S&P or A and Baa
by Moody's, and unrated obligations that the Investment Adviser believes are of
comparable quality. Lower grade obligations (commonly known as "junk bonds") are
those rated below BBB or Baa, and unrated obligations that the Investment
Adviser believes are of comparable quality. Lower grade obligations will
generally be more speculative with respect to
21
<PAGE>
the capacity of the issuer to make interest and principal payments. Because
issuers of Municipal Bonds having these characteristics may choose not to have
their obligations rated, it is possible that a substantial portion of the
National Portfolio's portfolio may consist of obligations that are not rated.
Unrated bonds are not necessarily of lower quality than rated bonds, but the
market for rated bonds is often broader. It is not the present intention of the
National Portfolio to invest over 35% of its assets in securities rated below
Baa by Moody's or in securities rated below BBB by S&P.
Junk bonds are generally considered to have varying degrees of speculative
characteristics. Consequently, although junk bonds 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 junk bonds will be made only when, in the
judgment of the Fund's management, such securities provide attractive total
return potential relative to the risk of such securities, as compared to higher
quality debt securities. The National Portfolio will not invest in debt
securities in the lowest rating categories (those rated CC or lower by S&P or Ca
or lower by Moody's) unless the Fund's management 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 National
Portfolio does not intend to purchase debt securities that are in default or
that the Fund's management believes will be in default. The Statement of
Additional Information contains a more detailed description of the risks
involved in purchasing junk bonds.
The table below shows the market value, by S&P rating category, of the
securities held by the National Portfolio at June 30, 1997:
<TABLE>
<CAPTION>
% NET
RATING ASSETS
--------------------------------------------------------------------- -----
<S> <C>
AAA.................................................................. 43.9
AA................................................................... 13.1
A.................................................................... 12.2
BBB.................................................................. 13.2
BB................................................................... 3.3
NR*.................................................................. 9.6
----
95.3
====
</TABLE>
- ---------------
* Bonds that are not rated by S&P. Such bonds may be rated by nationally
recognized statistical rating organizations other than S&P, or may not be
rated by any of such organizations. With respect to the percentage of the
Portfolio's assets invested in such securities, the Investment Adviser
believes that 2.9% are of comparable quality to bonds rated AAA, 0.3% are of
comparable quality to bonds rated AA, 3.2% are of comparable quality to bonds
rated A, 0.6% are of comparable quality to bonds rated BBB, 1.9% are of
comparable quality to bonds rated BB and 0.7% are of comparable quality to
bonds rated B. This determination is based on the Investment Adviser's own
internal evaluation and does not necessarily reflect how such securities would
be rated by S&P if it were to rate the securities.
It is expected that the National Portfolio will consist primarily of
revenue bonds emphasizing hospital, health care, public utility and housing
issues.
LIMITED MATURITY PORTFOLIO
The Limited Maturity Portfolio invests primarily in a portfolio of
short-term investment grade Municipal Bonds. Municipal Bonds in the Limited
Maturity Portfolio will be either Municipal Bonds with a remaining
22
<PAGE>
maturity of less than four years or short-term municipal notes, which typically
are issued with a maturity of not more than one year. The Limited Maturity
Portfolio will treat Municipal Bonds that it has the option to require the
issuer to redeem within four years as having a remaining maturity of less than
four years, even if the period to the stated maturity date of such Bonds is
greater than four years. Municipal notes include tax anticipation notes, bond
anticipation notes and revenue anticipation notes. The Limited Maturity
Portfolio can be expected to offer a lower yield than the longer-term
Portfolios. Interest rates on short-term Municipal Bonds may fluctuate more
widely from time to time than interest rates on long-term Municipal Bonds.
However, because of the shorter maturities, the market value of the Municipal
Bonds held by the Limited Maturity Portfolio can be expected to fluctuate less
in value as a result of changes in interest rates.
The Limited Maturity Portfolio will invest only in Municipal Bonds rated at
the date of purchase in the four highest rating categories by S&P (AAA, AA, A
and BBB) or Moody's (Aaa, Aa, A and Baa) in the case of long-term debt, rated by
Moody's as MIG 1 through MIG 4, or rated SP-1+ through SP-2 by S&P in the case
of short-term tax-exempt notes, and rated by Moody's P-1 through P-2 or rated
A-1+ through A-3 by S&P in the case of tax-exempt commercial paper. The Limited
Maturity Portfolio will also invest in other Municipal Bonds deemed to qualify
for such ratings and in variable rate tax-exempt demand notes. Securities rated
in the lowest of these categories are considered to have some speculative
characteristics. The Limited Maturity Portfolio may continue to hold securities
that, after being purchased by the Portfolio, are downgraded to a rating lower
than those set forth above.
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 industrial development bonds are issued by or on behalf of
public authorities to finance various privately operated facilities, including
pollution control facilities. Such obligations are included within the term
Municipal Bonds if the interest paid thereon is exempt from Federal income tax.
Municipal Bonds also include short-term tax-exempt municipal obligations such as
tax anticipation notes, bond anticipation notes, revenue anticipation notes,
variable rate demand notes and Public Housing Authority notes that are fully
secured by a pledge of the full faith and credit of the United States.
The two principal classifications of Municipal Bonds are "general
obligation" and "revenue" or "special obligation" 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 or special obligation 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 from the user of the facility being financed.
Industrial development bonds are in most cases revenue bonds and do not
generally constitute the pledge of the credit or taxing power of the issuer of
such bonds. The payment of the principal of and interest on such industrial
revenue bonds depends solely on the ability of the user of the facilities
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. A
Portfolio may also include "moral obligation" bonds, which are normally issued
by special purpose public authorities. If an issuer of moral obligation bonds is
unable to meet its obligations, the repayment of such bonds becomes a moral
commitment but not a legal obligation of the state or municipality in question.
23
<PAGE>
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 a Portfolio 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 only make 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 the Investment Adviser deems it
advisable. Purchasing Municipal Bonds on a when-issued basis involves the risk
that the yields available in the market when the delivery takes place may
actually be higher than those obtained in the transaction itself; if yields so
increase, the value of the when-issued obligation will generally decrease. When
a Portfolio engages in when-issued and delayed delivery transactions, the
Portfolio relies on the buyer or seller, as the case may be, to consummate the
trade. Failure of the buyer or seller to do so may result in the Portfolio's
missing the opportunity of obtaining a price considered to be advantageous. The
Fund will maintain a separate account as its custodian bank consisting of cash
or liquid Municipal Bonds (valued on a daily basis) equal at all times to the
amount of the when-issued commitment.
Variable rate demand notes ("VRDNs") are tax-exempt obligations that
contain a floating or variable interest rate adjustment formula and an
unconditional right of demand to receive payment of the unpaid principal balance
plus accrued interest upon a short notice period not to exceed seven days. The
interest rates are adjustable at intervals ranging from daily up to six months
to some prevailing market rate for similar investments, such adjustment formula
being calculated to maintain the market value of the VRDN at approximately the
par value of the VRDN upon the adjustment date. The adjustments are typically
based upon the prime rate of a bank or some other appropriate interest rate
adjustment index.
The Fund may also invest in VRDNs in the form of participation interests
("Participating VRDNs") in variable rate tax-exempt obligations held by a
financial institution, typically a commercial bank ("institution").
Participating VRDNs 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 VRDNs from the
institution upon a specified number of days' notice, not to exceed seven days.
In addition, the Participating VRDN is backed by an irrevocable letter of credit
or guaranty of the institution. The Fund has an undivided interest in the
underlying obligation and thus participates on the same basis as the institution
in such obligation except that the 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 to the effect that the interest
received on Participating VRDNs will be treated as interest from tax-exempt
obligations as long as the Fund does not invest more than a limited amount (not
more than 20%) of its total assets in such investments and certain other
conditions are met. It is contemplated that the Fund will not invest more than a
limited amount of its total assets in Participating VRDNs.
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 maturity of the obligation, and the rating of
the issue. The ability of a Portfolio to achieve its investment objective is
also dependent on the continuing ability of the issuers of the Municipal Bonds
in which the Portfolio 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, within a particular classification and between
classifications, depending
24
<PAGE>
on numerous factors. Furthermore, the rights of holders of Municipal Bonds and
the obligations of the issuers of such Municipal Bonds may be subject to
applicable bankruptcy, insolvency and similar laws and court decisions affecting
the rights of creditors generally and such laws, if any, that may be enacted by
Congress or state legislatures imposing a moratorium on the payment of principal
and interest or imposing other constraints or conditions on the payment of
principal of and interest on Municipal Bonds.
From time to time, proposals have been introduced before Congress for the
purpose of restricting or eliminating the federal income tax exemption for
interest on Municipal Bonds. It may be expected that similar proposals may be
introduced in the future. If such a proposal were enacted, the ability of the
Portfolios to pay "exempt-interest" dividends might be adversely affected and
the Fund would re-evaluate its investment objective and policies and consider
changes in its structure. See "Additional Information -- Dividends and
Distributions" and "Additional Information -- Federal Income Taxes."
FORWARD COMMITMENTS
Each Portfolio may purchase Municipal Bonds on a forward commitment basis
at fixed purchase terms. The purchase will be recorded on the date the Portfolio
enters into the commitment and the value of the security will thereafter be
reflected in the calculation of the Portfolio's net asset value. The value of
the security on the delivery date may be more or less than its purchase price. A
separate account of the Portfolio will be established with its custodian
consisting of cash or liquid Municipal Bonds having a market value at all times
at least equal to the amount of the forward commitment.
FINANCIAL FUTURES CONTRACTS AND DERIVATIVES
The Portfolios are authorized to purchase and sell certain financial
futures contracts ("futures contracts") and options on such futures contracts
solely for the purpose of hedging their investments in Municipal Bonds against
declines in value and to hedge against increases in the cost of securities the
Portfolios intend to purchase. 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 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.
The Portfolios intend to trade in futures contracts based upon The Bond
Buyer Municipal Bond Index, a price-weighted measure of the market value of 40
large, recently issued tax-exempt bonds, and to engage in transactions in
exchange-traded futures contracts on U.S. Treasury securities and options on
such futures. If making or accepting delivery of the underlying commodity is not
desired, a position in a futures contract or an option on a futures contract may
be terminated only by entering into an offsetting transaction on the exchange on
which the position was established and only if there is a liquid market for such
contract. If it is not economically practicable, or otherwise possible to close
a futures position or certain option positions entered into by a Portfolio, the
Portfolio could be required to make continuing daily cash payments of variation
margin in the event of adverse price movements. In such situations, if the
Portfolio 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. In addition, the Portfolio may be required to perform
under the terms of its contracts. The
25
<PAGE>
inability to close futures or options positions could also have an adverse
impact on the Portfolio's ability to hedge effectively. There is also risk of
loss by a Portfolio of margin deposits in the event of bankruptcy of a broker
with whom the Portfolio has an open position in a futures contract, or the
exchange or clearing organization on which that contract is traded. The
Portfolios may also engage in transactions in other futures contracts, such as
futures contracts on other municipal bond indexes that may become available, if
the Investment Adviser believes such contracts would be appropriate for hedging
the Portfolios' investments in Municipal Bonds.
Utilization of futures or option contracts involves the risk of imperfect
correlation in movements in the price of such contracts and movements in the
price of the security or securities that are the subject of the hedge. If the
price of the futures or option contract moves more or less than the price of the
security or securities that are the subject of the hedge, a Portfolio will
experience a gain or loss that will not be completely offset by movements in the
price of such security, which could occur as a result of many factors, including
where the securities underlying futures or option 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 that serves as a basis for an index futures contract. The trading of
futures contracts or options on futures contracts based on indexes of securities
also involves a risk of imperfect correlation between the value of the futures
contracts and the value of the underlying index. The anticipated spread between
such values or in the correlation between the futures contract and the
underlying security may be affected by differences in markets, such as margin
requirements, market liquidity and the participation of speculators in the
futures markets. Moreover, when a Portfolio enters into transactions in futures
contracts on U.S. Treasury securities, or options on such contracts, the
underlying securities will not correspond to securities held by the Portfolio.
Finally, in the case of futures contracts on U.S. Treasury securities and
options on such futures contracts, the anticipated correlation of price
movements between U.S. Treasury securities underlying the futures or options and
Municipal Bonds may be adversely affected by economic, political, legislative or
other developments which have a disparate impact on the respective markets for
such securities.
Under regulations of the Commodity Futures Trading Commission ("CFTC"), the
futures trading activities described herein will not result in the Portfolios
being deemed to be "commodity pools," as defined under such regulations,
provided that certain restrictions are adhered to. In particular, among other
requirements, the Portfolios may either (a) purchase and sell futures contracts
only for bona fide hedging purposes, as defined under CFTC regulations, or (b)
limit any transaction not qualifying as bona fide hedging so that the sum of the
amount of initial margin deposits and premiums paid on such positions would not
exceed 5% of the market value of a Portfolio's net assets. Margin deposits may
consist of cash or securities acceptable to the broker and the relevant contract
market.
When a Portfolio purchases a futures contract, it will maintain an amount
of cash, cash equivalents or commercial paper or other liquid securities in a
segregated account with the Fund's custodian, so that the amount segregated plus
the amount of initial margin and option premiums held in the account of its
broker equals the value represented by the futures contract, as reflected by its
daily settlement price, thereby ensuring that the use of such futures contract
is unleveraged. It is not anticipated that transactions in the futures contracts
will have the effect of increasing portfolio turnover.
Reference is made to the Statement of Additional Information for further
information on financial futures contracts.
26
<PAGE>
INDEXED AND INVERSE FLOATING OBLIGATIONS
The Fund may invest in a variety of instruments that may be characterized
as "Derivative Securities." The Fund may invest in Municipal Bonds, the return
on which is based on a particular index of value or interest rates. For example,
the Fund may invest in Municipal Bonds that pay interest based on an index of
Municipal Bond interest rates or based on the value of gold or some other
commodity. The principal amount payable upon maturity of certain Municipal Bonds
also may be based on the value of an index. Also, the Fund may invest in
so-called "inverse floating obligations" or "residual interest bonds" on which
the interest rates typically decline as market rates increase and increase as
market rates decline. To the extent the Fund invests in these types of Municipal
Bonds, the Fund's return on such Municipal Bonds will be subject to risk with
respect to the value of the particular index. Such securities have the effect of
providing a degree of investment leverage, since they may increase or decrease
in value in response to changes, as an illustration, in market interest rates at
a rate which is a multiple (typically two) of the rate at which fixed-rate
long-term 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 Investment Adviser believes that
indexed and inverse floating obligations represent a flexible portfolio
management instrument for the Fund that allows the Investment Adviser 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 10% of the Fund's net assets.
INVESTMENT RESTRICTIONS
The Fund has adopted a number of restrictions and policies relating to the
investment of its assets and its activities, which are fundamental policies of
the Fund and may not be changed without the approval of the holders of a
majority of the Fund's outstanding voting securities (including a majority of
the shares of each Portfolio). One such restriction prohibits the Fund from
entering into a repurchase agreement if, as a result thereof, more than 10% of
the total assets of any Portfolio (taken at market value at the time of each
investment) would be subject to repurchase agreements maturing in more than
seven days. Investors are referred to the Statement of Additional Information
for a complete description of such restrictions and policies.
MANAGEMENT OF THE FUND
BOARD OF DIRECTORS
The Board of Directors of the Fund consists of six individuals, five of
whom are not "interested persons" of the Fund as defined in the Investment
Company Act of 1940, as amended (the "Investment Company Act"). The Directors of
the Fund are responsible for the overall supervision of the operations of the
Fund and perform the various duties imposed on the directors of investment
companies by the Investment Company Act.
27
<PAGE>
The Directors are:
ARTHUR ZEIKEL* -- President of the Investment Adviser and its affiliate,
MLAM; President and Director of Princeton Services, Inc. ("Princeton Services");
Executive Vice President of ML & Co.; and Director of Merrill Lynch Funds
Distributor, Inc. (the "Distributor").
RONALD W. FORBES -- Professor of Finance, School of Business State
University of New York at Albany.
CYNTHIA A. MONTGOMERY -- Professor of Competition and Strategy, Harvard
Business School.
CHARLES C. REILLY -- Former Adjunct Professor, Columbia University Graduate
School of Business.
KEVIN A. RYAN -- Professor of Education, Boston University; Founder and
current Director of The Boston University Center for Advancement of Ethics and
Character.
RICHARD R. WEST -- Dean Emeritus, New York University Leonard N. Stern
School of Business Administration.
- ---------------
* Interested person, as defined in the Investment Company Act, of the Fund.
MANAGEMENT AND ADVISORY ARRANGEMENTS
The Investment Adviser to the Fund is FAM, an affiliate of MLAM, an
indirect subsidiary of ML & Co., a financial services holding company and the
parent of Merrill Lynch. The address of FAM is P.O. Box 9011, Princeton, New
Jersey 08543-9011. FAM or MLAM acts as the investment adviser for more than 140
registered investment companies. As of August 31, 1997, the Investment Adviser
and MLAM had a total of $267.7 billion in investment company and other portfolio
assets under management, including accounts of certain affiliates of the
Investment Adviser.
Subject to the supervision of the Directors of the Fund, the Investment
Adviser is responsible for the actual management of the Fund's portfolio and
constantly reviews the Fund's holdings in light of its own research and analysis
and that from other relevant sources. The responsibility for making decisions to
buy, sell or hold a particular security rests with the Investment Adviser. The
Investment Adviser performs certain other administrative services for the Fund
and provides all of the office space, facilities, equipment and necessary
personnel for management of the Fund.
For its services as Investment Adviser, the Fund pays FAM a monthly fee
based upon the aggregate average net assets of the three Portfolios. For the
fiscal year ended June 30, 1997, the fee paid by the Fund to FAM was
$16,555,920, of which $8,042,098 was received with respect to the Insured
Portfolio (representing 0.36% of its average net assets), $6,961,453 was
received with respect to the National Portfolio (representing 0.48% of its
average net assets) and $1,552,369 was received with respect to the Limited
Maturity Portfolio (representing 0.33% of its average net assets).
The Investment Advisory Agreement obligates each Portfolio to pay certain
expenses incurred in its operation and a portion of the Fund's general
administrative expenses allocated on the basis of the asset size of the
respective Portfolios. The Fund's total expenses for the fiscal year ended June
30, 1997 were $28,449,431, of which $14,925,877 was attributable to the Insured
Portfolio (representing 0.44%, 1.19%, 1.25%, and 0.69% of average net assets for
Class A, Class B, Class C and Class D shares, respectively), $11,465,595 was
attributable to the National Portfolio representing 0.55%, 1.31%, 1.36%, and
0.80% of average net assets for Class A, Class B, Class C and Class D shares,
respectively), and $2,057,959 was attributable to the Limited
28
<PAGE>
Maturity Portfolio (representing 0.39%, 0.75%, 0.75%, and 0.48% of average net
assets for Class A, Class B, Class C and Class D shares, respectively). FAM was
not required to reduce its fee or reimburse any of the Fund's expenses for the
fiscal year ended June 30, 1997.
The Fund pays certain expenses incurred in its operations including, among
other things, taxes; expenses for legal and auditing services; and costs of
printing proxies, stock certificates, shareholder reports, prospectuses and
statements of additional information. Also, accounting services are provided to
the Fund by the Investment Adviser and the Fund reimburses the Investment
Adviser for its costs in connection with such services. For the fiscal year
ended June 30, 1997, the Fund reimbursed the Investment Adviser $433,527 for
accounting services, of which $249,511 was received with respect to the Insured
Portfolio, $142,298 was received with respect to the National Portfolio and
$41,718 was received with respect to the Limited Maturity Portfolio.
Kenneth A. Jacob has served as the Portfolio Manager for the Insured
Portfolio since 1995 and is primarily responsible for its day-to-day management.
Peter J. Hayes has served as the Portfolio Manager for the Limited Maturity
Portfolio and is primarily responsible for its day-to-day management. Walter
O'Connor has served as the Portfolio Manager for the National Portfolio and is
primarily responsible for its day-to-day management.
TRANSFER AGENCY SERVICES
Merrill Lynch Financial Data Services, Inc. (the "Transfer Agent"), which
is a subsidiary of ML & Co., acts as the Fund's Transfer Agent pursuant to a
Transfer Agency, Dividend Disbursing Agency and Shareholder Servicing Agency
Agreement (the "Transfer Agency Agreement"). Pursuant to the Transfer Agency
Agreement, the Transfer Agent is responsible for the issuance, transfer and
redemption of shares and the opening and maintenance of shareholder accounts.
Pursuant to the Transfer Agency Agreement, the Transfer Agent receives an annual
fee of up to $11.00 per Class A or Class D account and up to $14.00 per Class B
or Class C account and is entitled to reimbursement for certain transaction
charges and out-of-pocket expenses incurred by the Transfer Agent under the
Transfer Agency Agreement. Additionally, a $0.20 monthly closed account charge
will be assessed to all accounts that close during the calendar year.
Application of this fee will commence the month following the month the account
is closed. At the end of the calendar year, no further fees will be due. For
purposes of the Transfer Agency Agreement, the term "account" includes a
shareholder account maintained directly by the Transfer Agent and any other
account representing the beneficial interest of a person in the relevant share
class on a recordkeeping system, provided the recordkeeping system is maintained
by a subsidiary of ML & Co. For the fiscal year ended June 30, 1997, the
Insured, National and Limited Maturity Portfolios of the Fund incurred fees
totaling $1,467,879, pursuant to the Transfer Agency Agreement.
CODE OF ETHICS
The Board of Directors of the Fund has adopted a Code of Ethics under Rule
17j-1 of the Investment Company Act that incorporates the Code of Ethics of the
Investment Adviser (together, the "Codes"). The Codes significantly restrict the
personal investing activities of all employees of the Investment Adviser and, as
described below, impose additional, more onerous, restrictions on fund
investment personnel.
29
<PAGE>
The Codes require that all employees of the Investment Adviser preclear any
personal securities investment (with limited exceptions, such as government
securities). The preclearance requirement and associated procedures are designed
to identify any substantive prohibition or limitation applicable to the proposed
investment. The substantive restrictions applicable to all employees of the
Investment Adviser include a ban on acquiring any securities in a "hot" initial
public offering and a prohibition from profiting on short-term trading in
securities. In addition, no employee may purchase or sell any security which at
the time is being purchased or sold (as the case may be), or to the knowledge of
the employee is being considered for purchase or sale, by any fund advised by
the Investment Adviser. Furthermore, the Codes provide for trading "blackout
periods" which prohibit trading by investment personnel of the Fund within
periods of trading by the Fund in the same (or equivalent) security (15 or 30
days depending upon the transaction).
PURCHASE OF SHARES
The Distributor, an affiliate of both the Investment Adviser and Merrill
Lynch, acts as the Distributor of the shares of each Portfolio. Shares may be
purchased directly from the Distributor or from other securities dealers,
including Merrill Lynch, with whom the Distributor has entered into selected
dealer agreements; however, only Class A and Class D shares may be available for
purchase through securities dealers, other than Merrill Lynch, that are eligible
to sell shares. The Fund is offering shares in four classes of its Portfolios 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 (the "initial sales
charge alternative") or on a deferred basis (the "deferred sales charge
alternative") depending upon the class of shares selected by the investor under
the Merrill Lynch Select Pricing(SM) System, as described below. Net asset value
per share will be determined in the manner set forth under "Additional
Information -- Determination of Net Asset Value." The minimum initial purchase
in each Portfolio is $1,000 and the minimum subsequent purchase in each
Portfolio is $50 except that for participants in certain fee-based programs the
minimum initial purchase is $500 and the minimum subsequent purchase is $50.
Merrill Lynch may charge its customers a processing fee (currently $5.35) to
confirm a sale of shares. Purchases made directly through the Fund's transfer
agent are not subject to the processing fee.
As to purchase orders received by selected dealers prior to the close of
the New York Stock Exchange, which includes orders received after the close on
the previous day, the applicable offering price will be based on the net asset
value determined on the day the order is placed with the Distributor, provided
the order is received by the Distributor prior to 4:30 p.m., New York City time,
on that day. Any order may be rejected by the Distributor or the Fund. Neither
the Distributor nor the dealers are permitted to withhold placing orders to
benefit themselves by a price change. The Fund reserves the right to suspend the
sale of its shares to the public in response to conditions in the Municipal Bond
markets, or otherwise.
Each of the Portfolios issues four classes of shares under the Merrill
Lynch Select Pricing(SM) System, which permits each investor to choose the
method of purchasing shares that the investor believes is most beneficial given
the amount of the purchase, the length of time the investor expects to hold the
shares and other relevant circumstances. Shares of Class A and Class D shares
are sold to investors choosing the initial sales charge alternatives and shares
of Class B and Class C shares are sold to investors choosing the deferred sales
charge alternatives. Class C shares of the Limited Maturity Portfolio are
available only through the Exchange Privilege and may not be purchased except
through exchange of Class C shares of another Portfolio or another MLAM-advised
mutual fund. Because retirement plans qualified under Section 401 of the
Internal
30
<PAGE>
Revenue Code of 1986, as amended (the "Code"), will be unable to benefit from
the tax-exempt dividends of the Fund, the shares of the Fund may not be suitable
investments for such retirement plans.
Investors should determine whether under their particular circumstances it
is more advantageous to incur the initial sales charge or to have the initial
purchase price invested with the Portfolio with the investment thereafter being
subject to a CDSC 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(SM) System is set forth under the Merrill
Lynch Select Pricing(SM) System on page 8. Each Class A, Class B, Class C and
Class D share of a Portfolio represents an identical interest in the Portfolio
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, distribution fees and account
maintenance fees that are imposed on Class B and Class C shares, as well as the
account maintenance fees that are imposed on Class D shares, 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 a Portfolio for each class of shares will be calculated in the same
manner at the same time and will differ only to the extent that account
maintenance and distribution fees and any incremental transfer agency costs
relating to a particular class are borne exclusively by that class. Class B,
Class C and Class D shares each have exclusive voting rights with respect to the
Rule 12b-1 distribution plan adopted with respect to such class pursuant to
which account maintenance and/or distribution fees are paid (except that Class B
shareholders may vote upon any material changes to expenses charged under the
Class D Distribution Plan). See "Distribution Plans" below. Each class has
different exchange privileges. See "Shareholder Services -- Exchange
Privileges."
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 and distribution fees with respect to Class B and
Class C shares in that the sales charges and distribution fees applicable to
each class provide for the financing of the distribution of the shares of the
Fund. The distribution-related revenues paid with respect to a class will not be
used to finance the distribution expenditures of another class. Sales personnel
may receive different compensation for selling different classes of shares.
Investors are advised that only Class A and Class D shares may be available for
purchase through securities dealers, other than Merrill Lynch, that are eligible
to sell shares.
The following table sets forth a summary of the distribution arrangements
for each class of shares under the Merrill Lynch Select Pricing(SM) System.
31
<PAGE>
INSURED AND NATIONAL PORTFOLIOS
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------
ACCOUNT
MAINTENANCE DISTRIBUTION CONVERSION
CLASS SALES CHARGE(1) FEE FEE FEATURE
- -------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
A Maximum 4.00% initial sales
charge(2)(3) No No No
- -------------------------------------------------------------------------------------------------
B CDSC for a period of 4 0.25% 0.50% B shares convert to D shares
years, at a rate of 4.00% automatically after
during the first year, approximately ten years(5)
decreasing 1.00% annually to
0.0%(4)
- -------------------------------------------------------------------------------------------------
C 1.00% CDSC for one year 0.25% 0.55% No
decreasing to 0.0% after the
first year(6)
- -------------------------------------------------------------------------------------------------
D Maximum 4.00% initial sales 0.25% No No
charge(3)
- -------------------------------------------------------------------------------------------------
</TABLE>
LIMITED MATURITY PORTFOLIO
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------
ACCOUNT
MAINTENANCE DISTRIBUTION CONVERSION
CLASS SALES CHARGE(1) FEE FEE FEATURE
- -------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
A Maximum 1.00% initial sales No No No
charge(2)(3)
- -------------------------------------------------------------------------------------------------
B CDSC at a rate of 1.00% 0.15% 0.20% B shares convert to D shares
during the first year, automatically after
decreasing to 0.0% after the approximately ten years(5)
first year(4)
- -------------------------------------------------------------------------------------------------
C* 1.00% CDSC for one year 0.15% 0.20% No
decreasing to 0.0% after the
first year(6)
- -------------------------------------------------------------------------------------------------
D Maximum 1.00% initial sales 0.10% No No
charge(3)
- -------------------------------------------------------------------------------------------------
</TABLE>
- ---------------
(1) Initial sales charges are imposed at the time of purchase as a percentage of
the offering price. CDSCs are imposed if the redemption occurs within the
applicable CDSC time period. The charge will be assessed on an amount equal
to the lesser of the proceeds of redemption or the cost of the shares being
redeemed.
(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 for the Insured and National
Portfolios and $100,000 or more for the Limited Maturity Portfolio and
waived for purchases of Class A shares by participants in certain fee-based
programs. Class A and Class D share purchases of $1,000,000 or more may not
be subject to an initial sales charge but instead may be subject to a 1.0%
CDSC for the Insured and National Portfolios and 0.20% CDSC for the Limited
Maturity Portfolio, for one year. See "Class A" and "Class D" below.
(4) The CDSC may be modified in connection with certain fee-based programs.
(5) The conversion period for dividend reinvestment shares and the conversion
and holding periods for certain retirement plans was modified. Also, Class B
shares of certain other MLAM-advised mutual funds into which exchanges may
be made have an eight-year conversion period. If Class B shares of the Fund
are exchanged for Class B shares of another MLAM-advised mutual fund, the
conversion period applicable to the Class B shares acquired in the exchange
will apply, and the holding period for the shares exchanged will be tacked
onto the holding period for the shares acquired.
(6) The CDSC may be waived in connection with certain fee-based programs.
* Class C shares of the Limited Maturity Portfolio are available only through
the Exchange Privilege. See page 46.
32
<PAGE>
INITIAL SALES CHARGE ALTERNATIVES -- CLASS A AND CLASS D SHARES
Investors choosing the initial sales charge alternatives who are eligible
to purchase Class A shares should purchase Class A shares rather than Class D
shares because there is an account maintenance fee imposed on Class D shares.
The public offering price of Class A and Class D shares of the Portfolios,
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:
CLASS A AND CLASS D SHARES OF INSURED AND NATIONAL PORTFOLIOS
<TABLE>
<CAPTION>
SALES CHARGE
-----------------------------------------------------------
DISCOUNT TO
SALES LOAD AS SALES LOAD AS SELECT DEALERS AS A
A PERCENTAGE OF A PERCENTAGE* OF PERCENTAGE OF
AMOUNT OF PURCHASE OFFERING PRICE NET 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>
CLASS A AND CLASS D SHARES OF LIMITED MATURITY PORTFOLIO
<TABLE>
<CAPTION>
SALES CHARGE
-----------------------------------------------------------
DISCOUNT TO
SALES LOAD AS SALES LOAD AS SELECT DEALERS AS A
A PERCENTAGE OF A PERCENTAGE* OF PERCENTAGE OF
AMOUNT OF PURCHASE OFFERING PRICE NET AMOUNT INVESTED OFFERING PRICE
- ----------------------------------------------- --------------- ------------------- -------------------
<S> <C> <C> <C>
Less than $100,000............................. 1.00% 1.01% .95%
$100,000 but less than $250,000................ .75 .75 .70
$250,000 but less than $500,000................ .50 .50 .45
$500,000 but less than $1,000,000.............. .30 .30 .27
$1,000,000 and over**.......................... .00 .00 .00
</TABLE>
- ---------------
* Rounded to the nearest one-hundredth percent.
** The initial sales charge may be waived on Class A and Class D purchases of
$1,000,000 or more made on or after October 21, 1994, but such purchases may
be subject to a CDSC of 1.00% for the Insured and National Portfolios and
0.20% for the Limited Maturity Portfolio, if the shares are redeemed within
one year after purchase. Such CDSC may be waived in connection with certain
fee-based programs.
The Distributor may reallow discounts to securities dealers with whom it
has agreements and retain the balance over such discount. At times the
Distributor may reallow the entire sales charge to selected dealers, in which
case such dealers may be deemed to be underwriters within the meaning of the
Securities Act of 1933, as amended (the "Securities Act"), and subject to
liability as such. The Distributor will retain the entire sales
33
<PAGE>
charge on orders placed directly with it. The proceeds from account maintenance
fees are used to compensate Merrill Lynch for providing continuing account
maintenance activities.
During the fiscal year ended June 30, 1997, the Insured Portfolio, the
National Portfolio and the Limited Maturity Portfolio sold 4,575,281, 7,233,788
and 2,507,909 Class A shares, respectively, for aggregate net proceeds of
$36,693,201, $74,396,433 and $24,924,435, respectively. The gross sales charges
for the sale of Class A shares of the Insured Portfolio, the National Portfolio
and the Limited Maturity Portfolio for that period were $192,703, $166,061, and
$12,434, of which Merrill Lynch received $168,171 for the Insured Portfolio,
$149,402 for the National Portfolio and $11,295, for the Limited Maturity
Portfolio, and the Distributor received $24,532(1) for the Insured Portfolio,
$16,659(2) for the National Portfolio and $1,139(3) for the Limited Maturity
Portfolio. For the fiscal year ended June 30, 1997, the Distributor did not
receive any CDSCs with respect to redemption within one year after purchase of
Class A shares purchased subject to a front-end sales charge waiver for the
Insured, the National and the Limited Maturity Portfolios.
During the fiscal year ended June 30, 1997, the Insured Portfolio, the
National Portfolio and the Limited Maturity Portfolio sold 12,779,520,
10,536,060, and 3,468,693 Class D shares, respectively, for aggregate net
proceeds of $101,973,172, $108,053,333 and $34,441,741, respectively. The gross
sales charges for the sale of Class D shares of the Insured Portfolio, the
National Portfolio and the Limited Maturity Portfolio for that period were
$76,775, $110,841, and $21,653, of which the Merrill Lynch received $69,053 for
the Insured Portfolio, $98,975 for the National Portfolio and $20,019, for the
Limited Maturity Portfolio, and the Distributor received $7,722(4), for the
Insured Portfolio, $11,866(5) for the National Portfolio and $1,634 for the
Limited Maturity Portfolio. For the fiscal year ended June 30, 1997, the
Distributor received CDSC proceeds of $180,983 and $177,957 with respect to
redemption within one year after purchase of Class D shares purchased subject to
a front-end sales charge waiver for the Insured and National Portfolios,
respectively. For the same period the Distributor did not receive any CDSC
proceeds with respect to redemption within one year after purchase of Class D
shares purchased subject to a front-end sales charge waiver for the Limited
Maturity Portfolio.
Eligible Class A Investors. Class A shares are offered to a limited group
of investors and also will be issued upon reinvestment of dividends from
outstanding Class A shares. Investors that currently own Class A shares of a
Portfolio in a shareholder account, including participants in the Merrill Lynch
Blueprint(SM) program, are entitled to purchase additional Class A shares of
that Portfolio in that account. Class A shares are available at net asset value
to corporate warranty insurance reserve fund programs and U.S. branches of
foreign banking institutions, provided that the program or branch has $3 million
or more initially invested in MLAM-advised mutual funds. Also eligible to
purchase Class A shares at net asset value are participants in certain
investment programs, including TMA(SM) Managed Trusts to which Merrill Lynch
Trust Company provides discretionary trustee services, collective investment
trusts for which Merrill Lynch Trust Company
- ---------------
(1) Includes $4,806 in direct commissions received by MLFD.
(2) Includes $114 in direct commissions received by MLFD.
(3) Includes $138 in direct commissions received by MLFD.
(4) Includes $56 in direct commissions received by MLFD.
(5) Includes $56 in direct commissions received by MLFD.
34
<PAGE>
serves as trustee, certain Merrill Lynch investment programs that offer pricing
alternatives for securities transactions and purchases made in connection with
certain fee-based programs. In addition, Class A shares will be offered at net
asset value to ML & Co. and its subsidiaries and their directors and employees
and to members of the Boards of MLAM-advised mutual funds, including the Fund.
Certain persons who acquired shares of certain MLAM-advised closed-end funds in
their initial offerings who wish to reinvest the net proceeds from a sale of
their closed-end fund shares of common stock in shares of the Fund also may
purchase Class A shares of the Fund if certain conditions set forth in the
Statement of Additional Information are met (for closed-end funds that commenced
operations prior to October 21, 1994). In addition, Class A shares of the Fund
and certain other MLAM-advised mutual funds are offered at net asset value to
shareholders of Merrill Lynch Senior Floating Rate Fund, Inc. and, if certain
conditions set forth in the Statement of Additional Information are met, to
shareholders of Merrill Lynch Municipal Strategy Fund, Inc. and Merrill Lynch
High Income Municipal Bond Fund, Inc. who wish to reinvest the net proceeds from
a sale of certain of their shares of common stock pursuant to a tender offer
conducted by such funds in shares of the Fund and certain other MLAM-advised
mutual funds.
Reduced Initial Sales Charges. No initial sales charges are imposed upon
Class A and Class D shares issued as a result of the automatic reinvestment of
dividends or capital gains distributions. Class A and Class D sales charges also
may be reduced under a Right of Accumulation and a Letter of Intention. Class A
shares are offered at net asset value to certain eligible Class A investors as
set forth under "Eligible Class A Investors." See "Shareholder
Services -- Fee-Based Programs."
Provided applicable threshold requirements are met, Class D shares are
offered at net asset value to Employee Access(SM) Accounts available through
authorized employers. Subject to certain conditions, Class A and Class D shares
are offered at net asset value to shareholders of Merrill Lynch Municipal
Strategy Fund, Inc. and Merrill Lynch High Income Municipal Bond Fund, Inc., and
Class A shares are offered at net asset value to shareholders of Merrill Lynch
Senior Floating Rate Fund, Inc., who wish to reinvest in shares of the Fund the
net proceeds from a sale of certain of their shares of common stock, pursuant to
tender offers conducted by those funds.
Class D shares are offered at net asset value without sales charge to an
investor who has a business relationship with a Merrill Lynch Financial
Consultant if certain conditions set forth in the Statement of Additional
Information are met. Class D shares may be offered at net asset value in
connection with the acquisition of assets of other investment companies.
Class D shares are offered with reduced sales charges and, in certain
circumstances, at net asset value, to participants in the Merrill Lynch
Blueprint(SM) Program.
Additional information concerning these reduced initial sales charges is
set forth in the Statement of Additional Information.
Employee Access(SM) Accounts. Class A or Class D shares are offered at net
asset value to Employee Access Accounts available through employers that provide
employer sponsored retirement or savings plans that are eligible to purchase
such shares at net asset value. The initial minimum investments for such
accounts is $500, except that the initial minimum investments for shares
purchased for such accounts pursuant to the Automatic Investment Program is $50.
35
<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 of the Insured and National
Portfolios are subject to a four year CDSC and Class B shares of the Limited
Maturity Portfolio are subject to a one year CDSC, while Class C shares of each
Portfolio are subject only to a one year 1.00% 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 relevant
Portfolio and thereafter will be subject to lower continuing fees. See
"Conversion of Class B Shares to Class D Shares" below. Class C shares of the
Limited Maturity Portfolio are available only through the Exchange Privilege.
Both Class B and Class C shares of each Portfolio are subject to an account
maintenance fee of 0.25% (in the case of the National and Insured Portfolios)
and 0.15% (in the case of the Limited Maturity Portfolio) of net assets. Class B
and Class C shares of the Insured and National Portfolios are subject to
distribution fees equal to 0.50% and 0.55%, respectively, of net assets. Class B
and Class C shares of the Limited Maturity portfolio are subject to a
distribution fee of 0.20% of net assets. See "Distribution Plans." The proceeds
from account maintenance fees are used to compensate Merrill Lynch for providing
continuing account maintenance activities.
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 its 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 of a Portfolio
will convert automatically into Class D shares of that Portfolio, which are
subject to an account maintenance fee but 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. Class B shareholders of the Fund
exercising the exchange privilege described under "Shareholder Services --
Exchange Privileges" 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.
36
<PAGE>
Contingent Deferred Sales Charge -- Class B Shares. Class B shares of the
Insured and National Portfolios redeemed within four years of purchase and Class
B shares of the Limited Maturity Portfolio redeemed within one year of purchase,
may be subject to a CDSC at the rates set forth below charged as a percentage of
the dollar amount subject thereto. The charge will be assessed on an amount
equal to the lesser of the proceeds of redemption or the cost of the shares
being redeemed. Accordingly, no CDSC will be imposed on increases in net asset
value above the initial purchase price. In addition, no CDSC will be assessed on
the redemption of shares received upon the reinvestment of dividends or capital
gains distributions. Effective on or about May 12, 1997, the Class B CDSC also
will be waived for any Class B shares purchased within eligible Employee
Access(SM) Accounts.
The following table sets forth the rates of the CDSC on Class B shares
applicable for the period starting October 21, 1994:
<TABLE>
<CAPTION>
INSURED OR CDSC AS A
NATIONAL PORTFOLIO; PERCENTAGE OF
YEAR SINCE PURCHASE DOLLAR AMOUNT
PAYMENT MADE SUBJECT TO CHARGE
--------------------- -----------------
<S> <C>
0-1.......................................................... 4.00%
1-2.......................................................... 3.00%
2-3.......................................................... 2.00%
3-4.......................................................... 1.00%
4 and thereafter............................................. 0.00%
</TABLE>
<TABLE>
<CAPTION>
LIMITED MATURITY CDSC AS A
PORTFOLIO; PERCENTAGE OF
YEAR SINCE PURCHASE DOLLAR AMOUNT
PAYMENT MADE SUBJECT TO CHARGE
--------------------- -----------------
<S> <C>
0-1.......................................................... 1.0%
1 and thereafter............................................. 0.0%
</TABLE>
For the fiscal year ended June 30, 1997, the Distributor received
$1,906,615 in CDSCs with respect to redemptions of Class B shares, amounting to
$979,435, $868,705 and $58,475 in the Insured, National and Limited Maturity
Portfolios, respectively, all of which were paid to Merrill Lynch. Additional
CDSCs payable to the Distributor may have been waived or converted to a
contingent obligation in connection with a shareholder's participation in
certain fee-based programs.
In determining whether a CDSC is applicable to a redemption, the
calculation will be made in a manner that results in the lowest possible
applicable rate being charged. Therefore, with respect to the Insured and
National Portfolios, 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 applicable
four-year period. It will be assumed, with respect to the Limited Maturity
Portfolio, that the redemption is of shares held for over one year or shares
acquired pursuant to reinvestment of dividends or distributions and then of
shares held longest during the one-year period. The charge will not be applied
to dollar amounts representing an increase in the net asset value since the time
of purchase. A transfer of shares from a shareholder's account to another
account will be assumed to be made in the same order as a redemption.
37
<PAGE>
To provide an example, assume an investor purchased 100 Class B shares of
the Insured Portfolio 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 the increase in net asset value of
$2 per share. Therefore, $400 of the $600 redemption proceeds will be charged at
a rate of 2.00% (the applicable rate in the third year after purchase for shares
purchased on or after October 21, 1994).
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 that
are redeemed within one year of purchase may be subject to a 1.00% 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. The Class C CDSC may be waived in
connection with certain fee-based programs. See "Shareholder
Services -- Fee-Based Programs."
The following table sets forth the rates of the contingent deferred sales
charge on the Class C shares of the Insured, National and Limited Maturity
Portfolios:
<TABLE>
<CAPTION>
CONTINGENT DEFERRED
SALES CHARGE AS A
PERCENTAGE OF
YEAR SINCE PURCHASE DOLLAR AMOUNT
PAYMENT MADE SUBJECT TO CHARGE
------------------------------------------------------------ -------------------
<S> <C>
0-1......................................................... 1.00%
thereafter.................................................. 0.00%
</TABLE>
In determining whether a Class C CDSC is applicable to a redemption, the
calculation will be made in the manner that results in the lowest possible rate
being charged. Therefore, it will be assumed that the redemption is first of
shares held for over one year or shares acquired pursuant to reinvestment of
dividends or distributions and then of shares held longest during the one-year
period. The charge will not be applied to dollar amounts representing an
increase in the net asset value since the time of purchase. A transfer of shares
from a shareholder's account to another account will be assumed to be made in
the same order as a redemption.
For the fiscal year ended June 30, 1997, the Distributor received $17,583
in CDSCs with respect to redemptions of Class C shares, amounting to $6,915,
$10,273 and $395 in the Insured, National and Limited Maturity Portfolios,
respectively, all of which were paid to Merrill Lynch. Additional CDSCs payable
to the Distributor may have been waived or converted to a contingent obligation
in connection with a shareholder's participation in certain fee-based programs.
Conversion of Class B Shares to Class D Shares. After approximately ten
years (the "Conversion Period"), Class B shares of a Portfolio will be converted
automatically into Class D shares of the relevant Portfolio. Class D shares are
subject to an ongoing account maintenance fee of 0.25% (in the case of Insured
38
<PAGE>
Portfolio and National Portfolio) and 0.10% (in the case of the Limited Maturity
Portfolio) of net assets but are not subject to the distribution fee that is
borne by Class B shares. Automatic conversion of Class B shares into Class D
shares will occur at least once each month (on the "Conversion Date") on the
basis of the relative net asset values of the shares of the two classes on the
Conversion Date, without the imposition of any sales load, fee or other charge.
Conversion of Class B shares to Class D shares will not be deemed a purchase or
sale of the shares for federal income tax purposes.
In addition, shares purchased through reinvestment of dividends on Class B
shares also will convert automatically to Class D shares. The Conversion Date
for dividend reinvestment shares will be calculated taking into account the
length of time the shares underlying such dividend reinvestment shares were
outstanding. If at a Conversion Date the conversion of Class B shares to Class D
shares of the Fund in a single account will result in less than $50 worth of
Class B shares being left in the account, all of the Class B shares of the Fund
held in the account on the Conversion Date will be converted to Class D shares
of the Fund.
Share certificates for Class B shares of the Fund to be converted must be
delivered to the Transfer Agent at least one week prior to the Conversion Date
applicable to those shares. In the event such certificates are not received by
the Transfer Agent at least one week prior to the Conversion Date, the related
Class B shares will convert to Class D shares on the next scheduled Conversion
Date after such certificates are delivered.
In general, Class B shares of equity MLAM-advised mutual funds will convert
approximately eight years after initial purchase, and Class B shares of taxable
and tax-exempt fixed income MLAM-advised mutual funds will convert approximately
ten years after initial purchase. If, during the Conversion Period, a
shareholder exchanges Class B shares with an eight-year Conversion Period for
Class B shares with a ten-year Conversion Period, or vice versa, the Conversion
Period applicable to the Class B shares acquired in the exchange will apply, and
the holding period for the shares exchanged will be tacked onto the holding
period for the shares acquired.
The Conversion Period also may be modified in connection with certain
fee-based programs. See "Shareholder Services -- Fee-Based Programs."
DISTRIBUTION PLANS
The Fund has adopted separate distribution plans for Class B, Class C and
Class D shares pursuant to Rule 12b-1 under the 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 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 of a Portfolio, accrued daily and paid monthly, at
the annual rate of 0.25% (in the case of the Class B, Class C and Class D shares
of the Insured Portfolio and the National Portfolio) and 0.15% (in the case of
Class B and Class C shares of the Limited Maturity) and 0.10% (in the case of
the Class D shares of the Limited Maturity Portfolio) of the average daily net
assets of the Portfolio 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.
39
<PAGE>
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 of a Portfolio, accrued daily and paid monthly, at the annual
rate of 0.50% and 0.55% for the Class B and Class C shares, respectively, of the
Insured and National Portfolios and 0.20% for the Class B and Class C shares of
the Limited Maturity Portfolio of the average daily net assets of the Portfolio
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 Portfolio. 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.
Prior to July 6, 1993, the Fund paid the Distributor an ongoing
distribution fee, accrued daily and paid monthly, at the annual rate of 0.75%
(in the case of the Insured Portfolio and National Portfolio) and 0.35% (in the
case of the Limited Maturity Portfolio) of the average daily net assets of the
Class B shares of the respective Portfolio (the "Prior Plan") to compensate the
Distributor and Merrill Lynch for providing account maintenance and
distribution-related activities and services to Class B shareholders. The fee
rate payable and the services provided under the Prior Plan are identical to the
aggregate fee rate payable and the services provided under the Distribution
Plan, the difference being that the account maintenance and distribution
services have been unbundled. For the fiscal year ended June 30, 1997, the
Insured, National and Limited Maturity Portfolios paid the Distributor
$4,901,030, $3,073,016, and $222,614, respectively, pursuant to the Class B
Distribution Plan (based on average net assets subject to the Class B
Distribution Plan of approximately $653.5 million, $409.7 million, and $63.6
million, respectively), all of which were paid to Merrill Lynch for providing
account maintenance and distribution-related activities and services in
connection with Class B shares. For the fiscal year ended June 30, 1997, the
Insured, National and Limited Maturity Portfolios paid the Distributor $134,437,
$162,696, and $634, respectively, pursuant to the Class C Distribution Plan
(based on average net assets subject to the Class C Distribution Plan of
approximately $16.8 million, $20.3 million, and $0.2 million, respectively), all
of which were paid to Merrill Lynch for providing account maintenance and
distribution-related activities and services in connection with Class C shares.
For the fiscal year ended June 30, 1997, the Insured, National and Limited
Maturity Portfolios paid the Distributor $116,523, $126,564, and $17,810,
respectively, pursuant to the Class D Distribution Plan (based on average net
assets subject to the Class D Distribution Plan of approximately $46.6 million,
$50.6 million, and $17.8 million, respectively), all of which were paid to
Merrill Lynch for providing account maintenance services in connection with
Class D shares.
The payments under the Distribution Plans are based on a percentage of
average daily net assets attributable to the relevant shares regardless of the
amount of expenses incurred and, accordingly, distribution-related revenues from
Distribution Plans may be more or less than distribution-related expenses.
Information with respect to the distribution-related revenues and expenses
incurred by the Distributor and Merrill Lynch is presented to the Directors 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
40
<PAGE>
the fully allocated accrual basis, revenues consist of account maintenance fees,
the distribution fees, the CDSCs and certain other related revenues, and
expenses consist of financial consultant compensation, branch office and
regional operation center selling and transaction procession expenses,
advertising, sales promotion and marketing expenses, corporate overhead and
interest expense. On the direct expense and revenue/cash basis, revenues consist
of the account maintenance fees, distribution fees and the CDSCs, and expenses
consist of financial consultant compensation.
As of December 31, 1996, the last date for which fully allocated accrual
data is available, the fully allocated accrual revenues incurred by the
Distributor and Merrill Lynch since October 21, 1988 (commencement of
operations) with respect to Class B shares of the Insured Portfolio exceeded
fully allocated expenses for that period by $28,142,845 (representing 4.13% of
the Insured Portfolio's Class B net assets at that date), and the fully
allocated accrual revenues incurred by the Distributor and Merrill Lynch during
that period with respect to Class B shares of the National Portfolio exceeded
the fully allocated accrual expenses for that period by $13,052,833
(representing 3.28% of the National Portfolio's Class B net assets at that
date). The fully allocated accrual revenues incurred by the Distributor and
Merrill Lynch during the period from November 2, 1992 (commencement of
operations) to December 31, 1996, with respect to Class B shares of the Limited
Maturity Portfolio exceeded fully allocated expenses by $1,480,421 (representing
2.35% of the Limited Maturity Portfolio's Class B net assets at that date). As
of June 30, 1997, direct cash revenues received with respect to the Class B
shares of the Insured Portfolio for the period since October 21, 1988
(commencement of operations) exceeded direct cash expenses by $30,395,737
(representing 5.43% of Insured Portfolio Class B net assets at that date) and
direct cash revenues received with respect to Class B shares of the National
Portfolio for the same period exceeded direct cash expenses by $14,736,843
(representing 3.55% of National Portfolio Class B net assets at that date). As
of June 30, 1997, direct cash revenues received with respect to the Class B
shares of the Limited Maturity Portfolio for the period since November 2, 1992
(commencement of operations) exceeded direct cash expenses by $1,584,188
(representing 2.92% of Limited Maturity Portfolio Class B net assets at that
date).
With respect to Class C shares, as of December 31, 1996, the last date for
which fully allocated accrual data is available, the fully allocated accrual
revenues incurred by the Distributor and Merrill Lynch since October 21, 1994
(commencement of operations) with respect to Class C shares of the Insured
Portfolio exceeded fully allocated expenses for that period by $112,698
(representing 0.55% of the Insured Portfolio's Class C net assets at that date),
and the fully allocated accrual revenues incurred by the Distributor and Merrill
Lynch during that period with respect to Class C shares of the National
Portfolio exceeded the fully allocated accrual expenses for that period by
$75,014 (representing 0.40% of the National Portfolio's Class C net assets at
that date) and the fully allocated accrual expenses incurred by the Distributor
and Merrill Lynch during that period with respect to Class C shares of the
Limited Maturity Portfolio exceeded the fully allocated accrual revenues for
that period by $1,128 (representing 0.50% of the Limited Maturity Portfolio's
Class C net assets at that date). As of June 30, 1997, direct cash revenues
received with respect to the Class C shares of the Insured Portfolio for the
period since October 21, 1994 (commencement of operations) exceeded direct cash
expenses by $152,980 (representing 1.28% of Insured Portfolio Class C net assets
at that date), and the direct cash revenues received with respect to the Class C
shares of the National Portfolio for the same period exceeded direct cash
expenses by $144,667 (representing 0.51% of National Portfolio Class C net
assets at that date) and the direct cash expenses with respect to Class C shares
of the Limited Maturity Portfolio exceeded direct cash revenues by $812
(representing 0.76% of Limited Maturity Portfolio Class C net assets at that
date).
41
<PAGE>
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 the Class B, Class C and Class D shares, and there is no
assurance that the Board of Directors of the Fund will approve the continuation
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 Directors will be asked to take into consideration
expenses incurred in connection with the account maintenance and/or distribution
of each Class of a Portfolio separately. The initial sales charges, the account
maintenance fee, the distribution fee and/or the CDSCs received with respect to
the one class of a Portfolio will not be used to subsidize the sale of shares of
another class of the same Portfolio or of any class of another Portfolio.
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 to Class D Shares."
LIMITATIONS ON THE PAYMENT OF DEFERRED SALES CHARGES
The maximum sales charge rule in the Conduct Rules of the NASD imposes a
limitation on certain asset-based sales charges such as the Fund's distribution
fee and the CDSC borne by the Class B and Class C but not the account
maintenance fees. The maximum sales charge rule is applied separately to each
class and Portfolio. As applicable to a Portfolio, 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 of
that Portfolio, computed separately (defined to exclude shares issued pursuant
to dividend reinvestments and exchanges), plus (2) interest on the unpaid
balance for the respective classes, 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 charge 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
fees. 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
The Fund is required to redeem for cash all shares of each Portfolio upon
receipt of a written request in proper form. The redemption price is the net
asset value per share of the Portfolio next determined after the initial receipt
of proper notice of redemption. Except for any CDSC that may be applicable,
there will be no charge for redemption if the redemption request is sent
directly to the Transfer Agent. Shareholders liquidating their holdings will
receive upon redemption all dividends declared 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
relevant Portfolio at such time. If a shareholder redeems all of the shares in
his account, he will receive, in addition to the net asset value of the shares
redeemed, a separate check representing all dividends declared but unpaid. If a
shareholder redeems a portion of the shares in his
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account, the dividends declared but unpaid on the shares redeemed will be
distributed on the next dividend payment date. As set forth below, special
procedures are available pursuant to which shareholders may redeem by check.
REDEMPTION
A shareholder wishing to redeem shares may do so by tendering the shares
directly to the Transfer Agent, Merrill Lynch Financial Data Services, Inc.,
P.O. Box 45289, Jacksonville, Florida 32232-5289. Redemption requests delivered
other than by mail should be delivered to Merrill Lynch Financial Data Services,
Inc., 4800 Deer Lake Drive East, Jacksonville, Florida 32246-6484. Proper notice
of redemption in the case of shares deposited with the Transfer Agent may be
accomplished by a 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 the certificate(s) for the
shares to be redeemed. The notice in either event requires the signature(s) of
all persons in whose name(s) the shares are registered, signed exactly as their
name(s) appear(s) on the Transfer Agent's register or on the certificate(s), as
the case may be. The signature(s) on the redemption request must be guaranteed
by an "eligible guarantor institution" as such is defined in Rule 17Ad-15 under
the Securities Exchange Act of 1934, the existence and validity of which may be
verified by the Transfer Agent through the use of industry publications.
Notarized signatures are not sufficient. Examples of eligible guarantor
institutions include most commercial banks and other broker dealers (including
for example, Merrill Lynch branch offices). Information regarding other
financial institutions that qualify as "eligible guarantor institutions" may be
obtained from the Transfer Agent. 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, payment will be mailed within seven days of receipt of a proper notice of
redemption.
At various times the Fund may be requested to redeem shares of a Portfolio
for which it has not yet received good payment. The Fund may delay or cause to
be delayed the mailing of a redemption check until such time as it has assured
itself that good payment (e.g., cash, Federal funds, or a certified check drawn
on a United States bank) has been collected for the purchase of such shares.
Normally this delay will not exceed ten days.
REPURCHASE
The Fund will also repurchase shares of each Portfolio through a
shareholder's listed securities dealer. The Fund will normally accept orders to
repurchase 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 the dealer not later than 4:30 p.m., New York City time, on the
same day. Dealers have the responsibility of submitting such repurchase requests
to the Fund not later than 4:30 p.m., New York City time, in order to obtain
that day's closing price. These repurchase arrangements are for the convenience
of shareholders and do not involve a charge by the Fund (other than any
applicable CDSC). Securities dealers that do not have selected dealer agreements
with the Distributor may impose a charge on the shareholder for transmitting the
notice of repurchase to the Fund. Merrill Lynch may charge its customers a
processing fee (currently $5.35) to confirm a repurchase of shares. Redemptions
made
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directly through the Fund's Transfer Agent are not subject to the processing
fee. The Fund reserves the right to reject any order for repurchase. The
exercise of this right of rejection might adversely affect shareholders seeking
redemption through the repurchase procedure.
For shareholders redeeming through their listed securities dealer, payment
for full and fractional shares will be made by the securities dealer within
seven days of the proper tender of the certificates, if any, and stock power or
letter requesting redemption, in each instance with signatures guaranteed as
noted above.
REINSTATEMENT PRIVILEGE -- CLASS A AND CLASS D SHARES
As described in further detail in the Statement of Additional Information,
holders of Class A or Class D shares of any of the three Portfolios who have
redeemed their shares have a one-time privilege to reinstate their accounts by
purchasing Class A or Class D, as the case may be, shares of the same Portfolio,
in which they had invested at net asset value without a sales charge up to the
dollar amount redeemed. The reinstatement privilege may be exercised by sending
a notice of exercise along with a check for the amount to be reinstated to the
Transfer Agent within 30 days after the date the request for redemption was
accepted by the Transfer Agent or the Distributor. Alternatively, the
reinstatement privilege may be exercised through the investor's Merrill Lynch
Financial Consultant within 30 days after the date the request for redemption
was accepted by the Transfer Agent or Distributor. The reinstatement will be
made at the net asset value per share next determined after the notice of
reinstatement is received and cannot exceed the amount of the redemption
proceeds.
SHAREHOLDER SERVICES
Each Portfolio offers a number of shareholder services designed to
facilitate investment in its shares at no extra cost to the investor. Below is a
description of these services. Full details as to each of these services and
copies of the various plans described below can be obtained from the Fund.
INVESTMENT ACCOUNT
Each shareholder whose account is maintained with the Transfer Agent has an
Investment Account and will receive a statement, at least quarterly, from the
Transfer Agent. These statements will serve as transaction confirmations for
automatic investment purchases and the reinvestment of ordinary income dividends
and long-term capital gains distributions. These statements will also show any
other activity in the account since the preceding statement. After the end of
each year, shareholders will receive Federal income tax information regarding
dividends and capital gain distributions. A shareholder may make additions to
his Investment Account at any time by purchasing shares at the applicable public
offering price either through a securities dealer that has entered into a
selected dealer agreement with the Distributor or by mail directly to the
Transfer Agent.
Shareholders also may maintain their accounts through Merrill Lynch. Upon
the transfer of shares out of a Merrill Lynch brokerage account, an Investment
Account in the transferring shareholder's name will be opened automatically, at
the Transfer Agent. Shareholders considering transferring their Class A or Class
D shares from Merrill Lynch to another brokerage firm or financial institution
should be aware that, if the firm to which the Class A or Class D shares are to
be transferred will not take delivery of shares of the Fund, a shareholder
either must redeem the Class A or Class D shares (paying any applicable CDSC) so
that the cash
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proceeds can be transferred to the account at the new firm or such shareholder
must continue to maintain an Investment Account at the Transfer Agent for those
Class A or Class D shares. Shareholders interested in transferring their Class B
or Class C shares from Merrill Lynch and who do not wish to have an Investment
Account maintained for such shares at the Transfer Agent may request their new
brokerage firm to maintain such shares in an account registered in the name of
the brokerage firm for the benefit of the shareholder at the Transfer Agent.
Share certificates are issued only for full shares and only upon the
specific request of the shareholder. 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
An Automatic Investment Plan is available whereby the Transfer Agent is
authorized through pre-authorized checks of $50 or more to charge the regular
bank account of the shareholder on a monthly basis to provide systematic
additions of shares of the Fund to the shareholder's Investment Account.
Shareholders whose positions in any Portfolio of the Fund are maintained in a
CMA(R) or CBA(R) account may participate in the CMA(R) or CBA(R) Automated
Investment Program, through which investments in any Portfolio of the Fund may
be made on a regularly scheduled basis ranging from weekly to semiannually in
amounts of $100 or more.
FEE-BASED PROGRAMS
Certain Merrill Lynch fee-based programs, including pricing alternatives
for securities transactions (each referred to in this paragraph as a "Program"),
may permit the purchase of Class A shares at net asset value. Under specified
circumstances, participants in certain Programs may deposit other classes of
shares that will be exchanged for Class A shares. Initial or deferred sales
charges otherwise due in connection with such exchanges may be waived or
modified, as may the Conversion Period applicable to the deposited shares.
Termination of participation in a Program may result in the redemption of shares
held therein or the automatic exchange thereof to another class at net asset
value, which may be shares of a money market fund. In addition, upon termination
of participation in a Program, shares that have been held for less than
specified periods within such Program may be subject to a fee based upon the
current value of such shares. These Programs also generally prohibit such shares
from being transferred to another account at Merrill Lynch, to another
broker-dealer or to the Transfer Agent. Except in limited circumstances (which
may also involve an exchange as described above), such shares must be redeemed
and another class of shares purchased (which may involve the imposition of
initial or deferred sales charges and distribution and account maintenance fees)
in order for the investment not to be subject to Program fees. Additional
information regarding a specific Program (including charges and limitations on
transferability applicable to shares that may be held in such Program) is
available in such Program's client agreement and from the Transfer Agent at
1-800-MER-FUND or (800) 637-3863.
AUTOMATIC REINVESTMENT OF DIVIDENDS AND CAPITAL GAINS DISTRIBUTIONS
All dividends and capital gains distributions are automatically reinvested
in full and fractional shares of the respective Portfolio, without a sales
charge at the net asset value of the shares of the respective Portfolio as of
the close of business on the payable date of the dividend or distribution. A
shareholder may at any time, by
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written notification to Merrill Lynch if the shareholder's account is maintained
with Merrill Lynch or by written notification or by telephone (1-800-MER-FUND)
to the Transfer Agent if the shareholder's account is maintained with the
Transfer Agent, elect to have subsequent dividends or capital gains
distributions, or both, paid in cash, rather than reinvested, in which event
payment will be mailed on or about the payment date. The Fund is not responsible
for any failure of delivery to the shareholder's addresses of record and no
interest will accrue on amounts represented by uncashed distribution or
redemption checks. Cash payments can also be directed to the shareholder's bank
account. No CDSC will be imposed upon redemption of shares issued as a result of
the automatic reinvestment of dividends or capital gains distributions.
SYSTEMATIC WITHDRAWAL PLANS
A shareholder of any of the three Portfolios may elect to receive
systematic withdrawal payments from his or her Investment Account in the form of
payments by check or through automatic payment by direct deposit to his or her
bank account on either a monthly or calendar quarterly basis. A shareholder
whose shares are held within a CMA(R), CBA(R) or Retirement Account may elect to
have shares redeemed on a monthly, bimonthly, quarterly, semiannual or annual
basis through the CMA(R) or CBA(R) Systematic Redemption Program, subject to
certain conditions. With respect to redemptions of Class B and Class C shares
pursuant to a systematic withdrawal plan, the maximum number of Class B or Class
C shares that can be redeemed from an account annually shall not exceed 10% of
the value of shares of such class in that account at the time the election to
join the systematic withdrawal plan was made. Any CDSC that otherwise might be
due on such redemption of Class B or Class C shares will be waived. Shares
redeemed pursuant to a systematic withdrawal plan will be redeemed in the same
order as Class B or Class C shares are otherwise redeemed. See "Purchase of
Shares -- Deferred Sales Charge Alternatives -- Class B and Class C
Shares -- Contingent Deferred Sales Charge -- Class B Shares" and "Contingent
Deferred Sales Charges -- Class C Shares." Where the systematic withdrawal plan
is applied to Class B Shares, upon conversion of the last Class B shares in an
account to Class D shares, the systematic withdrawal plan will automatically be
applied thereafter to Class D shares. See "Purchase of Shares -- Deferred Sales
Charge Alternatives -- Class B and Class C Shares -- Conversion of Class B
Shares to Class D Shares."
EXCHANGE PRIVILEGES
U.S. Shareholders of each class of shares of a Portfolio who have held all
or part of their shares in the Portfolio for at least 15 days may exchange their
shares for shares of certain other Portfolios of the Fund, or with certain other
MLAM-advised mutual funds.
Under the Merrill Lynch Select Pricing(SM) System, Class A shareholders may
exchange Class A shares of a Portfolio for Class A shares of another Portfolio
or a second MLAM-advised mutual fund if the shareholder holds any Class A shares
of the other Portfolio or second fund in the account in which the exchange is
made at the time of the exchange or is otherwise eligible to purchase Class A
shares of the other Portfolio or second fund. If the Class A shareholder wants
to exchange Class A shares for shares of another Portfolio or a second
MLAM-advised mutual fund, and the shareholder does not hold Class A shares of
the other Portfolio or second fund in his account at the time of the exchange
and is not otherwise eligible to acquire Class A shares of the other Portfolio
or second fund, the shareholder will receive Class D shares of the other
Portfolio or second fund as a result of the exchange. Class D shares also may be
exchanged for Class A shares of another Portfolio or a second MLAM-advised
mutual fund at any time as long as, at the time of the exchange, the
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shareholder holds Class A shares of the other Portfolio or second fund in the
account in which the exchange is made or is otherwise eligible to purchase Class
A shares of the other Portfolio or second fund.
Exchanges of Class A and Class D shares are made on the basis of the
relative net asset values per Class A or Class D share, respectively, plus an
amount equal to the difference, if any, between the sales charge previously paid
on the Class A or Class D shares being exchanged and the sales charge payable at
the time of the exchange on the shares being acquired.
Class B, Class C and Class D shares of a Portfolio will be exchangeable
with shares of the same class of another Portfolio or other MLAM-advised mutual
funds. Class C shares of the Limited Maturity Portfolio are available only
through the Exchange Privilege.
Shares of a Portfolio that 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 Portfolio. 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 Portfolio is "tacked" to the holding period for the newly acquired
shares of the other fund or Portfolio.
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 a Portfolio exercising the exchange privilege will
continue to be subject to the CDSC schedule applicable to that Portfolio if such
schedule is higher than the CDSC schedule relating to the new Class B shares. In
addition, Class B shares of a Portfolio acquired through use of the exchange
privilege will be subject to the CDSC schedule applicable to that Portfolio if
such schedule is higher than the CDSC schedule relating to the Class B shares of
the MLAM-advised mutual fund from which the exchange has been made.
Exercise of the exchange privilege is treated as a sale of the exchanged
shares and a purchase of the acquired shares for Federal income tax purposes.
For further information, see "Shareholder Services -- Exchange Privilege" in the
Statement of Additional Information.
PORTFOLIO TRANSACTIONS
No Portfolio has any obligation to deal with any dealer or group of dealers
in the execution of transactions in portfolio securities. Municipal Bonds and
money market securities in which each Portfolio invests are traded primarily in
the over-the-counter market. Where possible, each Portfolio 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 Fund to obtain the best net results taking into account such
factors as price (including the applicable dealer spread), the size, type and
difficulty of the transaction involved, the firm's general execution and
operational facilities, and the firm's risk in positioning the securities
involved and the provision of supplemental investment research by the firm.
While the Fund generally seeks
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reasonably competitive spreads or commissions, the Fund will not necessarily be
paying the lowest spread or commission available.
Municipal Bonds and money market securities are generally traded on a net
basis and do not normally involve either brokerage commissions or transfer
taxes. The cost of the portfolio securities transactions of each Portfolio
consists primarily of dealer or underwriter spreads. Under the Investment
Company Act, persons affiliated with the Fund, including Merrill Lynch, are
prohibited from dealing with the Fund as a principal in the purchase and sale of
securities. The Fund has obtained an exemptive order permitting it to engage in
certain principal transactions involving high-quality short-term Municipal
Bonds. In addition, the Fund may not purchase Municipal Bonds from any
underwriting syndicate of which Merrill Lynch is a member except pursuant to
procedures approved by the Board of Directors which comply with rules adopted by
the Securities and Exchange Commission. Affiliated persons of the Fund may serve
as its broker in over-the-counter transactions conducted on an agency basis.
ADDITIONAL INFORMATION
DIVIDENDS AND DISTRIBUTIONS
The net investment income of each Portfolio is declared as dividends daily
immediately prior to the determination of the net asset value of each Portfolio
on that day. The net investment income of each Portfolio for dividend purposes
consists of interest earned on portfolio securities, less expenses, in each case
computed since the most recent determination of net asset value. Expenses of
each Portfolio, including the advisory fee and Class B, Class C and Class D
account maintenance and Class B and Class C distribution fees (if applicable),
are accrued daily. Dividends of net investment income are declared daily and
reinvested monthly in the form of additional full and fractional shares of each
Portfolio at net asset value unless the shareholder elects to receive such
dividends in cash. The per share dividend distributions on each class of shares
of each of the three Portfolios will be reduced as a result of any account
maintenance, distribution and transfer agency fees applicable to that class.
Shares will accrue dividends as long as they are issued and outstanding. Shares
are issued and outstanding as of the settlement date of a purchase order to the
settlement date of a redemption order.
Net realized capital gains, if any, are declared and distributed to the
Fund's shareholders at least annually. Capital gains distributions will be
automatically reinvested in shares unless the shareholder elects to receive such
distributions in cash.
See "Shareholder Services -- Automatic Reinvestment of Dividends and
Capital Gains Distributions" for information as to how to elect either dividend
reinvestment or cash payments. Any portions of dividends and distributions that
are taxable to shareholders as described below are subject to income tax whether
they are reinvested in shares of any Portfolio or received in cash.
FEDERAL INCOME TAXES
Each Portfolio of the Fund generally will be treated as a separate
corporation for Federal income tax purposes. Each Portfolio has qualified and
expects to continue to qualify for the special tax treatment afforded regulated
investment companies under the Internal Revenue Code of 1986, as amended (the
"Code"). If each
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Portfolio qualifies for that tax treatment, it will not be subject to Federal
income tax on that part of its net ordinary income and net realized long-term
capital gains that it distributes to its shareholders.
Each Portfolio has qualified and expects to continue to qualify to pay
"exempt-interest" dividends as defined in the Code. If it so qualifies,
dividends or any part thereof (other than any capital gain distributions) paid
by the Portfolio that are attributable to interest on tax-exempt obligations and
designated by the Portfolio as exempt-interest dividends in a written notice
mailed to the Portfolio's shareholders within sixty days after the close of its
taxable year may be treated by shareholders for all purposes as items of
interest excludable from their gross income under Section 103(a) of the Code.
The recipient of tax-exempt income is required to report such income on his or
her Federal income tax return. However, a shareholder is advised to consult his
or her tax adviser with respect to whether exempt-interest dividends retain the
exclusion under Section 103(a) if such shareholder would be treated as a
"substantial user" under Section 147(a)(1) of the Code with respect to some or
all of the tax-exempt obligations held by the Portfolio. The Code provides that
interest on indebtedness incurred or continued to purchase or carry shares of
the Portfolio is not deductible to the extent attributable to exempt-interest
dividends. Also, any losses realized by individuals who dispose of shares of the
Fund within six months of their purchase are disallowed to the extent of any
exempt-interest dividends received with respect to such shares.
Each Portfolio may realize capital gains, which will constitute taxable
income. Any distributions designated as capital gain dividends, i.e., as being
made from the Portfolio's net long-term capital gains (whether from tax-exempt
or taxable obligations) in a written notice furnished annually to shareholders
are taxable to shareholders as gains from the sale or exchange of a capital
asset held for more than one year, regardless of a shareholder's holding period
for shares of the Portfolio. In addition, if, after April 30, 1993, a Portfolio
acquired tax-exempt obligations having market discount (generally, obligations
acquired for a price less than their principal amount), any gain on the
disposition or retirement of such obligations will be treated as ordinary income
to the extent of accrued market discount.
Dividends paid by each Portfolio from its taxable income (i.e., interest on
money market securities) and distributions of net realized short-term capital
gains (whether from tax-exempt or taxable obligations) are taxable to
shareholders as ordinary income.
Some shareholders may be subject to a 31% withholding tax ("backup
withholding") on reportable dividends, capital gains distributions and
redemption payments. Backup withholding is not required with respect to
dividends representing "exempt-interest." Generally, shareholders subject to
backup withholding will be those for whom no certified taxpayer identification
number is on file with the Fund or who, to the Fund's knowledge, have furnished
an incorrect number. When establishing an account, an investor must certify
under penalties of perjury that such number is correct and that he is not
otherwise subject to backup withholding.
No gain or loss will be recognized by Class B shareholders on the
conversion of their Class B shares into Class D shares. A shareholder's basis in
the Class D shares acquired will be the same as such shareholder's basis in the
Class B shares converted, and the holding period of the acquired Class D shares
will include the holding period for the converted Class B shares.
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
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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.
Individual shareholders of the Fund may be subject to alternative minimum
tax to the extent the Fund holds "private activity" bonds. The Fund expects that
it will hold private activity bonds; however, in general, an individual
shareholder filing a joint return who does not have any tax preference items
subject to the alternative minimum tax other than income received from the Fund
derived from private activity bonds would have to receive more than $45,000 of
such income from the Fund before becoming subject to the alternative minimum
tax.
Exempt-interest dividends paid by the Fund, whether or not attributable to
private activity bonds, may increase a corporate shareholder's alternative
minimum taxable income. In addition, the payment of exempt-interest dividends
may increase a corporate shareholder's liability for the environmental tax
imposed on a corporation's alternative minimum taxable income (computed without
regard to either the alternative tax net operating loss deduction or the
environmental tax deduction) at a rate of $12 per $10,000 (0.12%) of alternative
minimum taxable income in excess of $2,000,000. The tax will be imposed even if
the corporation is not required to pay an alternative minimum tax.
The foregoing is a general and abbreviated summary of the applicable
provisions of the Code and Treasury Regulations currently in effect. For the
complete provisions, reference should be made to the pertinent Code sections and
the Treasury Regulations promulgated thereunder. The Code and these Regulations
are subject to change by legislative or administrative action either
prospectively or retroactively. The Statement of Additional Information sets
forth additional information regarding other tax aspects of investment in the
Fund.
Ordinary income and capital gains dividends may also be subject to State
and local taxes.
STATE AND LOCAL TAXES
Depending upon the extent of the Fund's activities in those states and
localities in which its offices are maintained or in which its agents or
independent contractors are located, the Fund may be subject to the tax laws of
such states or localities. In addition, the exemption of interest income for
Federal income tax purposes does not necessarily result in exemption under the
income or other tax laws of any state or local taxing authority. The laws of the
several states and local taxing authorities vary with respect to the taxation of
such interest income, and each holder of shares of the Fund is advised to
consult his or her own tax adviser in that regard. The Fund will report annually
the percentage of interest income received by each Portfolio during the
preceding year on tax-exempt obligations, indicating, on a state-by-state basis,
the source of such income.
DETERMINATION OF NET ASSET VALUE
The net asset value of the shares of all classes of each Portfolio is
determined once daily, Monday through Friday, immediately after the declaration
of dividends as of 15 minutes after the close of business on the New York Stock
Exchange (generally 4:00 p.m., New York City time), on each day that the New
York Stock Exchange is open for trading or on any other day on which there is
sufficient trading in portfolio securities that the net asset value of a
Portfolio's shares may be materially affected. The New York Stock Exchange is
not open on New Year's Day, Martin Luther King, Jr. Day, Presidents' Day, Good
Friday, Memorial Day, Independence Day, Labor Day, Thanksgiving Day and
Christmas Day. The net asset value per share is
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computed by dividing the sum of the value of the portfolio securities held by
each Portfolio 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 investment advisory fees payable to FAM and account
maintenance and/or distribution fees payable to the distributor are accrued
daily.
The per share net asset value of Class A shares of a Portfolio generally
will be higher than the per share net asset value of shares of the other classes
of that Portfolio, reflecting the daily expense accruals of the account
maintenance, distribution and higher transfer agency fees applicable with
respect to Class B and Class C shares and the daily expense accruals of the
account maintenance and higher transfer agency fees applicable with respect to
Class D shares. Moreover, the per share net asset value of Class D shares
generally will be higher than the per share net asset value of Class B and Class
C shares, reflecting the daily expense accruals of distribution and higher
transfer agency fees applicable with respect to Class B and Class C shares. It
is expected, however, that the per share net asset value of the four classes of
a Portfolio will tend to converge (although not necessarily meet) immediately
after the payment of dividends or distributions, which will differ by
approximately the amount of expense accrual differentials among the classes.
The Municipal Bonds and money market securities in which each Portfolio
invests are traded primarily in the over-the-counter markets and are valued at
the most recent bid price or yield equivalent as obtained from dealers that make
markets in such securities. Positions in futures contracts are valued at closing
prices for such contracts established by the exchange on which they are traded
on each day during which trading is conducted thereon. Assets for which market
quotations are not readily available are valued at fair value on a consistent
basis using methods determined in good faith by the Board of Directors,
including valuations furnished by a pricing service retained by the Fund, which
may utilize a matrix system for valuations.
PERFORMANCE DATA
From time to time the Fund may include its average annual total return,
yield and tax equivalent yield for various specified time periods in
advertisements or information furnished to present or prospective shareholders.
Average annual total return, yield and tax equivalent yield are computed
separately for the Class A, Class B, Class C and Class D shares of the
Portfolios 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 with respect to all shares of
a Portfolio, 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 distribution fees, account maintenance fees and any incremental
transfer agency costs relating to a class of shares will be borne exclusively by
that class. The Fund will include performance data for all classes of shares of
the Portfolios in any advertisement or information including performance data
for such Portfolios.
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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 charge will not
be included. 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. 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 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 adding the result to that part, if any, of the Fund's
yield that is not tax-exempt. The yield for the 30-day period ending June 30,
1997 was:
<TABLE>
<CAPTION>
LIMITED
MATURITY
INSURED PORTFOLIO NATIONAL PORTFOLIO PORTFOLIO
----------------- ------------------ --------
<S> <C> <C> <C>
Class A............................ 4.91% 4.92% 3.90%
Class B............................ 4.36% 4.37% 3.58%
Class C............................ 4.30% 4.32% 3.56%
Class D............................ 4.66% 4.68% 3.80%
</TABLE>
The tax equivalent yield for the same period (based on a tax rate of 28%)
was:
<TABLE>
<CAPTION>
LIMITED
MATURITY
INSURED PORTFOLIO NATIONAL PORTFOLIO PORTFOLIO
----------------- ------------------ --------
<S> <C> <C> <C>
Class A............................ 6.82% 6.83% 5.42%
Class B............................ 6.06% 6.07% 4.97%
Class C............................ 5.97% 6.00% 4.94%
Class D............................ 6.47% 6.50% 5.28%
</TABLE>
Total return, yield and tax equivalent yield figures are based on the
Fund's historical performance and are not intended to indicate future
performance. The Fund's total return, yield and tax equivalent yield will vary
depending on market conditions, the securities comprising the Portfolio, the
Portfolio's operating expenses and the amount of realized and unrealized net
capital gains or losses during the period. The value of an investment in a
Portfolio 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 that of the Standard &
Poor's 500 Index, the Value Line Composite Index, the Dow Jones Industrial
Average, or performance data contained in publications such as Lipper Analytical
Services, Inc., Morningstar Publications, Inc., Money Magazine, U.S. News &
World Report, Business Week, CDA Investment Technology, Inc., Forbes Magazine or
Fortune
52
<PAGE>
Magazine. As with other performance data, performance comparisons should not be
considered indicative of the Fund's relative performance for any future period.
TRANSFER AGENT
Merrill Lynch Financial Data Services, Inc., 4800 Deer Lake Drive East,
Jacksonville, Florida 32246-6484, acts as the Fund'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 Fund -- Transfer Agency Services."
CUSTODIAN
The Bank of New York, 90 Washington Street, 12th Floor, New York, New York
10286, is the Fund's Custodian.
COUNSEL AND AUDITOR
Rogers & Wells, counsel to the Fund, passes upon legal matters for the Fund
in connection with the shares offered by this Prospectus. Deloitte & Touche LLP,
independent auditors, are auditors of the Fund.
SHAREHOLDER REPORTS
The Fund issues to its shareholders quarterly reports containing unaudited
financial statements and annual reports containing financial statements examined
by auditors approved annually by the Directors. Only one copy of each
shareholder report and certain shareholder communications will be mailed to each
identified shareholder regardless of the number of accounts such shareholder
has. If a shareholder wishes to receive separate copies of each report and
communication for each of the shareholder's related accounts the shareholder
should notify in writing:
Merrill Lynch Financial Data Services, Inc.
P.O. Box 45289
Jacksonville, Florida 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
please call your Merrill Lynch Financial Consultant or Merrill Lynch Financial
Data Services, Inc. at (800) 637-3863.
ADDITIONAL INFORMATION
This Prospectus does not contain all the information included in the
Registration Statement filed with the Commission under the Securities Act with
respect to the securities offered hereby, certain portions of which have been
omitted pursuant to the rules and regulations of the Commission. The Statement
of Additional Information, dated October 7, 1997, which forms a part of the
Registration Statement, is incorporated by reference into this Prospectus. The
Statement of Additional Information may be obtained without charge as provided
on the cover page of this Prospectus. The Registration Statement, including the
exhibits filed therewith, may be examined at the office of the Commission in
Washington, D.C. To the knowledge of the Fund, no person or entity owned
beneficially 5% or more of any class of the Fund's shares on September 1, 1997.
53
<PAGE>
[This page is intentionally left blank]
54
<PAGE>
MERRILL LYNCH MUNICIPAL BOND FUND -- AUTHORIZATION FORM (PART 1)
- --------------------------------------------------------------------------------
NOTE: THIS FORM MAY NOT BE USED FOR PURCHASES THROUGH THE MERRILL LYNCH
BLUEPRINT(SM) PROGRAM. YOU MAY REQUEST A MERRILL LYNCH BLUEPRINT(SM)
PROGRAM APPLICATION BY CALLING (800) 637-3766.
- --------------------------------------------------------------------------------
1. SHARE PURCHASE APPLICATION
I, being of legal age, wish to purchase: (choose one)
<TABLE>
<S> <C> <C> <C> <C> <C>
Insured Portfolio [ ] Class A [ ] Class B [ ] Class C [ ] Class D
shares shares shares shares
National Portfolio [ ] Class A [ ] Class B [ ] Class C [ ] Class D
shares shares shares shares
Limited Maturity Portfolio [ ] Class A [ ] Class B [ ] Class D
shares shares shares
</TABLE>
of Merrill Lynch Municipal Bond Fund and establish an Investment Account as
described in the Prospectus. In the event that I am not eligible to purchase
Class A shares, I understand that Class D shares will be purchased.
Basis for establishing an Investment Account:
A. I enclose a check for $.......... payable to Merrill Lynch Financial
Data Services, Inc., as an initial investment (minimum $1,000). I understand
that this purchase will be executed at the applicable offering price next to
be determined after this Application is received by you.
B. I already own shares of the following Merrill Lynch mutual funds that
would qualify for the right of accumulation as outlined in the Statement of
Additional Information: (Please list all funds. Use a separate sheet of paper
if necessary.)
1. .......................................................... 4.
..........................................................
2. .......................................................... 5.
..........................................................
3. .......................................................... 6.
..........................................................
Name............................................................................
First Name Initial Last Name
Name of Co-Owner (if any).......................................................
First Name Initial Last Name
Address
...............................................................................
Date............................................................................
(Zip Code)
Occupation .........................................
...................................................
Signature of Owner
<TABLE>
<S> <C>
Occupation ......................................... Name and Address of Employer.................................................
.............................................................................
.............................................................................
................................................... .............................................................................
Signature of Owner Signature of Co-Owner (if any)
- --------------------------------------------------------------------------------
2. DIVIDEND AND CAPITAL GAIN DISTRIBUTION OPTIONS
Ordinary Income Dividends Long-Term Capital Gains
--------------------------------- ---------------------------------
SELECT [ ] Reinvest SELECT [ ] Reinvest
ONE: [ ] Cash ONE: [ ] Cash
--------------------------------- ---------------------------------
</TABLE>
If no election is made, dividends and capital gains will be automatically
reinvested at net asset value without a sales charge.
IF CASH, SPECIFY HOW YOU WOULD LIKE YOUR DISTRIBUTIONS PAID TO YOU: [ ] CHECK
OR [ ] DIRECT DEPOSIT TO BANK ACCOUNT
IF DIRECT DEPOSIT TO BANK ACCOUNT IS SELECTED, PLEASE COMPLETE BELOW:
I hereby authorize payment of dividend and capital gain distributions by direct
deposit to my bank account and, if necessary, debit entries and adjustments for
any credit entries made to my account in accordance with the terms I have
selected on the Merrill Lynch Municipal Bond Fund Authorization Form.
SPECIFY TYPE OF ACCOUNT (CHECK ONE) [ ] CHECKING [ ] SAVINGS
Name on your Account............................................................
Bank Name.......................................................................
Bank Number ................................................... Account
Number..........................................................................
Bank Address....................................................................
I agree that this authorization will remain in effect until I provide written
notification to Merrill Lynch Financial Data Services, Inc. amending or
terminating this service.
Signature of Depositor..........................................................
Signature of Depositor ......................................................
Date............................................................................
(If joint account, both must sign)
NOTE: IF DIRECT DEPOSIT TO BANK ACCOUNT IS SELECTED, YOUR BLANK, UNSIGNED CHECK
MARKED "VOID" OR A DEPOSIT SLIP FROM YOUR SAVINGS ACCOUNT SHOULD ACCOMPANY THIS
APPLICATION.
55
<PAGE>
MERRILL LYNCH MUNICIPAL BOND FUND -- AUTHORIZATION FORM
(PART 1) -- (CONTINUED)
3. SOCIAL SECURITY NUMBER OR TAXPAYER IDENTIFICATION NUMBER
Social Security Number or Taxpayer Identification Number
Under penalty of perjury, I certify (1) that the number set forth above is my
correct Social Security Number or Taxpayer Identification Number and (2) that I
am not subject to backup withholding (as discussed in the Prospectus under
"Dividends, Distributions and Taxes -- Federal Income Taxes") either because I
have not been notified that I am subject thereto as a result of a failure to
report all interest or dividends, or the Internal Revenue Service ("IRS") has
notified me that I am no longer subject thereto.
INSTRUCTION: YOU MUST STRIKE OUT THE LANGUAGE IN (2) ABOVE IF YOU HAVE BEEN
NOTIFIED THAT YOU ARE SUBJECT TO BACKUP WITHHOLDING DUE TO UNDER-REPORTING AND
IF YOU HAVE NOT RECEIVED A NOTICE FROM THE IRS THAT BACKUP WITHHOLDING HAS BEEN
TERMINATED. THE UNDERSIGNED AUTHORIZES THE FURNISHING OF THIS CERTIFICATION TO
OTHER MERRILL LYNCH SPONSORED MUTUAL FUNDS.
<TABLE>
<S> <C>
............................................................. ............................................................
Signature of Owner Signature of Co-Owner (if any)
</TABLE>
(In the case of co-owners, a joint tenancy with right of survivorship will be
presumed unless otherwise specified)
- --------------------------------------------------------------------------------
4. LETTER OF INTENTION -- CLASS A AND D SHARES ONLY (SEE TERMS AND CONDITIONS IN
THE STATEMENT OF ADDITIONAL INFORMATION)
<TABLE>
<S> <C>
......................,
19 . . . .
Dear Sir/Madam: Date of initial purchase
</TABLE>
Although I am not obligated to do so, I intend to purchase shares of Merrill
Lynch 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 distributor over the next 13-month period which will equal or
exceed:
<TABLE>
<S> <C> <C> <C> <C> <C>
Insured Portfolio [ ] $25,000 [ ] $50,000 [ ] $100,000 [ ] $250,000 [ ] $1,000,000
National Portfolio [ ] $25,000 [ ] $50,000 [ ] $100,000 [ ] $250,000 [ ] $1,000,000
Limited Maturity [ ] $100,000 [ ] $250,000 [ ] $500,000 [ ] $1,000,000
Portfolio
</TABLE>
Each purchase will be made at the then reduced offering price applicable to
the amount checked above, as described in the Merrill Lynch Municipal Bond Fund
Prospectus.
I agree to the terms and conditions of the Letter of Intention. I hereby
irrevocably constitute and appoint Merrill Lynch Funds Distributor, Inc., my
attorney, with full power of substitution, to surrender for redemption any or
all shares of Merrill Lynch Municipal Bond Fund held as security.
<TABLE>
<S> <C>
By:.............................................................. ...............................................................
Signature of Owner Signature of Co-Owner (If registered in joint parties, both must
sign)
</TABLE>
In making purchases under this letter, the following are the related accounts
on which reduced offering prices are to apply:
<TABLE>
<S> <C>
(1) Name ................................................... (2) Name....................................................
Account Number ............................................ Account Number..............................................
- --------------------------------------------------------------------------------
</TABLE>
5. FOR DEALER ONLY
- --- Branch Office, Address, Stamp
- ---
=
=
===
This form when completed should be mailed to:
Merrill Lynch Municipal Bond Fund
c/o Merrill Lynch Financial Data Services, Inc.
P.O. Box 45289
Jacksonville, FL 32232-5289
We hereby authorize Merrill Lynch Funds Distributor, Inc. to act as our agent in
connection with transactions under this authorization form and agree to notify
the Distributor of any purchases or sales made under a Letter of Intention,
Automatic Investment Plan or Systematic Withdrawal Plan. We guarantee the
shareholder's signature.
...............................................................
Dealer Name and Address
By .............................................................................
Authorized Signature of Dealer
- --------- ------------
..............................
- --------- ------------
Branch-Code F/C No. F/C Last Name
- --------- ---------------
- --------- ---------------
Dealer's Customer Account No.
56
<PAGE>
<TABLE>
<S> <C>
MERRILL LYNCH MUNICIPAL BOND FUND -- AUTHORIZATION FORM (PART 2)
- --------------------------------------------------------------------------------
1. ACCOUNT REGISTRATION
------------------------------------
Name of Owner.......................................................................
First Name Initial Last Name
------------------------------------
Social Security No.
or Taxpayer Identification No.
Name of Co-Owner (if any)...........................................................
First Name Initial Last Name
Address.............................................................................
.................................................................................... Account Number...........................
(if existing account)
(Zip Code)
Name of Owner.......................................................................
First Name Initial Last Name
Name of Co-Owner (if any)...........................................................
First Name Initial Last Name
Address.............................................................................
....................................................................................
(Zip Code)
</TABLE>
- --------------------------------------------------------------------------------
2. SYSTEMATIC WITHDRAWAL PLAN -- (SEE TERMS AND CONDITIONS IN THE STATEMENT OF
ADDITIONAL INFORMATION)
MINIMUM REQUIREMENTS: $10,000 for monthly disbursements, $5,000 for
quarterly, of [ ] Class A, [ ] Class B*, Class C* or [ ] Class D of the
Insured Portfolio, [ ] Class A, [ ] Class B*, Class C* or [ ] Class D shares
of the National Portfolio, or [ ] Class A, [ ] Class B*, Class C* or [ ]
Class D shares of the Limited Maturity Portfolio in Merrill Lynch Municipal Bond
Fund at cost or current offering price. Withdrawals to be made either (check
one) [ ] Monthly on the 24th day of each month, or [ ] Quarterly on the 24th
day of March, June, September and December. If the 24th falls on a weekend or
holiday, the next succeeding business day will be utilized. Begin systematic
withdrawal on ............... (month), or as soon as possible thereafter.
SPECIFY THE AMOUNT OF THE WITHDRAWAL YOU WOULD LIKE PAID TO YOU (CHECK ONE): [ ]
$________ of [ ] Class A, [ ] Class B*, Class C* or [ ] Class D shares in the
account.
SPECIFY WITHDRAWAL METHOD: [ ] check or [ ] direct deposit to bank account
(check one and complete part (a) or (b) below):
DRAW CHECKS PAYABLE (CHECK ONE)
(a) I hereby authorize payment by check
[ ] as indicated in Item 1.
[ ] to the order of..........................................................
Mail to (check one)
[ ] the address indicated in Item 1.
[ ] Name (Please Print)......................................................
Address.........................................................................
...........................................................................
Signature of Owner
........................................................................ Date...
Signature of Co-Owner (if any).............................................
(B) I HEREBY AUTHORIZE PAYMENT BY DIRECT DEPOSIT TO MY BANK ACCOUNT AND, IF
NECESSARY, DEBIT ENTRIES AND ADJUSTMENTS FOR ANY CREDIT ENTRIES MADE TO MY
ACCOUNT. I AGREE THAT THIS AUTHORIZATION WILL REMAIN IN EFFECT UNTIL I PROVIDE
WRITTEN NOTIFICATION TO MERRILL LYNCH FINANCIAL DATA SERVICES, INC. AMENDING OR
TERMINATING THIS SERVICE.
Specify type of account (check one): [ ] checking [ ] savings
Name on your Account............................................................
Bank Name.......................................................................
Bank Number .............................................................
Account Number..................................................................
Bank Address....................................................................
................................................................................
Signature of Depositor
..............................................................................
Date............................................................................
Signature of Depositor..........................................................
(If joint account, both must sign)
NOTE: IF DIRECT DEPOSIT IS ELECTED, YOUR BLANK, UNSIGNED CHECK MARKED "VOID" OR
A DEPOSIT SLIP FROM YOUR SAVINGS ACCOUNT SHOULD ACCOMPANY THIS APPLICATION.
- ------------------------------------
* Annual withdrawal cannot exceed 10% of the value of shares of such class held
in the account at the time the election to join the systematic withdrawal plan
is made.
57
<PAGE>
MERRILL LYNCH MUNICIPAL BOND FUND -- AUTHORIZATION FORM
(PART 2) -- (CONTINUED)
- --------------------------------------------------------------------------------
3. APPLICATION FOR AUTOMATIC INVESTMENT PLAN
I hereby request that Merrill Lynch Financial Data Services, Inc. draw an
automated clearing house ("ACH") debit on my checking account as described below
each month to purchase: (choose one)
[ ] Class A shares [ ] Class B shares [ ] Class C
shares* [ ] Class D shares
of Merrill Lynch Municipal Bond Fund subject to the terms set forth below. In
the event that I am not eligible to purchase Class A shares, I understand that
Class D shares will be purchased.
* Not available for the Limited Maturity Portfolio.
MERRILL LYNCH FINANCIAL DATA SERVICES, INC.
You are hereby authorized to draw an ACH debit each month on my bank account for
investment in Merrill Lynch Municipal Bond Fund as indicated below:
Amount of each ACH debit $...................................................
Account Number...............................................................
Please date and invest ACH debits on the 20th of each month beginning
................................................................................
................................ (month)
or as soon thereafter as possible.
I agree that you are drawing these ACH debits voluntarily at my request and that
you shall not be liable for any loss arising from any delay in preparing or
failure to prepare any such debit. If I change banks or desire to terminate or
suspend this program, I agree to notify you promptly in writing. I hereby
authorize you to take any action to correct erroneous ACH debits of my bank
account or purchases of fund shares including liquidating shares of the Fund and
credit my bank account. I further agree that if a check or debit is not honored
upon presentation, Merrill Lynch Financial Data Services, Inc. is authorized to
discontinue immediately the Automatic Investment Plan and to liquidate
sufficient shares held in my account to offset the purchase made with the
dishonored debit.
................. .......................................
Date Signature of Depositor
.......................................
Signature of Depositor
(If joint account, both must sign)
AUTHORIZATION TO HONOR ACH DEBITS
DRAWN BY MERRILL LYNCH FINANCIAL
DATA SERVICES, INC.
To..........................................................................Bank
(Investor's Bank)
Bank Address....................................................................
City........................................ State .......... Zip Code..........
As a convenience to me, I hereby request and authorize you to pay and charge to
my account ACH debits drawn on my account by and payable to Merrill Lynch
Financial Data Services, Inc. I agree that your rights in respect to each such
debit shall be the same as if it were a check drawn on you and signed personally
by me. This authority is to remain in effect until revoked personally by me in
writing. Until you receive such notice, you shall be fully protected in honoring
any such debit. I further agree that if any such debit be dishonored, whether
with or without cause and whether intentionally or inadvertently, you shall be
under no liability.
................. .......................................
Date Signature of Depositor
................. .......................................
Bank Account Number Signature of Depositor
(If joint account, both must sign)
NOTE: IF AUTOMATIC INVESTMENT PLAN IS ELECTED, YOUR BLANK, UNSIGNED CHECK MARKED
"VOID" SHOULD ACCOMPANY THIS APPLICATION.
58
<PAGE>
APPENDIX
DESCRIPTIONS OF RATINGS
DESCRIPTIONS OF MOODY'S INVESTORS SERVICE, INC.'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 medium grade obligations;
i.e.,they are neither highly protected nor poorly secured. Interest payments 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.
Conditional Rating: Bonds for which the security depends upon the
completion of some act or the fulfillment of some condition are rated
conditionally. These are bonds secured by (a) earnings of projects under
construction, (b) earnings of projects unseasoned in operation experience, (c)
rentals which begin when
A-1
<PAGE>
facilities are completed, or (d) payments to which some other limiting condition
attaches. Parenthetical rating denotes probable credit stature upon completion
of construction or elimination of basis of condition.
Rating Refinements: Moody's may apply numerical modifiers, 1, 2 and 3 in
each generic rating classification from Aa through B in its municipal bond
rating system. The modifier 1 indicates that the security ranks in the higher
end of its generic rating category; the modifier 2 indicates a mid-range
ranking; and a modifier 3 indicates that the issue ranks in the lower end of its
generic rating category.
Short-term Notes: The four ratings of Moody's for short-term notes are MIG
1, MIG 2, MIG 3 and MIG 4. MIG 1 denotes best quality. There is present strong
protection by established cash flows, superior liquidity support or demonstrated
broad-based access to the market for refinancing; MIG 2 denotes high quality.
Margins of protection are ample although not so large as in the preceding group;
MIG 3 denotes favorable quality. All security elements are accounted for but
there is lacking the undeniable strength of the preceding grades. Liquidity and
cash flow protection may be narrow and market access for refinancing is likely
to be less well established; MIG 4 denotes adequate quality. Protection commonly
regarded as required of an investment security is present and although not
distinctly or predominantly speculative, there is specific risk.
DESCRIPTIONS OF MOODY'S COMMERCIAL PAPER RATINGS
Moody's Commercial Paper ratings are opinions of the ability to repay
punctually promissory obligations having an original maturity not 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.
Issuers rated Prime-2 (or related supporting institutions) have a
strong capacity for repayment of short-term promissory obligations.
Issuers rated Prime-3 (or related supporting institutions) have an
acceptable capacity for repayment of short-term promissory obligations.
Issuers rated Not Prime do not fall within any of the Prime rating
categories.
DESCRIPTIONS OF STANDARD & POOR'S RATINGS GROUP'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.
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 rating
may be changed, suspended or withdrawn as a result of changes in, or
unavailability of, such information, or for other circumstances.
A-2
<PAGE>
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 obligation;
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 creditor's rights.
<TABLE>
<S> <C>
AAA Debt rated "AAA" have the highest rating assigned by Standard & Poor's to a debt
obligation. Capacity to pay interest and repay principal is extremely strong.
AA Debt rated "AA" have 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" have a strong capacity to pay interest and repay principal
although they are somewhat more susceptible to the adverse effects of changes in
circumstances and economic conditions than debts in higher rated categories.
BBB Debt rated "BBB" are regarded as having an adequate capacity to pay interest and
repay principal. Whereas they normally exhibit 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.
BB Debt rated "BB," "B," "CCC" and "CC" are regarded, on balance, as predominantly
B speculative with respect to capacity to pay interest and repay principal in
CCC accordance with the terms of the obligation. "BB" indicates the lowest degree of
CC speculation and "CC" the highest of speculation. While such debts will likely
have some quality and protective characteristics, these are out-weighed by large
uncertainties or major risk exposures to adverse conditions.
C The rating "C" is reserved for income bonds on which no interest is being paid.
D Debt rated "D" is in default, and payment of interest and/or repayment of
principal is in arrears.
</TABLE>
Plus (+) or Minus (-): The ratings from "AA" to "B" may be modified by the
addition of a plus or minus sign to show relative standing within the major
rating categories.
Provisional Ratings: The letter "p" indicates that the rating is
provisional. A provisional rating assumes the successful completion of the
project being financed by the debt being rated and indicates that payment of
debt service requirements is largely or entirely dependent upon the successful
and timely completion of the project. This rating, however, while addressing
credit quality subsequent to completion of the project, makes no comment on the
likelihood of, or the risk of default upon failure of, such completion. The
investor should exercise his own judgment with respect to such likelihood and
risk.
<TABLE>
<S> <C>
NR Indicates that no rating has been requested, that there is insufficient
information on which to base a rating or that Standard & Poor's does not rate a
particular type of obligation as a matter of policy.
</TABLE>
A-3
<PAGE>
DESCRIPTIONS OF STANDARD & POOR'S RATINGS GROUP'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. The four categories are as
follows:
<TABLE>
<S> <C>
A Issues assigned this highest rating are regarded as having the greatest capacity
for timely payment. Issues in this category are delineated with the numbers 1, 2
and 3 to indicate the relative degree of safety.
A-1 This designation indicates that the degree of safety regarding timely payment is
very strong.
A-2 Capacity for timely payment on issues with this designation is strong. However,
the relative degree of safety is not as high 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 an adequate capacity for timely
payment. However, such capacity may be damaged by changing conditions or
short-term adversities.
C This rating is assigned to short-term debt obligations with a doubtful capacity
for payment.
D This rating indicates that the issue is either in default or is expected to be in
default upon maturity.
</TABLE>
The 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 or 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.
DESCRIPTIONS OF STANDARD & POOR'S RATINGS SERVICES' NOTE RATINGS
A Standard & Poor's note rating reflects the liquidity concerns and market
access risks unique to notes. Notes due in three years or less will likely
receive a note rating. Notes maturing beyond three years will most likely
receive a long-term debt rating. The following criteria will be used in making
that assessment.
-- Amortization schedule (the larger the final maturity relative to other
maturities, the more likely it will be treated as a note).
-- Source of Payment (the more dependent the issue is on the market for its
refinancing, the more likely it will be treated as a note).
Note rating symbols are as follows:
<TABLE>
<S> <C>
SP-1 Very strong, or strong, capacity to pay principal and interest. Those issues
determined to possess overwhelming safety characteristics will be given a plus
(+) designation.
SP-2 Satisfactory capacity to pay principal and interest.
SP-3 Speculative capacity to pay principal and interest.
</TABLE>
A-4
<PAGE>
NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATIONS, OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS, IN CONNECTION
WITH THE OFFER CONTAINED IN THIS PROSPECTUS, AND, IF GIVEN OR MADE, SUCH OTHER
INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED
BY THE FUND, THE INVESTMENT ADVISER, OR THE DISTRIBUTOR. THIS PROSPECTUS DOES
NOT CONSTITUTE AN OFFERING IN ANY STATE IN WHICH SUCH OFFERING MAY NOT LAWFULLY
BE MADE.
-------------------------
TABLE OF CONTENTS
PAGE
----
Fee Tables.............................. 2
Merrill Lynch Select Pricing (SM)
System................................ 8
Financial Highlights.................... 13
Investment Objective and Policies....... 19
Investment Policies of the Portfolios... 20
Insured Portfolio..................... 20
National Portfolio.................... 21
Limited Maturity Portfolio............ 22
Description of Municipal Bonds........ 23
Forward Commitments................... 25
Financial Futures Contracts and
Derivatives......................... 25
Indexed and Inverse Floating
Obligations......................... 27
Investment Restrictions............... 27
Management of the Fund.................. 27
Board of Directors.................... 27
Management and Advisory Arrangements.. 28
Transfer Agency Services.............. 29
Code of Ethics........................ 29
Purchase of Shares...................... 30
Initial Sales Charge
Alternatives -- Class A and Class D
Shares.............................. 33
Deferred Sales Charge Alternatives
-- Class B and Class C Shares....... 36
Distribution Plans.................... 39
Limitations on the Payment of Deferred
Sales Charges....................... 42
Redemption of Shares.................... 42
Redemption............................ 43
Repurchase............................ 43
Reinstatement Privilege -- Class A and
Class D Shares...................... 44
Shareholder Services.................... 44
Investment Account.................... 44
Automatic Investment Plan............. 45
Fee-Based Programs.................... 45
Automatic Reinvestment of Dividends
and Capital Gains Distribution...... 45
Systematic Withdrawal Plans........... 46
Exchange Privileges................... 46
Portfolio Transactions.................. 47
Additional Information.................. 48
Dividends and Distributions........... 48
Federal Income Taxes.................. 48
State and Local Taxes................. 50
Determination of Net Asset Value...... 50
Performance Data...................... 51
Transfer Agent........................ 53
Custodian............................. 53
Counsel and Auditor................... 53
Shareholder Reports................... 53
Additional Information................ 53
Authorization Form...................... 55
Code #10051-1097
[Merrill Lynch Logo]
MERRILL LYNCH
MUNICIPAL BOND FUND, INC.
[MERRILL LYNCH COMPASS]
PROSPECTUS
October 7, 1997
Distributor:
Merrill Lynch
Funds Distributor, Inc.
This Prospectus should be
retained for future reference.
<PAGE>
STATEMENT OF ADDITIONAL INFORMATION
MERRILL LYNCH MUNICIPAL BOND FUND, INC.
P.O. BOX 9011, PRINCETON, NEW JERSEY 08543-9011 - PHONE NO. (609) 282-2800
------------------------
Merrill Lynch Municipal Bond Fund, Inc. (the "Fund") is a professionally
managed, diversified, open-end investment company that seeks to provide
shareholders with as high a level of income exempt from Federal income taxes as
is consistent with the investment policies of each of its Portfolios and prudent
investment management. The Fund is comprised of three separate Portfolios: the
Insured Portfolio, the National Portfolio and the Limited Maturity Portfolio,
each of which invests primarily in a diversified portfolio of tax-exempt
Municipal Bonds, principally consisting of state, municipal and public authority
securities.
The Fund is a series fund and is comprised of three separate Portfolios.
Each Portfolio is, in effect, a separate fund issuing its own shares. Pursuant
to the Merrill Lynch Select Pricing(SM) System, each Portfolio of the Fund
offers four classes of shares, each with a different combination of sales
charges, ongoing fees and other features. Class C shares of the Limited Maturity
Portfolio are available only through the Exchange Privilege. The Merrill Lynch
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.
------------------------
This Statement of Additional Information of the Fund is not a prospectus
and should be read in conjunction with the Prospectus of the Fund (the
"Prospectus") dated October 7, 1997, which has been filed with the Securities
and Exchange Commission (the "Commission") and is available upon oral or written
request without charge. Copies of the Prospectus can be obtained by calling or
writing the Fund at the above telephone number or address. This Statement of
Additional Information has been incorporated by reference into the Prospectus.
------------------------
FUND ASSET MANAGEMENT -- INVESTMENT ADVISER
MERRILL LYNCH FUNDS DISTRIBUTOR, INC. -- DISTRIBUTOR
------------------------
The date of this Statement of Additional Information is October 7, 1997.
<PAGE>
INVESTMENT OBJECTIVE AND POLICIES
Reference is made to "Investment Objective and Policies" in the Prospectus
for a discussion of the investment objective and policies of the Fund.
At June 30, 1997, the average maturity of the Insured Portfolio, National
Portfolio and the Limited Maturity Portfolio was approximately 19.01 years,
20.26 years and 1.7 years, respectively.
INSURANCE ON PORTFOLIO SECURITIES
Reference is made to the discussion of the Insured Portfolio under
"Investment Policies of the Portfolios" in the Prospectus. As stated in the
Prospectus, the Fund has purchased from AMBAC Indemnity Corporation ("AMBAC"),
Municipal Bond Investors Assurance Corporation ("MBIA") and Financial Security
Assurance Inc. ("FSA") separate Mutual Fund Insurance Policies (the "Policies").
The Policies guarantee the payment of principal at maturity and interest on
all Municipal Bonds that are purchased by the Insured Portfolio at a time when
they are eligible for insurance. Municipal Bonds are eligible for insurance if
they are, at the time of purchase by the Insured Portfolio, identified
separately or by category in qualitative guidelines furnished by AMBAC, MBIA or
FSA and are in compliance with the aggregate limitations on amounts set forth in
such guidelines. AMBAC, MBIA and/or FSA may withdraw particular securities from
the classifications of securities eligible for insurance while continuing to
insure previously acquired bonds of such ineligible issues so long as they
remain in the Insured Portfolio and may limit the aggregate amount of each issue
or category of municipal securities thereof. The restrictions on investment
imposed by the eligibility requirement of the Policies may reduce the yield of
the Insured Portfolio.
RISK FACTORS IN TRANSACTIONS IN JUNK BONDS
The National Portfolio may invest in Municipal Bonds that are rated below
Baa by Moody's Investors Service, Inc. ("Moody's") or below BBB by Standard &
Poor's Ratings Services ("S&P") or that, in the Investment Adviser's judgment,
possess similar credit characteristics ("junk bonds"). See "Additional
Information -- Rating Information" in the Prospectus for additional information
regarding ratings of debt securities. The Investment Adviser considers the
ratings assigned by S&P or Moody's as one of several factors in its independent
credit analysis of issuers.
Junk bonds are considered by S&P and Moody's to have varying degrees of
speculative characteristics. Consequently, although junk bonds 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 junk bonds will be made only when, in the
judgment of the Investment Adviser, such securities provide attractive total
return potential relative to the risk of such securities, as compared to higher
quality debt securities. The National Portfolio will not invest in debt
securities in the lowest rating categories (those rated CC or lower by S&P or Ca
or lower by Moody's) unless the Investment Adviser 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 National
Portfolio does not intend to purchase debt securities that are in default or
that the Investment Adviser believes will be in default.
Issuers of junk bonds may be highly leveraged and may not have available to
them more traditional methods of financing. Therefore, the risks associated with
acquiring the securities of such issuers generally are
2
<PAGE>
greater than is the case with higher rated securities. For example, during an
economic downturn or a sustained period of rising interest rates, issuers of
high-yield securities may be more likely to experience financial stress,
especially if such issuers are highly leveraged. In addition, the market for
high-yield municipal securities is relatively new and has not weathered a major
economic recession, and it is unknown what effects such a recession might have
on such securities. During such a period, 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 junk bonds
because such securities may be unsecured and may be subordinated to other
creditors of the issuer.
Junk bonds frequently have call or redemption features that would permit an
issuer to repurchase the security from the National Portfolio. If a call were
exercised by the issuer during a period of declining interest rates, the
National Portfolio likely would have to replace such called security with a
lower yielding security, thus decreasing the net investment income to the
National Portfolio and dividends to shareholders.
The National Portfolio may have difficulty disposing of certain junk bonds
because there may be a thin trading market for such securities. Because not all
dealers maintain markets in all junk bonds, there is no established secondary
market for many of these securities, and the National Portfolio 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 junk
bonds does exist, it is generally 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 National Portfolio's ability to dispose of
particular issues when necessary to meet its 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 National Portfolio to obtain accurate market
quotations for purposes of valuing its portfolio. Market quotations are
generally available on many junk bonds 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 junk bonds acquired by the
National Portfolio will be purchased upon issuance, which may involve special
risks because the securities so acquired are new issues. In such instances, the
National Portfolio 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 National Portfolio 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 junk bonds,
particularly in a thinly traded market. Factors adversely affecting the market
value of such securities are likely to affect adversely the National Portfolio's
net asset value. In addition, the National Portfolio 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.
TRANSACTIONS IN FUTURES CONTRACTS
The Insured Portfolio, the National Portfolio and the Limited Maturity
Portfolio (collectively, the "Portfolios" and each, a "Portfolio") may engage in
the purchase and sale of futures contracts on an index of municipal bonds or on
U.S. Treasury securities, or options on such futures contracts, for hedging
purposes
3
<PAGE>
only. The Portfolios may sell such futures contracts in anticipation of a
decline in the value of municipal bonds held by them or may purchase such
futures contracts in anticipation of an increase in the cost of municipal bonds
they intend to acquire. The Portfolios also are authorized to purchase and sell
other financial futures contracts that in the opinion of management, provide an
appropriate hedge for some or all of the Fund's portfolio securities.
Because of low initial margin deposits made upon the opening of a futures
position, futures transactions involve substantial leverage. As a result,
relatively small movements in the price of the futures contract can result in
substantial unrealized gains or losses. Because the Portfolios will engage in
the purchase and sale of financial 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 Portfolios or decreases in the price of
securities the Portfolios intend to acquire. Further, the Portfolios will
maintain cash, cash equivalents and high-grade securities with the Fund's
custodian, so that the amount segregated plus the initial margin equals the
value represented by the futures contract purchased by the Portfolios, thereby
ensuring that such transactions are actually unleveraged.
Municipal bond index futures contracts commenced trading in June 1985, and
it is possible that trading in such futures contracts will be less liquid than
that in other futures contracts. The trading of futures contracts and options
thereon is subject to certain market risks, such as trading halts, suspensions,
exchange or clearing house equipment failures, government intervention or other
disruptions of normal trading activity, which could at times make it difficult
or impossible to liquidate existing positions.
The liquidity of the market in futures contracts may be further adversely
affected by "daily price fluctuation limits" established by contract markets,
which limit the amount of a fluctuation in the price of a futures contract or
option thereon 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 positions at prices beyond the
limit. Prices of existing contracts have in the past moved the daily limit on a
number of consecutive trading days. The Portfolios will enter into a futures
position only if, in the judgment of the Investment Adviser, there appears to be
an actively traded market for such futures contracts.
The successful use of transactions in futures contracts and options thereon
depends on the ability of the Investment Adviser correctly to forecast the
direction and extent of price movements of these instruments, as well as price
movements of the securities held by the Portfolios within a given time frame. To
the extent these price movements are not correctly forecast or move in a
direction opposite to that anticipated, the Portfolios may realize a loss on the
hedging transaction that is not fully or partially offset by an increase in the
value of portfolio securities. As a result, either Portfolio's total return for
such period may be less than if it had not engaged in the hedging transaction.
See "Additional Information -- Description of Financial Futures Contracts" below
for a further discussion of the risks of futures trading.
INVESTMENT RESTRICTIONS
The Fund has adopted the following fundamental and non-fundamental
restrictions and policies relating to the investment of its assets and its
activities. The fundamental policies set forth below may not be changed without
the approval of the holders of a majority of the Fund's outstanding voting
securities, including a majority of the shares of each Portfolio affected (which
for this purpose and under the Investment Company Act of 1940, as amended (the
"Investment Company Act"), means the lesser of (i) 67% of the shares
4
<PAGE>
represented at a meeting at which more than 50% of the outstanding shares are
represented or (ii) more than 50% of the outstanding shares).
Under the fundamental investment restrictions, none of the Portfolios of
the Fund may:
1. Make any investment inconsistent with the Fund's classification as
a diversified company under the Investment Company Act.
2. 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).
3. Make investments for the purpose of exercising control or
management.
4. Purchase or sell real estate, except that to the extent permitted
by applicable law, each Portfolio of 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.
5. Make loans to other persons, except that the acquisition of bonds,
debentures or other corporate debt securities and investments in government
obligations, commercial paper, pass-through instruments, certificates of
deposit, bankers' acceptances, repurchase agreements or any similar
instruments shall not be deemed to be the making of a loan, and except
further that each Portfolio of the Fund may lend its portfolio securities,
provided that the lending of portfolio securities may be made only in
accordance with applicable law and the guidelines set forth in the Fund's
Prospectus and Statement of Additional Information, as they may be amended
from time to time.
6. Issue senior securities to the extent such issuance would violate
applicable law.
7. Borrow money, except that (i) each Portfolio of the Fund may borrow
from banks (as defined in the Investment Company Act) in amounts up to
33 1/3% of its total assets (including the amount borrowed), (ii) each
Portfolio of the Fund may, to the extent permitted by applicable law,
borrow up to an additional 5% of its total assets for temporary purposes,
(iii) each Portfolio of the Fund may obtain such short-term credit as may
be necessary for the clearance of purchases and sales of portfolio
securities and (iv) each Portfolio of the Fund may purchase securities on
margin to the extent permitted by applicable law. The Fund may not pledge
its assets other than to secure such borrowings or, to the extent permitted
by the Fund's investment policies as set forth in its Prospectus and
Statement of Additional Information, as they may be amended from time to
time, in connection with hedging transactions, short sales, when-issued and
forward commitment transactions and similar investment strategies.
8. Underwrite securities of other issuers except insofar as a
Portfolio of the Fund technically may be deemed an underwriter under the
Securities Act of 1933, as amended (the "Securities Act"), in selling
portfolio securities.
9. Purchase or sell commodities or contracts on commodities, except to
the extent that a Portfolio of the Fund may do so in accordance with
applicable law and the Fund's Prospectus and Statement of Additional
Information, as they may be amended from time to time, and without
registering as a commodity pool operator under the Commodity Exchange Act.
The Fund has also adopted certain non-fundamental investment restrictions,
which may be changed by the Investment Adviser without approval by the
shareholders subject to the supervision by the Board of Directors.
5
<PAGE>
Under the non-fundamental investment restrictions, none of the Portfolios
of the Fund may:
a. Purchase securities of other investment companies, except to the
extent such purchases are permitted by applicable law. As a matter of
policy, however, the Fund will not purchase shares of any registered
open-end investment company or registered unit investment trust, in
reliance on Section 12(d)(1)(F) or (G) (the "fund of funds" provisions) of
the Investment Company Act, at any time its shares are owned by another
investment company that is part of the same group of investment companies
as the Fund.
b. Make short sales of securities or maintain a short position, except
to the extent permitted by applicable law. The Fund currently does not
intend to engage in short sales, except short sales "against the box."
c. Invest in securities which cannot be readily resold because of
legal or contractual restrictions or which cannot otherwise be marketed,
redeemed or put to the issuer or a third party, if at the time of
acquisition more than 15% of its total assets would be invested in such
securities. This restriction shall not apply to securities which mature
within seven days or securities which the Board of Directors of the Fund
has otherwise determined to be liquid pursuant to applicable law.
Securities purchased in accordance with Rule 144A under the Securities Act
(a "Rule 144A Security") and determined to be liquid by the Fund's Board of
Directors are not subject to the limitations set forth in this investment
restriction.
d. Notwithstanding fundamental investment restriction (7) above, the
Fund currently does not intend to borrow amounts in any Portfolio in excess
of 10% of the total assets of such Portfolio, taken at market value, and
then only from banks as a temporary measure for extraordinary or emergency
purposes such as the redemption of Fund shares. In addition, the Fund will
not purchase securities while borrowings are outstanding.
MANAGEMENT OF THE FUND
DIRECTORS AND OFFICERS
The Directors and executive officers of the Fund, their ages and their
principal occupations for at least the last five years are set forth below.
Unless otherwise noted, the address of each Director and officer is P.O. Box
9011, Princeton, New Jersey 08543-9011.
ARTHUR ZEIKEL (65) -- President and Director(1)(2) -- President of Merrill
Lynch Asset Management, L.P. ("MLAM") (which term as used herein includes its
corporate predecessors) since 1977; President of Fund Asset Management, L.P.
("FAM") (which term as used herein includes its corporate predecessors) since
1977; President and Director of Princeton Services, Inc. ("Princeton Services")
since 1993; Executive Vice President of Merrill Lynch & Co., Inc. ("ML & Co.")
since 1990; Director of Merrill Lynch Funds Distributor, Inc. (the
"Distributor") since 1977.
RONALD W. FORBES (57) -- Director(2) -- 1400 Washington Avenue, Albany, New
York 12222. Professor of Finance, School of Business, State University of New
York at Albany since 1989.
CYNTHIA A. MONTGOMERY (45) -- Director(2) -- Harvard Business School,
Soldiers Field Road, Boston, Massachusetts 02163. Professor, Harvard Business
School since 1989; Associate Professor, J.L.
6
<PAGE>
Kellogg Graduate School of Management, Northwestern University from 1985 to
1989; Assistant Professor, Graduate School of Business Administration, The
University of Michigan from 1979 to 1985; Director, UNUM Corporation since 1990
and Director of Newell Co. since 1995.
CHARLES C. REILLY (66) -- Director(2) -- 9 Hampton Harbor Road, Hampton
Bays, New York 11946. Self-employed financial consultant since 1990; President
and Chief Investment Officer of Versus Capital, Inc. from 1979 to 1990; Senior
Vice President of Arnhold and S. Bleichroeder, Inc. from 1973 to 1990; Adjunct
Professor, Columbia University Graduate School of Business, from 1990 to 1991;
Adjunct Professor, Wharton School, The University of Pennsylvania from 1989 to
1990; Partner, Small Cities Cable Television since 1986.
KEVIN A. RYAN (64) -- Director(2) -- 127 Commonwealth Avenue, Chestnut
Hill, Massachusetts 02167. Founder and current Director of The Boston University
Center for the Advancement of Ethics and Character; Professor of Education at
Boston University since 1982; formerly taught on the faculties of The University
of Chicago, Stanford University and Ohio State University.
RICHARD R. WEST (59) -- Director(2) -- Box 604, Genoa, Nevada 89411.
Professor of Finance since 1984 and Dean from 1984 to 1993, and currently Dean
Emeritus of New York University, Leonard N. Stern School of Business
Administration; Director of Bowne & Co., Inc. (financial printers), Vornado,
Inc. (real estate holding company), and Alexander's Inc. (real estate company).
TERRY K. GLENN (57) -- Executive Vice President(1)(2) -- Executive Vice
President of MLAM and FAM since 1983; Executive Vice President and Director of
Princeton Services since 1993; President of the Distributor since 1986 and
Director thereof since 1991; President of Princeton Administrators, L.P. since
1988.
VINCENT R. GIORDANO (53) -- Senior Vice President(1)(2) -- Senior Vice
President of the Investment Adviser and MLAM since 1984; Senior Vice President
of Princeton Services since 1993; portfolio manager of the Investment Adviser
since 1977 and Vice President from 1980 to 1984.
DONALD C. BURKE (37) -- Vice President(2) -- First Vice President of MLAM
since 1997; Vice President and Director of Taxation of MLAM since 1990.
KENNETH A. JACOB (46) -- Vice President(1)(2) -- First Vice President of
MLAM since 1997; Vice President of the Investment Adviser since 1984; employee
of MLAM since 1978.
GERALD M. RICHARD (48) -- Treasurer(1)(2) -- Senior Vice President and
Treasurer of the Investment Adviser and MLAM since 1984; Senior Vice President
and Treasurer of Princeton Services since 1993; Vice President of the
Distributor since 1981 and Treasurer since 1984.
PETER J. HAYES (38) -- Vice President(1)(2) -- First Vice President of MLAM
since 1997; Vice President of MLAM since 1988.
WALTER O'CONNOR (35) -- Vice President(1)(2) -- Director of MLAM since
1997; Vice President of MLAM since 1993; Assistant Vice President of MLAM from
1991 to 1993; Assistant Vice President of Prudential Securities from 1984 to
1991.
7
<PAGE>
BARBARA G. FRASER (53) -- Secretary(2) -- First Vice President of MLAM
since 1997; Vice President of the Investment Adviser and MLAM since 1996.
- ---------------
(1) Interested person, as defined in the Investment Company Act, of the Fund.
(2) Such a Director or officer is a Director or officer of certain other
investment companies for which the Investment Adviser or MLAM acts as
investment adviser.
COMPENSATION OF DIRECTORS
At September 30, 1997, the Directors and officers of the Fund as a group
(14 persons) owned an aggregate of less than 1% of the outstanding shares of the
Fund. At that date, Mr. Zeikel, an officer and Director of the Fund, and the
other officers of the Fund, owned less than 1% of the outstanding Common Stock
of ML & Co.
Pursuant to the terms of the Investment Advisory Agreement, the Investment
Adviser pays all compensation of officers and employees of the Fund as well as
the fees of all Directors of the Fund who are affiliated persons of the
Investment Adviser. The Fund pays each Director not affiliated with the
Investment Adviser (each a "non-interested Director") an annual fee of $3,000
plus a fee of $400 per meeting attended, together with such Director's actual
out-of-pocket expenses relating to attendance at meetings. The Fund also
compensates members of its Audit and Nominating Committee (the "Committee"),
which consists of all of the non-interested Directors with a fee of $2,900 per
year. The Chairman of the Audit Committee is paid an additional annual fee of
$1,000. For the fiscal year ended June 30, 1997, fees and expenses paid to the
non-interested Directors of the Fund aggregated $52,926.
The following table sets forth the compensation paid by the Fund to the
non-interested Directors for the fiscal year ended June 30, 1997 and the
aggregate compensation paid by all investment companies advised by MLAM and its
affiliate, FAM ("MLAM/FAM-Advised Funds") to the non-interested Directors for
the calendar year ended December 31, 1996:
<TABLE>
<CAPTION>
AGGREGATE
COMPENSATION
FROM FUND AND
PENSION OR RETIREMENT MLAM/FAM-ADVISED
COMPENSATION BENEFITS ACCRUED AS FUNDS PAID TO
DIRECTOR/TRUSTEE FROM FUND PART OF FUND EXPENSE DIRECTOR(1)
- ---------------------------------------- ------------ ---------------------- ----------------
<S> <C> <C> <C>
Ronald W. Forbes........................ $ 9,200 None $142,500
Cynthia A. Montgomery................... 9,200 None 142,500
Charles C. Reilly....................... 10,200 None 293,833
Kevin A. Ryan........................... 9,200 None 142,500
Richard R. West......................... 9,200 None 272,833
</TABLE>
- ---------------
(1) The Directors serve on the boards of MLAM/FAM-Advised Funds as follows: Mr.
Forbes (28 registered investment companies consisting of 41 portfolios); Ms.
Montgomery (28 registered investment companies consisting of 41 portfolios);
Mr. Reilly (46 registered investment companies consisting of 59 portfolios);
Mr. Ryan (28 registered investment companies consisting of 41 portfolios);
and Mr. West (47 registered investment companies consisting of 69
portfolios).
MANAGEMENT AND ADVISORY ARRANGEMENTS
FAM, a subsidiary of MLAM, an indirect subsidiary of ML & Co., acts as the
investment adviser for the Fund and provides the Fund with management services.
While FAM is at all times subject to the direction of
8
<PAGE>
the Board of Directors of the Fund, under the Investment Advisory Agreement FAM
is responsible for the actual management of each Portfolio and constantly
reviews the holdings of each Portfolio in light of its own research analysis and
analyses from other relevant sources. The responsibility for making decisions to
buy, sell or hold a particular security rests with FAM. FAM provides the
portfolio managers for each Portfolio, who consider analyses from various
sources, make the necessary investment decisions and place transactions
accordingly. FAM is also obligated to perform certain administrative and
management services for the Fund and is obligated to provide all the office
space, facilities, equipment and personnel necessary to perform its duties under
the Agreement.
Securities held by the Fund may also be held by other funds for which FAM
or MLAM acts as an adviser or by investment advisory clients of MLAM. If
purchases or sales of securities for the Fund or other funds for which FAM or
MLAM acts as investment adviser or for their advisory clients arise for
consideration at or about the same time, transactions in such securities will be
made, insofar as feasible, for the respective funds and clients in a manner
deemed equitable to all. To the extent that transactions on behalf of more than
one client of the Investment Adviser or MLAM during the same period may increase
the demand for securities being purchased or the supply of securities being
sold, there may be an adverse effect on price.
Advisory Fee. As compensation for its services to the Portfolios, the
Investment Adviser receives at the end of each month a fee with respect to each
Portfolio. The fee for each Portfolio is determined based on the annual advisory
fee rates for that Portfolio set forth in the table below. These fee rates are
applied to the average daily net assets of each Portfolio, with the reduced
rates shown below applicable to portions of the assets of each Portfolio to the
extent that the aggregate of the average daily net assets of the three combined
Portfolios exceeds $250 million, $400 million, $550 million and $1.5 billion
(each such amount being a "breakpoint level"). The portion of the assets of a
Portfolio to which the rate at each breakpoint level applies will be determined
on a "uniform percentage" basis. The uniform percentage applicable to a
breakpoint level is determined by dividing the amount of the aggregate of the
average daily net assets of the three combined Portfolios that falls within that
breakpoint level by the aggregate of the average daily net assets of the three
combined Portfolios. The amount of the fee for a Portfolio at each breakpoint
level is determined by multiplying the average daily net assets of that
Portfolio by the uniform percentage applicable to that breakpoint level and
multiplying the product by the advisory fee rate.
<TABLE>
<CAPTION>
RATE OF ADVISORY FEE
---------------------------------
LIMITED
AGGREGATE OF AVERAGE DAILY NET ASSETS OF THE THREE COMBINED INSURED NATIONAL MATURITY
PORTFOLIOS PORTFOLIO PORTFOLIO PORTFOLIO
- ------------------------------------------------------------------- --------- --------- ---------
<S> <C> <C> <C>
Not exceeding $250 million......................................... 0.40% 0.50% 0.40%
In excess of $250 million but not exceeding $400 million........... 0.375 0.475 0.375
In excess of $400 million but not exceeding $550 million........... 0.375 0.475 0.35
In excess of $550 million but not exceeding $1.5 billion........... 0.375 0.475 0.325
In excess of $1.5 billion.......................................... 0.35 0.475 0.325
</TABLE>
For the fiscal year ended June 30, 1995, FAM received $9,408,013 from the
Insured Portfolio, $7,415,203 from the National Portfolio and $2,712,662 from
the Limited Maturity Portfolio as advisory fees. For the fiscal year ended June
30, 1996, FAM received $8,850,984 from the Insured Portfolio, $7,014,416 from
the National Portfolio and $1,899,352 from the Limited Maturity Portfolio as
advisory fees. For the fiscal year ended
9
<PAGE>
June 30, 1997, FAM received $8,042,098 from the Insured Portfolio, $6,961,453
from the National Portfolio and $1,552,369 from the Limited Maturity Portfolio
as advisory fees.
Payment of Expenses. The Investment Advisory Agreement obligates FAM to
provide investment advisory services and to pay all compensation of and furnish
office space for officers and employees of the Fund connected with economic
research, investment research, trading and investment management of the Fund, as
well as the fees of all Directors of the Fund who are affiliated persons of ML &
Co. or any of its subsidiaries. Each Portfolio pays all other expenses incurred
in its operation and a portion of the Fund's general administrative expenses
allocated on the basis of the asset size of the respective Portfolios. Expenses
that will be borne directly by the Portfolios include redemption expenses,
expenses of portfolio transactions, shareholder servicing costs, portfolio
insurance maintained and paid by the Insured Portfolio, expenses of registering
the shares under Federal and state securities laws, pricing costs (including the
daily calculation of net asset value), interest, certain taxes, charges of the
custodian and Transfer Agent and other expenses attributable to a particular
Portfolio. Expenses that will be allocated on the basis of the size of the
respective Portfolios include Directors' fees, legal expenses, state franchise
taxes, auditing services, costs of printing proxies, stock certificates,
shareholder reports and prospectuses (except to the extent paid by the
Distributor), Commission fees, accounting costs and other expenses properly
payable by the Fund and allocable on the basis of the size of the respective
Portfolios. Accounting services are provided for the Fund by FAM, and the Fund
reimburses FAM for its costs in connection with such services. During the fiscal
year ended June 30, 1997, the Fund reimbursed FAM $433,527 for such services.
Depending upon the nature of a lawsuit, litigation costs may be directly
applicable to the Portfolios or allocated on the basis of the size of the
respective Portfolios. The Board of Directors has determined that this is an
appropriate method of allocation of expenses. As required by the Distribution
Agreement, the Distributor will pay certain of the expenses of each Portfolio
incurred in connection with the offering of shares of each Portfolio, including
the expense of printing the prospectuses used in connection with the continuous
offering of shares by each Portfolio. See "Purchase of Shares -- Distribution
Plans" in the Prospectus.
The Investment Adviser is a limited partnership, the partners of which are
ML & Co. and Princeton Services. ML & Co. and Princeton Services are
"controlling persons" of the Investment Adviser as defined under the Investment
Company Act because of their ownership of its voting securities or their power
to exercise a controlling influence over its management or policies.
Duration and Termination. Unless earlier terminated as described below,
the Investment Advisory Agreement will continue in effect from year to year if
approved annually (a) by the Board of Directors of the Fund or by a majority of
the outstanding voting shares of each Portfolio and (b) by a majority of the
Directors who are not parties to such contract or interested persons (as defined
in the Investment Company Act) of any such party. Such contract terminates upon
assignment and may be terminated without penalty on 60 days' written notice at
the option of either party thereto or by the vote of the shareholders of the
Fund.
If the shareholders of any Portfolio fail to approve the continuance of the
Investment Advisory Agreement, the Investment Advisory Agreement will continue
in effect as to any other Portfolio if the shareholders of such Portfolio have
approved the contract.
10
<PAGE>
PURCHASE OF SHARES
The Fund has entered into separate distribution agreements (the
"Distribution Agreements") with the Distributor in connection with the offering
of each class of shares of the three Portfolios. The Distribution Agreements
obligate the Distributor to pay certain expenses in connection with the offering
of the Fund's shares. After the prospectuses, statements of additional
information and periodic reports have been prepared, set in type and mailed to
shareholders, the Distributor pays for the printing and distribution of copies
thereof used in connection with the offering to dealers and investors. The
Distributor also pays for other supplementary sales literature and advertising
costs. The Distribution Agreements are subject to the same renewal requirements
and termination provisions as the Investment Advisory Agreement described above.
The Fund is a series fund comprised of three separate Portfolios. All three
Portfolios are divided into four classes of shares under the Merrill Lynch
Select Pricing(SM) System. Class A and Class D shares of the three Portfolios
are sold to investors choosing the initial sales charge alternative and Class B
and Class C shares are sold to investors choosing the deferred sales charge
alternative. Each Class A, Class B, Class C and Class D share of a Portfolio
represents an identical interest in the investment portfolio of the Portfolio,
has the same rights and is identical in all respects to the other classes of
shares, except that Class B, Class C and Class D shares of the Portfolio 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
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 the distribution fee is paid (except that Class B shareholders
may vote upon any material changes to expenses charged under the Class D
Distribution Plan). Each class has different exchange privileges. See "Exchange
Privilege."
The Merrill Lynch Select Pricing(SM) System is used by more than 50
registered investment companies advised by MLAM or FAM, an affiliate of MLAM.
Funds advised by MLAM or FAM that utilize the Merrill Lynch Select Pricing(SM)
System are referred to herein as "MLAM-advised mutual funds."
INITIAL SALES CHARGE ALTERNATIVES -- CLASS A AND CLASS D SHARES
For the fiscal year ended June 30, 1997, Class A gross sales charges
aggregated $371,198, of which the Distributor received $42,330 and Merrill Lynch
received $328,868. During the fiscal year ended June 30, 1997, the Distributor
received no CDSCs with respect to redemptions within one year after purchase of
Class A shares purchased subject to a front-end sales charge waiver. For the
fiscal year ended June 30, 1996, Class A gross sales charges aggregated
$531,864, of which the Distributor received $60,672, and Merrill Lynch received
$471,192. During the fiscal year ended June 30, 1996, the Distributor received
$7,073 with respect to redemptions within one year after purchase of Class A
shares purchased subject to a front-end sales charge waiver. For the year ended
June 30, 1995, Class A gross sales charges aggregated $664,935, of which the
Distributor received $63,348, and Merrill Lynch received $601,587. During the
fiscal year ended June 30, 1995, the Distributor received $13,802 with respect
to redemptions within one year after purchase of Class A shares purchased
subject to a front-end sales charge waiver. All of such sales charges were
attributable to payments of initial sales charges in connection with purchases
of Class A shares of the Portfolios.
For the fiscal year ended June 30, 1997, Class D gross sales charges
aggregated $209,269, of which the Distributor received $21,222 and Merrill Lynch
received $188,047. During the fiscal year ended, June 30,
11
<PAGE>
1997 the Distributor received $358,940 in CDSCs with respect to redemptions
within one year after purchase of Class D shares purchased subject to a
front-end sales charge waiver. For the fiscal year ended June 30, 1996, Class D
gross sales charges aggregated $271,962 of which the Distributor received
$29,110 and Merrill Lynch received $242,852. During the fiscal year ended June
30, 1996, the distributor received $10,531 in CDSCs with respect to redemptions
within one year after purchase of Class D shares purchased subject to a
front-end sales charge waiver. For the period October 21, 1994 (commencement of
operations) to June 30, 1995, Class D sales charges aggregated $246,501 of which
the Distributor received $17,470 and Merrill Lynch received $229,031. During the
period October 21, 1994 to June 30, 1995, the distributor received $800 in CDSCs
with respect to redemptions within one year after purchase of Class D shares
purchased subject to a front-end sales charge waiver. All of such sales charges
were attributable to payments of initial sales charges in connection with
purchases of Class D shares of the Portfolios.
Closed-End Fund Investment Option. Class A shares of the Fund and other
MLAM-advised mutual funds ("Eligible Class A Shares") are offered at net asset
value to shareholders of certain closed-end funds advised by MLAM or the
Investment Adviser who purchased such closed-end fund shares prior to October
21, 1994 and wish to reinvest the net proceeds from a sale of their closed-end
fund shares of common stock in Eligible Class A shares, if the conditions set
forth below are satisfied. Alternatively, closed-end fund shareholders who
purchased such shares on or after October 21, 1994 and wish to reinvest the net
proceeds from a sale of their closed-end fund shares are offered Class A shares
(if eligible to purchase Class A shares) or Class D shares of the Fund and other
MLAM-advised mutual funds ("Eligible Class D Shares"), if the following
conditions are met. First, the sale of the closed-end fund shares must be made
through Merrill Lynch, and the net proceeds therefrom must be immediately
reinvested in Eligible Class A or Class D shares. Second, the closed-end fund
shares must either have been acquired in the initial public offering or be
shares representing dividends from shares of common stock acquired in such
offering. Third, the closed-end fund shares must have been continuously
maintained in a Merrill Lynch securities account. Fourth, there must be a
minimum purchase of $250 to be eligible for the investment option.
Shareholders of certain MLAM-advised continuously offered closed-end funds
may reinvest at net asset value the net proceeds from a sale of certain shares
of common stock of such funds in shares of the Fund. Upon exercise of this
investment option, shareholders of Merrill Lynch Senior Floating Rate Fund, Inc.
will receive Class A shares of the Fund and shareholders of Merrill Lynch
Municipal Strategy Fund, Inc. and Merrill Lynch High Income Municipal Bond Fund,
Inc. will receive Class D shares of the Fund, except that shareholders already
owning Class A shares of the Fund will be eligible to purchase additional Class
A shares pursuant to this option, if such additional Class A shares will be held
in the same account as the existing Class A shares and the other requirements
pertaining to the reinvestment privilege are met. In order to exercise this
investment option, a shareholder of one of the above-referenced continuously
offered closed-end funds (an "eligible fund") must sell his or her shares of
common stock of the eligible fund (the "eligible shares") back to the fund in
connection with a tender offer conducted by the eligible fund and reinvest the
proceeds immediately in the designated class of shares of the Fund. This
investment option is available only with respect to eligible shares as to which
no Early Withdrawal Charge or CDSC (each as defined in the eligible fund's
prospectus) is applicable. Purchase orders from eligible fund shareholders
wishing to exercise this investment option will be accepted only on the day that
the related tender offer terminates and will be effected at the net asset value
of the designed class of the Fund on such day.
12
<PAGE>
REDUCED INITIAL SALES CHARGES -- CLASS A AND CLASS D SHARES
As set forth in the Prospectus, a reduced sales charge is available for any
purchase in excess of $25,000 (in the case of the Insured Portfolio and National
Portfolio) and $100,000 for the Limited Maturity Portfolio of Class A or Class D
shares of a Portfolio. The term "purchase" as used in the Prospectus and
Statement of Additional Information in connection with 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 fiduciary purchasing shares for a single trust or
estate or single fiduciary account although more than one beneficiary is
involved. The term "purchase" also includes purchases by any "company," as that
term is defined in the Investment Company Act, but does not include purchases by
any such company that has not been in existence for at least six months or 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 will
not include purchases by any group of individuals whose sole organizational
nexus is that the participants therein are credit card holders of a company,
policyholders of an insurance company, customers of either a bank or
broker-dealer or clients of an investment adviser.
Right of Accumulation. Reduced sales charges are applicable through a
right of accumulation under which investors are permitted to purchase shares of
any of the three Portfolios 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 the shares of all of the Portfolios 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, and acceptance of the purchase order is subject to such
confirmation. The right of accumulation may be amended or terminated at any
time. Shares held in the name of a nominee or custodian under pension,
profit-sharing or other employee benefits 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 of
Class A and Class D shares of the Portfolios, or any other MLAM-advised mutual
funds, where purchases of such shares aggregating $25,000 or more for the
Insured Portfolio and National Portfolio or $100,000 or more for the Limited
Maturity Portfolio are made through any dealer within a 13-month period starting
with the first purchase pursuant to a Letter of Intention in the form provided
by the Distributor. The Letter of Intention is not a binding obligation to
purchase any amount of Class A or Class D shares, but its execution will result
in the purchaser's paying a lower sales charge at the appropriate quantity
purchase level. The Letter of Intention is available only to investors whose
accounts are maintained at the Fund's Transfer Agent. A purchase not originally
made pursuant to a Letter of Intention may be included under a subsequent letter
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 Portfolios and of other MLAM-advised mutual funds (or eligible
shares) 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 the Letter of Intention will be applied only
to new purchases. If the total amount of shares purchased does not equal the
amount stated in the Letter of Intention (minimum of $25,000 for the National
and Insured Portfolio or $100,000 for the Limited Maturity Portfolio), the
investor
13
<PAGE>
will be notified and must pay, within 20 days of the expiration of such Letter,
the difference between the sales charge on 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 and Class D shares equal to five percent
of the intended amount will be held in escrow during the 13-month period (while
remaining registered in the name of the purchaser) for this purpose and will be
involuntarily redeemed to pay the additional sales charge, if necessary. The
first purchase under the Letter of Intention must be at least five percent of
the dollar amount of such Letter. If during the term of such Letter a purchase
brings the total amount invested to an amount equal to or in excess of the
amount indicated in the Letter, the purchaser will be entitled on that purchase
and subsequent purchases to the reduced percentage sales charge which would be
applicable to a single purchase equal to the total dollar value of the shares
then being purchased plus the total cost of all shares previously purchased
under such Letter, but there will be no retroactive reduction of the sales
charges on any previous purchase. The value of any shares redeemed or otherwise
disposed of by the purchaser prior to termination or completion of the Letter of
Intention will be deducted from the total purchases made under such Letter. An
exchange from a MLAM-advised money market fund into any Portfolio that creates a
sales charge will count toward completing a new or existing Letter of Intention
in any Portfolio.
Employee Access (SM) Accounts. Class A or Class D shares are offered at
net asset value to Employee Access Accounts available through employers that
provide employer sponsored retirement or savings plans that are eligible to
purchase such shares at net asset value. The initial minimum investment for such
accounts is $500, except that the initial minimum investment for shares
purchased for such accounts pursuant to the Automatic Investment Program is $50.
TMA(SM) Managed Trusts. Class A shares are offered to TMA(SM) Managed
Trusts to which Merrill Lynch Trust Company provides discretionary trustee
services at net asset value.
Merrill Lynch Blueprint (SM) Program. Class D shares of any of the three
Portfolios are offered to participants in the Merrill Lynch Blueprint(SM)
Program ("Blueprint"). In addition, participants in Blueprint who own Class A
shares of a Portfolio may purchase additional Class A shares of the Portfolio
through Blueprint. Blueprint is directed to small investors, group IRAs and
participants in certain affinity groups such as credit unions and trade
associations. Investors placing orders to purchase Class A or Class D shares of
a Portfolio through Blueprint will acquire the shares at net asset value plus a
sales charge calculated in accordance with Blueprint sales charge schedule
(i.e., up to $5,000 at 0.80% for Limited Maturity Portfolio, up to $5,000 at
3.5% for the Insured Portfolio or National Portfolio, and $5,000.01 or more at
the standard disclosed sales charge rate in the Prospectus). However, services,
including the exchange privilege, available to Class A or Class D shareholders
through Blueprint may differ from those available to other investors. Class A
and Class D shares are offered at net asset value, to Blueprint participants
through the Merrill Lynch Directed IRA Rollover Program ("IRA Rollover Program")
available from Merrill Lynch Business Financial Services, a business unit of
Merrill Lynch. Orders for purchases and redemptions of Class A or Class D shares
of the Portfolios may be grouped for execution purposes which, in some
circumstances, may involve the execution of such orders two business days
following the day such orders are placed. The minimum initial purchase price is
$100, with a $50 minimum for subsequent purchases through Blueprint. There are
no minimum initial or subsequent purchase requirements for participants who are
part of an automatic investment plan. Additional information concerning
purchases through Blueprint, including any annual fees and transaction charges,
is available from Merrill Lynch, Pierce, Fenner & Smith Incorporated, The
Blueprint(SM) Program, P.O. Box 30441, New Brunswick, New Jersey 08989-0441.
14
<PAGE>
Purchase Privileges of Certain Persons. Directors of the Fund, members of
the Boards of other MLAM-advised investment companies, ML & Co. and its
subsidiaries (the term "subsidiaries," when used herein with respect to ML &
Co., includes MLAM, FAM and certain other entities directly or indirectly wholly
owned and controlled by ML & Co.), and their directors and employees and any
trust, pension, profit-sharing or other benefit plan for such persons, may
purchase Class A shares of the Fund at net asset value.
Class D shares of the Fund 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 advise Merrill Lynch that it
will purchase Class D shares of the Fund with proceeds from a redemption of a
mutual fund that was sponsored by the financial consultant's previous firm and
was subject to a sales charge either at the time of purchase or on a deferred
basis. Second, the investor also must establish that such redemption had been
made within 60 days prior to the investment in the Fund, and the proceeds from
the redemption had been maintained in the interim in cash or a money market
fund.
Class D shares of the Fund are also offered at net asset value, without
sales charge, to an investor who has a business relationship with a Merrill
Lynch Financial Consultant and who has invested in a mutual fund sponsored by a
non-Merrill Lynch company for which Merrill Lynch has served as a selected
dealer and where Merrill Lynch has either received or given notice that such
arrangement will be terminated ("notice"), if the following conditions are
satisfied: First, the investor must purchase Class D shares of the Fund with
proceeds from a redemption of shares of such other mutual fund and such fund was
subject to 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.
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 Merrill
Lynch Financial Consultant and who has invested in a mutual fund for which
Merrill Lynch has not served as a selected dealer if the following conditions
are satisfied: First, the investor must advise Merrill Lynch that it will
purchase Class D shares of the Fund with proceeds from the redemption of such
shares of other mutual fund and that such shares have been outstanding for a
period of no less than six months. Second, such purchase of Class D shares must
be made within 60 days after the redemption and the proceeds from the redemption
must be maintained in the interim in cash or a money market fund.
A purchase of $1 million or more in a single transaction by an investor, or
a purchase by a TMA(SM) Managed Trust, of Class A and Class D Shares of the
Fund's Portfolios may not be subject to an initial sales charge. Such purchases
may instead be subject to a contingent deferred sales charge if the shares are
redeemed within one year after purchase at the following rates: 1.00% on
purchases of $1,000,000 to $2,500,000; 0.60% on purchases of $2,500,000 to
$3,500,000; 0.40% on purchases of $3,500,000 to $5,000,000; and 0.25% on
purchases of more than $5,000,000 in lieu of paying an initial sales charge.
Acquisition of Certain Investment Companies. The public offering price of
Class D shares of the Portfolios may be reduced to the net asset value per 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 in
appropriate cases be adjusted to reduce possible adverse tax consequences to the
Fund that might result from an acquisition of assets having
15
<PAGE>
net unrealized appreciation that is disproportionately higher at the time of
acquisition than the realized or unrealized appreciation of the Fund.
The issuance of Class D shares for consideration other than cash is limited
to bona fide reorganizations, statutory mergers or other acquisitions of
portfolio securities that (i) meet the investment objectives and policies of the
Fund; (ii) are acquired for investment and not for resale (subject to the
understanding that the disposition of the Fund's portfolio securities shall at
all times remain within its control); and (iii) are liquid securities, the value
of which is readily ascertainable, which are not restricted as to transfer
either by law or illiquidity of market (except that the Fund may acquire through
such transactions restricted or illiquid securities to the extent the Fund does
not exceed the applicable limits on acquisition of such securities set forth
under "Investment Objective and Policies" herein).
Purchases by Banks. Class A shares of the Fund's Insured Portfolio may be
purchased at net asset value, without a sales charge, by banks that have
invested a minimum of $25 million in such shares.
Fee-Based Investment Programs. Certain Merrill Lynch fee-based investment
programs, including pricing alternatives for securities transactions, (each
referred to in this paragraph as a "Program") may permit the purchase of Class A
shares at net asset value. Under specified circumstances, participants in
certain Programs may deposit other classes of shares, which will be exchanged
for Class A shares. Initial or deferred sales charges otherwise due in
connection with such exchanges may be waived or modified. Termination of
participation in a Program may result in the redemption of such shares or the
automatic exchange thereof to another class at net asset value. In addition,
upon termination of participation in a Program, shares that have been held for
less than specified periods within such Program may be subject to a fee based
upon the current value of such shares. These Programs also generally prohibit
such shares from being transferred to another account at Merrill Lynch, to
another broker-dealer or to the Transfer Agent. Except in limited circumstances
(which may also involve an exchange as described above), such shares must be
redeemed and another class of shares purchased (which may involve the imposition
of initial or deferred sales charges and distribution and account maintenance
fees) in order for the investment not to be subject to Program fees. Additional
information regarding a specific Program (including charges and limitations on
transferability applicable to shares that may be held in such Program) is
available in the Program's client agreement and from the Transfer Agent at (800)
MER-FUND or (800) 637-3863.
DISTRIBUTION PLANS
Distribution Plans. Reference is made to "Purchase of
Shares -- Distribution Plans" in the Prospectus for certain information with
respect to the distribution plans for Class B and Class C 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 Investment Company Act. Among
other things, each Distribution Plan provides that the Distributor shall provide
and the Directors shall review quarterly reports of the disbursement of the
account maintenance and/or distribution fees paid to the Distributor. In their
consideration of each Distribution Plan, the Directors must consider all factors
they deem relevant, including information as to the benefits of the Distribution
Plan to the Fund and the related class of shareholders of the relevant
Portfolio. Each Distribution Plan further provides that, so long as the
Distribution Plan remains in effect, the selection and nomination of
16
<PAGE>
Directors who are not "interested persons" of the Fund, as defined in the
Investment Company Act (the "Independent Directors"), shall be committed to the
discretion of the Independent Directors then in office. In approving each
Distribution Plan in accordance with Rule 12b-1, the Independent Directors
concluded that there is reasonable likelihood that such Distribution Plan will
benefit the Fund and the related class of shareholders of the Portfolio. Each
Distribution Plan can be terminated at any time, without penalty, by the vote of
a majority of the Independent Directors or by the vote of the holders of a
majority of the outstanding related voting securities of the relevant Portfolio.
A Distribution Plan cannot be amended to increase materially the amount to be
spent by any Portfolio without the approval of the related class of shareholders
of such Portfolio and all material amendments are required to be approved by the
vote of directors, including a majority of the Independent Directors 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 Fund
preserve copies of each class of Distribution Plan and any report made pursuant
to such plan for a period of not less than six years from the date of such
Distribution Plan or such report, the first two years in an easily accessible
place.
LIMITATIONS ON THE PAYMENT OF DEFERRED SALES CHARGES
The maximum sales charge rule in the Conduct Rules of the National
Association of Securities Dealers, Inc. ("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 of each Portfolio. As
applicable to the Fund, the maximum sales charge rule limits the aggregate of
distribution fee payments and CDSCs payable by the Fund with respect to Class B
or Class C shares of a Portfolio to (1) 6.25% of eligible gross sales of such
shares, computed separately for each class of a Portfolio (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
of a Portfolio 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 of the relevant Portfolio,
and any CDSCs with respect to that class will be paid to the Fund rather than to
the Distributor; however, the Fund will continue to make payments of the account
maintenance fee. In certain circumstances the amount payable pursuant to the
voluntary maximum may exceed the amount payable under the NASD formula. In such
circumstances payment in excess of the amount payable under the NASD formula
will not be made.
The following tables set forth comparative information as of June 30, 1997
with respect to the Class B and Class C shares of the Fund indicating the
maximum allowable payments that can be made under the NASD maximum sales charge
rule and the Distributor's voluntary maximum for the period October 21, 1988
(commencement of operations) to June 30, 1997 for the Class B shares of the
National and Insured Portfolios, for the period November 2, 1992 (commencement
of operations) to June 30, 1997 for Class B shares of the Limited Maturity
Portfolio, and for the period October 21, 1994 (commencement of operations) to
June 30, 1997 for the Insured, National and Limited Maturity Portfolios.
17
<PAGE>
DATA CALCULATED AS OF JUNE 30, 1997
INSURED PORTFOLIO
<TABLE>
<CAPTION>
ANNUAL
DISTRIBUTION
ALLOWABLE ALLOWABLE AMOUNTS FEE AT
ELIGIBLE AGGREGATE INTEREST MAXIMUM PREVIOUSLY AGGREGATE CURRENT
GROSS SALES ON UNPAID AMOUNT PAID TO UNPAID NET ASSET
SALES(1) CHARGES BALANCE(2) PAYABLE DISTRIBUTOR(3) BALANCE LEVEL(4)
---------- --------- ---------- -------- -------------- --------- ------------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
CLASS B
Under NASD Rule as
Adopted............ $1,276,011 $79,750 $ 36,227 $115,977 $ 38,365 $77,612 $2,800
Under Distributor's
Voluntary Waiver... $1,276,011 $79,750 $ 6,380 $ 86,130 $ 38,365 $47,765 $2,800
CLASS C
Under NASD Rule as
Adopted............ $ 23,404 $ 1,462 $ 210 $ 1,672 $ 197 $ 1,475 $ 65
</TABLE>
NATIONAL PORTFOLIO
<TABLE>
<CAPTION>
ANNUAL
DISTRIBUTION
ALLOWABLE ALLOWABLE AMOUNTS FEE AT
ELIGIBLE AGGREGATE INTEREST MAXIMUM PREVIOUSLY AGGREGATE CURRENT
GROSS SALES ON UNPAID AMOUNT PAID TO UNPAID NET ASSET
SALES(1) CHARGES BALANCE(2) PAYABLE DISTRIBUTOR(3) BALANCE LEVEL(4)
-------- --------- ---------- ------- -------------- --------- ------------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
CLASS B
Under NASD Rule as
Adopted.............. $684,109 $42,756 $ 17,315 $60,071 $ 19,235 $40,836 $2,075
Under Distributor's
Voluntary Waiver..... $684,109 $42,756 $ 3,421 $46,177 $ 19,235 $26,942 $2,075
CLASS C
Under NASD Rule as
Adopted.............. $ 2,705 $ 1,719 $ 198 $1,917 $ 190 $ 1,727 $ 154
(see footnotes on next page).
</TABLE>
18
<PAGE>
LIMITED MATURITY PORTFOLIO
<TABLE>
<CAPTION>
ANNUAL
DISTRIBUTION
ALLOWABLE ALLOWABLE AMOUNTS FEE AT
ELIGIBLE AGGREGATE INTEREST MAXIMUM PREVIOUSLY AGGREGATE CURRENT
GROSS SALES ON UNPAID AMOUNT PAID TO UNPAID NET ASSET
SALES(5) CHARGES BALANCE(2) PAYABLE DISTRIBUTOR(6) BALANCE LEVEL(4)
-------- --------- ---------- ------- -------------- --------- ------------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
CLASS B
Under NASD Rule as
Adopted.............. $176,436 $11,027 $3,727 $14,754 $1,811 $12,943 $108
Under Distributor's
Voluntary Waiver..... $176,436 $11,027 $ 882 $11,909 $1,811 $10,098 $108
CLASS C
Under NASD Rule as
Adopted.............. $ 3,360 $ 210 $ 50 $ 260 $ 7 $ 253 $215
</TABLE>
- ---------------
(1) Purchase price of all eligible Class B shares sold since October 21, 1988
(commencement of Class B operations) other than shares acquired through
dividend reinvestment and the exchange privilege.
(2) Interest is computed on a monthly average Prime Rate basis, based upon the
prime rate as reported in The Wall Street Journal, plus 1.0%, as permitted
under the NASD Rule.
(3) Consists of CDSC payments, distribution fee payments and accruals. Of these
distribution fee payments made prior to July 6, 1993 under the Prior Plan at
the 0.75% rate, 0.50% of average daily net assets has been treated as a
distribution fee and 0.25% of average daily net assets has been deemed to
have been a service fee and not subject to the NASD maximum sales charge
rule. This figure may include CDSCs that were deferred when a shareholder
redeemed shares prior to the expiration of the applicable CDSC period and
invested the proceeds, without the imposition of a sales charge, in Class A
shares in conjunction with the Shareholder's participation in the Merrill
Lynch Mutual Funds Advisor ("MFA") program. The CDSC is booked as a
contingent obligation that may be payable if the shareholder terminates
participation in the MFA program.
(4) Provided to illustrate the extent to which the current level of distribution
fee payments (not including any CDSC payments) is amortizing the unpaid
balance. No assurance can be given that payments of the distribution fee
will reach either the voluntary maximum or the NASD maximum.
(5) Purchase price of all eligible Class B shares sold since November 2, 1992
(commencement of Class B operations) other than shares acquired through
dividend reinvestment and exchange privilege.
(6) Consists of CDSC payments, distribution fee payments and accruals. Of these
distribution fee payments made prior to July 6, 1993 under the Prior Plan at
the 0.35% rate, 0.25% of average daily net assets has been treated as a
distribution fee and 0.10% of average daily net assets has been deemed to
have been a service fee and not subject to the NASD maximum sales charge
rule.
REDEMPTION OF SHARES
The right to redeem shares or to receive payment with respect to any such
redemption may be suspended for any period during which trading on the New York
Stock Exchange (the "NYSE") is restricted as determined by the Commission or the
NYSE is closed (other than customary weekend and holiday closings), for any
period during which an emergency exists, as defined by the Commission, as a
result of which disposal of portfolio securities or determination of the net
asset value of any Portfolio is not reasonably practicable, and for such other
periods as the Commission may by order permit for the protection of shareholders
of each Portfolio. Reference is made to "Redemption of Shares" in the
Prospectus, for certain information as to the redemption and repurchase of Fund
shares.
19
<PAGE>
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 each
Portfolio at such time.
REINSTATEMENT PRIVILEGE
Holders of Class A or Class D shares of any Portfolio who have redeemed
their 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 Portfolio in which they
had invested at net asset value without a sales charge up to the dollar amount
redeemed. The reinstatement privilege may be exercised as follows. A notice to
exercise this privilege along with a check for the amount to be reinstated must
be received by the Transfer Agent within 30 days after the date the request for
redemption was executed 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. Alternatively, the reinstatement privilege may be
exercised through the investor's Merrill Lynch Financial Consultant within 30
days after the date the request for redemption was accepted by the Transfer
Agent or Distributor.
DEFERRED SALES CHARGE -- 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 under most
circumstances, Class B shares of the Insured Portfolio and National Portfolio
redeemed within four years of purchase and Class B shares of the Limited
Maturity Portfolio redeemed within one year of purchase are subject to a CDSC,
the charge is waived on redemptions of Class B shares in certain instances,
including in connection with certain post-retirement withdrawals from an
Individual Retirement Account ("IRA") or other retirement plan or following the
death or disability of a Class B shareholder. Redemptions for which the waiver
applies in the case of such withdrawal are: (a) any partial or complete
redemption in connection with a tax-free distribution following retirement under
a tax-deferred retirement plan or attaining age 59 1/2 in the case of an IRA or
other retirement plan, or part of a series of equal periodic payments (not less
frequently than annually) made for the life (or life expectancy) or any
redemption resulting from the tax-free return of an excess contribution to an
IRA; or, (b) any partial or complete redemption following the death or
disability (as defined in the Code) of a Class B shareholder (including one who
owns the Class B shares as joint tenant with his or her spouse), provided the
redemption is requested within one year of the death or initial determination of
disability.
For the fiscal year ended June 30, 1997, the Distributor received CDSCs of
$979,435 for the Insured Portfolio, $868,705 for the National Portfolio, and
$58,475 for the Limited Maturity Portfolio, with regard to redemptions of Class
B shares, all of which were paid to Merrill Lynch. Additional CDSCs payable to
the Distributor may have been waived or converted to a contingent obligation in
connection with a shareholder's participation in certain fee-based programs. For
the fiscal year ended June 30, 1996, the Distributor received CDSCs of
$1,033,602 for the Insured Portfolio, $771,851 for the National Portfolio, and
$106,430 for the Limited Maturity Portfolio, with regard to redemptions of Class
B shares, all of which were paid to Merrill Lynch. For the fiscal year ended
June 30, 1995, the Distributor received CDSCs of $1,840,608 for the Insured
Portfolio, $1,036,339 for the National Portfolio, and $387,044 for the Limited
Maturity Portfolio, with regard to redemptions of Class B shares, all of which
were paid to Merrill Lynch.
For the fiscal year ended June 30, 1997, the Distributor received CDSCs of
$6,915 for the Insured Portfolio, $10,273 for the National Portfolio, and $395
for the Limited Maturity Portfolio, with regard to
20
<PAGE>
redemptions of Class C shares, all of which were paid to Merrill Lynch.
Additional CDSCs payable to the Distributor may have been waived or converted to
a contingent obligation in connection with a shareholder's participation in
certain fee-based programs. For the fiscal year ended June 30, 1996, the
Distributor received CDSCs of $7,257 for the Insured Portfolio, $6,455 for the
National Portfolio, and $2,130 for the Limited Maturity Portfolio, with regard
to redemptions of Class C shares, all of which were paid to Merrill Lynch. For
the period ended October 21, 1994 (commencement of Class C operations) to June
30, 1995, the Distributor received CDSCs of $5,361 for the Insured Portfolio,
$3,219 for the National Portfolio, and $2,661 for the Limited Maturity
Portfolio, with regard to redemptions of Class C shares, all of which were paid
to Merrill Lynch.
All of such contingent deferred sales charges were attributable to payments
made in connection with redemptions of Class B and Class C shares of the
Portfolios.
Merrill Lynch Blueprint(SM) Program. Class B shares of all three
Portfolios are offered to certain participants in the Merrill Lynch
Blueprint(SM) Program ("Blueprint"). Blueprint is directed to small investors
and participants in certain affinity groups such as trade associations and
credit unions. Class B shares are offered through Blueprint only to members of
certain affinity groups. The CDSC is waived for shareholders who are members of
such affinity groups at the time of placing orders to purchase Class B shares
through Blueprint. However, services, including the exchange privilege,
available to Class B shareholders through Blueprint may differ from those
available to other Class B investors. Orders for purchases and redemptions of
Class B shares of any of the three Portfolios may be grouped for execution
purposes which, in some circumstances, may involve the execution of such orders
two business days following the day such orders are placed. The minimum initial
purchase price is $100, with a $50 minimum for subsequent purchases throughout
Blueprint. There is no minimum initial or subsequent purchase requirement for
investors who are part of the Blueprint automatic investment plan. Additional
information concerning Blueprint, including any annual fees or transaction
charges, is available from Merrill Lynch, Pierce, Fenner & Smith Incorporated.
The Blueprint(SM) Program, P.O. Box 30441, New Brunswick, New Jersey 08989-0441.
DETERMINATION OF NET ASSET VALUE
The net asset value of the shares of each class of each Portfolio of the
Fund is determined once daily, Monday through Friday, as of 15 minutes after the
close of business on the NYSE (generally, 4:00 p.m., New York City time), on
each day on which the NYSE is open for trading. The NYSE is not open on New
Year's Day, Martin Luther King, Jr. Day, Presidents' Day, Good Friday, Memorial
Day, Independence Day, Labor Day, Thanksgiving Day and Christmas Day. The net
asset value per share is computed by dividing the sum of the value of the
portfolio securities held by each Portfolio plus any cash or other assets
(including interest and dividends accrued but not yet received) minus all
liabilities (including accrued expenses) by the total number of shares
outstanding at such time, rounded to the nearest cent. Expenses, including the
investment advisory and any account maintenance and/or distribution fees, are
accrued daily.
The per share net asset value of the Class B, Class C and Class D shares of
a Portfolio generally will be lower than the per share net asset value of the
Class A shares of that Portfolio reflecting the daily expense accruals of the
account maintenance distribution and higher transfer agency fees applicable with
respect to the Class B, Class C and Class D shares and daily expense accruals of
the account maintenance fees applicable with respect to the Class D shares.
Moreover the per share net asset value of the Class B and Class C shares
21
<PAGE>
generally will be lower than the per share net asset value of its Class D shares
reflecting the daily expense accruals of the distribution fees and higher
transfer agency fees applicable with respect to the Class B and Class C shares.
It is expected, however, that the per share net asset value of the four classes
of a Portfolio will tend to converge, although not necessarily meet, immediately
after the payment of dividends, which will differ by approximately the amount of
the expense accrual differential among the classes.
The Municipal Bonds and money market securities in which each Portfolio
invests are traded primarily in the over-the-counter markets and are valued at
the most recent bid price or yield equivalent as obtained from dealers that make
markets in such securities. Positions in futures contracts are valued at closing
prices for such contracts established by the exchange on which they are traded
on each day during which trading is conducted thereon. Assets for which market
quotations are not readily available are valued at fair value on a consistent
basis using methods determined in good faith by the Board of Directors,
including valuations furnished by a pricing service retained by the Fund, which
may utilize a matrix system for valuations.
It is the intention of FAM, subject to guidelines established by the Board
of Directors of the Fund, to hold Insured Municipal Bonds in the Insured
Portfolio that are in default, or in significant risk of default, in the payment
of principal or interest until the default has been cured or the principal and
interest are paid by the issuer or the insurer. In accordance with such
guidelines, FAM will consider the following factors in determining the effective
value of Insured Municipal Bonds in the Insured Portfolio that are in default,
or in significant risk of default, in the payment of principal or interest: (1)
the market value of the bonds; (2) the market value of securities of similar
issuers whose securities carry similar interest rates; and (3) the value of the
insurance guaranteeing interest and principal payments. Absent unusual or
unforeseen circumstances, the value ascribed to the insurance feature of the
bonds would be the difference between the market value of the bonds and the
market value of securities of a similar nature which are not in default or
significant risk of default. It is the position of the Board of Directors that
this is a fair method of valuing the insurance feature and reflects a proper
valuation method in accordance with the provisions of the Investment Company
Act. This method of valuing securities will mean that shareholders of the
Insured Portfolio, whether they decide to redeem or decide to retain their
investment in the Insured Portfolio, will in normal circumstances receive the
benefit of the insurance. Because of the unusual circumstances surrounding the
bonds held in the Insured Portfolio that were in default at the end of the
Fund's last fiscal year, the insurance feature was valued in an amount that,
when combined with the market value of the bonds, resulted in the bonds' having
an effective value of par.
PORTFOLIO TRANSACTIONS AND BROKERAGE COMMISSIONS
Under the Investment Company Act, persons affiliated with the Fund are
prohibited from dealing with the Fund as a principal in the purchase and sale of
securities unless an exemptive order allowing such transactions is obtained from
the Commission. Since over-the-counter transactions are usually principal
transactions, affiliated persons of the Fund, including Merrill Lynch, may not
serve as a dealer in connection with transactions with the Fund. However, the
Fund has obtained an exemptive order permitting it to engage in certain
principal transactions involving high quality short-term Municipal Bonds.
Affiliated persons of the Fund may serve as its broker 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 Investment Company Act in order to seek to recapture underwriting and
dealer spreads from affiliated entities. The Directors have considered the
possibilities of seeking to recapture spreads for the benefit of the
22
<PAGE>
Fund and, after considering factors deemed relevant, have made a determination
not to seek such recapture at this time. The Board will reconsider this matter
from time to time.
Under the Investment Company Act, the Fund may not purchase Municipal Bonds
from any underwriting syndicate of which Merrill Lynch is a member except
pursuant to an exemptive order or rules adopted by the Commission. During the
year ended June 30, 1995, the Fund purchased $79,188,750 of Municipal Bonds in
20 transactions pursuant to an exemptive order or such a rule. During the fiscal
years ended June 30, 1996 and June 30, 1997, the Fund did not engage in any
transactions pursuant to such order. For the fiscal years ended June 30, 1995,
June 30, 1996 and June 30, 1997, the National Portfolio paid total brokerage
commissions of $315,000, $20,250 and $29,400, respectively, none of which was
paid to Merrill Lynch. For the same fiscal periods, the Insured Portfolio and
the Limited Maturity Portfolio paid no brokerage commissions.
The Fund does not expect to use any particular dealer in the execution of
transactions for its Portfolios, but, subject to obtaining the best net results,
dealers who provide supplemental investment research (such as economic data and
market forecasts) to FAM may receive orders for transactions by any Portfolio.
Information so received will be in addition to and not in lieu of the services
required to be performed by FAM under its Investment Advisory Agreement and
FAM's expenses will not necessarily be reduced as a result of the receipt of
such supplemental information.
FAM expects that the portfolio turnover rate for the Insured Portfolio and
the National Portfolio should not generally exceed 100%. Because of the
short-term nature of the Limited Maturity Portfolio, its turnover rate may be
substantially higher. In any particular year, however, market conditions could
result in portfolio activity of a Portfolio at a greater or lesser rate than
anticipated. The portfolio turnover rates for the Insured Portfolio for the
fiscal years ended June 30, 1997 and June 30, 1996 were 74.40% and 78.49%,
respectively. The portfolio turnover rates for the National Portfolio for the
fiscal years ended June 30, 1997 and June 30, 1996 were 99.52% and 95.09%,
respectively. The portfolio turnover rates for the Limited Maturity Portfolio
for the fiscal years ended June 30, 1997 and June 30, 1996 were 61.90% and
88.32%, respectively.
DIVIDENDS, DISTRIBUTIONS AND TAXES
Reference is made to "Additional Information -- Dividends and
Distributions" and "Additional Information -- Federal Income Taxes" in the
Prospectus.
Each Portfolio intends to qualify to pay "exempt-interest" dividends as
defined in Section 852(b)(5) of the Internal Revenue Code of 1986, as amended
(the "Code"). Under that section if, at the close of each quarter of its taxable
year, at least 50% of the value of its total assets consists of obligations
exempt from federal income tax ("tax-exempt obligations"), pursuant to Section
103(a) of the Code (relating to obligations of a state, territory, or a
possession of the United States, or any political sub-division of any of the
foregoing, or of the District of Columbia), the Portfolio will be qualified to
pay exempt-interest dividends to its shareholders. Exempt-interest dividends are
dividends or any part thereof (other than any capital gain distributions) paid
by the Portfolio which are attributable to interest on tax-exempt obligations
and designated by the Portfolio as exempt-interest dividends in a written notice
mailed to the Portfolio's shareholders within sixty days after the close of its
taxable year. The percentage of the total dividends paid by the Portfolio during
any taxable year which qualifies as exempt-interest dividends will be the same
for all shareholders of each Portfolio receiving dividends during such year.
Exempt-interest dividends may be treated by shareholders for all purposes as
items of interest excludible from their gross income under Section 103(a) of the
Code. However, a shareholder is advised to consult his or her tax adviser with
respect to whether exempt-interest
23
<PAGE>
dividends retain the exclusion under Section 103(a) if such shareholder would be
treated as a "substantial user" under Section 147(a)(1) with respect to some or
all of the tax-exempt obligations held by the Portfolio.
Dividends paid by each Portfolio from its taxable income (i.e., interest on
money market securities) and distributions of net realized short-term capital
gains (whether from tax-exempt or taxable obligations) are taxable to
shareholders as ordinary income. If a Portfolio acquires tax-exempt obligations
having market discount (generally, obligations acquired for a price less than
their principal amount) after April 30, 1993, gain on the disposition or
retirement of such obligations will be treated as ordinary income to the extent
of accrued market discount. To the extent the Portfolio has both taxable and
tax-exempt income, expenses of the Fund will be allocated between the taxable
and the tax-exempt income on a proportional basis. Since the Portfolio will not
invest in the stock of domestic corporations, the dividends received deductions
for corporations will not be available. The per share dividends on Class B and
Class C shares of any Portfolio will be lower than the per share dividends on
Class A and Class D shares of those Portfolios as a result of the account
maintenance distribution and higher transfer agency fees applicable to Class B
and Class C shares; similarly, the per share dividends and distributions on
Class D shares will be lower than the per share dividends and distributions on
Class A shares as a result of the account maintenance fees applicable with
respect to the Class D shares. See "Net Asset Value." The Code provides that
interest on indebtedness incurred or continued to purchase or carry shares of
the Portfolio is not deductible to the extent attributable to exempt-interest
dividends.
As a result of trading in futures contracts, a Portfolio may realize net
capital gains which, when distributed to shareholders, would be taxable in the
hands of the shareholders. For example, if the Portfolios sold municipal bond
index futures contracts in anticipation of a decline in the value of securities
they own and that index in fact declines in value, the Portfolios would realize
a capital gain upon the closing out of that futures contract. Furthermore, if a
Portfolio holds such a futures contract on the last day of its taxable year, it
would be deemed under the Code to have sold that futures contract at its fair
market value on the last day of its taxable year and thus would realize a gain
or loss. Such gain or loss is treated as 60% long-term capital gain or loss and
40% short-term capital gain or loss (hereinafter "blended gain or loss"),
notwithstanding the holding period of the futures contract. Since the futures
transaction was entered into to hedge the anticipated decline in the portfolio
securities of the Portfolio in question, it is likely that the gain on the
futures transactions would be partly or completely offset by a corresponding
decline in the value of the portfolio securities of such Portfolio. However,
unless the Portfolios sell such securities so as to "realize" such losses in a
manner to offset the blended gain for Federal income tax purposes, the Portfolio
would have a blended gain. Such blended gain would result in taxable income to
the shareholders of the Fund.
A redemption resulting in a gain is a taxable event whether or not the
reinstatement privilege is exercised. A redemption resulting in a loss will not
be a taxable event to the extent the reinstatement privilege is exercised and an
adjustment will be made to the shareholder's tax basis in shares acquired
pursuant to the reinstatement. For shares of a Portfolio acquired after October
3, 1989, if a shareholder disposes of those shares and subsequently reacquires
shares of the Portfolio pursuant to the reinstatement privilege, then the
shareholder's tax basis in those shares will be reduced to the extent the sales
charge paid to the Portfolio reduces any sales charge such shareholder would
have been required to pay on the subsequent acquisition in the absence of the
reinstatement privilege. Instead, such sales charge will be treated as an
additional amount paid for the subsequently acquired shares and will be included
in the shareholder's tax basis for such shares.
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
24
<PAGE>
basis in the Class B shares converted, and the holding period of the acquired
Class D shares will include the holding period of the converted Class B shares.
If a shareholder exercises his exchange privilege within 90 days after the
date such shares were acquired to acquire shares in such fund or another fund
("New Fund"), then the loss, if any, recognized on the exchange will be reduced
(or the gain, if any, increased) to the extent the load charge paid to the Fund
reduces any load charge such shareholder would have been required to pay on the
acquisition of the New Fund shares in the absence of the exchange privilege.
Instead, such load charge will be treated as an amount paid for the New Fund
shares and will be included in the shareholder's basis for such 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.
An exchange between funds pursuant to the Exchange Privilege (as described
below on page 29) is treated as a sale of the exchanged shares and a purchase of
the acquired shares for Federal income tax purposes and, depending upon the
circumstances, a short-, mid- or long-term capital gain or loss may be realized.
In addition, any shareholder of the Fund who exercises the Exchange Privilege
and becomes a shareholder of another fund must certify to such other fund his or
her Social Security Number or Taxpayer Identification Number and that he is not
subject to the backup withholding tax if he or she wishes to avoid a 31% backup
withholding tax on the gross proceeds paid by such other fund on redemption of
shares and on dividend distributions made to him or to her by such other fund.
Any dividend declared by a Portfolio in October, November or December of
any year and made payable to shareholders of record in such a month will be
deemed to be received on December 31 of such year if actually paid during the
following January. Accordingly, those dividends, to the extent taxable, will be
taxable to shareholders in the year declared, and not in the year in which
shareholders actually receive the dividend.
Not later than sixty days after the end of each fiscal year of the Fund,
the Fund will send to its shareholders the written notice required by the Code
designating the amount of its dividends that constitute exempt-interest
dividends, the amount of the dividends and distributions which are ordinary
taxable income and the amount of distributions which are taxable to shareholders
as mid- or long-term capital gains.
Every person required to file a tax return must disclose on that return the
amount of exempt-interest dividends received from a Portfolio during the taxable
year. The disclosure of this amount is for information purposes only. In
addition, with respect to a shareholder who receives exempt-interest dividends
on shares held for less than six months, any loss on the sale or exchange of
such shares will, to the extent of the amount of such exempt-interest dividends,
be disallowed.
Interest income with respect to certain tax-exempt bonds, known as "private
activity" bonds, is a preference item for purposes of the corporate and
individual alternative minimum tax. To the extent that a Portfolio invests in
private activity bonds, shareholders of the Portfolio will have preference items
attributable to their proportionate shares of the interest income received by
the Portfolio from such bonds, thereby increasing a shareholder's alternative
minimum taxable income. In addition, a corporation must increase its alternative
minimum taxable income by 75 percent of the amount by which adjusted current
earnings exceed alternative minimum taxable income (without regard to this
provision or the alternative net operating loss
25
<PAGE>
deduction). Adjusted current earnings are computed by making certain
adjustments, which generally follow the rules applicable to corporations in
computing earnings and profits. All tax-exempt dividends received by the
corporate shareholders of a Portfolio are included in their current earnings,
thus, increasing a corporate shareholders' alternative minimum taxable income.
The Code imposes a four percent nondeductible excise tax on a regulated
investment company, such as a Portfolio of the Fund, if the company does not
distribute to its shareholders during the calendar year an amount equal to 98
percent of the investment company's taxable income, with certain adjustments,
for such calendar year, plus 98 percent of the company's capital gain net income
for the one-year period ending on October 31 of such calendar year. In addition,
an amount equal to any undistributed investment company taxable income or
capital gain net income from the previous calendar year must also be distributed
to avoid the excise tax. The excise tax is imposed on the amount by which a
company does not meet the foregoing distribution requirements. The excise tax
will not, however, generally apply to the tax-exempt income of a regulated
investment company, such as a Portfolio of the Fund, that pays exempt-interest
dividends. In addition, if a Portfolio has taxable income that would be subject
to the excise tax, the Fund intends to distribute the income of such Portfolio
so as to avoid payment of the excise tax.
At June 30, 1997, the Fund had a net capital loss carryforward as follows:
Approximately $4,620,000 in the Insured Portfolio, of which $1,981,000 expires
in 2003 and $2,639,000 expires in 2004; approximately $48,141,000 in the
National Portfolio, of which $19,665,000 expires in 2003 and $28,476,000 expires
in 2004; and approximately $4,658,000 in the Limited Maturity Portfolio, of
which $2,590,000 expires in 1998, $22,000 expires in 1999, $25,000 expires in
2002 and $2,021,000 expires in 2003. These amounts will be available to offset
like amounts of any future taxable gains.
The foregoing is a general and abbreviated summary of the applicable
provisions of the Code and Treasury Regulations presently in effect. For the
complete provisions, reference should be made to the pertinent Code sections and
the Treasury Regulations promulgated thereunder. The Code and these Regulations
are subject to change by legislative or administrative action.
SHAREHOLDER SERVICES
The Fund offers a number of shareholder services, described below, that are
designed to facilitate investment in its shares. Full details as to each of such
services and copies of the various plans described below can be obtained from
the Fund, the Distributor or Merrill Lynch. Certain of these services are
available only to United States investors.
INVESTMENT ACCOUNT
Each shareholder whose account is maintained at the Transfer Agent has an
Investment Account and will receive statements, at least quarterly, from the
Transfer Agent. These statements will serve as transaction confirmations for
automatic investment purchases and the reinvestment of income dividends and
long-term capital gains 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
ordinary income dividends and long-term capital gains distributions. A
shareholder may make additions to his Investment Account at any time by mailing
a check directly to the Transfer Agent.
26
<PAGE>
Share certificates are issued only for full shares and only upon the
specific request of the shareholder. Issuance of certificates representing all
or only part of the full shares in an Investment Account may be requested by a
shareholder directly from the Transfer Agent.
Shareholders considering transferring their Class A or Class D shares from
Merrill Lynch to another brokerage firm or financial institution should be aware
that, if the firm to which the Class A or Class D shares are to be transferred
will not take delivery of shares of the Fund, a shareholder either must redeem
the Class A or Class D shares 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
or she be issued certificates for his or her shares, and then must turn the
certificates over to the new firm for re-registration as described in the
preceding sentence.
AUTOMATIC INVESTMENT PLANS
A shareholder may make additions to the Investment Account at any time by
purchasing Class A shares (if he or she is an eligible Class A investor as
described in the Prospectus) or Class B, Class C or Class D shares at the
applicable public offering price either through the shareholder's securities
dealer or by mail directly to the Transfer Agent, acting as agent for such
securities dealer. 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. For
investors who buy shares of the Fund through Blueprint, no minimum charge to the
investors' bank account is required. Investors who maintain CMA(R) or CBA(R)
accounts may arrange to have periodic investments made in the Fund, in the
CMA(R) or CBA(R) accounts or in certain related accounts in amounts of $100 or
more ($1 for retirement accounts) through the CMA(R) or CBA(R) Automated
Investment Program. The Automatic Investment Plan is not available for Class C
shares of the Limited Maturity Portfolio.
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, without sales charge, as
of the close of business on the NYSE on the ex-dividend date of such dividend or
distribution. 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 or direct deposited on or about the payment date.
Shareholders may, at any time, notify the Transfer Agent in writing or by
telephone ((800)-MER-FUND) that they no longer wish to have their dividends
and/or distributions reinvested in shares of the Fund or vice versa and,
commencing ten days after the receipt by the Transfer Agent of such notice,
those instructions will be effected.
27
<PAGE>
SYSTEMATIC WITHDRAWAL PLANS
A shareholder of any of the three Portfolios may elect to make systematic
withdrawals from an Investment Account of Class A, Class B, Class C or Class D
shares in the form of payments by check or through automatic payment by direct
deposit to such shareholder's bank account on either a monthly or calendar
quarterly basis as provided below. Quarterly withdrawals are available for
shareholders who have acquired shares of the Fund having a value, based on cost
or the current offering price, of $5,000 or more, and monthly withdrawals are
available for shareholders with shares having a value of $10,000 or more.
At the time of each withdrawal payment, sufficient 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 the dollar amount and class of shares to be redeemed. Redemptions will
be made at net asset value as determined once daily by FAM immediately after the
declaration of dividends as of 15 minutes after the close of business on the
NYSE (generally 4:00 p.m. New York City time) on the 24th day of each month or
the 24th day of the last month of each quarter, whichever is applicable. If the
NYSE is not open for business on that day, the shares will be redeemed at the
close of business on the following business day. The check for the withdrawal
payment will be mailed or the direct deposit for the withdrawal payment will be
made, on the next business day following redemption. When a shareholder is
making systematic withdrawals, dividends and distributions on all shares in the
Investment Account are reinvested automatically in shares of the Fund. A
shareholder's Systematic Withdrawal Plan may be terminated at any time, without
a charge or penalty, by the shareholder, the Fund, 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 shares concurrent with
withdrawals are ordinarily disadvantageous to the shareholder because of sales
charges and tax liabilities. The Fund will not knowingly accept purchase orders
for shares of the Fund from investors 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. With respect to redemptions of Class B and Class C shares pursuant
to a systematic withdrawal plan, the maximum number of Class B or Class C shares
that can be redeemed from an account annually shall not exceed 10% of the value
of shares of such class in that account at the time the election to join the
systematic withdrawal plan was made. Any CDSC that otherwise might be due on
such redemption of Class B or Class C shares will be waived. Shares redeemed
pursuant to a systematic withdrawal plan will be redeemed in the same order as
Class B or Class C shares are otherwise redeemed. See "Purchase of
Shares -- Deferred Sales Charge Alternatives -- Class B and Class C
Shares -- Contingent Deferred Sales Charge -- Class B Shares" and "Contingent
Deferred Sales Charges -- Class C Shares" in the Prospectus. Where the
systematic withdrawal plan is applied to Class B Shares, upon conversion of the
last Class B shares in an account to Class D shares, the systematic withdrawal
plan will automatically be applied thereafter to Class D shares. See "Purchase
of Shares -- Deferred Sales Charge Alternatives -- Class B and Class C
Shares -- Conversion of Class B Shares to Class D Shares" in the Prospectus; if
an investor wishes to change the amount being withdrawn in a systematic
withdrawal plan the investor should contact his or her Financial Consultant.
Alternatively, a shareholder whose shares are held within a CMA(R), CBA(R)
or Retirement Account may elect to have shares redeemed on a monthly, bimonthly,
quarterly, semiannual or annual basis through the CMA(R) or CBA(R) Systematic
Redemption Program. The minimum fixed dollar amount redeemable is $50.
28
<PAGE>
The proceeds of systematic redemptions will be posted to the shareholder's
account five business days after the date the shares are redeemed all
redemptions are made at net asset value. A shareholder may elect to have his or
her shares redeemed on the first, second, third or fourth Monday of each month,
in the case of monthly redemptions, or of every other month, in the case of
bimonthly redemptions. For quarterly, semiannual or annual redemptions, the
shareholder may select the month in which the shares are to be redeemed and may
designate whether the redemption is to be made on the first, second, third or
fourth Monday of the month. If the Monday selected is not a business day, the
redemption will be processed at net asset value on the next business day. The
CMA(R) or CBA(R) Systematic Redemption Program is not available if Fund shares
are being purchased within the account pursuant to the Automatic Investment
Program. For more information on the CMA(R) or CBA(R) Systematic Redemption
Program, eligible shareholders should contact their Merrill Lynch Financial
Consultant.
EXCHANGE PRIVILEGE
U.S. Shareholders of each class of shares of a Portfolio of the Fund have
an exchange privilege (the "Exchange Privilege") with other Portfolios of the
Fund and with certain other MLAM-advised mutual funds listed below. Under the
Merrill Lynch Select Pricing(SM) System, Class A shareholders may exchange Class
A shares of a Portfolio for Class A shares of another Portfolio or a second
MLAM-advised mutual fund if the shareholder holds any Class A shares of the
other Portfolio or second fund in the account in which the exchange is made at
the time of the exchange or is otherwise eligible to purchase Class A shares of
the second fund. If the Class A shareholder wants to exchange Class A shares for
shares of another Portfolio or a second MLAM-advised mutual fund, and the
shareholder does not hold Class A shares of the other Portfolio or second fund
in his account at the time of the exchange and is not otherwise eligible to
acquire Class A shares of the other Portfolio or second fund, the shareholder
will receive Class D shares of the other Portfolio or second fund as a result of
the exchange. Class D shares also may be exchanged for Class A shares of another
Portfolio or 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 other
Portfolio or second fund in the account in which the exchange is made or is
otherwise eligible to purchase Class A shares of the other Portfolio or second
fund. Class B, Class C and Class D of a Portfolio shares will be exchangeable
with shares of the same class of another Portfolio or 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 Portfolio is "tacked" to the holding period of the newly
acquired shares of the other Portfolio or other MLAM-advised mutual 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, except that there is no minimum value of
shares that must be exchanged by shareholders of the Insured Portfolio who
exchange their shares for shares of either the National Portfolio or the Limited
Maturity Portfolio and any shares utilized in an exchange must have been held by
the shareholder for at least 15 days. The Exchange Privilege available to
participants in the Merrill Lynch Blueprint(SM) Program may be different from
that available to other investors.
Exchanges of Class A and Class D shares of a Portfolio outstanding
("outstanding Class A and Class D shares") for Class A or Class D shares of
another Portfolio or 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
29
<PAGE>
respectively, plus an amount equal to the difference, if any, between the sales
charge previously paid on the outstanding Class A or Class D shares and the
sales charge payable at the time of the exchange on the new Class A or Class D
shares. With respect to outstanding Class A or Class D shares as to which
previous exchanges have taken place, the 'sales charge previously paid' will
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, dividend reinvestment Class A or Class D shares will be
exchanged into the Class A or Class D shares of the other funds or into shares
of the Class A or Class D money market funds without a sales charge.
In addition, the Fund offers to exchange Class B and Class C shares of a
Portfolio outstanding ("outstanding Class B or Class C shares") for Class B or
Class C shares respectively of another Portfolio or any of the other
MLAM-advised mutual funds ("new Class B or Class C shares") on the basis of
relative net asset value per Class B or Class C share, without the payment of
any CDSC that might otherwise be due on redemption of the outstanding shares.
Class B shareholders of a Portfolio exercising the Exchange Privilege will
continue to be subject to that Portfolio's CDSC schedule if such schedule is
higher than the CDSC schedule relating to the new Class B shares acquired
through the use of the Exchange Privilege. In addition, Class B shares of the
Portfolio acquired through the use of the Exchange Privilege will be subject to
that Portfolio's CDSC schedule if such schedule is higher than the CDSC schedule
relating to the Class B shares of the fund or Portfolio 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 or
Class C shares of the National Portfolio for those of the Merrill Lynch Basic
Value Fund, Inc. after having held the National Portfolio Class B shares for two
and a half years. The 2% contingent deferred sales charge that generally would
apply to a redemption would not apply to the exchange. Two years later the
investor may decide to redeem the Class B shares of Merrill Lynch Basic Value
Fund, Inc. and receive cash. There will be no CDSC due on this redemption, since
by "tacking" the two and a half year holding period of National Portfolio Class
B shares to the two year holding period for the Merrill Lynch Basic Value Fund,
Inc. Class B shares, the investor will be deemed to have held the new Class B
shares for more than four years.
Shareholders also may exchange shares of the Fund into shares of certain
money market funds advised by the Investment Adviser or its affiliates, but the
period of time that Class B or Class C shares are held in a Class B or Class C
money market fund will not count towards satisfaction of the holding period
requirement for purposes of reducing the CDSC or, with respect to the Class B
shares, towards satisfaction of the conversion period. However, Class B shares
of a money market fund that were acquired as a result of an exchange for Class B
or Class C shares of a fund may, in turn, be exchanged back into Class B or
Class C shares of any fund offering such shares, in which event the holding
period for Class B or Class C shares of the newly acquired fund will be
aggregated with previous holding periods for purposes of reducing the CDSC.
Thus, for example, an investor may exchange Class B shares of the National
Portfolio for shares of Merrill Lynch Institutional Fund ("Institutional Fund")
after having held the Class B shares for two and a half years, and two years
later decide to redeem the shares of Institutional Fund for cash. At the time of
this redemption, the 2% CDSC that would have been due had the Class B shares of
the National Portfolio been redeemed for cash rather than exchanged for shares
of Institutional Fund will be payable. If, instead of such redemption the
30
<PAGE>
shareholder exchanged such shares for Class B shares of a fund which the
shareholder continued to hold for an additional one and a half years, any
subsequent redemption will not incur a CDSC.
Before effecting an exchange, shareholders of the Fund should obtain a
currently effective prospectus of the fund into which the exchange is to be
made. Exercise of the Exchange Privilege is treated as a sale for Federal income
tax purposes and, depending on the circumstances, a short- or long-term capital
gain or loss may be realized. In addition, a shareholder exchanging shares of
any of the funds may be subject to a backup withholding tax unless such
shareholder certifies under penalty of perjury that the taxpayer identification
number on file with any such fund is correct and that such shareholder is not
otherwise subject to backup withholding. See "Dividends, Distributions and
Taxes" above.
To exercise the Exchange Privilege, shareholders should contact their
listed dealer, who will advise the Fund of the exchange, or the shareholder may
write to the Transfer Agent requesting that the exchange be effected. Such
letter must be signed exactly as the account is registered with signature(s)
guaranteed by "eligible guarantor institution" (including, for example, Merrill
Lynch branch offices and certain other financial institutions) as such is
defined in Rule 17Ad-15 under the Securities Exchange Act of 1934, as amended,
the existence and validity of which may be verified by the transfer agent
through the use of industry publications. 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. These funds may suspend the continuous
offering of their shares to the public at any time and may thereafter resume
such offering from time to time.
The Exchange Privilege may be modified or terminated at any time on 60
days' notice. The Fund reserves the right to limit the number of times an
investor may exercise the Exchange Privilege. The exchange privilege is
available only to U.S. shareholders in states where the exchange legally may be
made.
PERFORMANCE DATA
From time to time the Fund may include its average annual total return and
other total return data, as well as yield and tax equivalent yield, in
advertisements or information furnished to present or prospective shareholders.
Total return, yield, and tax equivalent yield figures are based on the Fund's
historical performance and are not intended to indicate future performance.
Average annual total return, yield and tax equivalent yield are determined
separately for Class A, Class B, Class C and Class D shares, in accordance with
formulas specified by the Commission.
Average annual total return quotations for the specified periods are
computed by finding the average annual compounded rates of return (based on net
investment income and any realized and unrealized capital gains or losses on
portfolio investments over such periods) that would equate the initial amount
invested to the redeemable value of such investment at the end of each period.
Average annual total return is computed assuming all dividends and distributions
are reinvested and taking into account all applicable recurring and nonrecurring
expenses, including the maximum sales charge in the case of Class A and Class D
shares and the CDSC that would be applicable to a complete redemption of the
investment at the end of the specified period in the case of Class B and Class C
shares.
31
<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 (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 calculation of including or excluding the maximum applicable
sales charges, actual annual or annualized total return data generally will be
lower than average annual total return data since the average rates of return
reflect compounding of return. Aggregate total return data generally will be
higher than average annual total return data since the aggregate rates of return
reflect compounding over a longer period of time.
Set forth below is total return information for each class of shares of
each Portfolio for the periods indicated.
AVERAGE ANNUAL TOTAL RETURN
(INCLUDING MAXIMUM APPLICABLE SALES CHARGES)
<TABLE>
<CAPTION>
EXPRESSED AS A PERCENTAGE BASED ON A REDEEMABLE VALUE OF A HYPOTHETICAL
$1,000 INVESTMENT AT THE END OF THE
HYPOTHETICAL $1,000 INVESTMENT PERIOD
-------------------------------------- --------------------------------------
LIMITED LIMITED
INSURED NATIONAL MATURITY INSURED NATIONAL MATURITY
PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO
---------- ---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
One Year Ended June 30, 1997
Class A....................... 3.41% 4.49% 3.35% $ 1,034.10 $ 1,044.90 $ 1,033.50
Class B....................... 2.78 3.92 3.13 1,027.80 1,039.20 1,031.30
Class C....................... 5.86 6.97 3.11 1,058.60 1,069.70 1,031.10
Class D....................... 3.16 4.23 3.35 1,031.60 1,042.30 1,033.50
Five Years Ended June 30, 1997
Class A....................... 5.67% 6.13% 3.84% $ 1,317.80 $ 1,346.70 $ 1,207.10
Class B....................... 5.71 6.20 -- 1,320.30 -- --
Ten Years Ended June 30, 1997
Class A....................... 7.42% 7.57% 4.94% $ 2,045.30 $ 2,074.90 $ 1,620.10
Class B 10/21/88-6/30/97...... 6.86 7.08 -- 1,780.60 1,811.90 --
Class B 11/02/92-6/30/97...... -- -- 3.63 -- -- 1,180.50
Inception (October 21, 1994) to
June 30, 1997
Class C....................... 7.57% 8.19% 3.95% $ 1,217.10 $ 1,235.80 $ 1,109.70
Class D....................... 6.55 7.19 3.96 1,186.10 1,205.30 1,110.10
</TABLE>
32
<PAGE>
ANNUAL TOTAL RETURN
(EXCLUDING MAXIMUM APPLICABLE SALES CHARGE)
<TABLE>
<CAPTION>
LIMITED LIMITED
INSURED NATIONAL MATURITY INSURED NATIONAL MATURITY
YEAR ENDED JUNE 30, PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO
- -------------------------------- --------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
1997
(Class A)..................... 7.72% 8.84% 4.40% $1,077.20 $1,088.50 $1,044.00
(Class B)..................... 6.78 7.92 4.13 1,067.80 1,079.20 1,041.30
(Class C)..................... 6.86 7.97 4.11 1,068.60 1,079.70 1,041.10
(Class D)..................... 7.46 8.57 4.40 1,074.60 1,085.70 1,044.00
1996
(Class A)..................... 5.51 6.98 3.75 1,055.10 1,069.80 1,037.50
(Class B)..................... 4.71 6.17 3.37 1,047.10 1,061.70 1,033.70
(Class C)..................... 4.65 6.01 2.97 1,046.50 1,060.10 1,029.70
(Class D)..................... 5.25 6.71 3.55 1,052.50 1,067.10 1,035.50
1995
(Class A)..................... 8.60 7.89 4.53 1,086.00 1,078.90 1,045.30
(Class B)..................... 7.91 7.28 4.14 1,079.10 1,072.80 1,041.40
(Class C)**................... 8.83 7.97 3.52 1,088.30 1,079.70 1,035.20
(Class D)**................... 9.24 8.37 3.73 1,092.40 1,083.70 1,037.30
1994
(Class A)..................... (1.08) (0.47) 2.30 989.20 995.30 1,023.00
(Class B)..................... (1.81) (1.39) 1.98 981.90 986.10 1,019.80
1993
(Class A)..................... 12.41 12.19 5.28 1,124.10 1,121.90 1,052.80
(Class B)*.................... 11.44 11.45 3.26 1,114.40 1,114.50 1,032.60
1992
(Class A)..................... 12.11 13.09 6.93 1,121.10 1,130.90 1,069.30
(Class B)..................... 11.27 12.25 -- 1,112.70 1,122.50 --
1991
(Class A)..................... 8.84 7.94 6.45 1,088.40 1,079.40 1,064.50
(Class B) 8.02 7.14 -- 1,080.20 1,071.40 --
1990
(Class A)..................... 5.76 5.53 6.16 1,057.60 1,055.30 1,061.60
(Class B) 4.98 4.74 -- 1,049.80 1,047.40 --
1989
(Class A)..................... 11.62 11.89 5.96 1,116.20 1,118.90 1,059.60
(Class B)(10/21/88-6/30/89)... 6.88 6.48 -- 1,068.80 1,064.80 --
1988............................ 7.75 6.89 4.83 1,077.50 1,068.90 1,048.30
1987............................ 6.94 7.99 4.99 1,069.40 1,079.90 1,049.90
1986............................ 15.62 17.09 6.50 1,156.20 1,170.90 1,065.00
1985............................ 22.21 22.36 8.72 1,222.10 1,223.60 1,087.20
1984............................ 3.00 4.44 5.58 1,030.00 1,044.40 1,055.80
1983............................ 31.60 32.66 8.59 1,316.00 1,326.60 1,085.90
1982............................ (.33) 2.73 7.96 996.70 1,027.30 1,079.60
1981............................ (10.27) (2.72) 4.55 897.30 972.80 1,045.50
1980............................ (5.88) 4.21 5.91 941.20 1,042.10 1,059.10
</TABLE>
- ---------------
* November 2, 1992 to June 30, 1993 for Limited Maturity Portfolio.
** October 21, 1994 (commencement of operations) to June 30, 1995 for Class C
and Class D Shares.
33
<PAGE>
AGGREGATE TOTAL RETURN
(INCLUDING MAXIMUM APPLICABLE SALES CHARGES)
<TABLE>
<CAPTION>
LIMITED LIMITED
INSURED NATIONAL MATURITY INSURED NATIONAL MATURITY
YEAR ENDED JUNE 30, PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO
- ------------------------- ------- -------- -------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
From Inception to June
30, 1997**
Class A................ 260.63% 363.16% 169.91% $3,606.30 $4,631.60 $2,699.10
Class B................ 78.06 81.19 18.05 1,780.60 1,811.90 1,180.50
Class C................ 21.71 23.58 10.97 1,217.10 1,235.80 1,109.70
Class D................ 18.61 20.53 11.01 1,186.10 1,205.30 1,110.10
</TABLE>
- ---------------
** Commencement of operations is November 2, 1979 for Class A shares of National
Portfolio and shares of Limited Maturity Portfolio, October 21, 1977 for
Class A shares of Insured Portfolio, and October 21, 1988 for Class B shares
of National Portfolio and Insured Portfolio, and November 2, 1992 for Class B
shares of Limited Maturity Portfolio. Commencement of operations is October
21, 1994 for Class C and Class D shares of each Portfolio.
In order to reflect the reduced sales charges applicable to certain
investors the performance data in advertisements distributed to investors whose
purchases are subject to reduced sales load, in the case of Class A or Class D
shares, or waiver of the contingent deferred sales charge in the case of the
Class B and Class C shares, may take into account the reduced, and not the
maximum, sales charge or may not take into account the contingent deferred sales
charge and therefore may reflect greater total return since, due to the reduced
sales charge, a lower amount of expenses is deducted.
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
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 adding the result to that part, if any, of the Fund's
yield that is not tax-exempt.
The following table sets forth the yield for the 30-day period ending June
30, 1997 for each class of each Portfolio.
<TABLE>
<CAPTION>
FOR THE PERIOD ENDING JUNE 30, 1997
-----------------------------------------------------------------------
YIELD
-----------------------------------------------------------------------
INSURED PORTFOLIO NATIONAL PORTFOLIO LIMITED MATURITY PORTFOLIO
----------------- ------------------ --------------------------
<S> <C> <C> <C>
Class A............... 4.91% 4.92% 3.90%
Class B............... 4.36% 4.37% 3.58%
Class C............... 4.30% 4.32% 3.56%
Class D............... 4.66% 4.68% 3.80%
</TABLE>
34
<PAGE>
The tax equivalent yield for the same period (based on a tax rate of 28%)
was:
<TABLE>
<CAPTION>
INSURED PORTFOLIO NATIONAL PORTFOLIO LIMITED MATURITY PORTFOLIO
----------------- ------------------ --------------------------
<S> <C> <C> <C>
Class A............... 6.82% 6.83% 5.42%
Class B............... 6.06% 6.07% 4.97%
Class C............... 5.97% 6.00% 4.94%
Class D............... 6.47% 6.50% 5.28%
</TABLE>
Total return, yield and tax equivalent yield figures are based on each
Portfolio's historical performance and are not intended to indicate future
performance. Each Portfolio's total return, yield and tax equivalent yield will
vary depending on market conditions, the securities comprising the Portfolio,
the Portfolio's operating expenses and the amount of realized and unrealized net
capital gains or losses during the period. The value of an investment in a
Portfolio will fluctuate and an investor's shares, when redeemed, may be worth
more or less than their original cost.
ADDITIONAL INFORMATION
ORGANIZATION OF THE FUND
The Fund, a Maryland corporation, is a diversified, open-end management
investment company that commenced operations on October 21, 1977. Prior to
September 21, 1979, the Fund consisted solely of the Insured Portfolio.
Currently, the Fund is comprised of three separate Portfolios: Insured
Portfolio, National Portfolio and Limited Maturity Portfolio.
The authorized capital stock of the Fund consists of 3,850,000,000 shares
of Common Stock, divided into three series, each of which is divided into four
classes, having a par value of $0.10 per share. The shares
of Insured Portfolio Series Common Stock (500,000,000 Class A, 375,000,000 Class
B shares, 375,000,000 Class C shares, 500,000,000 Class D shares authorized),
National Portfolio Series Common Stock (375,000,000 Class A, 375,000,000 Class B
shares, 375,000,000 Class C shares, 375,000,000 Class D shares authorized),
which does business under the name "National Portfolio," and Limited Maturity
Portfolio Series Common Stock (150,000,000 Class A, 150,000,000 Class B shares,
150,000,000 Class C shares, 150,000,000 Class D shares authorized) are divided
into four classes, designated Class A, Class B, Class C and Class D Common
Stock. Each Class A, Class B, Class C and Class D share of common stock of each
of the Portfolios represents an interest in the same assets of such Portfolio
and are identical in all respects to the shares of the other classes except that
the 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 of
shares of a Portfolio has exclusive voting rights with respect to matters
relating to account maintenance services and distribution expenditures relative
to that Portfolio, as applicable (except that Class B shareholders have certain
voting rights with respect to the Class D Distribution Plan). Only shares of
each respective Portfolio are entitled to vote on matters concerning only that
Portfolio.
Each issued and outstanding share is entitled to one vote and to
participate equally in dividends and distributions declared by the respective
Portfolios and in net assets of the respective Portfolios upon liquidation or
dissolution remaining after satisfaction of outstanding liabilities, except, as
noted above, the Class B,
35
<PAGE>
Class C and Class D shares of the Portfolios bear certain expenses related to
the distribution of such shares. The shares of each Portfolio, when issued, will
be fully paid and nonassessable, have no preference, pre-emptive, conversion,
exchange or similar rights. Shares have the conversion rights described in the
Prospectus. Holders of shares of any Portfolio are entitled to redeem their
shares as set forth under "Redemption of Shares." Shares do not have cumulative
voting rights, and the holders of more than 50% of the shares of the Fund voting
for the election of Directors can elect all of the Directors of the Fund if they
choose to do so and in such event the holders of the remaining shares would not
be able to elect any Directors. Stock certificates will be issued by the
Transfer Agent only on specific request. Certificates for fractional shares are
not issued in any case. Shareholders are entitled to redeem their shares as set
forth under "Redemption of Shares."
DESCRIPTION OF TEMPORARY INVESTMENTS
The short-term money market securities in which the Portfolios may invest
as temporary investments consist of U.S. Government securities, U.S. Government
agency securities, domestic bank certificates of deposit and bankers'
acceptances, short-term corporate debt securities such as commercial paper, and
repurchase agreements. The money market securities must have a stated maturity
not in excess of one year from the date of purchase. U.S. Government securities
consist of various types of marketable securities issued by or guaranteed as to
principal and interest by the U.S. Government and supported by the full faith
and credit of the U.S. Treasury. U.S. Government agency securities consist of
debt securities issued by government sponsored enterprises, federal agencies and
international institutions. Such securities are not direct obligations of the
Treasury but involve government sponsorship or guarantees by government agencies
or enterprises. The Fund has established the following standards with respect to
money market securities in which the Portfolios invest. Commercial paper
investments at the time of purchase must be rated "A" by Standard & Poor's
Ratings Services ("S&P") or "Prime" by Moody's Investors Service, Inc.
("Moody's") or, if not rated, issued by companies having an outstanding debt
issue rated at least "A" by S&P 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 S&P or by Moody's.
The Portfolios may not invest in any securities issued by a commercial bank or a
savings and loan association unless the bank or association 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.
INSURANCE ON PORTFOLIO SECURITIES
Set forth below is further information with respect to the Mutual Fund
Insurance Policies (the "Policies") which the Fund has obtained from AMBAC
Indemnity Corporation ("AMBAC"), Municipal Bond Investors Assurance Corporation
("MBIA") and Financial Security Assurance Inc. ("FSA"), with respect to Insured
Municipal Bonds held by the Insured Portfolio (see "Investment Policies of the
Portfolios -- Insured Portfolio" in the Prospectus). During the fiscal year
ended June 30, 1997, the premium for the Policies aggregated $29,338 or
approximately 0.001% of the average net assets of the Insured Portfolio.
In determining eligibility for insurance, AMBAC, MBIA and FSA have applied
their own standards, which correspond generally to the standards they normally
use in establishing the insurability of new issues of Municipal Bonds and which
are not necessarily the criteria which would be used in regard to the purchase
of Municipal Bonds by the Insured Portfolio. The Policies do not insure (i)
municipal securities ineligible for
36
<PAGE>
insurance, or (ii) municipal securities that are no longer owned by the Insured
Portfolio. In addition, the AMBAC policy does not insure municipal obligations
which were insured as to the payment of principal and interest at the time of
their issuance by AMBAC.
The Policies do not guarantee the market value of the Insured Municipal
Bonds or the value of the shares of the Insured Portfolio. In addition, if the
provider of an original issuance insurance policy is unable to meet its
obligations under such policy or if the rating assigned to the claims paying
ability of any such insurer deteriorates, neither AMBAC, MBIA nor FSA has any
obligation to insure any issue held by the Insured Portfolio which is adversely
affected by either of the above described events. The AMBAC policy provides for
an annual policy period, which is renewable by the Fund for successive annual
periods for so long as the Fund is in compliance with the terms of the AMBAC
policy. In addition to the payment of premiums, the Policies require that the
Insured Portfolio notify AMBAC and MBIA as to all Municipal Bonds in the Insured
Portfolio and permit AMBAC and MBIA to audit records. The insurance premiums are
payable monthly by the Insured Portfolio in accordance with a premium schedule
which was furnished by AMBAC, MBIA and FSA at the time the Policies were issued.
Premiums are based upon the amounts covered and the composition of the
portfolio. AMBAC has reserved the right to change the premium schedule for any
renewal policy period as to any municipal securities purchased by the Insured
Portfolio during such renewal period. The FSA policy and the MBIA policy both
provide that the premium rate for subsequent purchases by the Insured Portfolio
of the same obligations will be determined by FSA or MBIA as of the date of such
purchases.
AMBAC has received a letter ruling from the Internal Revenue Service, which
holds in effect that insurance proceeds representing maturing interest on
defaulted municipal obligations paid by AMBAC to municipal bond funds
substantially similar to the Insured Portfolio, under policy provisions
substantially identical to the policy described herein, will be excludable from
federal gross income under Section 103(a) of the Internal Revenue Code.
AMBAC insures the portfolio of the Insured Portfolio and the prompt payment
of the interest and principal of new issues of Municipal Bonds and Municipal
Bond portfolios of individuals, banks, trust companies, corporations, insurance
companies and units trusts. As of June 30, 1997, the admitted assets of AMBAC
were approximately $2,735.7 million (unaudited) with a qualified capital of
approximately $1,547.7 million (unaudited). Qualified capital consists of the
statutory contingency reserve and policyholders' surplus of the insurance
company.
FSA insures the prompt payment of interest and principal of new issues of
Municipal Bonds and Municipal Bond portfolios of individuals, banks, trust
companies, corporations, insurance companies and unit trusts. As of June 30,
1997, the total admitted assets (unaudited) of FSA were approximately $1,269.9
million with a total capital and surplus (unaudited) of approximately $711.2
million as reported to the Insurance Department of the State of New York.
MBIA insures the prompt payment of interest and principal of new issues of
Municipal Bonds and Municipal Bond portfolios of individuals, banks, trust
companies, corporations, insurance companies and unit trusts. As of June 30,
1997, the total admitted assets of MBIA were approximately $4,823.7 million
(unaudited) with total capital and surplus of approximately $2,552.6 million
(unaudited).
AMBAC has entered into reinsurance agreements with a number of unaffiliated
reinsurers, relating to the municipal bond insurance programs of AMBAC including
the insurance obtained by the Fund for the portfolio of the Insured Portfolio.
37
<PAGE>
The contracts of insurance relating to the Insured Portfolio and the
negotiations in respect thereof represent the only significant relationship
between AMBAC, MBIA and FSA and the Fund. Otherwise neither AMBAC or any
associate thereof, nor MBIA or any associate thereof, nor FSA or any associate
thereof has any material business relationship, direct or indirect, with the
Fund.
AMBAC, MBIA and FSA are subject to regulation by the department of
insurance in each state in which they are qualified to do business. Such
regulation, however, is not a guarantee that any of AMBAC, MBIA or FSA will be
able to perform on its contractual insurance in the event a claim should be made
thereunder at some time in the future.
The information relating to AMBAC, MBIA and FSA set forth above, including
the financial information, has been furnished by such corporations. Financial
information with respect to AMBAC, MBIA and FSA appears in reports filed by
AMBAC, MBIA and FSA with state insurance regulatory authorities and is subject
to audit and review by such authorities. No representation is made herein as to
the accuracy or adequacy of such information with respect to AMBAC, MBIA or FSA
or as to the absence of material adverse changes in such information subsequent
to the date thereof.
DESCRIPTION OF FINANCIAL FUTURES CONTRACTS
Futures Contracts. 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 called for in the contract or, in some instances, to
make a cash settlement based upon the value of an instrument or an index of
values, at a specified future time for a specified price. Although the terms of
a contract call for actual delivery of the underlying financial instrument, or
for a cash settlement, in most cases the contracts are closed out before the
delivery date without the delivery taking place. The Fund intends to close out
its futures contracts prior to the delivery date of such contracts.
The Portfolios may sell futures contracts in anticipation of a decline in
value of their investments in Municipal Bonds. The loss associated with any such
decline could be reduced without employing futures as a hedge by selling
long-term securities 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 brokerage commissions and dealer
spreads and will typically reduce the Portfolio's average yields as a result of
the shortening of maturities.
The purchase or sale of a futures contract differs from the purchase or
sale of a security in that the total cash value reflected by the futures
contract is not paid. Instead, an amount of cash or securities acceptable to the
Fund's futures commission merchant ("FCM") and the relevant contract market,
which varies but is generally about 5% or less of the contract amount, must be
deposited with the FCM. This amount is known as "initial margin," and represents
a "good faith" deposit assuring the performance of both the purchaser and the
seller under the futures contract. Subsequent payments to and from the FCM,
known as "maintenance" or "variation margin," are required to be made on a daily
basis as the price of the futures contract fluctuates, making the long or short
position in the futures contract more or less valuable, a process known as
"marking to the market." 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 FCM, and the
38
<PAGE>
purchaser realizes a loss or gain. In addition, a commission is paid on each
completed purchase and sale transaction.
The sale of financial futures contracts provides an alternative means of
hedging a Portfolio against declines in the value of its investments in
Municipal Bonds. As such values decline, the value of the Portfolio's positions
in the futures contracts are expected to increase, thus offsetting all or a
portion of the depreciation in the market value of the Portfolios' fixed income
investments which are being hedged. While the Portfolios will incur commission
expenses in establishing and closing out futures positions, commissions on
futures transactions may be significantly lower than transaction costs incurred
in the purchase and sale of fixed income securities. In addition, the ability of
the Portfolios to trade in the standardized contracts available in the futures
market may offer a more effective hedging strategy than a program to reduce the
average maturity of portfolio securities, due to the unique and varied credit
and technical characteristics of the municipal debt instruments available to the
Portfolios. Employing futures as a hedge may also permit the Portfolios to
assume a hedging posture without reducing the yield on their investments beyond
any amounts required to engage in futures trading.
The Portfolios engage in the purchase and sale of future contracts on an
index of municipal securities. These instruments provide for the purchase or
sale of a hypothetical portfolio of municipal bonds at a fixed price in a stated
delivery month. Unlike most other futures contracts, however, a municipal bond
index futures contract does not require actual delivery of securities but
results in a cash settlement based upon the difference in value of the index
between the time the contract was entered into and the time it is liquidated.
The municipal bond index underlying the futures contracts traded by the
Portfolios is The Bond Buyer Municipal Bond Index, developed by The Bond Buyer
and the Chicago Board of Trade ("CBT"), the contract market on which the futures
contracts are traded. As currently structured, the index is comprised of 40 tax-
exempt term municipal revenue and general obligation bonds. Each bond included
in the index must be rated either A- or higher by S&P or A or higher by Moody'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 will be deleted from, the index. The value of the index is computed daily
according to a formula based upon the price of each bond in the Index, as
evaluated by four dealer-to-dealers brokers.
The Portfolios may also purchase and sell futures contracts on U.S.
Treasury bills, notes and bonds for the same types of hedging purposes. Such
futures contracts provide for delivery of the underlying security at a specified
future time for a fixed price, and the value of the futures contract generally
fluctuates with movements in interest rates.
The municipal bond index futures contract, futures contracts on U.S.
Treasury securities and options on such futures contracts are traded on the CBT
and the Chicago Mercantile Exchange, which, like other contract markets, assures
the performance of the parties to each futures contract through a clearing
corporation, a nonprofit organization managed by the exchange membership, which
is also responsible for handling daily accounting of deposits or withdrawals of
margin.
The Portfolios may also purchase financial futures contracts when they are
not fully invested in municipal bonds in anticipation of an increase in the cost
of securities they intend to purchase. As such securities are purchased, an
equivalent amount of futures contracts will be closed out. In a substantial
majority of these transactions, the Portfolios will purchase municipal bonds
upon termination of the futures contracts. Due to changing market conditions and
interest rate forecasts, however, a futures position may be terminated without
39
<PAGE>
a corresponding purchase of securities. Nevertheless, all purchases of futures
contracts by the Portfolios will be subject to certain restrictions, described
below.
Options on Futures Contracts. An option on a futures contract provides the
purchaser with the right, but not the obligation, to enter into a long position
in the underlying futures contract (i.e., purchase the futures contract), in the
case of a "call" option, or to enter into a short position (i.e., sell the
futures contract), in the case of a "put" option, for a fixed price (the
"exercise" or "strike" price) up to a stated expiration date. The option is
purchased for a nonrefundable fee, known as the "premium." Upon exercise of the
option, the contract market clearing house assigns each party the appropriate
position in the underlying futures contract. In the event of exercise,
therefore, the parties are subject to all of the risks of futures trading, such
as payment of initial and variation margin. In addition, the seller, or
"writer," of the option is subject to margin requirements on the option
position. Options on futures contracts are traded on the same contract markets
as the underlying futures contracts.
The Portfolios may purchase options on futures contracts for the same types
of hedging purposes described above in connection with futures contracts. For
example, in order to protect against an anticipated decline in the value of
securities it holds, a Portfolio could purchase put options on futures
contracts, instead of selling the underlying futures contracts. Conversely, in
order to protect against the adverse effects of anticipated increases in the
cost of securities to be acquired, a Portfolio could purchase call options on
futures contracts, instead of purchasing the underlying futures contracts. The
Portfolios generally will sell options on futures contracts only to close out an
existing position.
The Portfolios will not engage in transactions in such instruments unless
and until the Investment Adviser determines that market conditions and the
circumstances of the Portfolios warrant such trading. To the extent the
Portfolios engage in the purchase and sale of futures contracts or options
thereon, they will do so only at a level that reflects the Investment Adviser's
view of the hedging needs of the Portfolios, the liquidity of the market for
futures contracts and the anticipated correlation between movements in the value
of the futures or option contract and the value of securities held by the
Portfolios.
Restrictions on the Use of Futures Contracts and Options on Futures
Contracts. Under regulations of the Commodity Futures Trading Commission
("CFTC"), the futures trading activities described herein will not result in the
Portfolios' being deemed to be "commodity pools," as defined under such
regulations, provided that certain trading restrictions are adhered to. In
particular, CFTC regulations require that a notice of eligibility be filed and
that all futures and option positions entered into by the Portfolios qualify as
bona fide hedge transactions, as defined under CFTC regulations, or that any
nonqualifying positions be limited so that the sum of the amount of initial
margin deposits and premiums paid on such positions would not exceed 5% of the
market value of the respective Portfolio's net assets.
When either Portfolio purchases a futures contract, it will maintain an
amount of cash, cash equivalents or commercial paper or liquid securities in a
segregated account with the Fund's custodian, so that the amount so segregated
plus the amount of initial 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 Transactions in Futures Contracts and Options Thereon. The
particular municipal bonds comprising the index underlying the municipal bond
index futures contract may vary from the bonds held by the Portfolios. In
addition, the securities underlying futures contracts on U.S. Treasury
securities will not be the same as securities held by the Portfolios. As a
result, the Portfolios' ability effectively to hedge all or
40
<PAGE>
a portion of the value of their municipal bonds through the use of futures
contracts will depend in part on the degree to which price movements in the
index underlying the municipal bond index futures contract, or the U.S. Treasury
securities underlying other futures contracts traded, correlate with price
movements of the Municipal Bonds held by the Portfolios.
For example, where prices of securities in the Portfolios do not move in
the same direction or to the same extent as the values of the securities or
index underlying a futures contract, the trading of such futures contracts may
not effectively hedge the Portfolios' investments and may result in trading
losses. The correlation may be affected by disparities in the average maturity,
ratings, geographical mix or structure of the Portfolios' investments as
compared to those comprising the index, and general economic or political
factors. In addition, the correlation between movements in the value of the
index underlying a futures contract may be subject to change over time, as
additions to and deletions from the index alter its structure. In the case of
futures contracts on U.S. Treasury securities and options thereon, the
anticipated correlation of price movements between the U.S. Treasury securities
underlying the futures or options and Municipal Bonds may be adversely affected
by economic, political, legislative or other developments that have a disparate
impact on the respective markets for such securities. In the event that the
Investment Adviser determines to enter into transactions in financial futures
contracts other than the municipal bond index futures contract or futures on
U.S. Treasury securities, the risk of imperfect correlation between movements in
the prices of such futures contracts and the prices of Municipal Bonds held by
the Portfolios may be greater.
The trading of futures contracts on an index also entails the risk of
imperfect correlation between movements in the price of the futures contract and
the value of the underlying index. The anticipated spread between the prices may
be affected due to differences in the nature of the markets, such as margin
requirements, liquidity and the participation of speculators in the futures
markets. The risk of imperfect correlation, however, generally diminishes as the
delivery month specified in the futures contract approaches.
Prior to exercise or expiration, and absent delivery, a position in futures
contracts or options thereon may be terminated only by entering into a closing
purchase or sale transaction on the relevant contract market. A Portfolio will
enter into a futures or option position only if there appears to be a liquid
market therefor, although there can be no assurance that such a liquid market
will exist for any particular contract at any specific time. Thus, it may not be
economically practicable, or otherwise possible, to close out a position once it
has been established. Under such circumstances, a portfolio could be required to
make continuing daily cash payments of variation margin in the event of adverse
price movements. In such situations, if the Portfolio 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. In addition, the
Portfolio may be required to perform under the terms of the futures or option
contracts it holds. The inability to close out futures or options positions also
could have an adverse impact on the Portfolio's ability effectively to hedge its
portfolio.
When a Portfolio purchases an option on a futures contract, its risk is
limited to the amount of the premium, plus related transaction costs, although
this entire amount may be lost. In addition, in order to profit from the
purchase of an option on a futures contract, a Portfolio may be required to
exercise the option and liquidate the underlying futures contract, subject to
the availability of a liquid market. The trading of options on futures contracts
also entails the risk that changes in the value of the underlying futures
contract will not be fully reflected in the value of the option, although the
risk of imperfect correlation generally tends to diminish as the maturity date
of the futures contract or expiration date of the option approaches.
41
<PAGE>
"Position Limits" are generally imposed on the maximum number of contracts
which any person may hold or control at a given time. A contract market may
order the liquidation of positions found to be in violation of these limits and
it may impose other sanctions or restrictions. The Investment Adviser does not
believe that position limits will have any adverse impact on the portfolio
strategies for hedging a Portfolio's investments.
Further, the trading of futures contracts is subject to the risk of the
insolvency of a brokerage firm or the relevant exchange or clearing corporation,
which could make it difficult or impossible to liquidate existing positions or
to recover margin or other payments due.
In addition to the risks of imperfect correlation and lack of a liquid
secondary market for such instruments, transactions in futures contracts involve
risks related to leveraging such that a change in the price of a futures
contract could result in substantial gains or losses. The potential for
incorrect forecasts of the direction and extent of interest rate movements
within a given time frame also involves the risk of loss in the event such
forecasts are inaccurate.
COMPUTATION OF OFFERING PRICE PER SHARE
The offering price for Class A , Class B, Class C and Class D shares of the
Insured, National and Limited Maturity, based on the value of each Portfolio's
net asset and the number of shares outstanding as of June 30, 1997, is
calculated as set forth below.
INSURED PORTFOLIO:
<TABLE>
<CAPTION>
CLASS A CLASS B CLASS C CLASS D
-------------- -------------- -------------- --------------
<S> <C> <C> <C> <C>
Net Assets.................. $1,441,784,905 $ 560,105,263 $ 11,922,182 $ 38,421,750
============== ============ =========== ===========
Number of Shares
Outstanding............... 178,876,402 69,537,481 1,479,783 4,767,006
============== ============ =========== ===========
Net Asset Value Per Share
(net assets divided by
number of shares
outstanding) ............. $ 8.06 $ 8.05 $ 8.06 $ 8.06
Sales Charge (Class A and
Class D shares: 4.00% of
offering price (4.17% of
net asset value per
share))*.................. .34 ** ** .34
-------------- ------------ ----------- -----------
Offering Price.............. $ 8.40 $ 8.05 $ 8.06 $ 8.40
============== ============ =========== ===========
(See footnotes on next page)
</TABLE>
42
<PAGE>
NATIONAL PORTFOLIO:
<TABLE>
<CAPTION>
CLASS A CLASS B CLASS C CLASS D
-------------- -------------- -------------- --------------
<S> <C> <C> <C> <C>
Net Assets..................... $ 983,649,868 $ 415,103,109 $ 28,095,834 $ 51,038,145
============== ============ =========== ===========
Number of Shares Outstanding... 94,784,980 40,014,114 2,706,856 4,914,399
============== ============ =========== ===========
Net Asset Value Per Share (net
assets divided by number of
shares outstanding) ......... $ 10.38 $ 10.37 $ 10.38 $ 10.39
Sales Charge (Class A and Class
D shares: 4.00% of offering
price (4.17% of net asset
value per share))*........... .43 ** ** .43
-------------- ------------ ----------- -----------
Offering Price................. $ 10.81 $ 10.37 $ 10.38 $ 10.82
============== ============ =========== ===========
</TABLE>
LIMITED MATURITY PORTFOLIO:
<TABLE>
<CAPTION>
CLASS A CLASS B CLASS C CLASS D
-------------- -------------- -------------- --------------
<S> <C> <C> <C> <C>
Net Assets..................... $ 343,640,605 $ 54,275,249 $ 107,551 $ 20,383,393
============== ============ =========== ===========
Number of Shares Outstanding... 34,594,470 5,462,680 10,849 2,050,790
============== ============ =========== ===========
Net Asset Value Per Share (net
assets divided by number of
shares outstanding) ......... $ 9.93 $ 9.94 $ 9.91 9.94
Sales Charge (Class A and Class
D shares: 1.00% of offering
price (1.01% of the net asset
value per share))*........... .10 ** ** .10
-------------- ------------ ----------- -----------
Offering Price................. $ 10.03 $ 9.94 $ 9.91 $ 10.04
============== ============ =========== ===========
</TABLE>
- ---------------
* Rounded to the nearest one-hundredth percent; assumes maximum sales charge is
applicable.
** Class B and Class C shares are not subject to an initial sales charge but may
be subject to a CDSC on redemption of shares within four years of purchase
(for Class B shares of Insured Portfolio and National Portfolio) or within
one year of purchase (for Class B shares of Limited Maturity Portfolio and
Class C shares). See "Purchase of Shares -- Deferred Sales Charge
Alternatives -- Class B and Class C Shares" in the Prospectus and "Redemption
of Shares -- Deferred Sales Charge -- Class B and Class C Shares" herein.
43
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Shareholders,
Merrill Lynch Municipal Bond Fund, Inc.:
We have audited the accompanying statements of assets and liabilities, including
the schedules of investments, of the Insured, National and Limited Maturity
Portfolios of Merrill Lynch Municipal Bond Fund, Inc. as of June 30, 1997, the
related statements of operations for the year then ended and changes in net
assets for each of the years in the two-year period then ended, and the
financial highlights for each of the years in the five-year period then ended.
These financial statements and the financial highlights are the responsibility
of the Fund's management. Our responsibility is to express an opinion on these
financial statements and the financial highlights based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements and the financial
highlights are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. Our procedures included confirmation of securities owned at June 30,
1997 by correspondence with the custodian and brokers. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such financial statements and financial highlights present
fairly, in all material respects, the financial position of the Insured,
National and Limited Maturity Portfolios of Merrill Lynch Municipal Bond Fund,
Inc. as of June 30, 1997, the results of their operations, the changes in their
net assets, and the financial highlights for the respective stated periods in
conformity with generally accepted accounting principles.
Deloitte & Touche LLP
Princeton, New Jersey
August 15, 1997
44
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<TABLE>
<CAPTION>
Merrill Lynch Municipal Bond Fund, Inc., June 30, 1997
SCHEDULE OF INVESTMENTS (in Thousands)
Municipal Bonds Insured Portfolio
------------------------------------------------------------------------------------------------------
S&P Moody's Face Value
STATE Ratings Ratings Amount Issue (Note 1a)
<S> <C> <C> <C> <C> <C>
Alabama--0.2% AAA Aaa $ 1,625 Alabama Water Pollution Control Authority, Revolving
Fund Loan, Series A, 6.75% due 8/15/2017 (b) $ 1,789
AAA Aaa 1,250 Mobile, Alabama, GO, Refunding and Capital Improvement
Bonds, 10.875% due 11/01/2007 (c) 1,697
Alaska--0.8% Kenai Peninsula Borough, Alaska, GO (b):
AAA Aaa 6,450 8.40% due 1/01/2000 7,059
AAA Aaa 8,460 8.40% due 1/01/2001 9,526
Arizona--1.5% AAA Aaa 6,750 Arizona State Municipal Financing Program, COP,
Series 34, 7.25% due 8/01/2009 (g) 8,091
AAA Aaa 3,800 Maricopa County, Arizona, IDA, Health Facilities Revenue
Bonds (Saint Joseph's Care Center Project), Series A, 7.75%
due 7/01/2020 (e) 4,170
AAA Aaa 4,000 Maricopa County, Arizona, IDA, Hospital Facility Revenue
Refunding Bonds (Samaritan Health Services), Series A, 7% due
12/01/2013 (e) 4,336
AAA Aaa 7,000 Maricopa County, Arizona, Unified School District No.097
(Deer Valley Project), UT, 1986 Series E, 10% due 7/01/2000 (h) 8,109
AAA Aaa 6,000 Mesa, Arizona, Utility System Revenue Bonds, 5.375%
due 7/01/2017 (h) 5,975
California--1.6% AAA Aaa 5,245 Los Angeles, California, Metropolitan Transportation
Authority, Revenue Refunding Bonds (General Union Station),
Series A, 5.25% due 7/01/2013 (i) 5,217
AAA Aaa 5,000 Los Angeles County, California, Public Works Finance
Authority (Lease Revenue Multiple Capital Facility
Project), Series V-B, 5.125% due 12/01/2017 (b) 4,754
AAA Aaa 8,800 Northern California Power Agency, Multiple Capital Facilities
Revenue Bonds, RIB, 8.837% due 9/02/2025 (d) (e) 10,296
AAA Aaa 5,900 Oakland, California, Redevelopment Agency, Refunding Bonds,
INFLOS, 7.966% due 9/01/2019 (d) (e) 6,114
AAA Aaa 5,000 University of California Revenue Bonds (Multiple Purpose
Projects), Series D, 6.375% due 9/01/2024 (e) 5,399
Colorado--0.9% AAA Aaa 590 La Plata County, Colorado, School District Number 9, GO
(R Durango), UT, 6.60% due 11/01/2017 (h) 643
A1+ VMIG1++ 2,000 Moffat County, Colorado, PCR, Refunding (Pacificorp
Projects), VRDN, 5.50% due 5/01/2013 (b) (f) 2,000
Municipal Subdistrict Northern Colorado, Water Conservancy
District, Revenue Refunding Bonds, Series F (b):
Aaa Aaa 4,470 6.15% due 12/01/2005 4,893
Aaa Aaa 4,250 6.25% due 12/01/2006 4,706
Aaa Aaa 5,055 6.35% due 12/01/2007 5,660
Delaware--0.2% AAA Aaa 3,750 Delaware State Health Facilities Authority, Crossover
Revenue Refunding Bonds (Medical Center of Delaware),
7% due 10/01/2015 (e) 4,004
Florida--3.9% Florida State Division, Board of Finance, Department of
General Services Revenue Bonds, Series 2000-A (b):
AAA Aaa 23,490 (Department of Enviromental Preservation),
5% due 7/01/2012 22,743
AAA Aaa 14,630 (Department of Enviromental Preservation),
5% due 7/01/2013 14,069
AAA Aaa 5,000 (Department of Natural Resource Preservation),
6.75% due 7/01/2013 5,423
AAA Aaa 1,000 Florida State Turnpike Authority, Turnpike Revenue Bonds,
Series A, 7.125% due 7/01/2001 (a) (b) 1,118
AAA Aaa 500 Jacksonville, Florida, Health Facilities Authority,
Hospital Revenue Refunding and Improvement Bonds
(Baptist Medical Center Project), 11.50% due 10/01/2012 (c) 819
AAA Aaa 10,000 Lee County, Florida, Hospital Board of Directors,
Hospital Revenue, INFLOS, 9.063% due 4/01/2020 (d) (e) 11,400
AAA Aaa 3,950 Orange County, Florida, HFA, Mortgage Revenue Refunding
Bonds, Series A, 7.60% due 1/01/2024 (h) (j) 4,191
AAA Aaa 5,790 Orange County, Florida, Health Facilities Authority
Revenue Bonds (Hospital--Orlando Regional Healthcare),
Series A, 6.25% due 10/01/2006 (e) 6,379
AAA Aaa 2,000 Port Saint Lucie, Florida, Special Assessment Revenue Bonds,
Assessment District No. 1, Phase II, 5.40% due 10/01/2016 (e) 1,979
AAA Aaa 4,900 Saint John's River, Florida, Water Management District,
Revenue Refunding Bonds (Land Acquisition), 5.125% due
7/01/2016 (i) 4,685
AAA Aaa 2,850 South Broward Hospital District, Florida, Hospital
Revenue Bonds, RIB, Series C, 9.034% due 5/01/2001 (a) (b) (d) 3,384
</TABLE>
45
<PAGE>
<TABLE>
<S> <C> <C> <C> <C> <C>
AAA Aaa 2,240 West Coast Regional Water Supply Authority, Florida,
Capital Improvement Revenue Bonds (Hillsborough County Project),
10.40% due 10/01/2010 (a) (b) 3,185
Georgia--2.2% A1+ VMIG1++ 6,200 Burke County, Georgia, Development Authority, PCR
(Oglethorpe Power Corporation), VRDN, Series A,
4.15% due 1/01/2016 (f) (h) 6,200
AAA Aaa 4,000 Chatam County, Georgia, School District, UT, 6.75%
due 8/01/2003 (a) (e) 4,526
AAA Aaa 20,000 Georgia Municipal Electric Authority, Power Revenue
Bonds, Series EE, 7% due 1/01/2025 (b) 24,293
AAA Aaa 9,000 Georgia Municipal Electric Authority, Special Obligation
Bonds (Fifth Crossover Series, Project One), 6.40% due
1/01/2013 (b) 10,007
Hawaii--3.7% Hawaii State Airport System Revenue Bonds:
AAA Aaa 21,795 AMT, 7.30% due 7/01/2020 (b) 23,591
AAA Aaa 23,200 AMT, Second Series, 7.50% due 7/01/2020 (h) 25,240
AAA Aaa 10,000 Refunding, Series 1993, 6.45% due 7/01/2013 (e) 10,909
AAA Aaa 5,000 Hawaii State Department of Budget and Finance, Special
Purpose Mortgage Revenue Bonds (Hawaiian Electric Company,
AMT, Series C, 7.375% due 12/01/2020 (e) 5,463
Hawaii State, GO (h):
AAA Aaa 2,920 Series CH, UT, 6% due 11/01/2005 3,146
AAA Aaa 2,000 Series CN, 5.25% due 3/01/2017 1,938
AAA Aaa 4,500 Hawaii State Harbor Capital Improvement Revenue
Bonds, AMT, 7% due 7/01/2017 (e) 4,833
Illinois--11.6% AAA Aaa 28,200 Chicago, Illinois, GO, Series A-1, 5.125% due
1/01/2025 (b) 26,257
AAA Aaa 48,835 Chicago, Illinois, Refunding, Series B, 5.125%
due 1/01/2025 (h) 45,406
AAA Aaa 24,000 Chicago, Illinois, Wastewater Transmission Revenue
Refunding Bonds, 5.125% due 1/01/2025 (h) 22,315
AAA Aaa 3,000 Chicago, Illinois, Water Revenue Bonds, 5% due 11/01/2015 (h) 2,818
AAA Aaa 7,000 Cleveland, Ohio, Public Power System, Revenue Refunding
Bonds (First Mortgage, Series 1), 5.25% due 11/15/2016 (e) 6,825
Illinois Health Facilities Authority Revenue Bonds:
AAA Aaa 3,250 (Elmhurst Memorial Hospital), 6.625% due 1/01/2022 (h) 3,498
AAA Aaa 2,000 (Methodist Health Project), RIB, 9.628% due 5/01/2021 (b) (d) 2,303
AAA Aaa 28,900 Refunding (Sinai Health System), 6% due 2/15/2024 (b) 29,397
AAA Aaa 10,000 (Rush Presbyterian-Saint Luke's Medical Center),
INFLOS, 9.615% due 10/01/2024 (d) (e) 11,550
Illinois State, GO, Refunding Bonds, UT (h):
AAA Aaa 5,000 5.125% due 12/01/2013 4,862
AAA Aaa 5,750 5.125% due 12/01/2016 5,461
AAA Aaa 4,520 Illinois State Sales Tax Revenue Bonds, Series W,
5% due 6/15/2016 (h) 4,266
</TABLE>
Portfolio
Abbreviations
To simplify the listings of
Merrill Lynch Municipal
Bond Fund, Inc.'s portfolio
holdings in the Schedule of
Investments, we have
abbreviated the names of
many of the securities
according to the list at right.
AMT Alternative Minimum Tax (subject to)
BAN Bond Anticipation Notes
COP Certificates of Participation
EDA Economic Development Authority
GAN Grant Anticipation Notes
GO General Obligation Bonds
HDA Housing Development Authority
HFA Housing Finance Agency
IDA Industrial Development Authority
IDR Industrial Development Revenue Bonds
INFLOS Inverse Floating Rate Municipal Bonds
IRS Inverse Rate Securities
LEVRRS Leveraged Reverse Rate Securities
M/F Multi-Family
PCR Pollution Control Revenue Bonds
RIB Residual Interest Bonds
RITR Residual Interest Tax Receipts
S/F Single-Family
TAN Tax Anticipation Notes
TRAN Tax Revenue Anticipation Notes
UT Unlimited Tax
VRDN Variable Rate Demand Notes
46
<PAGE>
<TABLE>
<CAPTION>
Merrill Lynch Municipal Bond Fund, Inc., June 30, 1997
SCHEDULE OF INVESTMENTS (continued) (in Thousands)
Municipal Bonds Insured Portfolio
------------------------------------------------------------------------------------------------------
S&P Moody's Face Value
STATE Ratings Ratings Amount Issue (Note 1a)
<S> <C> <C> <C> <C> <C>
Illinois Metropolitan Pier and Exposition Authority, Illinois,
(concluded) Dedicated State Tax Revenue Bonds (McCormick Place
Expansion Project):
AAA Aaa $ 6,070 Refunding, Series A, 6% due 12/15/2006 (b) $ 6,556
AAA Aaa 16,660 Refunding, Series A, 6.10% due 12/15/2015 (e) (k) 5,851
AAA Aaa 8,330 Refunding, Series A, 6.10% due 12/15/2016 (e) (k) 2,764
AAA Aaa 9,400 Refunding, Series A, 6.05% due 12/15/2018 (e) (k) 2,756
AAA Aaa 13,550 Refunding, Series A, 6.03% due 12/15/2022 (e) (k) 3,120
AAA Aaa 49,575 Refunding, Series A, 6.09% due 12/15/2023 (e) (k) 10,740
AAA Aaa 14,305 Refunding, Series A, 6.24% due 6/15/2024 (e) (k) 3,006
AAA Aaa 6,260 Refunding, Series A, 6.02% due 6/15/2025 (e) (k) 1,238
AAA Aaa 5,000 Refunding, Series B, 5.867% due 6/15/2018 (e) (k) 1,509
AAA Aaa 6,600 Series A, 6.50% due 6/15/2003 (a) (b) 7,366
AAA Aaa 3,000 Series A, 5.87% due 6/15/2020 (h) (k) 802
AAA Aaa 26,000 Regional Transportation Authority, Illinois,
Series A, 6.25% due 6/01/2024 (b) 27,565
Indiana--1.6% AAA Aaa 2,470 Indiana State Employment Development Commission,
Environmental Revenue Bonds (Public Service
Company of Indiana, Inc.), AMT, 7.50% due 3/15/2015 (e) 2,671
AAA Aaa 4,040 Indianapolis, Indiana, Local Public Improvement
Bond Bank, Series A, 7.90% due 2/01/2002 (a) (g) 4,607
AAA Aaa 4,340 Jasper County, Indiana, PCR, Refunding (Northern
Indiana Public Service), 7.10% due 7/01/2017 (e) 4,758
AAA Aaa 4,510 Munster, Indiana, School Building Corp. (First
Mortgage), 5.75% due 1/15/2021 (e) 4,516
AAA Aaa 5,000 Penn, Indiana, High School Building Corp. (First
Mortgage), 6.125% due 1/15/2016 (e) 5,223
Rockport, Indiana, PCR, Refunding:
A1 Aaa 4,200 (AEP Generating Co. Project), VRDN, Series A,
5.50% due 7/01/2025 (b) (f) 4,200
AAA Aaa 5,800 (Indiana--Michigan Power), Series B, 7.60%
due 3/01/2016 (h) 6,421
Iowa--0.3% AAA Aaa 5,000 Des Moines, Iowa, Parking Facilities Revenue
Refunding Bonds, Series A, 7.25% due 7/01/2015 (h) 5,361
Kentucky--0.6% AAA Aaa 11,470 Kentucky Development Finance Authority, Hospital
Revenue Refunding and Improvement Bonds (Saint Elizabeth
Medical Center), Series A, 9% due 11/01/2000 (h) 13,101
Louisiana--0.4% A1 VMIG1++ 10,000 Louisiana Public Facilities Authority, Hospital
Revenue Bonds (Willis-Knighton Medical Center Project),
VRDN, 4.15% due 9/01/2025 (b) (f) 10,000
Maryland--0.4% Maryland State Health and Higher Educational Facilities
Authority Revenue Bonds (University of Maryland
Medical Systems) (h):
AAA Aaa 2,250 Series A, 7% due 7/01/2001 (a) 2,504
AAA Aaa 4,400 Series B, 7% due 7/01/2022 5,284
Massachusetts AAA Aaa 13,000 Massachusetts Bay Transportation Authority, COP,
- --5.3% Series A, 7.65% due 8/01/2000 (a) (i) 14,477
Massachusetts Bay Transportation Authority (Massachusetts
General Transportation), Series A (h):
AAA Aaa 4,325 6% due 3/01/2006 4,670
AAA Aaa 4,610 6% due 3/01/2007 4,993
AAA Aaa 4,690 Massachusetts Educational Loan Authority, Education
Loan Revenue Bonds, AMT, Issue D, Series A,
7.25% due 1/01/2009 (e) 5,027
Massachusetts State Consolidated Loan (b):
AAA Aaa 5,110 Series A, 5% due 3/01/2010 5,002
AAA Aaa 5,420 Series D, 5% due 11/01/2016 5,093
Massachusetts State Health and Educational Facilities
Authority Revenue Bonds:
AAA Aaa 10,000 (Beth Israel), INFLOS, 8.319% due 7/01/2025 (b) (d) 10,400
A1+ VMIG1++ 500 (Capital Assets Program), VRDN, Series D, 5.35%
due 1/01/2035 (e) (f) 500
AAA Aaa 3,100 (Saint Elizabeth's Hospital), LEVRRS, Series E,
9.37% due 8/12/2021 (d) (i) 3,565
</TABLE>
47
<PAGE>
<TABLE>
<S> <C> <C> <C> <C> <C>
AAA Aaa 19,755 Massachusetts State, HFA, Housing Revenue Refunding
Bonds (Insured Rental), AMT, Series A, 6.75% due
7/01/2028 (b) 20,648
AAA Aaa 12,250 Massachusetts State, HFA, M/F Housing Refunding Bonds,
Series A, 6.15% due 7/01/2018 (e) 12,591
AAA Aaa 4,020 Massachusetts State Insured Revenue Refunding Bonds,
Series B, 5.40% due 11/01/2007 (e) 4,184
AAA Aaa 3,250 Massachusetts State Port Authority Revenue Bonds, 13%
due 7/01/2013 (c) 5,448
Massachusetts State Water Resources Authority
Revenue Bonds, Series B (e):
AAA Aaa 2,730 5% due 12/01/2016 2,574
AAA Aaa 10,000 5% due 12/01/2025 9,112
Michigan--2.5% AAA Aaa 5,000 Michigan State Building Authority, Revenue Refunding
Bonds, Series I, 6.25% due 10/01/2020 (e) 5,351
Aaa Aaa 6,915 Michigan State, HDA, Rental Housing Revenue Bonds,
Series B, 6.15% due 10/01/2015 (e) 7,090
AAA Aaa 10,000 Michigan State Strategic Fund Limited Obligation, Revenue
Refunding Bonds (Detroit Edison Co.) Series AA,
6.40% due 9/01/2025 (e) 10,757
Monroe County, Michigan, PCR (Detroit Edison
Company Project), AMT:
AAA Aaa 16,500 (Monroe and Fermi Plants), Series 1, 7.65% due
9/01/2020 (h) 18,078
AAA Aaa 9,745 Series I-B, 7.50% due 9/01/2019 (b) 10,556
Mississippi--0.1% AAA Aaa 1,320 Harrison County, Mississippi, Wastewater Management
District, Revenue Refunding Bonds (Wastewater
Treatment Facilities), Series A, 8.50% due 2/01/2013 (h) 1,751
Missouri--0.2% AAA Aaa 3,500 Sikeston, Missouri, Electric Revenue Refunding Bonds,
6.25% due 6/01/2002 (a) (e) 3,830
Nebraska--0.4% AAA Aaa 9,000 Nebraska Public Power District Revenue Refunding Bonds,
6.125% due 1/01/2015 (e) 9,387
Nevada--2.5% AAA Aaa 3,450 Clark County, Nevada, Airport Revenue Bonds, 6.90%
due 6/01/2001 (a) (h) 3,757
AAA Aaa 45,000 Washoe County, Nevada, Water Facility Revenue Bonds
(Sierra Pacific Power), AMT, 6.65% due 6/01/2017 (e) 48,527
New Jersey--7.1% AAA Aaa 3,350 Cape May County, New Jersey, Industrial Pollution Control
Financing Authority, Revenue Refunding Bonds
(Atlantic City Electric Company Project), Series A,
6.80% due 3/01/2021 (e) 3,957
Casino Reinvestment Development Authority, New Jersey,
Parking Fee Revenue Bonds, Series A (i):
AAA Aaa 3,730 6% due 10/01/2005 4,013
AAA Aaa 3,955 6% due 10/01/2006 4,263
AAA Aaa 4,190 6% due 10/01/2007 4,519
AAA Aaa 28,750 New Jersey EDA, Natural Gas Facilities, Revenue
Refunding Bonds (NUI Corp.), Series A, 6.35% due
10/01/2022 (b) 31,029
A1+ VMIG1++ 1,100 New Jersey Sports and Exposition Authority Revenue
Bonds (State Contract), VRDN, Series C, 3.95% due
9/01/2024 (e) (f) 1,100
New Jersey State Housing and Mortgage Finance Agency
Revenue Bonds (Home Buyer), AMT (e):
AAA Aaa 8,790 Series D, 7.70% due 10/01/2029 9,204
AAA Aaa 23,890 Series M, 7% due 10/01/2026 25,442
New Jersey State Transit Corp., Capital, GAN, Series A (i):
AAA Aaa 15,000 5% due 9/01/2000 15,265
AAA Aaa 35,000 5.25% due 9/01/2001 36,008
New Jersey State Turnpike Authority, Turnpike Revenue
Refunding Bonds:
AAA Aaa 4,215 Series C, 6.50% due 1/01/2008 (b) 4,738
AAA VMIG1++ 6,100 VRDN, Series D, 3.80% due 1/01/2018 (f) (h) 6,100
</TABLE>
48
<PAGE>
<TABLE>
<CAPTION>
Merrill Lynch Municipal Bond Fund, Inc., June 30, 1997
SCHEDULE OF INVESTMENTS (continued) (in Thousands)
Municipal Bonds Insured Portfolio
------------------------------------------------------------------------------------------------------
S&P Moody's Face Value
STATE Ratings Ratings Amount Issue (Note 1a)
<S> <C> <C> <C> <C> <C>
New York--10.7% Nassau County, New York, General Improvement,
UT, Series V (b):
AAA Aaa $ 5,305 5.25% due 3/01/2015 $ 5,197
AAA Aaa 2,845 5.25% due 3/01/2016 2,769
New York City, New York, GO, UT:
AAA Aaa 15,000 Series B, 6.25% due 8/15/2008 (b) 16,376
AAA Aaa 8,175 Series E, 6% due 8/01/2007 (h) 8,809
AAA Aaa 13,770 Series G, 6% due 10/15/2007 (b) 14,855
AAA Aaa 31,000 Series I, 6% due 4/15/2012 (i) 32,509
AAA Aaa 2,500 Series L, 5.20% due 8/01/2008 (e) 2,515
AAA Aaa 10,095 Series M, 5.30% due 6/01/2012 (b) 10,006
AAA Aaa 15,000 Series M, 5.50% due 6/01/2017 (b) 14,874
New York City, New York, GO, UT, Series I (b):
AAA Aaa 2,825 7.25% due 8/15/1999 (a) 3,043
AAA Aaa 7,150 7.25% due 8/15/2013 7,636
AAA Aaa 4,385 7.25% due 8/15/2016 4,693
New York City, New York, Municipal Water Finance Authority,
Water and Sewer System Revenue Bonds:
AAA Aaa 28,510 RITR, 6.945% due 6/15/2026 (d) (e) 29,294
AAA Aaa 5,010 Series C, 6.20% due 6/15/2021 (b) 5,282
A1+ VMIG1++ 1,000 Series C, VRDN, 5.50% due 6/15/2023 (f) (h) 1,000
AAA Aaa 1,500 New York City, New York, Refunding, UT, Series E, 6.20%
due 8/01/2008 (e) 1,637
AAA Aaa 2,500 New York State Dormitory Authority Revenue Bonds
(City University), Third Generation Reserves,
Series 2, 6.25% due 7/01/2019 (e) 2,639
AAA Aaa 1,650 New York State Environmental Facilities Corporation,
Special Obligation Revenue Refunding Bonds
(Riverbank State Park), 5.50% due 4/01/2016 (b) 1,647
AAA Aaa 2,015 New York State Medical Care Facilities Finance Agency,
Revenue Improvement Bonds (Mental Health
Services), Series C, 7.375% due 8/15/2019 (e) 2,161
Aaa Aaa 9,125 New York State Medical Care Facilities Financial Agency
Revenue Bonds (Mental Health Services), Series E, 6.25%
due 8/15/2019 (h) 9,650
AAA VMIG1++ 13,700 New York State Thruway Authority, General Revenue Bonds,
VRDN, 5.45% due 1/01/2024 (f) (h) 13,700
AAA Aaa 12,000 New York State Thruway Authority, Highway and Bridge
Trust Fund, Series B, 5.125% due 4/01/2015 (e) 11,585
Niagara Falls, New York, Public Improvement Bonds, UT (e):
AAA Aaa 2,975 6.90% due 3/01/2023 3,313
AAA Aaa 3,190 6.90% due 3/01/2024 3,553
AAA Aaa 11,940 Suffolk County, New York, Water Authority, Water Works
Revenue Bonds, 5% due 6/01/2011 (e) 11,613
Ohio--1.1% AAA Aaa 2,710 Clermont County, Ohio, Hospital Facilities Revenue
Refunding Bonds (Mercy Health Systems), Series A,
7.50% due 9/01/2001 (a) (b) 3,028
AAA Aaa 12,000 Cleveland, Ohio, Public Power System Revenue Bonds,
First Mortgage, Series A, 7% due 11/15/2004 (a) (e) 13,930
AAA Aaa 1,550 Cleveland, Ohio, Water Works Revenue Bonds (First Mortgage),
Series F-92 A, 6.50% due 1/01/2002 (a) (b) 1,704
AAA Aaa 3,500 Ohio State Building Authority, State Facilities (Adult
Correctional), Series A, 6% due 4/01/2004 (b) 3,762
Oklahoma--1.3% AAA Aaa 10,500 Central Oklahoma, Transportation and Packaging Authority,
Packaging Systems Revenue Refunding, 5.25% due 7/01/2016 (i) 10,169
AAA Aaa 9,280 Grand River Dam Authority, Oklahoma, Revenue Refunding
Bonds, 5.50% due 6/01/2009 (b) 9,718
AAA Aaa 7,500 Oklahoma State Industrial Authority, Hospital Revenue
Bonds (Baptist Medical Center), Series A, 7% due 8/15/2000
(a) (b) 8,212
Oregon--0.2% Port Portland, Oregon, International Airport Revenue
Bonds (Portland International Airport), Series Seven-B,
AMT (e):
AAA Aaa 3,865 7.10% due 1/01/2012 (a) 4,511
AAA Aaa 135 7.10% due 7/01/2021 146
</TABLE>
49
<PAGE>
<TABLE>
<S> <C> <C> <C> <C> <C>
Pennsylvania AAA Aaa 2,000 Allegheny County, Pennsylvania, Higher Education Building
- --5.4% Authority Revenue Bonds (Duquesne University Project),
5% due 3/01/2016 (b) 1,882
AAA Aaa 1,750 Allegheny County, Pennsylvania, Hospital Development Authority
Revenue Bonds (Mercy Hospital of Pittsburgh), 6.75% due
4/01/2001 (a) (b) 1,922
AAA Aaa 6,900 Beaver County, Pennsylvania, Hospital Authority Revenue
Bonds (Medical Center of Beaver, Pennsylvania Inc.), Series A,
6.25% due 7/01/2022 (b) 7,218
AAA Aaa 3,365 Beaver County, Pennsylvania, IDA, PCR, Refunding (Ohio Edison
Company/Mansfield), Series A, 7% due 6/01/2021 (h) 3,675
AAA Aaa 7,590 Erie County, Pennsylvania, Prison Authority, Lease Revenue
Bonds, 6.25% due 11/01/2001 (a) (e) 8,144
AAA Aaa 1,155 Exeter Township Pennsylvania School District, UT, 6.65%
due 5/15/2002 (a) (h) 1,265
Pennsylvania State Higher Educational Assistance Agency,
Student Loan Revenue Bonds, AMT, RIB (d):
AAA Aaa 15,000 9.317% due 9/03/2026 (b) 16,856
AAA Aaa 8,000 Series B, 10.749% due 3/01/2020 (e) 9,160
AAA Aaa 18,600 Series B, 7.955% due 3/01/2022 (b) 19,321
Pennsylvania State Higher Educational Facilities Authority,
College and University Revenue Bonds:
AAA Aaa 1,500 (Bryn Mawr College), 6.50% due 12/01/1999 (a) (h) 1,607
AAA Aaa 4,250 (Temple University), First Series, 6.50% due 4/01/2021 (e) 4,566
AAA Aaa 10,000 Pennsylvania State Higher Educational Facilities Authority,
Health Services Revenue Refunding (Allegheny Delaware Valley),
Series A, 5.875% due 11/15/2016 (e) 10,228
Pennsylvania State Second Series, GO, UT (b):
AAA Aaa 8,875 5% due 11/15/2014 8,468
AAA Aaa 1,000 5% due 11/15/2015 950
AAA Aaa 6,000 Philadelphia, Pennsylvania, Gas Works Revenue Bonds,
12th Series B, 7% due 5/15/2020 (c) (e) 7,013
AAA Aaa 5,000 Philadelphia, Pennsylvania, School District, Series B,
5.50% due 9/01/2015 (b) 4,977
AAA Aaa 4,020 Philadelphia, Pennsylvania, Water and Sewer Authority,
Water and Wastewater Revenue Bonds, 5.60% due 8/01/2018 (e) 3,976
Rhode Island AAA Aaa 6,100 Rhode Island Depositors Economic Protection Corporation,
- --1.4% Special Obligation Bonds, Series A, 6.625% due 8/01/2002
(a) (i) 6,792
AAA Aaa 3,775 Rhode Island State Consolidated Capital Development Loan,
Series A, 6% due 8/01/2007 (e) 4,096
Rhode Island State Health and Educational Building
Corporation Revenue Bonds:
AAA Aaa 1,500 Higher Education Facility, Refunding (Rhode Island
School Design), 5.625% due 6/01/2026 (e) 1,472
AAA Aaa 12,800 (Rhode Island Hospital), INFLOS, 9.487% due
8/15/2021 (d) (h) 15,568
South AAA Aaa 5,000 Florence County, South Carolina, Hospital Revenue
Carolina--1.6% Bonds (McLeod Regional Medical Center Project),
6.75% due 11/01/2020 (h) 5,374
AAA Aaa 4,000 Piedmont, South Carolina, Municipal Power Agency,
Electric Revenue Refunding Bonds, 6.30% due 1/01/2022 (e) 4,263
South Carolina State Public Service Authority, Revenue
Refunding Bonds, Series A (b):
AAA Aaa 17,090 6.375% due 7/01/2021 18,425
AAA Aaa 4,200 6.25% due 1/01/2022 4,452
Texas--14.3% Austin, Texas, Utility System, Combined Revenue Bonds,
Prior Lien (e):
AAA Aaa 11,190 9.25% due 5/15/2004 (a) 14,160
AAA Aaa 5,000 6.25% due 11/15/2019 5,273
AAA Aaa 20,000 Austin, Texas, Utility System, Combined Revenue
Refunding Bonds, Series A, 5.25% due 5/15/2016 (i) 19,348
Brazos River Authority, Texas, PCR (Texas Utilities
Electric Company Project), AMT:
AAA Aaa 6,000 Refunding, 6.50% due 12/01/2027 (b) 6,422
AAA Aaa 12,000 Series B, 6.625% due 6/01/2022 (h) 12,882
AAA Aaa 12,400 Brazos River Authority, Texas, Revenue Refunding
Bonds (Houston Light and Power Co.), Series B,
7.20% due 12/01/2018 (h) 13,387
Brownsville, Texas, Utility System, Revenue
Refunding Bonds:
AAA Aaa 20,000 6.25% due 9/01/2014 (e) 21,862
AAA Aaa 2,000 5.25% due 9/01/2015 (b) 1,952
</TABLE>
50
<PAGE>
<TABLE>
<CAPTION>
Merrill Lynch Municipal Bond Fund, Inc., June 30, 1997
SCHEDULE OF INVESTMENTS (concluded) (in Thousands)
Municipal Bonds Insured Portfolio
------------------------------------------------------------------------------------------------------
S&P Moody's Face Value
STATE Ratings Ratings Amount Issue (Note 1a)
<S> <C> <C> <C> <C> <C>
Texas AAA Aaa $ 5,000 Harris County, Texas, Hospital District Mortgage,
(concluded) Revenue Refunding Bonds, 7.40% due 2/15/2010 (b) $ 5,974
Harris County, Texas, Toll Road Revenue Bonds,
Senior Lien:
AAA Aaa 11,455 Senior Lien, Refunding, 5% due 8/15/2016 (h) 10,756
AAA Aaa 20,430 Senior Lien, Refunding, Series A, 6.50% due
8/15/2002 (a) (b) 22,645
AAA Aaa 10,305 Senior Lien, Refunding, Series A, 6.50% due
8/15/2002 (a) (h) 11,422
AAA Aaa 1,000 Senior Lien, Series A, 6.25% due 8/15/2015 (e) 1,069
AAA Aaa 2,750 Senior Lien, Series A, 6.50% due 8/15/2017 (b) 2,994
AAA Aaa 11,100 Senior Lien, Series A, 6.375% due 8/15/2024 (e) 11,953
AAA Aaa 1,695 Series A, 6.50% due 8/15/2011 (h) 1,845
Houston, Texas, Water and Sewer System Revenue Bonds,
Junior Lien, Series A (e):
AAA Aaa 7,615 6.375% due 12/01/2022 8,242
AAA Aaa 19,770 Refunding, 6.125% due 12/01/2015 20,708
AAA Aaa 8,000 Refunding, 6.20% due 12/01/2023 8,400
AAA Aaa 3,500 Houston, Texas, Water Conveyance System Contract,
COP, Series J, 6.25% due 12/15/2013 (b) 3,854
AAA Aaa 5,000 Matagorda County, Texas, Navigation District No. 1, PCR
(Central Power and Light Company Project), AMT, 7.50%
due 3/01/2020 (b) 5,404
AAA Aaa 11,800 Matagorda County, Texas, Navigation District No. 1,
Revenue Refunding Bonds (Houston Light and
Power Co.), Series A, 6.70% due 3/01/2027 (b) 12,838
A1 Aaa 15,400 North Central, Texas, Health Facility Development Corp.
Revenue Bonds (Methodist Hospital, Dallas), VRDN, Series B,
5.50% due 10/01/2015 (f) (g) 15,400
Nueces River Authority, Texas, Water Supply Facilities
Revenue (Corpus Christi Lake Project) (i):
AAA Aaa 3,705 5.25% due 7/15/2013 3,642
AAA Aaa 3,900 5.25% due 7/15/2014 3,814
A1 VMIG1++ 16,500 Sabine River Authority, Texas, PCR, Refunding (Texas
Utilities Project), VRDN, Series A, 5.50% due
3/01/2026 (b) (f) 16,500
AAA Aaa 3,000 San Antonio, Texas, Electric and Gas Revenue Bonds,
Series 95, 5.375% due 2/01/2016 (e) 2,943
AAA Aaa 15,000 Southwest Higher Education Authority Incorporated,
Texas, Revenue Refunding Bonds (Southern Methodist University),
Series B, 6.25% due 10/01/2022 (h) 15,931
Texas State Municipal Power Agency, Revenue Refunding Bonds:
AAA Aaa 3,520 5.25% due 9/01/2007 (e) 3,643
AAA Aaa 3,150 Series A, 6.75% due 9/01/2012 (b) 3,424
AAA Aaa 5,095 Texas State Public Finance Authority, Building Revenue
Bonds, Series A, 5% due 8/01/2016 (b) 4,790
Utah--1.7% AAA Aaa 12,855 Intermountain Power Agency, Utah, Power Supply Revenue
Refunding Bonds, Series B, 6% due 7/01/2006 (e) 13,836
AAA Aaa 14,000 Salt Lake City, Utah, Hospital Revenue Refunding Bonds
(IHC Hospitals, Inc.), INFLOS, 9.491% due
5/15/2020 (b) (d) 16,327
AA- Aaa 1,000 Uintah County, Utah, PCR (Desert Generation and
Transmission Cooperative--National Rural Utilities
Company), Series 1984 F-2, 10.50% due 6/15/2001 (a) 1,218
AAA Aaa 2,650 Utah State Board of Regents, Student Loan Revenue Bonds,
AMT, Series F, 7.45% due 11/01/2008 (b) 2,773
Vermont--1.0% AAA Aaa 18,950 Vermont, HFA, Home Mortgage Purchase Bonds, AMT,
Series B, 7.60% due 12/01/2024 (e) 19,986
Virginia--3.1% AAA Aaa 5,000 Danville, Virginia, IDA, Hospital Revenue Refunding
Bonds (Danville Regional Medical Center),
6.50% due 10/01/2019 (h) 5,394
AAA Aaa 4,000 Loudoun County, Virginia, Sanitation Authority,
Water and Sewer Revenue Refunding Bonds, 5.125% due
1/01/2026 (h) 3,769
AAA Aaa 20,000 Upper Occoquan, Virginia, Sewer Authority Regional,
Revenue Bonds, Series A, 4.75% due 7/01/2029 (e) 17,429
Virginia State, HDA, Commonwealth Mortgage, AMT,
Series A, Sub-Series A-4 (e):
AAA Aaa 5,000 6.30% due 7/01/2014 5,195
AAA Aaa 11,215 6.35% due 7/01/2018 11,535
AAA Aaa 19,000 6.45% due 7/01/2028 19,584
</TABLE>
51
<PAGE>
<TABLE>
<S> <C> <C> <C> <C> <C>
Washington--2.9% Seattle, Washington, Metropolitan Seattle Municipality,
Sewer Revenue Bonds, Series W (e):
AAA Aaa 3,730 6.25% due 1/01/2020 3,949
AAA Aaa 2,465 6.25% due 1/01/2022 2,610
AAA Aaa 4,485 6.25% due 1/01/2023 4,749
AAA Aaa 33,535 Seattle, Washington, Municipal Light and Power
Revenue Bonds, 6.625% due 7/01/2020 (h) 36,944
University of Washington, University Revenue Bonds
(Housing and Dining) (e):
AAA Aaa 2,785 7% due 12/01/2001 (a) 3,121
AAA Aaa 465 7% due 12/01/2021 512
AAA Aaa 7,000 Washington State Health Care Facilities Authority
Revenue Bonds (Southwest Washington
Hospital--Vancouver), 7.125% due 10/01/2019 (g) 7,492
West AAA Aaa 23,150 Marshall County, West Virginia, PCR, Refunding
Virginia--2.4% (Ohio Power Company--Kammer Plant Project), Series B,
5.45% due 7/01/2014 (e) 23,197
AAA Aaa 11,465 Mason County, West Virginia, PCR, Refunding (Appalachian
Power Co.), Series I, 6.85% due 6/01/2022 (e) 12,570
AAA Aaa 12,250 Pleasants County, West Virginia, PCR (Potomac
Pleasants), Series 95-C, 6.15% due 5/01/2015 (b) 12,930
Wisconsin--3.5% Milwaukee County, Wisconsin, GO, UT, Series A (e):
AAA Aaa 2,975 5.25% due 10/01/2011 2,969
AAA Aaa 2,975 5.25% due 10/01/2012 2,956
AAA Aaa 9,000 Superior, Wisconsin, Limited Obligation Revenue
Refunding Bonds (Midwest Energy Resources), Series E,
6.90% due 8/01/2021 (h) 10,630
AAA Aaa 6,500 Wisconsin Public Power System Inc., Power Supply
System Revenue Bonds, Series A, 6.875% due
7/01/2001 (a) (b) 7,199
Wisconsin State Health and Educational Facilities
Authority Revenue Bonds:
AAA Aaa 6,520 Refunding (Sister's Sorrowful Mother), Series A,
6.125% due 8/15/2022 (e) 6,657
AAA Aaa 8,545 Refunding (Waukesha Memorial Horpital), Series A,
5.50% due 8/15/2015 (b) 8,448
AAA Aaa 1,500 (Saint Luke's Medical Center Project), 7.10%
due 8/15/2019 (e) 1,638
AAA Aaa 5,655 (Waukesha Memorial Hospital), Series B, 7.25%
due 8/15/2000 (a) (b) 6,233
Wisconsin State Veteran's Housing Loans, AMT,
Series B (e):
AAA Aaa 7,920 6.50% due 5/01/2020 8,330
AAA Aaa 17,130 6.50% due 5/01/2025 17,908
Wyoming--0.0% A1 VMIG1++ 400 Sweetwater County, Wyoming, PCR, Refunding
(PacificCorp. Projects), VRDN, 5.50% due
11/01/2024 (b) (f) 400
Total Investments (Cost--$1,910,410)--98.6% 2,023,013
Other Assets Less Liabilities--1.4% 29,221
-----------
Net Assets--100.0% $ 2,052,234
===========
</TABLE>
<TABLE>
<S> <C>
FN:
(A)PREREFUNDED.
(B)AMBAC INSURED.
(C)ESCROWED TO MATURITY.
(D)THE INTEREST RATE IS SUBJECT TO CHANGE PERIODICALLY AND INVERSELY
BASED UPON PREVAILING MARKET RATES. THE INTEREST RATE SHOWN IS THE
RATE IN EFFECT AT JUNE 30, 1997.
(E)MBIA INSURED.
(F)THE INTEREST RATE IS SUBJECT TO CHANGE PERIODICALLY BASED UPON
PREVAILING MARKET RATES. THE INTEREST RATE SHOWN IS THE RATE IN
EFFECT AT JUNE 30, 1997.
(G)BIG INSURED.
(H)FGIC INSURED.
(I)FSA INSURED.
(J)GNMA COLLATERALIZED.
(K)REPRESENTS A ZERO COUPON BOND; THE INTEREST RATE SHOWN IS THE
EFFECTIVE YIELD AT THE TIME OF PURCHASE BY THE PORTFOLIO.
++HIGHEST SHORT-TERM RATING ISSUED BY MOODY'S INVESTORS SERVICE, INC.
RATINGS OF ISSUES SHOWN HAVE NOT BEEN AUDITED BY DELOITTE & TOUCHE LLP.
</TABLE>
See Notes to Financial Statements.
52
<PAGE>
SCHEDULE OF INVESTMENTS
<TABLE>
<CAPTION>
Merrill Lynch Municipal Bond Fund, Inc., June 30, 1997
(in Thousands)
Municipal Bonds National Portfolio
------------------------------------------------------------------------------------------------------
S&P Moody's Face Value
STATE Ratings Ratings Amount Issue (Note 1a)
<S> <C> <C> <C> <C> <C>
Alaska--2.5% Valdez, Alaska, Marine Terminal Revenue Refunding Bonds:
AA Aa2 $ 6,000 (British Petroleum Pipeline), Series B, 7% due
12/01/2025 $ 6,584
AA Aa3 27,150 (Sohio Pipeline--British Petroleum Oil), 7.125%
due 12/01/2025 30,123
California--3.7% NR* NR* 6,000 Antioch, California, Improvement Bond Act of 1915
(Assessment District No.27--Lone Tree), Series E,
7.125% due 9/02/2016 6,189
A Aaa 10,350 California State Public Works Board, Lease Revenue
Bonds (Department of Corrections--Monterey County,
Soledad II), Series A, 7% due 11/01/2004 (j) 12,143
NR* NR* 4,000 Long Beach, California, Special Tax Community
Facilities (District No.3--Pine Avenue), 6.375% due 9/01/2023 4,001
A NR* 8,975 Palmdale, California, Civic Authority, Revenue Refunding
Bonds (Merged Redevelopment Project), Series A,
6.60% due 9/01/2034 9,800
AAA Aaa 18,755 Riverside County, California, Asset Leasing Corp.,
Leasehold Revenue Bonds (Riverside County Hospital
Project), 6%** due 6/01/2023 (f) 4,151
AAA Aaa 20,000 San Diego, California, Public Facilities Financing
Authority, Sewer Revenue Bonds, 5% due 5/15/2020 (e) 18,510
Colorado--2.8% Denver, Colorado, City and County Airport Revenue Bonds, AMT:
BBB Baa1 3,000 Series A, 7.50% due 11/15/2023 3,410
BBB Baa1 8,570 Series A, 8% due 11/15/2025 9,507
BBB Baa1 13,000 Series B, 7.25% due 11/15/2023 14,335
BBB Baa1 13,150 Series D, 7.75% due 11/15/2021 14,678
Connecticut--0.3% AA- Baa1 4,550 Connecticut State Resource Recovery Authority, Resource
Recovery Revenue Bonds (American Refunding Fuel), AMT,
Series A, 8% due 11/15/2015 4,875
Delaware--0.6% AAA NR* 7,500 Delaware State Health Facilities Authority, Revenue
Refunding Bonds (Beebe Medical Center Project),
8.50% due 6/01/2000 (j) 8,481
District of District of Columbia General Fund Recovery Bonds, VRDN, UT (a):
Columbia--1.3% A1+ VMIG1++ 6,300 Series B-1, 5.25% due 6/01/2003 6,300
A1+ VMIG1++ 8,200 Series B-3, 5.25% due 6/01/2003 8,200
A+ A1 3,750 District of Columbia Revenue Bonds (Georgetown
University), RIB, 8.683% due 4/25/2022 (k) 4,186
Florida--4.3% AAA Aaa 16,070 Dade County, Florida, Refunding, Seaport, UT, 5.125%
due 10/01/2026 (f) 15,130
AAA Aaa 8,140 Dade County, Florida, Special Obligation Refunding Bonds,
Series B, 5% due 10/01/2035 (c) 7,432
AAA Aaa 6,330 Florida HFA (Antigua Club Apartments), AMT, Series A-1,
7% due 2/01/2035 (c) 6,791
NR* Aaa 8,860 Florida HFA, Home Ownership Revenue Bonds, AMT,
Series G1, 7.90% due 3/01/2022 (i) 9,333
NR* NR* 5,000 Grand Haven Community Development District, Florida,
Special Assessment, Series A, 6.30% due 5/01/2002 4,995
AA Aa3 5,000 Hillsborough County, Florida, IDA, PCR, Refunding
(Tampa Electric Company Project), Series 91, 7.875%
due 8/01/2021 5,703
A- NR* 2,700 Leesburg, Florida, Hospital Revenue Capital Improvement
Bonds (Leesburg Regional Medical Center Project),
Series 91-A, 7.50% due 7/01/2002 (j) 3,109
AAA NR* 4,345 Orange County, Florida, HFA, Mortgage Revenue Bonds, AMT,
Series A, 8.375% due 3/01/2021 (i) 4,587
AAA Aaa 5,850 South Broward, Florida, Hospital District, RIB,
Series C, 9.034% due 5/01/2001 (c) (j) (k) 6,947
Georgia--1.8% A1 VMIG1++ 3,580 Floyd County, Georgia, Development Authority, PCR,
Georgia Power Co. (Plt Hammond Project), VRDN,
5.60% due 9/01/2026 (a) 3,580
AAA Aaa 20,000 Metropolitan Atlanta, Georgia, Rapid Transit Authority,
Sales Tax Revenue Bonds, Second Indenture, Series A,
6.90% due 7/01/2004 (f) (j) 22,966
Idaho--0.1% AA NR* 1,675 Idaho Housing Agency, S/F Mortgage, AMT, Series E,
7.875% due 7/01/2024 (b) 1,803
Illinois--5.1% AA- Aa3 8,000 Chicago, Illinois, Gas Supply Revenue Bonds (Peoples
Gas, Light & Coke Company Project), AMT, Series A,
8.10% due 5/01/2020 8,785
</TABLE>
53
<PAGE>
<TABLE>
<S> <C> <C> <C> <C> <C>
Chicago, Illinois, O'Hare International Airport,
Special Facilities Revenue Bonds (United Airlines, Inc.):
BB+ Baa2 4,675 AMT, Series B, 8.95% due 5/01/2018 5,295
BB+ Baa2 13,565 Series 1984-B, 8.85% due 5/01/2018 15,346
AAA Aaa 16,000 Chicago, Illinois, Water Revenue Bonds, 5% due 11/01/2025 (e) 14,580
BBB NR* 3,500 Illinois Development Finance Authority, Revenue
Refunding Bonds (Community Rehabilitation Providers),
Series A, 6% due 7/01/2015 3,477
A+ Aa2 5,100 Illinois HDA, Residential Mortgage Revenue Bonds,
RIB, AMT, Series C-2, 9.471% due 2/01/2018 (k) 5,514
Illinois Health Facilities Authority Revenue Bonds:
AAA Aaa 1,500 (Methodist Health Project), RIB, 9.628% due
5/01/2021 (c) (k) 1,727
BBB NR* 2,625 Refunding (Saint Elizabeth's Hospital--Chicago),
7.75% due 7/01/2016 2,907
AAA Aaa 11,000 (Rush Presbyterian--Saint Luke's Medical Center),
INFLOS, 9.615% due 10/01/2024 (f) (k) 12,705
NR* A1 4,400 Southwestern Illinois Development Authority, Sewer
Facilities Revenue Bonds (Monsanto Company Project),
AMT, 7.30% due 7/15/2015 4,871
Indiana--1.8% NR* Aaa 9,500 Indiana State Educational Facilities Authority Revenue
Bonds (University of Notre Dame Project),
6.70% due 3/01/2025 10,519
A+ NR* 9,100 Indianapolis, Indiana, Local Public Improvement Bond
Bank, Refunding, Series D, 6.75% due 2/01/2020 9,931
AA- Aa2 5,700 Petersburg, Indiana, PCR, Refunding (Indianapolis
Power & Light Company Project), 6.625% due 12/01/2024 6,144
Iowa--0.7% NR* NR* 9,000 Iowa Finance Authority, Health Care Facilities,
Revenue Refunding Bonds (Care Initiatives Project),
9.25% due 7/01/2025 10,652
Kansas--1.7% Wichita, Kansas, Hospital Revenue Bonds, RIB (f) (k):
AAA Aaa 12,000 Series III-A, 8.702% due 10/01/2017 13,740
AAA Aaa 10,000 Series III-B, 8.691% due 10/21/2022 11,450
Kentucky--2.0% AAA Aaa 18,500 Louisville and Jefferson County, Kentucky, Metropolitan
Sewer District, Sewer and Drain System Revenue
Refunding Bonds, Series A, 5.25% due 5/15/2027 (f) 17,642
NR* NR* 4,500 Perry County, Kentucky, Solid Waste Disposal Revenue
Bonds (TJ International Project), AMT, 7% due 6/01/2024 4,725
AA- Aa2 6,345 Trimble County, Kentucky, PCR (Louisville Gas and
Electric Company), AMT, Series A, 7.625% due 11/01/2020 6,949
Louisiana--4.1% NR* Baa2 37,850 Lake Charles, Louisiana, Harbor and Terminal District
Port Facilities, Revenue Refunding Bonds (Trunkline LNG
Company Project), 7.75% due 8/15/2022 43,018
Port New Orleans, Louisiana, IDR, Refunding (Continental
Grain Company Project):
BB NR* 10,000 7.50% due 7/01/2013 10,785
BB NR* 5,000 6.50% due 1/01/2017 5,101
BBB Baa2 1,100 Saint Charles Parish, Louisiana, PCR (Union Carbide
Project), AMT, 7.35% due 11/01/2022 1,183
Maine--0.3% NR* Aa2 3,815 Maine State Housing Authority, Mortgage Purchase, AMT,
Series B-4, 6.90% due 11/15/2026 3,990
Maryland--0.5% AA- Aa 7,000 Maryland State Stadium Authority, Sports Facilities
Lease Revenue Bonds, AMT, Series D, 7.60% due 12/15/2019 7,618
Massachusetts AAA Aaa 6,000 Massachusetts Bay Transportation Authority,
- --5.0% Series B, 7.875% due 3/01/2001 (j) 6,811
AAA Aaa 7,500 Massachusetts State, HFA, Revenue Bonds (Residential
Development) Series C, 6.90% due 11/15/2021 (d) 8,015
Massachusetts State Health and Educational Facilities
Authority Revenue Bonds:
AAA NR* 6,900 (North Adams Regional Hospital), Series A, 9.625%
due 7/01/1999 (j) 7,736
NR* B2 12,350 Refunding (New England Memorial Hospital), Series B,
6.25% due 7/01/2023 9,880
Massachusetts State Water Resources Authority:
AAA Aaa 12,500 Series A, 6.50% due 12/01/2001 (j) 13,766
AAA Aaa 30,000 Series B, 5% due 12/01/2025 (f) 27,335
</TABLE>
54
<PAGE>
SCHEDULE OF INVESTMENTS (continued)
<TABLE>
<CAPTION>
Merrill Lynch Municipal Bond Fund, Inc., June 30, 1997
(in Thousands)
Municipal Bonds National Portfolio
------------------------------------------------------------------------------------------------------
S&P Moody's Face Value
STATE Ratings Ratings Amount Issue (Note 1a)
<S> <C> <C> <C> <C> <C>
Michigan--2.1% A A $ 3,500 Michigan State Hospital Finance Authority, Hospital
Revenue Bonds (Detroit Medical Center), Series A,
7.50% due 8/15/2011 $ 3,848
AAA Aaa 15,000 Michigan State Hospital Finance Authority
(Sisters of Mercy), INFLOS, 8.514% due 2/15/2022 (h) (k) 16,275
BBB Baa1 9,350 Monroe County, Michigan, PCR (Detroit Edison
Company Project), AMT, Series A, 7.75% due 12/01/2019 10,100
Minnesota--1.5% Minnesota State, HFA, S/F Mortgage:
AA+ Aa 6,080 AMT, Series A, 7.45% due 7/01/2022 (b) 6,402
AA+ Aa2 4,250 Series F, 6.30% due 7/01/2025 4,397
AA+ NR* 3,000 Rochester, Minnesota, Health Care Facilities Revenue
Bonds (Mayo Foundation), IRS, Series H, 7.875% due
11/15/2015 (k) 3,229
AAA NR* 8,070 Saint Paul, Minnesota, Housing and Redevelopment
Authority, S/F Mortgage Revenue Refunding Bonds,
Series C, 6.95% due 12/01/2031 8,403
Mississippi--0.7% BBB Baa 5,950 Lowndes County, Mississippi, Hospital Revenue
Refunding Bonds (Golden Triangle Medical Center),
8.50% due 2/01/2010 6,552
NR* Aaa 4,195 Mississippi Home Corporation, S/F Mortgage Revenue Bonds
(Access Program), AMT, Final Tranche, Series A, 6.90%
due 6/01/2024 (i) 4,423
Missouri & BBB NR* 11,400 Bi-State Development Agency, Missouri and Illinois,
Illinois-- Metropolitan No. 5, Refunding (American Commonwealth
0.8% Lines, Inc.), 7.75% due 6/01/2010 12,457
Nebraska--0.3% AAA Aaa 3,400 Nebraska Investment Finance Authority, S/F Mortgage
Revenue Bonds, AMT, Series 2, RIB, 11.177% due
9/10/2030 (i) (k) 3,787
New Hampshire-- A+ Aa 2,685 New Hampshire State, HFA, S/F Residential Mortgage,
0.2% AMT, 7.90% due 7/01/2022 2,840
New Jersey--1.2% NR* NR* 6,495 New Jersey Health Care Facilities Financing Authority
Revenue Bonds (Riverwood Center), Series A,
9.90% due 7/01/2001 (j) 7,852
AA- A3 9,500 University of Medicine and Dentistry of New Jersey,
Series C, 7.20% due 12/01/1999 (j) 10,332
New York--14.6% Metropolitan Transportation Authority, New York,
Service Contract Refunding Bonds (Commuter Facilities),
Series 5:
BBB Baa1 2,145 6.90% due 7/01/2006 2,330
BBB Baa1 5,000 7% due 7/01/2012 5,399
New York City, New York, GO, UT:
AAA Aaa 7,240 Series A, 7.75% due 8/15/2001 (j) 8,254
BBB+ Aaa 9,385 Series A, 7.75% due 8/15/2001 (j) 10,699
BBB+ Baa1 280 Series A, 7.75% due 8/15/2017 311
BBB+ Baa1 4,000 Series B, 8.25% due 6/01/2006 4,803
BBB+ Baa1 10,000 Series B, Fiscal 92, 7.75% due 2/01/2011 11,177
BBB+ Baa1 4,500 Series B, Fiscal 92, 7.75% due 2/01/2012 5,030
BBB+ Baa1 2,875 Series B, Fiscal 92, 7.75% due 2/01/2013 3,213
BBB+ Baa1 1,650 Series B, Fiscal 92, 7.75% due 2/01/2014 1,844
AAA Aaa 1,865 Series D, 7.70% due 2/01/2002 (j) 2,140
BBB+ Aaa 3,495 Series D, Group C, 8% due 8/01/2001 (j) 4,009
AAA Aaa 5,495 Series F, 8.25% due 11/15/2001 (j) 6,402
New York City, New York, Municipal Water Finance
Authority, Water and Sewer System Revenue Bonds:
A- Aaa 11,685 Series 93-B, 6.50% due 6/15/2002 (j) 12,856
A- Aaa 10,000 Series A, 6.75% due 6/15/2001 (j) 10,952
AAA Aaa 10,000 Series B, 5.875% due 6/15/2026 (h) 10,185
A1 VMIG1++ 3,000 Series RI-2, RITR, 7.025% due 6/15/2025 (k) 3,150
</TABLE>
55
<PAGE>
<TABLE>
<S> <C> <C> <C> <C> <C>
New York State Dormitory Authority Revenue Bonds (State
University Educational Facilities):
BBB+ Baa1 6,735 Refunding, Series B, 7.375% due 5/15/2014 7,318
BBB+ Baa1 2,000 Refunding, Series B, 7% due 5/15/2016 2,135
BBB+ Baa1 5,000 Series A, 7.50% due 5/15/2013 5,978
New York State Local Government Assistance Corporation:
A Aaa 6,000 Series A, 7% due 4/01/2002 (j) 6,757
A Aaa 10,000 Series B, 7.25% due 4/01/2001 (j) 11,182
A A3 10,000 Series C, 6.25% due 4/01/2018 10,475
A A3 18,810 Series D, 5% due 4/01/2023 17,065
New York State Medical Care Facilities, Finance
Agency Revenue Bonds (New York Hospital Mortgage),
Series A (b) (c):
AAA Aaa 8,400 6.75% due 8/15/2014 9,223
AAA Aaa 9,100 6.80% due 8/15/2024 10,020
BBB Aaa 10,000 New York State Urban Development Corporation Revenue
Bonds (State Facilities), 7.50% due 4/01/2001 (j) 11,268
AAA Aaa 4,000 Niagara Falls, New York, Commission Toll Bridge, Revenue
Refunding Bonds, Series B, 5.25% due 10/01/2021 (e) 3,775
AAA Aaa 6,800 Port Authority of New York and New Jersey, Consolidated
Revenue Bonds, 104th Series, 3rd Installment,
4.75% due 1/15/2026 6,007
A+ Aa 12,750 Triborough Bridge and Tunnel Authority, New York,
General Purpose Revenue Bonds, Series B, 5.20% due
1/01/2027 12,035
North A1+ NR* 5,000 Raleigh-Durham, North Carolina, Airport Authority,
Carolina--0.3% Special Facilities Revenue Refunding Bonds (American Airlines),
VRDN, Series B, 5.50% due 11/01/2015 (a) 5,000
Ohio--2.7% AAA Aaa 20,300 Cleveland, Ohio, Public Power System Revenue Bonds
(First Mortgage), Series A, 7% due 11/15/2004 (f) (j) 23,565
Ohio, HFA, S/F Mortgage Revenue Bonds, AMT (i):
AAA Aaa 9,100 RIB, Series B-4, 9.578% due 3/31/2031 (k) 9,942
AAA NR* 1,895 Series B, 8.25% due 12/15/2019 2,003
AAA NR* 4,295 Series C, 7.85% due 9/01/2021 4,565
Pennsylvania BBB Baa 10,000 Pennsylvania Convention Center Authority, Revenue
- --3.8% Refunding Bonds, Series A, 6.75% due 9/01/2019 10,787
Pennsylvania HFA, Refunding:
AA Aa2 8,800 RIB, AMT, Series 1991-31C, 9.68% due 10/01/2023 (k) 9,647
AAA Aaa 7,850 (Rental Housing), 6.50% due 7/01/2023 (d) 8,122
AAA A1 5,000 Pennsylvania State, 3rd Series A, UT, 6.50% due 11/15/2001 (j) 5,473
AAA Aaa 10,000 Pennsylvania State Higher Educational Assistance Agency,
Student Loan Revenue Bonds, RIB, AMT, 9.317%
due 9/03/2026 (c) (k) 11,238
NR* NR* 2,000 Pennsylvania State Higher Educational Facilities
Authority, College and University Revenue Bonds
(Eastern College), Series B, 8% due 10/15/2025 2,139
AAA Aaa 4,800 Pittsburgh, Pennsylvania, Water and Sewer Authority,
Water and Sewer System, Revenue Refunding Bonds,
Series A, 6.75% due 9/01/2001 (e) (j) 5,309
AAA Aaa 2,500 York County, Pennsylvania, Hospital Authority Revenue
Bonds (York Hospital), 7% due 1/01/2001 (c) (j) 2,754
Rhode AAA Aaa 5,250 Rhode Island Depositors Economic Protection Corporation,
Island--0.4% Special Obligation Bonds, Series A, 6.95% due 8/01/2002 (j) 5,923
South AAA Aaa 2,500 Spartanburg County, South Carolina, Hospital Revenue
Carolina--0.2% Bonds (Health Services District Inc.), Series A,
5.50% due 4/15/2027 (f) 2,439
</TABLE>
56
<PAGE>
SCHEDULE OF INVESTMENTS (concluded)
<TABLE>
<CAPTION>
Merrill Lynch Municipal Bond Fund, Inc., June 30, 1997
(in Thousands)
Municipal Bonds National Portfolio
---------------------------------------------------------------------------------------------------------
S&P Moody's Face Value
STATE Ratings Ratings Amount Issue (Note 1a)
<S> <C> <C> <C> <C> <C>
South AAA Aa1 $ 9,085 South Dakota HDA, Homeownership Mortgage, Series A,
Dakota--0.7% 7.15% due 5/01/2027 $ 9,551
Tennessee--1.9% NR* Aaa 10,000 Knox County, Tennessee, Health, Educational and
Housing Facilities Board, Hospital Facilities Revenue
Bonds (Baptist Health System of East Tennessee),
8.60% due 4/15/1999 (j) 10,916
AAA Aaa 14,750 Metropolitan Government, Nashville and Davidson County,
Tennessee (Meharry Medical College Project), 6.875% due
12/01/2004 (j) 16,999
Texas--16.8% AAA Aaa 10,000 Bexar County, Texas, Health Facilities Development
Corporation, Revenue Refunding Bonds (Baptist Health
Systems), Series A, 5.25% due 11/15/2027 (f) 9,326
Brazos River Authority, Texas, PCR (Texas Utilities
Electric Company Project), AMT, Series A:
BBB+ Baa1 2,095 8.25% due 1/01/2019 2,230
BBB+ Baa1 18,150 7.875% due 3/01/2021 19,958
A- A2 12,350 Brazos River Authority, Texas, Revenue Refunding Bonds
(Houston Light and Power), Series 1989-A, 7.625% due 5/01/2019 13,175
BBB Baa1 7,250 Gulf Coast Waste Disposal Authority, Texas, Revenue Bonds
(Champion International Corporation), AMT, 7.45% due 5/01/2026 7,890
AA Aa3 19,000 Harris County, Texas, Health Facilities Development
Corporation, Health Care System Revenue Bonds
(Sisters of Charity), 7.10% due 7/01/2001 (j) 21,183
Harris County, Texas, Health Facilities Development
Corporation, Hospital Revenue Bonds:
A1+ NR* 200 (Methodist Hospital), 5.50% due 12/01/2025 (a) 200
AAA Aaa 10,150 RITR, Series 12, 8.07% due 10/01/2024 (k) 11,317
AAA Aaa 10,000 Refunding (Memorial Hospital System Project), Series A,
5.50% due 6/01/2024 (f) 9,766
AAA Aa3 12,470 (Saint Luke's Episcopal Hospital Project), Series A,
6.75% due 2/15/2001 (j) 13,667
AAA Aaa 11,100 Harris County, Texas, Toll Road Revenue Bonds, Senior Lien,
Series A, 6.375% due 8/15/2024 (f) 11,953
Houston, Texas, Water and Sewer System, Revenue Refunding
Bonds, Junior Lien, Series A:
AAA Aaa 10,000 6.20% due 12/01/2023 (f) 10,501
AAA Aaa 10,000 5.25% due 12/01/2025 (e) 9,518
BB Ba1 8,095 Jefferson County, Texas, Health Facilities Development
Corporation, Hospital Revenue Bonds (Baptist
Healthcare System Project), 8.875% due 6/01/2021 8,523
AA Aa 12,000 North Central Texas, Health Facilities Development
Corporation Revenue Bonds (Baylor University
Medical Center), INFLOS, Series A, 9.715% due
5/15/2001 (j) (k) 14,415
BB Ba 3,000 Odessa, Texas, Junior College District, Revenue
Refunding Bonds, Series A, 8.125% due 12/01/2018 3,258
A+ Aa 5,195 Texas Housing Agency, Residential Development Mortgage
Revenue Bonds, Series A, 7.50% due 7/01/2015 (i) 5,538
Texas State Turnpike Authority, Dallas North Thruway
Revenue Bonds (President George Bush Turnpike) (e):
AAA Aaa 15,000 5.25% due 1/01/2023 14,311
AAA Aaa 30,000 5% due 1/01/2025 27,608
AA Aa 4,440 Texas State Veteran's Housing Assistance (Fund II),
AMT, UT, Series A, 7% due 12/01/2025 4,713
AA Aa 16,000 Texas State Water Development, Series A, B, and C,
5.25% due 8/01/2028 15,338
AAA Aa1 15,000 Texas Water Development Revenue Board, State Revolving
Fund, Senior-Lien, Series B, 5.125% due 7/15/2018 14,321
Utah--3.6% A1+ VMIG1++ 10,300 Emery County, Utah, PCR, Refunding (Pacificorp Projects),
VRDN, 4.10% due 11/01/2024 (a) (c) 10,300
A+ A1 20,000 Intermountain Power Agency, Utah, Power Supply Revenue
Refunding Bonds, Series D, 5% due 7/01/2021 18,254
AAA Aaa 5,000 Murray City, Utah, Hospital Revenue Bonds (IHC Health
Services Inc.), 4.75% due 5/15/2020 (f) 4,351
AAA Aaa 5,500 Utah County, Utah, Hospital Revenue Bonds (IHC Health
Services, Inc.), 5.25% due 8/15/2026 5,120
AAA Aaa 13,250 Weber County, Utah, Municipal Building Authority,
Lease Revenue Bonds, 7.50% due 12/15/2004 (j) 15,795
Virginia--1.5% AAA Aaa 20,000 Prince William County, Virginia, Service Authority,
Water and Sewer System, Revenue Refunding Bonds,
5% due 7/01/2021 (e) 18,328
AA+ Aa1 4,000 Virginia State, HDA, Commonwealth Mortgage, Series A,
7.15% due 1/01/2033 4,183
Washington--3.3% AA Aaa 10,000 Washington State, GO, Series B, UT, 6.75% due 6/01/2001 (j) 10,845
AAA Aaa 13,860 Washington State, GO, Series C, 5% due 1/01/2022 (e) 12,863
</TABLE>
57
<PAGE>
<TABLE>
<S> <C> <C> <C> <C> <C>
AAA NR* 18,070 Washington State Housing Finance Commission, S/F
Mortgage Revenue Refunding Bonds, AMT, Series E,
7.10% due 7/01/2022 (g) 18,878
AA- Aaa 5,000 Washington State Public Power Supply System, Revenue
Refunding Bonds (Nuclear Project No. 1), Series A,
6.875% due 7/01/2001 (j) 5,538
West NR* NR* 4,000 Upshur County, West Virginia, Solid Waste Disposal
Virginia--0.9% Revenue Bonds (TJ International Project), AMT,
7% due 7/15/2025 4,218
AAA Aaa 8,400 West Virginia State, Housing Development Fund,
Housing Finance, Series D, 7.05% due 11/01/2024 8,854
Wisconsin--1.9% AA Aa 4,925 Wisconsin Housing and EDA, Home Ownership Revenue Bonds,
Series A, 7.10% due 3/01/2023 5,186
Wisconsin Housing and EDA, Housing Revenue Bonds:
A A1 5,400 Series B, 7.05% due 11/01/2022 5,716
A A1 5,105 Series C, 7% due 5/01/2015 5,405
AAA Aaa 11,400 Wisconsin State Health and Educational Facilities
Authority Revenue Bonds (Wausau Hospitals Inc.), Series B,
6.70% due 8/15/2020 (c) 12,205
Total Investments (Cost--$1,357,588)--98.0% 1,448,055
Other Assets Less Liabilities--2.0% 29,832
----------
Net Assets--100.0% $1,477,887
==========
</TABLE>
<TABLE>
<S> <C>
FN:
(A)The interest rate is subject to change periodically based upon
prevailing market rates. The interest rate shown is the rate in
effect at June 30, 1997.
(B)FHA Insured.
(C)AMBAC Insured.
(D)FNMA Collateralized.
(E)FGIC Insured.
(F)MBIA Insured.
(G)GNMA/FNMA Collateralized.
(H)FSA Insured.
(I)GNMA Collateralized.
(J)Prerefunded.
(K)The interest rate is subject to change periodically and inversely
based upon prevailing market rates. The interest rate shown is the
rate in effect at June 30, 1997.
*Not Rated.
**Represents a zero coupon bond; the interest rate shown is the
effective yield at the time of purchase by the Portfolio.
++Highest short-term rating issued by Moody's Investors Service, Inc.
Ratings of issues shown have not been audited by Deloitte & Touche LLP.
</TABLE>
See Notes to Financial Statements.
58
<PAGE>
SCHEDULE OF INVESTMENTS
<TABLE>
<CAPTION>
Merrill Lynch Municipal Bond Fund, Inc., June 30, 1997
(in Thousands)
Municipal Bonds Limited Maturity Portfolio
----------------------------------------------------------------------------------------------------
S&P Moody's Face Value
STATE Ratings Ratings Amount Issue (Note 1a)
<S> <C> <C> <C> <C> <C>
Alabama--1.0% A1+ NR* $ 4,100 Birmingham, Alabama, Medical Clinic Board Revenue
Bonds (U.A.H.S.F.), VRDN, 5.50% due 12/01/2026 (b) $ 4,100
Arizona--1.2% AAA Aaa 5,000 Phoenix, Arizona, Airport Revenue Refunding Bonds,
Series A, 5.55% due 7/01/2000 (d) 5,174
Arkansas--0.1% NR* Aa 460 Arkansas State Student Loan Authority Revenue Bonds,
AMT, Senior Series A-1, 5.50% due 12/01/1998 467
California--2.4% SP1+ VMIG1++ 5,000 Los Angeles County, California, Local Educational
Agencies, COP, TRAN, Series B, 4.50% due 9/30/1998 (e) 5,026
SP1+ NR* 5,000 Santa Barbara County, California, TRAN, Series A, 4.50%
due 10/01/1998 5,029
Connecticut--2.7% AAA Aaa 2,160 Bridgeport, Connecticut, Refunding, GO, UT, Series A,
4.40% due 9/01/1998 (c) 2,171
AAA Aaa 8,900 Connecticut State Special Assessment (Unemployment
Compensation Advance Fund), Revenue Refunding Bonds,
Series A, 5.50% due 5/15/2001 (c) 9,255
District of A1+ VMIG1++ 10,000 District of Columbia, General Fund Recovery
Columbia-- Bonds, VRDN, UT, Series B-2, 5.25% due 6/01/2003 (b) 10,000
2.4%
Florida--1.4% AAA Aaa 4,000 Florida School Boards Association Incorporated,
Lease Revenue Bonds (Orange County School Board
Project), 6.80% due 7/01/1998 (c) 4,116
A1+ VMIG1++ 1,500 Hillsborough County, Florida, IDA, PCR, Refunding
(Tampa Electric Company Project), VRDN, 4% due
5/15/2018 (b) 1,500
Georgia--2.5% A NR* 6,410 Burke County, Georgia, Development Authority, PCR,
Refunding (Oglethorpe Power Corporation) (Plant
Vogtle Project), Series B, 3.95% due 1/01/1999 6,375
AAA Aaa 4,000 Georgia Municipal Electric Authority, General Power
Revenue Refunding Bonds, Series D, 6% due
1/01/2000 (c) 4,157
Hawaii--2.1% AAA Aaa 3,200 Hawaii State, GO, Refunding, Series CO, 6% due 3/01/2001 (f) 3,366
A+ Aa3 5,250 Hawaii State, GO, UT, Series CH, 4.75% due 11/01/1999 5,311
Illinois--7.8% AA- NR* 10,000 Chicago, Illinois, Board of Education, COP (School
Reform Equipment Acquisition), 4.60% due 12/01/1999 10,038
AA- Baa1 5,000 Chicago, Illinois, School Finance Authority, 7.25%
due 6/01/1998 5,116
AAA Aaa 3,000 Cook County, Illinois, High School District No. 205,
Revenue Refunding Bonds (Thorton Township), UT, 5.60%
due 6/01/1998 (f) (g) 3,048
AA Aa1 6,425 Cook County, Illinois, Township High School District
No. 211 (Palatine and Schaumb), 4.25% due 12/01/1998 6,444
Illinois State Refunding, GO, UT:
AA- Aa3 4,600 3.90% due 12/01/1998 4,587
AAA Aaa 3,500 5.125% due 12/01/1999 (f) 3,576
Kentucky--2.2% Kentucky State Property and Buildings Commission,
Revenue Refunding Bonds:
A+ A 5,000 (Project No. 55), 4.10% due 9/01/1998 5,004
A+ A 4,000 (Project No. 59), 5% due 11/01/1998 4,048
Louisiana--5.9% A1+ VMIG1++ 5,000 Louisiana State Recovery District, Sales Tax
Revenue Bonds, 4.25% due 7/01/1998 (d) (g) 5,021
AAA Aaa 19,230 Louisiana State Refunding, GO, Series A, 5.50%
due 8/01/1998 (f) 19,546
Massachusetts AAA Aaa 2,005 Massachusetts State Health and Educational
- --2.9% Facilities Authority Revenue Bonds (New England Medical
Center Hospitals), Series G, 3.80% due 7/01/1997 (d) 2,005
A- A1 10,160 New England Education Loan Marketing Corporation
Refunding Bonds (Massachusetts Student Loan),
Series D, 4.75% due 7/01/1998 10,231
Michigan--3.8% AAA Aaa 8,000 Detroit, Michigan, Distributable State Aid, 7.20%
due 5/01/1999 (a) (c) 8,576
AA- A1 6,000 Michigan State Building Authority, Revenue Refunding
Bonds, Series I, 5.80% due 10/01/1998 6,127
</TABLE>
59
<PAGE>
<TABLE>
<S> <C> <C> <C> <C> <C>
NR* VMIG1++ 800 Michigan State Strategic Fund, Solid Waste Disposal
Revenue Bonds (Grayling Generating Project),
VRDN, AMT, 4.25% due 1/01/2014 (b) 800
Minnesota--1.3% AAA Aaa 2,385 Metropolitan Council, Minnesota, St. Paul Metropolitan
Area Transit, UT, Series C, 4.75% due 2/01/2000 2,414
AAA Aaa 2,965 Minnesota State, HFA (Rental Housing), Refunding,
Series D, 4.50% due 8/01/1999 (d) 2,983
Mississippi--2.4% NR* Aaa 10,000 Mississippi Higher Education Assistance Corporation,
Student Loan Revenue Bonds, AMT, Series B, 4.80%
due 9/01/1998 10,061
Nebraska--1.5% A+ A1 6,250 Nebraska Public Power District Revenue Bonds (Consumer
Public Power District), 4.90% due 7/01/1998 6,309
New Jersey--3.6% A A1 2,000 Camden County, New Jersey, Improvement Authority, Solid
Waste Disposal, Revenue Refunding Bonds (Landfill Project),
4% due 7/01/1997 2,000
NR* NR* 3,000 New Jersey State, EDA, Economic Growth Revenue Bonds
(Greater Mercer County), VRDN, Series C, 4.25% due
11/01/2011 (b) 3,000
AAA Aaa 5,715 New Jersey State Educational Facilities Authority
Revenue Bonds (Higher Education Facilities Trust Fund),
Series A, 5.125% due 9/01/1999 (c) 5,829
AA+ Aa1 4,250 New Jersey State Refunding, UT, Series O, 5.10% due 2/15/2000 4,341
New York--10.4% AA- Aa2 4,550 Municipal Assistance Corporation, Refunding, Series E,
5.50% due 7/01/2000 4,700
A1+ VMIG1++ 100 New York City, New York, Municipal Water Finance Authority,
Water and Sewer System Revenue Bonds, VRDN, Series G, 5.50%
due 6/15/2024 (b) (f) 100
New York State Dormitory Authority Revenue Bonds
(Consolidated City University System), Series A:
BBB Baa1 6,675 4.50% due 7/01/1998 6,711
BBB Baa1 10,885 4.75% due 7/01/1999 10,945
AAA Aaa 3,000 New York State Dormitory Authority Revenue Bonds
(State University Educational), Series A, 7.125% due
5/15/1999 (a) 3,218
A- A2 11,820 New York State GO, Refunding, 7.80% due 11/15/1998 12,397
BBB Aaa 5,000 New York State Urban Development Corporation Revenue
Bonds (State Facilities), 7.50% due 4/01/2001 (a) 5,634
Ohio--12.4% AAA Aaa 2,000 Cincinnati, Ohio, City School District, TAN, Series B,
5% due 12/01/1998 (c) 2,026
NR* Aa1 6,000 Franklin County, Ohio, Hospital Revenue Refunding
Bonds (US Health Corp.), Series B, 4.50% due 6/01/2000 6,005
Ohio State Air Quality Development Authority, Revenue
Refunding Bonds (Ohio Edison Project), Series A:
A1+ VMIG1++ 7,500 3.95% due 2/01/1998 7,502
A1+ VMIG1++ 7,000 4.35% due 8/01/1998 7,003
NR* Aaa 6,700 Ohio State Buillding Authority, Correctional Facilities,
Series A, 7.35% due 8/01/1999 (a) 7,251
AAA Aa1 12,400 Ohio State Highway, GO, Series V, 4.70% due 5/15/2000 12,556
AAA Aaa 3,500 Ohio State Public Facilities Commission, Higher
Education Capital Facilities, Series II-A, 4.375% due
11/01/1999 (d) 3,516
NR* Aaa 6,000 Student Loan Funding Corporation, Cincinnati, Ohio,
Student Loan Revenue Refunding Bonds, AMT, Series C,
5.70% due 7/01/1999 6,123
Oklahoma--0.6% AA Aa 2,400 Tulsa, Oklahoma, GO, UT, 5.125% due 5/01/1999 2,443
</TABLE>
60
<PAGE>
SCHEDULE OF INVESTMENTS (concluded)
<TABLE>
<CAPTION>
Merrill Lynch Municipal Bond Fund, Inc., June 30, 1997
(in Thousands)
Municipal Bonds Limited Maturity Portfolio
S&P Moody's Face Value
STATE Ratings Ratings Amount Issue (Note 1a)
<S> <C> <C> <C> <C> <C>
Oregon--0.7% A1+ VMIG1++ $ 3,000 Port Saint Helens, Oregon, PCR (Portland General Electric
Company Project), VRDN, Series A, 5.40% due 4/01/2010 (b) $ 3,000
Pennsylvania A1+ P1 4,000 Beaver County, Pennsylvania, IDA, PCR, Refunding
- --4.1% (Ohio Edison Co.), Series A, 4.30% due 10/01/1997 4,006
AAA Aaa 8,675 Pennsylvania State Refunding Bonds, GO, UT, 5.25%
due 11/15/1998 (f) 8,818
AAA Aaa 4,145 Pittsburgh, Pennsylvania, Refunding, UT, Series A,
5% due 3/01/2000 (d) 4,214
South Carolina-- AA- A1 8,250 Greenville County, South Carolina, School District,
2.0% UT, 4% due 3/01/1999 8,235
Tennessee--2.9% AA NR* 11,885 Clarksville, Tennessee, Public Building Authority,
Revenue Refunding Bonds (Pooled Loan Program),
4.40% due 12/01/1998 11,926
Texas--6.6% Brazos, Texas, Higher Education Authority Incorporated,
Student Loan Revenue Refunding Bonds, AMT:
NR* Aaa 2,200 Senior Lien, Series A-2, 5.45% due 6/01/1998 2,228
NR* Aa 5,135 Series C-1, 5.60% due 11/01/1997 5,163
Harris County, Texas, Health Facilities Development
Corporation, Hospital Revenue Bonds, VRDN (b):
A1+ NR* 5,900 (Methodist Hospital), 5.50% due 12/01/2025 5,900
AAA NR* 1,000 (Saint Luke's Episcopal Hospital), Series B, 5.50%
due 9/15/1997 (a) 1,000
AAA NR* 100 (Saint Luke's Episcopal Hospital), Series D, 5.50%
due 9/15/1997 (a) 100
AA+ Aa3 6,700 Houston, Texas, Independent School District, Public
Property Financial Contractual Obligation, 5% due
7/15/1999 6,816
AAA Aaa 2,600 Houston, Texas, Water and Sewer Systems, Revenue
Refunding Bonds, Junior Lien, Series C, 5.90% due
12/01/1999 (c) 2,701
NR* Aaa 2,455 Panhandle-Plains, Texas, Higher Education Authority
Incorporated, Student Loan Revenue Refunding Bonds,
Series C, 4.15% due 9/01/1997 2,456
A+ A2 2,000 Texas Municipal Power Agency, Revenue Refunding Bonds,
GO, Series A, 4.25% due 9/01/1997 2,001
Utah--1.1% AAA Aaa 4,700 Utah State Building and Highway, GO, UT, 4.40% due 7/01/1999 4,730
Virginia--0.6% AA Aa 2,555 Virginia State Transportation Board, Transportation
Contract Revenue Bonds (US Route 58 Corridor),
Series B, 5% due 5/15/2000 2,604
Washington--4.7% AAA Aaa 5,000 Seattle, Washington, Municipality Metropolitan Seattle
Sewer Revenue Bonds, Series U, 6.60% due 1/01/2001 (a) (f) 5,448
AA- Aa1 4,890 Washington State Public Power Supply System, Revenue
Refunding Bonds (Nuclear Project No. 2), Series A,
3.75% due 7/01/1997 4,890
AA Aa1 4,655 Washington State Refunding Bonds, GO, Series R-96B,
5% due 7/01/1998 4,705
Washington State Refunding Bonds, Motor Vehicle Fuel Tax:
AA Aa1 2,000 Series R-94B, 4.20% due 9/01/1998 2,005
AA Aa1 2,285 Series R-96A, 5% due 7/01/1998 2,310
Wisconsin--8.0% NR* NR* 4,500 Ashland County, Wisconsin, Promissary Notes, GO,
4.25% due 9/01/1997 4,502
NR* VMIG1++ 4,000 Mequon, Wisconsin, BAN, 4.10% due 11/01/1998 3,999
A A1 2,795 Wisconsin Housing and Economic Development Authority,
Housing Revenue Refunding Bonds, Series C, 4.30% due 11/01/1997 2,801
AA Aa2 11,000 Wisconsin State, GO, Refunding, UT, Series 3, 4.25%
due 11/01/1999 11,026
AA Aa2 4,385 Wisconsin State, GO, Series C, 5.50% due 5/01/2000 4,527
AAA NR* 5,720 Wisconsin State Health and Educational Facilities
Authority Revenue Bonds (Medical College of Wisconsin),
Series D, 7.35% due 12/01/2000 (a) 6,339
Wyoming--0.1% NR* P1 500 Uinta County, Wyoming, PCR, Refunding (Chevron USA Inc.
Project), VRDN, 5.50% due 8/15/2020 (b) 500
</TABLE>
61
<PAGE>
<TABLE>
<S> <C> <C> <C> <C> <C>
Total Investments (Cost--$422,830)--101.4% 424,231
Liabilities in Excess of Other Assets--(1.4%) (5,824)
----------
Net Assets--100.0% $ 418,407
==========
</TABLE>
<TABLE>
<S> <C>
FN:
(A)Prerefunded.
(B)The interest rate is subject to change periodically based upon
prevailing market rates. The interest rate shown is the rate in
effect at June 30, 1997.
(C)AMBAC Insured.
(D)MBIA Insured.
(E)FSA Insured.
(F)FGIC Insured.
(G)Escrowed to maturity.
*Not Rated.
++Highest short-term rating issued by Moody's Investors Service, Inc.
Ratings of issues shown have not been audited by Deloitte & Touche LLP.
</TABLE>
See Notes to Financial Statements.
62
<PAGE>
<TABLE>
<CAPTION>
STATEMENTS OF ASSETS AND LIABILITIES
Merrill Lynch Municipal Bond Fund, Inc., June 30, 1997
Limited
Insured National Maturity
Portfolio Portfolio Portfolio
<S> <C> <C> <C> <C>
Assets: Investments, at value* (Note 1a).......... $2,023,013,288 $1,448,054,588 $ 424,230,840
Cash...................................... 341,447 27,022 8,214
Receivables:
Interest................................ 33,075,339 24,381,071 5,787,339
Securities sold......................... 790,557 32,781,265 --
Capital shares sold..................... 495,726 2,646,269 150,322
Prepaid registration fees and
other assets (Note 1e).................... 62,244 45,650 35,641
-------------- -------------- --------------
Total assets.............................. 2,057,778,601 1,507,935,865 430,212,356
-------------- -------------- --------------
Liabilities: Payables:
Securities purchased.................... -- 25,674,754 10,052,250
Capital shares redeemed................. 2,061,664 1,683,390 1,193,090
Dividends to shareholders (Note 1f)..... 2,087,176 1,569,055 319,585
Investment adviser (Note 2)............. 594,019 563,269 113,098
Distributor (Note 2).................... 352,997 276,962 17,801
Accrued expenses and other liabilities.... 448,645 281,479 109,734
-------------- -------------- --------------
Total liabilities......................... 5,544,501 30,048,909 11,805,558
-------------- -------------- --------------
Net Assets: Net assets................................ $2,052,234,100 $1,477,886,956 $ 418,406,798
============== ============== ==============
Net Assets Class A Common Stock, $0.10
Consist of: par value++............................... $ 17,887,640 $ 9,478,498 $ 3,459,447
Class B Common Stock, $0.10
par value++++............................. 6,953,748 4,001,411 546,268
Class C Common Stock, $0.10
par value++++++........................... 147,978 270,686 1,085
Class D Common Stock, $0.10
par value++++++++......................... 476,701 491,440 205,079
Paid-in capital in excess of par.......... 1,918,211,598 1,431,757,690 417,358,735
Accumulated realized capital losses
on investments--net (Note 5).............. (4,046,911) (58,579,321) (4,564,588)
Unrealized appreciation on
investments--net.......................... 112,603,346 90,466,552 1,400,772
-------------- -------------- --------------
Net assets................................ $2,052,234,100 $1,477,886,956 $ 418,406,798
============== ============== ==============
Net Asset Class A:
Value: Net assets.............................. $1,441,784,905 $ 983,649,868 $ 343,640,605
============== ============== ==============
Shares outstanding...................... 178,876,402 94,784,980 34,594,470
============== ============== ==============
Net asset value and redemption
price per share......................... $ 8.06 $ 10.38 $ 9.93
============== ============== ==============
Class B:
Net assets.............................. $ 560,105,263 $ 415,103,109 $ 54,275,249
============== ============== ==============
Shares outstanding...................... 69,537,481 40,014,114 5,462,680
============== ============== ==============
Net asset value and redemption
price per share......................... $ 8.05 $ 10.37 $ 9.94
============== ============== ==============
Class C:
Net assets.............................. $ 11,922,182 $ 28,095,834 $ 107,551
============== ============== ==============
Shares outstanding...................... 1,479,783 2,706,856 10,849
============== ============== ==============
Net asset value and redemption
price per share......................... $ 8.06 $ 10.38 $ 9.91
============== ============== ==============
Class D:
Net assets.............................. $ 38,421,750 $ 51,038,145 $ 20,383,393
============== ============== ==============
Shares outstanding...................... 4,767,006 4,914,399 2,050,790
============== ============== ==============
Net asset value and redemption
price per share......................... $ 8.06 $ 10.39 $ 9.94
============== ============== ==============
</TABLE>
63
<PAGE>
<TABLE>
<S> <C> <C> <C> <C>
FN:
*IDENTIFIED COST......................... $1,910,409,942 $1,357,588,036 $ 422,830,068
============== ============== ==============
++AUTHORIZED SHARES--CLASS A.............. 500,000,000 375,000,000 150,000,000
============== ============== ==============
++++AUTHORIZED SHARES--CLASS B.............. 375,000,000 375,000,000 150,000,000
============== ============== ==============
++++++AUTHORIZED SHARES--CLASS C.............. 375,000,000 375,000,000 150,000,000
============== ============== ==============
++++++++AUTHORIZED SHARES--CLASS D.............. 500,000,000 375,000,000 150,000,000
============== ============== ==============
</TABLE>
See Notes to Financial Statements.
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Limited
Insured National Maturity
For the Year Ended June 30, 1997 Portfolio Portfolio Portfolio
<S> <C> <C> <C> <C>
Investment Interest and amortization of premium
Income (Note 1d): and discount earned....................... $ 134,133,814 $ 93,607,495 $ 20,199,235
-------------- -------------- --------------
Expenses: Investment advisory fees (Note 2)......... 8,042,098 6,961,453 1,552,369
Account maintenance and
distribution fees--Class B (Note 2)....... 4,901,030 3,073,016 222,614
Transfer agent fees--Class A (Note 2)..... 497,705 353,478 82,086
Transfer agent fees--Class B (Note 2)..... 275,141 186,850 18,726
Accounting services (Note 2).............. 249,511 142,298 41,718
Custodian fees............................ 186,028 130,167 43,968
Account maintenance and distribution
fees--Class C (Note 2).................... 134,437 162,696 634
Registration fees (Note 1e)............... 184,229 94,978 1,102
Account maintenance fees--Class D (Note 2) 116,523 126,564 17,810
Printing and shareholder reports.......... 115,250 66,878 28,907
Professional fees......................... 93,805 67,598 21,232
Pricing services.......................... 30,251 27,987 11,936
Directors' fees and expenses.............. 25,803 21,508 5,615
Transfer agent fees--Class D (Note 2)..... 15,283 18,048 3,561
Transfer agent fees--Class C (Note 2)..... 7,771 9,161 69
Other..................................... 51,012 22,915 5,612
-------------- -------------- --------------
Total expenses............................ 14,925,877 11,465,595 2,057,959
-------------- -------------- --------------
Investment income--net.................... 119,207,937 82,141,900 18,141,276
-------------- -------------- --------------
Realized & Realized gain on investments--net......... 37,935,579 18,687,317 1,870,059
Unrealized Gain on Change in unrealized appreciation on
Investments--Net investments--net.......................... 5,465,463 18,217,116 104,267
(Notes 1b, 1d -------------- -------------- --------------
& 3): Net Increase in Net Assets Resulting
from Operations........................... $ 162,608,979 $ 119,046,333 $ 20,115,602
============== ============== ==============
</TABLE>
See Notes to Financial Statements.
64
<PAGE>
STATEMENTS OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
Merrill Lynch Municipal Bond Fund, Inc., June 30, 1997
Insured Portfolio National Portfolio
--------------------------- -----------------------------
For the Year For the Year
Ended June 30, Ended June 30,
--------------------------- -----------------------------
INCREASE (DECREASE) IN NET ASSETS: 1997 1996 1997 1996
<S> <C> <C> <C> <C> <C>
Operations: Investment income--net............ $ 119,207,937 $ 131,085,773 $ 82,141,900 $ 83,697,410
Realized gain (loss)
on investments--net............... 37,935,579 (3,897,219) 18,687,317 3,774,748
Change in unrealized
appreciation/depreciation
on investments--net............... 5,465,463 3,149,618 18,217,116 10,373,235
-------------- -------------- -------------- --------------
Net increase in net assets
resulting from operations......... 162,608,979 130,338,172 119,046,333 97,845,393
-------------- -------------- -------------- --------------
Dividends & Investment income--net:
Distributions to Class A......................... (84,438,105) (92,116,281) (57,401,862) (60,489,070)
Shareholders Class B......................... (31,486,251) (36,347,050) (20,879,493) (20,995,504)
(Note 1f): Class C......................... (800,743) (626,972) (1,024,766) (462,078)
Class D......................... (2,482,838) (1,995,470) (2,835,779) (1,750,758)
Realized gain on investments--net:
Class A......................... -- -- -- --
Class B......................... -- -- -- --
Class C......................... -- -- -- --
Class D......................... -- -- -- --
-------------- -------------- -------------- --------------
Net decrease in net assets resulting
from dividends and distributions
to shareholders................... (119,207,937) (131,085,773) (82,141,900) (83,697,410)
-------------- -------------- -------------- --------------
Capital Share Net increase (decrease) in net
Transactions assets derived from capital
(Note 4): share transactions................ (357,799,862) (155,203,186) 916,838 (78,305,357)
-------------- -------------- -------------- --------------
Net Assets: Total increase (decrease)
in net assets..................... (314,398,820) (155,950,787) 37,821,271 (64,157,374)
Beginning of year................. 2,366,632,920 2,522,583,707 1,440,065,685 1,504,223,059
-------------- -------------- -------------- --------------
End of year....................... $2,052,234,100 $2,366,632,920 $1,477,886,956 $1,440,065,685
============== ============== ============== ==============
</TABLE>
See Notes to Financial Statements.
STATEMENTS OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
Limited Maturity Portfolio
--------------------------------
For the Year
Ended June 30,
--------------------------------
Increase (Decrease) in Net Assets: 1997 1996
<S> <C> <C> <C>
Operations: Investment income--net............ $ 18,141,276 $ 21,711,132
Realized gain (loss)
on investments--net............... 1,870,059 1,322,566
Change in unrealized
appreciation/depreciation
on investments--net............... 104,267 (1,526,762)
-------------- --------------
Net increase in net assets
resulting from operations......... 20,115,602 21,506,936
-------------- --------------
Dividends & Investment income--net:
Distributions to Class A......................... (15,176,552) (18,019,083)
Shareholders Class B......................... (2,274,531) (3,055,609)
(Note 1f): Class C......................... (6,456) (25,939)
Class D......................... (683,737) (610,501)
Realized gain on investments--net:
Class A......................... (666,000) --
Class B......................... (108,061) --
Class C......................... (293) --
Class D......................... (28,170) --
-------------- --------------
Net decrease in net assets resulting
from dividends and distributions
to shareholders................... (18,943,800) (21,711,132)
-------------- --------------
Capital Share Net increase (decrease) in net
Transactions assets derived from capital
(Note 4): share transactions................ (86,916,618) (176,922,554)
-------------- --------------
Net Assets: Total increase (decrease)
in net assets..................... (85,744,816) (177,126,750)
Beginning of year................. 504,151,614 681,278,364
-------------- --------------
End of year....................... $ 418,406,798 $ 504,151,614
============== ==============
</TABLE>
See Notes to Financial Statements.
FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
Insured Portfolio
The following per share data and ratios ---------------------------
have been derived from information Class A
provided in the financial statements. ---------------------------
For the Year Ended June 30,
--------------------------------------------------------------------------
INCREASE (DECREASE)
IN NET ASSET VALUE: 1997 1996 1995 1994 1993
<S> <C> <C> <C> <C> <C> <C>
Per Share Net asset value,
Operating beginning of year...... $ 7.91 $ 7.92 $ 7.88 $ 8.64 $ 8.26
Performance: ------------ ------------ ------------ ------------ ------------
Investment income--net.. .45 .44 .46 .47 .50
Realized and unrealized
gain (loss) on
investments--net....... .15 (.01) .18 (.53) .49
------------ ------------ ------------ ------------ ------------
</TABLE>
65
<PAGE>
<TABLE>
<S> <C> <C> <C> <C> <C> <C>
Total from investment
operations.............. .60 .43 .64 (.06) .99
------------ ------------ ------------ ------------ ------------
Less dividends and
distributions:
Investment income--net (.45) (.44) (.46) (.47) (.50)
Realized gain on
investments--net...... -- -- (.14) (.23) (.11)
------------ ------------ ------------ ------------ ------------
Total dividends and
distributions........... (.45) (.44) (.60) (.70) (.61)
------------ ------------ ------------ ------------ ------------
Net asset value,
end of year............. $ 8.06 $ 7.91 $ 7.92 $ 7.88 $ 8.64
============ ============ ============ ============ ============
Total Investment Based on net asset
Return:* value per share......... 7.72% 5.51% 8.60% (1.08%) 12.41%
============ ============ ============ ============ ============
Ratios to Average Expenses................ .44% .43% .43% .42% .42%
Net Assets: ============ ============ ============ ============ ============
Investment income--net.. 5.58% 5.55% 5.78% 5.53% 5.94%
============ ============ ============ ============ ============
Supplemental Net assets, end of
Data: year (in thousands)..... $ 1,441,785 $ 1,572,835 $ 1,706,064 $ 1,941,741 $ 2,225,188
============ ============ ============ ============ ============
Portfolio turnover...... 74.40% 78.49% 35.61% 28.34% 43.86%
============ ============ ============ ============ ============
</TABLE>
<TABLE>
<CAPTION>
Insured Portfolio
THE FOLLOWING PER SHARE DATA AND RATIOS -----------------
HAVE BEEN DERIVED FROM INFORMATION Class B
PROVIDED IN THE FINANCIAL STATEMENTS. -----------------
For the Year Ended June 30,
---------------------------------------------------------------------------
INCREASE (DECREASE)
IN NET ASSET VALUE: 1997 1996 1995 1994 1993
<S> <C> <C> <C> <C> <C> <C>
Per Share Net asset value,
Operating beginning of year....... $ 7.91 $ 7.92 $ 7.87 $ 8.63 $ 8.26
Performance: ------------ ------------ ------------ ------------ ------------
Investment income--net.. .39 .38 .40 .40 .44
Realized and unrealized
gain (loss) on
investments--net........ .14 (.01) .19 (.53) .48
------------ ------------ ------------ ------------ ------------
Total from investment
operations.............. .53 .37 .59 (.13) .92
------------ ------------ ------------ ------------ ------------
Less dividends and
distributions:
Investment income--net (.39) (.38) (.40) (.40) (.44)
Realized gain on
investments--net...... -- -- (.14) (.23) (.11)
------------ ------------ ------------ ------------ ------------
Total dividends and
distributions........... (.39) (.38) (.54) (.63) (.55)
------------ ------------ ------------ ------------ ------------
Net asset value,
end of year............. $ 8.05 $ 7.91 $ 7.92 $ 7.87 $ 8.63
============ ============ ============ ============ ============
Total Investment Based on net asset
Return:* value per share......... 6.78% 4.71% 7.91% (1.81%) 11.44%
============ ============ ============ ============ ============
Ratios to Average Expenses................ 1.19% 1.19% 1.19% 1.17% 1.18%
Net Assets: ============ ============ ============ ============ ============
Investment income--net.. 4.82% 4.80% 5.03% 4.78% 5.17%
============ ============ ============ ============ ============
Supplemental Net assets, end of
Data: year (in thousands)..... $ 560,105 $ 723,090 $ 782,748 $ 866,193 $ 911,307
============ ============ ============ ============ ============
Portfolio turnover...... 74.40% 78.49% 35.61% 28.34% 43.86%
============ ============ ============ ============ ============
</TABLE>
FN:
*TOTAL INVESTMENT RETURNS EXCLUDE THE EFFECTS OF SALES LOADS.
See Notes to Financial Statements.
66
<PAGE>
FINANCIAL HIGHLIGHTS (continued)
<TABLE>
<CAPTION>
Merrill Lynch Municipal Bond Fund, Inc., June 30, 1997
Insured Portfolio
The following per share ---------------------------------------------------------------------
data and ratios have been Class C Class D
derived from information ------------------------------- --------------------------------
provided in the financial For the Period For the Period
statements. For the Year Oct 21, 1994++ For the Year Oct 21, 1994++
Ended June 30, to June 30, Ended June 30, to June 30,
INCREASE (DECREASE) IN -------------- --------------- --------------- ---------------
NET ASSET VALUE: 1997 1996 1995 1997 1996 1995
<S> <C> <C> <C> <C> <C> <C> <C>
Per Share Net asset value,
Operating beginning of period.......$ 7.91 $ 7.92 $ 7.68 $ 7.91 $ 7.92 $ 7.68
Performance: ---------- ---------- ---------- ---------- ---------- ----------
Investment income--net.. .38 .38 .27 .43 .42 .29
Realized and unrealized
gain (loss) on
investments--net.......... .15 (.01) .38 .15 (.01) .38
---------- ---------- ---------- ---------- ---------- ----------
Total from investment
operations................ .53 .37 .65 .58 .41 .67
---------- ---------- ---------- ---------- ---------- ----------
Less dividends and
distributions:
Investment income--net.. (.38) (.38) (.27) (.43) (.42) (.29)
Realized gain on
investments--net........ -- -- (.14) -- -- (.14)
---------- ---------- ---------- ---------- ---------- ----------
Total dividends and
distributions............. (.38) (.38) (.41) (.43) (.42) (.43)
---------- ---------- ---------- ---------- ---------- ----------
Net asset value,
end of period............. 8.06 $ 7.91 $ 7.92 $ 8.06 $ 7.91 $ 7.92
========== ========== ========== ========== ========== ==========
Total Investment Based on net asset
Return:** value per share........... 6.86% 4.65% 8.83%+++ 7.46% 5.25% 9.24%+++
========== ========== ========== ========== ========== ==========
Ratios to Average Expenses.................. 1.25% 1.24% 1.23%* .69% .68% .68%*
Net Assets: ========== ========== ========== ========== ========== ==========
Investment income--net.... 4.77% 4.75% 4.93%* 5.33% 5.31% 5.50%*
========== ========== ========== ========== ========== ==========
Supplemental Net assets, end of
Data: period (in thousands).....$ 11,922 $ 18,936 $ 7,756 $ 38,422 $ 51,772 $ 26,015
========== ========== ========== ========== ========== ==========
Portfolio turnover........ 74.40% 78.49% 35.61% 74.40% 78.49% 35.61%
========== ========== ========== ========== ========== ==========
<CAPTION>
National Portfolio
The following per share --------------------------------------------------------------------------
data and ratios have been Class A
derived from information --------------------------------------------------------------------------
provided in the financial For the Yeear Ended June 30,
statements. --------------------------------------------------------------------------
INCREASE (DECREASE)
IN NET ASSET VALUE: 1997 1996 1995 1994 1993
<S> <C> <C> <C> <C> <C> <C>
Per Share Net asset value,
Operating beginning of year.........$ 10.11 $ 10.02 $ 10.08 $ 11.02 $ 10.64
Performance: ------------ ------------ ------------ ------------ ------------
Investment income--net .60 .60 .60 .62 .67
Realized and unrealized
gain (loss) on
investments--net.......... .27 .09 .15 (.64) .57
------------ ------------ ------------ ------------ ------------
Total from investment
operations................ .87 .69 .75 (.02) 1.24
------------ ------------ ------------ ------------ ------------
Less dividends and
distributions:
Investment income--net.. (.60) (.60) (.60) (.62) (.67)
Realized gain on
investments--net........ -- -- (.19) (.30) (.19)
In excess of realized
gain on investments--net.. -- -- (.02) -- --
------------ ------------ ------------ ------------ ------------
Total dividends and
distributions............. (.60) (.60) (.81) (.92) (.86)
------------ ------------ ------------ ------------ ------------
Net asset value,
end of year...............$ 10.38 $ 10.11 $ 10.02 $ 10.08 $ 11.02
============ ============ ============ ============ ============
Total Investment Based on net asset
Return:** value per share........... 8.84% 6.98% 7.89% (.47%) 12.19%
============ ============ ============ ============ ============
Ratios to Average Expenses.................. .55% .56% .56% .55% .55%
Net Assets: ============ ============ ============ ============ ============
Investment income--net.... 5.86% 5.89% 6.01% 5.72% 6.23%
============ ============ ============ ============ ============
Supplemental Net assets, end of
Data: year (in thousands).......$ 983,650 $ 983,550 $ 1,059,440 $ 1,203,181 $ 1,353,805
============ ============ ============ ============ ============
Portfolio turnover........ 99.52% 95.09% 103.65% 73.33% 65.43%
============ ============ ============ ============ ============
</TABLE>
67
<PAGE>
<TABLE>
<CAPTION>
The following per share data and ratios
have been derived from information National Portfolio
provided in the financial statements. ---------------------------
Class B
---------------------------
For the Year Ended June 30,
---------------------------
INCREASE (DECREASE)
IN NET ASSET VALUE: 1997 1996 1995 1994 1993
<S> <C> <C> <C> <C> <C> <C>
Per Share Net asset value,
Operating beginning of year.........$ 10.11 $ 10.02 $ 10.07 $ 11.02 $ 10.63
Performance: ------------ ------------ ------------ ------------ ------------
Investment income--net.... .52 .52 .52 .54 .59
Realized and unrealized
gain (loss) on
investments--net.......... .26 .09 .16 (.65) .58
------------ ------------ ------------ ------------ ------------
Total from investment
operations................ .78 .61 .68 (.11) 1.17
------------ ------------ ------------ ------------ ------------
Less dividends and
distributions:
Investment income--net.. (.52) (.52) (.52) (.54) (.59)
Realized gain on
investments--net........ -- -- (.19) (.30) (.19)
In excess of realized
gain on investments--net.. -- -- (.02) -- --
------------ ------------ ------------ ------------ ------------
Total dividends and
distributions............. (.52) (.52) (.73) (.84) (.78)
------------ ------------ ------------ ------------ ------------
Net asset value,
end of year...............$ 10.37 $ 0.11 $ 10.02 $ 10.07 $ 11.02
============ ============ ============ ============ ============
Total Investment Based on net asset
Return:** value per share........... 7.92% 6.17% 7.28% (1.39%) 11.45%
============ ============ ============ ============ ============
Ratios to Average Expenses.................. 1.31% 1.32% 1.32% 1.30% 1.31%
Net Assets: ============ ============ ============ ============ ============
Investment income--net.... 5.10% 5.13% 5.25% 4.97% 5.46%
============ ============ ============ ============ ============
Supplemental Net assets, end of
Data: year (in thousands).......$ 415,103 $ 399,341 $ 419,933 $ 459,169 $ 424,071
============ ============ ============ ============ ============
Portfolio turnover........ 99.52% 95.09% 103.65% 73.33% 65.43%
============ ============ ============ ============ ============
<CAPTION>
The following per share National Portfolio
data and ratios have been -----------------------------------------------------------------------
derived from information Class C Class D
provided in the financial --------------------------------- -------------------------------
statements. For the Period For the Period
For the Year Oct 21, 1994++ For the Year Oct 21, 1994++
Ended June 30, to June 30, Ended June 30, to June 30,
INCREASE (DECREASE) IN -------------------- --------------------
NET ASSET VALUE: 1997 1996 1995 1997 1996 1995
<S> <C> <C> <C> <C> <C> <C> <C>
Per Share Net asset value,
Operating beginning of period.......$ 10.11 $ 10.03 $ 9.85 $ 10.12 $ 10.03 $ 9.85
Performance: ---------- ---------- ---------- ---------- ---------- ----------
Investment income--net .52 .52 .36 .58 .57 .40
Realized and unrealized
gain on investments--net.. .27 .08 .39 .27 .09 .39
---------- ---------- ---------- ---------- ---------- ----------
Total from investment
operations................ .79 .60 .75 .85 .66 .79
---------- ---------- ---------- ---------- ---------- ----------
Less dividends and
distributions:
Investment
income--net............. (.52) (.52) (.36) (.58) (.57) (.40)
Realized gain on
investments--net........ -- -- (.19) -- -- (.19)
In excess of
realized gain on
investments--net........ -- -- (.02) -- -- (.02)
---------- ---------- ---------- ---------- ---------- ----------
Total dividends and
distributions............. (.52) (.52) (.57) (.58) (.57) (.61)
---------- ---------- ---------- ---------- ---------- ----------
Net asset value,
end of period.............$ 10.38 $ 10.11 $ 10.03 $ 10.39 $ 10.12 $ 10.03
========== ========== ========== ========== ========== ==========
Total Investment Based on net asset
Return:** value per share........... 7.97% 6.01% 7.97%+++ 8.57% 6.71% 8.37%+++
========== ========== ========== ========== ========== ==========
Ratios to Average Expenses.................. 1.36% 1.37% 1.37%* .80% .81% .81%*
Net Assets: ========== ========== ========== ========== ========== ==========
Investment income--net.... 5.04% 5.08% 5.21%* 5.60% 5.64% 5.78%*
========== ========== ========== ========== ========== ==========
Supplemental Net assets, end of
Data: period (in thousands).....$ 28,096 $ 13,291 $ 5,195 $ 51,038 $ 43,884 $ 19,656
========== ========== ========== ========== ========== ==========
Portfolio turnover........ 99.52% 95.09% 103.65% 99.52% 95.09% 103.65%
========== ========== ========== ========== ========== ==========
</TABLE>
FN:
*ANNUALIZED.
**TOTAL INVESTMENT RETURNS EXCLUDE THE EFFECTS OF SALES LOADS.
++COMMENCEMENT OF OPERATIONS
+++AGGREGATE TOTAL INVESTMENT RETURN.
See Notes to Financial Statements.
68
<PAGE>
<TABLE>
<CAPTION>
Merrill Lynch Municipal Bond Fund, Inc., June 30, 1997
FINANCIAL HIGHLIGHTS (concluded)
The following per share
data and ratios have Limited Maturity Portfolio
been derived from ----------------------------------------------------------------------------
information provided Class A
in the financial ----------------------------------------------------------------------------
statements. For the Year Ended June 30,
----------------------------------------------------------------------------
INCREASE (DECREASE)
IN NET ASSET VALUE: 1997 1996 1995 1994 1993
<S> <C> <C> <C> <C> <C> <C>
Per Share Net asset value,
Operating beginning of year $ 9.91 $ 9.92 $ 9.87 $ 10.01 $ 9.91
Performance: ------------ ----------- ------------ ------------ ------------
Investment income--net .39 .38 .38 .37 .41
Realized and unrealized
gain (loss) on
investments--net .04 (.01) .05 (.14) .10
------------ ----------- ------------ ------------ ------------
Total from investment
operations .43 .37 .43 .23 .51
------------ ----------- ------------ ------------ ------------
Less dividends and
distributions:
Investment income--net (.39) (.38) (.38) (.37) (.41)
Realized gain on
investments--net (.02) -- -- -- --
------------ ----------- ------------ ------------ ------------
Total dividends and
distributions (.41) (.38) (.38) (.37) (.41)
------------ ----------- ------------ ------------ ------------
Net asset value,
end of year $ 9.93 $ 9.91 $ 9.92 $ 9.87 $ 10.01
============ =========== ============ ============ ============
Total Investment Based on net asset
Return:** value per share 4.40% 3.75% 4.53% 2.30% 5.28%
============ =========== ============ ============ ============
Ratios to Average Expenses .39% .44% .41% .40% .41%
Net Assets: ============ =========== ============ ============ ============
Investment income--net 3.93% 3.83% 3.86% 3.68% 4.13%
============ =========== ============ ============ ============
Supplemental Net assets, end of
Data: year (in thousands) $ 343,641 $ 417,097 $ 536,474 $ 790,142 $ 846,736
============ =========== ============ ============ ============
Portfolio turnover 61.90% 88.32% 37.33% 45.67% 65.43%
============ =========== ============ ============ ============
<CAPTION>
The following per share Limited Maturity Portfolio
data and ratios have ----------------------------------------------------------------------------
been derived from Class B For the Period
information provided in ----------------------------------------------------------- Nov. 2, 1992 to
the financial statements. For the Year Ended June 30, June 30, 1993
----------------------------------------------------------- ---------------
INCREASE (DECREASE)
IN NET ASSET VALUE: 1997 1996 1995 1994
<S> <C> <C> <C> <C> <C> <C>
Per Share Net asset value,
Operating beginning of period $ 9.91 $ 9.92 $ 9.87 $ 10.01 $ 9.93
Performance: ------------ ----------- ------------ ------------- ------------
Investment income--net .36 .35 .35 .33 .24
Realized and unrealized
gain (loss) on
investments--net .05 (.01) .05 (.14) .08
------------ ----------- ------------ ------------- ------------
Total from investment
operations .41 .34 .40 .19 .32
------------ ----------- ------------ ------------- ------------
Less dividends and
distributions:
Investment income--net (.36) (.35) (.35) (.33) (.24)
Realized gain on
investments--net (.02) -- -- -- --
------------ ----------- ------------ ------------- ------------
Total dividends and
distributions (.38) (.35) (.35) (.33) (.24)
------------ ----------- ------------ ------------- ------------
Net asset value,
end of period $ 9.94 $ 9.91 $ 9.92 $ 9.87 $ 10.01
============ =========== ============ ============ ============
Total Investment Based on net asset
Return:** value per share 4.13% 3.37% 4.14% 1.98% 3.26%+++
============ =========== ============ ============ ============
Ratios to Average Expenses .75% .80% .78% .76% .76%*
Net Assets: ============ =========== ============ ============ ============
Investment income--net 3.58% 3.46% 3.50% 3.33% 3.60%*
============ =========== ============ ============ ============
Supplemental Net assets, end of
Data: period (in thousands) $ 54,275 $ 71,075 $ 129,581 $ 145,534 $ 95,179
============ =========== ============ ============ ============
Portfolio turnover 61.90% 88.32% 37.33% 45.67% 65.43%
============ =========== ============ ============ ============
</TABLE>
69
<PAGE>
<TABLE>
<CAPTION>
Limited Maturity Portfolio
The following per share ----------------------------------------------------------------------
data and ratios have been Class C Class D
derived from information --------------------------------- ---------------------------------
provided in the financial For the Period For the Period
statements. For the Year Oct 21, 1994++ For the Year Oct 21, 1994++
Ended June 30, to June 30, Ended June 30, to June 30,
INCREASE (DECREASE) IN -------------------------------- ---------------------------------
NET ASSET VALUE: 1997 1996 1995 1997 1996 1995
<S> <C> <C> <C> <C> <C> <C> <C>
Per Share Net asset value,
Operating beginning of period..... $ 9.88 $ 9.92 $ 9.83 $ 9.91 $ 9.93 $ 9.83
Performance: ---------- ---------- ---------- ---------- ---------- ----------
Investment income--net.. .35 .34 .25 .38 .37 .26
Realized and unrealized
gain (loss) on
investments--net........ .05 (.04) .09 .05 (.02) .10
---------- ---------- ---------- ---------- ---------- ----------
Total from investment
operations.............. .40 .30 .34 .43 .35 .36
---------- ---------- ---------- ---------- ---------- ----------
Less dividends
and distributions:
Investment income--net (.35) (.34) (.25) (.38) (.37) (.26)
Realized gain on
investments--net...... (.02) -- -- (.02) -- --
---------- ---------- ---------- ---------- ---------- ----------
Total dividends and
distributions........... (.37) (.34) (.25) (.40) (.37) (.26)
---------- ---------- ---------- ---------- ---------- ----------
Net asset value,
end of period........... $ 9.91 $ 9.88 $ 9.92 $ 9.94 $ 9.91 $ 9.93
========== ========== ========== ========== ========== ==========
Total Investment Based on net asset
Return:** value per share......... 4.11% 2.97% 3.52%+++ 4.40% 3.55% 3.73%+++
========== ========== ========== ========== ========== ==========
Ratios to Average Expenses................ .75% .80% .70%* .48% .54% .53%*
Net Assets: ========== ========== ========== ========== ========== ==========
Investment income--net.. 3.57% 3.41% 3.61%* 3.84% 3.71% 3.78%*
========== ========== ========== ========== ========== ==========
Supplemental Net assets, end of
Data: period (in thousands)... $ 108 $ 94 $ 3,965 $ 20,383 $ 15,886 $ 11,258
========== ========== ========== ========== ========== ==========
Portfolio turnover...... 61.90% 88.32% 37.33% 61.90% 88.32% 37.33%
========== ========== ========== ========== ========== ==========
</TABLE>
FN:
*ANNUALIZED.
**TOTAL INVESTMENT RETURNS EXCLUDE THE EFFECTS OF SALES LOADS.
++COMMENCEMENT OF OPERATIONS.
+++AGGREGATE TOTAL INVESTMENT RETURN.
See Notes to Financial Statements.
70
<PAGE>
Merrill Lynch Municipal Bond Fund, Inc., June 30, 1997
NOTES TO FINANCIAL STATEMENTS
1. SIGNIFICANT ACCOUNTING POLICIES:
Merrill Lynch Municipal Bond Fund, Inc. (the "Fund") is registered
under the Investment Company Act of 1940 as a diversified, open-end
management investment company. The Fund's Portfolios offer four
classes of shares under the Merrill Lynch Select Pricing SM System.
Shares of Class A and Class D are sold with a front-end sales
charge. Shares of Class B and Class C may be subject to a contingent
deferred sales charge. All classes of shares have identical voting,
dividend, liquidation and other rights and the same terms and
conditions, except that Class B, Class C and Class D Shares bear
certain expenses related to the account maintenance of such shares,
and Class B and Class C Shares also bear certain expenses related to
the distribution of such shares. Each class has exclusive voting
rights with respect to matters relating to its account maintenance
and distribution expenditures. The following is a summary of
significant accounting policies followed by the Fund.
(a) VALUATION OF INVESTMENTS--Insured Portfolio: Where bonds in the
Portfolio have not been insured pursuant to policies obtained by the
issuer, the Fund has obtained insurance with respect to the payment
of interest and principal of each bond. Such insurance is valid as
long as the bonds are held by the Fund.
ALL PORTFOLIOS: Municipal bonds and money market securities are
traded primarily in the over-the-counter markets and are valued at
the most recent bid price or yield equivalent as obtained from
dealers that make markets in such securities. Positions in futures
contracts and options thereon, which are traded on exchanges, are
valued at closing prices as of the close of such exchanges. Assets
for which market quotations are not readily available are valued at
fair value on a consistent basis using methods determined in good
faith by the Fund's Board of Directors, including valuations
furnished by a pricing service retained by the Fund, which may
utilize a matrix system for valuations. The procedures of the
pricing service and its valuations are reviewed by the officers of
the Fund under the general supervision of the Board of Directors.
(b) DERIVATIVE FINANCIAL INSTRUMENTS--The Fund may engage in various
portfolio strategies to seek to increase its return by hedging its
portfolio against adverse movements in the debt markets. Losses may
arise due to changes in the value of the contract or if the
counterparty does not perform under the contract.
* FINANCIAL FUTURES CONTRACTS--The National and Limited Maturity
Portfolios (the "Portfolios") may purchase or sell interest rate
futures contracts and options on such futures contracts for the
purpose of hedging the market risk on existing securities or the
intended purchase of securities. Futures contracts are contracts for
delayed delivery of securities at a specific future date and at a
specific price or yield. Upon entering into a contract, the
Portfolios deposit and maintain as collateral such initial margin as
required by the exchange on which the transaction is effected.
Pursuant to the contract, the Portfolios agree to receive from or
pay to the broker an amount of cash equal to the daily fluctuation
in value of the contract. Such receipts or payments are known as
variation margin and are recorded by the Portfolios as unrealized
gains or losses. When the contract is closed, the Portfolios record
a realized gain or loss equal to the difference between the value of
the contract at the time it was opened and the value at the time it
was closed.
(c) INCOME TAXES--It is the Fund's policy to comply with the
requirements of the Internal Revenue Code applicable to regulated
investment companies and to distribute substantially all of its
taxable income to its shareholders. Therefore, no Federal income tax
provision is required.
(d) SECURITY TRANSACTIONS AND INVESTMENT INCOME--Security
transactions are recorded on the dates the transactions are entered
into (the trade dates). Interest income is recognized on the accrual
basis. Discounts and market premiums are amortized into interest
income. Realized gains and losses on security transactions are
determined on the identified cost basis.
(e) PREPAID REGISTRATION FEES--Prepaid registration fees are charged
to expenses as the related shares are issued.
(f) DIVIDENDS AND DISTRIBUTIONS--Dividends from net investment
income are declared daily and paid monthly. Distributions of capital
gains are recorded on the ex-dividend dates.
2. INVESTMENT ADVISORY AGREEMENT AND TRANSACTIONS
WITH AFFILIATES:
The Fund has entered into an Investment Advisory Agreement with Fund
Asset Management, L.P. ("FAM"). The general partner of FAM is
Princeton Services, Inc. ("PSI"), an indirect wholly-owned
subsidiary of Merrill Lynch & Co., Inc. ("ML & Co."), which is the
limited partner. The Fund has also entered into a Distribution
Agreement and Distribution Plans with Merrill Lynch Funds
Distributor, Inc. ("MLFD" or "Distributor"), a wholly-owned
subsidiary of Merrill Lynch Group, Inc.
FAM is responsible for the management of the Fund's portfolios and
provides the necessary personnel, facilities, equipment and certain
other services necessary to the operation of the Fund. For such
services, FAM receives at the end of each month a fee with respect
71
<PAGE>
to each Portfolio at the annual rates set forth below which are
based upon the average daily value of the Fund's net assets.
Rate of Advisory Fee
--------------------------------
AGGREGATE OF AVERAGE DAILY LIMITED
NET ASSETS OF THE THREE INSURED NATIONAL MATURITY
COMBINED PORTFOLIOS PORTFOLIO PORTFOLIO PORTFOLIO
- -------------------------- --------- --------- ---------
Not exceeding $250 million .40 % .50 % .40 %
In excess of $250 million
but not exceeding $400 million .375 .475 .375
In excess of $400 million
but not exceeding $550 million .375 .475 .35
In excess of $550 million
but not exceeding $1.5 billion .375 .475 .325
In excess of $1.5 billion .35 .475 .325
Pursuant to the distribution plans (the "Distribution Plans")
adopted by the Fund in accordance with Rule 12b-1 under the
Investment Company Act of 1940, the Fund pays the Distributor
ongoing account maintenance and distribution fees. The fees are
accrued daily and paid monthly at annual rates based upon the
average daily net assets of the shares as follows:
ACCOUNT MAINTENANCE FEES DISTRIBUTION FEES
----------------------------------- ---------------------------------
LIMITED LIMITED
INSURED NATIONAL MATURITY INSURED NATIONAL MATURITY
PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO
--------- --------- --------- --------- --------- ---------
Class B .25% .25% .15% .50% .50% .20%
Class C .25% .25% .15% .55% .55% .20%
Class D .25% .25% .10% -- -- --
---- ---- ---- ---- ---- ---
Pursuant to a sub-agreement with the Distributor, Merrill Lynch,
Pierce, Fenner & Smith Inc. ("MLPF&S"), a subsidiary of ML & Co.,
also provides account maintenance and distribution services to the
Fund. The ongoing account maintenance fee compensates the
Distributor and MLPF&S for providing account maintenance services to
Class B, Class C and Class D shareholders. The ongoing distribution
fee compensates the Distributor and MLPF&S for providing shareholder
and distribution-related services to Class B and Class C
shareholders.
For the year ended June 30, 1997, MLFD earned underwriting
discounts and direct commissions and MLPF&S earned dealer
concessions on sales of the Fund's Class A and Class D Shares
follows:
LIMITED
INSURED NATIONAL MATURITY
PORTFOLIO PORTFOLIO PORTFOLIO
--------- --------- ---------
CLASS A SHARES:
MLFD $ 24,532 $ 16,659 $ 1,139
MLPF&S 168,171 149,402 11,295
-------- -------- -------
CLASS D SHARES:
MLFD 7,722 11,866 1,634
MLPF&S 69,053 98,975 20,019
-------- -------- -------
For the year ended June 30, 1997, MLPF&S received contingent
deferred sales charges of $1,906,615 relating to transactions in
Class B Shares, amounting to $979,435, $868,705 and $58,475 in the
Insured, National and Limited Maturity Portfolios, respectively, and
$17,583, relating to transactions in Class C Shares, amounting to
$6,915, $10,273 and $395 in the Insured, National and Limited
Maturity Portfolios, respectively, and $358,940 relating to
transactions in Class D Shares, amounting to $180,983 and $177,957
in the Insured and National Portfolios, respectively.
Merrill Lynch Financial Data Services, Inc. ("MLFDS"), a wholly-
owned subsidiary of ML & Co., is the Fund's transfer agent.
Accounting services are provided to the Fund by FAM at cost.
Certain officers and/or directors of the Fund are officers and/or
directors of FAM, PSI, MLFD, MLFDS, and/or ML & Co.
3. INVESTMENTS:
Purchases and sales of investments, excluding short-term securities,
for the year ended June 30, 1997 were as follows:
PURCHASES SALES
--------- -----
Insured Portfolio $1,539,869,960 $1,795,948,640
National Portfolio 1,385,982,904 1,395,027,690
Limited Maturity Portfolio 259,616,429 327,912,199
-------------- --------------
Net realized and unrealized gains (losses) as of June 30, 1997 were
as follows:
REALIZED UNREALIZED
INSURED PORTFOLIO GAINS GAINS
- ----------------- -------- ----------
Long-term investments $ 37,935,579 $ 112,603,346
-------------- --------------
Total $ 37,935,579 $ 112,603,346
============== ==============
REALIZED UNREALIZED
NATIONAL PORTFOLIO GAINS (LOSSES) GAINS
- ------------------ -------------- ----------
Long-term investments $ 22,647,030 $ 90,466,552
Financial futures contracts (3,959,713) --
-------------- --------------
Total $ 18,687,317 $ 90,466,552
============== ==============
72
<PAGE>
Merrill Lynch Municipal Bond Fund Inc., June 30, 1997
NOTES TO FINANCIAL STATEMENTS (continued)
- --------------------------------------------------------------
REALIZED UNREALIZED
LIMITED MATURITY PORTFOLIO GAINS GAINS
- -------------------------- -------- ----------
Long-term investments $ 1,870,059 $ 1,388,965
Short-term investments -- 11,807
-------------- --------------
Total $ 1,870,059 $ 1,400,772
============== ==============
- --------------------------------------------------------------
As of June 30, 1997 net unrealized appreciation/depreciation for
Federal income tax purposes were as follows:
- ---------------------------------------------------------------------
GROSS GROSS NET
UNREALIZED UNREALIZED UNREALIZED
APPRECIATION DEPRECIATION APPRECIATION
------------ ------------ ------------
Insured Portfolio $114,126,818 $ (1,772,618) $112,354,200
National Portfolio 92,758,314 (2,333,380) 90,424,934
Limited Maturity
Portfolio 1,811,320 (410,548) 1,400,772
- ---------------------------------------------------------------------
The aggregate cost of investments at June 30, 1997 for Federal
income tax purposes was $1,910,659,088 for the Insured Portfolio,
$1,357,629,654 for the National Portfolio, and $422,830,068 for the
Limited Maturity Portfolio.
4. CAPITAL SHARE TRANSACTIONS:
Net increase (decrease) on net assets derived from capital share
transactions for years ended June 30, 1997 and June 30, 1996 were
$(357,799,862) and $(155,203,186), respectively, for the Insured
Portfolio; $916,838 and $(78,305,357), respectively for the National
Portfolio and $(86,916,618) and $(176,922,554), respectively, for
the Limited Maturity Portfolio.
Transactions in capital shares for each class were as follows:
- --------------------------------------------------------------
INSURED PORTFOLIO
- --------------------------------------------------------------
CLASS A SHARES FOR THE YEAR DOLLAR
ENDED JUNE 30, 1997 SHARES AMOUNT
- --------------------------- ------ ------
Shares sold 4,575,281 $ 36,693,201
Shares issued to shareholders
in reinvestment of dividends 4,476,285 35,809,346
-------------- --------------
Total issued 9,051,566 72,502,547
Shares redeemed (28,976,583) (232,180,607)
-------------- --------------
Net decrease (19,925,017) $ (159,678,060)
============== ==============
- --------------------------------------------------------------
INSURED PORTFOLIO
- --------------------------------------------------------------
CLASS A SHARES FOR THE YEAR DOLLAR
ENDED JUNE 30, 1996 SHARES AMOUNT
- --------------------------- ------ ------
Shares sold 5,469,354 $ 44,001,252
Shares issued to shareholders
in reinvestment of dividends 4,986,858 40,042,330
-------------- --------------
Total issued 10,456,212 84,043,582
Shares redeemed (27,028,706) (217,178,396)
-------------- --------------
Net decrease (16,572,494) $ (133,134,814)
============== ==============
- --------------------------------------------------------------
INSURED PORTFOLIO
- --------------------------------------------------------------
CLASS B SHARES FOR THE YEAR DOLLAR
ENDED JUNE 30, 1997 SHARES AMOUNT
- --------------------------- ------ ------
Shares sold 5,729,555 $ 45,791,612
Shares issued to shareholders
in reinvestment of dividends 2,004,591 16,028,058
-------------- --------------
Total issued 7,734,146 61,819,670
Automatic conversion of shares (654,971) (5,237,060)
Shares redeemed (29,004,786) (232,763,104)
-------------- --------------
Net decrease (21,925,611) $ (176,180,494)
============== ==============
- --------------------------------------------------------------
INSURED PORTFOLIO
- --------------------------------------------------------------
CLASS B SHARES FOR THE YEAR DOLLAR
ENDED JUNE 30, 1996 SHARES AMOUNT
- --------------------------- ------ ------
Shares sold 13,419,351 $ 107,963,983
Shares issued to shareholders
in reinvestment of dividends 2,346,122 18,823,418
-------------- --------------
Total issued 15,765,473 126,787,401
Automatic conversion of shares (355,991) (2,835,885)
Shares redeemed (22,831,309) (183,110,029)
-------------- --------------
Net decrease (7,421,827) $ (59,158,513)
============== ==============
- --------------------------------------------------------------
INSURED PORTFOLIO
- --------------------------------------------------------------
CLASS C SHARES FOR THE YEAR DOLLAR
ENDED JUNE 30, 1997 SHARES AMOUNT
- --------------------------- ------ ------
Shares sold 742,610 $ 5,954,624
Shares issued to shareholders
in reinvestment of dividends 65,517 524,081
-------------- --------------
Total issued 808,127 6,478,705
Shares redeemed (1,722,393) (13,923,454)
-------------- --------------
Net decrease (914,266) $ (7,444,749)
============== ==============
- --------------------------------------------------------------
73
<PAGE>
- --------------------------------------------------------------
INSURED PORTFOLIO
- --------------------------------------------------------------
CLASS C SHARES FOR THE YEAR DOLLAR
ENDED JUNE 30, 1996 SHARES AMOUNT
- --------------------------------------------------------------
Shares sold 1,893,607 $ 15,225,385
Shares issued to shareholders
in reinvestment of dividends 53,775 431,720
-------------- --------------
Total issued 1,947,382 15,657,105
Shares redeemed (532,614) (4,266,135)
-------------- --------------
Net increase 1,414,768 $ 11,390,970
============== ==============
- --------------------------------------------------------------
INSURED PORTFOLIO
- --------------------------------------------------------------
CLASS D SHARES FOR THE YEAR DOLLAR
ENDED JUNE 30, 1997 SHARES AMOUNT
- --------------------------------------------------------------
Shares sold 12,779,520 $ 101,973,172
Automatic conversion of shares 654,971 5,237,060
Shares issued to shareholders
in reinvestment of dividends 147,570 1,180,790
-------------- --------------
Total issued 13,582,061 108,391,022
Shares redeemed (15,359,300) (122,887,581)
-------------- --------------
Net decrease (1,777,239) $ (14,496,559)
============== ==============
- --------------------------------------------------------------
INSURED PORTFOLIO
- --------------------------------------------------------------
CLASS D SHARES FOR THE YEAR DOLLAR
ENDED JUNE 30, 1996 SHARES AMOUNT
- --------------------------------------------------------------
Shares sold 14,968,451 $ 120,849,832
Automatic conversion of shares 355,872 2,835,885
Shares issued to shareholders
in reinvestment of dividends 118,797 953,911
-------------- --------------
Total issued 15,443,120 124,639,628
Shares redeemed (12,181,923) (98,940,457)
-------------- --------------
Net increase 3,261,197 $ 25,699,171
============== ==============
- --------------------------------------------------------------
NATIONAL PORTFOLIO
- --------------------------------------------------------------
CLASS A SHARES FOR THE YEAR DOLLAR
ENDED JUNE 30, 1997 SHARES AMOUNT
- --------------------------------------------------------------
Shares sold 7,233,788 $ 74,396,433
Shares issued to shareholders
in reinvestment of dividends 2,685,525 27,558,310
-------------- --------------
Total issued 9,919,313 101,954,743
Shares redeemed (12,395,672) (127,128,438)
-------------- --------------
Net decrease (2,476,359) $ (25,173,695)
============== ==============
- --------------------------------------------------------------
NATIONAL PORTFOLIO
- --------------------------------------------------------------
CLASS A SHARES FOR THE YEAR DOLLAR
ENDED JUNE 30, 1996 SHARES AMOUNT
- --------------------------------------------------------------
Shares sold 1,874,548 $ 19,100,358
Shares issued to shareholders
in reinvestment of dividends 2,851,242 29,021,298
-------------- --------------
Total issued 4,725,790 48,121,656
Shares redeemed (13,151,450) (133,904,005)
-------------- --------------
Net decrease (8,425,660) $ (85,782,349)
============== ==============
- --------------------------------------------------------------
NATIONAL PORTFOLIO
- --------------------------------------------------------------
CLASS B SHARES FOR THE YEAR DOLLAR
ENDED JUNE 30, 1997 SHARES AMOUNT
- --------------------------------------------------------------
Shares sold 11,777,487 $ 121,489,230
Shares issued to shareholders
in reinvestment of dividends 975,743 10,006,225
-------------- --------------
Total issued 12,753,230 131,495,455
Automatic conversion of shares (495,542) (5,075,762)
Shares redeemed (11,745,518) (120,476,972)
-------------- --------------
Net increase 512,170 $ 5,942,721
============== ==============
- --------------------------------------------------------------
NATIONAL PORTFOLIO
- --------------------------------------------------------------
CLASS B SHARES FOR THE YEAR DOLLAR
ENDED JUNE 30, 1996 SHARES AMOUNT
- --------------------------------------------------------------
Shares sold 6,798,097 $ 69,266,670
Shares issued to shareholders
in reinvestment of dividends 964,834 9,817,408
-------------- --------------
Total issued 7,762,931 79,084,078
Automatic conversion of shares (175,462) (1,776,371)
Shares redeemed (9,989,397) (101,634,492)
-------------- --------------
Net decrease (2,401,928) $ (24,326,785)
============== ==============
- --------------------------------------------------------------
NATIONAL PORTFOLIO
- --------------------------------------------------------------
CLASS C SHARES FOR THE YEAR DOLLAR
ENDED JUNE 30, 1997 SHARES AMOUNT
- --------------------------------------------------------------
Shares sold 2,182,254 $ 22,508,694
Shares issued to shareholders
in reinvestment of dividends 56,394 579,121
-------------- --------------
Total issued 2,238,648 23,087,815
Shares redeemed (845,937) (8,691,227)
-------------- --------------
Net increase 1,392,711 $ 14,396,588
============== ==============
- --------------------------------------------------------------
NATIONAL PORTFOLIO
- --------------------------------------------------------------
CLASS C SHARES FOR THE YEAR DOLLAR
ENDED JUNE 30, 1996 SHARES AMOUNT
- --------------------------------------------------------------
Shares sold 1,026,234 $ 10,483,940
Shares issued to shareholders
in reinvestment of dividends 22,712 231,247
-------------- --------------
Total issued 1,048,946 10,715,187
Shares redeemed (252,941) (2,580,645)
-------------- --------------
Net increase 796,005 $ 8,134,542
============== ==============
- --------------------------------------------------------------
NATIONAL PORTFOLIO
- --------------------------------------------------------------
CLASS D SHARES FOR THE YEAR DOLLAR
ENDED JUNE 30, 1997 SHARES AMOUNT
- --------------------------------------------------------------
Shares sold 10,536,060 $ 108,053,333
Automatic conversion of shares 495,032 5,075,762
Shares issued to shareholders
in reinvestment of dividends 114,893 1,179,969
-------------- --------------
Total issued 11,145,985 114,309,064
Shares redeemed (10,568,675) (108,557,840)
-------------- --------------
Net increase 577,310 $ 5,751,224
============== ==============
74
<PAGE>
Merrill Lynch Municipal Bond Fund, Inc., June 30, 1997
NOTES TO FINANCIAL STATEMENTS (concluded)
- --------------------------------------------------------------
NATIONAL PORTFOLIO
- --------------------------------------------------------------
CLASS D SHARES FOR THE YEAR DOLLAR
ENDED JUNE 30, 1996 SHARES AMOUNT
- --------------------------------------------------------------
Shares sold 13,624,624 $ 139,439,739
Automatic conversion of shares 175,315 1,776,371
Shares issued to shareholders
in reinvestment of dividends 74,448 759,889
-------------- --------------
Total issued 13,874,387 141,975,999
Shares redeemed (11,497,765) (118,306,764)
-------------- --------------
Net increase 2,376,622 $ 23,669,235
============== ==============
- --------------------------------------------------------------
LIMITED MATURITY PORTFOLIO
- --------------------------------------------------------------
CLASS A SHARES FOR THE YEAR DOLLAR
ENDED JUNE 30, 1997 SHARES AMOUNT
- --------------------------------------------------------------
Shares sold 2,507,909 $ 24,924,435
Shares issued to shareholders
in reinvestment of dividends and
distributions 920,017 9,134,741
-------------- --------------
Total issued 3,427,926 34,059,176
Shares redeemed (10,923,304) (108,467,108)
-------------- --------------
Net decrease (7,495,378) $ (74,407,932)
============== ==============
- --------------------------------------------------------------
LIMITED MATURITY PORTFOLIO
- --------------------------------------------------------------
CLASS A SHARES FOR THE YEAR DOLLAR
ENDED JUNE 30, 1996 SHARES AMOUNT
- --------------------------------------------------------------
Shares sold 2,286,543 $ 22,746,544
Shares issued to shareholders
in reinvestment of dividends 1,098,806 10,929,822
-------------- --------------
Total issued 3,385,349 33,676,366
Shares redeemed (15,364,211) (152,811,221)
-------------- --------------
Net decrease (11,978,862) $ (119,134,855)
============== ==============
- --------------------------------------------------------------
LIMITED MATURITY PORTFOLIO
- --------------------------------------------------------------
CLASS B SHARES FOR THE YEAR DOLLAR
ENDED JUNE 30, 1997 SHARES AMOUNT
- --------------------------------------------------------------
Shares sold 1,746,766 $ 17,337,114
Shares issued to shareholders
in reinvestment of dividends and
distributions 156,709 1,556,287
-------------- --------------
Total issued 1,903,475 18,893,401
Automatic conversion of shares (11,559) (114,986)
Shares redeemed (3,599,880) (35,740,926)
-------------- --------------
Net decrease (1,707,964) $ (16,962,511)
============== ==============
- --------------------------------------------------------------
LIMITED MATURITY PORTFOLIO
- --------------------------------------------------------------
CLASS B SHARES FOR THE YEAR DOLLAR
ENDED JUNE 30, 1996 SHARES AMOUNT
- --------------------------------------------------------------
Shares sold 1,855,378 $ 18,448,441
Shares issued to shareholders
in reinvestment of dividends 196,945 1,959,129
-------------- --------------
Total issued 2,052,323 20,407,570
Automatic conversion of shares (1,991) (19,792)
Shares redeemed (7,937,046) (78,947,865)
-------------- --------------
Net decrease (5,886,714) $ (58,560,087)
============== ==============
- --------------------------------------------------------------
LIMITED MATURITY PORTFOLIO
- --------------------------------------------------------------
CLASS C SHARES FOR THE YEAR DOLLAR
ENDED JUNE 30, 1997 SHARES AMOUNT
- --------------------------------------------------------------
Shares sold 125,730 $ 1,243,007
Shares issued to shareholders
in reinvestment of dividends and
distributions 526 5,211
-------------- --------------
Total issued 126,256 1,248,218
Shares redeemed (124,926) (1,236,530)
-------------- --------------
Net increase 1,330 $ 11,688
============== ==============
75
<PAGE>
- --------------------------------------------------------------
LIMITED MATURITY PORTFOLIO
- --------------------------------------------------------------
CLASS C SHARES FOR THE YEAR DOLLAR
ENDED JUNE 30, 1996 SHARES AMOUNT
- --------------------------------------------------------------
Shares sold 1,035,202 $ 10,296,541
Shares issued to shareholders
in reinvestment of dividends 1,535 15,247
-------------- --------------
Total issued 1,036,737 10,311,788
Shares redeemed (1,426,909) (14,189,010)
-------------- --------------
Net decrease (390,172) $ (3,877,222)
============== ==============
- --------------------------------------------------------------
LIMITED MATURITY PORTFOLIO
- --------------------------------------------------------------
CLASS D SHARES FOR THE YEAR DOLLAR
ENDED JUNE 30, 1997 SHARES AMOUNT
- --------------------------------------------------------------
Shares sold 3,468,693 $ 34,441,741
Automatic conversion of shares 11,555 114,986
Shares issued to shareholders
in reinvestment of dividends and
distributions 40,524 402,564
-------------- --------------
Total issued 3,520,772 34,959,291
Shares redeemed (3,072,180) (30,517,154)
-------------- --------------
Net increase 448,592 $ 4,442,137
============== ==============
- --------------------------------------------------------------
LIMITED MATURITY PORTFOLIO
- --------------------------------------------------------------
CLASS D SHARES FOR THE YEAR DOLLAR
ENDED JUNE 30, 1996 SHARES AMOUNT
- --------------------------------------------------------------
Shares sold 5,319,786 $ 52,931,793
Automatic conversion of shares 1,989 19,792
Shares issued to shareholders
in reinvestment of dividends 32,445 322,874
-------------- --------------
Total issued 5,354,220 53,274,459
Shares redeemed (4,886,241) (48,624,849)
-------------- --------------
Net increase 467,979 $ 4,649,610
============== ==============
5. CAPITAL LOSS CARRYFORWARD:
At June 30, 1997, the Fund had a net capital loss carryforward as
follows: Approximately $4,620,000 in the Insured Portfolio, of which
$1,981,000 expires in 2003 and $2,639,000 expires in 2004;
approximately $48,141,000 in the National Portfolio, of which
$19,665,000 expires in 2003 and $28,476,000 expires in 2004; and
approximately $4,658,000 in the Limited Maturity Portfolio, of which
$2,590,000 expires in 1998, $22,000 expires in 1999, $25,000 expires
in 2002, and $2,021,000 expires in 2003. These amounts will be
available to offset like amounts of any future taxable gains.
76
<PAGE>
- ------
TABLE OF CONTENTS
PAGE
Investment Objective and Policies....... 2
Insurance on Portfolio Securities..... 2
Risk Factors In Transactions In Junk
Bonds............................... 2
Transactions In Futures Contracts..... 3
Investment Restrictions................. 4
Management of the Fund.................. 6
Directors and Officers................ 6
Compensation of Directors............. 8
Management and Advisory
Arrangements........................ 8
Purchase of Shares...................... 11
Initial Sales Charge Alternatives --
Class A and Class D Shares.......... 11
Reduced Initial Sales Charges -- Class
A and Class D Shares................ 13
Distribution Plans.................... 16
Limitations on the Payment of Deferred
Sales Charges....................... 17
Redemption of Shares.................... 19
Reinstatement Privilege............... 20
Deferred Sales Charge --
Class B and Class C Shares.......... 20
Determination of Net Asset Value........ 21
Portfolio Transactions and Brokerage
Commissions........................... 22
Dividends, Distributions and Taxes...... 23
Shareholder Services.................... 26
Investment Account.................... 26
Automatic Investment Plans............ 27
Automatic Reinvestment of Dividends
and Capital Gains Distributions..... 27
Systematic Withdrawal Plans........... 28
Exchange Privilege.................... 29
Performance Data........................ 31
Additional Information.................. 35
Organization of the Fund.............. 35
Description of Temporary
Investments......................... 36
Insurance on Portfolio Securities..... 36
Description of Financial Futures
Contracts........................... 38
Computation of Offering Price Per
Share............................... 42
Independent Auditors' Report............ 44
Financial Statements.................... 45
Code # 10130-1097
Merrill Lynch Logo
MERRILL LYNCH
MUNICIPAL BOND FUND, INC.
[MLYNCH COMPASS GRAPH]
STATEMENT OF
ADDITIONAL
INFORMATION
October 7, 1997
Distributor:
Merrill Lynch
Funds Distributor, Inc.
<PAGE>
APPENDIX FOR GRAPHIC AND IMAGE MATERIAL
Pursuant to Rule 304 of Regulation S-T, the following table presents
fair and accurate narrative descriptions of graphic and image material omitted
from this EDGAR Submission File due to ASCII-incompatibility and
cross-references this material to the location of each occurrence in the text.
DESCRIPTION OF OMITTED LOCATION OF GRAPHIC
GRAPHIC OR IMDATE OR IMAGE IN TEST
- ---------------------- -------------------
Compass plate, circular Back cover of Prospectus and
graph paper and Merrill Lynch back cover of Statement of
logo including stylized market Additional Information
bull.
<PAGE>
EXHIBIT 17(c)
PROSPECTUS
- ----------
November 27, 1996
MERRILL LYNCH MULTI-STATE LIMITED MATURITY MUNICIPAL SERIES TRUST
<TABLE>
<S> <C>
MERRILL LYNCH ARIZONA LIMITED MATURITY MERRILL LYNCH MICHIGAN LIMITED MATURITY
MUNICIPAL BOND FUND MUNICIPAL BOND FUND
MERRILL LYNCH CALIFORNIA LIMITED MATURITY MERRILL LYNCH NEW JERSEY LIMITED MATURITY
MUNICIPAL BOND FUND MUNICIPAL BOND FUND
MERRILL LYNCH FLORIDA LIMITED MATURITY MERRILL LYNCH NEW YORK LIMITED MATURITY
MUNICIPAL BOND FUND MUNICIPAL BOND FUND
MERRILL LYNCH MASSACHUSETTS LIMITED MATURITY MERRILL LYNCH PENNSYLVANIA LIMITED MATURITY
MUNICIPAL BOND FUND MUNICIPAL BOND FUND
</TABLE>
P.O. Box 9011, Princeton, New Jersey 08543-9011 o Phone No. (609) 282-2800
Merrill Lynch Multi-State Limited Maturity Municipal Series Trust (the
"Trust") consists of eight separate series: Merrill Lynch Arizona Limited
Maturity Municipal Bond Fund (the "Arizona Fund"), Merrill Lynch California
Limited Maturity Municipal Bond Fund (the "California Fund"), Merrill Lynch
Florida Limited Maturity Municipal Bond Fund (the "Florida Fund"), Merrill Lynch
Massachusetts Limited Maturity Municipal Bond Fund (the "Massachusetts Fund"),
Merrill Lynch Michigan Limited Maturity Municipal Bond Fund (the "Michigan
Fund"), Merrill Lynch New Jersey Limited Maturity Municipal Bond Fund (the "New
Jersey Fund"), Merrill Lynch New York Limited Maturity Municipal Bond Fund (the
"New York Fund") and Merrill Lynch Pennsylvania Limited Maturity Municipal Bond
Fund (the "Pennsylvania Fund"). Each series of the Trust is referred to herein
as a "Fund". Each Fund seeks to provide shareholders with as high a level of
income exempt from Federal income taxes and personal income taxes imposed by the
designated state (and, in certain instances, state intangible personal property
taxes and local personal income taxes) as is consistent with prudent investment
management. Under normal market conditions, each Fund invests primarily in a
portfolio of intermediate-term investment grade obligations of the designated
state or its political subdivisions, agencies or instrumentalities, or certain
other jurisdictions, that pay interest exempt, in the opinion of bond counsel to
the issuer, from Federal income taxes and personal income taxes of the
designated state and, where applicable, local personal income taxes in the
designated state. The obligations in which the Funds invest have remaining
maturities of between one and ten years, and it is anticipated that, depending
on market conditions, the dollar weighted average maturity of each Fund's
portfolio will not exceed five years. The Funds may invest in certain tax-exempt
securities classified as "private activity bonds" that may subject certain
investors in the Funds to an alternative minimum tax. At times, a Fund may seek
to hedge its portfolio through the use of futures and options transactions.
There can be no assurance that the investment objective of any Fund will be
realized. For more information on each Fund's investment objectives and
policies, please see "Investment Objectives and Policies" on page 19.
(continued on following page)
------------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION NOR HAS THE SECURITIES AND EXCHANGE 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 Trust and
each Fund that is relevant to making an investment in a Fund. This Prospectus
should be retained for future reference. A statement containing additional
information about the Trust and each Fund, dated November 27, 1996 (the
"Statement of Additional Information"), has been filed with the Securities and
Exchange Commission (the "Commission") and is available, without charge, by
calling or by writing the Trust at the above telephone number or address. The
Statement of Additional Information is hereby incorporated by reference into
this Prospectus.
------------------------
Fund Asset Management -- Manager
Merrill Lynch Funds Distributor, Inc. -- Distributor
1
<PAGE>
(continued from prior page)
Pursuant to the Merrill Lynch Select Pricing(SM) System, each
Fund offers four classes of shares, each with a different combination of sales
charges, ongoing fees and other features. The Merrill Lynch Select
Pricing(SM) System permits an investor to choose the method of
purchasing shares that the investor believes is most beneficial given the amount
of the purchase, the length of time the investor expects to hold the shares and
other relevant circumstances. See "Merrill Lynch Select Pricing(SM)
System" on page 7.
Shares may be purchased directly from Merrill Lynch Funds Distributor, Inc.
(the "Distributor"), P.O. Box 9081, Princeton, New Jersey 08543-9081 [(609)
282-2800], or from securities dealers which have entered into selected dealer
agreements with the Distributor, including Merrill Lynch, Pierce, Fenner & Smith
Incorporated ("Merrill Lynch"). The minimum initial purchase is $1,000 and the
minimum subsequent purchase is $50. Merrill Lynch may charge its customers a
processing fee (presently $4.85) for confirming purchases and repurchases.
Purchases and redemptions directly through the Trust's Transfer Agent are not
subject to the processing fee. See "Purchase of Shares" and "Redemption of
Shares".
Unless otherwise indicated, the information set forth in this Prospectus is
applicable to each Fund. Management of the Trust has considered the possibility
that the use of a combined prospectus may subject a Fund or Funds to liability
for an alleged misstatement relating to another Fund or Funds. Management
believes this possibility is remote.
Each Fund has qualified its shares for sale under the securities laws of
certain states, and shares of a Fund may be purchased only in jurisdictions in
which such shares are qualified for purchase. This Prospectus does not
constitute an offering of shares of any Fund in any state or jurisdiction in
which such offering may not lawfully be made. An investor considering purchasing
shares of a Fund should consult his or her Merrill Lynch Financial Consultant to
determine whether shares of such Fund are available for purchase in his or her
state.
2
<PAGE>
FEE TABLE
A general comparison of the sales arrangements and other nonrecurring and
recurring expenses applicable to shares of the Funds follows:
<TABLE>
<CAPTION>
All Funds
----------------------------------------------------------------------
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)..... 1.0%(c) None None 1.0%(c)
Sales Charge Imposed on Dividend
Reinvestments........................... None None None None
Deferred Sales Charge (as a percentage of
original purchase price or redemption
proceeds, whichever is lower)........... None(d) 1.0% during the first 1.0% during the first None(d)
year, year,
decreasing to 0.0% decreasing to 0.0%
after after
the first year(e) the first year(f)
Exchange Fee.............................. None None None None
</TABLE>
- ------------
(a) Class A shares are sold to a limited group of investors including existing
Class A shareholders and certain participants in fee-based programs. See
"Purchase of Shares--Initial Sales Charge Alternatives--Class A and Class D
Shares"--page 36 and "Shareholder Services--Fee-Based Programs"--page 48.
(b) Class B shares convert to Class D shares automatically approximately ten
years after initial purchase. See "Purchase of Shares--Deferred Sales Charge
Alternatives--Class B and Class C Shares"--page 38.
(c) Reduced for purchases of $100,000 and over and waived for purchases of Class
A shares in connection with certain fee-based programs. Class A or Class D
purchases of $1,000,000 or more may not be subject to an initial sales
charge. See "Purchase of Shares--Initial Sales Charge Alternatives--Class A
and Class D Shares"--page 36.
(d) Class A and Class D shares are not subject to a contingent deferred sales
charge ("CDSC"), except that certain purchases of $1,000,000 or more which
are not subject to an initial sales charge may instead be subject to a CDSC
of 0.20% of amounts redeemed within the first year after purchase. Such CDSC
may be waived in connection with redemptions to fund participation in
certain fee-based programs. See "Shareholder Services--Fee-Based
Programs"--page 48.
(e) The CDSC may be modified in connection with redemptions to fund
participation in certain fee-based programs. See "Shareholder
Services--Fee-Based Programs"--page 48.
(f) The CDSC may be waived in connection with redemptions to fund participation
in certain fee-based programs. See "Shareholder Services--Fee-Based
Programs"--page 48.
(continued on next page)
3
<PAGE>
<TABLE>
<CAPTION>
Arizona Fund California Fund
------------------------------------------- -------------------------------------------
Class A Class B Class C Class D Class A Class B Class C Class D
------- ------- ------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Annual Fund Operating
Expenses (as a
percentage of
average
net assets):
Management Fees(g).... 0.35% 0.35% 0.35% 0.35% 0.35% 0.35% 0.35% 0.35%
Rule 12b-1 Fees(h)
Account Mainte-
nance Fees........ None 0.15% 0.15% 0.10% None 0.15% 0.15% 0.10%
Distribution
Fees(i)........... None 0.20%* 0.20% None None 0.20%* 0.20% None
Other Expenses........ 1.92% 1.91% 2.10% 1.97% 0.95% 0.96% 0.80% 0.95%
------ ------ ------ ------ ------ ------ ------ ------
Total Fund Operating
Expenses**.......... 2.27% 2.61% 2.80% 2.42% 1.30% 1.66% 1.50% 1.40%
====== ====== ====== ====== ====== ====== ====== ======
</TABLE>
<TABLE>
<CAPTION>
Florida Fund Massachusetts Fund
--------------------------------------------- -------------------------------------------
Class A Class B Class C Class D Class A Class B Class C Class D
---------- ------- ------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Annual Fund Operating
Expenses (as a
percentage of
average
net assets):
Management Fees(g).... 0.35% 0.35% 0.35% 0.35% 0.35% 0.35% 0.35% 0.35%
Rule 12b-1 Fees(h)
Account Mainte-
nance Fees........ None 0.15% 0.15% 0.10% None 0.15% 0.15% 0.10%
Distribution
Fees(i)........... None 0.20%* 0.20% None None 0.20%* 0.20% None
Other Expenses........ 0.62% 0.62% 0.53% 0.62% 1.80% 1.91% 1.67% 1.97%
---- ---- ---- ---- ---- ---- ---- ----
Total Fund Operating
Expenses**.......... 0.97% 1.32% 1.23% 1.07% 2.15% 2.61% 2.37% 2.42%
==== ==== ==== ==== ==== ==== ==== ====
</TABLE>
- ------------
(g) See "Management of the Trust--Management and Advisory Arrangements"--page
32.
(h) See "Purchase of Shares--Distribution Plans"--page 41.
(i) Distribution Fees reflect the maximum amount a Fund would be subject to pay
under its Distribution Plans. See "Purchase of Shares--Distribution
Plans"--page 41. Such amount, however, is subject to certain limitations.
See "Purchase of Shares--Limitations on the Payment of Deferred Sales
Charges"--page 44.
* Class B shares convert to Class D shares automatically after approximately
ten years and cease being subject to distribution fees.
** For the fiscal year ended July 31, 1996, Fund Asset Management, L.P. (the
"Manager") voluntarily waived all of the management fees due from each of
the Funds and voluntarily reimbursed each of the Funds for a portion of
other expenses (excluding Rule 12b-1 fees), except for the Florida Fund, for
which the Manager voluntarily waived $24,123 of the management fees due from
such Fund and did not reimburse any portion of other expenses (excluding
Rule 12b-1 fees). The Total Fund Operating Expenses in the fee table above
have been restated to assume the absence of any such waiver or reimbursement
because the Manager may discontinue or reduce such waiver of fees and/or
assumption of expenses at any time without notice. The actual Total Fund
Operating Expenses, net of the waiver, is provided below for the fiscal year
ended July 31, 1996.
<TABLE>
<CAPTION>
Management Fees Total Operating
Waived and Expenses After
Expenses Waiver and
Reimbursed Reimbursement
---------------------------------------- ----------------------------------------
Class A Class B Class C Class D Class A Class B Class C Class D
------- ------- ------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Arizona Fund........................... 1.53% 1.52% 1.77% 1.52% 0.74% 1.09% 1.03% 0.90%
California Fund........................ 0.36% 0.36% 0.36% 0.34% 0.94% 1.30% 1.14% 1.06%
Florida Fund........................... 0.08% 0.08% 0.02% 0.08% 0.89% 1.24% 1.21% 0.99%
Massachusetts Fund..................... 1.38% 1.45% 1.43% 1.49% 0.77% 1.16% 0.94% 0.93%
Michigan Fund.......................... 2.04% 2.04% 2.07% 2.19% 0.74% 1.10% 1.24% 0.87%
New Jersey Fund........................ 1.02% 1.02% 1.04% 1.02% 0.76% 1.10% 1.00% 0.84%
New York Fund.......................... 0.88% 0.88% 0.88% 0.87% 0.50% 0.87% 0.71% 0.62%
Pennsylvania Fund...................... 0.83% 0.84% 0.86% 0.75% 0.80% 1.15% 0.97% 0.96%
</TABLE>
4
<PAGE>
<TABLE>
<CAPTION>
Michigan Fund New Jersey Fund
- ------------------------------------------- -------------------------------------------
Class A Class B Class C Class D Class A Class B Class C Class D
- ------- ------- ------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C>
0.35% 0.35% 0.35% 0.35% 0.35% 0.35% 0.35% 0.35%
None 0.15% 0.15% 0.10% None 0.15% 0.15% 0.10%
None 0.20%* 0.20% None None 0.20%* 0.20% None
2.43% 2.44% 2.61% 2.61% 1.43% 1.42% 1.34% 1.41%
---- ---- ---- ---- ---- ---- ---- ----
2.78 3.14% 3.31% 3.06% 1.78% 2.12% 2.04% 1.86%
==== ==== ==== ==== ==== ==== ==== ====
</TABLE>
<TABLE>
<CAPTION>
New York Fund Pennsylvania Fund
--------------------------------------------- -------------------------------------------
Class A Class A Class B Class C Class D Class A Class B Class C Class D
- ------- ---------- ------- ------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
0.35% 0.35% 0.35% 0.35% 0.35% 0.35% 0.35% 0.35% 0.35%
None None 0.15% 0.15% 0.10% None 0.15% 0.15% 0.10%
None None 0.20%* 0.20% None None 0.20%* 0.20% None
2.43% 1.03% 1.05% 0.89% 1.04% 1.28% 1.29% 1.13% 1.26%
---- ---- ---- ---- ---- ---- ---- ---- ----
2.78 1.38% 1.75% 1.59% 1.49% 1.63% 1.99% 1.83% 1.71%
==== ==== ==== ==== ==== ==== ==== ==== ====
</TABLE>
5
<PAGE>
Example:
<TABLE>
<CAPTION>
Cumulative Expenses Paid for the Period Indicated
------------------------------------------------------------------------------
Arizona Fund California Fund
------------------------------------- --------------------------------------
1 Year 3 Years 5 Years 10 Years 1 Year 3 Years 5 Years 10 Years
------ ------- ------- -------- ------- ------- ------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
An investor in each Fund would pay
the following expenses on a $1,000
investment including the maximum
$10.00 initial sales charge (Class
A and Class D shares only) and
assuming (1) the Total Fund
Operating Expenses for each class
set forth on pages 4 and 5, (2) a
5% annual return throughout the
period, and (3) redemption at the
end of the period:
Class A.......................... $ 33 $ 80 $ 130 $268 $ 23 $ 51 $ 81 $165
Class B.......................... $ 36 $ 81 $ 139 $294 $ 27 $ 52 $ 90 $197
Class C.......................... $ 38 $ 87 $ 148 $313 $ 25 $ 47 $ 82 $179
Class D.......................... $ 34 $ 85 $ 138 $283 $ 24 $ 54 $ 86 $176
An investor would pay the following
expenses on the same $1,000
investment assuming no redemption
at the end of the period:
Class A.......................... $ 33 $ 80 $ 130 $268 $ 23 $ 51 $ 81 $165
Class B.......................... $ 26 $ 81 $ 139 $294 $ 17 $ 52 $ 90 $197
Class C.......................... $ 28 $ 87 $ 148 $313 $ 15 $ 47 $ 82 $179
Class D.......................... $ 34 $ 85 $ 138 $283 $ 24 $ 54 $ 86 $176
</TABLE>
<TABLE>
<CAPTION>
Florida Fund Massachusetts Fund
---------------------------------------- --------------------------------------
1 Year 3 Years 5 Years 10 Years 1 Year 3 Years 5 Years 10 Years
---------- ------- ------- -------- ------- ------- ------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
An investor in each Fund would pay
the following expenses on a $1,000
investment including the maximum
$10.00 initial sales charge (Class
A and Class D shares only) and
assuming (1) the Total Fund
Operating Expenses for each class
set forth on pages 4 and 5, (2) a
5% annual return throughout the
period, and (3) redemption at the
end of the period:
Class A.......................... $ 20 $41 $63 $128 $232 $77 $ 124 $256
Class B.......................... $ 23 $42 $72 $159 $36 $81 $ 139 $294
Class C.......................... $ 23 $39 $68 $149 $34 $74 $ 127 $271
Class D.......................... $ 21 $44 $68 $139 $34 $85 $ 138 $283
An investor would pay the following
expenses on the same $1,000
investment assuming no redemption
at the end of the period:
Class A.......................... $ 20 $41 $63 $128 $32 $77 $ 124 $256
Class B.......................... $ 13 $42 $72 $159 $26 $81 $ 139 $294
Class C.......................... $ 13 $39 $68 $149 $24 $74 $ 127 $271
Class D.......................... $ 21 $44 $68 $139 $34 $85 $ 138 $283
</TABLE>
<TABLE>
<CAPTION>
Michigan Fund New Jersey Fund
------------------------------------- --------------------------------------
1 Year 3 Years 5 Years 10 Years 1 Year 3 Years 5 Years 10 Years
------ ------- ------- -------- ------- ------- ------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
An investor in each Fund would pay
the following expenses on a $1,000
investment including the maximum
$10.00 initial sales charge (Class
A and Class D shares only) and
assuming (1) the Total Fund
Operating Expenses for each class
set forth on pages 4 and 5, (2) a
5% annual return throughout the
period, and (3) redemption at the
end of the period:
Class A.......................... $ 38 $ 95 $ 155 $318 $ 28 $ 65 $ 105 $217
Class B.......................... $ 42 $ 97 $ 164 $345 $ 32 $ 66 $ 114 $245
Class C.......................... $ 43 $ 102 $ 173 $360 $ 31 $ 64 $ 110 $237
Class D.......................... $ 41 $ 104 $ 169 $344 $ 29 $ 68 $ 110 $226
An investor would pay the following
expenses on the same $1,000
investment assuming no redemption
at the end of the period:
Class A.......................... $ 38 $ 95 $ 155 $318 $ 28 $ 65 $ 105 $217
Class B.......................... $ 32 $ 97 $ 164 $345 $ 22 $ 66 $ 114 $245
Class C.......................... $ 33 $ 102 $ 173 $360 $ 21 $ 64 $ 110 $237
Class D.......................... $ 41 $ 104 $ 169 $344 $ 29 $ 68 $ 110 $226
</TABLE>
<TABLE>
<CAPTION>
New York Fund Pennsylvania Fund
---------------------------------------- --------------------------------------
1 Year 3 Years 5 Years 10 Years 1 Year 3 Years 5 Years 10 Years
---------- ------- ------- -------- ------- ------- ------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
An investor in each Fund would pay
the following expenses on a $1,000
investment including the maximum
$10.00 initial sales charge (Class
A and Class D shares only) and
assuming (1) the Total Fund
Operating Expenses for each class
set forth on pages 4 and 5, (2) a
5% annual return throughout the
period, and (3) redemption at the
end of the period:
Class A.......................... $ 24 $53 $85 $174 $26 $61 $ 98 $201
Class B.......................... $ 28 $55 $95 $206 $30 $62 $ 107 $232
Class C.......................... $ 26 $50 $87 $189 $29 $58 $ 99 $215
Class D.......................... $ 25 $57 $91 $186 $27 $63 $ 102 $210
An investor would pay the following
expenses on the same $1,000
investment assuming no redemption
at the end of the period:
Class A.......................... $ 24 $53 $85 $174 $26 $61 $ 98 $201
Class B.......................... $ 18 $55 $95 $206 $20 $62 $ 107 $232
Class C.......................... $ 16 $50 $87 $189 $19 $58 $ 99 $215
Class D.......................... $ 25 $57 $91 $186 $27 $63 $ 102 $210
</TABLE>
6
<PAGE>
The foregoing Fee Table is intended to assist investors in understanding
the costs and expenses that shareholders in the Funds will bear directly or
indirectly. The example set forth above assumes reinvestment of all dividends
and distributions and utilizes a 5% annual rate of return as mandated by
Commission regulations. The example should not be considered a representation of
past or future expenses or annual rates of return, and actual expenses or annual
rates of return may be more or less than those assumed for purposes of the
example. Class B and Class C shareholders of any Fund who hold their shares for
an extended period of time may pay more in Rule 12b-1 distribution fees than the
economic equivalent of the maximum front-end sales charges permitted under the
Conduct Rules of the National Association of Securities Dealers, Inc. (the
"NASD"). Merrill Lynch may charge its customers a processing fee (presently
$4.85) for confirming purchases and repurchases. Purchases and redemptions
directly through the Trust's Transfer Agent are not subject to the processing
fee. See "Purchase of Shares" and "Redemption of Shares".
MERRILL LYNCH SELECT PRICING(SM) SYSTEM
Each of the Funds offers four classes of shares under the Merrill Lynch
Select Pricing(SM) System. Class A, Class B and Class D shares may be
purchased at a price equal to the next determined net asset value per share
subject to the sales charges and ongoing fee arrangements described below.
Shares of Class A and Class D are sold to investors choosing the initial sales
charge alternatives, and shares of Class B are sold to investors choosing the
deferred sales charge alternative. Class C shares are not offered for sale by
the Funds but are available for exchange with Class C shares of other
MLAM-advised mutual funds. The Merrill Lynch Select Pricing(SM) System
is used by more than 50 registered investment companies advised by Merrill Lynch
Asset Management, L.P. ("MLAM") or FAM, an affiliate of MLAM. Funds advised by
MLAM or FAM which utilize the Merrill Lynch Select Pricing(SM) System
are referred to herein as "MLAM-advised mutual funds".
Each Class A, Class B, Class C or Class D share of each of the Funds
represents an identical interest in the investment portfolio of that Fund and
has the same rights, except that Class B, Class C and Class D shares bear the
expenses of the ongoing account maintenance fees and Class B and Class C shares
bear the expenses of the ongoing distribution fees and the additional
incremental transfer agency costs resulting from the deferred sales charge
arrangements. The CDSCs and distribution and account maintenance fees that are
imposed on Class B and Class C shares, as well as the account maintenance fees
that are imposed on Class D shares, are imposed directly against those classes
and not against all assets of the Fund issuing the shares 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 a
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 that 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.
7
<PAGE>
The following table sets forth a summary of the distribution arrangements
for each class of shares under the Merrill Lynch Select Pricing(SM)
System, followed by a more detailed description of each class and a discussion
of the factors that investors should consider in determining the method of
purchasing shares under the Merrill Lynch Select Pricing(SM) System
that the investor believes is most beneficial under his particular
circumstances. More detailed information as to each class of shares is set forth
under "Purchase of Shares".
<TABLE>
<S> <C> <C> <C> <C>
- ---------------------------------------------------------------------------------------------------------------------
Account
Maintenance Distribution
Class Sales Charge(1) Fee Fee Conversion Feature
- ---------------------------------------------------------------------------------------------------------------------
A Maximum 1.0% initial sales No No No
charge(2)(3)
- --------------------------------------------------------------------------------------------------------------------
B 1.0% CDSC for one year(4) 0.15% 0.20% B shares convert to D shares
automatically after approximately
ten years(5)
- --------------------------------------------------------------------------------------------------------------------
C(7) 1.0% CDSC for one year(6) 0.15% 0.20% No
- --------------------------------------------------------------------------------------------------------------------
D Maximum 1.0% initial sales 0.10% No No
charge(3)
- --------------------------------------------------------------------------------------------------------------------
</TABLE>
- ------------
(1) Initial sales charges are imposed at the time of purchase as a percentage of
the offering price. CDSCs are imposed if the redemption occurs within the
applicable CDSC time period. The charge will be assessed on an amount equal
to the lesser of the proceeds of redemption or the cost of the shares being
redeemed.
(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 $100,000 or more and waived for purchases of Class
A shares in connection with certain fee-based programs. Class A and Class D
share purchases of $1,000,000 or more may not be subject to an initial sales
charge but instead may be subject to a 0.20% CDSC for one year. Such CDSC
may be waived in connection with redemptions to fund participation in
certain fee-based programs. See "Class A" and "Class D" below.
(4) The CDSC may be modified in connection with redemptions to fund
participation in certain fee-based programs.
(5) The conversion period for dividend reinvestment shares and certain fee-based
programs may be modified. Also, Class B shares of certain other MLAM-advised
mutual funds into which exchanges may be made have an eight year conversion
period. If Class B shares of a Fund are exchanged for Class B shares of
another MLAM-advised mutual fund, the conversion period applicable to the
Class B shares acquired in the exchange will apply, and the holding period
for the shares exchanged will be tacked onto the holding period for the
shares acquired.
(6) The CDSC may be waived in connection with redemptions to fund participation
in certain fee-based programs.
(7) Class C shares will be issued only upon exchange for Class C shares of
another MLAM-advised mutual fund. See "Shareholder Services--Exchange
Privilege".
Class A: Class A shares incur an initial sales charge when they are purchased
and bear no ongoing distribution or account maintenance fees. Class A
shares are offered to a limited group of investors and also will be
issued upon reinvestment of dividends on outstanding Class A shares.
Investors that currently own Class A shares of a Fund in a shareholder
account are entitled to purchase additional Class A shares of such Fund
in that account. Other eligible investors include participants in
certain fee-based programs. In addition, Class A shares will be offered
at net asset value to Merrill Lynch & Co., Inc. ("ML&Co.") and its
subsidiaries (the term "subsidiaries" when used herein with respect to
ML&Co. includes MLAM, FAM and certain other entities directly or
indirectly wholly owned and controlled by ML&Co.) and their directors
and employees, and to members of the Boards of MLAM-advised mutual
funds. The maximum initial sales charge is 1.00%, which is reduced for
purchases of $100,000 and over and waived for purchases of Class A
shares in connection with certain fee-based programs.
8
<PAGE>
Purchases of $1,000,000 or more may not be subject to an initial sales
charge but if the initial sales charge is waived, such purchases may be
subject to a 0.20% CDSC if the shares are redeemed within one year
after purchase. Such CDSC may be waived in connection with redemptions
to fund participation in certain fee-based programs. Sales charges also
are reduced under a right of accumulation 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 0.15% and an
ongoing distribution fee of 0.20%, of the Fund's average net assets
attributable to the Class B shares, as well as a CDSC if they are
redeemed within one year of purchase. Such CDSC may be modified in
connection with redemptions to fund participation in certain fee-based
programs. Approximately ten years after issuance, Class B shares of a
Fund will convert automatically into Class D shares of that Fund, which
are subject to a lower account maintenance fee than Class B shares 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 a 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. Automatic conversion of Class B shares into Class D shares
will occur at least once each month on the basis of the relative net
asset values of the shares of the two classes on the conversion date,
without the imposition of any sales load, fee or other charge.
Conversion of Class B shares to Class D shares will not be deemed a
purchase or sale of the shares for Federal income tax purposes. Shares
purchased through reinvestment of dividends on Class B shares also will
convert automatically to Class D shares. The conversion period for
dividend reinvestment shares is modified as described under "Purchase
of Shares--Deferred Sales Charge Alternatives--Class B and Class C
Shares--Conversion of Class B Shares to Class D Shares".
Class C: Class C shares of the Funds are not available for purchase but will be
issued only pursuant to the exchange privilege to holders of Class C
shares of other MLAM-advised mutual funds who elect to exchange Class C
shares of such other MLAM-advised mutual fund for Class C shares of one
of the Funds. Class C shares are subject to an ongoing account
maintenance fee of 0.15% and an ongoing distribution fee of 0.20% of
the Fund's average net assets attributable to Class C shares. Although,
like Class B shares, Class C shares are subject to a 1.0% CDSC for one
year, Class C shares have no conversion feature and, accordingly, an
investor that acquires Class C shares will be subject to distribution
fees and higher account maintenance fees that will be imposed on Class
C shares for an indefinite period subject to annual approval by the
Trust's Board of Trustees and regulatory limitations. Such CDSC may be
waived in connection with redemptions to fund participation in certain
fee-based programs.
Class D: Class D shares incur an initial sales charge when they are purchased
and are subject to an ongoing account maintenance fee of 0.10% of the
Fund's average net assets attributable to Class D shares. Class D
shares are not subject to an ongoing distribution fee or any CDSC when
they are redeemed. Purchases of $1,000,000 or more may not be subject
to an initial sales charge but if the initial sales charge is waived,
such purchase may be subject to a CDSC of 0.20% if the shares are
redeemed within one year after purchase. Such CDSC may be waived in
connection with redemptions to fund participation in certain fee-based
programs. The schedule of initial sales charges and reductions for
9
<PAGE>
Class D shares is the same as the schedule for Class A shares, except
that there is no waiver for purchases of Class D shares in connection
with certain fee-based programs. Class D shares also will be issued
upon conversion of Class B shares as described above under "Class B".
See "Purchase of Shares--Initial Sales Charge Alternatives--Class A and
Class D Shares".
The following is a discussion of the factors that investors should consider
in determining the method of purchasing shares under the Merrill Lynch Select
Pricing(SM) System that the investor believes is most beneficial under his
particular circumstances.
Initial Sales Charge Alternatives. Investors who prefer an initial sales
charge alternative may elect to purchase Class D shares or, if an eligible
investor, Class A shares. Investors choosing the initial sales charge
alternative who are eligible to purchase Class A shares should purchase Class A
shares rather than Class D shares because there is an account maintenance fee
imposed on Class D shares. Investors qualifying for significantly reduced
initial sales charges may find the initial sales charge alternative particularly
attractive because similar sales charge reductions are not available with
respect to the CDSCs imposed in connection with purchases of Class B 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 Alternative. Because no initial sales charges are
deducted at the time of purchase, Class B 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 alternative 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 of a Fund
will be converted into Class D shares of that 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. Although Class C
shareholders are subject to the same CDSC period and rate as Class B
shareholders, Class C shares have no conversion feature, and therefore are
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".
10
<PAGE>
FINANCIAL HIGHLIGHTS
The financial information in the tables below has been audited in
connection with the annual audits of the financial statements of the Trust by
Deloitte & Touche LLP, independent auditors. Financial statements for the year
ended July 31, 1996 and the independent auditors' report thereon are included in
the Statement of Additional Information. The following per share data and ratios
have been derived from information provided in such audited financial
statements. Further information about the performance of the Funds is contained
in the Trust's most recent annual report to shareholders which may be obtained,
without charge, by calling or writing the Trust at the telephone number or
address on the front cover of this Prospectus.
<TABLE>
<CAPTION>
Arizona Fund
--------------------------------------------------------------------------------------
Class A Class B Class C
------------------------------- ------------------------------- --------------------
For the For the For the
period period For the period
For the year ended Nov. 26, For the year ended Nov. 26, year Oct. 21,
July 31, 1993+ to July 31, 1993+ to ended 1994+ to
-------------------- July 31, -------------------- July 31, July 31, July 31,
1996 1995 1994 1996 1995 1994 1996 1995
--------- --------- --------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Increase (Decrease) in Net Asset Value:
Per Share Operating Performance:
Net asset value, beginning of period.... $ 10.17 $ 9.97 $ 10.00 $ 10.16 $ 9.97 $ 10.00 $ 10.17 $ 9.89
--------- --------- --------- --------- --------- --------- --------- ---------
Investment income--net................. .41 .43 .23 .37 .39 .20 .37 .29
Realized and unrealized gain (loss) on
investments--net..................... (.09) .20 (.03) (.08) .19 (.03) (.09) .28
--------- --------- --------- --------- --------- --------- --------- ---------
Total from investment operations........ .32 .63 .20 .29 .58 .17 .28 .57
--------- --------- --------- --------- --------- --------- --------- ---------
Less dividends from investment
income--net............................ (.41) (.43) (.23) (.37) (.39) (.20) (.37) (.29)
--------- --------- --------- --------- --------- --------- --------- ---------
Net asset value, end of period.......... $ 10.08 $ 10.17 $ 9.97 $ 10.08 $ 10.16 $ 9.97 $ 10.08 $ 10.17
========= ========= ========= ========= ========= ========= ========= =========
Total Investment Return:**
Based on net asset value per share...... 3.16% 6.47% 2.02%# 2.88% 5.99% 1.78%# 2.78% 5.90%#
========= ========= ========= ========= ========= ========= ========= =========
Ratios to Average Net Assets:
Expenses, net of reimbursement.......... .74% .35% .02%* 1.09% .72% .38%* 1.03% 1.05%*
========= ========= ========= ========= ========= ========= ========= =========
Expenses................................ 2.27% 2.05% 1.82%* 2.61% 2.44% 2.18%* 2.80% 2.79%*
========= ========= ========= ========= ========= ========= ========= =========
Investment income--net.................. 4.01% 4.31% 3.37%* 3.65% 3.95% 3.02%* 3.86% 3.80%*
========= ========= ========= ========= ========= ========= ========= =========
Supplemental Data:
Net assets, end of period (in
thousands)............................. $ 813 $ 1,054 $ 2,103 $ 2,885 $ 5,191 $ 5,575 $ 135 $ 1
========= ========= ========= ========= ========= ========= ========= =========
Portfolio turnover...................... 43.53% 182.58% 142.37% 43.53% 182.58% 142.37% 43.53% 182.58%
========= ========= ========= ========= ========= ========= ========= =========
</TABLE>
<TABLE>
<CAPTION>
Class D
--------------------
For the
For the period
year Oct. 21,
ended 1994+ to
July 31, July 31,
1996 1995
--------- ---------
<S> <C> <C>
Increase (Decrease) in Net Asset Value:
Per Share Operating Performance:
Net asset value, beginning of period.... $ 10.17 $ 9.89
--------- ---------
Investment income--net................. .40 .33
Realized and unrealized gain (loss) on
investments--net..................... (.09) .28
--------- ---------
Total from investment operations........ .31 .61
--------- ---------
Less dividends from investment
income--net............................ (.40) (.33)
--------- ---------
Net asset value, end of period.......... $ 10.08 $ 10.17
========= =========
Total Investment Return:**
Based on net asset value per share...... 3.05% 6.34%#
========= =========
Ratios to Average Net Assets:
Expenses, net of reimbursement.......... .90% .55%*
========= =========
Expenses................................ 2.42% 2.39%*
========= =========
Investment income--net.................. 3.88% 4.31%*
========= =========
Supplemental Data:
Net assets, end of period (in
thousands)............................. $ 619 $ 19
========= =========
Portfolio turnover...................... 43.53% 182.58%
========= =========
</TABLE>
- ------------
* Annualized.
** Total investment returns exclude the effects of sales loads.
+ Commencement of operations.
# Aggregate total investment return.
11
<PAGE>
<TABLE>
<CAPTION>
California Fund
--------------------------------------------------------------------------------------
Class A Class B Class C
------------------------------- ------------------------------- --------------------
For the For the For the
period period For the period
For the year ended Nov. 26, For the year ended Nov. 26, year Oct. 21,
July 31, 1993+ to July 31, 1993+ to ended 1994+ to
-------------------- July 31, -------------------- July 31, July 31, July 31,
1996 1995 1994 1996 1995 1994 1996 1995
--------- --------- --------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Increase (Decrease) in Net Asset Value:
Per Share Operating Performance:
Net asset value, beginning of period.... $ 9.99 $ 9.88 $ 10.00 $ 9.99 $ 9.88 $ 10.00 $ 9.99 $ 9.76
--------- --------- --------- --------- --------- --------- --------- ---------
Investment income--net................. .39 .42 .24 .36 .39 .21 .37 .31
Realized and unrealized gain (loss) on
investments--net..................... .06 .11 (.12) .05 .11 (.12) .06 .23
--------- --------- --------- --------- --------- --------- --------- ---------
Total from investment operations........ .45 .53 .12 .41 .50 .09 .43 .54
--------- --------- --------- --------- --------- --------- --------- ---------
Less dividends from investment
income--net............................. (.39) (.42) (.24) (.36) (.39) (.21) (.37) (.31)
--------- --------- --------- --------- --------- --------- --------- ---------
Net asset value, end of period.......... $ 10.05 $ 9.99 $ 9.88 $ 10.04 $ 9.99 $ 9.88 $ 10.05 $ 9.99
========= ========= ========= ========= ========= ========= ========= =========
Total Investment Return:**
Based on net asset value per share...... 4.56% 5.60% 1.23%# 4.08% 5.23% .99%# 4.35% 5.60%#
========= ========= ========= ========= ========= ========= ========= =========
Ratios to Average Net Assets:
Expenses, net of reimbursement.......... .94% .40% .02%* 1.30% .76% .38%* 1.14% .82%*
========= ========= ========= ========= ========= ========= ========= =========
Expenses................................ 1.30% 1.44% 1.16%* 1.66% 1.80% 1.52%* 1.50% 1.98%*
========= ========= ========= ========= ========= ========= ========= =========
Investment income--net.................. 3.89% 4.36% 3.54%* 3.53% 4.00% 3.19%* 3.69% 4.04%*
========= ========= ========= ========= ========= ========= ========= =========
Supplemental Data:
Net assets, end of period (in
thousands).............................. $ 3,162 $ 3,527 $ 3,804 $ 9,919 $ 10,363 $ 11,430 $ 55 $ 64
========= ========= ========= ========= ========= ========= ========= =========
Portfolio turnover...................... 11.09% 124.72% 130.10% 11.09% 124.72% 130.10% 11.09% 124.72%
========= ========= ========= ========= ========= ========= ========= =========
</TABLE>
Class D
--------------------
For the
For the period
year Oct. 21,
ended 1994+ to
July 31, July 31,
1996 1995
--------- ---------
Increase (Decrease) in Net Asset Value:
Per Share Operating Performance:
Net asset value, beginning of period.... $ 9.99 $ 9.76
--------- ---------
Investment income--net................. .38 .33
Realized and unrealized gain (loss) on
investments--net..................... .06 .23
--------- ---------
Total from investment operations........ .44 .56
--------- ---------
Less dividends from investment
income--net............................. (.38) (.33)
--------- ---------
Net asset value, end of period.......... $ 10.05 $ 9.99
========= =========
Total Investment Return:**
Based on net asset value per share...... 4.46% 5.85%#
========= =========
Ratios to Average Net Assets:
Expenses, net of reimbursement.......... 1.06% .66%*
========= =========
Expenses................................ 1.40% 1.81%*
========= =========
Investment income--net.................. 3.77% 4.28%*
========= =========
Supplemental Data:
Net assets, end of period (in
thousands).............................. $ 2,185 $ 1,771
========= =========
Portfolio turnover...................... 11.09% 124.72%
========= =========
- ------------
* Annualized.
** Total investment returns exclude the effects of sales loads.
+ Commencement of operations.
# Aggregate total investment return.
12
<PAGE>
<TABLE>
<CAPTION>
Florida Fund
--------------------------------------------------------------------------------------
Class A Class B Class C
------------------------------- ------------------------------- --------------------
For the For the For the
period period For the period
For the year ended Nov. 26, For the year ended Nov. 26, year Oct. 21,
July 31, 1993+ to July 31, 1993+ to ended 1994+ to
-------------------- July 31, -------------------- July 31, July 31, July 31,
1996 1995 1994 1996 1995 1994 1996 1995
--------- --------- --------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Increase (Decrease) in Net Asset Value:
Per Share Operating Performance:
Net asset value, beginning of period.... $ 10.02 $ 9.87 $ 10.00 $ 10.02 $ 9.88 $ 10.00 $ 10.01 $ 9.76
--------- --------- --------- --------- --------- --------- --------- ---------
Investment income--net................. .40 .43 .24 .37 .40 .21 .36 .29
Realized and unrealized gain (loss) on
investments--net..................... (.06) .15 (.13) (.06) .14 (.12) (.11) .25
--------- --------- --------- --------- --------- --------- --------- ---------
Total from investment operations........ .34 .58 .11 .31 .54 .09 .25 .54
--------- --------- --------- --------- --------- --------- --------- ---------
Less dividends from investment
income--net............................ (.40) (.43) (.24) (.37) (.40) (.21) (.36) (.29)
--------- --------- --------- --------- --------- --------- --------- ---------
Net asset value, end of period.......... $ 9.96 $ 10.02 $ 9.87 $ 9.96 $ 10.02 $ 9.88 $ 9.90 $ 10.01
========= ========= ========= ========= ========= ========= ========= =========
Total Investment Return:**
Based on net asset value per share...... 3.45% 6.05% 1.12%# 3.08% 5.57% .99%# 2.48% 5.65%#
========= ========= ========= ========= ========= ========= ========= =========
Ratios to Average Net Assets:
Expenses, net of reimbursement.......... .89% .39% .02%* 1.24% .75% .38%* 1.21% 1.09%*
========= ========= ========= ========= ========= ========= ========= =========
Expenses................................ .97% 1.03% .86%* 1.32% 1.38% 1.23%* 1.23% 1.67%*
========= ========= ========= ========= ========= ========= ========= =========
Investment income--net.................. 4.01% 4.39% 3.54%* 3.66% 4.05% 3.19%* 3.75% 3.83%*
========= ========= ========= ========= ========= ========= ========= =========
Supplemental Data:
Net assets, end of period (in
thousands)............................. $ 7,874 $ 9,849 $ 14,868 $ 13,690 $ 16,213 $ 18,179 $ 52 $ 1
========= ========= ========= ========= ========= ========= ========= =========
Portfolio turnover...................... 39.90% 138.97% 136.71% 39.90% 138.97% 136.71% 39.90% 138.97%
========= ========= ========= ========= ========= ========= ========= =========
</TABLE>
Class D
--------------------
For the
For the period
year Oct. 21,
ended 1994+ to
July 31, July 31,
1996 1995
--------- ---------
Increase (Decrease) in Net Asset Value:
Per Share Operating Performance:
Net asset value, beginning of period.... $ 10.01 $ 9.76
--------- ---------
Investment income--net................. .39 .33
Realized and unrealized gain (loss) on
investments--net..................... (.06) .25
--------- ---------
Total from investment operations........ .33 .58
--------- ---------
Less dividends from investment
income--net............................ (.39) (.33)
--------- ---------
Net asset value, end of period.......... $ 9.95 $ 10.01
========= =========
Total Investment Return:**
Based on net asset value per share...... 3.35% 6.07%#
========= =========
Ratios to Average Net Assets:
Expenses, net of reimbursement.......... .99% .67%*
========= =========
Expenses................................ 1.07% 1.19%*
========= =========
Investment income--net.................. 3.91% 4.23%*
========= =========
Supplemental Data:
Net assets, end of period (in
thousands)............................. $ 6,406 $ 7,210
========= =========
Portfolio turnover...................... 39.90% 138.97%
========= =========
- ------------
* Annualized.
** Total investment returns exclude the effects of sales loads.
+ Commencement of operations.
# Aggregate total investment return.
13
<PAGE>
<TABLE>
<CAPTION>
Massachusetts Fund
--------------------------------------------------------------------------------------
Class A Class B Class C
------------------------------- ------------------------------- --------------------
For the For the For the
period period For the period
For the year ended Nov. 26, For the year ended Nov. 26, year Oct. 21,
July 31, 1993+ to July 31, 1993+ to ended 1994+ to
-------------------- July 31, -------------------- July 31, July 31, July 31,
1996 1995 1994 1996 1995 1994 1996 1995
--------- --------- --------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Increase (Decrease) in Net Asset Value:
Per Share Operating Performance:
Net asset value, beginning of period.... $ 9.96 $ 9.95 $ 10.00 $ 9.96 $ 9.95 $ 10.00 $ 9.96 $ 9.82
--------- --------- --------- --------- --------- --------- --------- ---------
Investment income--net................. .40 .44 .25 .37 .40 .22 .39 .33
Realized and unrealized gain (loss) on
investments--net..................... -- .02 (.05) -- .02 (.05) (.01) .15
--------- --------- --------- --------- --------- --------- --------- ---------
Total from investment operations........ .40 .46 .20 .37 .42 .17 .38 .48
--------- --------- --------- --------- --------- --------- --------- ---------
Less dividends and distributions:
Investment income--net................. (.40) (.44) (.25) (.37) (.40) (.22) (.39) (.33)
Realized gain on investments--net...... -- (.01) -- -- (.01) -- -- (.01)
--------- --------- --------- --------- --------- --------- --------- ---------
Total dividends and distributions....... (.40) (.45) (.25) (.37) (.41) (.22) (.39) (.34)
--------- --------- --------- --------- --------- --------- --------- ---------
Net asset value, end of period.......... $ 9.96 $ 9.96 $ 9.95 $ 9.96 $ 9.96 $ 9.95 $ 9.95 $ 9.96
========= ========= ========= ========= ========= ========= ========= =========
Total Investment Return:**
Based on net asset value per share...... 4.08% 4.79% 2.01%# 3.70% 4.41% 1.77%# 3.81% 5.00%#
========= ========= ========= ========= ========= ========= ========= =========
Ratios to Average Net Assets:
Expenses, net of reimbursement.......... .77% .37% .03%* 1.16% .74% .38%* .94% .67%*
========= ========= ========= ========= ========= ========= ========= =========
Expenses................................ 2.15% 1.71% 1.17%* 2.61% 2.08% 1.54%* 2.37% 2.23%*
========= ========= ========= ========= ========= ========= ========= =========
Investment income--net.................. 4.04% 4.45% 3.69%* 3.66% 4.08% 3.28%* 3.88% 4.32%*
========= ========= ========= ========= ========= ========= ========= =========
Supplemental Data:
Net assets, end of period (in
thousands).............................. $ 1,719 $ 4,453 $ 8,097 $ 4,577 $ 4,800 $ 8,046 $ 210 $ 413
========= ========= ========= ========= ========= ========= ========= =========
Portfolio turnover...................... 22.71% 89.96% 57.80% 22.71% 89.96% 57.80% 22.71% 89.96%
========= ========= ========= ========= ========= ========= ========= =========
</TABLE>
Class D
--------------------
For the
For the period
year Oct. 21,
ended 1994+ to
July 31, July 31,
1996 1995
--------- ---------
Increase (Decrease) in Net Asset Value:
Per Share Operating Performance:
Net asset value, beginning of period.... $ 9.96 $ 9.82
--------- ---------
Investment income--net................. .39 .34
Realized and unrealized gain (loss) on
investments--net..................... -- .15
--------- ---------
Total from investment operations........ .39 .49
--------- ---------
Less dividends and distributions:
Investment income--net................. (.39) (.34)
Realized gain on investments--net...... -- (.01)
--------- ---------
Total dividends and distributions....... (.39) (.35)
--------- ---------
Net asset value, end of period.......... $ 9.96 $ 9.96
========= =========
Total Investment Return:**
Based on net asset value per share...... 3.97% 5.09%#
========= =========
Ratios to Average Net Assets:
Expenses, net of reimbursement.......... .93% .70%*
======== ========
Expenses................................ 2.42% 2.31%*
======== ========
Investment income--net.................. 3.89% 4.21%*
======== ========
Supplemental Data:
Net assets, end of period (in
thousands).............................. $ 890 $ 253
======== ========
Portfolio turnover...................... 22.71% 89.96%
======== ========
- ------------
* Annualized.
** Total investment returns exclude the effects of sales loads.
+ Commencement of operations.
# Aggregate total investment return.
14
<PAGE>
<TABLE>
<CAPTION>
Michigan Fund
--------------------------------------------------------------------------------------
Class A Class B Class C
------------------------------- ------------------------------- --------------------
For the For the For the
period period For the period
For the year ended Nov. 26, For the year ended Nov. 26, year Oct. 21,
July 31, 1993+ to July 31, 1993+ to ended 1994+ to
-------------------- July 31, -------------------- July 31, July 31, July 31,
1996 1995 1994 1996 1995 1994 1996 1995
--------- --------- --------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Increase (Decrease) in Net Asset Value:
Per Share Operating Performance:
Net asset value, beginning of period.... $ 9.98 $ 9.92 $ 10.00 $ 9.98 $ 9.92 $ 10.00 $ 9.98 $ 9.76
--------- --------- --------- --------- --------- --------- --------- ---------
Investment income--net................. .41 .44 .24 .37 .40 .22 .36 .30
Realized and unrealized gain (loss) on
investments--net..................... (.04) .06 (.08) (.04) .06 (.08) (.04) .22
--------- --------- --------- --------- --------- --------- --------- ---------
Total from investment operations........ .37 .50 .16 .33 .46 .14 .32 .52
--------- --------- --------- --------- --------- --------- --------- ---------
Less dividends from investment
income--net............................ (.41) (.44) (.24) (.37) (.40) (.22) (.36) (.30)
--------- --------- --------- --------- --------- --------- --------- ---------
Net asset value, end of period.......... $ 9.94 $ 9.98 $ 9.92 $ 9.94 $ 9.98 $ 9.92 $ 9.94 $ 9.98
========= ========= ========= ========= ========= ========= ========= =========
Total Investment Return:**
Based on net asset value per share...... 3.71% 5.16% 1.66%# 3.32% 4.78% 1.42%# 3.20% 5.40%#
========= ========= ========= ========= ========= ========= ========= =========
Ratios to Average Net Assets:
Expenses, net of reimbursement.......... .74% .27% .02%* 1.10% .65% .38%* 1.24% .96%*
========= ========= ========= ========= ========= ========= ========= =========
Expenses................................ 2.78% 2.18% 2.01%* 3.14% 2.56% 2.38%* 3.31% 2.90%*
========= ========= ========= ========= ========= ========= ========= =========
Investment income--net.................. 4.06% 4.42% 3.59%* 3.70% 4.09% 3.21%* 3.57% 3.80%*
========= ========= ========= ========= ========= ========= ========= =========
Supplemental Data:
Net assets, end of period (in
thousands)............................. $ 1,641 $ 2,302 $ 3,435 $ 1,842 $ 2,494 $ 2,411 $ 1 $ 1
========= ========= ========= ========= ========= ========= ========= =========
Portfolio turnover...................... 32.92% 93.08% 204.15% 32.92% 93.08% 204.15% 32.92% 93.08%
========= ========= ========= ========= ========= ========= ========= =========
</TABLE>
Class D
--------------------
For the
For the period
year Oct. 21,
ended 1994+ to
July 31, July 31,
1996 1995
--------- ---------
Increase (Decrease) in Net Asset Value:
Per Share Operating Performance:
Net asset value, beginning of period.... $ 9.97 $ 9.76
--------- ---------
Investment income--net................. .40 .34
Realized and unrealized gain (loss) on
investments--net..................... (.03) .21
--------- ---------
Total from investment operations........ .37 .55
--------- ---------
Less dividends from investment
income--net............................ (.40) (.34)
--------- ---------
Net asset value, end of period.......... $ 9.94 $ 9.97
========= =========
Total Investment Return:**
Based on net asset value per share...... 3.71% 5.72%#
========= =========
Ratios to Average Net Assets:
Expenses, net of reimbursement.......... .87% .44%*
========= =========
Expenses................................ 3.06% 2.38%*
========= =========
Investment income--net.................. 3.94% 4.47%*
========= =========
Supplemental Data:
Net assets, end of period (in
thousands)............................. $ 541 $ 254
========= =========
Portfolio turnover...................... 32.92% 93.08%
========= =========
- ------------
* Annualized.
** Total investment returns exclude the effects of sales loads.
+ Commencement of operations.
# Aggregate total investment return.
15
<PAGE>
<TABLE>
<CAPTION> New Jersey Fund
--------------------------------------------------------------------------------------
Class A Class B Class C
------------------------------- ------------------------------- --------------------
For the For the For the
period period For the period
For the year ended Nov. 26, For the year ended Nov. 26, year Oct. 21,
July 31, 1993+ to July 31, 1993+ to ended 1994+ to
-------------------- July 31, -------------------- July 31, July 31, July 31,
1996 1995 1994 1996 1995 1994 1996 1995
--------- --------- --------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Increase (Decrease) in Net Asset Value:
Per Share Operating Performance:
Net asset value, beginning of period.... $ 10.15 $ 9.94 $ 10.00 $ 10.16 $ 9.95 $ 10.00 $ 9.20 $ 9.86
--------- --------- --------- --------- --------- --------- --------- ---------
Investment income--net................. .41 .42 .23 .37 .38 .20 .34 .26
Realized and unrealized gain (loss) on
investments--net..................... (.04) .21 (.06) (.05) .21 (.05) (.04) (.66)
--------- --------- --------- --------- --------- --------- --------- ---------
Total from investment operations........ .37 .63 .17 .32 .59 .15 .30 (.40)
--------- --------- --------- --------- --------- --------- --------- ---------
Less dividends from investment
income--net............................. (.41) (.42) (.23) (.37) (.38) (.20) (.34) (.26)
--------- --------- --------- --------- --------- --------- --------- ---------
Net asset value, end of period.......... $ 10.11 $ 10.15 $ 9.94 $ 10.11 $ 10.16 $ 9.95 $ 9.16 $ 9.20
========= ========= ========= ========= ========= ========= ========= =========
Total Investment Return:**
Based on net asset value per share...... 3.68% 6.45% 1.73%# 3.21% 6.07% 1.59%# 3.24% (4.01)%#
========= ========= ========= ========= ========= ========= ========= =========
Ratios to Average Net Assets:
Expenses, net of reimbursement.......... .76% .34% .03%* 1.10% .73% .38%* 1.00% .55%*
========= ========= ========= ========= ========= ========= ========= =========
Expenses................................ 1.78% 1.69% 1.14%* 2.12% 2.15% 1.52%* 2.04% 2.22%*
========= ========= ========= ========= ========= ========= ========= =========
Investment income--net.................. 4.02% 4.10% 3.45%* 3.67% 3.80% 3.04%* 3.82% 4.06%*
========= ========= ========= ========= ========= ========= ========= =========
Supplemental Data:
Net assets, end of period (in
thousands).............................. $ 2,663 $ 2,401 $ 5,933 $ 5,152 $ 7,593 $ 7,885 $ 272 $ 1
========= ========= ========= ========= ========= ========= ========= =========
Portfolio turnover...................... 6.57% 131.56% 205.04% 6.57% 131.56% 205.04% 6.57% 131.56%
========= ========= ========= ========= ========= ========= ========= =========
</TABLE>
Class D
--------------------
For the
For the period
year Oct. 21,
ended 1994+ to
July 31, July 31,
1996 1995
--------- ---------
Increase (Decrease) in Net Asset Value:
Per Share Operating Performance:
Net asset value, beginning of period.... $ 10.16 $ 9.85
--------- ---------
Investment income--net................. .40 .32
Realized and unrealized gain (loss) on
investments--net..................... (.05) .31
--------- ---------
Total from investment operations........ .35 .63
--------- ---------
Less dividends from investment
income--net............................. (.40) (.32)
--------- ---------
Net asset value, end of period.......... $ 10.11 $ 10.16
========= =========
Total Investment Return:**
Based on net asset value per share...... 3.48% 6.51%#
========= =========
Ratios to Average Net Assets:
Expenses, net of reimbursement.......... .84% .62%*
========= =========
Expenses................................ 1.86% 2.07%*
========= =========
Investment income--net.................. 3.93% 4.17%*
========= =========
Supplemental Data:
Net assets, end of period (in
thousands).............................. $ 540 $ 437
========= =========
Portfolio turnover...................... 6.57% 131.56%
========= =========
- ------------
* Annualized.
** Total investment returns exclude the effects of sales loads.
+ Commencement of operations.
# Aggregate total investment return.
16
<PAGE>
<TABLE>
<CAPTION>
New York Fund
--------------------------------------------------------------------------------------
Class A Class B Class C
------------------------------- ------------------------------- --------------------
For the For the For the
period period For the period
For the year ended Nov. 26, For the year ended Nov. 26, year Oct. 21,
July 31, 1993+ to July 31, 1993+ to ended 1994+ to
-------------------- July 31, -------------------- July 31, July 31, July 31,
1996 1995 1994 1996 1995 1994 1996 1995
--------- --------- --------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Increase (Decrease) in Net Asset Value:
Per Share Operating Performance:
Net asset value, beginning of period.... $ 10.05 $ 9.91 $ 10.00 $ 10.05 $ 9.91 $ 10.00 $ 10.05 $ 9.78
--------- --------- --------- --------- --------- --------- --------- ---------
Investment income--net................. .43 .44 .25 .40 .41 .22 .42 .30
Realized and unrealized gain (loss) on
investments--net..................... .01 .14 (.09) .01 .14 (.09) .01 .27
--------- --------- --------- --------- --------- --------- --------- ---------
Total from investment operations........ .44 .58 .16 .41 .55 .13 .43 .57
--------- --------- --------- --------- --------- --------- --------- ---------
Less dividends from investment
income--net............................ (.43) (.44) (.25) (.40) (.41) (.22) (.42) (.30)
--------- --------- --------- --------- --------- --------- --------- ---------
Net asset value, end of period.......... $ 10.06 $ 10.05 $ 9.91 $ 10.06 $ 10.05 $ 9.91 $ 10.06 $ 10.05
========= ========= ========= ========= ========= ========= ========= =========
Total Investment Return:**
Based on net asset value per share...... 4.46% 6.03% 1.61%# 4.08% 5.66% 1.37%# 4.28% 5.97%#
========= ========= ========= ========= ========= ========= ========= =========
Ratios to Average Net Assets:
Expenses, net of reimbursement.......... .50% .33% .03%* .87% .69% .38%* .71% .63%*
========= ========= ========= ========= ========= ========= ========= =========
Expenses................................ 1.38% 1.30% 1.24%* 1.75% 1.65% 1.60%* 1.59% 1.63%*
========= ========= ========= ========= ========= ========= ========= =========
Investment income--net.................. 4.28% 4.49% 3.68%* 3.91% 4.11% 3.31%* 4.06% 4.21%*
========= ========= ========= ========= ========= ========= ========= =========
Supplemental Data:
Net assets, end of period (in
thousands)............................. $ 3,723 $ 4,811 $ 5,290 $ 10,071 $ 8,822 $ 9,743 $ 214 $ 38
========= ========= ========= ========= ========= ========= ========= =========
Portfolio turnover...................... 51.47% 139.16% 152.73% 51.47% 139.16% 152.73% 51.47% 139.16%
========= ========= ========= ========= ========= ========= ========= =========
</TABLE>
Class D
--------------------
For the
For the period
year Oct. 21,
ended 1994+ to
July 31, July 31,
1996 1995
--------- ---------
Increase (Decrease) in Net Asset Value:
Per Share Operating Performance:
Net asset value, beginning of period.... $ 10.05 $ 9.78
--------- ---------
Investment income--net................. .42 .34
Realized and unrealized gain (loss) on
investments--net..................... .01 .27
--------- ---------
Total from investment operations........ .43 .61
--------- ---------
Less dividends from investment
income--net............................ (.42) (.34)
--------- ---------
Net asset value, end of period.......... $ 10.06 $ 10.05
========= =========
Total Investment Return:**
Based on net asset value per share...... 4.35% 6.37%#
========= =========
Ratios to Average Net Assets:
Expenses, net of reimbursement.......... .62% .48%*
========= =========
Expenses................................ 1.49% 1.48%*
========= =========
Investment income--net.................. 4.16% 4.47%*
========= =========
Supplemental Data:
Net assets, end of period (in
thousands)............................. $ 3,912 $ 2,306
========= =========
Portfolio turnover...................... 51.47% 139.16%
========= =========
- ------------
* Annualized.
** Total investment returns exclude the effects of sales loads.
+ Commencement of operations.
# Aggregate total investment return.
17
<PAGE>
<TABLE>
<CAPTION>
Pennsylvania Fund
--------------------------------------------------------------------------------------
Class A Class B Class C
------------------------------- ------------------------------- --------------------
For the For the For the
period period For the period
For the year ended Nov. 26, For the year ended Nov. 26, year Oct. 21,
July 31, 1993+ to July 31, 1993+ to ended 1994+ to
-------------------- July 31, -------------------- July 31, July 31, July 31,
1996 1995 1994 1996 1995 1994 1996 1995
--------- --------- --------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Increase (Decrease) in Net Asset Value:
Per Share Operating Performance:
Net asset value, beginning of period.... $ 10.10 $ 9.95 $ 10.00 $ 10.10 $ 9.95 $ 10.00 $ 10.10 $ 9.84
--------- --------- --------- --------- --------- --------- --------- ---------
Investment income--net................. .41 .42 .23 .37 .39 .21 .38 .29
Realized and unrealized gain (loss) on
investments--net..................... .01 .15 (.05) .01 .15 (.05) .05 .26
--------- --------- --------- --------- --------- --------- --------- ---------
Total from investment operations........ .42 .57 .18 .38 .54 .16 .43 .55
--------- --------- --------- --------- --------- --------- --------- ---------
Less dividends from investment
income--net............................. (.41) (.42) (.23) (.37) (.39) (.21) (.38) (.29)
--------- --------- --------- --------- --------- --------- --------- ---------
Net asset value, end of period.......... $ 10.11 $ 10.10 $ 9.95 $ 10.11 $ 10.10 $ 9.95 $ 10.15 $ 10.10
========= ========= ========= ========= ========= ========= ========= =========
Total Investment Return:**
Based on net asset value per share...... 4.18% 5.89% 1.85%# 3.80% 5.51% 1.61%# 4.28% 5.68%#
========= ========= ========= ========= ========= ========= ========= =========
Ratios to Average Net Assets:
Expenses, net of reimbursement.......... .80% .38% .02%* 1.15% .73% .38%* .97% 1.05%*
========= ========= ========= ========= ========= ========= ========= =========
Expenses................................ 1.63% 1.90% 1.48%* 1.99% 2.25% 1.83%* 1.83% 2.55%*
========= ========= ========= ========= ========= ========= ========= =========
Investment income--net.................. 4.01% 4.25% 3.46%* 3.65% 3.87% 3.05%* 3.84% 3.77%*
========= ========= ========= ========= ========= ========= ========= =========
Supplemental Data:
Net assets, end of period (in
thousands).............................. $ 833 $ 943 $ 990 $ 6,264 $ 7,414 $ 9,532 $ 1 $ 1
========= ========= ========= ========= ========= ========= ========= =========
Portfolio turnover...................... 30.90% 141.52% 237.47% 30.90% 141.52% 237.47% 30.90% 141.52%
========= ========= ========= ========= ========= ========= ========= =========
</TABLE>
Class D
--------------------
For the
For the period
year Oct. 21,
ended 1994+ to
July 31, July 31,
1996 1995
--------- ---------
Increase (Decrease) in Net Asset Value:
Per Share Operating Performance:
Net asset value, beginning of period.... $ 10.10 $ 9.84
--------- ---------
Investment income--net................. .40 .33
Realized and unrealized gain (loss) on
investments--net..................... .01 .26
--------- ---------
Total from investment operations........ .41 .59
--------- ---------
Less dividends from investment
income--net............................. (.40) (.33)
--------- ---------
Net asset value, end of period.......... $ 10.11 $ 10.10
========= =========
Total Investment Return:**
Based on net asset value per share...... 4.07% 6.10%#
========= =========
Ratios to Average Net Assets:
Expenses, net of reimbursement.......... .96% .57%*
========= =========
Expenses................................ 1.71% 2.08%*
========= =========
Investment income--net.................. 3.84% 4.30%*
========= =========
Supplemental Data:
Net assets, end of period (in
thousands).............................. $ 1,807 $ 382
========= =========
Portfolio turnover...................... 30.90% 141.52%
========= =========
- ------------
* Annualized.
** Total investment returns exclude the effects of sales loads.
+ Commencement of operations.
# Aggregate total investment return.
18
<PAGE>
INVESTMENT OBJECTIVES AND POLICIES
The investment objective of each Fund is to provide shareholders with as
high a level of income exempt from Federal income taxes, the designated state's
personal income taxes and, where applicable, local personal income taxes, as is
consistent with prudent investment management. Each Fund seeks to achieve its
objective while providing investors with the opportunity to invest in a
portfolio of securities consisting primarily of intermediate-term investment
grade obligations issued by or on behalf of the designated state or its
political subdivisions, agencies or instrumentalities, and obligations of other
qualifying issuers, such as issuers located in Puerto Rico, the Virgin Islands
and Guam. Such obligations pay interest exempt, in the opinion of bond counsel
to the issuer, from Federal income taxes, the designated state's personal income
taxes and, in certain instances, local personal income taxes. Obligations that
pay interest exempt from Federal income taxes are referred to herein as
"Municipal Bonds". Obligations that pay interest exempt from Federal income
taxes, the designated state's personal income taxes and, where applicable, local
personal income taxes, and obligations that would not subject shareholders to
intangible personal property taxes in the designated state are referred to
herein as "State Municipal Bonds". Unless otherwise indicated, references to
Municipal Bonds shall be deemed to include State Municipal Bonds. Each Fund will
maintain at all times, except during temporary defensive periods, at least 65%
of its total assets invested in its respective State Municipal Bonds; the New
Jersey Fund will maintain at least 80% of its total assets invested in New
Jersey State Municipal Bonds. The investment objective of each Fund as set forth
in this paragraph is a fundamental policy of that Fund and may not be changed
without shareholder approval. At times, a Fund may seek to hedge its portfolio
through the use of futures transactions to reduce volatility in the net asset
value of Fund shares.
Each Fund will invest primarily in Municipal Bonds with remaining
maturities of between one and ten years, and may not invest in Municipal Bonds
with remaining maturities of greater than ten years. For cash management and
temporary defensive purposes, each Fund may invest in Municipal Bonds with
remaining maturities of less than one year. It is anticipated that, depending on
market conditions, the dollar weighted average maturity of each Fund's portfolio
will not exceed five years. For purposes of these investment policies, a bond
will be treated as having a maturity earlier than its stated maturity date if
such bond has technical features which, in the judgment of the Manager will
result in the bond being valued in the market as though it has such earlier
maturity. Interest rates on shorter-term Municipal Bonds may fluctuate more
widely from time to time than interest rates on longer-term Municipal Bonds.
However, because of their limited maturities, the market value of the Municipal
Bonds held by each Fund can be expected to fluctuate less as a result of changes
in interest rates.
Municipal Bonds may include several types of bonds. The interest on
Municipal Bonds may bear a fixed rate or be payable at a variable or floating
rate. The Funds also may invest in variable rate demand obligations ("VRDOs")
and participations therein, described below, and short-term tax-exempt municipal
obligations such as tax anticipation notes. The Municipal Bonds purchased by the
Funds primarily will be what are commonly referred to as "investment grade"
securities, which are obligations rated at the time of purchase within the four
highest quality ratings as determined by either Moody's Investors Service, Inc.
("Moody's") (currently Aaa, Aa, A and Baa), Standard & Poor's Ratings Services
("Standard & Poor's") (currently AAA, AA, A and BBB) or Fitch Investors Service,
Inc. ("Fitch") (currently AAA, AA, A and BBB). If Municipal Bonds are unrated,
such securities will possess creditworthiness comparable, in the opinion of the
Manager, to investment grade obligations. 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 I--"Ratings of Municipal Bonds" in the Statement of
Additional Information for more information regarding ratings of debt
securities. An issue of rated Municipal
19
<PAGE>
Bonds may cease to be rated or its rating may be reduced below investment grade
subsequent to its purchase by a 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, interest rates and any
state or local tax limitations to determine whether to continue to hold the
obligation in a Fund's portfolio.
Each 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. 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, a 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 Objectives 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 I--"Ratings of Municipal
Bonds" in the Statement of Additional Information for additional information
regarding ratings of debt securities. None of the Funds intends 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.
Each Fund's investments also may include VRDOs and VRDOs in the form of
participation interests ("Participating VRDOs") in variable rate tax-exempt
obligations held by a financial institution. The VRDOs in which the Funds 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 Funds 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 Trust has
been advised by its counsel that the Funds 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 therefore will be subject to each 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 Funds ordinarily do not intend to realize investment income not exempt
from Federal income taxes, state personal income taxes and, where applicable,
local personal income taxes, or to hold investments that would subject
shareholders to intangible personal property taxes in the designated state.
However, to the extent that
20
<PAGE>
suitable Municipal Bonds of a designated state are not available for investment
by the Fund in that state, the Fund may purchase Municipal Bonds issued by other
states or their agencies or instrumentalities, the interest on which is exempt,
in the opinion of bond counsel to the issuer, from Federal, but not state,
taxation. The Funds 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 Manager
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 intermediate-term municipal securities.
Under normal circumstances, except when acceptable securities are
unavailable as determined by the Manager, each Fund will invest at least 65% of
its total assets in State Municipal Bonds; except that under normal
circumstances the New Jersey Fund will invest at least 80% of its total assets
in New Jersey State Municipal Bonds. For temporary defensive purposes or to
provide liquidity, each Fund has the authority to invest in taxable or
tax-exempt money market obligations with maturities 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 a Fund's net
assets. The Temporary Investments, VRDOs and Participating VRDOs in which the
Funds may invest also will be in the following rating categories at the time of
purchase: MIG-1/VMIG-1 through MIG-4/VMIG-4 for notes and VRDOs and Prime-1
through Prime-3 for commercial paper (as determined by Moody's), SP-1+ through
SP-2 for notes and A-1+ through A-3 for VRDOs and commercial paper (as
determined by Standard & Poor's), or F-1 through F-3 for notes, VRDOs and
commercial paper (as determined by Fitch) or, if unrated, of comparable quality
in the opinion of the Manager. Each 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. See "Distributions and Taxes". The percentage of each Fund's net
assets invested in "private activity bonds" will vary during the year. In
addition, each 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
each Fund is a fundamental policy of that Fund which may not be changed without
a vote of a majority of the outstanding shares of the Fund, as defined in the
1940 Act. Each Fund's hedging strategies, which are described in more detail
under "Financial Futures Contracts and Options Thereon", 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 a Fund offers several benefits. Each Fund offers
investors the opportunity to receive income exempt from Federal income taxes,
the designated state's personal income taxes and, where applicable, local
personal income taxes, by investing in a professionally managed portfolio
consisting primarily of intermediate-term State Municipal Bonds. Shares of
certain Funds also may be exempt from intangible personal property taxes in the
designated state. Each 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 each Fund are at least partially offset by the expenses involved in
operating an investment company. Such expenses primarily consist of the
management fee and operational costs, and in the case of Class B, Class C and
Class D shares of a Fund, the account maintenance costs for that Fund
21
<PAGE>
relating to that class of shares and in the case of Class B and Class C shares,
the distribution costs of that Fund relating to that class of shares.
Risk Factors and Special Considerations
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. See "Description of Municipal
Bonds". Certain instruments in which the Funds may invest may be characterized
as derivative instruments. See "Indexed and Inverse Floating Obligations",
"Synthetic Short-Term Municipal Bonds" and "Financial Futures Contracts and
Options Thereon".
Moreover, each Fund ordinarily will invest at least 65% (80% in the case of
the New Jersey Fund) of its total assets in its respective State Municipal Bonds
and, therefore, it is more susceptible to factors adversely affecting issuers of
Municipal Bonds in such state than is a tax-exempt mutual fund that is not
concentrated in issuers of State Municipal Bonds to this degree. Because each
Fund's portfolio will be comprised primarily of intermediate-term, investment
grade securities, each Fund is expected to be less subject to market and credit
risks than a fund that invests in longer-term or lower quality State Municipal
Bonds. Set forth below are special considerations and risk factors specific to
each Fund. The Manager does not believe that the current economic conditions
described below for each state will have a significant adverse effect on the
related Fund's ability to invest in investment grade State Municipal Bonds.
The Arizona Fund. Over the past several decades, the State's economy has
grown faster than most other regions of the country, as measured by nearly every
major indicator of economic growth, including population, employment and
aggregate personal income. Although the rate of growth slowed considerably
during the late 1980s and early 1990s, the State's efforts to diversify its
economy have enabled it to realize, and then sustain, increasing growth rates in
more recent years. The State continues to search for a new method to finance its
public school system following the Arizona Supreme Court's 1994 ruling that the
current system is unconstitutional. Because the Fund's portfolio will consist
primarily of investment grade securities, the Fund is expected to be less
subject to market and credit risks than a fund that invests in lower quality
Municipal Bonds. See Appendix A, "Economic and Financial Conditions in Arizona",
in the Statement of Additional Information.
The California Fund. Since the start of the 1990-91 fiscal year, the State
of California has faced the worst economic, fiscal and budget conditions since
the 1930's. On July 5, 1994, all three of the rating agencies rating the State
of California's long-term debt lowered their ratings of the State of
California's general obligation bonds. Moody's lowered its rating from "Aa" to
"A1". Standard & Poor's lowered its rating from "A+" to "A" and termed its
outlook as "stable", and Fitch lowered its rating from "AA" to "A". No assurance
can be given that such ratings will not be lowered in the future. Although a
steady upturn has been underway since 1994, pre-recession job levels are not
expected to be reached until later in the decade. See Appendix B, "Economic and
Financial Conditions in California", in the Statement of Additional Information.
The Florida Fund. Many different social, environmental and economic
factors may affect the financial condition of Florida and its political
subdivisions. From time to time Florida and its political subdivisions have
encountered financial difficulties. Florida is highly dependent upon sales and
use taxes which account for the majority of its General Fund revenues. The
Florida Constitution does not permit a state or local personal income tax. The
structure of personal income in Florida is also different from the rest of the
nation in that it has a proportionally greater retirement age population which
is dependent upon transfer payments (social security, pension benefits, etc.).
Such transfer payments can be affected by Federal legislation. Florida's
economic growth
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is also highly dependent upon other factors such as changes in population
growth, tourism, interest rates and hurricane activity. Finally, two recent
amendments to the Florida Constitution may limit the State's ability to raise
revenues. In combination, the two amendments may have an adverse effect on the
finances of Florida and its political subdivisions. See "Distributions and
Taxes--State" herein and Appendix C, "Economic and Financial Conditions in
Florida", in the Statement of Additional Information for important information
regarding the State of Florida.
The Massachusetts Fund. The Commonwealth of Massachusetts is experiencing
a moderate economic recovery. The budgeted operating funds of the Commonwealth
ended fiscal 1993 with a surplus of revenues and other sources over expenditures
and other uses, and with aggregate ending fund balances of approximately $562.5
million. Massachusetts ended fiscal 1994 and fiscal 1995 with positive closing
fund balances of $589.3 million and $726.0 million, respectively. According to
the Comptroller's preliminary financial report for fiscal year 1996, fiscal year
1996 ended with positive budgetary fund balances of approximately $1.152
billion. Currently, Massachusetts" general obligation bonds are rated by
Standard & Poor's, Fitch and Moody's as A+, A+ and A1, respectively. From time
to time, the rating agencies may further change their ratings in response to
budgetary matters or other economic indicators. See Appendix D, "Economic and
Financial Conditions in Massachusetts", in the Statement of Additional
Information.
The Michigan Fund. In recent years, the State of Michigan has reported its
financial results in accordance with generally accepted accounting principles.
For the fiscal years ended September 30, 1990 and 1991, the State reported
negative year-end General Fund balances of $310.3 million and $169.4 million,
respectively, but ended the 1992, 1993, 1994 and 1995 fiscal years with its
General Fund in balance after transfers in 1993, 1994 and 1995 from the General
Fund to the Budget Stabilization Fund of $283 million, $464 million and $67.4
million, respectively. Those and certain other transfers into and out of the
Budget Stabilization Fund raised the balance in the Budget Stabilization Fund to
$987.9 million as of September 30, 1995. A positive cash balance in the combined
General Fund/School Aid Fund was recorded at September 30, 1990. In each of the
three prior fiscal years, the State had undertaken mid-year actions to address
projected year-end budget deficits, including expenditure cuts and deferrals and
one time expenditures or revenue recognition adjustments. From 1991 to 1993, the
State experienced deteriorating cash balances which necessitated short-term
borrowings and the deferral of certain scheduled cash payments to local units of
government. The State borrowed between $500 and $900 million for cash flow
purposes in the 1992 and 1993 fiscal years, $500 million in the 1995 fiscal year
and $900 million in the 1996 fiscal year. The State did not have to borrow for
short-term cash flow purposes in the 1993-94 fiscal year due to improved cash
balances. Currently, the State's general obligation bonds are rated Aa by
Moody's, AA by Standard & Poor's and Aa by Fitch. The State's economy could
continue to be affected by changes in the auto industry, notably consolidations
and plant closings resulting from competitive pressures and overcapacity. See
Appendix E, "Economic and Financial Conditions in Michigan", in the Statement of
Additional Information.
The New Jersey Fund. New Jersey has benefited from the national economic
recovery. The State is in its fifth year of economic recovery. New Jersey is
reliant on Federal assistance and ranks high among the states in the amount of
Federal aid received. Currently, the State's general obligation bonds are rated
AA+ by Standard & Poor's, Aa1 by Moody's and AA+ by Fitch. See Appendix F,
"Economic and Financial Conditions in New Jersey", in the Statement of
Additional Information.
The New York Fund. In recent years, New York State, some of its agencies,
instrumentalities and public authorities and certain of its municipalities have
faced serious financial difficulties that could have an adverse effect on the
sources of payment for, or the market value of, New York State municipal
securities in which the New York Fund invests. Currently, Moody's, Standard &
Poor's and Fitch rate New York City's general
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obligation bonds Baa1, BBB+ and A-, respectively, and Moody's, Standard & Poor's
and Fitch rate New York State's general obligation bonds A, A- and A+,
respectively. See Appendix G, "Economic and Financial Conditions in New York",
in the Statement of Additional Information.
The Pennsylvania Fund. Many different social, environmental and economic
factors may affect the financial condition of Pennsylvania and its political
subdivisions. From time to time Pennsylvania and certain of its political
subdivisions have encountered financial difficulties which have adversely
affected their respective credit standings. For example, the financial condition
of the City of Philadelphia had impaired its ability to borrow and resulted in
its obligations generally being downgraded by the major rating services to below
investment grade. Other factors which may negatively affect economic conditions
in Pennsylvania include adverse changes in employment rates, Federal revenue
sharing or laws with respect to tax-exempt financing. For the 1995 fiscal year,
the Commonwealth of Pennsylvania General Fund recorded a $49.8 million deficit
(determined on a "GAAP" basis). Some of the deficit was attributable to changes
in the methodology used to compute certain liabilities. Financial results for
fiscal 1996, determined on a budgetary basis, reflected an ending unappropriated
surplus (prior to transfers) of $183.8 million, $65.5 million above estimate.
For the fiscal year, net expenditures and encumbrances from Commonwealth
revenues (including supplemental appropriations but excluding pooled financing
expenditures), totalled $16,162.9 million. Expenditures exceeded available
revenues and lapses by $253.2 million. The difference was funded from a planned
partial drawdown of the $437.0 million fiscal year adjusted beginning
unappropriated surplus. Commonwealth revenues (prior to tax refunds) increased
by $113.9 million over the prior fiscal year to $16,338.5 million. Currently,
Pennsylvania's general obligation bonds are rated AA- by Standard & Poor's and
Fitch and A1 by Moody's. See Appendix H, "Economic and Financial Conditions in
Pennsylvania", in the Statement of Additional Information.
Description of Municipal Bonds
Municipal Bonds include debt obligations issued by or on behalf of a state
or its agencies, instrumentalities, municipalities or political subdivisions 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 disposal, health care, transportation, education and housing
facilities), refunding of outstanding obligations and obtaining of funds for
general operating expenses and loans to other public institutions and
facilities. In addition, certain types of industrial development bonds or
private activity bonds are issued by or on behalf of public authorities to
finance or refinance 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, in the opinion of bond counsel to the
issuer, excluded from gross income for Federal income tax purposes ("exempt from
Federal income tax"). Such obligations are referred to herein as State Municipal
Bonds if such obligations pay interest exempt, in the opinion of bond counsel to
the issuer, from Federal income taxes, the designated state's personal income
taxes and, where applicable, local personal income taxes, and would not subject
shareholders to intangible personal property taxes in the designated state. 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 repayment of principal and the
payment of interest. The taxing power of any governmental entity may be limited,
however, by provisions of its state constitution or laws. An entity's
creditworthiness and its capacity to make timely payment of interest and
repayment of principal on a general obligation bond when
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due will depend on many factors, including potential erosion of the tax base due
to population declines, natural disasters, declines in the state's industrial
base or inability to attract new industries, economic limits on the ability to
tax without eroding the tax base, state legislative proposals or voter
initiatives to limit ad valorem real property taxes and the extent to which the
entity relies on Federal or state aid, access to capital markets or other
factors beyond the state or entity's control.
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. A Fund will not invest in 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 if such
investments, together with investments in other unseasoned issuers, would exceed
5% of its total assets (taken at market value at the time of each investment).
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 such
investments will not adversely affect the Funds, particularly given each Fund's
limitations on such investments.
The Funds may purchase IDBs or private activity bonds. IDBs or private
activity bonds are, in most cases, tax-exempt securities issued by states,
municipalities or public authorities to provide funds, usually through a loan or
lease arrangement, to a private entity for the purpose of financing construction
or improvement of a facility to be used by the entity. Such bonds are secured
primarily by revenues derived from loan repayments or lease payments due from
the entity which may or may not be guaranteed by a parent company or otherwise
secured. IDBs and private activity bonds are generally not secured by a pledge
of the taxing power of the issuer of such bonds. Therefore, an investor should
be aware that repayment of such bonds generally depends on the revenues of a
private entity and should be aware of the risks that such an investment may
entail. Continued ability of an entity to generate sufficient revenues for the
repayment of principal and the payment of interest on such bonds will be
affected by many factors including the size of the entity, its 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. Each Fund also may
invest in so-called "moral obligation" bonds, which are normally issued by
special purpose authorities. If an issuer of moral obligation bonds is unable to
meet its obligations, repayment of such bonds becomes a moral commitment, but
not a legal obligation, of the state or municipality in question. Each Fund may
purchase obligations of state and local housing authorities the proceeds of
which are used to purchase single-family mortgage loans or to finance the
construction of multi-family housing projects. Economic developments, including
fluctuations in interest rates, increasing construction and operating costs, and
reductions in Federal housing subsidy programs may adversely affect the revenues
of housing authorities. Furthermore, adverse economic conditions may result in
an increasing rate of default of mortgagors on the underlying mortgage loans.
Single-family mortgage revenue bonds also are subject to extraordinary mandatory
redemption at par at any time, in whole or in part, from the proceeds derived
from prepayments of underlying mortgage loans and from the unused proceeds of
the issue within a stated period which may be within one year of the date of
issue.
Municipal Lease Obligations. Also included within the general category of
Municipal Bonds are participation certificates issued by government authorities
or entities to finance the acquisition or construction of equipment, land and/or
facilities. The certificates represent participations in a lease, an installment
purchase contract or a conditional sales contract (hereinafter collectively
called "lease obligations") relating to such equipment, land or facilities.
Although lease obligations do not constitute general obligations of the issuer
for
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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 repossession 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. A Fund may not invest in
illiquid lease obligations if such investments, together with other illiquid
investments, would exceed 15% of the Fund's total assets. A Fund, however, may
invest without regard to such limitation in lease obligations which the Manager,
pursuant to guidelines which have been adopted by the Board of Trustees and
subject to the supervision of the Board, determines to be liquid. The Manager
will deem lease obligations liquid if they are publicly offered and have
received an investment grade rating of Baa or better by Moody's, or BBB or
better by Standard & Poor's or Fitch. Unrated lease obligations, or those rated
below investment grade, will be considered liquid if the obligations come to the
market through an underwritten public offering and at least two dealers are
willing to give competitive bids. In reference to obligations rated below
investment grade, the Manager, among other things, also must 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 Funds.
When-Issued Securities and Delayed Delivery Transactions
The Funds may purchase or sell Municipal Bonds on a delayed delivery basis
or on a when-issued basis at fixed purchase terms. These transactions arise when
securities are purchased or sold by a Fund with payment and delivery taking
place in the future. The purchase will be recorded on the date a Fund enters
into the commitment and the value of the obligation thereafter will 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 each Fund will be established with its respective custodian
consisting of cash, cash equivalents or liquid securities having a market value
at all times at least equal to the amount of the forward commitment.
Indexed and Inverse Floating Obligations
The Funds may invest in Municipal Bonds the return on which is based on a
particular index of value or interest rates. For example, a 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 product. The principal amount
payable upon maturity of certain Municipal Bonds also may be based on the value
of an index. To the extent a Fund invests in these types of Municipal Bonds, the
Fund's return on such Municipal Bonds will be subject to risk with respect to
the value of the particular index. Interest and principal payable on the
Municipal Bonds may also be based on relative changes among particular indices.
Also, a Fund may invest in so-called "inverse floating obligations" or "residual
interest bonds" on which the interest rates typically vary inversely with a
short-term floating rate (which may be reset periodically by a dutch auction, a
remarketing agent, or by reference to a short-term tax-exempt interest rate
index). The Funds may purchase original issue inverse floating rate bonds in
both
26
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the primary and secondary markets and also may purchase in the secondary market
synthetically-created inverse floating rate bonds evidenced by custodial or
trust receipts. Generally, interest rates on inverse floating rate bonds will
decrease when short-term rates increase, and will increase when short-term rates
decrease. 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 generally will be more volatile than the market
values of fixed-rate, tax-exempt securities. To seek to limit the volatility of
these securities, a 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 a 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. A Fund may not invest in such illiquid obligations
if such investments, together with other illiquid investments, would exceed 15%
of that Fund's total assets.
Synthetic Short-Term Municipal Bonds
Each Fund may invest in a variety of synthetic short-term municipal bonds
("Synthetic Bonds"). Synthetic Bonds are typically structured by a bank,
broker-dealer or other financial institution, and generally consist of a trust
or partnership through which the Fund holds an interest in one or more long-term
municipal bonds which are assets of the applicable entity ("Underlying Bonds")
coupled with a conditional right to sell ("put") the Fund's interest in the
Underlying Bonds at par plus accrued interest to a financial institution (a
"Liquidity Provider"). Typically, a Synthetic Bond is structured as a trust or
partnership which provides for pass-through tax-exempt income. There are
currently three principal types of Synthetic Bond structures: (1) "Tender Option
Bonds", which are instruments that grant the holder thereof the right to put an
Underlying Bond at par plus accrued interest at specified intervals to a
Liquidity Provider; (2) "Swap Products", in which the trust or partnership swaps
the payments due on an Underlying Bond with a swap counterparty who agrees to
pay a floating municipal money market interest rate; and (3) "Partnerships",
which allocate to the partners income, expenses, capital gains and losses in
accordance with a governing partnership agreement. Each of the Funds may also
invest in other forms of Synthetic Bonds.
Investments in Synthetic Bonds raise certain tax, legal, regulatory and
accounting issues which may not be presented by investments in other Municipal
Bonds. There is some risk that certain issues could be resolved in a manner
which could adversely impact the performance of the Funds. For example, the
tax-exempt treatment of the interest paid to holders of Synthetic Bonds is
premised on the legal conclusion that the holders of such Synthetic Bonds have
an ownership interest in the Underlying Bonds. While the Fund receives an
opinion of legal counsel to the effect that the income from each Synthetic Bond
is tax-exempt to the same extent as the Underlying Bond, the Internal Revenue
Service (the "IRS") has not issued a ruling on this subject. Were the IRS to
issue an adverse ruling, there is a risk that the interest paid on such
Synthetic Bonds would be deemed taxable. A Synthetic Bond with a put notice
period exceeding seven days will be subject to each Fund's restriction on
illiquid investments unless, in the judgment of the Trustees, such Synthetic
Bond is liquid.
Call Rights
Each Fund may purchase, either directly from the issuer or from a third
party, a Municipal Bond issuer's contractual right to call all or a portion of
such Municipal Bond for mandatory tender for purchase (a "Call Right"). A Fund
purchasing a Call Right may or may not own the related Municipal Bond. A holder
of a Call
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Right may exercise such right to require a mandatory tender for the purchase of
related Municipal Bonds, subject to certain conditions. A Call Right that is not
exercised prior to the maturity of the related Municipal Bond will expire
without value. The economic effect of holding both the Call Right and the
related Municipal Bond is identical to that of holding a Municipal Bond as a
non-callable security. Certain investments in such obligations may be illiquid.
A Fund may not invest in such illiquid obligations if such investments, together
with other illiquid investments, would exceed 15% of that Fund's total assets.
Financial Futures Contracts and Options Thereon
Each Fund is authorized to purchase and sell certain exchange-traded
financial futures contracts ("financial futures contracts") and options thereon.
The purchase or sale of an option on a financial futures contract is analogous
to the purchase or sale of an option on an individual security. Financial
futures contracts and options thereon are used solely for the purposes of
hedging a Fund's investments in Municipal Bonds against declines in value and
hedging against increases in the cost of securities it intends to purchase.
However, a Fund's transactions involving financial futures contracts or options
thereon (which options may include both puts and calls) will be in accordance
with its 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 financial futures contracts, to make and accept a cash
settlement at a specific future time for a specified price. A sale of financial
futures contracts or options thereon 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 or options thereon
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 financial futures contracts or
options thereon. 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".
Each Fund may deal 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 or option thereon at any
specific time. If it is not possible to close a financial futures position or
the related option entered into by a 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 contracts or related option positions also could have an adverse impact
on a Fund's ability to hedge effectively. There is also the risk of loss by a
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 or option thereon.
Each Fund may purchase and sell financial futures contracts on U.S.
Government securities and write and purchase put and call options on such
financial 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, U.S. Treasury notes, Government National
Mortgage Association ("GNMA") Certificates and three-month U.S. Treasury bills.
Subject to policies adopted by the Trustees, the Funds also may enter into
other financial futures transactions, such as financial futures contracts or
options on other municipal bond indices which may become
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available, if the Manager of the Funds and the Trustees of the Trust should
determine that there is normally a sufficient correlation between the prices of
such financial futures contracts or options thereon and the Municipal Bonds in
which a Fund invests to make such hedging appropriate.
Utilization of financial futures contracts and options thereon involves the
risk of imperfect correlation in movements in the price of financial futures
contracts or options thereon and movements in the price of the security which is
the subject of the hedge. If the price of the financial futures contract or
option thereon moves more or less than the price of the security that is the
subject of the hedge, a 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 financial futures
contracts or options thereon 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 or option thereon. Finally, in the case of
financial futures contracts on U.S. Government securities and options on such
financial futures contracts, the anticipated correlation of price movements
between the U.S. Government securities underlying the financial 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 a Fund being deemed to be
a "commodity pool", as defined under such regulations, provided that the Fund
adheres to certain restrictions. In particular, a Fund may purchase and sell
financial 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. As stated above, each 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 a Fund purchases a financial futures contract, or writes a put option
or purchases a call option thereon, it will maintain an amount of cash, cash
equivalents (e.g., high grade commercial paper and daily tender adjustable
notes) or liquid securities in a segregated account with the Fund's custodian,
so that the amount so segregated plus the amount of initial and variation margin
held in the account of its broker equals the market value of the financial
futures contract or option thereon, thereby ensuring that the use of such
financial futures contract or option is unleveraged. It is not anticipated that
transactions in financial futures contracts or options thereon will have the
effect of increasing portfolio turnover.
Although certain risks are involved in options and futures transactions,
the Manager believes that, because the Funds will engage in financial futures
transactions only for hedging purposes, the futures portfolio strategies of the
Funds will not subject the Funds to certain risks frequently associated with
speculation in futures transactions. The Funds 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, each Fund is required to meet certain
diversification requirements under the Code.
The liquidity of a secondary market in a financial futures contract or
related option may be adversely affected by "daily price fluctuation limits"
established by commodity exchanges which limit the amount of fluctuation in a
financial futures contract price during a single trading day. Once the daily
limit has been reached
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in the contract, no trades may be entered into at a price beyond the limit, thus
preventing the liquidation of open futures positions. Prices in the past have
reached or exceeded the daily limit on a number of consecutive trading days.
The successful use of financial futures contracts and options thereon 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 financial futures contract or
related option is held by a Fund or move in a direction opposite to that
anticipated, the Fund may realize a loss on the hedging transaction which is not
fully or partially offset by an increase in the value of portfolio securities.
As a result, a Fund's total return for such period may be less than if it had
not engaged in the hedging transaction. Furthermore, each Fund only will engage
in hedging transactions from time to time and may not necessarily be engaging in
hedging transactions when movements in interest rates occur.
Reference is made to the Statement of Additional Information for further
information on financial futures contracts and certain options thereon.
Repurchase Agreements
As Temporary Investments, the Funds may invest in securities pursuant to
repurchase agreements. Repurchase agreements may be entered into only with a
member bank of the Federal Reserve System or a primary dealer in U.S. Government
securities or an affiliate thereof. Under such agreements, the seller agrees,
upon entering into the contract, to repurchase the security from the Fund at a
mutually agreed upon time and price, thereby determining the yield during the
term of the agreement. This results in a fixed rate of return insulated from
market fluctuations during such period. A Fund may not invest in repurchase
agreements maturing in more than seven days if such investments, together with
the Fund's other illiquid investments, would exceed 15% of that Fund's total
assets. In the event of a default by the seller under a repurchase agreement, a
Fund may suffer time delays and incur costs or possible losses in connection
with the disposition of the underlying securities.
Certain Funds may be subject to state and local restrictions which prohibit
certain types of investments and investment strategies, including some of the
investments and investment strategies discussed herein.
Investment Restrictions
Each Fund has adopted a number of restrictions and policies relating to the
investment of the Fund's assets and its activities, which are fundamental
policies of the Fund and may not be changed without the approval of the holders
of a majority of the Fund's outstanding voting securities, as defined in the
1940 Act, which means the lesser of (i) 67% of the shares represented at a
meeting at which more than 50% of the outstanding shares are represented or (ii)
more than 50% of the outstanding shares. As a fundamental policy, no Fund may
invest more than 25% of its total assets (taken at market value at the time of
each investment) in securities of issuers in any particular industry (other than
U.S. Government securities or Government agency securities, Municipal Bonds and
Non-Municipal Tax-Exempt Securities). Investment restrictions and policies that
are non-fundamental policies may be changed by the Board of Trustees without
shareholder approval. As a non-fundamental policy, no Fund may borrow amounts in
excess of 20% of its total assets taken at market value (including the amount
borrowed), and then only from banks as a temporary measure for extraordinary or
emergency purposes. In addition, no Fund will purchase securities while
borrowings are outstanding.
As a non-fundamental policy, no Fund will invest in securities which cannot
be readily resold because of legal or contractual restrictions or which are not
readily marketable, including individually negotiated loans that
30
<PAGE>
constitute illiquid investments and illiquid lease obligations, and in
repurchase agreements maturing in more than seven days, if, regarding all such
securities taken together, more than 15% of its total assets (taken at market
value at the time of each investment) would be invested in such securities. In
addition, no Fund may invest more than 10% of its total assets (taken at market
value at the time of each investment) in revenue bonds where the entity
supplying the revenues from which the issue is to be paid, and the guarantor of
the obligation, including predecessors, each has a record of less than three
years" continuous business operation.
Each 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,
each Fund's investments will be limited so as to qualify as a "regulated
investment company" for purposes of the Code. See "Distributions and
Taxes--Taxes". To qualify, among other requirements, the Trust will limit each
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, each 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 a Fund assumes large positions in the obligations of a small
number of issuers, that 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 each Fund's investment restrictions.
31
<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
Funds and perform the various duties imposed on the directors or trustees of
investment companies by the 1940 Act.
The Trustees are:
ARTHUR ZEIKEL*--President of the Manager and its affiliate, MLAM; President
and Director of Princeton Services, Inc. ("Princeton Services"); Executive Vice
President of ML&Co.; and Director of the Distributor.
JAMES H. BODURTHA--Director and Executive Vice President, The China
Business Group, Inc.
HERBERT I. LONDON--John M. Olin Professor of Humanities, New York
University.
ROBERT R. MARTIN--Former Chairman, Kinnard Investments, Inc.
JOSEPH L. MAY--Attorney in private practice.
ANDRE F. PEROLD--Professor, Harvard Business School.
- ------------
* Interested person, as defined in the 1940 Act, of the Trust.
Management and Advisory Arrangements
The Manager, which is an affiliate of MLAM and is owned and controlled by
ML&Co., a financial services holding company and the parent of Merrill Lynch,
acts as the manager for the Trust and provides each Fund with management
services. The Manager or MLAM acts as the investment adviser for over 130
registered investment companies. MLAM also offers portfolio management and
portfolio analysis services to individuals and institutions. As of October 31,
1996, the Manager and MLAM had a total of approximately $217.6 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 each Fund's portfolio and constantly reviews each
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 Funds.
Edward J. Andrews, Peter J. Hayes and Helen M. Sheehan are the Portfolio
Managers for each Fund and are responsible for the day-to-day management of each
Fund's investment portfolio. Edward J. Andrews has been a Portfolio Manager and
Vice President of the Manager and of MLAM since 1991. Peter J. Hayes has been a
Portfolio Manager and Vice President of the Manager and of MLAM since 1989.
Helen M. Sheehan has been a Portfolio Manager and Vice President of the Manager
and of MLAM since 1991.
Pursuant to separate management agreements between the Manager and the
Trust on behalf of each Fund (each a "Management Agreement"), the Manager is
entitled to receive from each Fund a monthly fee based upon the average daily
net assets of that Fund at the annual rate of 0.35% of the average daily net
assets of that Fund. Information about fees paid by each Fund is contained in
the table below.
32
<PAGE>
Each Management Agreement obligates the related Fund to pay certain
expenses incurred in that 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 Trust by the Manager, and each Fund reimburses the Manager for
its proportionate costs in connection with such services. The Manager may waive
all or a portion of its management fee for any Fund and may assume voluntarily
all or a portion of each Fund's expenses. Information about the amounts
reimbursed by each Fund is contained in the table below.
Set forth in the table below is information for each Fund pertaining to the
Fund's investment advisory arrangements for the fiscal year ended July 31, 1996:
<TABLE>
<CAPTION>
Reimbursement
Based on of Manager Ratio of Total Expenses
Management Average Net for to Average Net Assets
Fee Voluntary Assets of Accounting ----------------------------------------
Fund ($) Waiver($) Approx. ($) Services ($) Class A Class B Class C Class D
- --------------------- ---------- --------- ------------ ------------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Arizona Fund......... 21,459 21,459 6.1 million 30,172 2.27% 2.61% 2.80% 2.42%
California Fund...... 54,033 54,033 15.4 million 38,245 1.30% 1.66% 1.50% 1.40%
Florida Fund......... 108,720 24,123 31.1 million 34,053 0.97% 1.32% 1.23% 1.07%
Massachusetts Fund... 30,736 30,736 8.8 million 53,983 2.15% 2.61% 2.37% 2.42%
Michigan Fund........ 16,413 16,413 4.7 million 47,178 2.78% 3.14% 3.31% 3.06%
New Jersey Fund...... 33,770 33,770 9.6 million 43,508 1.78% 2.12% 2.04% 1.86%
New York Fund........ 57,995 57,995 16.6 million 62,140 1.38% 1.75% 1.59% 1.49%
Pennsylvania Fund.... 30,196 30,196 8.6 million 43,426 1.63% 1.99% 1.83% 1.71%
</TABLE>
Code of Ethics
The Board of Trustees of the Trust has adopted a Code of Ethics under Rule
17j-1 of the Act which incorporates the Code of Ethics of the Manager (together,
the "Codes"). The Codes significantly restrict the personal investing activities
of all employees of the Manager and, as described below, impose additional, more
onerous, restrictions on fund investment personnel.
The Codes require that all employees of the Manager preclear any personal
securities investment (with limited exceptions, such as government securities).
The preclearance requirement and associated procedures are designed to identify
any substantive prohibition or limitation applicable to the proposed investment.
The substantive restrictions applicable to all employees of the Manager include
a ban on acquiring any securities in a "hot" initial public offering and a
prohibition from profiting on short-term trading in securities. In addition, no
employee may purchase or sell any security which at the time is being purchased
or sold (as the case may be), or to the knowledge of the employee is being
considered for purchase or sale, by any fund advised by the Manager.
Furthermore, the Codes provide for trading "blackout periods" which prohibit
trading by investment personnel of the Funds within periods of trading by the
Funds in the same (or equivalent) security (15 or 30 days depending upon the
transaction).
Transfer Agency Services
Merrill Lynch Financial Data Services, Inc. (the "Transfer Agent"), which
is a wholly-owned subsidiary of ML&Co., acts as the Trust's transfer agent
pursuant to a transfer agency, dividend disbursing agency and shareholder
servicing agency agreement (the "Transfer Agency Agreement"). Pursuant to the
Transfer Agency
33
<PAGE>
Agreement, the Transfer Agent is responsible for the issuance, transfer and
redemption of shares of each Fund and the opening and maintenance of shareholder
accounts. Pursuant to the Transfer Agency Agreement, each 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 on behalf of such Fund under the Transfer Agency Agreement.
The table below sets forth information about the fees paid by each Fund for
transfer agency services for the fiscal year ended July 31, 1996 and the
transfer agency fees which would be payable based on the number of shareholder
accounts at October 31, 1996.
<TABLE>
<CAPTION>
At October 31, 1996
------------------------------------------------------
Number of
Shareholder
Transfer Accounts Transfer
Agency Fee ---------------------------------------- Agency Fee
Fund Paid Class A Class B Class C Class D Payable
- -------------------------------------------------- ---------- ------- ------- ------- ------- ----------
<S> <C> <C> <C> <C> <C> <C>
Arizona Fund...................................... $ 3,271 24 87 5 13 $1,695
California Fund................................... $ 4,477 40 181 4 26 $3,316
Florida Fund...................................... $ 7,997 65 271 4 29 $4,884
Massachusetts Fund................................ $ 4,426 26 148 6 13 $2,585
Michigan Fund..................................... $ 3,510 32 81 3 13 $1,671
New Jersey Fund................................... $ 4,054 46 129 5 13 $2,525
New York Fund..................................... $ 6,172 53 253 11 29 $4,598
Pennsylvania Fund................................. $ 4,261 26 187 3 18 $3,144
</TABLE>
PURCHASE OF SHARES
The Distributor, an affiliate of both the Manager and Merrill Lynch, acts
as the Distributor of the shares of each Fund. Shares of each Fund are offered
continuously for sale by the Distributor and other eligible securities dealers
(including Merrill Lynch). Class A, Class B and Class D shares of the Funds may
be purchased from securities dealers or by mailing a purchase order directly to
the Transfer Agent. Class C shares of the Funds are not available for purchase
but will be issued only pursuant to the exchange privilege to holders of Class C
shares of other MLAM-advised mutual funds who elect to exchange Class C shares
of such other MLAM-advised mutual fund for Class C shares of one of the Funds.
The minimum initial purchase for shares of each Fund is $1,000 and the minimum
subsequent purchase is $50.
Each Fund offers its Class A, Class B, Class C and Class D shares at a
public offering price equal to the next determined net asset value per share
plus sales charges imposed either at the time of purchase or on a deferred basis
depending upon the class of shares selected by the investor under the Merrill
Lynch Select Pricing(SM) System, as described below. The applicable offering
price for purchase orders is based upon the net asset value of the respective
Fund next determined after receipt of the purchase orders by the Distributor. As
to purchase orders received by securities dealers prior to the close of business
on the New York Stock Exchange (the "NYSE") (generally, 4:00 p.m., New York
time) which includes orders received after the close of business on the previous
day, the applicable offering price will be based on the net asset value
determined as of 15 minutes after the close of business on the NYSE on that day,
provided the Distributor in turn receives the order from the securities dealer
prior to 30 minutes after the close of business on the NYSE on that day. If the
purchase orders are not received by the Distributor prior to 30 minutes after
the close of business on the NYSE, such orders shall be deemed received on the
next business day. The Trust or the Distributor may suspend the continuous
offering of a 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
34
<PAGE>
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 Trust's Transfer Agent are not subject to the
processing fee.
Each of the Funds issues four classes of shares under the Merrill Lynch
Select Pricing(SM) System, which permits each investor to choose the method of
purchasing shares that the investor believes is most beneficial given the amount
of the purchase, the length of time the investor expects to hold the shares and
other relevant circumstances. Shares of Class A and Class D are sold to
investors choosing the initial sales charge alternatives and shares of Class B
are sold to investors choosing the deferred sales charge alternative. Investors
should determine whether under their particular circumstances it is more
advantageous to incur an initial sales charge or to have the entire initial
purchase price invested in the Fund with the investment thereafter being subject
to a CDSC, ongoing distribution fees and higher account maintenance fees. A
discussion of the factors that investors should consider in determining the
method of purchasing shares under the Merrill Lynch Select Pricing(SM) System is
set forth under "Merrill Lynch Select Pricing(SM) System" on page 7.
Each Class A, Class B, Class C and Class D share of each of the Funds
represents identical interests in the investment portfolio of that Fund and has
the same rights, except that Class B, Class C and Class D shares bear the
expenses of the ongoing account maintenance fees, and Class B and Class C shares
bear the expenses of the ongoing distribution fees and the additional
incremental transfer agency costs resulting from the deferred sales charge
arrangements. The CDSCs and distribution and account maintenance fees that are
imposed on Class B and Class C shares, as well as the account maintenance fees
that are imposed on Class D shares, will be imposed directly against those
classes and not against all assets of the Fund and, accordingly, such charges
will not affect the net asset value of any other class or have any impact on
investors choosing another sales charge option. Dividends paid by the Funds 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 Funds. The distribution-related revenues paid
with respect to a class will not be used to finance the distribution
expenditures of another class. Sales personnel may receive different
compensation for selling different classes of shares. Investors are advised that
only Class A and Class D shares may be available for purchase through securities
dealers, other than Merrill Lynch, which are eligible to sell shares.
35
<PAGE>
The following table sets forth a summary of the distribution arrangements
for each class of shares under the Merrill Lynch Select Pricing(SM) System.
<TABLE>
<CAPTION>
Account
Maintenance Distribution
Class Sales Charge(1) Fee Fee Conversion Feature
<C> <S> <C> <C> <C>
A Maximum 1.0% initial sales No No No
charge(2)(3)
B 1.0% CDSC for one year(4) 0.15% 0.20% B shares convert to D shares
automatically after approximately
ten years(5)
C(7) 1.0% CDSC for one year(6) 0.15% 0.20% No
D Maximum 1.0% initial sales 0.10% No No
charge(3)
</TABLE>
- ------------
(1) Initial sales charges are imposed at the time of purchase as a percentage of
the offering price. CDSCs are imposed if the redemption occurs within the
applicable CDSC time period. The charge will be assessed on an amount equal
to the lesser of the proceeds of redemption or the cost of the shares being
redeemed.
(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 $100,000 or more and waived for purchases of Class
A shares in connection with certain fee-based programs. Class A and Class D
share purchases of $1,000,000 or more may not be subject to an initial sales
charge but instead may be subject to a 0.20% CDSC if redeemed within one
year. Such CDSC may be waived in connection with redemptions to fund
participation in certain fee-based programs.
(4) The CDSC may be modified in connection with redemptions to fund
participation in certain fee-based programs.
(5) The conversion period for dividend reinvestment shares and certain fee-based
programs may be modified. Also, Class B shares of certain other MLAM-advised
mutual funds into which exchanges may be made have an eight year conversion
period. If Class B shares of a Fund are exchanged for Class B shares of
another MLAM-advised mutual fund, the conversion period applicable to the
Class B shares acquired in the exchange will apply, and the holding period
for the shares exchanged will be tacked onto the holding period for the
shares acquired.
(6) The CDSC may be waived in connection with redemptions to fund participation
in certain fee-based programs.
(7) Class C shares will be issued only upon exchange for Class C shares of
another MLAM-advised mutual fund. See "Shareholder Services--Exchange
Privilege".
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.
36
<PAGE>
The public offering price of Class A and Class D shares of each Fund for
purchasers choosing the initial sales charge alternatives is the next determined
net asset value plus varying sales charges (i.e., sales loads), as set forth
below.
<TABLE>
<CAPTION>
Sales Load Sales Load Discount to Selected
as Percentage* as Percentage* Dealers as
of Offering of the Net Percentage* of the
Amount of Purchase Price Amount Invested Offering Price
- ------------------------------------------------------------ -------------- --------------- --------------------
<S> <C> <C> <C>
Less than $100,000.......................................... 1.00% 1.01% .95%
$100,000 but less than $250,000............................. .75 .76 .70
$250,000 but less than $500,000............................. .50 .50 .45
$500,000 but less than $1,000,000........................... .30 .30 .27
$1,000,000 and over**....................................... .00 .00 .00
</TABLE>
- ------------
* Rounded to the nearest one-hundredth percent.
** Class A and Class D purchases of $1 million or more may be subject to a CDSC
of 0.20% if the shares are redeemed within one year after purchase. Such CDSC
may be waived in connection with redemptions to fund participation in certain
fee-based programs. The charge will be assessed on an amount equal to the
lesser of the proceeds of redemption or the cost of the shares being
redeemed.
The Distributor may reallow discounts to selected dealers and retain the
balance over such discounts. At times the Distributor may reallow the entire
sales charge to such dealers. Since securities dealers selling Class A and Class
D shares of a Fund will receive a concession equal to most of the sales charge,
they may be deemed to be underwriters under the Securities Act of 1933, as
amended.
The following table sets forth information about the number of Class A
shares and Class D shares sold by each Fund for the fiscal year ended July 31,
1996, the aggregate net proceeds from such sales, the gross sales charges and
the amounts of such charges received by the Distributor and Merrill Lynch for
Class A shares and Class D shares. No CDSCs were received by the Distributor
with respect to redemptions within one year after purchase of Class A or Class D
shares purchased subject to a front-end sales charge waiver.
<TABLE>
<CAPTION>
No. of Aggregate
Shares Net Gross Sales Paid to
Sold Proceeds ($) Charges ($) Distributor ($)
----------------- --------------------- ----------------- -----------------
Class A Class D Class A Class D Class A Class D Class A Class D
------- ------- --------- --------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Arizona Fund.............................. 5,200 104,371 52,303 1,066,013 463 241 17 14
California Fund........................... 8,087 105,834 80,919 1,060,270 580 3,148 67 299
Florida Fund.............................. 91,796 316,584 926,979 3,192,506 497 2,943 22 373
Massachusetts Fund........................ 22,851 101,394 226,189 1,009,332 964 3,387 93 298
Michigan Fund............................. 40,664 29,731 405,188 298,909 102 479 4 59
New Jersey Fund........................... 102,101 47,184 1,042,636 477,087 239 1,128 2 31
New York Fund............................. 44,189 162,557 446,602 1,636,956 34 4,790 1 476
Pennsylvania Fund......................... 5,556 155,680 56,865 1,569,272 5 533 -- 14
</TABLE>
Paid to
Merrill
Lynch ($)
-----------------
Class A Class D
------- -------
Arizona Fund.............................. 446 227
California Fund........................... 513 2,849
Florida Fund.............................. 475 2,570
Massachusetts Fund........................ 871 3,089
Michigan Fund............................. 98 420
New Jersey Fund........................... 237 1,097
New York Fund............................. 33 4,314
Pennsylvania Fund......................... 5 519
Eligible Class A Investors. Class A shares are offered to a limited group
of investors and also will be issued upon reinvestment of dividends on
outstanding Class A shares. Investors that currently own Class A shares of a
Fund in a shareholder account are entitled to purchase additional Class A shares
of that Fund in that account. Class A shares are available at net asset value to
corporate warranty insurance reserve fund programs provided that the program has
$3 million or more initially invested in MLAM-advised mutual funds. 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, collective
investment trusts for which Merrill Lynch Trust Company serves as trustee and
purchases made in connection with certain fee-based programs. In addition, Class
A shares are offered at net asset value to ML & Co. and its
37
<PAGE>
subsidiaries and their directors and employees and to members of the Boards of
MLAM-advised investment companies, including the Trust. Certain persons who
acquired shares of certain MLAM-advised closed-end funds in their initial
offerings who wish to reinvest the net proceeds from a sale of their closed-end
fund shares of common stock in shares of the Funds also may purchase Class A
shares of the Funds if certain conditions set forth in the Statement of
Additional Information are met. In addition, Class A shares of the Funds and
certain other MLAM-advised mutual funds are offered at net asset value to
shareholders of Merrill Lynch Senior Floating Rate Fund, Inc. and, if certain
conditions set forth in the Statement of Additional Information are met, to
shareholders of Merrill Lynch Municipal Strategy Fund, Inc. and Merrill Lynch
High Income Municipal Bond Fund, Inc. who wish to reinvest the net proceeds from
a sale of certain of their shares of common stock pursuant to a tender offer
conducted by such funds in shares of any of the Funds and certain other
MLAM-advised mutual funds.
Reduced Initial Sales Charges. No initial sales charges are imposed upon
Class A and Class D shares issued as a result of the automatic reinvestment of
dividends or capital gains distributions. Class A and Class D sales charges also
may be reduced under a Right of Accumulation and a Letter of Intention. Class A
shares are offered at net asset value to certain eligible Class A investors as
set forth above under "Eligible Class A Investors". See "Shareholder
Services--Fee-Based Programs". Class A and Class D shares are offered at net
asset value to Employee Access Accounts(SM) available through qualified
employers which provide employer-sponsored retirement and savings plans that are
eligible to purchase such shares at net asset value. Class A and Class D shares
of each of the Funds are offered at net asset value to shareholders of Merrill
Lynch Municipal Strategy Fund, Inc. and Merrill Lynch High Income Municipal Bond
Fund, Inc. who wish to reinvest in shares of any of the Funds the net proceeds
from a sale of certain of their shares of common stock pursuant to tender offers
conducted by those funds.
Class D shares are offered at net asset value, without sales charge, to an
investor who has a business relationship with a Merrill Lynch Financial
Consultant, if certain conditions set forth in the Statement of Additional
Information are met. Class D shares may be offered at net asset value in
connection with the acquisition of assets of other investment companies.
Additional information concerning these reduced initial sales charges is
set forth in the Statement of Additional Information.
Deferred Sales Charge Alternatives--Class B and Class C Shares
The public offering price of Class B shares for investors choosing the
deferred sales charge alternative is the next determined net asset value per
share without the imposition of a sales charge at the time of purchase. Class C
shares of the Funds are not available for purchase but will be issued only
pursuant to the exchange privilege to holders of Class C shares of other
MLAM-advised mutual funds who elect to exchange Class C shares of such other
MLAM-advised mutual funds for Class C shares of one of the Funds. See
"Shareholder Services-- Exchange Privilege". As discussed below, Class B and
Class C shares are subject to a one-year 1.0% CDSC. Approximately ten years
after Class B shares of a Fund 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 that 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 0.15% of net assets and a distribution fee of 0.20% of net
assets as discussed below under "Distribution Plans". The proceeds from the
ongoing account maintenance fees are used to compensate Merrill Lynch for
providing continuing account maintenance activities.
38
<PAGE>
Class B and Class C shares are not subject to an initial sales charge;
therefore, Merrill Lynch compensates its financial consultants for selling Class
B and Class C shares of MLAM-advised mutual funds at the time of purchase from
its own funds. See "Distribution Plans".
Proceeds from the CDSCs and the distribution fee of a Fund 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 that Fund in connection with the sale of its
Class B shares, such as the payment of compensation to financial consultants for
selling Class B shares of that Fund from its own funds. The combination of the
CDSC and the ongoing distribution fee facilitates the ability of a Fund to sell
its Class B shares without a sales charge being deducted at the time of
purchase.
Approximately ten years after issuance, Class B shares of each of the Funds
will convert automatically into Class D shares of the same 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 one of the Funds are exchanged for Class B shares of
another MLAM-advised mutual fund, the conversion period applicable to the Class
B shares acquired in the exchange will apply, and the holding period for the
shares exchanged will be tacked on to the holding period for the shares
acquired.
Imposition of the CDSC and the distribution fee on Class B shares is
limited by the NASD asset-based sales charge rule. See "Limitations on the
Payment of Deferred Sales Charges" below. Class B shareholders of a Fund
exercising the exchange privilege described under "Shareholder
Services--Exchange Privilege" will continue to be subject to that 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 and Class C Shares. Class B and
Class C shares of a Fund which are redeemed within one year after acquisition
may be subject to a CDSC at the rates set forth below charged as a percentage of
the dollar amount subject thereto. The charge will be assessed on an amount
equal to the lesser of the proceeds of redemption or the cost of the shares
being redeemed. Accordingly, no CDSC will be imposed on increases in net asset
value above the initial purchase price. In addition, no CDSC will be assessed on
shares derived from reinvestment of dividends or capital gains distributions.
The following table sets forth the rates of the Class B and Class C CDSCs
for all Funds:
<TABLE>
<CAPTION>
CDSC as
Percentage of
Dollar Amount
Subject to
Years Since Purchase Payment Made Charge
- ---------------------------------------------------------------------------------------- -------------
<S> <C>
0-1..................................................................................... 1.0%
1 and thereafter........................................................................ None
</TABLE>
39
<PAGE>
For the fiscal year ended July 31, 1996, the Distributor received CDSCs
from the Funds with respect to redemptions of Class B shares, all of which were
paid to Merrill Lynch, as follows:
<TABLE>
<CAPTION>
CDSCs Received
Fund by Distributor
- --------------------------------------------------------------------------------------- --------------
<S> <C>
Arizona Fund........................................................................... $ 10,222
California Fund........................................................................ $ 3,456
Florida Fund........................................................................... $ 18,456
Massachusetts Fund..................................................................... $ 4,849
Michigan Fund.......................................................................... $ 6,724
New Jersey Fund........................................................................ $ 8,141
New York Fund.......................................................................... $ 6,475
Pennsylvania Fund...................................................................... $ 3,775
</TABLE>
For the fiscal year ended July 31, 1996, the Distributor received no CDSCs
with respect to redemptions of Class C shares. No Class C CDSC will be assessed
in connection with redemptions to fund participation in certain fee-based
programs. See "Shareholder Services--Fee-Based Programs".
In determining whether a CDSC is applicable to a redemption of Class B or
Class C shares, the calculation will be made in the manner that results in the
lowest applicable rate being charged. Therefore, it will be assumed that the
redemption is first of shares held for over one year or shares acquired pursuant
to reinvestment of dividends or distributions and then of shares held longest
during the one-year period. The charge will not be applied to dollar amounts
representing an increase in the net asset value since the time of purchase. A
transfer of shares from a shareholder's account to another account will be
assumed to be made in the same order as a redemption.
The Class B CDSC is waived on redemptions of shares following the death or
disability (as defined in the Code) of a shareholder. Additional information
concerning the waiver of the Class B CDSC is set forth in the Statement of
Additional Information. The terms of the CDSC may be modified in connection with
redemptions to fund participation in certain fee-based programs. See
"Shareholder Services--Fee-Based Programs".
Conversion of Class B Shares to Class D Shares. After approximately ten
years (the "Conversion Period"), Class B shares of a Fund will be converted
automatically into Class D shares of the same Fund. Class D shares are subject
to an ongoing account maintenance fee of 0.10% of net assets which is lower than
the account maintenance fee borne by the Class B shares, and Class D shares are
not subject to the distribution fee that is borne by Class B shares. Automatic
conversion of Class B shares into Class D shares will occur at least once each
month (on the "Conversion Date") on the basis of the relative net asset values
of the shares of the two classes on the Conversion Date, without the imposition
of any sales load, fee or other charge. Conversion of Class B shares to Class D
shares will not be deemed a purchase or sale of the shares for Federal income
tax purposes.
In addition, shares purchased through reinvestment of dividends on Class B
shares also will convert automatically to Class D shares. The Conversion Date
for dividend reinvestment shares will be calculated taking into account the
length of time the shares underlying such dividend reinvestment shares were
outstanding. If at a Conversion Date the conversion of Class B shares to Class D
shares of a Fund in a single account will result in less than $50 worth of Class
B shares being left in the account, all of the Class B shares of that Fund held
in the account on the Conversion Date will be converted to Class D shares of
that Fund.
40
<PAGE>
Share certificates for Class B shares of the Fund to be converted must be
delivered to the Transfer Agent at least one week prior to the Conversion Date
applicable to those shares. In the event such certificates are not received by
the Transfer Agent at least one week prior to the Conversion Date, the related
Class B shares will convert to Class D shares on the next scheduled Conversion
Date after such certificates are delivered.
In general, Class B shares of equity MLAM-advised mutual funds will convert
approximately eight years after initial purchase, and Class B shares of taxable
and tax-exempt fixed income MLAM-advised mutual funds will convert approximately
ten years after initial purchase. If, during the Conversion Period, a
shareholder exchanges Class B shares with an eight-year Conversion Period for
Class B shares with a ten-year Conversion Period, or vice versa, the Conversion
Period applicable to the Class B shares acquired in the exchange will apply, and
the holding period for the shares exchanged will be tacked on to the holding
period for the shares acquired.
The Conversion Period may be modified for certain fee-based programs. See
"Shareholder Services--Fee-Based Programs".
Distribution Plans
The Trust has adopted a separate distribution plan on behalf of each of the
Funds for Class B, Class C and Class D shares pursuant to Rule 12b-1 under the
1940 Act (each a "Distribution Plan") with respect to the account maintenance
and/or distribution fees paid by the Funds to the Distributor with respect to
such classes. The Class B and Class C Distribution Plans provide for the payment
of account maintenance fees and distribution fees, and the Class D Distribution
Plan provides for the payment of account maintenance fees.
The Distribution Plans for Class B, Class C and Class D shares each 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 rate
of 0.15% (in the case of Class B and Class C shares) or 0.10% (in the case of
Class D shares) 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 0.20% 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 Funds in that the deferred sales charges provide for the financing
of the distribution of the Funds' Class B and Class C shares.
41
<PAGE>
Set forth in the table below is information for each Fund pertaining to the
Fund's Distribution Plans for Class B, Class C and Class D shares for the fiscal
year ended July 31, 1996 and information with respect to the annual fee payable
pursuant to such Distribution Plans based on the net assets of each Fund as of
October 31, 1996.
<TABLE>
<CAPTION>
Payment to the
Distributor, all of which Based on Average Net Net Assets
was paid to Merrill Lynch ($) Assets as of July 31, 1996($) as of October 31, 1996($)
----------------------------- -------------------------------- ---------------------------------
Class B Class C Class D Class B Class C Class D Class B Class C Class D
------- ------- ------- -------- ------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Arizona ....... 15,724 68 655 4.5 45,456 655,171 2.8 136,461 412,372
Fund million million
California .... 35,889 103 1,776 10.3 58,005 1.8 9.2 55,254 2.1
Fund million million million million
Florida ....... 53,229 20 6,850 15.2 13,882 6.8 12.8 51,595 5.9
Fund million million million million
Massachusetts .... 17,257 558 565 4.9 372,041 564,924 4.5 267,506 739,074
Fund million million
Michigan ...... 7,629 1 415 2.2 1,153 414,649 1.7 1,183 485,048
Fund million million
New Jersey .... 22,973 174 310 6.6 115,966 310,391 4.7 272,937 558,023
Fund million million
New York ...... 34,048 206 2,638 9.7 137,248 2.6 9.7 206,236 4.9
Fund million million million million
Pennsylvania .... 24,307 41 725 6.9 27,261 725,614 6.1 1,207 1.8
Fund million million million
</TABLE>
Fee Payable to
the Distributor($)
----------------------------------
Class B Class C Class D
-------- -------- --------
Arizona ....... 9,762 478 412
Fund
California .... 32,098 193 2,146
Fund
Florida ....... 44,649 181 5,873
Fund
Massachusetts . 15,872 936 739
Fund
Michigan ...... 6,058 4 485
Fund
New Jersey .... 16,350 955 558
Fund
New York ...... 34,022 722 4,937
Fund
Pennsylvania .. 21,265 4 1,828
Fund
The payments under each of the Distribution Plans are based on a percentage
of average daily net assets attributable to the shares of the related Fund
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 of each Fund is presented to the
Trustees for their consideration in connection with their deliberations as to
the continuance of each of the Class B and Class C Distribution Plans. This
information is presented separately for each Fund 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, a Fund's
revenues consist of the account maintenance fees, distribution fees, the CDSCs
and certain other related revenues of that Fund, 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 of that Fund. On the
direct expense and revenue/cash basis, revenues consist of the account
maintenance fees, distribution fees and CDSCs of that Fund, and the expenses
consist of financial consultant compensation of that Fund.
42
<PAGE>
The table below sets forth information with respect to Class B shares of
the Funds concerning direct cash revenues and expenses for the period November
26, 1993 (commencement of operations) to July 31, 1996 and fully allocated
accrual revenues and expenses incurred by the Distributor and Merrill Lynch for
the period November 26, 1993 (commencement of operations) to December 31, 1995.
<TABLE>
<CAPTION>
Amount by which Approximate Amount by
Direct Cash Revenues % of Class B which Fully Allocated Accrual % of Class B
Exceeded Direct Cash Net Assets Expenses Exceeded Fully Net Assets
Expenses as of at Allocated Accrual Revenues as of at
Fund 7/31/96($) 7/31/96 12/31/95($) 12/31/95
- -------------------------- ------------------------- ------------ -------------------------------- ------------
<S> <C> <C> <C> <C>
Arizona Fund.............. 29,410 1.02% 35,000 0.69%
California Fund........... 18,581 0.19% 97,000 0.94%
Florida Fund.............. 253,004 1.85% (53,000)* 0.33%
Massachusetts Fund........ 5,507 0.12% 73,000 1.49%
Michigan Fund............. 14,792 0.80% 12,000 0.55%
New Jersey Fund........... 20,242 0.39% 69,000 1.02%
New York Fund............. 22,736 2.26% 84,000 0.86%
Pennsylvania Fund......... 21,161 0.34% 74,000 1.07%
</TABLE>
- ------------
* Accrual revenues exceeded accrual expenses.
The table below sets forth information with respect to Class C shares of
the Funds concerning direct cash revenues and expenses for the period October
21, 1994 (commencement of operations) to July 31, 1996. Fully allocated accrual
data for Class C shares for the period October 21, 1994 (commencement of
operations) to December 31, 1995 is not presented because such revenues and
expenses are de minimis.
Amount by Which
Direct Cash
Revenues Exceeded % of Class
Direct Cash C Net
Expenses as of Assets at
Fund 7/31/96($) 7/31/96
- -------------------------------- ----------------- ----------
Arizona Fund.................... 68 0.05%
California Fund................. 118 0.21%
Florida Fund.................... 21 0.04%
Massachusetts Fund.............. 763 0.36%
Michigan Fund................... 2 0.17%
New Jersey Fund................. 198 0.07%
New York Fund................... 214 0.10%
Pennsylvania Fund............... 31 2.60%
The Funds have 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
43
<PAGE>
terminate upon conversion of those Class B shares into Class D shares as set
forth under "Purchase of Shares-- Deferred Sales Charge Alternatives--Class B
and Class C Shares--Conversion of Class B Shares to Class D Shares".
Limitations on the Payment of Deferred Sales Charges
The maximum sales charge rule in the Conduct Rules of the NASD imposes a
limitation on certain asset-based sales charges such as the distribution fee and
the CDSC borne by the Class B shares of each of the Funds, but not the account
maintenance fee. The maximum sales charge rule is applied separately to each
class. As applicable to each Fund, the maximum sales charge rule limits the
aggregate of distribution fee payments and CDSCs payable by each Fund to (1)
6.25% of eligible gross sales of Class B shares of that Fund (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 of
that Fund). 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 in connection with each Fund (referred to as the "voluntary
maximum") in connection with the Class B shares is 6.75% of eligible gross sales
of that Fund. The Distributor retains the right to stop waiving the interest
charges at any time. To the extent a Fund's payments would exceed the voluntary
maximum, such 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, such Fund will continue to make payments of the
account maintenance fee. In certain circumstances the amount payable pursuant to
the voluntary maximum may exceed the amount payable under the NASD formula. In
such circumstances payments in excess of the amount payable under the NASD
formula will not be made.
REDEMPTION OF SHARES
The Trust is required to redeem for cash all shares of the Funds 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 a Fund at such time.
Redemption
A shareholder wishing to redeem shares of a Fund may do so by tendering the
shares directly to the Transfer Agent, Merrill Lynch Financial Data Services,
Inc., P.O. Box 45289, Jacksonville, Florida 32232-5289. Redemption requests
delivered other than by mail should be delivered to Merrill Lynch Financial Data
Services, Inc., 4800 Deer Lake Drive East, Jacksonville, Florida 32246-6484.
Proper notice of redemption in the case of shares deposited with the Transfer
Agent may be accomplished by a written letter requesting redemption. Proper
notice of redemption in the case of shares of a Fund 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 or any Fund. 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
44
<PAGE>
such term is defined in Rule 17Ad-15 under the Securities Exchange Act of 1934,
as amended, the existence and validity of which may be verified by the Transfer
Agent through the use of industry publications. Notarized signatures are not
sufficient. In certain instances, the Transfer Agent may require additional
documents such as, but not limited to, trust instruments, death certificates,
appointments as executor or administrator, or certificates of corporate
authority. For shareholders redeeming directly with the Transfer Agent, payments
will be mailed within seven days of receipt of a proper notice of redemption.
At various times the Trust may be requested to redeem shares of a Fund 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 shares of a Fund through a shareholder's
listed securities dealer. The Trust normally will accept orders to repurchase
Fund shares by wire or telephone from dealers for their customers at the net
asset value next computed after receipt of the order by the dealer, provided
that the request for repurchase is received by the dealer prior to the close of
business on the NYSE (generally, 4:00 p.m., New York time) on the day received
and is received by a Fund from such dealer not later than 30 minutes after the
close of business on the NYSE on the same day. Dealers have the responsibility
of submitting such repurchase requests to the Trust not later than 30 minutes
after the close of business on the NYSE in order to obtain that day's closing
price.
The foregoing repurchase arrangements are for the convenience of
shareholders and do not involve a charge by the Trust (other than any applicable
CDSC); securities firms 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. Repurchases directly through a Fund's Transfer Agent are not subject
to the processing fee. The Trust reserves the right to reject any order for
repurchase, which right of rejection might adversely affect shareholders seeking
redemption through the repurchase procedure. However, a shareholder whose order
for repurchase is rejected by the Trust may redeem Fund shares as set forth
above.
Redemption payments will be made within seven days of the proper tender of
the certificates, if any, and stock power or letter requesting redemption, in
each instance with signatures guaranteed as noted above.
Reinstatement Privilege--Class A and Class D Shares
Shareholders who have redeemed their Class A or Class D shares of a Fund
have a privilege to reinstate their accounts by purchasing Class A or Class D
shares of that Fund at net asset value without a sales charge up to the dollar
amount redeemed. The reinstatement privilege may be exercised by sending a
notice of exercise along with a check for the amount to be reinstated to the
Transfer Agent within 30 days after the date the request for redemption was
accepted by the Transfer Agent or the Distributor. Alternatively, the
reinstatement privilege may be exercised through the investor's Merrill Lynch
Financial Consultant within 30 days after the date the request for redemption
was accepted by the Transfer Agent or the Distributor. The reinstatement will be
made at the net asset value per share next determined after the notice of
reinstatement is received and cannot exceed the amount of the redemption
proceeds.
45
<PAGE>
SHAREHOLDER SERVICES
The Trust offers a number of shareholder services and investment plans
designed to facilitate investment in shares of the Funds. Full details as to
each of such services, copies of the various plans described below, and
instructions as to how to participate in the various services or plans, or to
change options with respect thereto can be obtained from the Trust by calling
the telephone number on the cover page hereof or from the Distributor or Merrill
Lynch. Included in such services are the following:
Investment Account
Each shareholder whose account is maintained at the Transfer Agent has an
Investment Account and will receive statements, at least quarterly, from the
Transfer Agent. These statements will serve as transaction confirmations for
automatic investment purchases and the reinvestment of ordinary income
dividends, and long-term capital gains distributions. The statements will also
show any other activity in the account since the preceding statement.
Shareholders will receive separate transaction confirmations for each purchase
or sale transaction other than automatic investment purchases and the
reinvestment of ordinary income dividends and long-term capital gains
distributions. A shareholder may make additions to his or her Investment Account
at any time by mailing a check directly to the Transfer Agent. Shareholders also
may maintain their accounts through Merrill Lynch. Upon the transfer of shares
out of a Merrill Lynch brokerage account, an Investment Account in the
transferring shareholder's name will be opened automatically at the Transfer
Agent. Shareholders considering transferring their Class A or Class D shares of
a Fund from Merrill Lynch to another brokerage firm or financial institution
should be aware that, if the firm to which the Class A or Class D shares are to
be transferred will not take delivery of shares of the Fund, a shareholder
either must redeem the Class A or Class D shares (paying any applicable CDSC) so
that the cash proceeds can be transferred to the account at the new firm or such
shareholder must continue to maintain an Investment Account at the Transfer
Agent for those Class A or Class D shares. Shareholders interested in
transferring their Class B or Class C shares of a Fund from Merrill Lynch and
who do not wish to have an Investment Account maintained for such shares at the
Transfer Agent may request their new brokerage firm to maintain such shares in
an account registered in the name of the brokerage firm for the benefit of the
shareholder at the Transfer Agent.
Exchange Privilege
U.S. shareholders of each class of shares of each of the Funds 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 in
accordance with the rules of the Commission.
Under the Merrill Lynch Select Pricing(SM) System, Class A
shareholders may exchange Class A shares of a Fund for Class A shares of a
second MLAM-advised mutual fund if the shareholder holds any Class A shares of
the second fund in his or her account in which the exchange is made at the time
of the exchange or is otherwise eligible to purchase Class A shares of the
second fund. If the Class A shareholder wants to exchange Class A shares for
shares of a second MLAM-advised mutual fund, and the shareholder does not hold
Class A shares of the second fund in his or her account at the time of the
exchange and is not otherwise eligible to acquire Class A shares of the second
fund, the shareholder will receive Class D shares of the second fund as a result
of the exchange. Class D shares also may be exchanged for Class A shares of a
second MLAM-advised mutual fund at any time as long as, at the time of the
exchange, the shareholder holds Class A shares of the second fund in the account
in which the exchange is made or is otherwise eligible to purchase Class A
shares of the second fund.
46
<PAGE>
Exchanges of Class A and Class D shares are made on the basis of the
relative net asset values per Class A or Class D share, respectively, plus an
amount equal to the difference, if any, between the sales charge previously paid
on the Class A or Class D shares being exchanged and the sales charge payable at
the time of the exchange on the shares being acquired.
Class B, Class C and Class D shares are exchangeable with shares of the
same class of other MLAM-advised mutual funds.
Shares of the Funds which are subject to a CDSC are exchangeable on the
basis of relative net asset value per share without the payment of any CDSC that
might otherwise be due upon redemption of the shares of that 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 onto the holding period for the newly acquired shares of the
other fund.
Class A, Class B, Class C and Class D shares also are exchangeable for
shares of certain MLAM-advised money market funds specifically designated as
available for exchange by holders of Class A, Class B, Class C or Class D
shares. The period of time that Class A, Class B, Class C or Class D shares are
held in a money market fund, however, will not count toward satisfaction of the
holding period requirement for reduction of any CDSC imposed on such shares, if
any, and, with respect to Class B shares, toward satisfaction of the Conversion
Period.
Class B shareholders of a Fund exercising the exchange privilege will
continue to be subject to that 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 a 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.
Automatic Reinvestment of Dividends and Capital Gains Distributions
All dividends and capital gains distributions are reinvested automatically
in full and fractional shares of a Fund, without a sales charge, at the net
asset value per share of that Fund at the close of business on the monthly
payment date for such dividends and distributions. A shareholder, at any time,
by written notification or by telephone (1-800-MER-FUND) to the Transfer Agent,
may 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 on or about the payment date. Cash payments also can be directly
deposited to the shareholder's bank account. No CDSC will be imposed upon
redemption of shares issued as a result of the automatic reinvestment of
dividends or capital gains distributions.
Systematic Withdrawal Plans
A Class A or Class D shareholder of a Fund may elect to receive systematic
withdrawal payments from his or her Investment Account through automatic payment
by check or through automatic payment by direct deposit to his or her bank
account on either a monthly or quarterly basis. Alternatively, a Class A or
Class D shareholder whose shares are held within a CMA(Registered) or
CBA(Registered) Account may elect to have shares redeemed on a monthly,
bimonthly, quarterly, semiannual or annual basis through the
CMA(Registered)/CBA(Registered) Systematic Redemption Program, subject to
certain conditions.
47
<PAGE>
Automatic Investment Plans
Regular additions of Class A, Class B, Class C and Class D shares may be
made to an investor's Investment Account by prearranged charges of $50 or more
to his or her regular bank account. Alternatively, an investor who maintains a
CMA(Registered) or CBA(Registered) account may arrange to have periodic
investments made in a Fund in that CMA(Registered) or CBA(Registered) account or
in certain related accounts in amounts of $100 or more through the
CMA(Registered) or CBA(Registered) Automated Investment Program.
Fee-Based Programs
Certain Merrill Lynch fee-based programs, including pricing alternatives
for securities transactions, (each referred to in this paragraph as a "Program")
may permit the purchase of Class A shares at net asset value. Under specified
circumstances, participants in certain Programs may deposit other classes of
shares which will be exchanged for Class A shares. Initial or deferred sales
charges otherwise due in connection with such exchanges may be waived or
modifed, as may the Conversion Period applicable to the deposited shares.
Termination of participation in a Program may result in the redemption of shares
held therein or the automatic exchange thereof to another class at net asset
value, which may be shares of a money market fund. In addition, upon termination
of participation in a Program, shares that have been held for less than
specified periods within such Program may be subject to a fee based upon the
current value of such shares. These Programs also generally prohibit such shares
from being transferred to another account at Merrill Lynch, to another
broker-dealer or to the Transfer Agent. Except in limited circumstances (which
may also involve an exchange as described above), such shares must be redeemed
and another class of shares purchased (which may involve the imposition of
initial or deferred sales charges and distribution and account maintenance fees)
in order for the investment not to be subject to Program fees. Additional
information regarding a specific Program (including charges and limitations on
transferability applicable to shares that may be held in such Program) is
available in such Program's client agreement and from Merrill Lynch Investor
Services at (800) MER-FUND (637-3863).
PORTFOLIO TRANSACTIONS
Subject to the policies established by the Trustees of the Trust, the
Manager is primarily responsible for the execution of the Fund's portfolio
transactions. Municipal Bonds and other securities in which the Funds invest 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 Funds, 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 Funds will not necessarily be paying the
lowest spread or commission available. The sale of shares of the Funds may be
taken into consideration as a factor in the selection of brokers or dealers to
execute portfolio transactions for the Funds. The portfolio securities of the
Funds generally are traded on a principal basis and normally do not involve
either brokerage commissions or transfer taxes. The cost of portfolio securities
transactions of the Funds 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 or any Fund as principals 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 and each Fund to engage in certain principal transactions with
Merrill Lynch involving high quality short-term municipal securities, subject to
certain conditions. In addition, the Trust may not purchase securities,
48
<PAGE>
including Municipal Bonds, for the Funds 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. The Trust has applied for an exemptive order permitting it
to, among other things, (i) purchase high quality tax-exempt securities from
Merrill Lynch when Merrill Lynch is a member of an underwriting syndicate and
(ii) purchase tax-exempt securities from and sell tax-exempt securities to
Merrill Lynch in secondary market transactions. An affiliated person of the
Trust may serve as its broker in over-the-counter transactions conducted for the
Funds on an agency basis only.
Portfolio Turnover. Generally, the Funds do not purchase securities for
short-term trading profits. However, a Fund may dispose of securities without
regard to the time they have been held when such action, for defensive or other
reasons, appears advisable to the Manager. As a result of the investment
policies of the Funds, each Fund's portfolio turnover may be higher than that of
other investment companies; however, it is extremely difficult to predict
portfolio turnover rates with any degree of accuracy. Higher portfolio turnover
may contribute to higher transactional costs and negative tax consequences, such
as an increase in capital gain dividends or in ordinary income dividends of
accrued market discount, as well as greater difficulty meeting the requirement
for qualification as a regulated investment company that less than 30% of its
gross income be derived from the sale or other disposition of securities held
for less than three months. See "Distributions and Taxes." (The portfolio
turnover rate for a Fund 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.)
For the fiscal years ended July 31, 1996 and 1995, the portfolio turnover
rates for each of the Funds were as follows:
<TABLE>
<CAPTION>
For the Year Ended
July 31,
----------------------------------------
Fund 1996 1995
- ----------------------------------------------------------------------- ------------------ ------------------
<S> <C> <C>
Arizona Fund........................................................... 43.53% 182.58%
California Fund........................................................ 11.09 124.72
Florida Fund........................................................... 39.90 138.97
Massachusetts Fund..................................................... 22.71 89.96
Michigan Fund.......................................................... 32.92 93.08
New Jersey Fund........................................................ 6.57 131.56
New York Fund.......................................................... 51.47 139.16
Pennsylvania Fund...................................................... 30.90 141.52
</TABLE>
For each of the Funds, the yield volatility exhibited by the municipal bond
market during the fiscal year ended July 31, 1995 contributed to recent
portfolio turnover. Each Fund's shift to a more defensive posture necessitated a
significant portfolio restructuring which led to increased trading activity for
the fiscal year ended July 31, 1995.
49
<PAGE>
DISTRIBUTIONS AND TAXES
Distributions
The net investment income of each Fund is declared as dividends, prior to
the determination of the net asset value which is calculated 15 minutes after
the close of business on the NYSE (generally 4:00 p.m., New York time) on that
day. The net investment income of each 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 each
Fund, including the management fees and account maintenance fees and
distribution fees with respect to Class B and Class C shares of that Fund and
account maintenance fees with respect to Class D shares of that Fund, are
accrued daily. Dividends of net investment income of a Fund are declared daily
and reinvested monthly in the form of additional full and fractional shares of
that Fund at net asset value unless the shareholder elects to receive such
dividends in cash. Shares will accrue dividends as long as they are issued and
outstanding. Shares are issued and outstanding from the settlement date of a
purchase order to the day prior to the settlement date of a redemption order.
All net realized long- or short-term capital gains of a Fund, if any, are
declared and distributed to that Fund's shareholders at least annually. Capital
gains distributions will be reinvested automatically in shares of a Fund unless
the shareholder elects to receive such distributions in cash.
The per share dividends and distributions on each class of shares of a Fund
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 a Fund or received in cash.
Taxes
Federal. The Trust intends to continue to qualify each Fund for the
special tax treatment afforded regulated investment companies ("RICs") under the
Code. If a Fund so qualifies, the Fund (but not its shareholders) will not be
subject to Federal income tax to the extent that it distributes its net
investment income and net realized capital gains. The Trust intends to cause
each Fund to distribute substantially all of such income.
To the extent that the dividends distributed to a 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 Trust will inform shareholders annually as
to the portion of each Fund's distributions which constitutes exempt-interest
dividends and which is exempt from Federal income tax. Interest on indebtedness
incurred or continued to purchase or carry Fund shares is not deductible for
Federal 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 a Fund should consult their tax advisors before
purchasing Fund shares.
To the extent that a 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
50
<PAGE>
distributions are considered ordinary income for Federal income tax purposes.
Distributions, if any, from an excess of net long-term capital gains over net
short-term capital losses derived from the sale of securities or from certain
transactions in futures or options ("capital gain dividends") are taxable as
long-term capital gains for Federal income tax purposes, regardless of the
length of time the shareholder has owned Fund shares. Distributions by the Fund,
whether from exempt-interest income, ordinary income or capital gains, will not
be eligible for the dividends received deduction allowed to corporations under
the Code.
All or a portion of each Fund's gain from the sale or redemption of
tax-exempt obligations purchased at a market discount will be treated as
ordinary income rather than capital gain. This rule may increase the amount of
ordinary income dividends received by shareholders. Distributions in excess of
the Fund's earnings and profits will first reduce the adjusted tax basis of a
holder's shares and, after such adjusted tax basis is reduced to zero, will
constitute capital gains to such holder (assuming the shares are held as a
capital asset). Any loss upon the sale or exchange of shares held for six months
or less will be disallowed to the extent of any exempt-interest dividends
received by the shareholder. In addition, any such loss that is not disallowed
under the rule stated above will be treated as long-term capital loss to the
extent of any capital gain dividends received by the shareholder. If a Fund pays
a dividend in January which was declared in the previous October, November or
December to shareholders of record on a specified date in one of such months,
then such dividend will be treated for tax purposes as being paid by the Fund
and received by its shareholders on December 31 of the year in which such
dividend was declared.
The Code subjects interest received on certain otherwise tax-exempt
securities to an alternative minimum tax. The alternative minimum tax applies to
interest received on certain "private activity bonds" issued after August 7,
1986. Private activity bonds are bonds which, although tax-exempt, are used for
purposes other than those generally performed by governmental units and which
benefit non-governmental entities (e.g., bonds used for industrial development
or housing purposes). Income received on such bonds is classified as an item of
"tax preference", which could subject certain investors in such bonds, including
shareholders of a Fund, to an alternative minimum tax. Each Fund will purchase
such "private activity bonds" and the Trust will report to shareholders within
60 days after each Fund's taxable year-end the portion of its dividends declared
during the year which constitutes an item of tax preference for alternative
minimum tax purposes. The Code further provides that corporations are subject to
an alternative minimum tax based, in part, on certain differences between
taxable income as adjusted for other tax preferences and the corporation's
"adjusted current earnings", which more closely reflect a corporation's economic
income. Because an exempt-interest dividend paid by a 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 such Fund.
No gain or loss will be recognized by Class B shareholders on the
conversion of their Class B shares into Class D shares. A shareholder's basis in
the Class D shares acquired will be the same as such shareholder's basis in the
Class B shares converted, and the holding period of the acquired Class D shares
will include the holding period for the converted Class B shares.
If a shareholder exercises an exchange privilege within 90 days of
acquiring the shares, then the loss the shareholder can recognize on the
exchange will be reduced (or the gain increased) to the extent any sales charge
paid to the Fund on the exchanged shares reduces any sales charge the
shareholder would have owed upon purchase of the new shares in the absence of
the exchange privilege. Instead, such sales charge will be treated as an amount
paid for the new shares.
A loss realized on a sale or exchange of shares of a Fund will be
disallowed if other Fund shares are acquired (whether through the automatic
reinvestment of dividends or otherwise) within a 61-day period
51
<PAGE>
beginning 30 days before and ending 30 days after the date that the shares are
disposed of. In such a case, the basis of the shares acquired will be adjusted
to reflect the disallowed loss.
Under certain Code provisions, some shareholders may be subject to a 31%
withholding tax on certain ordinary income dividends and on capital gain
dividends and redemption payments ("backup withholding"). Generally,
shareholders subject to backup withholding will be those for whom no certified
taxpayer identification number is on file with the Trust or who, to the Trust's
knowledge, have furnished an incorrect number. When establishing an account, an
investor must certify under penalty of perjury that such number is correct and
that such investor is not otherwise subject to backup withholding.
The Code provides that every person required to file a tax return must
include for information purposes on such return the amount of exempt-interest
dividends received from all sources (including each Fund), during the taxable
year.
The foregoing is a general and abbreviated summary of the applicable
provisions of the Code and Treasury regulations presently in effect. For the
complete provisions, reference should be made to the pertinent Code sections and
the Treasury regulations promulgated thereunder. The Code and the Treasury
regulations are subject to change by legislative, judicial or administrative
action either prospectively or retroactively.
Shareholders are urged to consult their tax advisors regarding specific
questions as to Federal, foreign, state or local taxes.
State. The State Municipal Bonds in which each Fund will invest consist of
obligations with remaining maturities of between one and ten years which are
issued by or on behalf of the designated state or its political subdivisions,
agencies or instrumentalities, and obligations of other qualifying issuers, such
as issuers located in Puerto Rico, the Virgin Islands and Guam. State Municipal
Bonds pay interest which is exempt, in the opinion of bond counsel to the
issuer, from Federal income taxes, personal income taxes in the designated state
and, in certain instances, franchise and local personal income taxes. In certain
states, State Municipal Bonds are exempt from intangible personal property taxes
in the designated state.
Exempt-interest dividends paid by a Fund and attributable to interest
income from State Municipal Bonds of a designated state generally will be exempt
from income taxation to shareholders otherwise subject to personal income
taxation by such designated state or in some cases, franchise or local personal
income taxes. Shareholders subject to income taxation by states other than the
Fund's designated state will realize a lower after-tax rate of return than
shareholders in that state since the dividends distributed by a Fund generally
will not be exempt, to any significant degree, from income taxation by any state
other than that Fund's designated state. The Trust will inform shareholders
annually as to the portion of a Fund's distributions which constitutes
exempt-interest dividends and the portion which is not subject to state and, if
applicable, city income or franchise taxes. Interest on indebtedness incurred or
continued to purchase or carry Fund shares generally will not be deductible for
state personal income tax purposes to the extent attributable to interest income
exempt from personal income taxation by the designated state.
The foregoing description relates generally to state personal income tax
issues; investors should consult with their tax advisors with respect to such
taxes as well as state corporate income or franchise taxes and any state or
local income taxes not described above, as well as to the availability of any
exemptions from state or local income taxes. Additional considerations relating
to income taxation in the various states is set forth under "Distributions and
Taxes" in the Statement of Additional Information.
52
<PAGE>
PERFORMANCE DATA
From time to time each Fund may include its average annual total return,
yield and tax-equivalent yield for various specified time periods in
advertisements or information furnished to present or prospective shareholders.
Average annual total return, yield and tax-equivalent yield are computed 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 is 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 of that Fund and the maximum sales charge in the case
of Class A and Class D shares of that Fund. Dividends paid by each 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. Each Fund will include performance data for all
classes of shares of that Fund in any advertisement or information including
performance data of that Fund.
The Funds also may quote total return and aggregate total return
performance data for various specified time periods. Such data will be
calculated substantially as described above, except that (1) the rates of return
calculated will not be average annual rates, but rather, actual annual,
annualized or aggregate rates of return and (2) the maximum applicable sales
charges will not be included with respect to annual or annualized rates of
return calculations. Aside from the impact on the performance data calculations
of including or excluding the maximum applicable sales charges, actual annual or
annualized total return data generally will be lower than average annual total
return data since the average annual rates of return reflect compounding and
aggregate total return data generally will be higher than average annual total
return data since the aggregate rates of return reflect compounding over a
longer period of time. In advertisements distributed to investors whose
purchases are subject to waiver of the CDSC in the case of Class B and Class C
shares or to reduced sales charges in the case of Class A and Class D shares,
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". A 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 (c) the maximum offering price per
share on the last day of the period. Tax-equivalent yield quotations will be
computed by dividing (a) the part of the Fund's yield that is tax-exempt by (b)
one minus a stated tax rate and (c) adding the result to that part, if any, of
the Fund's yield that is not tax-exempt.
The following sets forth the yield for the Class A, Class B, Class C and
Class D shares of each of the Funds for the 30-day period ended July 31, 1996.
The table also sets forth the tax-equivalent yield (based on a Federal
53
<PAGE>
income tax rate of 28%) for the Class A, Class B, Class C and Class D shares of
each of the Funds for the same period.
<TABLE>
<CAPTION>
Class A Class B Class C Class D
---------------------- ---------------------- ---------------------- ----------------------
30-Day Tax-Equivalent 30-Day Tax-Equivalent 30-Day Tax-Equivalent 30-Day Tax-Equivalent
Yield Yield Yield Yield Yield Yield Yield Yield
------ -------------- ------ -------------- ------ -------------- ------ --------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Arizona Fund.......... 3.63% 5.04% 3.31% 4.60% 3.51% 4.88% 3.53% 4.90%
California Fund....... 3.26% 4.53% 2.94% 4.08% 3.21% 4.46% 3.16% 4.39%
Florida Fund.......... 3.61% 5.01% 3.29% 4.57% 3.47% 4.82% 3.51% 4.88%
Massachusetts
Fund................ 3.63% 5.04% 3.31% 4.60% 3.51% 4.88% 3.53% 4.90%
Michigan Fund......... 3.68% 5.11% 3.35% 4.65% 3.35% 4.65% 3.58% 4.97%
New Jersey Fund....... 3.54% 4.92% 3.23% 4.49% 3.43% 4.76% 3.45% 4.79%
New York Fund......... 3.92% 5.44% 3.61% 5.01% 3.80% 5.28% 3.83% 5.32%
Pennsylvania
Fund................ 3.54% 4.92% 3.22% 4.47% 3.38% 4.69% 3.44% 4.78%
</TABLE>
Total return, yield and tax-equivalent yield figures are based on a Fund's
historical performance and are not intended to indicate future performance. A
Fund's total return, yield and tax-equivalent yield will vary depending on
market conditions, the securities comprising the Fund's portfolio, the Fund's
operating expenses and the amount of realized and unrealized net capital gain or
losses during the period. The value of an investment in a Fund will fluctuate
and an investor's shares, when redeemed, may be worth more or less than their
original cost. Investors' tax-equivalent yields may differ from those listed
above because of the application of state and local income and intangibles taxes
and Federal income tax rates which are higher or lower than 28%.
On occasion, a 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, a Fund may include its
Morningstar risk-adjusted performance ratings in advertisements or supplemental
sales literature. As with other performance data, performance comparisons should
not be considered indicative of a Fund's relative performance for any future
period.
54
<PAGE>
ADDITIONAL INFORMATION
Determination of Net Asset Value
The net asset value of all of the classes of shares of each Fund is
determined by the Manager once daily 15 minutes after the close of business on
the NYSE (generally, 4:00 p.m., New York time), on each day during which the
NYSE is open for trading. The net asset value per share is computed by dividing
the sum of the value of the securities held by a 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 net asset value per share of the shares of all classes of a Fund are
expected to be equivalent. Under certain circumstances, however, the per share
net asset value of Class A shares of that Fund will be higher than the per share
net asset value of shares of the other classes, reflecting the daily expense
accruals of the account maintenance, distribution and higher transfer agency
fees applicable with respect to Class B and Class C shares and the daily expense
accruals of the account maintenance fees applicable with respect to Class D
shares; moreover, the per share net asset value of Class D shares generally will
be higher than the per share net asset value of Class B and Class C shares,
reflecting the daily expense accruals of the distribution fees and the higher
account maintenance and transfer agency fees applicable with respect to Class B
and Class C shares. It is expected, however, that the per share net asset value
of the classes will tend to converge (although not necessarily meet) immediately
after the payment of dividends or distributions, which will differ by
approximately the amount of the expense accrual differentials between the
classes.
Organization of the Trust
The Trust is an unincorporated business trust organized on February 14,
1991 under the laws of Massachusetts. The Trust is an open-end management
investment company comprised of separate series ("Series"), each of which is a
separate portfolio offering shares to selected groups of purchasers. Each of the
Series is managed independently in order to provide to shareholders who are
residents of the state to which such Series relates as high a level of income
exempt from Federal and, in certain cases, state and local personal 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 each Fund are divided into four
classes designated Class A, Class B, Class C and Class D shares. Each share of
Class A, Class B, Class C and Class D represents an interest in the same assets
of a Fund and have identical voting, dividend, liquidation and other rights and
the same terms and conditions except that Class B, Class C and Class D shares
bear certain expenses related to the account maintenance 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 such expenditures, as applicable. See "Purchase of
Shares". The Trustees of the Trust may classify and reclassify the shares of any
Series into additional classes at a future date.
Shareholders are entitled to one vote for each full share and to fractional
votes for fractional shares held in the election of Trustees (to the extent
hereinafter provided) and on other matters submitted to the vote of
shareholders. All shares of the Trust have equal voting rights, except that only
shares of the respective Series are entitled to vote on matters concerning only
that Series and, as noted above, only Class B, Class C and Class D shares of a
Series will have exclusive voting rights with respect to matters relating to the
account maintenance and distribution expenditures being borne solely by such
class. There normally will be no meeting of
55
<PAGE>
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, in accordance
with the terms of the Declaration of Trust, may 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 of a Series bear certain
additional expenses. The obligations and liabilities of a particular Series are
restricted to the assets of that Series and do not extend to the assets of the
Trust generally. The shares of each Series, when issued, will be fully-paid and
non-assessable by the Trust.
Shareholder Reports
Only one copy of each shareholder report and certain shareholder
communications will be mailed to each identified shareholder regardless of the
number of accounts such shareholder has. If a shareholder wishes to receive
separate copies of each report and communication for each of the shareholder's
related accounts, the shareholder should notify in writing:
Merrill Lynch Financial Data Services, Inc.
P.O. Box 45289
Jacksonville, FL 32232-5289
The written notification should include the shareholder's name, address,
tax identification number and Merrill Lynch, Pierce, Fenner & Smith Incorporated
and/or mutual fund account numbers. Shareholders having any questions regarding
this matter should call their Merrill Lynch Financial Consultant or Merrill
Lynch Financial Data Services, Inc. at 800-637-3863.
Shareholder Inquiries
Shareholder inquiries may be addressed to the Trust at the address or
telephone number set forth on the cover page of this Prospectus.
The Declaration of Trust establishing the Trust, dated February 14, 1991, 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 Limited Maturity 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' (as defined in
the Declaration) only shall be liable.
56
<PAGE>
MERRILL LYNCH MULTI-STATE LIMITED MATURITY
MUNICIPAL SERIES TRUST -- AUTHORIZATION FORM (PART 1)
- --------------------------------------------------------------------------------
1. Share Purchase Application
I, being of legal age, wish to purchase: (choose one)*
[_] Class A shares [_] Class B shares [_] Class D shares
of
[_] Merrill Lynch Arizona Limited Maturity Municipal Bond Fund
[_] Merrill Lynch California Limited Maturity Municipal Bond Fund
[_] Merrill Lynch Florida Limited Maturity Municipal Bond Fund
[_] Merrill Lynch Massachusetts Limited Maturity Municipal Bond Fund
[_] Merrill Lynch Michigan Limited Maturity Municipal Bond Fund
[_] Merrill Lynch New Jersey Limited Maturity Municipal Bond Fund
[_] Merrill Lynch New York Limited Maturity Municipal Bond Fund
[_] Merrill Lynch Pennsylvania Limited Maturity Municipal Bond Fund
(The Fund selected above is herein referred to as the "Fund")
and establish an Investment Account as described in the Prospectus. In the
event that I am not eligible to purchase Class A shares, I understand that
Class D shares will be purchased.
Basis for establishing an Investment Account:
A. I enclose a check for $.......payable to Merrill Lynch Financial Data
Services, Inc. as an initial investment (minimum $1,000).
I understand that this purchase will be executed at the applicable offering
price next to be determined after this Application is received by you.
B. I already own shares of the following Merrill Lynch mutual funds that
would qualify for the Right of Accumulation as outlined in the Statement of
Additional Information: (Please list all funds. Use a separate sheet of
paper if necessary.)
1. ........................................................
2. ........................................................
3. ........................................................
4. ........................................................
5. ........................................................
6. ........................................................
(PLEASE PRINT)
Name............................................................................
First Name Initial Last
Name of Co-Owner (if any).......................................................
First Name Initial Last
Address.........................................................................
Date......................, 19.........
................................................................................
(Zip Code)
Occupation................ Name and Address of Employer........................
....................................................
....................................................
.......................... ....................................................
Signature of Owner Signature of Co-Owner (if any)
(In the case of co-owners, a joint tenancy with right of survivorship will be
presumed unless otherwise specified.)
- --------------------------------------------------------------------------------
2. Dividend and Capital Gain Distribution Option
Ordinary Income Dividends Long-Term Capital Gains
Select [_] Reinvest Select [_] Reinvest
One: [_] Cash One: [_] Cash
If no election is made, dividends and capital gains will be automatically
reinvested at net asset value without a sales charge.
If cash, specify how you would like your distributions paid to you: [_] Check
or [_] Direct Deposit to bank account
If direct deposit to bank account is selected, please complete below:
I hereby authorize payment of dividend and capital gain distributions by direct
deposit to my bank account and, if necessary, debit entries and adjustments for
any credit entries made to my account in accordance with the terms I have
selected on the Merrill Lynch Multi-State Limited Maturity Municipal Series
Trust Authorization Form.
Specify type of account (check one): [_] checking [_] savings
Name on your Account ...........................................................
Bank Name ......................................................................
Bank Number ......................... Account Number .........................
Bank Address ...................................................................
I agree that this authorization will remain in effect until I provide written
notification to Merrill Lynch Financial Data Services, Inc. amending or
terminating this service.
Signature of Depositor .........................................................
Signature of Depositor ......................... Date ........................
(if joint account, both must sign)
Note: If direct deposit to bank account is selected, your blank, unsigned check
marked "VOID" or a deposit slip from your savings account should accompany this
application.
57
<PAGE>
MERRILL LYNCH MULTI-STATE LIMITED MATURITY
MUNICIPAL SERIES TRUST -- AUTHORIZATION FORM (PART 1) -- (Continued)
- --------------------------------------------------------------------------------
3. SOCIAL SECURITY NUMBER OR TAXPAYER IDENTIFICATION NUMBER
[ ]
Social Security Number or Taxpayer Identification Number
Under penalty of perjury, I certify (1) that the number set forth above is
my correct Social Security Number or Taxpayer Identification Number and (2) that
I am not subject to backup withholding (as discussed in the Prospectus under
"Distributions and Taxes--Taxes") either because I have not been notified that I
am subject thereto as a result of a failure to report all interest or dividends,
or the Internal Revenue Service ("IRS") has notified me that I am no longer
subject thereto.
INSTRUCTION: YOU MUST STRIKE OUT THE LANGUAGE IN (2) ABOVE IF YOU HAVE BEEN
NOTIFIED THAT YOU ARE SUBJECT TO BACKUP WITHHOLDING DUE TO UNDERREPORTING AND IF
YOU HAVE NOT RECEIVED A NOTICE FROM THE IRS THAT BACKUP WITHHOLDING HAS BEEN
TERMINATED. THE UNDERSIGNED AUTHORIZES THE FURNISHING OF THIS CERTIFICATION TO
OTHER MERRILL LYNCH SPONSORED MUTUAL FUNDS.
...................................... .......................................
Signature of Owner Signature of Co-Owner (if any)
- --------------------------------------------------------------------------------
4. LETTER OF INTENTION--CLASS A AND CLASS D SHARES ONLY (SEE TERMS AND
CONDITIONS IN THE STATEMENT OF ADDITIONAL INFORMATION)
.................. , 19 ......
Date of Initial Purchase
Dear Sir/Madam:
Although I am not obligated to do so, I intend to purchase shares of the
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 distributor over the next 13 month period which will equal or exceed:
[ ] $100,000 [ ] $250,000 [ ] $500,000 [ ] $1,000,000
Each purchase will be made at the then reduced offering price applicable to
the amount checked above, as described in the Merrill Lynch Multi-State Limited
Maturity Municipal Series Trust Prospectus.
I agree to the terms and conditions of this 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 Multi-State Limited Maturity Municipal Series Trust
held as security.
By: ................................... .......................................
Signature of Owner Signature of Co-Owner
(If registered in joint names, both
must sign)
In making purchases under this letter, the following are the related
accounts on which reduced offering prices are to apply:
(1) Name .............................. (2) Name ..............................
Account Number ........................ Account Number ........................
- --------------------------------------------------------------------------------
5. FOR DEALER ONLY
Branch Office, Address, Stamp
- ---------------------------------
- ---------------------------------
This form, when completed, should be mailed to:
Merrill Lynch Multi-State Limited Maturity Municipal Series Trust
c/o Merrill Lynch Financial Data Services, Inc.
P.O. Box 45289
Jacksonville, Florida 32232-5289
We hereby authorize Merrill Lynch Funds Distributor, Inc. to act as our agent in
connection with transactions under this authorization form and agree to notify
the Distributor of any purchases or sales made under a Letter of Intention,
Automatic Investment Plan or Systematic Withdrawal Plan. We guarantee the
Shareholder's signature.
................................................................................
Dealer Name and Address
By:.............................................................................
Authorized Signature of Dealer
[ ][ ][ ] [ ][ ][ ][ ] .......................................
Branch Code F/C No. F/C Last Name
[ ][ ][ ] [ ][ ][ ][ ][ ]
Dealer's Customer Account No.
58
<PAGE>
MERRILL LYNCH MULTI-STATE LIMITED MATURITY
MUNICIPAL SERIES TRUST -- AUTHORIZATION FORM (PART 2)
- --------------------------------------------------------------------------------
Note: This form is required to apply for the Systematic Withdrawal or Automatic
Investment Plans only.
- --------------------------------------------------------------------------------
1. Account Registration [ ]
(Please Print) Social Security No.
or Taxpayer Identification Number
Name of Owner ...............................................
First Name Initial Last Name
Name of Co-Owner (if any) ...................................
First Name Initial Last Name
Address ........................ Account Number ..........................
(if existing account)
...............................
(Zip Code)
- --------------------------------------------------------------------------------
2. SYSTEMATIC WITHDRAWAL PLAN--CLASS A AND 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 [ ] Class A or [ ] Class D shares in (choose one)
[ ] Merrill Lynch Arizona Limited Maturity Municipal Bond Fund
[ ] Merrill Lynch California Limited Maturity Municipal Bond Fund
[ ] Merrill Lynch Florida Limited Maturity Municipal Bond Fund
[ ] Merrill Lynch Massachusetts Limited Maturity Municipal Bond Fund
[ ] Merrill Lynch Michigan Limited Maturity Municipal Bond Fund
[ ] Merrill Lynch New Jersey Limited Maturity Municipal Bond Fund
[ ] Merrill Lynch New York Limited Maturity Municipal Bond Fund
[ ] Merrill Lynch Pennsylvania Limited Maturity Municipal Bond Fund
(THE FUND SELECTED ABOVE IS HEREIN REFERRED TO AS THE "FUND")
at cost or current offering price. Withdrawals to be made either (check one)
[ ] Monthly on the 24th day of each month, or [ ] Quarterly on the 24th day of
March, June, September and December. If the 24th falls on a weekend or holiday,
the next succeeding business day will be utilized. Begin systematic withdrawal
on _______ or as soon as possible thereafter.
(month)
SPECIFY HOW YOU WOULD LIKE YOUR WITHDRAWAL PAID TO YOU (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):
DRAW CHECKS PAYABLE (CHECK ONE)
(a) I hereby authorize payment by check
[ ] as indicated in Item 1.
[ ] to the order of .......................................................
Mail to (check one)
[ ] the address indicated in Item 1.
[ ] Name (please print) ...................................................
Address .......................................................................
.......................................................................
Signature of Owner ....................... Date .......................
Signature of Co-Owner (if any) ..........................................
(b) I HEREBY AUTHORIZE PAYMENT BY DIRECT DEPOSIT TO BANK ACCOUNT AND, IF
NECESSARY, DEBIT ENTRIES AND ADJUSTMENTS FOR ANY CREDIT ENTRIES MADE TO MY
ACCOUNT. I AGREE THAT THIS AUTHORIZATION WILL REMAIN IN EFFECT UNTIL I PROVIDE
WRITTEN NOTIFICATION TO MERRILL LYNCH FINANCIAL DATA SERVICES, INC. AMENDING OR
TERMINATING THIS SERVICE.
Specify type of account (check one): [ ] checking [ ] savings
Name on your Account ..........................................................
Bank Name .....................................................................
Bank Number ......................... Account Number ........................
Bank Address ..................................................................
...................................................................
Signature of Depositor ........................ Date ........................
Signature of Depositor ........................................................
(If joint account, both must sign)
NOTE: IF DIRECT DEPOSIT IS ELECTED, YOUR BLANK, UNSIGNED CHECK MARKED "VOID" OR
A DEPOSIT SLIP FROM YOUR SAVINGS ACCOUNT SHOULD ACCOMPANY THIS APPLICATION.
59
<PAGE>
MERRILL LYNCH MULTI-STATE LIMITED MATURITY
MUNICIPAL SERIES TRUST -- AUTHORIZATION FORM (PART 2) -- (Continued)
- --------------------------------------------------------------------------------
3. APPLICATION FOR AUTOMATIC INVESTMENT PLAN
I hereby request that Merrill Lynch Financial Data Services, Inc. draw an
automated clearing house ("ACH") debit on my checking account as described below
each month to purchase: (choose one)
[ ] Class A shares [ ] Class B shares [ ] Class D shares
of the Fund subject to the terms set forth below. In the event that I am not
eligible to purchase Class A shares, I understand that Class D shares will be
purchased.
MERRILL LYNCH FINANCIAL DATA SERVICES, INC.
You are hereby authorized to draw an ACH debit each month on my bank account for
investment in the Fund as indicated below:
Amount of each ACH debit $ ................................................
Account No. ...............................................................
Please date and invest ACH debits on the 20th of each month
beginning _______________ or as soon thereafter as possible.
(Month)
I agree that you are drawing these ACH debits voluntarily at my request and
that you shall not be liable for any loss arising from any delay in preparing or
failure to prepare any such debit. If I change banks or desire to terminate or
suspend this program, I agree to notify you promptly in writing. I hereby
authorize you to take any action to correct erroneous ACH debits of my bank
account or purchases of Fund shares including liquidating shares of the Fund and
credit my bank account. I further agree that if a debit is not honored upon
presentation, Merrill Lynch Financial Data Services, Inc. is authorized to
discontinue immediately the Automatic Investment Plan and to liquidate
sufficient shares held in my account to offset the purchase made with the
dishonored debit.
.................. .......................................
Date Signature of Depositor
.......................................
Signature of Depositor
(If joint account, both must sign)
AUTHORIZATION TO HONOR ACH DEBITS
DRAWN BY MERRILL LYNCH FINANCIAL DATA
SERVICES, INC.
To ....................................................................... Bank
(Investor's Bank)
Bank Address ..................................................................
City ............ State ............ Zip Code ...............................
As a convenience to me, I hereby request and authorize you to pay and charge to
my account ACH debits drawn on my account by and payable to Merrill Lynch
Financial Data Services, Inc. I agree that your rights in respect to each such
debit shall be the same as if it were a check drawn on you and signed personally
by me. This authority is to remain in effect until revoked by me in writing.
Until you receive such notice, you shall be fully protected in honoring any such
debit. I further agree that if any such debit be dishonored, whether with or
without cause and whether intentionally or inadvertently, you shall be under no
liability.
................... .......................................
Date Signature of Depositor
................... .......................................
Bank Account Number Signature of Depositor
(If joint account, both must sign)
NOTE: IF AUTOMATIC INVESTMENT PLAN IS ELECTED, YOUR BLANK, UNSIGNED CHECK MARKED
"VOID" SHOULD ACCOMPANY THIS APPLICATION.
60
<PAGE>
MANAGER
Fund Asset Management
Administrative Offices:
800 Scudders Mill Road
Plainsboro, New Jersey 08536
Mailing Address:
P.O. Box 9011
Princeton, New Jersey 08543-9011
DISTRIBUTOR
Merrill Lynch Funds Distributor, Inc.
Administrative Offices:
800 Scudders Mill Road
Plainsboro, New Jersey 08536
Mailing Address:
P.O. Box 9081
Princeton, New Jersey 08543-9081
CUSTODIAN
The Bank of New York
90 Washington Street
12th Floor
New York, New York 10005
TRANSFER AGENT
Merrill Lynch Financial Data Services, Inc.
Administrative Offices:
4800 Deer Lake Drive East
Jacksonville, Florida 32246-6484
Mailing Address:
P.O. Box 45289
Jacksonville, Florida 32232-5289
INDEPENDENT AUDITORS
Deloitte & Touche LLP
117 Campus Drive
Princeton, New Jersey 08540-6400
COUNSEL
Brown & Wood LLP
One World Trade Center
New York, New York 10048-0557
<PAGE>
NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATIONS, OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS, IN CONNECTION
WITH THE OFFER CONTAINED IN THIS PROSPECTUS, AND, IF GIVEN OR MADE, SUCH OTHER
INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED
BY THE TRUST, THE MANAGER OR THE DISTRIBUTOR. THIS PROSPECTUS DOES NOT
CONSTITUTE AN OFFERING IN ANY STATE IN WHICH SUCH OFFERING MAY NOT LAWFULLY BE
MADE.
------------------------
TABLE OF CONTENTS
Page
----
Fee Table................................... 3
Merrill Lynch Select Pricing(SM) System....... 7
Financial Highlights........................ 11
Investment Objectives and Policies.......... 19
Potential Benefits........................ 21
Risk Factors and Special Considerations... 22
Description of Municipal Bonds............ 24
When-Issued Securities and Delayed
Delivery Transactions................... 26
Indexed and Inverse Floating
Obligations............................. 26
Synthetic Short-Term Municipal Bonds...... 27
Call Rights............................... 27
Financial Futures Contracts and Options
Thereon................................. 28
Repurchase Agreements..................... 30
Investment Restrictions................... 30
Management of the Trust..................... 32
Trustees.................................. 32
Management and Advisory Arrangements...... 32
Code of Ethics............................ 33
Transfer Agency Services.................. 33
Purchase of Shares.......................... 34
Initial Sales Charge Alternatives--Class A
and Class D Shares...................... 36
Deferred Sales Charge Alternatives--Class
B and Class C Shares.................... 38
Distribution Plans........................ 41
Limitations on the Payment of Deferred
Sales Charges........................... 44
Redemption of Shares........................ 44
Redemption................................ 44
Repurchase................................ 45
Reinstatement Privilege--Class A and Class
D Shares................................ 45
Shareholder Services........................ 46
Investment Account........................ 46
Exchange Privilege........................ 46
Automatic Reinvestment of Dividends and
Capital Gains Distributions............. 47
Systematic Withdrawal Plans............... 47
Automatic Investment Plans................ 48
Fee-Based Programs........................ 48
Portfolio Transactions...................... 48
Distributions and Taxes..................... 50
Distributions............................. 50
Taxes..................................... 50
Performance Data............................ 53
Additional Information...................... 55
Determination of Net Asset Value.......... 55
Organization of the Trust................. 55
Shareholder Reports....................... 56
Shareholder Inquiries..................... 56
Authorization Form.......................... 57
Code # 16925-1196
[LOGO] MERRILL LYNCH
Merrill Lynch Multi-
State Limited Maturity
Municipal Series Trust
Merrill Lynch Arizona Limited
Maturity Municipal Bond Fund
Merrill Lynch California Limited
Maturity Municipal Bond Fund
Merrill Lynch Florida Limited
Maturity Municipal Bond Fund
Merrill Lynch Massachusetts Limited
Maturity Municipal Bond Fund
Merrill Lynch Michigan Limited
Maturity Municipal Bond Fund
Merrill Lynch New Jersey Limited
Maturity Municipal Bond Fund
Merrill Lynch New York Limited
Maturity Municipal Bond Fund
Merrill Lynch Pennsylvania Limited
Maturity Municipal Bond Fund
PROSPECTUS
November 27, 1996
Distributor:
Merrill Lynch
Funds Distributor, Inc.
This Prospectus should be
retained for future reference.
<PAGE>
STATEMENT OF ADDITIONAL INFORMATION
- -----------------------------------
MERRILL LYNCH MULTI-STATE LIMITED MATURITY MUNICIPAL SERIES TRUST
MERRILL LYNCH ARIZONA LIMITED MATURITY
MUNICIPAL BOND FUND
MERRILL LYNCH CALIFORNIA LIMITED MATURITY
MUNICIPAL BOND FUND
MERRILL LYNCH FLORIDA LIMITED MATURITY
MUNICIPAL BOND FUND
MERRILL LYNCH MASSACHUSETTS LIMITED MATURITY
MUNICIPAL BOND FUND
MERRILL LYNCH MICHIGAN LIMITED MATURITY
MUNICIPAL BOND FUND
MERRILL LYNCH NEW JERSEY LIMITED MATURITY
MUNICIPAL BOND FUND
MERRILL LYNCH NEW YORK LIMITED MATURITY
MUNICIPAL BOND FUND
MERRILL LYNCH PENNSYLVANIA LIMITED MATURITY
MUNICIPAL BOND FUND
P.O. BOX 9011, PRINCETON, NEW JERSEY 08543-9011 O PHONE NO. (609) 282-2800
Merrill Lynch Multi-State Limited Maturity Municipal Series Trust (the
"Trust"), an open-end management investment company organized as a Massachusetts
business trust, consists of eight separate series: Merrill Lynch Arizona Limited
Maturity Municipal Bond Fund (the "Arizona Fund"), Merrill Lynch California
Limited Maturity Municipal Bond Fund (the "California Fund"), Merrill Lynch
Florida Limited Maturity Municipal Bond Fund (the "Florida Fund"), Merrill Lynch
Massachusetts Limited Maturity Municipal Bond Fund (the "Massachusetts Fund"),
Merrill Lynch Michigan Limited Maturity Municipal Bond Fund (the "Michigan
Fund"), Merrill Lynch New Jersey Limited Maturity Municipal Bond Fund (the "New
Jersey Fund"), Merrill Lynch New York Limited Maturity Municipal Bond Fund (the
"New York Fund") and Merrill Lynch Pennsylvania Limited Maturity Municipal Bond
Fund (the "Pennsylvania Fund") (together, the "Funds"). The investment objective
of each Fund is to provide shareholders with as high a level of income exempt
from Federal income taxes and personal income taxes imposed by the designated
state (and, in certain instances, local personal income taxes) as is consistent
with prudent investment management. Under normal market conditions, each Fund
invests primarily in a portfolio of intermediate-term investment grade
obligations of the designated state or its political subdivisions, agencies or
instrumentalities, or certain other jurisdictions, that pay interest exempt, in
the opinion of bond counsel to the issuer, from Federal income taxes and
personal income taxes of the designated state and, where applicable, local
personal income taxes. There can be no assurance that the investment objective
of any Fund will be realized.
Pursuant to the Merrill Lynch Select Pricing(SM) System, each Fund offers
four classes of shares, each with a different combination of sales charges,
ongoing fees and other features. The Merrill Lynch Select Pricing(SM) System
permits an investor to choose the method of purchasing shares that the investor
believes is most beneficial given the amount of the purchase, the length of time
the investor expects to hold the shares and other relevant circumstances.
------------------------
The Statement of Additional Information of the Trust and each Fund is not a
prospectus and should be read in conjunction with the prospectus of the Trust
and each Fund, dated November 27, 1996 (the "Prospectus"), which has been filed
with the Securities and Exchange Commission (the "Commission") and can be
obtained, without charge, by calling or by writing the Trust at the above
telephone number or address. This Statement of Additional Information has been
incorporated by reference into the Prospectus. Capitalized terms used but not
defined herein have the same meanings as in the Prospectus.
------------------------
FUND ASSET MANAGEMENT -- MANAGER
MERRILL LYNCH FUNDS DISTRIBUTOR, INC. -- DISTRIBUTOR
------------------------
THE DATE OF THIS STATEMENT OF ADDITIONAL INFORMATION IS NOVEMBER 27, 1996
<PAGE>
INVESTMENT OBJECTIVES AND POLICIES
The investment objective of each Fund is to provide shareholders with as
high a level of income exempt from Federal income taxes, the designated state's
personal income taxes and, where applicable, local personal income taxes, as is
consistent with prudent investment management. Each Fund seeks to achieve its
objective by investing primarily in a portfolio of intermediate-term investment
grade obligations issued by or on behalf of the designated state or its
political subdivisions, agencies or instrumentalities, and obligations of other
qualifying issuers, such as issuers located in Puerto Rico, the Virgin Islands
and Guam. Such obligations pay interest exempt, in the opinion of bond counsel
to the issuer, from Federal income taxes, the designated state's personal income
taxes and, in certain instances, local personal income taxes. Obligations that
pay interest exempt from Federal income taxes are referred to herein as
"Municipal Bonds". Obligations that pay interest exempt from Federal income
taxes, the designated state's personal income taxes and, where applicable, local
personal income taxes, and obligations that would not subject shareholders to
intangible personal property taxes in the designated state, are referred to
herein as "State Municipal Bonds". Unless otherwise indicated, references to
Municipal Bonds shall be deemed to include State Municipal Bonds. Each Fund
anticipates that at all times, except during temporary defensive periods, it
will maintain at least 65% of its total assets invested in its respective State
Municipal Bonds; the New Jersey Fund will maintain at least 80% of its total
assets invested in New Jersey State Municipal Bonds. At times, a Fund may 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 Objectives and Policies" in the Prospectus for a discussion of the
investment objective and policies of each Fund.
Each Fund will invest primarily in Municipal Bonds with remaining
maturities of between one and ten years. It is anticipated that, depending on
market conditions, the dollar weighted average maturity of each Fund's portfolio
will not exceed five years. For purposes of these investment policies, an
obligation will be treated as having a maturity earlier than its stated maturity
date if such obligation has technical features which, in the judgment of Fund
Asset Management, L.P. (the "Manager"), will result in the obligation being
valued in the market as though it has such earlier maturity. Interest rates on
shorter-term Municipal Bonds may fluctuate more widely from time to time than
interest rates on longer-term Municipal Bonds. However, because of their limited
maturities, the market value of the Municipal Bonds held by each Fund can be
expected to fluctuate less as a result of changes in interest rates.
Municipal Bonds may include general obligation bonds of a state and its
political subdivisions, revenue bonds to finance 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 each Fund will be primarily what
are commonly referred to as "investment grade" securities, which are obligations
rated at the time of purchase within the four highest quality ratings as
determined by either Moody's Investors Service, Inc. ("Moody's") (currently Aaa,
Aa, A and Baa), Standard & Poor's Ratings Services ("Standard & Poor's")
(currently AAA, AA, A and BBB) or Fitch Investors Service, Inc. ("Fitch")
(currently AAA, AA, A and BBB). If unrated, such securities will possess
creditworthiness comparable, in the opinion of the Manager, to investment grade
obligations.
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 obligations not only the creditworthiness of the issuer of such
obligations but also the creditworthiness of the financial institution. In
evaluating the creditworthiness of the financial institution, the Trustees and
the Manager will consider factors such as whether the letter of credit or
similar credit enhancement being issued is conditional or unconditional.
The Funds ordinarily do not intend to realize investment income not exempt
from Federal income taxes, the designated state's personal income taxes and,
where applicable, local personal income taxes, or to hold investments that would
subject shareholders to intangible personal property taxes in the designated
state. However, to the extent that suitable State Municipal Bonds are not
available for investment by a Fund, a Fund may purchase Municipal Bonds issued
by other states or their agencies or instrumentalities, the interest income
2
<PAGE>
on which is exempt, in the opinion of bond counsel to the issuer, from Federal
but not the designated state's taxation. Each Fund also may invest in securities
not issued by or on behalf of a state or territory or by an agency or
instrumentality thereof, if the Fund nevertheless believes such securities to be
exempt from Federal income taxation ("Non-Municipal Tax-Exempt Securities").
Non-Municipal Tax-Exempt Securities may include securities issued by other
investment companies that invest in municipal bonds, to the extent permitted by
applicable law. Other Non-Municipal Tax-Exempt Securities could include trust
certificates or other instruments evidencing interests in one or more long-term
municipal securities.
Except when acceptable securities are unavailable as determined by the
Manager, each Fund, under normal circumstances, will invest at least 65% (80% in
the case of the New Jersey Fund) of its total assets in its respective State
Municipal Bonds. For temporary defensive purposes or to provide liquidity, each
Fund has the authority to invest in tax-exempt or taxable money market
obligations with maturities 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 a Fund's net assets. Each Fund at
all times will have at least 80% of its net assets invested in securities exempt
from Federal income taxation. However, interest received on certain otherwise
tax-exempt securities which are classified as "private activity bonds" (in
general, bonds that benefit non-governmental entities) may be subject to an
alternative minimum tax. Each Fund may purchase such private activity bonds. See
"Distributions and Taxes". In addition, each 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 each 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. A 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 at times may be purchased or sold on a delayed delivery
basis or on a when-issued basis. These transactions arise when securities are
purchased or sold by a 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. A
Fund only will make commitments to purchase such securities with the intention
of actually acquiring the securities, but a Fund (subject to any state or local
personal income tax limitations) 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. Each Fund will maintain a separate account
at its custodian bank consisting of cash, cash equivalents or liquid securities
or Temporary Investments (valued on a daily basis) equal at all times to the
amount of the when-issued commitment.
The Funds 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 Funds 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 Funds invest in these types of Municipal Bonds, their return
on such Municipal Bonds will be subject to risk with respect to the value of the
particular index, which may include reduced or eliminated interest payments and
losses of invested principal. Also, the Funds may invest in so-called "inverse
floating obligations" or "residual interest bonds" on which the interest rates
typically vary inversely with a short-term floating rate (which may be reset
periodically by a dutch auction, by a remarketing agent or by reference to a
short-term tax-exempt interest rate index). The Funds may purchase original
issue inverse floating rate bonds in both the primary and secondary markets and
also may purchase in the secondary market synthetically-created inverse floating
rate bonds evidenced by custodial or trust receipts. Generally, interest rates
on inverse floating rate bonds will decrease when short-term rates increase and
increase when short-term rates decrease. 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 generally will be
more volatile than the market
3
<PAGE>
values of fixed-rate, tax-exempt securities. To seek to limit the volatility of
these securities, the Funds may purchase inverse floating obligations with
shorter term maturities or which contain limitations on the extent to which the
interest rate may vary. The Manager believes that indexed and inverse floating
obligations represent flexible portfolio management instruments for the Funds
which allow the Funds to seek potential investment rewards, hedge other
portfolio positions or vary the degree of investment leverage relatively
efficiently under different market conditions. Certain investments in such
obligations may be illiquid. A Fund may not invest in such illiquid obligations
if such investments, together with other illiquid investments, would exceed 15%
of that Fund's total assets.
The Funds may purchase a Municipal Bond issuer's right to call all or a
portion of such Municipal Bond for mandatory tender for purchase (a "Call
Right"). A holder of a Call Right may exercise such right to require a mandatory
tender for the purchase of related Municipal Bonds, subject to certain
conditions. A Call Right that is not exercised prior to the maturity of the
related Municipal Bond will expire without value. The economic effect of holding
both the Call Right and the related Municipal Bond is identical to holding a
Municipal Bond as a non-callable security. Certain investments in such
obligations may be illiquid. A Fund may not invest in such illiquid obligations
if such investments, together with other illiquid investments, would exceed 15%
of that Fund's total assets.
A 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 I--"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 Funds
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 otherwise
would be indicated by such low ratings.
Issuers or obligors of high yield securities may be highly leveraged and
may not have available to them more traditional methods of financing. Therefore,
the risks associated with acquiring the securities of such issuers 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 or obligors of high yield securities may be more likely to
experience financial stress, especially if such issuers or obligors are highly
leveraged. In addition, the market for high yield municipal securities is
relatively new and has not weathered a major economic recession, and it is
unknown what effects such a recession might have on such securities. During such
periods, such issuers may not have sufficient revenues to meet their interest
payment obligations. The issuer's ability to service its debt obligations also
may be adversely affected by specific issuer developments, or the issuer's
inability to meet specific projected business forecasts, or the unavailability
of additional financing. The risk of loss due to default by the issuer is
significantly greater for the holders of high yield securities because such
securities may be unsecured and may be subordinated to other creditors of the
issuer.
High yield securities frequently have call or redemption features that
would permit an issuer to repurchase the security from a Fund. If a call were
exercised by the issuer during a period of declining interest rates, a 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 Funds 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 Funds anticipate that
such securities could be
4
<PAGE>
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 a 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 a Fund to
obtain accurate market quotations for purposes of valuing the Fund's portfolio.
Market quotations generally are available on many high yield securities only
from a limited number of dealers and may not necessarily represent firm bids of
such dealers or prices for actual sales.
It is expected that a significant portion of the high yield securities
acquired by a 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 a 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 a
Fund's net asset value. In addition, a 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 each Fund may invest. A more complete discussion concerning
futures and options transactions and Municipal Bonds is set forth under
"Investment Objectives and Policies" in the Prospectus. Information with respect
to ratings assigned to tax-exempt obligations which the Funds may purchase is
set forth in Appendix I 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 outstanding obligations and obtaining funds for general operating
expenses and loans to other public institutions and facilities. In addition,
certain types of industrial development bonds or private activity bonds are
issued by or on behalf of public authorities to finance various privately owned
or operated facilities. Such obligations are included within the term Municipal
Bonds if the interest paid thereon, in the opinion of bond counsel, is excluded
from gross income for Federal income tax purposes ("exempt from Federal income
tax"). Such obligations are referred to herein as State Municipal Bonds if the
interest paid thereon is exempt, in the opinion of bond counsel, from Federal
income taxes, the designated state's personal income taxes and, where
applicable, local personal income taxes, and if the Fund's investment in such
obligations would not subject Fund shareholders to intangible personal property
taxes in the designated state. Other types of industrial development bonds or
private activity bonds, the proceeds of which are used for the construction,
equipment or improvement of privately operated industrial or commercial
facilities, may constitute Municipal Bonds, although the current Federal tax
laws place substantial limitations on the size of such issues.
The two principal classifications of Municipal Bonds are "general
obligation" bonds and "revenue" bonds, which latter category includes industrial
development bonds ("IDBs") and, for bonds issued after August 15, 1986, private
activity bonds. General obligation bonds are secured by the issuer's pledge of
its faith, credit and taxing power for the payment of principal and interest.
Revenue bonds are payable only from the revenues derived from a particular
facility or class of facilities or, in some cases, from the proceeds of a
special or limited tax or other specific revenue source such as payments from
the user of the facility being financed. IDBs and, in the case of bonds issued
after August 15, 1986, private activity bonds are in most cases revenue bonds
and generally do not constitute the pledge of the credit or taxing power of the
issuer of such bonds. Generally, the
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payment of the principal of and interest on such bonds depends solely on the
ability of the user of the facility financed by the bonds to meet its financial
obligations and the pledge, if any, of real and personal property so financed as
security for such payment, unless a line of credit, bond insurance or other
security is furnished. The Funds may invest in Municipal Bonds that are
so-called "moral obligation" bonds, which normally are issued by special purpose
public authorities. If an issuer of moral obligation bonds is unable to meet its
obligations, the repayment of such bonds becomes a moral commitment, but not a
legal obligation, of the state or municipality in question.
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. Certain investments in lease
obligations may be illiquid. A Fund may not invest in illiquid lease obligations
if such investments, together with all other illiquid investments, would exceed
15% of the Fund's total assets. A Fund, however, may 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, among
other things, also must 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 a Fund to achieve its investment
objective also is dependent on the continuing ability of the issuers of the
bonds in which the Fund invests to meet their obligations for the payment of
interest and principal when due. There are variations in the risks involved in
holding Municipal Bonds, both within a particular classification and between
classifications, depending on numerous factors. Furthermore, the rights of
owners of Municipal Bonds and the obligations of the issuer of such Municipal
Bonds may be subject to applicable bankruptcy, insolvency and similar laws and
court decisions affecting the rights of creditors generally and to general
equitable principles, which may limit the enforcement of certain remedies.
DESCRIPTION OF TEMPORARY INVESTMENTS AND VARIABLE RATE DEMAND OBLIGATIONS
The Funds may invest in short-term tax-free and taxable securities subject
to the limitations set forth under "Investment Objectives and Policies". The
tax-exempt money market securities may include municipal notes, municipal
commercial paper, municipal bonds with a remaining maturity of less than one
year, variable rate demand notes and participations therein. Municipal notes
include tax anticipation notes, bond anticipation notes and grant anticipation
notes. Anticipation notes are sold as interim financing in anticipation of tax
collection, bond sales, government grants or revenue receipts. Municipal
commercial paper refers to short-term unsecured promissory notes generally
issued to finance short-term credit needs. The taxable money market securities
in which the Funds 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.
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Variable rate demand obligations ("VRDOs") are tax-exempt obligations which
contain a floating or variable interest rate adjustment formula and an
unconditional right of demand on the part of the holder thereof to receive
payment of the unpaid principal balance plus accrued interest upon a short
notice period not to exceed seven days. There is, however, the possibility that
because of default or insolvency the demand feature of VRDOs and Participating
VRDOs, described below, may not be honored. The interest rates are adjustable at
intervals (ranging from daily to up to one year) to some prevailing market rate
for similar investments, such adjustment formula being calculated to maintain
the market value of the VRDOs at approximately the par value of the VRDOs on the
adjustment date. The adjustments typically are set at a rate determined by the
remarketing agent or based upon the Public Securities Association Index or some
other appropriate interest rate adjustment index. The Funds 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 Funds.
The Funds 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 Funds 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 Funds 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 Trust has been advised by its counsel that the Funds 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 a 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 Funds invest. 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 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. A 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 (the "FDIC"), except that up to 10% of a Fund's total assets may be
invested in certificates of deposit of small institutions if such certificates
are insured fully by the FDIC.
REPURCHASE AGREEMENTS
The Funds may invest in securities pursuant to repurchase agreements.
Repurchase agreements may be entered into only with a member bank of the Federal
Reserve System or a primary dealer in U.S. Government securities or an affiliate
thereof. Under such agreements, the seller agrees, upon entering into the
contract, to repurchase the security at a mutually agreed upon time and price,
thereby determining the yield during the term of the agreement. This results in
a fixed rate of return insulated from market fluctuations during such period. In
repurchase agreements, the prices at which the trades are conducted do not
reflect accrued interest on the underlying obligations. Such agreements usually
cover short periods, such as under one week. Repurchase
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agreements may be construed to be collateralized loans by the purchaser to the
seller secured by the securities transferred to the purchaser. In a repurchase
agreement, a Fund will require the seller to provide additional collateral if
the market value of the securities falls below the repurchase price at any time
during the term of the repurchase agreement. In the event of default by the
seller under a repurchase agreement construed to be a collateralized loan, the
underlying securities are not owned by a Fund but only constitute collateral for
the seller's obligation to pay the repurchase price. Therefore, a Fund may
suffer time delays and incur costs or possible losses in connection with the
disposition of the collateral. In the event of a default under such a repurchase
agreement, instead of the contractual fixed rate of return, the rate of return
to a Fund will depend on intervening fluctuations of the market value of such
security and the accrued interest on the security. In such event, a 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.
A Fund may not invest in repurchase agreements maturing in more than seven days
if such investments, together with all other illiquid investments, would exceed
15% of the Fund's total assets.
In general, for Federal income tax purposes, repurchase agreements are
treated as collateralized loans secured by the securities "sold". Therefore,
amounts earned under such agreements will not be considered tax-exempt interest.
FINANCIAL FUTURES TRANSACTIONS AND OPTIONS
Reference is made to the discussion concerning futures and options
transactions under "Investment Objectives and Policies" in the Prospectus. Set
forth below is additional information concerning these transactions.
As described in the Prospectus, each Fund may purchase and sell
exchange-traded financial futures contracts ("financial futures contracts") and
options thereon 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 a Fund intends to purchase. However, any transactions involving
financial futures or options will be in accordance with a Fund's investment
policies and limitations. To hedge its portfolio, a Fund may take an investment
position in a financial futures contract or option thereon which will move in
the opposite direction from the portfolio position being hedged. While a 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, each Fund anticipates that its net asset value will fluctuate. Set forth
below is information concerning financial futures contracts and options thereon.
Description of Financial Futures Contracts. A financial 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 financial 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. Financial futures contracts have been
designed by boards of trade which have been designated "contracts markets" by
the Commodity Futures Trading Commission (the "CFTC").
The purchase or sale of a financial 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 financial 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 financial futures
contract fluctuates making the long and short positions in the financial futures
contract more or less valuable, a process known as "mark to the market". At any
time prior to the settlement date of the financial futures contract, the
position may be closed out by taking an opposite position which will operate to
terminate the position in the financial 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.
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The Funds may enter into financial futures contracts based on a long-term
municipal bond index developed by the Chicago Board of Trade (the "CBT") and The
Bond Buyer (the "Municipal Bond Index"). The Municipal Bond Index is comprised
of 40 tax-exempt municipal revenue and general obligation bonds. Each bond
included in the Municipal Bond Index must be rated A or higher by Moody's or
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 financial futures contract is traded only on the
CBT. Like other contract markets, the CBT assures performance under financial
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 Funds may purchase and sell financial
futures contracts on U.S. Government securities as a hedge against adverse
changes in interest rates as described below. With respect to U.S. Government
securities, currently there are financial futures contracts based on long-term
U.S. Treasury bonds, U.S. Treasury notes, Government National Mortgage
Association ("GNMA") Certificates and three-month U.S. Treasury bills. The Funds
may purchase and write call and put options on financial futures contracts on
U.S. Government securities in connection with their hedging strategies.
Subject to policies adopted by the Trustees, the Funds also may enter into
other financial futures contracts and options thereon, such as financial futures
contracts or options on other municipal bond or interest rate 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 financial futures
contracts or options thereon and the Municipal Bonds in which the Funds invest
to make such hedging appropriate.
Financial Futures Strategies. A 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 a Fund's portfolio securities as a
result of the shortening of maturities. The sale of financial futures contracts
provides an alternative means of hedging against declines in the value of a
Fund's investments in Municipal Bonds. As such values decline, the value of a
Fund's positions in the financial 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 a Fund will
incur commission expenses in selling and closing out financial futures
positions, commissions on financial futures contracts are lower than transaction
costs incurred in the purchase and sale of Municipal Bonds. In addition, the
ability of a Fund to trade in the standardized contracts available in the
financial futures contract 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 a Fund. Employing financial futures contracts as a
hedge also may permit a Fund to assume a defensive posture without reducing the
yield on its investments beyond any amounts required to engage in financial
futures contract trading.
When the Funds intend to purchase Municipal Bonds, the Funds may purchase
financial futures contracts as a hedge against any increase in the cost of such
Municipal Bonds, resulting from a decrease in interest rates or otherwise, that
may occur before such purchases can be effected. Subject to the degree of
correlation between the Municipal Bonds and the financial futures contracts,
subsequent increases in the cost of Municipal Bonds should be reflected in the
value of the financial futures contracts held by the Funds. As such purchases
are made, an equivalent amount of financial futures contracts will be closed
out. Due to changing market conditions and interest rate forecasts, however, a
financial futures contract position may be terminated without a corresponding
purchase of portfolio securities.
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Call Options on Financial Futures Contracts. The Funds 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 financial 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 the price of the underlying debt securities, it
may or may not be less risky than ownership of the financial futures contract or
underlying debt securities. Like the purchase of a financial futures contract, a
Fund will purchase a call option on financial futures contracts to hedge against
a market advance when such Fund is not fully invested.
The writing of a call option on a financial futures contract constitutes a
partial hedge against declining prices of the securities which are deliverable
upon exercise of the financial futures contract. If the futures price at
expiration is below the exercise price, a Fund will retain the full amount of
the option premium which provides a partial hedge against any decline that may
have occurred in such Fund's portfolio holdings.
Put Options on Financial Futures Contracts. The purchase of a put option
on a financial futures contract is analogous to the purchase of a protective put
option on portfolio securities. A Fund will purchase put options on financial
futures contracts to hedge such Fund's portfolio against the risk of rising
interest rates.
The writing of a put option on a financial futures contract constitutes a
partial hedge against increasing prices of the securities which are deliverable
upon exercise of the financial futures contract. If the futures price at
expiration is higher than the exercise price, a 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 such Fund intends to purchase.
The writer of an option on a financial futures contract is required to
deposit initial and variation margin pursuant to requirements similar to those
applicable to financial futures contracts. Premiums received from the writing of
an option will be included in initial margin. The writing of an option on a
financial futures contract involves risks similar to those relating to financial
futures contracts.
The Trust has received an order from the Commission exempting it from the
provisions of Section 17(f) and Section 18(f) of the Investment Company Act of
1940, as amended (the "1940 Act") in connection with its strategy of investing
in financial 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 in the
past has indicated that a financial futures contract may be a "senior security"
under the 1940 Act.
Restrictions on Use of Financial Futures Transactions. Regulations of the
CFTC applicable to each Fund require that all of a Fund's financial futures
transactions constitute bona fide hedging transactions and that a 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, each 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 a Fund purchases a financial futures contract or a call option with
respect thereto or writes a put option on a futures contract, an amount of cash,
cash equivalents or liquid securities will be deposited in a segregated account
with the Fund's custodian so that the amount so segregated, plus the amount of
initial and variation margin held in the account of its broker, equals the
market value of the financial futures contract or related option, thereby
ensuring that the use of such futures is unleveraged.
Risk Factors in Financial Futures Contracts and Options
Thereon. Investment in financial futures contracts and options thereon involves
the risk of imperfect correlation between movements in the price of the
financial 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
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the price of a financial futures contract moves more than the price of the
hedged security, a Fund will experience either a loss or gain on the financial
futures contract which is not offset completely by movements in the price of the
hedged securities. To compensate for imperfect correlations, a Fund may purchase
or sell financial futures contracts or options thereon 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 transaction. Conversely,
a Fund may purchase or sell fewer financial futures contracts or options thereon
if the volatility of the price of the hedged securities is historically less
than that of the futures transaction.
The particular municipal bonds comprising the index underlying the
Municipal Bond Index financial futures contracts may vary from the Municipal
Bonds held by a Fund. As a result, a 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 or options thereon 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 a Fund. The correlation
may be affected by disparities in the average maturity, ratings, geographical
mix or structure of a 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 financial futures
contracts on U.S. Government securities or options thereon and the Municipal
Bonds held by a Fund may be affected adversely by similar factors, and the risk
of imperfect correlation between movements in the prices of financial futures
contracts or options thereon and the prices of the Municipal Bonds held by a
Fund may be greater.
Each Fund expects to liquidate a majority of the financial 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 financial 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, a Fund would continue to be required to make daily
cash payments of variation margin. In such situations, if a 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 financial futures positions also could have an
adverse impact on a Fund's ability to hedge effectively its investments in
Municipal Bonds. A Fund will enter into a financial futures position only if, in
the judgment of the Manager, there appears to be an actively traded secondary
market for such financial futures contracts or options thereon.
The successful use of transactions in financial 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 financial futures
contract or option is held by a Fund or such rates move in a direction opposite
to that anticipated, a 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, a 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 financial
futures position, financial futures transactions involve substantial leverage.
As a result, relatively small movements in the price of the financial futures
contracts or related options can result in substantial unrealized gains or
losses. Because a Fund will engage in the purchase and sale of financial futures
contracts or related options 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 a
Fund or decreases in the price of securities a Fund intends to acquire.
The amount of risk a Fund assumes when it purchases an option on a
financial 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 financial futures contract also entails the risk that
changes in the value of the underlying financial futures contract will not be
reflected fully in the value of the option purchased.
Municipal Bond Index financial futures contracts were approved for trading
in 1986. Trading in such financial futures contracts may tend to be less liquid
than that in other futures contracts. The trading of financial
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futures contracts also is subject to certain market risks, such as inadequate
trading activity, which could at times make it difficult or impossible to
liquidate existing positions.
INVESTMENT RESTRICTIONS
The Trust has adopted a number of restrictions and policies relating to the
investment of the assets of each Fund and its activities, which are fundamental
policies of each Fund and may not be changed without the approval of the holders
of a majority of such Fund's outstanding voting securities (which for this
purpose and under the 1940 Act means the lesser of (i) 67% of a Fund's shares
present at a meeting at which more than 50% of the outstanding shares of that
Fund are represented or (ii) more than 50% of such Fund's outstanding shares).
Under the fundamental investment restrictions, each Fund may not:
1. Invest more than 25% of its assets, taken at market value at the time of
each investment, in the securities of issuers in any particular industry
(excluding the U.S. Government and its agencies and instrumentalities). For
purposes of this restriction, states, municipalities and their political
subdivisions are not considered part of any industry.
2. Make investments for the purpose of exercising control or management.
3. Purchase or sell real estate, except that to the extent permitted by
applicable law, a Fund may invest in securities directly or indirectly secured
by real estate or interests therein or issued by companies which invest in real
estate or interests therein.
4. Make loans to other persons, except that the acquisition of bonds,
debentures or other corporate debt securities and investment in government
obligations, commercial paper, pass-through instruments, certificates of
deposit, bankers' acceptances, repurchase agreements or any similar instruments
shall not be deemed to be the making of a loan, and except further that a Fund
may lend its portfolio securities, provided that the lending of portfolio
securities may be made only in accordance with applicable law and the guidelines
set forth in the Trust's Prospectus and Statement of Additional Information, as
they may be amended from time to time.
5. Issue senior securities to the extent such issuance would violate
applicable law.
6. Borrow money, except that (i) a Fund may borrow from banks (as defined
in the 1940 Act) in amounts up to 33 1/3% of its total assets (including the
amount borrowed), (ii) a Fund may, to the extent permitted by applicable law,
borrow up to an additional 5% of its total assets for temporary purposes, (iii)
a Fund may obtain such short-term credit as may be necessary for the clearance
of purchases and sales of portfolio securities and (iv) a Fund may purchase
securities on margin to the extent permitted by applicable law. A Fund may not
pledge its assets other than to secure such borrowings or, to the extent
permitted by the Trust's investment policies as set forth in its Prospectus and
Statement of Additional Information, as they may be amended from time to time,
in connection with hedging transactions, short sales, when-issued and forward
commitment transactions and similar investment strategies.
7. Underwrite securities of other issuers, except insofar as a Fund
technically may be deemed an underwriter under the Securities Act of 1933, as
amended (the "Securities Act"), in selling portfolio securities.
8. Purchase or sell commodities or contracts on commodities, except to the
extent that a Fund may do so in accordance with applicable law and the Trust's
Prospectus and Statement of Additional Information, as they may be amended from
time to time, and without registering as a commodity pool operator under the
Commodity Exchange Act.
Under the non-fundamental investment restrictions, a Fund may not:
a. Purchase securities of other investment companies, except to the extent
such purchases are permitted by applicable law.
b. Make short sales of securities or maintain a short position, except to
the extent permitted by applicable law. None of the Funds currently intends to
engage in short sales, except short sales "against the box".
12
<PAGE>
c. Invest in securities which cannot be readily resold because of legal or
contractual restrictions or which cannot otherwise be marketed, redeemed or put
to the issuer or a third party, if at the time of acquisition more than 15% of
its total assets would be invested in such securities. This restriction shall
not apply to securities which mature within seven days or securities which the
Board of Trustees of the Trust has otherwise determined to be liquid pursuant to
applicable law.
d. 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 that
Fund's net assets; included within such limitation, but not to exceed 2% of that
Fund's net assets, are warrants which are not listed on the New York Stock
Exchange (the NYSE) or the American Stock Exchange or a major foreign exchange.
For purposes of this restriction, warrants acquired by a 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 that 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 Trustees of the Trust, the officers and general partner of the
Manager, the directors of such general partner or the officers and directors of
any subsidiary thereof each owning beneficially more than one-half of one
percent 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
a 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 Trust's Prospectus and Statement
of Additional Information, as they may be amended from time to time.
i. Notwithstanding fundamental investment restriction (6) above, borrow
amounts in excess of 20% of its total assets, taken at market value (including
the amount borrowed), and then only from banks as a temporary measure for
extraordinary or emergency purposes. [Usually only "leveraged" investment
companies may borrow in excess of 5% of their assets; however, each Fund will
not borrow to increase income but only to meet redemption requests which might
otherwise require untimely disposition of portfolio securities, such as the
redemption of Fund shares. No Fund will purchase securities while borrowings are
outstanding. Interest paid on such borrowings will reduce net income.]
Because of the affiliation of Merrill Lynch, Pierce, Fenner & Smith
Incorporated ("Merrill Lynch") with the Trust, each 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 a
principal and purchases of securities from underwriting syndicates of which
Merrill Lynch is a member. 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.
13
<PAGE>
MANAGEMENT OF THE TRUST
Trustees and Officers
Information about the Trustees, executive officers and the portfolio
managers of the Trust, including their ages and their principal occupations for
at least the last five years, is set forth below. Unless otherwise noted, the
address of each Trustee and executive officer is P.O. Box 9011, Princeton, New
Jersey 08543-9011.
ARTHUR ZEIKEL (64)--President and Trustee(1)(2)--President of the Manager
(which term, as used herein, includes the Manager's corporate predecessors)
since 1977; President of Merrill Lynch Asset Management, L.P. ("MLAM", which
term as used herein includes MLAM's corporate predecessors) since 1977;
President and Director of Princeton Services, Inc. ("Princeton Services") since
1993; Executive Vice President of Merrill Lynch & Co., Inc. ("ML&Co.") since
1990; Director of Merrill Lynch Funds Distributor, Inc. ("MLFD" or the
"Distributor") since 1977.
JAMES H. BODURTHA (52)--Trustee(2)--36 Popponesset Road, Cotuit,
Massachusetts 02635. Director and Executive Vice President, The China Business
Group, Inc. since 1996; Chairman and Chief Executive Officer, China Enterprise
Management Corporation from 1993 to 1996; Chairman, Berkshire Corporation since
1980; Partner, Squire, Sanders & Dempsey from 1980 to 1993.
HERBERT I. LONDON (57)--Trustee(2)--113-115 University Place, New York, New
York 10003. John M. Olin Professor of Humanities, New York University since 1993
and Professor thereof since 1980; Dean, Gallatin Division of New York University
from 1978 to 1993; 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 from 1983 to 1993;
Limited Partner, Hypertech L.P. since 1996.
ROBERT R. MARTIN (69)--Trustee(2)--513 Grand Hill, St. Paul, Minnesota
55102. Chairman and Chief Executive Officer, Kinnard Investments, Inc. from 1990
to 1993; Executive Vice President, Dain Bosworth from 1974 to 1989; Director,
Carnegie Capital Management from 1977 to 1985 and Chairman thereof in 1979;
Director, Securities Industry Association from 1981 to 1982 and Public
Securities Association from 1979 to 1980; Chairman of the Board, WTC Industries,
Inc. in 1994; Trustee, Northland College since 1992.
JOSEPH L. MAY (67)--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 (44)--Trustee(2)--Morgan Hall, Soldiers Field, Boston,
Massachusetts 02163. Professor, Harvard Business School since 1989 and Associate
Professor from 1983 to 1989; Trustee, The Common Fund, since 1989; Director,
Quantec Limited since 1991.
TERRY K. GLENN (56)--Executive Vice President(1)(2)--Executive Vice
President of the Manager and of MLAM since 1983; Executive Vice President and
Director of Princeton Services since 1993; President of MLFD since 1986 and
Director thereof since 1991; President of Princeton Administrators, L.P. since
1988.
VINCENT R. GIORDANO (52)--Senior Vice President(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.
EDWARD J. ANDREWS (36)--Vice President and Portfolio Manager(1)(2)--Vice
President of the Manager and of MLAM since 1991.
PETER J. HAYES (37)--Vice President and Portfolio Manager(1)(2)--Vice
President of the Manager and of MLAM since 1989 and Assistant Vice President of
MLAM from 1987 to 1989.
HELEN M. SHEEHAN (36)--Vice President and Portfolio Manager(1)(2)--Vice
President of the Manager and of MLAM since 1991.
14
<PAGE>
DONALD C. BURKE (36)--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 (47)--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 the Distributor since
1984 and Vice President thereof since 1981.
ROBERT HARRIS (44)--Secretary(1)(2)--Vice President of MLAM since 1984;
Secretary of MLFD since 1982.
- ------------
(1) Interested person, as defined in the 1940 Act, of the Trust.
(2) Such Trustee or officer is a director, trustee or officer of certain other
investment companies for which the Manager or MLAM acts as investment
adviser or manager.
At November 1, 1996, the Trustees and officers of the Trust as a group (14
persons) owned an aggregate of less than 1% of the outstanding shares of Common
Stock of ML&Co. and owned an aggregate of less than 1% of the outstanding shares
of any Fund, except that Vincent R. Giordano owns Class A shares representing
approximately 12.8% of the New Jersey Fund Class A shares (3.5% of the aggregate
outstanding shares of the New Jersey Fund).
Compensation of Trustees
The Trust pays each Trustee not affiliated with the Manager (each a
"non-affiliated Trustee") a fee of $5,000 per year plus $500 per meeting
attended, together with such Trustee's actual out-of-pocket expenses relating to
attendance at meetings. The Trust also compensates members of its Audit and
Nominating Committee (the "Committee"), which consists of all of the
non-affiliated Trustees, an additional fee of $1,000 per year plus $250 per
meeting attended. The Trust reimburses each non-affiliated Trustee for his
out-of-pocket expenses relating to attendance at Board and Committee meetings.
Fees and expenses paid to non-affiliated Trustees aggregated $42,132 for the
fiscal year ended July 31, 1996, and were allocated to each Fund on the basis of
the relative asset size of each Fund: Arizona Fund, $3,015; California Fund,
$7,114; Florida Fund, $13,676; Massachusetts Fund, $4,419; Michigan Fund,
$2,243; New Jersey Fund, $4,589; New York Fund, $6,879 and Pennsylvania Fund,
$197.
The following table sets forth for the fiscal year ended July 31, 1996,
compensation paid by the Trust to the non-affiliated Trustees and, for the
calendar year ended December 31, 1995, the aggregate compensation paid by all
registered investment companies (including the Trust) advised by the Manager and
its affiliate, MLAM ("FAM/MLAM Advised Funds") to the non-affiliated Trustees:
<TABLE>
<CAPTION>
Aggregate
Pension or Compensation
Retirement from Trust and
Benefits other
Accrued as FAM/MLAM
Part of Adivsed Funds
Compensation Trust's Paid to
Name of Trustee From Trust Expenses Trustee(1)
- --------------- ------------ -------------- --------------
<S> <C> <C> <C>
James H. Bodurtha................................................. $ 9,000 None $157,500*
Herbert I. London................................................. $ 9,000 None $157,500
Robert R. Martin.................................................. $ 9,000 None $157,500
Joseph L. May..................................................... $ 9,000 None $157,500
Andre F. Perold................................................... $ 9,000 None $157,500
</TABLE>
- ------------
(1) The Trustees serve on the boards of FAM/MLAM Advised Funds as follows: Mr.
Bodurtha (22 registered investment companies consisting of 46 portfolios);
Mr. London (22 registered investment companies consisting of 46 portfolios);
Mr. Martin (22 registered investment companies consisting of 46 portfolios);
Mr. May (22 registered investment companies consisting of 46 portfolios);
and Mr. Perold (22 registered investment companies consisting of 46
portfolios).
* $157,500 represents the amount Mr. Bodurtha would have received if he had
been a Trustee for the entire calendar year ended December 31, 1995. Mr.
Bodurtha was elected to the Trust's Board of Trustees effective June 23,
1995.
15
<PAGE>
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 Funds.
Securities held by the Funds also may be held by, or be appropriate
investments for, other funds or investment advisory clients of the Manager or
its affiliates (collectively, the "clients"). 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 Funds 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 separate management agreements between the Trust on behalf of
each Fund and the Manager (each a "Management Agreement"), the Manager receives
for its services to each Fund monthly compensation based upon the average daily
net assets of that Fund at the annual rate of 0.35% of the average daily net
assets of that Fund.
The table below sets forth for the fiscal years ended July 31, 1996 and
1995, and for the period November 26, 1993 (commencement of operations) to July
31, 1994, the total advisory fee payable by each Fund to the Manager:
<TABLE>
<CAPTION>
For the Year
Ended July 31, For the Period
-------------------- November 26, 1993+
Fund 1996 1995 to July 31, 1994
---- -------- -------- ------------------
<S> <C> <C> <C>
Arizona Fund............................................... $ 21,459 $ 26,468 $ 16,109
California Fund............................................ $ 54,033 $ 52,287 $ 34,377
Florida Fund............................................... $108,720 $112,421 $ 83,640
Massachusetts Fund......................................... $ 30,736 $ 41,496 $ 33,156
Michigan Fund.............................................. $ 16,413 $ 19,277 $ 13,621
New Jersey Fund............................................ $ 33,770 $ 39,629 $ 30,851
New York Fund.............................................. $ 57,995 $ 52,164 $ 32,105
Pennsylvania Fund.......................................... $ 30,196 $ 34,403 $ 25,192
</TABLE>
- ------------
+ Commencement of Operations.
For the fiscal year ended July 31, 1996, the total advisory fee payable to the
Manager by each Fund (other than the Florida Fund) was voluntarily waived. Of
the $108,720 advisory fee payable during the year by the Florida Fund, $24,123
was voluntarily waived. For the fiscal year ended July 31, 1995, and for the
period from November 26, 1993 (commencement of operations) to July 31, 1994, the
total advisory fee payable to the Manager by each Fund was voluntarily waived.
Each Management Agreement obligates the Manager to provide investment
advisory services to the related Fund and to pay all compensation of and furnish
office space for officers and employees of the Trust connected with investment
and economic research, trading and investment management of the Trust, as well
as the fees of all Trustees of the Trust who are affiliated persons of ML&Co. or
any of its affiliates. Each Fund pays all other expenses incurred in its
operation and a portion of the Trust's general administrative expenses allocated
pro rata on the basis of the asset size of the respective series of the Trust
("Series"), including the Funds and any additional Series added in the future.
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
16
<PAGE>
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 Trust, the
organizational expenses are allocated among the Series in a manner deemed
equitable by the Trustees. Depending upon the nature of a lawsuit, litigation
costs may be assessed to the specific Series to which the lawsuit relates or
allocated on the basis of the asset size of the respective Series. The Trustees
have determined that this is an appropriate method of allocation of expenses.
Accounting services are provided to the Funds by the Manager, and each Fund
reimburses the Manager for the Manager's costs in connection with such services.
The table below sets forth for the fiscal years ended July 31, 1996 and 1995,
and for the period November 26, 1993 (commencement of operations) to July 31,
1994, the amount reimbursed by each Fund to the Manager for accounting services:
<TABLE>
<CAPTION>
For the Year
Ended July 31, For the Period
------------------ November 26, 1993+
Fund 1996 1995 to July 31, 1994
---- ------- ------- ------------------
<S> <C> <C> <C>
Arizona Fund................................................. $30,172 $36,140 $ 20,900
California Fund.............................................. $38,245 $50,033 $ 19,998
Florida Fund................................................. $34,053 $32,012 $ 24,625
Massachusetts Fund........................................... $53,983 $49,502 $ 14,821
Michigan Fund................................................ $47,178 $19,568 $ 22,555
New Jersey Fund.............................................. $43,508 $36,998 $ 18,734
New York Fund................................................ $62,140 $ 3,623 $ 22,165
Pennsylvania Fund............................................ $43,426 $15,577 $ 22,273
</TABLE>
- ------------
+ Commencement of Operations.
As required by the Funds' distribution agreements, the Distributor will pay
the promotional expenses of the Funds incurred in connection with the offering
of shares of the Funds. Certain expenses in connection with account maintenance
and the distribution of Class B, Class C and Class D shares will be financed by
the Funds pursuant to Distribution Plans in compliance with Rule 12b-1 under the
1940 Act. See "Purchase of Shares-- Distribution Plans".
The Manager is a limited partnership, the partners of which are ML&Co. and
Princeton Services. ML&Co. and Princeton Services are "controlling persons" of
the Manager as defined under the 1940 Act because of their ownership of its
voting securities or their power to exercise a controlling influence over its
management or policies.
Duration and Termination. Unless earlier terminated as described below,
the Management Agreements 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 Funds 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 Funds.
PURCHASE OF SHARES
Reference is made to "Purchase of Shares" in the Prospectus for certain
information as to the purchase of shares of each Fund.
Each Fund issues four classes of shares under the Merrill Lynch Select
Pricing(SM) System: shares of Class A and Class D are sold to
investors choosing the initial sales charge alternatives, and shares of Class B
are sold to investors choosing the deferred sales charge alternative. Class C
shares of the Funds are not available for purchase but will be issued only
pursuant to the exchange privilege to holders of Class C shares of other
MLAM-advised mutual funds who elect to exchange Class C shares of such other
MLAM-advised mutual fund for Class C shares of one of the Funds. Each Class A,
Class B, Class C and Class D share of each Fund
17
<PAGE>
represents an identical interest in the investment portfolio of that Fund and
has the same rights, except that Class B, Class C and Class D shares of a Fund
bear the expenses of the ongoing account maintenance fees, and Class B and Class
C shares bear the expenses of the ongoing distribution fees of that Fund 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(SM) System is used by more than
50 registered investment companies advised by MLAM or its affiliate, the
Manager. Funds advised by MLAM or the Manager which utilize the Merrill Lynch
Select Pricing(SM) System are referred to herein as "MLAM-advised
mutual funds".
On behalf of each Fund, the Trust has entered into a separate distribution
agreement with the Distributor in connection with the continuous offering of
each class of shares of such Fund (each a "Distribution Agreement"). Each
Distribution Agreement obligates the Distributor to pay certain expenses in
connection with the offering of each class of shares of the related 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 Agreements described above.
Initial Sales Charge Alternatives--Class A and Class D Shares
The gross sales charges, the amounts of such charges received by the
Distributor and Merrill Lynch for the sale of Class A shares, and the CDSCs paid
with respect to redemption within one year after purchase of Class A shares
purchased subject to a front-end sales charge waiver for each of the Funds for
the periods indicated are set forth below:
<TABLE>
<CAPTION>
For the Year Ended July 31, 1996
----------------------------------------------------------
Class A Amount Amount CDSCs
Gross Sales Paid to Paid to Paid to
Fund Charges Distributor Merrill Lynch Distributor
- ---- ----------- ----------- ------------- -----------
<S> <C> <C> <C> <C>
Arizona Fund................................................. $ 463 $ 17 $ 446 --
California Fund.............................................. $ 580 $ 67 $ 513 --
Florida Fund................................................. $ 497 $ 22 $ 475 --
Massachusetts Fund........................................... $ 964 $ 93 $ 871 --
Michigan Fund................................................ $ 102 $ 4 $ 98 --
New Jersey Fund.............................................. $ 239 $ 2 $ 237 --
New York Fund................................................ $ 34 $ 1 $ 33 --
Pennsylvania Fund............................................ $ 5 -- $ 5 --
<CAPTION>
For the Year Ended July 31, 1995
----------------------------------------------------------
Class A Amount Amount CDSCs
Gross Sales Paid to Paid to Paid to
Fund Charges Distributor Merrill Lynch Distributor
- ---- ----------- ----------- ------------- -----------
<S> <C> <C> <C> <C>
Arizona Fund................................................. $ 1,026 $ 101 $ 925 --
California Fund.............................................. $ 754 $ 83 $ 671 --
Florida Fund................................................. $ 2,628 $ 154 $ 2,474 $ 2,894
Massachusetts Fund........................................... $ 1,544 $ 284 $ 1,260 $10,565
Michigan Fund................................................ $ 915 $ 56 $ 859 --
New Jersey Fund.............................................. $ 451 $ 30 $ 421 --
New York Fund................................................ $ 5,190 $ 157 $ 5,033 --
Pennsylvania Fund............................................ $ 79 $ 9 $ 70 --
</TABLE>
18
<PAGE>
<TABLE>
<CAPTION>
For the Period November 26, 1993+ to July 31, 1994
----------------------------------------------------------
Class A Amount Amount CDSCs
Gross Sales Paid to Paid to Paid to
Fund Charges Distributor Merrill Lynch Distributor
- ---- ----------- ----------- ------------- -----------
<S> <C> <C> <C> <C>
Arizona Fund................................................. $17,369 $ 473 $16,896 --
California Fund.............................................. $25,074 $ 555 $24,519 --
Florida Fund................................................. $67,354 $ 1,464 $65,890 --
Massachusetts Fund........................................... $36,132 $ 2,023 $34,109 --
Michigan Fund................................................ $24,819 $ 550 $24,269 --
New Jersey Fund.............................................. $ 9,444 $ 380 $ 9,064 --
New York Fund................................................ $21,122 $ 811 $20,311 --
Pennsylvania Fund............................................ $ 5,405 $ 127 $ 5,278 --
</TABLE>
- ------------
+ Commencement of Operations.
The gross sales charges and the amounts of such charges received by the
Distributor and Merrill Lynch for the sale of Class D shares for each of the
Funds for the periods indicated are set forth below:
<TABLE>
<CAPTION>
For the Year Ended July 31, 1996
-------------------------------------------
Class D Amount Amount
Gross Sales Paid to Paid to
Fund Charges Distributor Merrill Lynch
- ---- ----------- ----------- -------------
<S> <C> <C> <C>
Arizona Fund............................................................. $ 241 $ 14 $ 227
California Fund.......................................................... $ 3,148 $ 299 $ 2,849
Florida Fund............................................................. $ 2,943 $ 373 $ 2,570
Massachusetts Fund....................................................... $ 3,387 $ 298 $ 3,089
Michigan Fund............................................................ $ 479 $ 59 $ 420
New Jersey Fund.......................................................... $ 1,128 $ 31 $ 1,097
New York Fund............................................................ $ 4,790 $ 476 $ 4,314
Pennsylvania Fund........................................................ $ 533 $ 14 $ 519
<CAPTION>
For the Period October 21, 1994+
to July 31, 1995
-------------------------------------------
Class D Amount Amount
Gross Sales Paid to Paid to
Fund Charges Distributor Merrill Lynch
- ---- ----------- ----------- -------------
<S> <C> <C> <C>
Arizona Fund............................................................. $ 98 $ 3 $ 95
California Fund.......................................................... $ 2,145 $ 115 $ 2,030
Florida Fund............................................................. $12,063 $ 1,099 $10,964
Massachusetts Fund....................................................... $ 64 $ 33 $ 31
Michigan Fund............................................................ $ 888 $ 91 $ 797
New Jersey Fund.......................................................... $ 2,108 $ 222 $ 1,886
New York Fund............................................................ $ 3,877 $ 232 $ 3,645
Pennsylvania Fund........................................................ $ 1,198 $ 49 $ 1,149
</TABLE>
- ------------
+ Commencement of Operations.
No Fund received CDSCs with respect to redemption within one year after purchase
of Class D shares purchased subject to a front-end sales charge waiver during
the fiscal year ended July 31, 1996 or the period October 21, 1994 (commencment
of operations) to July 31, 1995.
19
<PAGE>
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 a Fund, refers to a single purchase by an individual, or to concurrent
purchases, which in the aggregate are at least equal to the prescribed amounts,
by an individual, his or her spouse and their children under the age of 21 years
purchasing shares for his or her 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 Fund Investment Option. Class A shares of each Fund and other
MLAM-advised mutual funds ("Eligible Class A shares") are offered at net asset
value to shareholders of certain closed-end funds advised by the Manager or MLAM
who purchased such closed-end fund shares prior to October 21, 1994, the date
the Merrill Lynch Select Pricing(SM) System commenced operations, and
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. Alternatively, closed-end fund shareholders who purchased such shares
on or after October 21, 1994 and wish to reinvest the net proceeds from a sale
of their closed-end fund shares are offered Class A shares (if eligible to
purchase Class A shares) or Class D shares of each Fund and other MLAM-advised
mutual funds ("Eligible Class D shares"), if the following conditions are met.
First, the sale of closed-end fund shares must be made through Merrill Lynch,
and the net proceeds therefrom must be reinvested immediately in Eligible Class
A or Class D shares. Second, the closed-end fund shares must either have been
acquired in the initial public offering or be shares representing dividends from
shares of common stock acquired in such offering. Third, the closed-end fund
shares must have been maintained continuously in a Merrill Lynch securities
account. Fourth, there must be a minimum purchase of $250 to be eligible for the
investment option.
Shareholders of certain MLAM-advised continuously offered closed-end funds
may reinvest at net asset value the net proceeds from a sale of certain shares
of common stock of such funds in shares of a Fund. Upon exercise of this
investment option, shareholders of Merrill Lynch Senior Floating Rate Fund, Inc.
will receive Class A shares of the Fund and shareholders of Merrill Lynch
Municipal Strategy Fund, Inc. and Merrill Lynch High Income Municipal Bond Fund,
Inc. will receive Class D shares of the Fund, except that shareholders already
owning Class A shares of the Fund will be eligible to purchase additional Class
A shares pursuant to this option, if such additional Class A shares will be held
in the same account as the existing Class A shares and the other requirements
pertaining to the reinvestment privilege are met. In order to exercise this
investment option, a shareholder of one of the above-referenced continuously
offered closed-end funds (an "eligible fund") must sell his or her shares of
common stock of the eligible fund (the "eligible shares") back to the eligible
fund in connection with a tender offer conducted by the eligible fund and
reinvest the proceeds immediately in the designated class of shares of the Fund.
This investment option is available only with respect to eligible shares as to
which no Early Withdrawal Charge or CDSC (each as defined in the eligible fund's
prospectus) is applicable. Purchase orders from eligible fund shareholders
wishing to exercise this investment option will be accepted only on the day that
the related tender offer terminates and will be effected at the net asset value
of the designated class of the Fund on such day.
Reduced Initial Sales Charges
Right of Accumulation. Reduced sales charges are applicable through a
right of accumulation under which eligible investors are permitted to purchase
shares of a 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 a 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
20
<PAGE>
order is subject to such confirmation. The right of accumulation may be amended
or terminated at any time. Shares held in the name of a nominee or custodian
under pension, profit-sharing or other employee benefit plans may not be
combined with other shares to qualify for the right of accumulation.
Letter of Intention. Reduced sales charges are applicable to purchases
aggregating $100,000 or more of the Class A or Class D shares of a Fund or any
other MLAM-advised mutual funds within a 13-month period starting with the first
purchase pursuant to a Letter of Intention in the form provided in the
Prospectus. The Letter of Intention is available only to investors whose
accounts are maintained at the Trust'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 of any Fund;
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 a 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 $100,000), 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 of the Fund purchased at the
reduced rate and the sales charge applicable to the shares of the Fund actually
purchased through the Letter. Class A or Class D shares of the Fund equal to at
least five percent of the intended amount will be held in escrow during the
13-month period (while remaining registered in the name of the purchaser) for
this purpose. The first purchase under the Letter of Intention must be at least
five percent of the dollar amount of such Letter. If during the term of such
Letter, a purchase brings the total amount invested to an amount equal to or in
excess of the amount indicated in the Letter, the purchaser will be entitled on
that purchase and subsequent purchases to the reduced percentage sales charge
which would be applicable to a single purchase equal to the total dollar value
of the Class A or Class D shares then being purchased under such Letter, but
there will be no retroactive reduction of the sales charges on any previous
purchase. The value of any shares redeemed or otherwise disposed of by the
purchaser prior to termination or completion of the Letter of Intention will be
deducted from the total purchases made under such Letter. An exchange from a
MLAM-advised money market fund into a Fund that creates a sales charge will
count toward completing a new or existing Letter of Intention to the Fund.
Employee Access Accounts(SM). Class A or Class D shares are
offered at net asset value to Employee Access Accounts(SM) available
through qualified employers that provide employer-sponsored retirement or
savings plans that are eligible to purchase such shares at net asset value. The
initial minimum for such accounts is $500, except that the initial minimum for
shares purchased for such accounts pursuant to the Automatic Investment Program
is $50.
TMA(SM) Managed Trusts. Class A shares are offered to TMA(SM)
Managed Trusts to which Merrill Lynch Trust Company provides discretionary
trustee services at net asset value.
Purchase Privilege of Certain Persons. Trustees of the Trust, members of
the Boards of other MLAM-advised investment companies, ML&Co. and its
subsidiaries (the term "subsidiaries," when used herein with respect to ML&Co.,
includes MLAM, the Manager and certain other entities directly or indirectly
wholly owned or controlled by ML&Co.), and their directors and employees, and
any trust, pension, profit-sharing or other benefit plan for such persons, may
purchase Class A shares of a Fund at net asset value.
Class D shares of each Fund are offered at net asset value, without a sales
charge, to an investor who has a business relationship with a financial
consultant who joined Merrill Lynch from another investment firm within six
months prior to the date of purchase by such investor, if the following
conditions are satisfied: first, the investor must advise Merrill Lynch that it
will purchase Class D shares of the Fund with proceeds from a redemption of a
mutual fund that was sponsored by the financial consultant's previous firm and
was subject to a sales charge either at the time of purchase or on a deferred
basis; and second, the investor also must establish that
21
<PAGE>
such redemption had been made within 60 days prior to the investment in the
Fund, and the proceeds from the redemption had been maintained in the interim in
cash or a money market fund.
Class D shares of the Fund are also offered at net asset value, without a
sales charge, to an investor who has a business relationship with a Merrill
Lynch Financial Consultant and who has invested in a mutual fund for which
Merrill Lynch has not served as a selected dealer if the following conditions
are satisfied: first, the investor must advise Merrill Lynch that it will
purchase Class D shares of the Fund with proceeds from the redemption of shares
of such other mutual fund and that such shares have been outstanding for a
period of no less than six months; and second, such purchase of Class D shares
must be made within 60 days after the redemption and the proceeds from the
redemption must be maintained in the interim in cash or a money market fund.
Class D shares of the Fund are also offered at net asset value, without a
sales charge, to an investor who has a business relationship with a Merrill
Lynch Financial Consultant and who has invested in a mutual fund sponsored by a
non-Merrill Lynch company for which Merrill Lynch has served as a selected
dealer and where Merrill Lynch has either received or given notice that such
arrangement will be terminated ("notice"), if the following conditions are
satisfied: first, the investor must purchase Class D shares of the Fund with
proceeds from a redemption of shares of such other mutual fund and the shares of
such other fund were subject to a sales charge either at the time of purchase or
on a deferred basis; and second, such purchase of Class D shares must be made
within 90 days after such notice.
Acquisition of Certain Investment Companies. The public offering price of
Class D shares of a Fund may be reduced to the net asset value per Class D share
of that Fund 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 each 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 each Fund. The
issuance of Class D shares for consideration other than cash is limited to bona
fide reorganizations, statutory mergers or other acquisitions of portfolio
securities which (i) meet the investment objectives and policies of the related
Fund; (ii) are acquired for investment and not for resale (subject to the
understanding that the disposition of a Fund's portfolio securities shall at all
times remain within its control); and (iii) are liquid securities, the value of
which is readily ascertainable, which are not restricted as to transfer either
by law or liquidity of market (except that a Fund may acquire through such
transactions restricted or illiquid securities to the extent the Fund does not
exceed the applicable limits for that Fund on acquisition of such securities set
forth under "Investment Objectives and Policies" herein).
Reductions in or exemptions from the imposition of a sales load are due to
the nature of the investors and/or the reduced sales efforts that will be needed
in obtaining such investments.
Distribution Plans
Reference is made to "Purchase of Shares--Distribution Plans" in the
Prospectus for certain information with respect to the separate distribution
plans of each Fund for Class B, Class C and Class D shares pursuant to Rule
12b-1 under the 1940 Act (each a "Distribution Plan") with respect to the
account maintenance and/or distribution fees paid by the Funds to the
Distributor with respect to such classes.
Payments of the account maintenance fees and/or distribution fees are
subject to the provisions of Rule 12b-1 under the 1940 Act. Among other things,
each Distribution Plan provides that the Distributor shall provide and the
Trustees shall review quarterly reports of the disbursement of the account
maintenance and/or distribution fees paid by each Fund to the Distributor. In
their consideration of each of the Distribution Plans, the Trustees must
consider all factors they deem relevant, including information as to the
benefits of each Distribution Plan to its 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 separately approving each Distribution Plan in
accordance with Rule 12b-1, the Independent Trustees concluded that there is a
reasonable likelihood that such Distribution Plan will benefit the related Fund
and its related class of shareholders. Any Distribution Plan can be
22
<PAGE>
terminated at any time, without penalty, by the vote of a majority of the
Independent Trustees or by the vote of the holders of a majority of the
outstanding related class of voting securities of the related Fund. No
Distribution Plan can be amended to increase materially the amount to be spent
by the related Fund without approval by the related class of shareholders of
that Fund, and all material amendments are required to be approved by the vote
of Trustees, including a majority of the Independent Trustees who have no direct
or indirect financial interest in the Distribution Plan, cast in person at a
meeting called for that purpose. Rule 12b-1 further requires that the Trust
preserve copies of each Distribution Plan and any report made pursuant to such
plan for a period of not less than six years from the date of such Distribution
Plan or such report, the first two years in an easily accessible place.
Limitations on the Payment of Deferred Sales Charges
The maximum sales charge rule in the Conduct Rules of the National
Association of Securities Dealers, Inc. ("NASD") imposes a limitation on certain
asset-based sales charges such as the distribution fee and the CDSC borne by the
Class B shares of each Fund, but not the account maintenance fee. The maximum
sales charge rule is applied separately to each class. As applicable to each
Fund, the maximum sales charge rule limits the aggregate of distribution fee
payments and CDSCs payable by each Fund to (1) 6.25% of eligible gross sales of
Class B shares of that Fund, 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 of that Fund). 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 in
connection with each Fund (referred to as the "voluntary maximum") in connection
with the Class B shares is 6.75% of eligible gross sales of that Fund. The
Distributor retains the right to stop waiving the interest charges at any time.
To the extent a Fund's payments would exceed the voluntary maximum, such 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, such Fund will continue to make payments of the account maintenance
fee. In certain circumstances the amount payable pursuant to the voluntary
maximum may exceed the amount payable under the NASD formula. In such
circumstances payment in excess of the amount payable under the NASD formula
will not be made.
The following table sets forth comparative information for the period
November 26, 1993 (commencement of operations) to July 31, 1996 with respect to
the Class B shares of each of the Funds, indicating the maximum allowable
payments that can be made under the NASD maximum sales charge rule and the
Distributor's voluntary maximum. No information is presented for the Class C
shares of the Funds because Class C shares are not available for purchase but
will be issued only pursuant to the exchange privilege to holders of Class C
shares of other MLAM-advised mutual funds who elect to exchange Class C shares
of such other MLAM-advised mutual fund for Class C shares of one of the Funds.
23
<PAGE>
<TABLE>
<CAPTION>
Data Calculated as of July 31, 1996
------------------------------------------------------------------------------------------
(In Thousands)
Annual
Allowable Allowable Amounts Distribution
Eligible Aggregate Interest on Maximum Previously Aggregate Fee at
Gross Sales Unpaid Amount Paid to Unpaid Current Net
Sales(1) Charges Balance(2) Payable Distributor(3) Balance Asset Level(4)
-------- --------- ----------- ------- -------------- --------- --------------
<S> <C> <C> <C> <C> <C> <C> <C>
Arizona Fund
Under NASD Rule as Adopted........... $ 6,624 $ 414 $ 92 $ 506 $ 52 $ 454 $ 6
Under Distributor's Voluntary
Waiver............................. $ 6,624 $ 414 $ 33 $ 447 $ 52 $ 395 $ 6
California Fund
Under NASD Rule as Adopted........... $ 12,777 $ 798 $ 173 $ 971 $ 71 $ 900 $ 20
Under Distributor's Voluntary
Waiver............................. $ 12,777 $ 798 $ 64 $ 862 $ 71 $ 791 $ 20
Florida Fund
Under NASD Rule as Adopted........... $ 22,409 $ 1,400 $ 284 $1,684 $330 $ 1,354 $ 27
Under Distributor's Voluntary
Waiver............................. $ 22,409 $ 1,400 $ 112 $1,512 $330 $ 1,182 $ 27
Massachusetts Fund
Under NASD Rule as Adopted........... $ 10,460 $ 654 $ 137 $ 791 $ 60 $ 731 $ 9
Under Distributor's Voluntary
Waiver............................. $ 10,460 $ 654 $ 52 $ 706 $ 60 $ 646 $ 9
Michigan Fund
Under NASD Rule as Adopted........... $ 3,216 $ 201 $ 45 $ 246 $ 27 $ 219 $ 4
Under Distributor's Voluntary
Waiver............................. $ 3,216 $ 201 $ 16 $ 217 $ 27 $ 190 $ 4
New Jersey Fund
Under NASD Rule as Adopted........... $ 10,628 $ 664 $ 144 $ 808 $ 59 $ 749 $ 10
Under Distributor's Voluntary
Waiver............................. $ 10,628 $ 664 $ 53 $ 717 $ 59 $ 658 $ 10
New York Fund
Under NASD Rule as Adopted........... $ 13,525 $ 845 $ 163 $1,008 $ 73 $ 935 $ 20
Under Distributor's Voluntary
Waiver............................. $ 13,525 $ 845 $ 68 $ 913 $ 73 $ 840 $ 20
Pennsylvania Fund
Under NASD Rule as Adopted........... $ 10,547 $ 659 $ 150 $ 809 $ 63 $ 746 $ 13
Under Distributor's Voluntary
Waiver............................. $ 10,547 $ 659 $ 53 $ 712 $ 63 $ 649 $ 13
</TABLE>
- ------------
(1) Purchase price of all eligible Class B shares sold since November 26, 1993
(commencement of operations) other than shares acquired through dividend
reinvestment and the exchange privilege.
(2) Interest is computed on a monthly basis based upon the prime rate, as
reported in The Wall Street Journal, plus 1.0%, as permitted under the NASD
Rule.
(3) Consists of CDSC payments, distribution fee payments and accruals. See
"Purchase of Shares--Distribution Plans" in the Prospectus.
(4) Provided to illustrate the extent to which the current level of distribution
fee payments (not including any CDSC payments) is amortizing the unpaid
balance. No assurance can be given that payments of the distribution fee
will reach either the voluntary maximum or the NASD maximum.
24
<PAGE>
REDEMPTION OF SHARES
Reference is made to "Redemption of Shares" in the Prospectus for certain
information as to the redemption and repurchase of shares of each Fund.
The right to redeem shares of any Fund or to receive payment with respect
to any such redemption may be suspended only for any period during which trading
on the NYSE is restricted as determined by the Commission or the NYSE is closed
(other than customary weekend and holiday closings), for any period during which
an emergency exists, as defined by the Commission, as a result of which disposal
of portfolio securities or determination of the net asset value of a Fund is not
reasonably practicable, and for such other periods as the Commission may by
order permit for the protection of shareholders of the Funds.
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 one year of purchase are subject to a CDSC under most circumstances, the
charge is waived on redemptions of Class B shares following the death or
disability of a Class B shareholder. Redemptions for which the waiver applies
are any partial or complete redemption following the death or disability (as
defined in the Internal Revenue Code of 1986, as amended (the "Code")) of a
Class B shareholder (including one who owns the Class B shares as joint tenant
with his or her spouse), provided the redemption is requested within one year of
the death or initial determination of disability.
For the fiscal years ended July 31, 1996 and 1995, and for the period
November 26, 1993 (commencement of operations) to July 31, 1994, the Distributor
received CDSCs from the Funds with respect to redemptions of Class B shares as
follows, all of which were paid to Merrill Lynch:
<TABLE>
<CAPTION>
For the Year
Ended July 31, For the Period
------------------- November 26, 1993+
Fund 1996 1995 to July 31, 1994
- ---- ------- -------- ------------------------
<S> <C> <C> <C>
Arizona Fund..................................................... $10,222 $ 13,587 $ 1,505
California Fund.................................................. $ 3,459 $ 5,805 $ 5,716
Florida Fund..................................................... $18,456 $202,558 $ 17,622
Massachusetts Fund............................................... $ 4,849 $ 10,430 $ 11,965
Michigan Fund.................................................... $ 6,724 $ 3,977 $ 3,454
New Jersey Fund.................................................. $ 8,141 $ 6,305 $ 6,854
New York Fund.................................................... $ 6,475 $ 6,435 $ 9,833
Pennsylvania Fund................................................ $ 3,775 $ 7,971 $ 6,500
</TABLE>
- ------------------
+ Commencement of Operations.
For the fiscal year ended July 31, 1996 and for the period October 21, 1994
(commencement of operations) to July 31, 1995, the Distributor received no CDSCs
with respect to redemptions of Class C shares.
25
<PAGE>
PORTFOLIO TRANSACTIONS
Reference is made to "Investment Objectives and Policies" and "Portfolio
Transactions" in the Prospectus.
Under the 1940 Act, persons affiliated with the Trust are prohibited from
dealing with the Trust or any Fund as principals 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 dealers in connection with transactions with the Funds absent an
exemptive order from 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.
The table below sets forth for the fiscal years ended July 31, 1996 and 1995,
and for the period November 26, 1993 (commencement of operations) to July 31,
1994, information about the transactions engaged in by the Funds pursuant to
this order.
<TABLE>
<CAPTION>
For the Period
For the Year Ended For the Year Ended November 26, 1993+
July 31, 1996 July 31, 1995 to July 31, 1994
----------------------------- ----------------------------- -----------------------------
Number of Aggregate Number of Aggregate Number of Aggregate
Fund Transactions Dollar Amount Transactions Dollar Amount Transactions Dollar Amount
- ---- ------------ ------------- ------------ ------------- ------------ -------------
<S> <C> <C> <C> <C> <C> <C>
Arizona Fund............ 3 $ 300,000 2 $ 600,000 0 --
California Fund......... 0 -- 5 $ 1,800,000 8 $ 4,704,660
Florida Fund............ 2 $ 1,000,000 0 -- 1 $ 1,102,552
Massachusetts Fund...... 3 $ 600,000 1 $ 200,000 0 --
Michigan Fund........... 1 $ 200,000 0 -- 2 $ 400,464
New Jersey Fund......... 5 $ 800,000 4 $ 1,100,000 1 $ 401,652
New York Fund........... 0 -- 0 -- 3 $ 1,601,675
Pennsylvania Fund....... 1 $ 401,836 3 $ 1,300,000 1 $ 322,314
</TABLE>
- ------------------
+ Commencement of Operations.
The Trust has applied for an exemptive order permitting it to, among other
things, (i) purchase high quality tax-exempt securities from Merrill Lynch when
Merrill Lynch is a member of an underwriting syndicate and (ii) purchase
tax-exempt securities from and sell tax-exempt securities to Merrill Lynch in
secondary market transactions. Affiliated persons of the Trust may serve as its
broker 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 any Fund of the securities of any issuer if the officers and
Trustees of the Trust, the officers and general partner of the Manager, the
directors of such general partner or the officers and directors of any
subsidiary thereof each owning beneficially more than one-half of one per cent
of the securities of an issuer own in the aggregate more than five per cent of
the securities of such issuer. In addition, under the 1940 Act, the Funds may
not purchase securities from 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 a
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 a Fund, the amount of municipal bonds which may be purchased
in any one issue and the assets of a Fund which may be invested in a particular
issue.
The Funds do not expect to use any particular dealer in the execution of
transactions but, subject to obtaining the best net results, dealers who provide
supplemental investment research (such as information concerning tax-exempt
securities, economic data and market forecasts) to the Manager may receive
orders for transactions by the Funds. 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.
26
<PAGE>
The Funds have no obligation to deal with any broker in the execution of
transactions for their portfolio securities. In addition, consistent with the
Conduct Rules of the NASD and policies established by the Trustees of the Trust,
the Manager may consider sales of shares of the Funds as a factor in the
selection of brokers or dealers to execute portfolio transactions for the Funds.
DETERMINATION OF NET ASSET VALUE
The net asset value of the shares of all classes of each Fund is determined
by the Manager once daily, Monday through Friday, as of 15 minutes after the
close of business on the NYSE (generally, 4:00 p.m., New York time) on each day
during which the NYSE is open for trading. The NYSE is not open on New Year's
Day, Presidents' Day, Good Friday, Memorial Day, Independence Day, Labor Day,
Thanksgiving Day and Christmas Day. Net asset value per share of a Fund is
computed by dividing the sum of the value of the securities held by the Fund
plus any cash or other assets minus all liabilities by the total number of
shares outstanding at such time, rounded to the nearest cent. Expenses,
including the fees payable to the Manager and Distributor, are accrued daily.
The net asset value per share of each class of shares of a Fund are expected to
be equivalent. The per share net asset value of a Fund's Class B, Class C and
Class D shares generally will be lower than the per share net asset value of its
Class A shares, reflecting the daily expense accruals of the account
maintenance, distribution and higher transfer agency fees applicable with
respect to Class B and Class C shares of the Fund and the daily expense accruals
of the account maintenance fees applicable with respect to Class D shares; in
addition, the per share net asset value of Class B and Class C shares generally
will be lower than the per share net asset value of its Class D shares,
reflecting the daily expense accruals of the distribution fees, higher account
maintenance fees and higher transfer agency fees applicable with respect to
Class B and Class C shares of the Fund. It is expected, however, that the per
share net asset value of the four classes will tend to converge (although not
necessarily meet) immediately after the payment of dividends, which will differ
by approximately the amount of the expense accrual differentials between the
classes.
The Municipal Bonds and other portfolio securities in which the Funds
invest 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 theoretically will 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.
27
<PAGE>
SHAREHOLDER SERVICES
The Trust offers a number of shareholder services described below which are
designed to facilitate investment in shares of the Funds. Full details as to
each of such services and copies of the various plans described below can be
obtained from the Trust, the Distributor or Merrill Lynch.
Investment Account
Each shareholder whose account is maintained at the Transfer Agent has an
Investment Account and will receive statements, at least quarterly, from the
Transfer Agent. These statements will serve as transaction confirmations for
automatic investment purchases and the reinvestment of ordinary income dividends
and long-term capital gains distributions. The statements will also show any
other activity in the account since the previous statement. Shareholders also
will receive separate confirmations for each purchase or sale transaction other
than automatic investment purchases and the reinvestment of ordinary income
dividends and long-term capital gains distributions. A shareholder may make
additions to his or her Investment Account at any time by mailing a check
directly to the Transfer Agent.
Share certificates are issued only for full shares and only upon the
specific request of the shareholder who has an Investment Account. Issuance of
certificates representing all or only part of the full shares in an Investment
Account may be requested by a shareholder directly from the Transfer Agent.
Shareholders considering transferring their Class A or Class D shares from
Merrill Lynch to another brokerage firm or financial institution should be aware
that, if the firm to which the Class A or Class D shares are to be transferred
will not take delivery of shares of the relevant Fund, a shareholder either must
redeem the Class A or Class D shares (paying any applicable CDSC) so that the
cash proceeds can be transferred to the account at the new firm, or such
shareholder must continue to maintain an Investment Account at the Transfer
Agent for those Class A or Class D shares. Shareholders interested in
transferring their Class B or Class C shares from Merrill Lynch and who do not
wish to have an Investment Account maintained for such shares at the Transfer
Agent may request their new brokerage firm to maintain such shares in an account
registered in the name of the brokerage firm for the benefit of the shareholder
at the Transfer Agent. If the new brokerage firm is willing to accommodate the
shareholder in this manner, the shareholder must request that he or she be
issued certificates for his or her shares, and then must turn the certificates
over to the new firm for re-registration as described in the preceding sentence.
Automatic Investment Plans
A shareholder of a Fund may make additions to an Investment Account at any
time by purchasing Class A shares (if he or she is an eligible Class A investor
as described in the Prospectus) or Class B or Class D shares at the applicable
public offering price either through the shareholder's securities dealer or by
mail directly to the Transfer Agent, acting as agent for such securities
dealers. Voluntary accumulation also can be made through a service known as a
Fund's Automatic Investment Plan whereby each Fund is authorized through
pre-authorized checks or automated clearing house debits of $50 or more to
charge the regular bank account of the shareholder on a regular basis to provide
systematic additions to the Investment Account of such shareholder.
Alternatively, an investor who maintains a CMA(Registered) or CBA(Registered)
account may arrange to have periodic investments made in a Fund in such
CMA(Registered) or CBA(Registered) account or in certain related accounts in
amounts of $100 or more through the CMA(Registered) or CBA(Registered) Automated
Investment Program.
Automatic Reinvestment of Dividends and Capital Gains Distributions
Unless specific instructions are given as to the method of payment of
dividends and capital gains distributions, dividends and distributions will be
automatically reinvested in additional shares of the respective Fund. Such
reinvestment will be at the net asset value of shares of the respective 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.
28
<PAGE>
Shareholders, at any time, may 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 respective 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 a 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 or her Class
A or Class D shares. Redemptions will be made at net asset value as determined
15 minutes after the close of business on the NYSE (generally 4:00 p.m., New
York time) on the 24th day of each month or the 24th day of the last month of
each quarter, whichever is applicable. If the NYSE is not open for business on
such date, the 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 respective
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
either the shareholder, the Trust, the Transfer Agent or the Distributor.
Withdrawal payments should not be considered as dividends, yield or income. Each
withdrawal is a taxable event. If periodic withdrawals continuously exceed
reinvested dividends, the shareholder's original investment may be reduced
correspondingly. Purchases of additional Class A 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 a Fund from investors who maintain a
Systematic Withdrawal Plan unless such purchase is equal to at least one year's
scheduled withdrawals or $1,200, whichever is greater. Periodic investments may
not be made into an Investment Account in which the shareholder has elected to
make systematic withdrawals.
Alternatively, a Class A or Class D shareholder whose shares are held
within a CMA(Registered) or CBA(Registered) Account may elect to have shares
redeemed on a monthly, bimonthly, quarterly, semiannual or annual basis through
the CMA(Registered) or CBA(Registered) Systematic Redemption Program. The
minimum fixed dollar amount redeemable is $25. The proceeds of systematic
redemptions will be posted to the shareholder's account three 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
redemptions 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 Fund shares are being purchased within the account pursuant to the
Automatic Investment Program. For more information on the CMA(Registered) or
CBA(Registered) Systematic Redemption Program, eligible shareholders should
contact their Financial Consultant.
Exchange Privilege
Shareholders of each class of shares of each of the Funds have an exchange
privilege with certain other MLAM-advised mutual funds. Under the Merrill Lynch
Select Pricing(SM) System, Class A shareholders may exchange Class A shares of a
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
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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 are exchangeable with shares of the same
class of other MLAM-advised mutual funds. For purposes of computing the CDSC
that may be payable upon a disposition of the shares acquired in the exchange,
the holding period for the previously owned shares of a Fund is "tacked" to the
holding period for the newly acquired shares of the other fund as more fully
described below. Class A, Class B, Class C and Class D shares also are
exchangeable for shares of certain MLAM-advised money market funds as follows:
Class A shares may be exchanged for shares of Merrill Lynch Ready Assets Trust,
Merrill Lynch Retirement Reserves Money Fund (available only for exchanges with
certain retirement plans), Merrill Lynch U.S.A. Government Reserves and Merrill
Lynch U.S. Treasury Money Fund; Class B, Class C and Class D shares may be
exchanged for shares of Merrill Lynch Government Fund, Merrill Lynch
Institutional Fund, Merrill Lynch Institutional Tax-Exempt Fund and Merrill
Lynch Treasury Fund. Shares with a net asset value of at least $100 are required
to qualify for the exchange privilege, and any shares utilized in an exchange
must have been held by the shareholder for 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 of each of the Funds
("outstanding Class A or Class D shares") for Class A or Class D shares of
another MLAM-advised mutual fund ("new Class A or Class D shares") are
transacted on the basis of relative net asset value per Class A or Class D
share, respectively, plus an amount equal to the difference, if any, between the
sales charge previously paid on the outstanding Class A or Class D shares and
the sales charge payable at the time of the exchange on the new Class A or Class
D shares. With respect to outstanding Class A or Class D shares as to which
previous exchanges have taken place, the "sales charge previously paid" shall
include the aggregate of the sales charges paid with respect to such Class A or
Class D shares in the initial purchase and any subsequent exchange. Class A or
Class D shares issued pursuant to dividend reinvestment are sold on a no-load
basis in each of the funds offering Class A or Class D shares. For purposes of
the exchange privilege, Class A or Class D shares acquired through dividend
reinvestment shall be deemed to have been sold with a sales charge equal to the
sales charge previously paid on the Class A or Class D shares on which the
dividend was paid. Based on this formula, Class A or Class D shares generally
may be exchanged into the Class A or Class D shares of the other funds or into
shares of certain money market funds without or with a reduced sales charge.
In addition, each of the Funds with Class B or Class C shares outstanding
("outstanding Class B or Class C shares") offers to exchange its Class B or
Class C shares for Class B or Class C shares, respectively, of another
MLAM-advised mutual fund ("new Class B or Class C shares") on the basis of
relative net asset value per Class B or Class C share, without the payment of
any CDSC that might otherwise be due on redemption of the outstanding shares.
Class B shareholders of each 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 Class B shares acquired through use of
the exchange privilege. In addition, Class B shares of each Fund acquired
through use of the exchange privilege will be subject to that 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 a Fund for those of
Merrill Lynch Special Value Fund, Inc. ("Special Value Fund") after having held
the Fund's Class B shares for six months. The 1% CDSC that generally would apply
to a redemption would not apply to the exchange. Three and a half 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
six month holding period of the Fund's
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Class B shares onto the three and a half 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 four years.
Shareholders also may exchange shares from any of the Funds into shares of
certain money market funds advised by the Manager or its affiliates, but the
period of time that Class B or Class C shares are held in a money market fund
will not count towards satisfaction of the holding period requirement for
purposes of reducing the CDSC or, with respect to Class B shares, towards
satisfaction of the conversion period. However, shares of a money market fund
which were acquired as a result of an exchange for Class B or Class C shares of
a Fund may, in turn, be exchanged back into Class B or Class C shares,
respectively, of any fund offering such shares, in which event the holding
period for Class B or Class C shares of the newly-acquired fund will be
aggregated with previous holding periods for purposes of reducing the CDSC.
Thus, for example, an investor may exchange Class B shares of a Fund for shares
of Merrill Lynch Institutional Fund ("Institutional Fund") after having held the
Fund's Class B shares for six months and three years later decide to redeem the
shares of Institutional Fund for cash. At the time of this redemption, the 1%
CDSC that would have been due had the Class B shares of the Fund been redeemed
for cash rather than exchanged for shares of Institutional Fund will be payable.
If, instead of such redemption, the shareholder exchanged such shares for Class
B shares of a fund with a four-year CDSC period which the shareholder continued
to hold for an additional three and a half years, any subsequent redemption
would not incur a CDSC.
Before effecting an exchange, shareholders of a Fund should obtain a
currently effective prospectus of the fund into which the exchange is to be
made.
To exercise the exchange privilege, a shareholder should contact his or her
Merrill Lynch Financial Consultant, who will advise the relevant Fund of the
exchange. Shareholders of the Funds, 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. Each
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. Each Fund reserves the right to limit the
number of times an investor may exercise the exchange privilege. Certain funds
may suspend the continuous offering of their shares at any time and thereafter
may resume such offering from time to time. The exchange privilege is available
only to U.S. shareholders in states where the exchange legally may be made.
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DISTRIBUTIONS AND TAXES
Federal
The Trust intends to continue to qualify each Fund for the special tax
treatment afforded regulated investment companies ("RICs") under the Internal
Revenue Code of 1986, as amended (the "Code"). If a Fund so qualifies, the Fund
(but not its shareholders) will not be subject to Federal income tax to the
extent that it distributes its net investment income and net realized capital
gains. The Trust intends to cause each Fund to distribute substantially all of
such income.
As discussed in the Prospectus for the Trust, the Trust has established a
number of series, each referred to herein as a "Fund". Each Fund is treated as a
separate corporation for Federal income tax purposes. Each Fund, therefore, is
considered to be a separate entity in determining its treatment under the rules
for RICs described in the Prospectus. Losses in one Fund do not offset gains in
another Fund, and the requirements (other than certain organizational
requirements) for qualifying for RIC status are determined at the Fund 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 RICs, such as the Funds, that pay exempt-
interest dividends.
The Trust intends to qualify each 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 a Fund's taxable year, at least 50% of the value of its total
assets consists of obligations exempt from Federal income tax ("tax-exempt
obligations") under Section 103(a) of the Code (relating generally to
obligations of a state or local governmental unit), a 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 a 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 each Fund's shareholders within 60 days
after the close of such Fund's taxable year. For this purpose, the Funds 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 rule permitting the issuance and sale
of multiple classes of shares) that is based on the gross income allocable to
Class A, Class B, Class C and Class D shareholders during the taxable year, or
such other method as the Internal Revenue Service may prescribe. The Fund will
allocate exempt-interest dividends among shareholders for state income tax
purposes in a similar manner. To the extent that the dividends distributed to a
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, subject to the possible application of the Federal
alternative minimum tax as described below. Exempt-interest dividends are
included, however, in determining the portion, if any, of a person's social
security and railroad retirement benefits subject to Federal income taxes. The
Trust will inform shareholders annually regarding the portion of each Fund's
distributions which constitutes exempt-interest dividends. Interest on
indebtedness incurred or continued to purchase or carry shares of RICs paying
exempt-interest dividends, such as the Funds, will not be deductible by the
investor for Federal 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 a Fund.
To the extent that a 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
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distributions are considered ordinary income for Federal income tax purposes.
Distributions, if any, from an excess of net long-term capital gains over net
short-term capital losses derived from the sale of securities or from certain
transactions in futures or options ("capital gain dividends") are taxable as
long-term capital gains for Federal income tax purposes, regardless of the
length of time the shareholder has owned Fund shares. Distributions by the Fund,
whether from exempt-interest income, ordinary income or capital gains, will not
be eligible for the dividends received deduction allowed to corporations under
the Code.
All or a portion of a 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. Any loss upon the sale or exchange of shares
held for six months or less will be disallowed to the extent of any
exempt-interest dividends received by the shareholder. In addition, any such
loss that is not disallowed under the rule stated above will be treated as
long-term capital loss to the extent of any capital gain dividends received by
the shareholder. Distributions in excess of a 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). If a Fund pays a
dividend in January which was declared in the previous October, November or
December to shareholders of record on a specified date in one of such months,
then such dividend will be treated for tax purposes as being paid by the Fund
and received by its shareholders on December 31 of the year in which such
dividend was declared.
The Code subjects interest received on certain otherwise tax-exempt
securities to an alternative minimum tax. The alternative minimum tax applies to
interest received on "private activity bonds" issued after August 7, 1986.
Private activity bonds are bonds which, although tax-exempt, are used for
purposes other than those generally performed by governmental units and which
benefit non-governmental entities (e.g., bonds used for industrial development
or housing purposes). Income received on such bonds is classified as an item of
"tax preference", which could subject certain investors in such bonds, including
shareholders of a Fund, to an alternative minimum tax. Each Fund will purchase
such "private activity bonds", and the Trust will report to shareholders within
60 days after such 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 a
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
a Fund.
The Funds may invest in high yield securities as described in the
Prospectus. Furthermore, the Funds may also invest in instruments the return on
which includes nontraditional features such as indexed principal or interest
payments ("nontraditional instruments"). These instruments may be subject to
special tax rules under which the Funds may be required to accrue and distribute
income before amounts due under the obligations are paid. In addition, it is
possible that all or a portion of the interest payments on such high yield
securities and/or nontraditional instruments could be recharacterized as taxable
ordinary income.
No gain or loss will be recognized by Class B shareholders on the
conversion of their Class B shares into Class D shares. A shareholder's basis in
the Class D shares acquired will be the same as such shareholder's basis in the
Class B shares converted, and the holding period of the acquired Class D shares
will include the holding period for the converted Class B shares.
If a shareholder exercises an exchange privilege within 90 days of
acquiring the shares, then the loss the shareholder can recognize on the
exchange will be reduced (or the gain increased) to the extent any sales charge
paid to the Fund on the exchanged shares reduces any sales charge the
shareholder would have owed upon purchase of the new shares in the absence of
the exchange privilege. Instead, such sales charge will be treated as an amount
paid for the new shares.
A loss realized on a sale or exchange of shares of a Fund will be
disallowed if other Fund shares are acquired (whether through the automatic
reinvestment of dividends or otherwise) within a 61-day period
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beginning 30 days before and ending 30 days after the date that the shares are
disposed of. In such a case, the basis of the shares acquired will be adjusted
to reflect the disallowed loss.
Ordinary income dividends paid to shareholders who are nonresident aliens
or foreign entities will be subject to a 30% United States withholding tax under
existing provisions of the Code applicable to foreign individuals and entities
unless a reduced rate of withholding or a withholding exemption is provided
under applicable treaty law. Nonresident shareholders are urged to consult their
own tax advisers concerning the applicability of the United States withholding
tax.
Under certain Code provisions, some shareholders may be subject to a 31%
withholding tax on certain ordinary income dividends and on capital gain
dividends and redemption payments ("backup withholding"). Generally,
shareholders subject to backup withholding will be those for whom no certified
taxpayer identification number is on file with the Trust or who, to the Trust's
knowledge, have furnished an incorrect number. When establishing an account, an
investor must certify under penalty of perjury that such number is correct and
that such investor is not otherwise subject to backup withholding.
The Code provides that every person required to file a tax return must
include for information purposes on such return the amount of exempt-interest
dividends received from all sources (including the Funds) during the taxable
year.
Environmental Tax
The Code previously imposed 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 has
expired for tax years beginning after December 31, 1995, but may be reinstated
in the future. The Environmental Tax was imposed even if the corporation was not
required to pay an alternative minimum tax because the corporation's regular
income tax liability exceeded its minimum tax liability. The Code provides,
however, that RICs, such as the Funds, would not be subject to the Environmental
Tax. However, exempt-interest dividends paid by the Funds that create
alternative minimum taxable income for corporate shareholders (as described
above) could subject corporate shareholders of such Funds to the Environmental
Tax.
Tax Treatment of Financial Futures Contracts and Options Thereon
Each Fund may purchase or sell municipal bond index futures contracts and
interest rate futures contracts on U.S. Government securities ("financial
futures contracts"). Each Fund also may purchase and write call and put options
on such financial futures contracts. In general, unless an election is available
to a 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 such
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 a Fund may
alter the timing and character of distributions to shareholders. The
mark-to-market rules outlined above, however, will not apply to certain
transactions entered into by the Fund solely to reduce the risk of changes in
price or interest rates with respect to its investments.
Code Section 1092, which applies to certain "straddles", may affect the
taxation of a Fund's sales of securities and transactions in financial futures
contracts and related options. Under Section 1092, a Fund may be required to
postpone recognition for tax purposes of losses incurred in certain sales of
securities and certain closing transactions in financial futures contracts or
the related options.
One of the requirements for qualification as a RIC is that less than 30% of
a Fund's gross income be derived from gains from the sale or other disposition
of securities held for less than three months. Accordingly, the Funds
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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 and Treasury regulations presently in effect. For the
complete provisions, reference should be made to the pertinent Code sections and
the Treasury regulations promulgated thereunder. The Code and the Treasury
regulations are subject to change by legislative, judicial or administrative
action either prospectively or retroactively.
Shareholders are urged to consult their tax advisors regarding specific
questions as to Federal, foreign, state or local taxes.
State
Arizona. Exempt-interest dividends from the Arizona Fund will not be
subject to Arizona income tax for shareholders who are Arizona residents to the
extent that the dividends are attributable to interest earned on Arizona State
Municipal Bonds. To the extent that the Arizona 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, such distributions are
considered ordinary income for Arizona 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 are taxable as
ordinary income for Arizona purposes. Inasmuch and for so long as the Arizona
Fund is registered as a diversified management company under the 1940 Act, the
Arizona Fund will not be subject to Arizona corporate income taxes, except to
the extent of its "unrelated business income", as defined in Section 512 of the
Code, if any, which would be taxed to the Fund (but not its shareholders) at the
Arizona corporate income tax rate (currently 9.0%) or $50, whichever is greater.
California. Exempt-interest dividends from the California Fund will not be
subject to California personal income taxes for California resident individuals
to the extent attributable to interest from California State Municipal Bonds,
and such exempt-interest dividends will also be excludable from the income base
used in calculating the California corporate income tax to the extent
attributable to interest from California State Municipal Bonds. However,
exempt-interest dividends paid to a corporate shareholder subject to California
state corporate franchise tax will be taxable as ordinary income. Distributions
of long-term capital gains will be treated as capital gains which are taxed at
ordinary income rates for California state income tax purposes.
Florida. The Florida Fund has received a ruling from the Florida
Department of Revenue that if on the last business day of any calendar year the
Florida Fund's assets consist solely of assets exempt from Florida intangible
personal property tax, shares of the Florida Fund will be exempt from Florida
intangible personal property tax in the following year. The Florida Department
of Revenue has the authority to revoke or modify a previously issued ruling;
however, if a ruling is revoked or modified, the revocation or modification is
prospective only. Thus, if the ruling is not revoked or modified and if 100% of
the Florida Fund's assets on the last business day of each calendar year
consists of assets exempt from Florida intangible personal property tax, shares
of the Florida Fund owned by Florida residents will be exempt from Florida
intangible personal property tax. Assets exempt from Florida intangible personal
property tax include obligations of the State of Florida and its political
subdivisions; obligations of the United States Government or its agencies; and
cash. If shares of the Florida Fund are subject to Florida intangible personal
property tax because less than 100% of the Florida Fund's assets on the last
business day of the previous calendar year consisted of assets exempt from
Florida intangible personal property tax, only the portion of the net asset
value of the Florida Fund that is attributable to obligations of the U.S.
Government will be exempt from taxation. The Florida Fund anticipates that on
the last business day of each calendar year the Florida Fund's assets will
consist solely of assets exempt from Florida intangible personal property tax.
Dividends paid by the Florida Fund to individuals who are Florida residents
are not subject to personal income taxation by Florida, because Florida does not
impose a personal income tax. Distributions of investment income and capital
gains by the Florida Fund will be subject to Florida corporate income tax, state
taxes in states
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other than Florida and local taxes in cities other than those in Florida.
Shareholders subject to taxation by states other than Florida may realize a
lower after-tax rate of return than Florida shareholders since the dividends
distributed by the Florida Fund may not be exempt, to any significant degree,
from income taxation by such other states.
If the Florida Fund does not have a taxable nexus to Florida, such as
through the location within the state of the Trust's or the Florida Fund's
activities or those of the Manager, under present Florida law, the Florida Fund
is not subject to Florida corporate income taxation. Additionally, if the
Florida Fund's assets do not have a taxable situs in Florida as of January 1 of
each calendar year, the Florida Fund will not be subject to Florida intangible
personal property tax. If the Florida Fund has a taxable nexus to Florida or the
Florida Fund's assets have a taxable situs in Florida, the Florida Fund will be
subject to Florida taxation.
Massachusetts. Under existing Massachusetts law, as long as the
Massachusetts Fund qualifies as a separate "regulated investment company" under
the Code, (i) the Massachusetts Fund will not be liable for any personal income
or any corporate excise tax in the Commonwealth of Massachusetts and (ii)
shareholders of the Massachusetts Fund who are subject to Massachusetts personal
income taxation will not be required to include in their Massachusetts taxable
income (a) that portion of their "exempt-interest dividends" (as defined in
Section 852(b)(5) of the Code) from the Massachusetts Fund which the
Massachusetts Fund clearly identifies as directly attributable to interest
received by the Massachusetts Fund on Massachusetts State Municipal Bonds or (b)
that portion of their dividends which is identified as attributable to interest
received by the Massachusetts Fund on obligations of the United States or its
agencies or possessions that are exempt from state taxation (collectively,
"Massachusetts-exempt dividends").
Any capital gains distributed by the Massachusetts Fund to a shareholder
otherwise subject to Massachusetts personal income taxation (except for capital
gains on certain Massachusetts State Municipal Bonds which are specifically
exempt by statute), or gains realized by such a shareholder on a redemption or
sale of shares of the Massachusetts Fund, will be subject to Massachusetts
personal income taxation. The portion of any deduction (e.g., an interest
deduction) otherwise available to a shareholder subject to Massachusetts
personal income taxation which relates or is allocable to Massachusetts-exempt
dividends will not be deductible for Massachusetts personal income tax purposes.
In the case of any corporate shareholder otherwise subject to the
Massachusetts corporate excise tax, distributions received from the
Massachusetts Fund, and any gain on the sale or other disposition of
Massachusetts Fund shares, will be includable in the corporation's Massachusetts
gross income and taxed accordingly. Similarly, the value of shares held in the
Massachusetts Fund will be taken into account in calculating the property
component of the Massachusetts corporate excise tax. Interest on indebtedness
incurred or continued to purchase or carry Fund shares will not be deductible in
calculating the income component of the Massachusetts corporate excise tax.
Michigan. Shareholders who are subject to the Michigan income tax or
single business tax will not be subject to the Michigan income tax or single
business tax on exempt-interest dividends from the Michigan Fund to the extent
they are attributable to interest from Michigan State Municipal Bonds or on
dividends that are attributable to interest from obligations of the United
States or its possessions. To the extent the distributions from the Michigan
Fund are attributable to sources other than Michigan State Municipal Bonds or
obligations of the United States or its possessions, they will not be exempt
from Michigan income tax or the single business tax. Distributions that are
attributable to long- or short-term capital gains from both Michigan State and
non-Michigan State Municipal Bonds will not be exempt from Michigan income tax
or the single business tax, while those attributable to long- or short-term
capital gains from obligations of the United States or its possessions will be
exempt from Michigan income tax and the single business tax. For purposes of
Michigan income tax laws, shareholders will have a taxable event upon redemption
or sale of their shares of the Michigan Fund to the extent the transaction
constitutes a taxable event for Federal income tax purposes.
In 1986, the Michigan Department of Treasury issued a Bulletin stating that
holders of interests in regulated investment companies who are subject to the
Michigan intangibles tax will be exempt from the tax to the extent that the
company's investment portfolio consists of items such as Michigan State
Municipal Bonds. In addition,
36
<PAGE>
shares owned by certain financial institutions or by certain other persons
subject to the Michigan single business tax are not subject to the Michigan
intangibles tax. The Intangibles Tax is being phased-out, with reductions of
twenty-five percent (25%) in 1994 and 1995, fifty percent (50%) in 1996, and
seventy-five percent (75%) in 1997, with total repeal effective January 1, 1988.
New Jersey. To the extent distributions from the New Jersey Fund are
derived from interest or gains on New Jersey State Municipal Bonds, such
distributions will be exempt from New Jersey personal income tax. In order to
pass through tax-exempt interest for New Jersey personal income tax purposes,
the New Jersey Fund, among other requirements, must have not less than 80% of
the aggregate principal amount of its investments invested in New Jersey State
Municipal Bonds at the close of each quarter of the tax year (the "80% Test").
For purposes of calculating whether the 80% Test is satisfied, financial
options, futures, forward contracts and similar financial instruments relating
to interest-bearing obligations are excluded from the principal amount of the
New Jersey Fund's investments. The New Jersey Fund intends to comply with this
requirement so as to enable it to pass through tax-exempt interest. In the event
the New Jersey Fund does not so comply, distributions by the New Jersey Fund
will be taxable to shareholders for New Jersey personal income tax purposes.
Interest on indebtedness incurred or continued to purchase or carry New Jersey
Fund shares is not deductible either for Federal income tax purposes or New
Jersey personal income tax purposes to the extent attributable to exempt-
interest dividends. Exempt-interest dividends and gains paid to a corporate
shareholder will be subject to the New Jersey corporation business (franchise)
tax or, if applicable, the New Jersey corporation income tax.
Under present New Jersey law, a RIC, such as the New Jersey Fund, pays a
flat tax of $250 per year. The New Jersey Fund might be subject to the New
Jersey corporation business (franchise) tax for any taxable year in which it
does not qualify as a RIC.
New York. The portion of the exempt-interest dividends equal to the
proportion which the New York Fund's interest on New York State Municipal Bonds
bears to all of the New York Fund's tax-exempt interest (whether or not
distributed) will be exempt from New York State and New York City personal
income taxes. To the extent the New York Fund's distributions are derived from
interest on taxable investments, from gain from the sale of investments or from
tax-exempt interest that is not attributable to New York State Municipal Bonds,
they will constitute taxable income for New York State and New York City
personal income tax purposes. Distributions from investment income and capital
gains of the New York Fund, including exempt-interest dividends paid to a
corporate shareholder, will be subject to New York State corporate franchise and
New York City corporation income tax.
Pennsylvania. To the extent distributions from the Pennsylvania Fund are
derived from interest received by the Pennsylvania Fund from Pennsylvania State
Municipal Bonds, such distributions will be exempt from the Pennsylvania
personal income tax. However, distributions attributable to capital gains
derived by the Pennsylvania Fund as well as distributions derived from income
from investments other than Pennsylvania State Municipal Bonds will be taxable
for purposes of the Pennsylvania personal income tax. In the case of residents
of the City of Philadelphia, distributions which are derived from interest
received by the Pennsylvania Fund from Pennsylvania State Municipal Bonds or
which are designated as capital gain dividends for Federal income tax purposes
will be exempt from the Philadelphia School District investment income tax.
Shares of the Pennsylvania Fund will be exempt from Pennsylvania county
personal property taxes to the extent the Pennsylvania Fund's portfolio
securities consist of Pennsylvania State Municipal Bonds on the annual
assessment date.
At present it is unclear whether an investment in the Pennsylvania Fund by
a corporate shareholder will qualify as an exempt asset for purposes of
apportionment of the Pennsylvania capital stock/foreign franchise tax. To the
extent exempt-interest dividends are excluded from taxable income for Federal
corporate income tax purposes (determined before net operating loss carryovers
and special deductions), they will not be subject to the Pennsylvania corporate
net income tax.
37
<PAGE>
The above discussion is a general and abbreviated summary of the relevant
state and local tax provisions presently in effect. Shareholders are urged to
consult their tax advisors regarding specific questions as to state or local
taxes.
PERFORMANCE DATA
From time to time each Fund may include its average annual total return and
other total return data, as well as yield and tax-equivalent yield, in
advertisements or information furnished to present or prospective shareholders.
From time to time, the Fund may include the Fund's Morningstar risk-adjusted
ratings in advertisements or supplemental sales literature. Total return, yield
and tax-equivalent yield figures are based on a Fund's historical performance
and are not intended to indicate future performance. Average annual total
return, yield and tax-equivalent yield are determined separately for Class A,
Class B, Class C and Class D shares of each Fund 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 of a Fund and the CDSC that would be applicable to a complete redemption
of the investment at the end of the specified period in the case of Class B and
Class C shares of that Fund.
The Funds 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.
38
<PAGE>
Set forth below is the total return, yield and tax-equivalent yield
information for the Class A, Class B, Class C and Class D shares of each of the
Funds for the periods indicated.
<TABLE>
<CAPTION>
Arizona Fund
- ------------------------------------------------------------------------------------------------------------------------------------
Class A Shares Class B Shares Class C Shares
------------------------------------ ------------------------------------ -----------------
Redeemable Value Redeemable Value
of a of a
Expressed as hypothetical Expressed as hypothetical Expressed as
a percentage $1,000 a percentage $1,000 a percentage
based on a investment based on a investment based on a
hypothetical at the end of hypothetical at the end of hypothetical
Period $1,000 investment the period $1,000 investment the period $1,000 investment
------ ----------------- ---------------- ----------------- ---------------- -----------------
<S> <C> <C> <C> <C> <C>
Average Annual Total Return
(including maximum applicable sales charge)
One year ended July 31, 1996....... 2.12% $ 1,021.20 1.89% $ 1,018.90 1.79%
Inception (November 26, 1993) to
July 31, 1996.................... 3.95% $ 1,109.30 3.97% $ 1,109.90
Inception (October 21, 1994) to
July 31, 1996.................... 4.88%
Annual Total Return
(excluding maximum applicable sales charge)
Year ended July 31, 1996........... 3.16% $ 1,031.60 2.88% $ 1,028.80 2.78%
Year ended July 31, 1995........... 6.47% $ 1,064.70 5.99% $ 1,059.90
Inception (October 21, 1994) to
July 31, 1995.................... 5.90%
Inception (November 26, 1993) to
July 31, 1994.................... 2.02% $ 1,020.20 1.78% $ 1,017.80
Aggregate Total Return
(including maximum applicable sales charge)
Inception (November 26, 1993) to
July 31, 1996.................... 10.93% $ 1,109.30 10.99% $ 1,109.90
Inception (October 21, 1994) to
July 31, 1996.................... 8.85%
Yield
30 days ended July 31, 1996........ 3.63% 3.31% 3.51%
Tax Equivalent Yield*
30 days ended July 31, 1996........ 5.04% 4.60% 4.88%
<CAPTION>
Arizona Fund
- --------------------------------------------------------------------------------------------
Class C Shares Class D Shares
---------------- ------------------------------------
Redeemable Value Redeemable Value
of a of a
hypothetical Expressed as hypothetical
$1,000 a percentage $1,000
investment based on a investment
at the end of hypothetical at the end of
Period the period $1,000 investment the period
------ ---------------- ----------------- ----------------
<S> <C> <C> <C>
Average Annual Total Return
(including maximum applicable sales charge)
One year ended July 31, 1996....... $ 1,017.90 2.02% $ 1,020.20
Inception (November 26, 1993) to
July 31, 1996....................
Inception (October 21, 1994) to
July 31, 1996.................... $ 1,088.50 4.69% $ 1,084.90
Annual Total Return
(excluding maximum applicable sales charge)
Year ended July 31, 1996........... $ 1,027.80 3.05% $ 1,030.50
Year ended July 31, 1995...........
Inception (October 21, 1994) to
July 31, 1995.................... $ 1,059.00 6.34% $ 1,063.40
Inception (November 26, 1993) to
July 31, 1994....................
Aggregate Total Return
(including maximum applicable sales charge)
Inception (November 26, 1993) to
July 31, 1996....................
Inception (October 21, 1994) to
July 31, 1996.................... $ 1,088.50 8.49% $ 1,084.90
Yield
30 days ended July 31, 1996........ 3.53%
Tax Equivalent Yield*
30 days ended July 31, 1996........ 4.90%
</TABLE>
- ------------
* Based on a Federal income tax rate of 28%.
39
<PAGE>
<TABLE>
<CAPTION>
California Fund
- ------------------------------------------------------------------------------------------------------------------------------------
Class A Shares Class B Shares Class C Shares
------------------------------------ ------------------------------------ -----------------
Redeemable Value Redeemable Value
of a of a
Expressed as hypothetical Expressed as hypothetical Expressed as
a percentage $1,000 a percentage $1,000 a percentage
based on a investment based on a investment based on a
hypothetical at the end of hypothetical at the end of hypothetical
Period $1,000 investment the period $1,000 investment the period $1,000 investment
------ ----------------- ---------------- ----------------- ---------------- -----------------
<S> <C> <C> <C> <C> <C>
Average Annual Total Return
(including maximum applicable sales charge)
One year ended July 31, 1996....... 3.52% $ 1,035.20 3.08% $ 1,030.80 3.35%
Inception (November 26, 1993) to
July 31, 1996.................... 3.85% $ 1,106.60 3.84% $ 1,106.10
Inception (October 21, 1994) to
July 31, 1996.................... 5.61%
Annual Total Return
(excluding maximum applicable sales charge)
Year ended July 31, 1996........... 4.56% $ 1,045.60 4.08% $ 1,040.80 4.35%
Year ended July 31, 1995........... 5.60% $ 1,056.00 5.23% $ 1,052.30
Inception (October 21, 1994) to
July 31, 1995.................... 5.60%
Inception (November 26, 1993) to
July 31, 1994.................... 1.23% $ 1,012.30 0.99% $ 1,009.90
Aggregate Total Return
(including maximum applicable sales charge)
Inception (November 26, 1993) to
July 31, 1996.................... 10.66% $ 1,106.60 10.61% $ 1,106.10
Inception (October 21, 1994) to
July 31, 1996.................... 10.20%
Yield
30 days ended July 31, 1996........ 3.26% 2.94% 3.21%
Tax Equivalent Yield*
30 days ended July 31, 1996........ 4.53% 4.08% 4.46%
<CAPTION>
California Fund
- --------------------------------------------------------------------------------------------
Class C Shares Class D Shares
---------------- ------------------------------------
Redeemable Value Redeemable Value
of a of a
hypothetical Expressed as hypothetical
$1,000 a percentage $1,000
investment based on a investment
at the end of hypothetical at the end of
Period the period $1,000 investment the period
------ ---------------- ----------------- ----------------
<S> <C> <C> <C>
Average Annual Total Return
(including maximum applicable sales charge)
One year ended July 31, 1996....... $ 1,033.50 3.41% $ 1,034.10
Inception (November 26, 1993) to
July 31, 1996....................
Inception (October 21, 1994) to
July 31, 1996.................... $ 1,102.00 5.22% $ 1,094.70
Annual Total Return
(excluding maximum applicable sales charge)
Year ended July 31, 1996........... $ 1,043.50 4.46% $ 1,044.60
Year ended July 31, 1995...........
Inception (October 21, 1994) to
July 31, 1995.................... $ 1,056.00 5.85% $ 1,058.50
Inception (November 26, 1993) to
July 31, 1994....................
Aggregate Total Return
(including maximum applicable sales charge)
Inception (November 26, 1993) to
July 31, 1996....................
Inception (October 21, 1994) to
July 31, 1996.................... $ 1,102.00 9.47% $ 1,094.70
Yield
30 days ended July 31, 1996........ 3.16%
Tax Equivalent Yield*
30 days ended July 31, 1996........ 4.39%
</TABLE>
- ------------
* Based on a Federal income tax rate of 28%.
40
<PAGE>
<TABLE>
<CAPTION>
Florida Fund
- ------------------------------------------------------------------------------------------------------------------------------------
Class A Shares Class B Shares Class C Shares
------------------------------------ ------------------------------------ -----------------
Redeemable Value Redeemable Value
of a of a
Expressed as hypothetical Expressed as hypothetical Expressed as
a percentage $1,000 a percentage $1,000 a percentage
based on a investment based on a investment based on a
hypothetical at the end of hypothetical at the end of hypothetical
Period $1,000 investment the period $1,000 investment the period $1,000 investment
- ----------------------------------- ----------------- ---------------- ----------------- ---------------- -----------------
<S> <C> <C> <C> <C> <C>
Average Annual Total Return
(including maximum applicable sales charge)
One year ended July 31, 1996....... 2.42% $ 1,024.20 2.09% $ 1,020.90 1.49%
Inception (November 26, 1993) to
July 31, 1996.................... 3.56% $ 1,098.40 3.58% $ 1,099.00
Inception (October 21, 1994) to
July 31, 1996.................... 4.57%
Annual Total Return
(excluding maximum applicable sales charge)
Year ended July 31, 1996........... 3.45% $ 1,034.50 3.08% $ 1,030.80 2.48%
Year ended July 31, 1995........... 6.05% $ 1,060.50 5.57% $ 1,055.70
Inception (October 21, 1994) to
July 31, 1995.................... 5.65%
Inception (November 26, 1993) to
July 31, 1994.................... 1.12% $ 1,011.20 0.99% $ 1,009.90
Aggregate Total Return
(including maximum applicable sales charge)
Inception (November 26, 1993) to
July 31, 1996.................... 9.84% $ 1,098.40 9.90% $ 1,099.00
Inception (October 21, 1994) to
July 31, 1996.................... 8.27%
Yield
30 days ended July 31, 1996........ 3.61% 3.29% 3.47%
Tax Equivalent Yield*
30 days ended July 31, 1996........ 5.01% 4.57% 4.82%
</TABLE>
<TABLE>
<CAPTION>
Florida Fund
- -----------------------------------
Class C Shares Class D Shares
---------------- ------------------------------------
Redeemable Value Redeemable Value
of a of a
hypothetical Expressed as hypothetical
$1,000 a percentage $1,000
investment based on a investment
at the end of hypothetical at the end of
Period the period $1,000 investment the period
- ----------------------------------- ---------------- ----------------- ----------------
<S> <C> <C> <C>
Average Annual Total Return
(including maximum applicable sales charge)
One year ended July 31, 1996....... $ 1,014.90 2.31% $ 1,023.10
Inception (November 26, 1993) to
July 31, 1996....................
Inception (October 21, 1994) to
July 31, 1996.................... $ 1,082.70 4.71% $ 1,085.30
Annual Total Return
(excluding maximum applicable sales charge)
Year ended July 31, 1996........... $ 1,024.80 3.35% $ 1,033.50
Year ended July 31, 1995...........
Inception (October 21, 1994) to
July 31, 1995.................... $ 1,056.50 6.07% $ 1,060.70
Inception (November 26, 1993) to
July 31, 1994....................
Aggregate Total Return
(including maximum applicable sales charge)
Inception (November 26, 1993) to
July 31, 1996....................
Inception (October 21, 1994) to
July 31, 1996.................... $ 1,082.70 8.53% $ 1,085.30
Yield
30 days ended July 31, 1996........ 3.51%
Tax Equivalent Yield*
30 days ended July 31, 1996........ 4.88%
</TABLE>
- ------------
* Based on a Federal income tax rate of 28%.
41
<PAGE>
<TABLE>
<CAPTION>
Massachusetts Fund
- ------------------------------------------------------------------------------------------------------------------------------------
Class A Shares Class B Shares Class C Shares
------------------------------------ ------------------------------------ -----------------
Redeemable Value Redeemable Value
of a of a
Expressed as hypothetical Expressed as hypothetical Expressed as
a percentage $1,000 a percentage $1,000 a percentage
based on a investment based on a investment based on a
hypothetical at the end of hypothetical at the end of hypothetical
Period $1,000 investment the period $1,000 investment the period $1,000 investment
- ----------------------------------- ----------------- ---------------- ----------------- ---------------- -----------------
<S> <C> <C> <C> <C> <C>
Average Annual Total Return
(including maximum applicable sales charge)
One year ended July 31, 1996....... 3.04% $ 1,030.40 2.70% $ 1,027.00 2.81%
Inception (November 26, 1993) to
July 31, 1996.................... 3.67% $ 1,101.40 3.69% $ 1,101.90
Inception (October 21, 1994) to
July 31, 1996.................... 4.97%
Annual Total Return
(excluding maximum applicable sales charge)
Year ended July 31, 1996........... 4.08% $ 1,040.80 3.70% $ 1,037.00 3.81%
Year ended July 31, 1995........... 4.79% $ 1,047.90 4.41% $ 1,044.10
Inception (October 21, 1994) to
July 31, 1995.................... 5.00%
Inception (November 26, 1993) to
July 31, 1994.................... 2.01% $ 1,020.10 1.77% $ 1,017.70
Aggregate Total Return
(including maximum applicable sales charge)
Inception (November 26, 1993) to
July 31, 1996.................... 10.14% $ 1,101.40 10.19% $ 1,101.90
Inception (October 21, 1994) to
July 31, 1996.................... 9.00%
Yield
30 days ended July 31, 1996........ 3.63% 3.31% 3.51%
Tax Equivalent Yield*
30 days ended July 31, 1996........ 5.04% 4.60% 4.88%
</TABLE>
<TABLE>
<CAPTION>
Massachusetts Fund
- -----------------------------------
Class C Shares Class D Shares
---------------- ------------------------------------
Redeemable Value Redeemable Value
of a of a
hypothetical Expressed as hypothetical
$1,000 a percentage $1,000
investment based on a investment
at the end of hypothetical at the end of
Period the period $1,000 investment the period
- ----------------------------------- ---------------- ----------------- ----------------
<S> <C> <C> <C>
Average Annual Total Return
(including maximum applicable sales charge)
One year ended July 31, 1996....... $ 1,028.10 2.93% $ 1,029.30
Inception (November 26, 1993) to
July 31, 1996....................
Inception (October 21, 1994) to
July 31, 1996.................... $ 1,090.00 4.52% $ 1,081.70
Annual Total Return
(excluding maximum applicable sales charge)
Year ended July 31, 1996........... $ 1,038.10 3.97% $ 1,039.70
Year ended July 31, 1995...........
Inception (October 21, 1994) to
July 31, 1995.................... $ 1,050.00 5.09% $ 1,050.90
Inception (November 26, 1993) to
July 31, 1994....................
Aggregate Total Return
(including maximum applicable sales charge)
Inception (November 26, 1993) to
July 31, 1996....................
Inception (October 21, 1994) to
July 31, 1996.................... $ 1,090.00 8.17% $ 1,081.70
Yield
30 days ended July 31, 1996........ 3.53%
Tax Equivalent Yield*
30 days ended July 31, 1996........ 4.90%
</TABLE>
- ------------
* Based on a Federal income tax rate of 28%.
42
<PAGE>
<TABLE>
<CAPTION>
Michigan Fund
- ------------------------------------------------------------------------------------------------------------------------------------
Class A Shares Class B Shares Class C Shares
------------------------------------ ------------------------------------ -----------------
Redeemable Value Redeemable Value
of a of a
Expressed as hypothetical Expressed as hypothetical Expressed as
a percentage $1,000 a percentage $1,000 a percentage
based on a investment based on a investment based on a
hypothetical at the end of hypothetical at the end of hypothetical
Period $1,000 investment the period $1,000 investment the period $1,000 investment
- ----------------------------------- ----------------- ---------------- ----------------- ---------------- -----------------
<S> <C> <C> <C> <C> <C>
Average Annual Total Return
(including maximum applicable sales charge)
One year ended July 31, 1996....... 2.67% $ 1,026.70 2.33% $ 1,023.30 2.20%
Inception (November 26, 1993) to
July 31, 1996.................... 3.53% $ 1,097.50 3.55% $ 1,098.00
Inception (October 21, 1994) to
July 31, 1996.................... 4.84%
Annual Total Return
(excluding maximum applicable sales charge)
Year ended July 31, 1996........... 3.71% $ 1,037.10 3.32% $ 1,033.20 3.20%
Year ended July 31, 1995........... 5.16% $ 1,051.60 4.78% $ 1,047.80
Inception (October 21, 1994) to
July 31, 1995.................... 5.40%
Inception (November 26, 1993) to
July 31, 1994.................... 1.66% $ 1,016.60 1.42% $ 1,014.20
Aggregate Total Return
(including maximum applicable sales charge)
Inception (November 26, 1993) to
July 31, 1996.................... 9.75% $ 1,097.50 9.80% $ 1,098.00
Inception (October 21, 1994) to
July 31, 1996.................... 8.77%
Yield
30 days ended July 31, 1996........ 3.68% 3.35% 3.35%
Tax Equivalent Yield*
30 days ended July 31, 1996........ 5.11% 4.65% 4.65%
</TABLE>
<TABLE>
<CAPTION>
Michigan Fund
- -----------------------------------
Class C Shares Class D Shares
---------------- ------------------------------------
Redeemable Value Redeemable Value
of a of a
hypothetical Expressed as hypothetical
$1,000 a percentage $1,000
investment based on a investment
at the end of hypothetical at the end of
Period the period $1,000 investment the period
- ----------------------------------- ---------------- ----------------- ----------------
<S> <C> <C> <C>
Average Annual Total Return
(including maximum applicable sales charge)
One year ended July 31, 1996....... $ 1,022.00 2.67% $ 1,026.70
Inception (November 26, 1993) to
July 31, 1996....................
Inception (October 21, 1994) to
July 31, 1996.................... $ 1,087.70 4.72% $ 1,085.40
Annual Total Return
(excluding maximum applicable sales charge)
Year ended July 31, 1996........... $ 1,032.00 3.71% $ 1,037.10
Year ended July 31, 1995...........
Inception (October 21, 1994) to
July 31, 1995.................... $ 1,054.00 5.72% $ 1,057.20
Inception (November 26, 1993) to
July 31, 1994....................
Aggregate Total Return
(including maximum applicable sales charge)
Inception (November 26, 1993) to
July 31, 1996....................
Inception (October 21, 1994) to
July 31, 1996.................... $ 1,087.70 8.54% $ 1,085.40
Yield
30 days ended July 31, 1996........ 3.58%
Tax Equivalent Yield
30 days ended July 31, 1996........ 4.97%
</TABLE>
- ------------
* Based on a Federal income tax rate of 28%.
43
<PAGE>
<TABLE>
<CAPTION>
New Jersey Fund
- ------------------------------------------------------------------------------------------------------------------------------------
Class A Shares Class B Shares Class C Shares
------------------------------------ ------------------------------------ -----------------
Redeemable Value Redeemable Value
of a of a
Expressed as hypothetical Expressed as hypothetical Expressed as
a percentage $1,000 a percentage $1,000 a percentage
based on a investment based on a investment based on a
hypothetical at the end of hypothetical at the end of hypothetical
Period $1,000 investment the period $1,000 investment the period $1,000 investment
- ----------------------------------- ----------------- ---------------- ----------------- ---------------- -----------------
<S> <C> <C> <C> <C> <C>
Average Annual Total Return
(including maximum applicable sales charge)
One year ended July 31, 1996....... 2.65% $ 1,026.50 2.21% $ 1,022.10 2.25%
Inception (November 26, 1993) to
July 31, 1996.................... 4.02% $ 1,111.50 4.04% $ 1,112.10
Inception (October 21, 1994) to
July 31, 1996.................... (0.50)%
Annual Total Return
(excluding maximum applicable sales charge)
Year ended July 31, 1996........... 3.68% $ 1,036.80 3.21% $ 1,032.10 3.24%
Year ended July 31, 1995........... 6.45% $ 1,064.50 6.07% $ 1,060.70
Inception (October 21, 1994) to
July 31, 1995.................... (4.01)%
Inception (November 26, 1993) to
July 31, 1994.................... 1.73% $ 1,017.30 1.59% $ 1,015.90
Aggregate Total Return
(including maximum applicable sales charge)
Inception (November 26, 1993) to
July 31, 1996.................... 11.15% $ 1,111.50 11.21% $ 1,112.10
Inception (October 21, 1994) to
July 31, 1996.................... (0.89)%
Yield
30 days ended July 31, 1996........ 3.54% 3.23% 3.43%
Tax Equivalent Yield*
30 days ended July 31, 1996........ 4.92% 4.49% 4.76%
</TABLE>
<TABLE>
<CAPTION>
New Jersey Fund
- -----------------------------------
Class C Shares Class D Shares
---------------- ------------------------------------
Redeemable Value Redeemable Value
of a of a
hypothetical Expressed as hypothetical
$1,000 a percentage $1,000
investment based on a investment
at the end of hypothetical at the end of
Period the period $1,000 investment the period
- ----------------------------------- ---------------- ----------------- ----------------
<S> <C> <C> <C>
Average Annual Total Return
(including maximum applicable sales charge)
One year ended July 31, 1996....... $ 1,022.50 2.44% $ 1,024.40
Inception (November 26, 1993) to
July 31, 1996....................
Inception (October 21, 1994) to
July 31, 1996.................... $ 991.10 5.03% $ 1,091.10
Annual Total Return
(excluding maximum applicable sales charge)
Year ended July 31, 1996........... $ 1,032.40 3.48% $ 1,034.80
Year ended July 31, 1995...........
Inception (October 21, 1994) to
July 31, 1995.................... $ 959.90 6.51% $ 1,065.10
Inception (November 26, 1993) to
July 31, 1994....................
Aggregate Total Return
(including maximum applicable sales charge)
Inception (November 26, 1993) to
July 31, 1996....................
Inception (October 21, 1994) to
July 31, 1996.................... $ 991.10 9.11% $ 1,091.10
Yield
30 days ended July 31, 1996........ 3.45%
Tax Equivalent Yield*
30 days ended July 31, 1996........ 4.79%
</TABLE>
- ------------
* Based on a Federal income tax rate of 28%.
44
<PAGE>
<TABLE>
<CAPTION>
New York Fund
- ------------------------------------------------------------------------------------------------------------------------------------
Class A Shares Class B Shares Class C Shares
------------------------------------ ------------------------------------ -----------------
Redeemable Value Redeemable Value
of a of a
Expressed as hypothetical Expressed as hypothetical Expressed as
a percentage $1,000 a percentage $1,000 a percentage
based on a investment based on a investment based on a
hypothetical at the end of hypothetical at the end of hypothetical
Period $1,000 investment the period $1,000 investment the period $1,000 investment
- ----------------------------------- ----------------- ---------------- ----------------- ---------------- -----------------
<S> <C> <C> <C> <C> <C>
Average Annual Total Return
(including maximum applicable sales charge)
One year ended July 31, 1996....... 3.41% $ 1,034.10 3.08% $ 1,030.80 3.28%
Inception (November 26, 1993) to
July 31, 1996.................... 4.12% $ 1,114.20 4.14% $ 1,114.70
Inception (October 21, 1994) to
July 31, 1996.................... 5.78%
Annual Total Return
(excluding maximum applicable sales charge)
Year ended July 31, 1996........... 4.46% $ 1,044.60 4.08% $ 1,040.80 4.28%
Year ended July 31, 1995........... 6.03% $ 1,060.30 5.66% $ 1,056.60
Inception (October 21, 1994) to
July 31, 1995.................... 5.97%
Inception (November 26, 1993) to
July 31, 1994.................... 1.61% $ 1,016.10 1.37% $ 1,013.70
Aggregate Total Return
(including maximum applicable sales charge)
Inception (November 26, 1993) to
July 31, 1996.................... 11.42% $ 1,114.20 11.47% $ 1,114.70
Inception (October 21, 1994) to
July 31, 1996.................... 10.50%
Yield
30 days ended July 31, 1996........ 3.92% 3.61% 3.80%
Tax Equivalent Yield*
30 days ended July 31, 1996........ 5.44% 5.01% 5.28%
</TABLE>
<TABLE>
<CAPTION>
New York Fund
- -----------------------------------
Class C Shares Class D Shares
---------------- ------------------------------------
Redeemable Value Redeemable Value
of a of a
hypothetical Expressed as hypothetical
$1,000 a percentage $1,000
investment based on a investment
at the end of hypothetical at the end of
Period the period $1,000 investment the period
- ----------------------------------- ---------------- ----------------- ----------------
<S> <C> <C> <C>
Average Annual Total Return
(including maximum applicable sales charge)
One year ended July 31, 1996....... $ 1,032.80 3.31% $ 1,033.10
Inception (November 26, 1993) to
July 31, 1996....................
Inception (October 21, 1994) to
July 31, 1996.................... $ 1,105.00 5.45% $ 1,098.90
Annual Total Return
(excluding maximum applicable sales charge)
Year ended July 31, 1996........... $ 1,042.80 4.35% $ 1,043.50
Year ended July 31, 1995...........
Inception (October 21, 1994) to
July 31, 1995.................... $ 1,059.70 6.37% $ 1,063.70
Inception (November 26, 1993) to
July 31, 1994....................
Aggregate Total Return
(including maximum applicable sales charge)
Inception (November 26, 1993) to
July 31, 1996....................
Inception (October 21, 1994) to
July 31, 1996.................... $ 1,105.00 9.89% $ 1,098.90
Yield
30 days ended July 31, 1996........ 3.83%
Tax Equivalent Yield*
30 days ended July 31, 1996........ 5.32%
</TABLE>
- ------------
* Based on a Federal income tax rate of 28%.
45
<PAGE>
<TABLE>
<CAPTION>
Pennsylvania Fund
- ------------------------------------------------------------------------------------------------------------------------------------
Class A Shares Class B Shares Class C Shares
------------------------------------ ------------------------------------ -----------------
Redeemable Value Redeemable Value
of a of a
Expressed as hypothetical Expressed as hypothetical Expressed as
a percentage $1,000 a percentage $1,000 a percentage
based on a investment based on a investment based on a
hypothetical at the end of hypothetical at the end of hypothetical
Period $1,000 investment the period $1,000 investment the period $1,000 investment
- ----------------------------------- ----------------- ---------------- ----------------- ---------------- -----------------
<S> <C> <C> <C> <C> <C>
Average Annual Total Return
(including maximum applicable sales charge)
One year ended July 31, 1996....... 3.14% $ 1,031.40 2.80% $ 1,028.00 3.28%
Inception (November 26, 1993) to
July 31, 1996.................... 4.05% $ 1,112.30 4.07% $ 1,112.90
Inception (October 21, 1994) to
July 31, 1996.................... 5.62%
Annual Total Return
(excluding maximum applicable sales charge)
Year ended July 31, 1996........... 4.18% $ 1,041.80 3.80% $ 1,038.00 4.28%
Year ended July 31, 1995........... 5.89% $ 1,058.90 5.51% $ 1,055.10
Inception (October 21, 1994) to
July 31, 1995.................... 5.68%
Inception (November 26, 1993) to
July 31, 1994.................... 1.85% $ 1,018.50 1.61% $ 1,016.10
Aggregate Total Return
(including maximum applicable sales charge)
Inception (November 26, 1993) to
July 31, 1996.................... 11.23% $ 1,112.30 11.29% $ 1,112.90
Inception (October 21, 1994) to
July 31, 1996.................... 10.20%
Yield
30 days ended July 31, 1996........ 3.54% 3.22% 3.38%
Tax Equivalent Yield*
30 days ended July 31, 1996........ 4.92% 4.47% 4.69%
</TABLE>
<TABLE>
<CAPTION>
Pennsylvania Fund
- -----------------------------------
Class C Shares Class D Shares
---------------- ------------------------------------
Redeemable Value Redeemable Value
of a of a
hypothetical Expressed as hypothetical
$1,000 a percentage $1,000
investment based on a investment
at the end of hypothetical at the end of
Period the period $1,000 investment the period
- ----------------------------------- ---------------- ----------------- ----------------
<S> <C> <C> <C>
Average Annual Total Return
(including maximum applicable sales charge)
One year ended July 31, 1996....... $ 1,032.80 3.03% $ 1,030.30
Inception (November 26, 1993) to
July 31, 1996....................
Inception (October 21, 1994) to
July 31, 1996.................... $ 1,102.00 5.13% $ 1,093.10
Annual Total Return
(excluding maximum applicable sales charge)
Year ended July 31, 1996........... $ 1,042.80 4.07% $ 1,040.70
Year ended July 31, 1995...........
Inception (October 21, 1994) to
July 31, 1995.................... $ 1,056.80 6.10% $ 1,061.00
Inception (November 26, 1993) to
July 31, 1994....................
Aggregate Total Return
(including maximum applicable sales charge)
Inception (November 26, 1993) to
July 31, 1996....................
Inception (October 21, 1994) to
July 31, 1996.................... $ 1,102.00 9.31% $ 1,093.10
Yield
30 days ended July 31, 1996........ 3.44%
Tax Equivalent Yield*
30 days ended July 31, 1996........ 4.78%
</TABLE>
- ------------
* Based on a Federal income tax rate of 28%.
46
<PAGE>
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 a 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, dated February 14, 1991, of the Trust, as amended
(the "Declaration"), 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 Arizona Fund, the
California Fund, the Florida Fund, the Massachusetts Fund, the Michigan Fund,
the New Jersey Fund, the New York Fund and the Pennsylvania 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 each 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 relevant Fund and have identical voting,
dividend, liquidation and other rights and the same terms and conditions, except
that Class B, Class C and Class D shares bear certain expenses related to the
account maintenance and/or distribution expenditures. The Board of Trustees may
classify and reclassify the shares of any Series into additional classes at a
future date.
All shares of the Trust have equal voting rights, except that only shares
of the respective Series are entitled to vote on matters concerning only that
Series and, as noted above, Class B, Class C and Class D shares have exclusive
voting rights with respect to matters relating to the account maintenance andor
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 a Series 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 andor distribution of the Class B, Class C and Class D
shares are borne solely by such class. There normally will be no meeting of
shareholders for the purpose of electing Trustees unless and until such time as
less than a majority of the Trustees holding office have been elected by
shareholders, at which time the Trustees then in office will call a
shareholders' meeting for the election of Trustees. Shareholders, in accordance
with the terms of the Declaration, may 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 non-
assessable, have no preference, preemptive, conversion, exchange or similar
rights, and will be freely transferable. Holders of shares of any Series are
entitled to redeem their shares as set forth elsewhere herein and in the
Prospectus. Shares do not have cumulative voting rights and the holders of more
than 50% of the shares of the Trust voting for the election of Trustees can
elect all of the Trustees if they choose to do so and in such event the holders
of the remaining shares would not be able to elect any Trustees. No amendments
may be made to the Declaration without the affirmative vote of a majority of the
outstanding shares of the Trust.
47
<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 each Fund based on the Funds' net assets and
number of shares outstanding on July 31, 1996 is set forth below.
<TABLE>
<CAPTION>
Class A Class B Class C Class D
---------- ----------- -------- ----------
<S> <C> <C> <C> <C>
ARIZONA FUND
Net Assets....................................................... $ 813,180 $ 2,884,780 $135,060 $ 619,008
========== =========== ======== ==========
Number of Shares Outstanding..................................... 80,693 286,287 13,395 61,417
========== =========== ======== ==========
Net Asset Value Per Share (net assets divided by number of shares
outstanding)................................................... $ 10.08 $ 10.08 $ 10.08 $ 10.08
Sales Charge (for Class A and Class D shares: 1.00% of offering
price; 1.01% of net asset value per share)*.................... .10 ** ** .10
---------- ----------- -------- ----------
Offering Price................................................... $ 10.18 $ 10.08 $ 10.08 $ 10.18
========== =========== ======== ==========
CALIFORNIA FUND
Net Assets....................................................... $3,161,461 $ 9,918,998 $ 55,114 $2,185,238
========== =========== ======== ==========
Number of Shares Outstanding..................................... 314,706 987,501 5,486 217,532
========== =========== ======== ==========
Net Asset Value Per Share (net assets divided by number of shares
outstanding)................................................... $ 10.05 $ 10.04 $ 10.05 $ 10.05
Sales Charge (for Class A and Class D shares: 1.00% of offering
price; 1.01% of net asset value per share)*.................... .10 ** ** .10
---------- ----------- -------- ----------
Offering Price................................................... $ 10.15 $ 10.04 $ 10.05 $ 10.15
========== =========== ======== ==========
FLORIDA FUND
Net Assets....................................................... $7,874,368 $13,690,359 $ 51,502 $6,405,856
========== =========== ======== ==========
Number of Shares Outstanding..................................... 790,910 1,375,127 5,204 643,764
========== =========== ======== ==========
Net Asset Value Per Share (net assets divided by number of shares
outstanding)................................................... $ 9.96 $ 9.96 $ 9.90 $ 9.95
Sales Charge (for Class A and Class D shares: 1.00% of offering
price; 1.01% of net asset value per share)*.................... .10 ** ** .10
---------- ----------- -------- ----------
Offering Price................................................... $ 10.06 $ 9.96 $ 9.90 $ 10.05
========== =========== ======== ==========
MASSACHUSETTS FUND
Net Assets....................................................... $1,719,269 $ 4,576,988 $210,323 $ 889,590
========== =========== ======== ==========
Number of Shares Outstanding..................................... 172,634 459,494 21,134 89,337
========== =========== ======== ==========
Net Asset Value Per Share (net assets divided by number of shares
outstanding)................................................... $ 9.96 $ 9.96 $ 9.95 $ 9.96
Sales Charge (for Class A and Class D shares: 1.00% of offering
price; 1.01% of net asset value per share)*.................... .10 ** ** .10
---------- ----------- -------- ----------
Offering Price................................................... $ 10.06 $ 9.96 $ 9.95 $ 10.06
========== =========== ======== ==========
MICHIGAN FUND
Net Assets....................................................... $1,640,666 $ 1,841,924 $ 1,163 $ 541,318
========== =========== ======== ==========
Number of Shares Outstanding..................................... 164,986 185,219 117 54,464
========== =========== ======== ==========
Net Asset Value Per Share (net assets divided by number of shares
outstanding)................................................... $ 9.94 $ 9.94 $ 9.94 $ 9.94
Sales Charge (for Class A and Class D shares: 1.00% of offering
price; 1.01% of net asset value per share)*.................... .10 ** ** .10
---------- ----------- -------- ----------
Offering Price................................................... $ 10.04 $ 9.94 $ 9.94 $ 10.04
========== =========== ======== ==========
</TABLE>
48
<PAGE>
<TABLE>
<CAPTION>
Class A Class B Class C Class D
---------- ----------- -------- ----------
<S> <C> <C> <C> <C>
NEW JERSEY FUND
Net Assets....................................................... $2,662,645 $ 5,152,224 $271,989 $ 540,229
========== =========== ======== ==========
Number of Shares Outstanding..................................... 263,436 509,424 29,696 53,434
========== =========== ======== ==========
Net Asset Value Per Share (net assets divided by number of shares
outstanding)................................................... $ 10.11 $ 10.11 $ 9.16 $ 10.11
Sales Charge (for Class A and Class D shares: 1.00% of offering
price; 1.01% of net asset value per share)*.................... .10 ** ** .10
---------- ----------- -------- ----------
Offering Price................................................... $ 10.21 $ 10.11 $ 9.16 $ 10.21
========== =========== ======== ==========
NEW YORK FUND
Net Assets....................................................... $3,723,308 $10,070,519 $214,138 $3,912,159
========== =========== ======== ==========
Number of Shares Outstanding..................................... 370,162 1,001,114 21,296 388,837
========== =========== ======== ==========
Net Asset Value Per Share (net assets divided by number of shares
outstanding)................................................... $ 10.06 $ 10.06 $ 10.06 $ 10.06
Sales Charge (for Class A and Class D shares: 1.00% of offering
price; 1.01% of net asset value per share)*.................... .10 ** ** .10
---------- ----------- -------- ----------
Offering Price................................................... $ 10.16 $ 10.06 $ 10.06 $ 10.16
========== =========== ======== ==========
PENNSYLVANIA FUND
Net Assets....................................................... $ 832,986 $ 6,263,404 $ 1,188 $1,806,923
========== =========== ======== ==========
Number of Shares Outstanding..................................... 82,402 619,654 117 178,650
========== =========== ======== ==========
Net Asset Value Per Share (net assets divided by number of shares
outstanding)................................................... $ 10.11 $ 10.11 $ 10.15 $ 10.11
Sales Charge (for Class A and Class D shares: 1.00% of offering
price; 1.01% of net asset value per share)*.................... .10 ** ** .10
---------- ----------- -------- ----------
Offering Price................................................... $ 10.21 $ 10.11 $ 10.15 $ 10.21
========== =========== ======== ==========
</TABLE>
- ------------
* Rounded to the nearest one-hundredth percent; assumes maximum sales charge is
applicable.
** Class B and Class C shares are not subject to an initial sales charge but may
be subject to a CDSC on redemption of shares within one year of purchase. See
"Purchase of Shares--Deferred Sales Charge Alternatives--Class B and Class C
Shares" in the Prospectus and "Redemption of Shares--Deferred Sales
Charges--Class B and Class C Shares" herein.
INDEPENDENT AUDITORS
Deloitte & Touche LLP, 117 Campus Drive, Princeton, New Jersey 08540-6400,
has been selected as the independent auditors of the Trust. The independent
auditors are responsible for auditing the annual financial statements of each
Fund.
CUSTODIAN
The Bank of New York, 90 Washington Street, 12th Floor, New York, New York
10005, acts as the custodian of the Trust's assets. The custodian is responsible
for establishing a separate account for each Fund, safeguarding and controlling
each Fund's cash and securities, handling the delivery of securities and
collecting interest on each Fund's investments.
TRANSFER AGENT
Merrill Lynch Financial Data Services, Inc. (the "Transfer Agent"), 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 Fund shares and the opening, maintenance and servicing of Fund
shareholder accounts. See "Management of the Trust--Transfer Agency Services" in
the Prospectus.
LEGAL COUNSEL
Brown & Wood LLP, One World Trade Center, New York, New York 10048-0557, is
counsel for the Trust.
49
<PAGE>
REPORTS TO SHAREHOLDERS
The fiscal year of each Fund ends on July 31 of each year. The Trust sends
to shareholders of each Fund at least semi-annually reports showing the Fund's
portfolio and other information. An annual report, containing financial
statements audited by independent auditors, is sent to shareholders each year.
After the end of each year shareholders will receive Federal income tax
information regarding dividends and capital gains distributions.
ADDITIONAL INFORMATION
The Prospectus and this Statement of Additional Information do not contain
all the information set forth in the Registration Statement and the exhibits
relating thereto, which the Trust has filed with the Commission, Washington,
D.C., under the Securities Act and the 1940 Act, to which reference is hereby
made.
The Declaration, a copy of which is on file in the office of the Secretary
of the Commonwealth of Massachusetts, provides that the name "Merrill Lynch
Multi-State Limited Maturity Municipal Series Trust" refers to the Trustees
under the Declaration collectively as Trustees, but not as individuals or
personally; and no Trustee, shareholder, officer, employee or agent of the Trust
shall be held to any personal liability; nor shall resort be had to any such
person's private property for the satisfaction of any obligation or claim of the
Trust but the "Trust Property" only shall be liable.
To the knowledge of the Trust, the following persons or entities owned
beneficially 5% or more of a class of a Fund's shares on November 1, 1996.
<TABLE>
<CAPTION>
Percent of
Name Address Class
--------------------------- ---------------------------- ---------------
<S> <C> <C> <C>
California Fund............. Bernard Lipinsky and 700 Front St. #2501 10.3% Class A
Dorris Lipinsky San Diego, CA 92101 6.4% Class B
Blush & Co. P.O. Box 976 5.7% Class D
New York, NY 10268
Florida Fund................ Est. of Edward J. McBride P.O. Box 880 11.4% Class D
Fort Myers, FL 33902
Massachusetts Fund.......... Heatbath Corporation P.O. Box 2978 7.8% Class A
Attn: Mary Simpson Springfield, MA 01101
Williams W. Walen and 129 Overbrook Rd. 10.2% Class B
Donna Walen Long Meadow, MA 01106
Michigan Fund............... Thomas O. Muller, III 21 S. End Ave. 10.2% Class A
# 1E PH Regatta
New York, NY 10280
Margarete Drettmann 32901 Gratiot Ave. 5.4% Class B
c/o Richard Zimmer Active Roseville, MI 48066
Tool
New York Fund............... Morris M. Greenberg 601 Stratford Rd. 7.4% Class D
North Baldwin, NY 11510
Karen E. Gitelson 2 Fox Run Rd. 5.5% Class D
Briarcliff, NY 10510
Pennsylvania Fund........... A.J. Clegg 1400 N. Providence Rd. #3010 12.3% Class B
Rose Tree Corp. Center II Media, PA 19063
Martin and Sylvia Kreithen 900 Roscommon Rd. 16.3% Class D
Bryn Mawr, PA 19010
</TABLE>
50
<PAGE>
APPENDIX A
ECONOMIC AND FINANCIAL CONDITIONS IN ARIZONA
The following information is a brief summary of factors affecting the
economy of the state and does not purport to be a complete description of such
factors. Other factors will affect issuers. The summary is based primarily upon
one or more publicly available offering statements relating to debt offerings of
state issuers; however, it has not been updated nor will it be updated during
the year. The Trust has not independently verified this information.
Over the past several decades, the State's economy has grown faster than
most other regions of the country as measured by nearly every major indicator of
economic growth, including population, employment, and aggregate personal
income. Although the rate of growth slowed considerably during the late 1980s
and early 1990s, the State's efforts to diversify its economy have enabled it to
realize, and then sustain, increasing growth rates in more recent years. While
jobs in industries such as mining and agriculture have diminished in relative
importance to the State's economy over the past two decades, substantial growth
has occurred in the areas of aerospace, high technology, light manufacturing and
the service industry. Other important industries that contributed to the State's
growth in past years, such as construction and real estate, have rebounded from
substantial declines during the late 1980s and early 1990s, and, like the rest
of the State, are experiencing positive growth.
Arizona's strong economy, warm climate, and reasonable cost of living have
encouraged many people to move to the State in recent years. Between 1985 and
1990, the State ranked fifth in the country in population growth, and Maricopa
County, the State's most populous county, had the single largest population
inflow (in absolute terms) of any county in the country during that period.
Since 1991, as a result of both the State's relatively good economy and the
troubles experienced in surrounding areas like California, the State's
population has grown by approximately 392,000, or 10.4%, including an increase
of 105,000, or 2.6%, in 1995 alone. Population growth is expected to continue at
or above 1995 levels for the foreseeable future.
Part of the State's popularity in recent years can be attributed to the
favorable job climate. Following 1994's near record employment rate increase of
6.7%, the State achieved an employment rate increase of 5.4% in 1995, recording
more than 91,000 new jobs. Once again, the service sector of the economy, which
represents more than 29% of all jobs in the State, showed significant growth. A
relatively sound United States economy, a stronger economy in California (which
historically has been a prime market for Arizona goods and services) and
continued growth in high technology, manufacturing and services should enable
the State to realize positive, though more modest, gains in job growth in 1996.
The 1995 unemployment rate was 5.1%.
The State's economic growth in recent times has enabled Arizonans to
realize substantial gains in personal income. While the State's per capita
personal income generally varies between 5% and 15% below the national average
due to such factors as the chronic poverty on the State's Indian reservations,
the State's relatively high numbers of retirees and children, and the State's
below-average wage scale, the State's aggregate personal income grew nearly 8.6%
during 1995 to approximately $84.8 billion, which translated into a gain in real
personal income of 6.1%, or $4.5 billion, over 1994.
The gains in per capita personal income during this period led to continued
strong growth in retail sales. While the 8.9% retail sales growth rate in 1995
was lower than 1994's 12.0% increase, the State's strong employment and personal
income figures should provide for continued growth in future years.
The State government's fiscal situation has improved substantially in
recent years. After experiencing several years of budget shortfalls requiring
mid-year adjustments, the State has had budget surpluses. Although an amendment
to the State's constitution requiring a 2/3 majority vote in both houses of the
Legislature to pass a tax or fee increase constrains the State's ability to
raise additional revenue when needed, the State has placed some of its surplus
revenue in a rainy-day fund.
In July 1994, a sharply divided Arizona Supreme Court ruled that the
State's current system for financing public education itself created substantial
disparities in facilities among school districts and therefore violated the
A-1
<PAGE>
provisions of Article XI, Section 1 of the Arizona Constitution, which requires
the Legislature to establish and maintain "a general and uniform public school
system." The Court remanded the case to the Superior Court "to determine
whether, within a reasonable time, legislative action has been taken [to correct
this situation]." In response to a subsequent motion for clarification, the
Supreme Court ordered that, pending such legislative action or further order of
the Supreme Court, "which would have prospective application only," the public
school system "continue under existing statutes, and the validity and
enforceability of past and future acts, bonded indebtedness and obligations
incurred under applicable statutes, as long as they are in force and effect, are
assured." In May 1995, a court dismissed a taxpayer's challenge to a school
district bond issue that was authorized at an election subsequent to the Supreme
Court decision on the ground that the Supreme Court decision contemplated and
approved such bond issues pending legislative action or further court order. A
new system of public school financing has not yet been implemented. However, in
November, 1996, a Superior Court judge ruled that all public school funding be
cut off after June 30, 1998 unless legislative action is taken to remedy the
situation. It is unclear what action the legislature will take in light of this
ruling or what effect, if any, the ruling will have on Arizona school district
bonds.
Maricopa County is the State's most populous and prosperous county,
accounting for nearly 60% of the State's population and a substantial majority
of its wage and salary employment and aggregate personal income. Within its
borders lie the City of Phoenix, the State's largest city and the seventh
largest city in the United States, and the Cities of Scottsdale, Tempe, Mesa,
Glendale, Chandler, and Peoria, as well as the Towns of Paradise Valley and
Gilbert. Good transportation facilities, a substantial pool of available labor,
a variety of support industries and a warm climate have helped make Maricopa
County a major business center in the southwestern United States. Once dependent
primarily on agriculture, Maricopa County has substantially diversified its
economic base. Led by the service sector, which includes transportation,
communications, public utilities, hospitality and entertainment, trade, finance,
insurance, real estate, and government, the County achieved an overall
employment growth rate of 6.3% in 1995. In addition, several large,
publicly-traded companies, such as The Dial Corp., Phelps Dodge and MicroAge,
have their headquarters in Maricopa County, while others, such as Motorola,
Intel and Honeywell, conduct major operations there. Already home to a variety
of professional sports teams, including the Phoenix Suns and Arizona Cardinals,
the County was also awarded one of two new major league baseball franchises; the
Arizona Diamondbacks are expected to begin play in 1998 upon completion of a
stadium currently under construction in downtown Phoenix.
Pima County is the State's second most populous county, and includes the
City of Tucson. Traditionally, Pima County's economy has been based primarily
upon manufacturing, mining, government, agriculture, tourism, education, and
finance. Hughes Aircraft, which transferred its Hughes Missile Systems division
to Tucson from Canoga Park, California, several years ago, and several large
mining companies, including Magma Copper, ASARCO, and Phelps Dodge, anchor the
non-public sector of the Tucson economy. During the past decade, the County, and
Tucson in particular, has become a base for hundreds of computer software
companies, as well as a number of companies operating in the areas of
environmental technology, bioindustry, and telecommunications. The County did
experience a significant drop in the rate of job growth from 7.0% in 1994 to
2.3% in 1995, although positive job growth is expected to continue.
In 1994, two special purpose irrigation districts, formed for the purpose
of issuing bonds to finance the purchase of Colorado River water from the
Central Arizona Project ("CAP"), filed for bankruptcy under Chapter 9 of the
United States Bankruptcy Code due to the districts' inability to collect tax
revenue in amounts and at times sufficient to service their bonded debt. The
financial problems that led to the districts' default arose from a combination
of the unexpectedly high cost of constructing the CAP and delivering the water
to the districts, plummeting land values, resulting in a need to increase
property taxes in order to pay the districts' bonds, and the refusal by many
land owners in the districts to shoulder the increased tax burden. In June 1995,
a bankruptcy plan was confirmed for one district which gave back to bondholders
57 cents of their principal and placed an additional 42 cents on the dollar in
new 8 percent bonds maturing in seven years. The proceedings with respect to the
second district are continuing.
A-2
<PAGE>
APPENDIX B
ECONOMIC AND FINANCIAL CONDITIONS IN CALIFORNIA
The following information is a brief summary of factors affecting the
economy of the State and does not purport to be a complete description of such
factors. Other factors will affect issuers. The summary is based primarily upon
one or more publicly available offering statements relating to debt offerings of
state issuers, however, it has not been updated nor will it be updated during
the year. The Trust has not independently verified the information.
Economic Conditions
The economy of the State of California (sometimes referred to herein as the
"State") is the largest among the 50 states and one of the largest in the world.
This diversified economy has major components in agriculture, manufacturing,
high technology, trade, entertainment, tourism, construction and services. Total
State gross domestic product of about $890 billion in 1995 was larger than all
but six nations in the world.
California's July 1, 1994 population of over 32 million represented over 12
percent of the total United States population. The official 1990 Census
population was 29,760,021 as of April 1, 1990, which represented an increase of
over 6 million persons, or 26 percent, during the decade of the 1980s. As of the
April 1, 1990 Census, the median age of California's population was 31.5 years,
younger than the 1990 U.S. median of 32.9 years.
California's population is concentrated in metropolitan areas. As of the
April 1, 1990 Census, 96 percent resided in the 23 Metropolitan Statistical
Areas in the State. Overall, California's population per square mile was 191 in
1990. As of July 1, 1994, 69 percent of the population of the State was located
in the two consolidated Metropolitan Statistical Areas in California. As of July
1, 1995, the 5-county Los Angeles area accounted for 49 percent, with 15.6
million residents. The 10-county San Francisco Bay Area represented 21 percent,
with a population of 6.6 million.
After suffering through a severe recession, California's economy has been
on a steady recovery since the start of 1994. Employment grew by over 500,000 in
1994 and 1995, and the pre-recession level of total employment is expected to be
matched in 1996. The strongest growth has been in export-related industries,
business services, electronics, entertainment and tourism, all of which have
offset the recession-related losses which were heaviest in aerospace and
defense-related industries (which accounted for two-thirds of the job losses),
finance and insurance. Residential housing construction, with new permits for
under 100,000 annual new units issued in 1994 and 1995, is weaker than in
previous recoveries, but has been growing slowly since 1993.
The State. In the years following enactment of the Federal Tax Reform Act
of 1986, and conforming changes to the State's tax laws, taxpayer behavior
became much more difficult to predict, and the State experienced a series of
fiscal years in which revenue came in significantly higher or lower than
original estimates. The 1989-90 Fiscal Year ended with revenues below estimates,
so that the State's budget reserve (the Special Fund for Economic Uncertainties
or "SFEU") was fully depleted by June 30, 1990. This date essentially coincided
with the start of the current recession, which severely affected State General
Fund revenues and increased expenditures above initial budget appropriations due
to greater health and welfare costs. The State's budget problems in recent years
have also been caused by a structural imbalance which has been identified by the
current and previous Administrations. The largest General Fund Program--K-14
education, health, welfare and corrections--was increasing faster than the
revenue base, driven by the State's rapid population growth. These pressures
will continue as population trends maintain strong demand for health and welfare
services, as the school-age population continues to grow and as the State's
corrections program responds to a "Three Strikes" law enacted in 1994, which
requires mandatory life prison terms for certain third-time felony offenders.
Prior Years. As a result of these factors and others, from the late 1980s
until 1992-93, the State had a period of budget imbalance. During this period,
expenditures exceeded revenues in four out of six years, and the State
accumulated and sustained a budget deficit in the SFEU approaching $2.8 billion
at its peak at June 30, 1993. Starting in the 1990-91 Fiscal Year and for each
fiscal year thereafter, each budget required multi-billion dollar actions to
bring projected revenues and expenditures into balance and to close large
"budget gaps" which were identified. Despite budget actions by the Legislature,
the effects of the recession led to large, unanticipated deficits in the budget
reserve, the SFEU, as compared to projected positive balances. By the 1993-94
Fiscal Year,
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the accumulated deficit was so large that it was impractical to budget to retire
it in one year, so a two-year program was implemented, using the issuance of
revenue anticipation warrants to carry a portion of the deficit over the end of
the fiscal year. When the economy failed to recover sufficiently in 1993-94, a
second two-year plan was implemented in 1994-95.
Another consequence of the accumulated budget deficits, together with other
factors such as disbursement of funds to local school districts "borrowed" from
future fiscal years and hence not shown in the annual budget, was to
significantly reduce the State's cash resources available to pay its ongoing
obligations. The State's cash condition became so serious in late Spring of 1992
that the State Controller was required to issue revenue anticipation warrants
maturing in the following fiscal year in order to pay the State's continuing
obligations. The State was forced to rely increasingly on external debt markets
to meet its cash needs, as a succession of notes and warrants were issued in the
period from June 1992 to July 1994, often needed to pay previously maturing
notes or warrants. These borrowings were used also in part to spread out the
repayment of the accumulated budget deficit over the end of the fiscal year.
The 1994-95 Fiscal Year represented the fourth consecutive year that the
Governor and the Legislature were faced with a very difficult budget environment
to produce a balanced budget. Many program cuts and budgetary adjustments had
already been made in the last three years. The Governor's budget proposal, as
updated in May and June, 1994, recognized that the accumulated deficit could not
be repaid in one year and proposed a two-year solution.
Pursuant to the Budget Adjustment Law (the "Law"), the State Controller was
required to make a report by November 15, 1994 on whether the projected cash
resources for the General Fund as of June 30, 1995 would decrease more than $430
million from the amount projected by the State in its Official Statement in July
1994 for the sale of $4,000,000,000 of revenue anticipation warrants. On
November 15, 1994, the State Controller issued the report on the State's cash
position required by the Law. The report indicated that the cash position of the
General Fund on June 30, 1995 would be $581 million better than was estimated in
the July 1994 cash flow projections and therefore, no budget adjustment
procedures would be invoked for the 1994-95 Fiscal Year.
On October 15, 1995, when the State Controller, in conjunction with the
Legislative Analyst's Office, reviewed the estimated cash condition of the
General Fund for the 1995-96 Fiscal Year, the State Controller estimated that
the General Fund would not have negative internal cash resources on June 30,
1996 (i.e., external borrowing would be needed to pay all obligations due). If a
cash shortfall had been identified by the State Controller, the State
Legislature would have been required to enact legislation providing for
sufficient General Fund expenditure reductions, revenue increases, or both.
1995-96. On January 10, 1995, the Governor presented his 1995-96 Fiscal
Year budget proposal (the "Proposed Budget"). Two of the principal features of
the Proposed Budget were a phased 15% cut in personal income and corporate taxes
and a further expansion of the "realignment" process to transfer more
responsibility and funding sources for certain health and welfare programs to
local governments. Neither of these proposals was approved by the Legislature.
As a result of the improving economy, with resulting improved revenue and
caseload estimates, the State entered the 1995-96 budget negotiations with the
smallest nominal "budget gap" to be enclosed in many years.
The 1995-96 Budget Act was signed by the Governor on August 3, 1995. The
Budget Act projects General Fund revenues and transfers of $44.1 billion, a 3.5
percent increase from the prior year. Expenditures are budgeted at $43.4
billion, a 4 percent increase. The Department of Finance projects that, after
repaying the last of the carryover budget deficit, there will be a positive
balance of $28 million in the budget reserve, the SFEU, at June 30, 1996. The
Budget Act also projects Special Fund revenues of $12.7 billion and appropriates
Special Fund expenditures of $13.4 billion.
1996-1997. The following are principal features of the 1996-97 Budget Act:
1. Proposition 98 funding for schools and community college districts
increased by almost $1.6 billion (General Fund) and $1.65 billion total
above revised 1995-96 levels. Almost half of this money was budgeted to
fund class-size reductions in kindergarten and grades 1-3. Also, for the
second year in a row, the full cost of living allowance (3.2 percent) was
funded. The Proposition 98 increases have brought K-12 expenditures to
almost $4,800 per pupil (also called per ADA, or Average Daily Attendance),
an almost
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15% increase over the level prevailing during the recession years.
Community colleges will receive an increase in funding of $157 million for
1996-97 out of this $1.6 billion total.
Because of the higher than projected revenues in 1995-96, an
additional $1.1 billion ($190 per K-12 ADA and $145 million for community
colleges) was appropriated and retroactively applied towards the 1995-96
Proposition 98 guarantee, bringing K-12 expenditures in that year to over
$4,600 per ADA. These new funds were appropriated for a variety of
purposes, including block grants, allocations for each school site,
facilities for class size reduction, and a reading initiative. Similar
retroactive increases totaling $230 million, based on final figures on
revenues and State population growth, were made to the 1991-92 and the
1994-95 Proposition 98 guarantees, most of which was allocated to each
school site.
2. The Budget Act assumed savings of approximately $660 million in
health and welfare costs which required changes in federal law, including
federal welfare reform. The Budget Act further assumed federal law changes
in August 1996 which would allow welfare cash grant levels to be reduced by
October 1, 1996. These cuts totaled approximately $163 million of the
anticipated $660 million savings.
3. A 4.9 percent increase in funding for the University of California
($130 million General Fund) and the California State University system
($101 million General Fund), with no increases in student fees, maintaining
the second year of the Governor's four-year "Compact" with the State's
higher education units.
4. The Budget Act assumed the federal government will provide
approximately $700 million in new aid for incarceration and health care
costs of illegal immigrants. These funds reduce appropriations in these
categories that would otherwise have to be paid from the General Fund. (For
purposes of cash flow projections, the Department of Finance expects $540
million of this amount to be received during the 1996-97 fiscal year.)
5. General Fund support for the Department of Corrections was
increased by about 7 percent over the prior year, reflecting estimates of
increased prison population.
6. With respect to aid to local governments, the principal new
programs included in the Budget Act are $100 million in grants to cities
and counties for law enforcement purposes, and budgeted $50 million for
competitive grants to local governments for programs to combat juvenile
crime.
The Budget Act did not contain any tax increases. As noted, there was a
reduction in corporate taxes. In addition, the Legislature approved another
one-year suspension of the Renters Tax Credit, saving $520 million in
expenditures.
Federal Welfare Reform. Following enactment of the 1996-97 Budget Act,
Congress passed and the President signed (on August 22, 1996) the Personal
Responsibility and Work Opportunity Act of 1996 (P.L. 104-193, the "Law") making
a fundamental reform of the current welfare system. Among many provisions, the
Law includes: (i) conversion of Aid to Families with Dependent Children from an
entitlement program to a block grant titled Temporary Assistance for Needy
Families (TANF), with lifetime time limits on TANF recipients, work requirements
and other changes; (ii) provisions denying certain federal welfare and public
benefits to legal noncitizens, allowing states to elect to deny additional
benefits (including TANF) to legal noncitizens, and generally denying almost all
benefits to illegal immigrants; and (iii) changes in the Food Stamp program,
including reducing maximum benefits and imposing work requirements.
The Law requires states to implement the new TANF program not later than
July 1, 1997 and provides California approximately $3.7 billion in block grant
funds for FY 1996-97 for the provisions of the Law. States are allowed to
implement TANF as soon as possible and will receive a prorated block grant
effective the date of application. The California State Plan is to be submitted
in time to allow grant reductions to be implemented effective January 1, 1997
(allowing $92 million of the $163 million referred to in Paragraph2 above to be
saved) and to allow the State to capture approximately $267 million in
additional federal block grant funds over the currently budgeted level. None of
the other federal changes needed to achieve the balance of the $660 million cost
savings were enacted. Thus, in lieu of the $660 million savings initially
assumed to be saved, it is now projected that savings will total approximately
$360 million.
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A preliminary analysis of the law by the Legislative Analyst's Office
indicates that an overall assessment of how these changes will affect the
State's General Fund will not be known for some time, and will depend on how the
State implements the Law. There are many choices including how quickly the State
implements the Law; the degree to which the State elects to make up for cuts in
federal aid, provide more aid to counties, or cut some of its own existing
programs for noncitizens; and the State's ability to avoid certain penalties
written into the Law.
Local Governments
The primary units of local government in California are the counties,
ranging in population from 1,300 (Alpine) to over 9,000,000 (Los Angeles).
Counties are responsible for the provision of many basic services, including
indigent healthcare, welfare, courts, jails and public safety in unincorporated
areas. There are also about 480 incorporated cities and thousands of other
special districts formed for education, utility and other services. The fiscal
condition of local governments has been constrained since the enactment of
"Proposition 13" in 1978, which reduced and limited the future growth of
property taxes and limited the ability of local governments to impose "special
taxes" (those devoted to a specific purpose) without two-thirds voter approval.
A recent California Supreme Court decision has upheld the constitutionality of
an initiative statute, previously held invalid by lower courts, which requires
voter approval for "general" as well as "special" taxes at the local level.
Counties, in particular, have had fewer options to raise revenues than other
local government entities and have been required to maintain many services.
In the aftermath of Proposition 13, the State provided aid from the General
Fund to make up some of the loss of property tax moneys, including taking over
the principal responsibility for funding local K-12 schools and community
colleges. Under the pressure of the recent recession, the Legislature has
eliminated remnants of this post-Proposition 13 aid to entities other than K-14
education districts, although it has also provided additional funding sources
(such as sales taxes) and reduced mandates for local services. Many counties
continue to be under severe fiscal stress. While such stress has in recent years
most often been experienced by smaller, rural counties, larger urban counties,
such as Los Angeles, have also been affected. Orange county implemented
significant reductions in services and personnel, and continues to face fiscal
constraints in the aftermath of its bankruptcy, which had been caused by large
investment losses in its pooled investment funds.
Constitutional and Statutory Limitations; Recent Initiatives; Pending
Legislation
Constitutional and Statutory Limitations. Article XIIIA of the California
Constitution (which resulted from the voter-approved Proposition 13 in 1978)
limits the taxing powers of California public agencies. Article XIIIA provides
that the maximum ad valorem tax on real property cannot exceed 1 percent of the
"full cash value" of the property and effectively prohibits the levying of any
other ad valorem tax on real property for general purposes. However, on May 3,
1986, Proposition 46, an amendment to Article XIIIA, was approved by the voters
of the State of California, creating a new exemption under Article XIIIA
permitting an increase in ad valorem taxes on real property in excess of 1
percent for bonded indebtedness approved by two-thirds of the voters voting on
the proposed indebtedness. "Full cash value" is defined as "the County
Assessor"s valuation of real property as shown on the 1975-76 tax bill under
"full cash value" or, thereafter, the appraised value of real property when
purchased, newly constructed, or a change in ownership has occurred after the
1975 assessment'. The "full cash value" is subject to annual adjustment to
reflect increases (not to exceed 2 percent) or decreases in the consumer price
index or comparable local data, or to reflect reductions in property value
caused by damage, destruction or other factors.
Article XIIIB of the California Constitution limits the amount of
appropriations of the State and of the local governments to the amount of
appropriations of the entity for the prior year, adjusted for changes in the
cost of living, population and the services that local government has financial
responsibility for providing. To the extent that the revenues of the State
and/or local government exceed its appropriations, the excess revenues must be
rebated to the public either directly or through a tax decrease. Expenditures
for voter-approved debt services are not included in the appropriations limit.
In 1986, California voters approved an initiative statute known as
Proposition 62. This initiative (i) required that any tax for general
governmental purposes imposed by a local governmental entity be approved by a
majority of the electorate of the governmental entity, (ii) required that any
special tax (defined as taxes levied for
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other than general government purposes) imposed by a local governmental entity
be approved by a two-thirds vote of the voters within that jurisdiction, (iii)
restricted the use of revenues from a special tax to the purposes or for the
services for which the special tax is imposed, (iv) prohibited the imposition of
ad valorem taxes on real property by local governmental entities except as
permitted by Article XIIIA, (v) prohibited the imposition of transaction taxes
and sales taxes on the sale of real property by local governments, (vi) required
that any tax imposed by a local government on or after August 1, 1985 be
ratified by a majority vote of the electorate within two years of the adoption
of the initiative or be terminated by November 15, 1988, (vii) required that, in
the event a local government fails to comply with the provisions of this
measure, a reduction in the amount of property tax revenues allocated to such
local government occurs in an amount equal to the revenues received by such
entity attributable to the tax levied in violation of the initiative, and (viii)
permitted those provisions to be amended exclusively by the voters of the State
of California.
On September 28, 1995 the California Supreme Court upheld the
constitutionality of the provision requiring a two-thirds vote in order for a
local government to impose a "special tax". Although the Supreme Court has yet
to rule on the provision requiring a majority vote for a "general tax", it
appears that the Supreme Court is favorably disposed to uphold that portion of
Proposition 62 as well. In that event, a number of taxes currently being
collected (especially by counties and general law cities) would be invalidated.
Prior collection of such taxes may also be subject to claims for refund unless
the Supreme Court chooses to apply its ruling prospectively. The California
Supreme Court has yet to consider the validity of Proposition 62 with regard to
charter cities.
Recent Initiatives. At the November 9, 1988 general election, California
voters approved an initiative known as Proposition 98. This initiative amends
Article XIIIB to require that (i) the California Legislature establish a prudent
state reserve fund in an amount it shall deem reasonable and necessary and (ii)
revenues in excess of amounts permitted to be spent and which would otherwise be
returned pursuant to Article XIIIB by revision of tax rates or fee schedules be
transferred and allocated (up to a maximum of 40%) to the State School Fund and
be expended solely for purposes of instructional improvement and accountability.
Proposition 98 also amends Article XVI to require that the State of California
provide a minimum level of funding for public schools and community colleges.
Commencing with the 1988-89 Fiscal Year, money to be applied by the State for
the support of school districts and community college districts shall not be
less than the greater of: (i) the amount which, as a percentage of the State
General Fund revenues which may be appropriated pursuant to Article XIIIB,
equals the percentage of such State General Fund revenues appropriated for
school districts and community college districts, respectively, in Fiscal Year
1986-87 or (ii) the amount required to ensure that the total allocations to
school districts and community college districts from the State General Fund
proceeds of taxes appropriated pursuant to Article XIIIB and allocated local
proceeds of taxes shall not be less than the total amount from these sources in
the prior year, adjusted for increases in enrollment and adjusted for changes in
the cost of living pursuant to the provisions of Article XIIIB. The initiative
permits the enactment of legislation, by a two-thirds vote, to suspend the
minimum funding requirements for one year. As a result of Proposition 98, funds
that the State might otherwise make available to its political subdivisions may
be allocated instead to satisfy such minimum funding level.
During the recent recession, General Fund revenues for several years were
less than originally projected, so that the original Proposition 98
appropriations turned out to be higher than the minimum percentage provided in
the law. The Legislature responded to these developments by designating the
"extra" Proposition 98 payments in one year as a "loan" from future years'
Proposition 98 entitlements and also intended that the "extra" payments would
not be included in the Proposition 98 "base" for calculating future years'
entitlement. By implementing these actions, per-pupil funding from Proposition
98 sources stayed almost constant at approximately $4,220 from Fiscal Year
1991-92 to Fiscal Year 1993-94.
In 1992, a lawsuit was filed, called California Teachers' Association v.
Gould, which challenged the validity of these off-budget loans. As part of the
negotiations leading to the 1995-96 Budget Act, an oral agreement was reached to
settle this case. The settlement was approved by the court in July 1996.
The settlement provides, among other things, that both the State and K-14
schools share in the repayment of prior years' emergency loans to schools. Of
the total $1.76 billion in loans, the State will repay $935 million by
forgiveness of the amount owed, while schools will repay $825 million. The State
share of the repayment will be
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reflected as expenditures above the current Proposition 98 base calculation. The
schools' share of the repayment will count as appropriations that count toward
satisfying the Proposition 98 guarantee, or from "below" the current base.
Repayments are spread over the eight-year period of 1994-95 through 2001-02 to
mitigate any adverse fiscal impact. The Director of Finance has certified that a
settlement has occurred, allowing approximately $377 million in appropriations
from the 1995-96 Fiscal Year to schools to be disbursed.
On November 8, 1994, the voters approved Proposition 187, an initiative
statute ("Proposition 187"). Proposition 187 specifically prohibits funding by
the State of social services, health care services and public school education
for the benefit of any person not verified as either a United States citizen or
a person legally admitted to the United States. Among the provisions in
Proposition 187 pertaining to public school education, the measure requires,
commencing January 1, 1995, that every school district in the State verify the
legal status of every child enrolling in the district for the first time. By
January 1, 1996, each school district must also verify the legal status of
children already enrolled in the district and of all parents or guardians of all
students. If the district "reasonably suspects" that a student, parent or
guardian is not legally in the United States, that district must report the
student to the United States Immigration and Naturalization Service and certain
other parties. The measure also prohibits a school district from providing
education to a student it does not verify as either a United States citizen or a
person legally admitted to the United States. The State Legislative Analyst
estimates that verification costs could be in the tens of millions of dollars on
a statewide level (including verification costs incurred by other local
governments), with first-year costs potentially in excess of $100 million.
The reporting requirements may violate the Family Educational Rights and
Privacy Act ("FERPA"), which generally prohibits schools that receive Federal
funds from disclosing information in student records without parental consent.
Compliance with FERPA is a condition of receiving Federal education funds, which
total $2.3 billion annually to California school districts. The Secretary of the
United States Department of Education has indicated that the reporting
requirements in Proposition 187 could jeopardize the ability of school districts
to receive these funds.
Opponents of Proposition 187 have filed at least eight lawsuits challenging
the constitutionality and validity of the measure. On November 2, 1995, a United
States District Court judge struck down the central provisions of Proposition
187 by ruling that parts of Proposition 187 conflict with Federal power over
immigration. The ruling concluded that states may not enact their own schemes to
"regulate immigration or devise immigration regulations which run parallel or
purport to supplement Federal immigration law". As a consequence of the ruling,
students may not be denied public education and may not be asked about their
immigration status when enrolling in public schools. Further, the ruling struck
down the requirements of Proposition 187 that teachers and district employees
report information on the immigrant status of students, parents and guardians.
An appeal has been filed.
On November 5, 1996, voters approved Proposition 218, entitled the "Right
to Vote on Taxes Act," which incorporates new Articles XIIIC and XIIID into the
California Constitution. These new provisions enact limitations (including the
need to obtain voter approval in many cases) on the ability of local government
agencies to impose or raise various taxes, fees, charges and assessments.
Additionally, certain "general taxes" imposed after January 1, 1995 must be
approved by voters in order to remain in effect. Moreover, Article XIIIC grants
the right to voters to reduce taxes, fees, assessments or charges through local
initiatives.
There are a number of ambiguities concerning the Proposition and its impact
on local governments and their bonded debt which will require interpretation by
the courts or the State Legislature. The State Legislative Analyst estimated
that enactment of Propositoin 218 would reduce local government revenues
statewide by over $100 million a year, and that over time local government
revenues would be several hundred million dollars a year lower than under
previous law. Proposition 218 does not affect California or its ability to levy
or collect taxes. However, it is unknown what response the State may undertake
to assist local governments in dealing with Proposition 218.
Article XIIIA, Article XIIIB and a number of other propositions were
adopted pursuant to California's constitutional initiative process. From time to
time, other initiative measures could be adopted by California voters. The
adoption of any such initiatives may cause California issuers to receive reduced
revenues, or to increase expenditures, or both.
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Pending Litigation. The State is a party to numerous legal proceedings,
many of which normally occur in governmental operations. Some of the more
significant lawsuits pending against the State are described herein.
The State is a defendant in 12 lawsuits involving the exclusion of small
business stock gains from preference tax and in some cases, also from taxation.
The lead cases are Mervin Morris v. Franchise Tax Board and James Lennane v.
Franchise Tax Board. The majority of the remaining cases had been deferred
pending the outcome of the Morris and Lennane cases. The Supreme Court has ruled
against the State in Lennane but has not yet ruled in Morris. The State has lost
at least $80 million as a result of the Lennane decision.
In Parr v. State of California, a complaint was filed in Federal court
claiming that payment of wages in registered warrants violated the Fair Labor
Standards Act ("FLSA"). The Federal court held that the issuance of registered
warrants does violate the FLSA but subsequently withdrew its order. The parties
have agreed to a settlement which has to be approved by the trial court. Under
the terms of the judgment, a maximum of $1.3 million will be paid to eligible
separated State employees and approximately $1 million will be paid in statutory
attorney's fees and costs. In addition, eligible current State employees will
receive employee leave, in an amount presently not quantified.
The State is involved in a lawsuit seeking reimbursement for alleged
state-mandated costs. In Thomas Hayes v. Commission on State Mandates, the State
Director of Finance is appealing a 1984 decision by the State Board of Control.
The Board of Control decided in favor of local school districts' claims for
reimbursement for special education programs for handicapped students; however,
funds have not been appropriated. The amount of potential liability to the
State, if all potentially eligible school districts pursue timely claims, has
been estimated by the Department of Finance at over $1 billion.
In another case, the State is a defendant in Long Beach Unified School
Districts v. State of California. In this case, the school district seeks
reimbursement for voluntary desegregation costs incurred in the implementation
of California Department of Education guidelines. The years of reimbursement are
from Fiscal Year 1977-78 and each fiscal year thereafter to the present. The
district prevailed in a superior court, and the case has been decided by a State
appellate court against the State. A petition for review was denied and the
superior court judgment has become final, but the court retains jurisdiction to
oversee payment. The State anticipates that the unfavorable outcome will affect
pending claims by other school districts, and the total loss could be in excess
of $300 million.
A Federal Court of Appeals in the case of Deanna Beno et al. v. Donna
Shalala, reversing a trial court ruling in favor of the State, recently
determined that the Secretary of the United States Department of Health and
Human Services violated the Federal Administrative Procedure Act when she
approved California's Assistance Payment Demonstration Project, which in part,
granted California a waiver from complying with requirements for state
participation in the Federal program for medical assistance ("Medicaid"). The
waiver has allowed California to reduce payments under the Aid to Families with
Dependent Children program ("AFDC"), below 1988 payment levels without violating
Medicaid requirements relating to maintenance of AFDC payments levels.
California had relied, in part, on the waiver to reduce state AFDC payments in
1992, 1993 and 1994. The Court of Appeals remanded the case to the trial court
with instructions to remand the Demonstration Project to the Secretary for
additional consideration of objections raised by the plaintiffs. The State
submitted a renewed waiver request to the Secretary, which was granted in early
1996.
One of the features of the 1994-95 Budget Act is a 2.3 percent reduction in
AFDC payments. In Welch v. Anderson, on August 19, 1994, the San Francisco
Superior Court issued a preliminary injunction against the California Director
of Social Services to prevent the 2.3 percent AFDC cuts from becoming effective
September 1, 1994. While September cuts were already in process and could not be
halted, the court ordered the cuts to be restored. The preliminary injunction
has been upheld and the case on the merits remains pending.
The State is involved in two lawsuits related to contamination at the
Stringfellow toxic waste site. In one suit, the State is one of approximately
130 defendants in Penny Newman v. J.B. Stringfellow, et al. in which 3,800
plaintiffs are claiming damages of $850 million arising from contamination at
the Stringfellow toxic waste site. The State is a defendant because it chose the
site and approved the deposit of toxic wastes. Seventeen of the 3,800 plaintiffs
have litigated their claims; in half of these cases plaintiffs' verdicts in the
total amount of $159,000 were received and in the remaining cases verdicts were
entered for the State. The other cases have been settled for $13.5 million. In
the separate suit described in United States, People of the State of California
v. J.B.
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Stringfellow Jr. et al., the State has been found liable by the District Court
on the counterclaim. The amount of liability is still being litigated although
allocation of liability has been determined by the trial court, including an
allocation of liability to the State.
The State is a defendant in a coordinated action involving 3,000 plaintiffs
seeking recovery for damages caused by the Yuba River flood of February 1986.
The appellate court affirmed the trial court finding of liability in inverse
condemnation and awarded damages of $500,000 to 12 sample plaintiffs. Potential
liability to the remaining 300 plaintiffs, from claims filed, ranges from $800
million to $1.5 billion.
The State is involved in a case concerning the default by Triad Healthcare
on a $167 million loan guaranteed by the Cal-Mortgage Loan Insurance Division of
the Office of Statewide Health Planning and Development ("Cal-Mortgage"). Monies
for the loan were raised through the sale of Certificates of Participation and
Cal-Mortgage insured the debt service payments. Since July 1993, Triad has
failed to make its monthly debt service payments; therefore, the reserve account
of the bonds has been used to make the payments. Once the reserve account is
exhausted, additional debt service payments would be made from the Health
Facility Construction Loan Insurance Fund as they become due. However, if there
is any shortfall in this fund, the State's General Fund would be used to make up
the difference.
In Jernigan & Burleson v. State, filed in Federal district court, the
prison inmate plaintiffs claim they are entitled to minimum wages while working
for the Prison Industry Authority. The inmates claim that the State has violated
the FLSA. Plaintiffs are seeking back pay for the period from August 1990
onward, and liquidated damages for a total of approximately $350 million. In
June 1995, the district court rules that the inmates are not employees under the
FLSA. The decision has been appealed to the Ninth Circuit Court of Appeals,
which affirmed the District Court decision holding that the inmates are not
employees under the FLSA. The inmates have filed a Petition for Rehearing and a
Petition for Hearing En Banc with the Ninth Circuit.
Additional lawsuits challenge the transfer of moneys from special fund
accounts within the State Treasury to the State's General Fund pursuant to the
Budget Acts of 1991, 1992, 1993 and 1994. Plaintiffs in the two cases titled
Abramovitz et al. v. Wilson et al., filed in State and Federal courts, seek to
have the transfers reversed and the moneys allegedly totalling approximately
$400 million returned to the special funds. Plaintiffs in the case of Kurt
Hathaway, et al. v. Wilson, filed in State court, seek to reverse transfers of
money from special fund accounts to the State's General Fund authorized in the
1994 and 1995 Budget Acts, allegedly totalling approximately $370 million. The
State disputes both liability and the amount claimed. In the case of
Professional Engineers in California Government v. Wilson, several State
employees' unions have challenged transfers made from special funds to the
General Fund pursuant to the Budget Act of 1993, 1994 and 1995 and seek
reimbursement of over $400 million to these special funds.
In the case of Board of Administration, California Public Employees'
Retirement System, et al. v. Pete Wilson, Governor, et al., plaintiffs
challenged the constitutionality of legislation which deferred payment of the
State's employer contribution to the Public Employees' Retirement System
("PERS") beginning in Fiscal Year 1992-1993. On January 11, 1995, the Sacramento
County Superior Court entered a judgment finding that the legislation
unconstitutionally impaired the vested contract rights of PERS members. The
judgment provides for issuance of a writ of mandate directing State defendants
to disregard the provisions of the legislation, to implement the statute
governing employer contributions that existed before the changes in the
legislation were found to be unconstitutional and to transfer to PERS the
1993-94 and 1994-95 contributions that are unpaid to date. The State defendants
have appealed.
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APPENDIX C
ECONOMIC CONDITIONS IN FLORIDA
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 upon one or
more publicly available offering statements relating to debt offerings of the
state of Florida; however, it has not been updated nor will it be updated during
the year. The Trust has not independently verified the information.
Throughout the 1980s, the State's unemployment rate has, generally, tracked
below that of the nation. In recent years, however, as the State's economic
growth has slowed from its previous highs, the State's unemployment rate has
tracked above the national average. The State's unemployment rate is projected
to be 5.9% in both 1995-96. Nevertheless, the average rate of unemployment for
the State since 1986 is 6.2%, while the national average is 6.4%. (The
projections set forth in this Appendix were obtained from a report, prepared by
the Revenue and Economic Analysis Unit of the Executive Office of the Governor
for the State of Florida, contained within a recent official statement, dated
August 7, 1996, for a State of Florida debt offering.)
Personal income in the State has grown at a strong pace and has generally
outperformed both the nation as a whole and the Southeast in particular. From
1985 through 1995, the State's per capita income rose an average 5.0% per year,
while the national per capita income increased an average of 4.9%. Real personal
income in Florida is estimated to increase 4.7% in 1995-96 and increase 3.8% in
1996-97 while real personal income per capita is projected to grow at 2.9% in
1995-96 and 1.9% in 1996-97.
The structure of Florida's income differs from that of the nation and the
Southeast. Because Florida has a proportionally greater retirement age
population, property income (dividends, interest, and rent) and transfer
payments (social security and pension benefits, among other sources of income)
are a relatively more important source of income. For example, Florida's
employment income in 1995 represented 60.6% of total personal income, while the
nation's share of total personal income in the form of wages and salaries and
other labor benefits was 70.8%. Florida's income is dependent upon transfer
payments controlled by the federal government.
The State's strong population growth is one fundamental reason why its
economy has typically performed better than the nation as a whole. In 1980, the
State was ranked seventh among the 50 states with a population of 9.7 million
people. The State has grown dramatically since then and as of April 1, 1995
ranked fourth with an estimated population of 14.1 million. Since 1985, the
State's average annual rate of population increase has been approximately 2.3%
as compared to an approximately 1.0% for the nation as a whole. While annual
growth in the State's population is expected to decline somewhat, it is still
expected to grow close to 230,000 new residents per year throughout the 1990s.
Tourism is one of the State's most important industries. 40.7 million
people visited the State in 1994, according to the Florida Department of
Commerce. Tourist arrivals are expected to decrease by 4.7% this fiscal year and
rebound by 4.5% next year. By the end of the fiscal year, 39.4 million domestic
and international tourists are expected to have visited the State. In 1996-97,
tourist arrivals should approximate 41.2 million. Florida tourism still appears
to be suffering from the effects of negative publicity regarding crime against
tourists in the state. Also, factors such as 'product maturity' of a Florida
vacation package, higher prices, and more aggressive marketing by competing
vacation destinations, could be contributory causes of the tourism slowdown.
Florida's economy has been and currently is dependent on the highly
cyclical construction and construction-related manufacturing sectors. For
example, total contract construction employment as a share of total non-farm
employment was a little over 5% in 1995. Florida, nevertheless, has had a
dynamic construction industry, with single and multi-family housing starts
accounting for approximately 8.5% of total U.S. housing starts in 1995, while
the State's population is 5.4% of the nation's population. Total housing starts
were 115,000 in 1995. A driving force behind Florida's construction industry is
its rapid growth in population. In Florida, single and multi-family housing
starts in 1995-96 are projected to reach a combined level of 117,500 while
dropping to 108,000 next year. Multi-family starts have been slow to recover,
but are expected to maintain a level of nearly 37,400 in
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1995-96 and almost 32,100 in 1996-97. Total construction expenditures are
forecasted to increase 2.4% in this year and increase 1.7% next year. This
represents a slower pace of growth than what was originally projected.
Financial operations of the State covering all receipts and expenditures
are maintained through the use of four funds--the General Revenue Fund, Trust
Funds, the Working Capital Fund, and beginning in fiscal year 1994-95, the
Budget Stabilization Fund. In fiscal year 1994-95, the State derived
approximately 66% of its total direct revenues to these funds from State taxes
and fees. Federal funds and other special revenues accounted for the remaining
revenues. Major sources of tax revenues to the General Revenue Fund are the
sales and use tax, corporate income tax, intangible personal property tax, and
beverage tax, which amounted to 67%, 7%, 4%, and 4%, respectively, of total
General Revenue Funds available. State expenditures are categorized for budget
and appropriation purposes by type of fund and spending unit, which are further
subdivided by line item. In fiscal year 1994-95, expenditures from the General
Revenue Fund for education, health and welfare, and public safety amounted to
approximately 49%, 32% and 11%, respectively, of total General Revenues.
The Sales and Use Tax is the greatest single source of tax receipts in the
State. For the State fiscal year ended June 30, 1995, receipts from this source
were $10,672 million, an increase of 6.0% from fiscal year 1993-94. The second
largest source of State tax receipts is the Motor Fuel Tax. The estimated
collections from this source during the fiscal year ending June 30, 1995, were
$1,924.6 million. Alcoholic beverage tax revenues totalled $437.3 million for
the State fiscal year ending June 30, 1995, down by $4.9 million from the
previous year. The receipts of corporate income tax for the fiscal year ended
June 30, 1995 were $1,063.5 million, an increase of 1.5% from fiscal year
1993-94. Gross Receipt tax collections for fiscal year 1994-95 totalled $508.4
million, an increase of 10.4% over the previous fiscal year. Documentary stamp
tax collections totalled $695.3 million during fiscal year 1994-95, posting an
11.4% decrease from the previous fiscal year. The intangible personal property
tax is a tax on stocks, bonds, notes, governmental leaseholds, certain limited
partnership interests, mortgages and other obligations secured by liens on
Florida realty, and other intangible personal property. Total collections from
intangible personal property taxes were $818.0 million during the fiscal year
ending June 30, 1995, down 2.1% from the previous fiscal year. Severance taxes
totalled $61.2 million during fiscal year 1994-95, up 1.1% from the previous
fiscal year. In November 1986, the voters of the State approved a constitutional
amendment to allow the State to operate a lottery. Fiscal year 1994-95 produced
ticket sales of $2.19 billion of which education received approximately $853.2
million.
For fiscal year 1995-96 the estimated General Revenue plus Working Capital
and Budget Stabilization funds available total $15,311.3 million, a 3.3%
increase over 1994-95. The $14,538.8 million in estimated revenues represent a
6.5% increase over the analagous figure in 1994-95. With combined General
Revenue, Working Capital Fund, and Budget Stabilization Fund appropriations at
$14,808.6 million, unencumbered reserves at the end of 1995-96 are estimated at
$502.7 million.
Estimated fiscal year 1996-97 General Revenue plus Working Capital and
Budget Stabilization funds available are expected to total $16,094.7 million, a
5.1% increase over fiscal year 1995-96.
The State Constitution does not permit a state or local personal income
tax. An amendment to the State Constitution by the electors of the State would
be required in order to impose a personal income tax in the State.
Property valuations for homestead property are subject to a growth cap.
Growth in the just (market) value of property qualifying for the homestead
exemption is limited to 3% or the change in the Consumer Price Index, whichever
is less. If the property changes ownership or homestead status, it is to be
re-valued at full just value on the next tax roll. Although the impact of the
growth cap cannot be determined, it may have the effect of causing local
government units in the State to rely more on non-ad valorem tax revenues to
meet operating expenses and other requirements normally funded with ad valorem
tax revenues.
An amendment to the State Constitution was approved by statewide ballot in
the November 8, 1994 general election which is commonly referred to as the
"Limitation on State Revenues Amendment." This amendment provides that State
revenues collected for any fiscal year shall be limited to State revenues
allowed under the amendment for the prior fiscal year plus an adjustment for
growth. Growth is defined as an amount equal to the average annual rate of
growth in State personal income over the most recent twenty quarters times the
State revenues allowed under the amendment for the prior fiscal year. State
revenues collected for any fiscal year in
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excess of this limitation are required to be transferred to the Budget
Stabilization Fund until the fund reaches the maximum balance specified in
Section 19(g) of Article III of the State Constitution, and thereafter is
required to be refunded to taxpayers as provided by general law. The limitation
on State revenues imposed by the amendment may be increased by the Legislature,
by a two-thirds vote of each house.
The term "State revenues," as used in the amendment, means taxes, fees,
licenses, and charges for services imposed by the Legislature on individuals,
businesses, or agencies outside State government. However, the term "State
revenues" does not include: (i) revenues that are necessary to meet the
requirements set forth in documents authorizing the issuance of bonds by the
State; (ii) revenues that are used to provide matching funds for the federal
Medicaid program with the exception of the revenues used to support the Public
Medical Assistance Trust Fund or its successor program and with the exception of
State matching funds used to fund elective expansions made after July 1, 1994;
(iii) proceeds from the State lottery returned as prizes; (iv) receipts of the
Florida Hurricane Catastrophe Fund; (v) balances carried forward from prior
fiscal years; (vi) taxes, licenses, fees and charges for services imposed by
local, regional, or school district governing bodies; or (vii) revenue from
taxes, licenses, fees and charges for services required to be imposed by any
amendment or revision to the State Constitution after July 1, 1994. The
amendment took effect on January 1, 1995 and is applicable to State fiscal year
1995-96.
It should be noted that many of the provisions of the amendment are
ambiguous, and likely will not be clarified until State courts have ruled on
their meanings. Further, it is unclear how the Legislature will implement the
language of the amendment and whether such implementing legislation will itself
be the subject of further court interpretation.
The Fund cannot predict the impact of the amendment on State finances. To
the extent local governments traditionally receive revenues from the State which
are subject to, and limited by, the amendment, the future distribution of such
State revenues may be adversely affected by the amendment.
Hurricanes continue to endanger the coastal and interior portions of
Florida. Substantial damage resulted from Hurricane Andrew in 1992. The 1995
hurricane season has experienced a record number of tropical storms and
hurricanes which caused substantial damage. During the 1996 hurricane season the
State has suffered considerably less damage than in 1995.
According to the Florida General Purposes Financial Statements for fiscal
year ended June 30, 1994, reported as of June 30, 1995, the State had a high
bond rating from Moody's Investors Service, Inc. (Aa), Standard & Poor's Rating
Services (AA) and Fitch Investors Service, Inc. (AA) on all of its general
obligation bonds. Outstanding general obligation bonds at June 30, 1995 totalled
almost $6.8 billion and were issued to finance capital outlay for educational
projects of both local school districts, community colleges and state
universities, environmental protection and highway construction. The State has
issued just over $1.13 billion of general obligation bonds since July 1, 1995.
Due to investments in certain derivatives, Escambia County, Florida in 1994
sustained notable losses which may in the future affect their operations. As
reported in the local press, several lawsuits have resulted regarding such
investments.
In late October, 1996, the Florida Auditor General notified the Governor's
office that seventeen municipalities or special districts are in a state of
financial emergency (including the Orlando-Orange County Expressway Authority
and the Pinellas Suncoast Transit Authority) and that another twenty-five
municipalities or special districts might be in a state of financial emergency
(including the City of Miami). For these purposes, a state of emergency is
considered two consecutive years of budget deficits. Municipalities or special
districts that may be in a state of financial emergency are those that the
Auditor General was unable to conclude had sufficient revenues to cover their
deficits. The operations of all of these entities mentioned in the Auditor
General's communication may be adversely affected by their financial condition.
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APPENDIX D
ECONOMIC AND FINANCIAL CONDITIONS IN MASSACHUSETTS
The following information is a brief summary of factors affecting the
economy of the state and does not purport to be a complete description of such
factors. Other factors will affect issuers. The summary is based primarily upon
one or more publicly available offering statements relating to debt offerings of
state issuers; however, it has not been updated nor will it be updated during
the year. The Trust has not independently verified the information.
Economic growth in the Commonwealth of Massachusetts (sometimes referred to
as the "Commonwealth") has slowed since 1988, particularly in the construction,
real estate, financial and manufacturing sectors, including certain high
technology areas. Economic conditions have improved somewhat since 1993. The
unemployment rate in Massachusetts averaged 6.9% during 1993, after rising
steadily during the previous three years, from 3.4% at the beginning of 1989. As
of September, 1996, however, the Commonwealth's unemployment rate was 4.2% as
compared to a national average of 5.2%. Per capita personal income in the
Commonwealth is currently higher than the national average.
Ending fund balances in the budgeted operating funds for fiscal 1991 were
$237.1 million. Fiscal 1992 ended with positive fund balances of $549.4 million
after carrying forward the fund balances from fiscal 1991. Fiscal 1993 ended
with positive fund balances of $562.5 million.
In fiscal 1994, the total revenues of the budgeted operating funds of the
Commonwealth during such fiscal year increased by approximately 5.7% over the
prior fiscal year, to $15.550 billion. Expenditures increased by 5.6% over the
prior year, to $15.523 billion. As a result, the Commonwealth ended fiscal 1994
with a positive closing fund balance of $589.3 million. In fiscal 1995, the
total revenues of the budgeted operating funds of the Commonwealth during such
fiscal year increased by approximately 5.4% over the prior fiscal year, to
$16.387 billion. Expenditures increased by 4.7% over the prior fiscal year, to
$16.251 billion. As a result, the Commonwealth ended fiscal 1995 with a positive
closing fund balance of $726.0 million. On September 16, 1996, the Comptroller
released his preliminary financial report for fiscal year 1996. According to
such report budgeted revenues and other sources in fiscal 1996, which ended June
30, 1996, were approximately $17.323 billion, including tax revenues of
approximately $12.049 billion. Fiscal 1996 budgeted expenditures totalled
approximately $16.896 billion.
Standard & Poor's and Moody's have rated the Commonwealth's general
obligation bonds as A+ and A1, respectively. Fitch Investors Service, Inc. has
recently rated the Commonwealth's bonds as A+. From time to time, the rating
agencies may change their ratings.
Growth of tax revenues in the Commonwealth is limited by law. Tax revenues
in fiscal years 1988 through 1995 were lower than the limits set by law, and the
Comptroller's report indicates that state tax revenues in fiscal 1996 were lower
than the limits imposed by law. In addition, effective July 1, 1990, limitations
were placed on the amount of direct bonds the Commonwealth may have outstanding
in a fiscal year, and the amount of the total appropriation in any fiscal year
that may be expended for repayment of principal of and payment of interest on
general obligation debt of the Commonwealth was limited to 10% of such
appropriation. Bonds in the aggregate principal amount of $1.416 billion issued
in October and December 1990, under Chapter 151 of the Acts of 1990 to meet the
fiscal 1990 deficit are excluded from the computation of these limitations, and
principal of and interest on such bonds are to be paid from up to 15% of the
Commonwealth's income tax receipts in each year that such principal or interest
is payable.
Furthermore, certain of the Commonwealth's cities and towns have at times
experienced serious financial difficulties which have adversely affected their
credit standing. The recurrence of such financial difficulties, or financial
difficulties of the Commonwealth, could adversely affect the market values and
marketability of outstanding obligations issued by the Commonwealth or its
public authorities or municipalities. In addition, the Massachusetts statutes
which limit the taxing authority of the Commonwealth or certain Massachusetts
governmental entities may impair the ability of issuers of some Massachusetts
obligations to pay debt service on their obligations.
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In Massachusetts, the tax on personal property and real estate is virtually
the only source of tax revenues available to cities and towns to meet local
costs. "Proposition 2 1/2," an initiative petition adopted by the voters of the
Commonwealth of Massachusetts on November 4, 1980, limits the power of
Massachusetts cities and towns and certain tax-supported districts and public
agencies to raise revenue from property taxes to support their operations,
including the payment of certain debt service. Proposition 2 1/2 required many
cities and towns to reduce their property tax levels to a stated percentage of
the full and fair cash value of their taxable real estate and personal property
and limited the amount by which the total property taxes assessed by a city or
town might increase from year to year. Although the limitations of Proposition 2
1/2 on tax increases may be overridden and amounts for debt service and capital
expenditures excluded from such limitation by the voters of the relevant
municipality, Proposition 2 1/2 will continue to restrain significantly the
ability of cities and towns to pay for local services, especially in light of
cost increases due to an inflation rate generally exceeding 2.5%.
To offset shortfalls experienced by local governments as a result of the
implementation of Proposition 2 1/2, the government of the Commonwealth
increased direct local aid from the 1981 level of $1.632 billion to the fiscal
1991 level of $2.608 billion. Direct local aid decreased from fiscal 1991 to
$2.359 billion in fiscal 1992, increased to $2.547 billion in fiscal 1993 and
increased to $2.727 billion in fiscal 1994. Fiscal 1995 expenditures for direct
local aid were $2.976 billion, which is an increase of approximately 9.1% above
the 1994 level. It is estimated that fiscal 1996 expenditures for direct local
aid will be $3.246 billion, which is an increase of approximately 9.1% above the
fiscal 1995 level.
The aggregate unfunded actuarial liabilities of the pension systems of the
Commonwealth and the unfunded liability of the Commonwealth related to local
retirement systems are significant-estimated to be approximately $8.227 billion
as of January 1, 1995 (the last date that such liability was calculated) on the
basis of certain actuarial assumptions regarding, among other things, future
investment earnings, annual inflation rates, wage increases and cost of living
increases. No assurance can be given that these assumptions will be realized.
The legislature adopted a comprehensive pension bill addressing the issue in
January 1988, which requires the Commonwealth, beginning in fiscal year 1989, to
fund future pension liabilities currently and amortize the Commonwealth's
unfunded liabilities over 40 years in accordance with funding schedules prepared
by the Secretary for Administration and Finance and approved by the legislature.
The amounts required for funding of current pension liabilities in fiscal years
1996, 1997 and 1998 are estimated to be $1.007 billion, $1.061 billion and
$1.128 billion, respectively.
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APPENDIX E
ECONOMIC AND FINANCIAL CONDITIONS IN MICHIGAN
The following information is a brief summary of factors affecting the
economy of the state and does not purport to be a complete description of such
factors. Other factors will affect issuers. The summary is based primarily upon
one or more publicly available offering statements relating to debt offerings of
state issuers, however, it has not been updated nor will it be updated during
the year. The Trust has not independently verified the information.
Due primarily to the fact that the leading sector of the economy of the
State of Michigan (sometimes referred to as the "State") is the manufacturing of
durable goods, economic activity in the State has tended to be more cyclical
than in the nation as a whole. While the State's efforts to diversify its
economy have proven successful, as reflected by the fact that the share of
employment in the State in the durable goods sector has fallen from 33.1% in
1960 to 15.8% in 1994, durable goods manufacturing still represents a sizable
portion of the State's economy. As a result, any substantial national economic
downturn is likely to have an adverse effect on the economy of the State and on
the revenues of the State and some of its local governmental units.
Historically, the average monthly unemployment rate in the State has been higher
than the average figures for the United States. More recently, the unemployment
rate in the State has been at or below the national average. During 1995, the
average monthly unemployment rate in the State was 5.3% compared to a national
average of 5.6%.
The State's economy could continue to be affected by changes in the auto
industry, notably consolidation and plant closings resulting from competitive
pressures and overcapacity. Such actions could adversely affect State revenues
and the financial impact on the local units of government in the areas in which
plants are closed could be more severe. The impact on the financial condition of
the municipalities in which the plants are located may be more severe than the
impact on the State itself.
The Michigan Constitution limits the amount of total revenues of the State
raised from taxes and certain other sources to a level for each fiscal year
equal to a percentage of the State's personal income for the prior calendar
year. In the event the State's total revenues exceed the limit by 1% or more,
the Constitution requires that the excess be refunded to taxpayers. To avoid
exceeding the revenue limit in the State's 1994-95 fiscal year, the State is
refunding approximately $113 million through income tax credits for the 1995
calendar year. The State Constitution does not prohibit the increasing of taxes
so long as revenues are expected to amount to less than the revenue limit and
authorizes exceeding the limit for emergencies. The State Constitution further
provides that the proportion of State spending paid to all local units' total
spending may not be reduced below the proportion in effect for the 1978-79
fiscal year. The Constitution requires that if spending does not meet the
required level in a given year an additional appropriation for local units is
required for the following fiscal year. The State Constitution also requires the
State to finance any new or expanded activity of local units mandated by State
law. Any expenditures required by this provision would be counted as State
spending for local units for purposes of determining compliance with the
provisions stated above.
The State Constitution limits the purposes for which State general
obligation debt may be issued. Such debt is limited to short-term debt for State
operating purposes, short- and long-term debt for the purposes of making loans
to school districts and long-term debt for voter approved purposes. In addition
to the foregoing, the State authorizes special purpose agencies and authorities
to issue revenue bonds payable from designated revenues and fees. Revenue bonds
are not obligations of the State and in the event of shortfalls in
self-supporting revenues, the State has no legal obligation to appropriate money
to these debt service payments. The State's Constitution also directs or
restricts the use of certain revenues.
The State finances its operations through the State's General Fund and
Special Revenue Funds. The General Fund receives revenues of the State that are
not specifically required to be included in the Special Revenue Fund. General
Fund revenues are obtained approximately 58% from the payment of State taxes and
42% from federal and non-tax revenue sources. The majority of the revenues from
State taxes are from the State's personal income tax, single business tax, use
tax, sales tax and various other taxes. Approximately 59% of total General Fund
expenditures are for State support of public education and for social services
programs. Other significant expenditures from the General Fund provide funds for
law enforcement, general State government, debt service
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and capital outlay. The State Constitution requires that any prior year's
surplus or deficit in any fund must be included in the next succeeding year's
budget for that fund.
In recent years, the State of Michigan has reported its financial results
in accordance with generally accepted accounting principles. For the fiscal
years ended September 30, 1990 and 1991, the State reported negative year-end
General Fund balances of $310.3 million and $169.4 million, respectively, but
ended the 1992, 1993, 1994 and 1995 fiscal years with its General Fund in
balance after transfers in 1993, 1994 and 1995 from the General Fund to the
Budget Stabilization Fund of $283 million, $464 million and $67.4 million,
respectively. Those and certain other transfers into and out of the Budget
Stabilization Fund raised the balance in the Budget Stabilization Fund to $987.9
million as of September 30, 1995. A positive cash balance in the combined
General Fund/School Aid Fund was recorded at September 30, 1990. In each of the
three prior fiscal years, the State undertook mid-year actions to address
projected year-end budget deficits including expenditure costs and deferrals and
one time expenditures or revenue recognition adjustments. From 1991 through
1993, the State experienced deteriorating cash balances which necessitated
short-term borrowings and the deferral of certain scheduled cash payments of
local units of government. The State borrowed between $500 million and $900
million for cash flow purposes in the 1992 and 1993 fiscal years, $500 million
in the 1995 fiscal year and $900 million in the 1996 fiscal year. The State did
not have to borrow for short-term cash flow purposes in the 1993-94 fiscal year
due to improved cash balances.
Amendments to the Michigan Constitution which placed limitations on
increases in State taxes and local ad valorem taxes (including taxes used to
meet debt service commitments on obligations of taxing units) were approved by
the voters of the State of Michigan in November, 1978 and became effective on
December 23, 1978. To the extent that obligations in the Fund are tax supported
and are for local units and have not been voted by the taxing unit's electors,
the ability of the local units to levy debt service taxes might be affected.
State law provides for distributions of certain State collected taxes or
portions thereof to local units based in part on population as shown by census
figures and authorizes levy of certain local taxes by local units having a
certain level of population as determined by census figures. Reductions in
population in local units resulting from periodic census could result in a
reduction in the amount of State collected taxes returned to those local units
and in reductions in levels of local tax collections for such local units unless
the impact of the census is changed by State law. No assurance can be given that
any such State law will be enacted. In the 1991 fiscal year, the State deferred
certain scheduled payments to municipalities, school districts, universities and
community colleges. While such deferrals were made up at later dates, similar
future deferrals could have an adverse impact on the cash position of some local
units. Additionally, the State has reduced revenue sharing payments to
municipalities below the level provided under formulas by increasing amounts in
each of the last five fiscal years and has budgeted a reduction of $81.26
million in the fiscal year which ended on September 30, 1996.
On March 15, 1994, the electors of the State voted to amend the State's
Constitution to increase the State sales tax rate from 4% to 6% and to place an
annual cap on property assessment increases for all property taxes. Companion
legislation also cut the State's income tax rate from 4.6% to 4.4%, reduced some
property taxes and shifted the balance of school funding sources among property
taxes and State revenues, some of which are being provided from new or increased
State taxes. The legislation also contains other provisions that may reduce or
alter the revenues of local units of government and tax increment bonds could be
particularly affected. While the ultimate impact of the constitutional amendment
and related legislation cannot yet be accurately predicted, investors should be
alert to the potential effect of such measures upon the operations and revenues
of Michigan local units of government.
The State is a party to various legal proceedings seeking damages or
injunctive or other relief. In addition to routine litigation, certain of these
proceedings could, if unfavorably resolved from the point of view of the State,
substantially affect State or local programs or finances. These lawsuits involve
programs generally in the areas of corrections, highway maintenance, social
services, tax collection, commerce and budgetary reductions to school districts
and governmental units and court funding.
Currently, the State's general obligation bonds are rated Aa by Moody's
Investors Service, Inc., AA by Standard & Poor's Ratings Services and Aa by
Fitch Investors Service, Inc.
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APPENDIX F
ECONOMIC AND FINANCIAL CONDITIONS IN NEW JERSEY
The following information is a brief summary of factors affecting the
economy of New Jersey and does not purport to be a complete description of such
factors. Other factors will affect issuers. The summary is based primarily upon
one or more publicly available offering statements relating to debt offerings of
state issuers, however, it has not been updated nor will it be updated during
the year. The Trust has not independently verified the information.
Effective January 1, 1994, personal income tax rates in the State of New
Jersey (the "State") were cut by 5% for all taxpayers. Effective January 1,
1995, the State's personal income tax rates were cut by an additional 10% for
most taxpayers. By a bill signed into law on July 4, 1995, New Jersey personal
income tax rates have been further reduced so that coupled with the prior rate
reductions, beginning with tax year 1996, personal income tax rates will be,
depending upon a taxpayer's level of income and filing status, 30%, 15% or 9%
lower than 1993 rates. At this time the effect of the tax reduction cannot be
evaluated.
The State operates on a fiscal year beginning July 1 and ending June 30.
For example, "fiscal year 1997" refers to the State's fiscal year beginning July
1, 1996 and ending June 30, 1997.
The General Fund is the fund into which all State revenues not otherwise
restricted by statute are deposited and from which appropriations are made. The
largest part of the total financial operations of the State is accounted for in
the General Fund. Revenues received from taxes and unrestricted by statute, most
federal revenue and certain miscellaneous revenue items are recorded in the
General Fund.
The State's undesignated General Fund balance was $937 million for fiscal
year 1993, $926 million for fiscal year 1994, $569 million for fiscal year 1995
and $471 million (estimated) for fiscal year 1996. For fiscal year 1997, the
balance in the undesignated General Fund is estimated to be $255 million.
The State finances capital projects primarily through the sale of the
general obligation bonds of the State. These bonds are backed by the full faith
and credit of the State. State tax revenues and certain other fees are pledged
to meet the principal, interest payments and if provided, redemption premium
payments, if any, required to pay the debt fully. No general obligation debt can
be issued by the State without prior voter approval, except that no voter
approval is required for any law authorizing the creation of a debt for the
purpose of refinancing all or a portion of outstanding debt of the State, so
long as such law requires that the refinancing provide a debt service savings.
All appropriations for capital projects and all proposals for State bond
authorizations are subject to the review and recommendation of the New Jersey
Commission on Capital Budgeting and Planning.
The State has extensive control over school districts, cities, counties and
local financing authorities. State laws impose specific limitations on local
appropriations, with exemptions subject to state approval. The State shares the
proceeds of a number of taxes, with funds going primarily for local education
programs, homestead rebates, medicaid and welfare programs. Certain bonds are
issued by localities, but supported by direct State payments. In addition, the
State participates in local wastewater treatment programs.
The State's economic base is diversified, consisting of a variety of
manufacturing, construction and service industries, supplemented by rural areas
with selective commercial agriculture. After enjoying an extraordinary boom
during the mid-1980s, New Jersey, as well as the rest of the Northeast, slipped
into a slowdown well before the onset of the national recession which officially
began in July 1990 (according to the National Bureau of Economic Research). By
the beginning of the national recession, construction activity had already been
declining in New Jersey for nearly two years, growth had tapered off markedly in
the service sectors and the long-term downward trend of factory employment had
accelerated, partly because of a leveling off of industrial demand nationally.
The onset of recession caused an acceleration of New Jersey's job losses in
construction and manufacturing, as well as an employment downturn in such
previously growing sectors as wholesale trade, retail trade, finance, utilities
and trucking and warehousing. The net effect was a decline in the State's total
non-farm wage and salary employment from a peak of 3,689,800 in March 1989 to a
low of 3,445,000 in March 1992. This loss was followed by an employment gain of
200,700 from May 1992 to August 1996; a recovery of 77% of the jobs lost during
the recession. Almost two-thirds of this number, nearly 138,000 jobs, were
recovered in the 31 month period from January 1994 to August 1996.
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Reflecting the downturn, the rate of unemployment in the State rose from a
low of 3.6% during the first quarter of 1989 to a recessionary peak of 8.5%
during 1992 (according to the U.S. Bureau of Labor Statistics and the New Jersey
Department of Labor, Division of Labor Market and Demographic Research). Since
then, the unemployment rate fell to an average of 6.4% in 1995 and 6.1% for the
four month period from May 1996 through August 1996.
For the recovery period as a whole, May 1992 to August 1996,
service-producing employment in New Jersey has expanded by 228,500 jobs. Hiring
has been reported by food stores, auto dealers, wholesale distributors, trucking
and warehousing firms, utilities, business and engineering/management service
firms, hotels/hotel-casinos, social service agencies and health care providers
other than hospitals. Employment growth was particularly strong in business
services and its personnel supply component with increases of 17,500 and 8,100,
respectively, in the 12-month period ended August 1996.
In the manufacturing sector, employment losses slowed between 1992 and
1994. After an average annual job loss of 33,500 from 1989 through 1992, New
Jersey's factory job losses fell to 13,300 during 1993 and 7,300 during 1994.
During 1995, however, manufacturing job losses increased slightly to 9,100,
reflecting a slowdown in national manufacturing production activity. While
experiencing growth in the number of production workers in 1994, the number
declined in 1995 at the same time that managerial and office staff were also
reduced as part of nationwide downsizing. Through August 1996, layoffs of white
collar workers and corporate downsizing appear to be abating.
Conditions have slowly improved in the construction industry, where
employment has risen by 15,600 since its low in May 1992. Between 1992 and 1995,
this sector's hiring rebound was driven primarily by increased homebuilding and
nonresidential projects. During 1996, public works projects and homebuilding
became the growth segments while nonresidential construction lessened.
Residential construction contracts through August 1996, despite monthly
fluctuations, increased by 1.4% for the first eight months of 1996 as compared
to the first eight months of 1995 ($1,502 million and $1,481 million,
respectively). Nonbuilding or infrastructure construction rose robustly by 17.8%
during this period. Despite these increases, total construction contracts
declined by 3.9% when comparing the first eight months of 1995 and 1996.
Improvements in overall employment opportunities and the economy in general
have led to increased consumer spending during the recovery. While overall
retail sales in New Jersey grew by only 1.6% during 1993, they performed much
better in 1994, advancing by 7.8% which exceeded the 7.5% growth registered
nationwide. During 1995, especially in the winter months, consumer confidence
and actual consumer spending moderated both nationally and in the State. For the
year 1995, retail sales in New Jersey grew by 2.3%. Retail sales regained
momentum in 1996 and have been on a moderately upward trend, rising to an annual
rate of $76.5 billion through June. The State's pickup in growth, after a
blizzard-related January decline, resulted in sales growth of 4.2% when
comparing the first six months of 1995 with those of 1996. The rising trend in
retail sales has translated into steady increases in retail trade jobs (both
full- and part-time) with a rise in retail employment from December 1995 to
August 1996 of 6,900 jobs.
Total new vehicle registrations (new passenger cars and light trucks and
vans) rose robustly in 1993 by more than 18% and in 1994 by 5.8%, but declined
by 4.4% in 1995. Through July 1996 however, total new vehicle registrations rose
by 3.5% compared to the same period in 1995.
Unemployment in the State through August 1996 has been receding. According
to the U.S. Bureau of Labor Statistics, the jobless rate dropped from 7.5% in
1993 to 6.8% in 1994 and to 6.4% in 1995. Subsequently, it has dropped to 6.1%
for the four-month period from May 1996 through August 1996.
The insured unemployment rate, i.e., the number of individuals claiming
benefits as a percentage of the number of workers covered by unemployment
insurance, declined from 3.9% during calendar years 1991 and 1992 to 3.3% during
1993 and then averaged 3.2% throughout 1994, 1995 and the first six months of
1996. As of August 1, 1996, the State's unemployment insurance trust fund
balance stood at $2.1 billion.
The State has benefited from the national recovery. New Jersey's recovery
is in its fifth year and appears to be sustainable now that the national economy
has "soft landed." The U.S. economy is in a period of steady, moderate growth,
having slowed enough during the fourth quarter of 1995 and the first quarter of
1996 to avoid
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inflation, but not enough to slip into a recession. While the latest national
indicators show that economic growth accelerated during the second quarter of
this year, the inflation rate remained low.
Business investment expenditures and consumer spending have increased
substantially in the nation as well as in the State. Capital and consumer
spending may very well continue to rise due to the sustained character of the
recovery, although the interest-sensitive homebuilding industry may provide only
a moderate amount of stimulus both nationally and in New Jersey. It is expected
that the employment and income growth that has and is taking place will lead to
further growth in consumer outlays. Reasons for cautious optimism in New Jersey
include increasing employment levels, a declining jobless rate, and a
higher-than-national level of per capita personal income.
If the nation's economic growth rate slows from the robust 4.7% growth in
the second quarter of 1996, business expansion could become somewhat more
subdued in New Jersey as the rest of 1996 unfolds. However, the State's economy
should have enough momentum to keep its trend line pointing upwards. Its growth
potential is not yet limited by the labor supply constraints beginning to affect
some other parts of the country.
Looking further ahead, prospects for New Jersey appear favorable. While
growth is likely to be slower than in the nation, the locational advantages that
have served New Jersey well for many years will still be there. Structural
changes that have been going on for years can be expected to continue, with job
creation concentrated most heavily in the service industries.
New Jersey Education Association, et al. v. State of New Jersey, et al.
represents a challenge to amendments to the pension laws enacted on June 30,
1994 (P.L. 1994, Chapter 62), which concerned the funding of the Teachers
Pension and Annuity Fund (TPAF), the Public Employee's Retirement System (PERS),
the Police and Fireman's Retirement System (PFRS), the State Police Retirement
System (SPRS) and the Judicial Retirement System (JRS). The complaint was filed
in the United States District Court of New Jersey on October 17, 1994. The
statute, as enacted, made several changes affecting these retirement systems
including changing the actuarial funding method to projected unit credit;
continuing the prefunding of post-retirement medical benefits but at a reduced
level for TPAF and PERS; revising the employee member contribution rate to a
flat 5% for TPAF and PERS; extending the phase-in period for the revised TPAF
actuarial assumptions; changing the phase-in period for funding of
cost-of-living adjustments and reducing the inflation assumption for the Cost of
Living Adjustment for all retirement systems; and decreasing the average salary
increase assumption for all retirement systems. Plaintiffs allege that the
changes resulted in lower employer contributions in order to reduce a general
budget deficit. The complaint further alleges that certain provisions of Chapter
62 violate the contract, due process, and taking clauses of the United States
and New Jersey Constitutions, and further constitute a breach of the State's
fiduciary duty to participants in TPAF and PERS. Plaintiffs seek to permanently
enjoin the State from administering, enforcing or otherwise implementing Chapter
62. An adverse determination against the State would have a significant impact
upon the fiscal year 1997 budget. The State filed a motion to dismiss and a
motion for summary judgment.
On October 6, 1995, the Court issued its opinion in which it dismissed the
State as a party to the action. The only defendant is Treasurer Clymer. The
claims surviving the motion are: (1) breach of trust and fiduciary duty (against
the Treasurer in both his individual and official capacities); (2) violation of
Due Process (against the Treasurer in both his individual and official
capacities); and (3) a 42 U.S.C. Section1983 claim (against the Treasurer in his
individual capacity).
The forms of relief sought related to these surviving claims are: (1) a
declaration that certain provisions of Chapter 62 violate Due Process of law
under the Fifth and Fourteenth Amendments to the U.S. Constitution; (2) a
declaration that the enactment and implementation of certain provisions of
Chapter 62 constitute a breach of the fiduciary obligations owed to contributing
participants, vested participants and retirees of the TPAF and PERS; (3) a
declaration that Chapter 62 contravenes the statutory and common law duties to
administer and fund the plans in an actuarially sound and fiscally responsible
manner; (4) a permanent injunction against administering, enforcing or otherwise
implementing certain provisions of Chapter 62; (5) directing payment of
plaintiff's attorneys' fees, disbursements and costs pursuant to 42 U.S.C
Section1988.
The State filed a motion for reconsideration or, in the alternative, for
certification to the Third Circuit Court of Appeals, of the remaining claims. By
order dated December 19, 1995, the District Court denied the motion in
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all respects. On January 29, 1996, the State, on behalf of Treasurer Clymer,
filed a Petition for a Writ of Mandamus and a Motion for a Stay of the
Proceedings below, pending consideration and disposition of the petition, with
the Third Circuit Court of Appeals. In the petition, Treasurer Clymer asked the
Court of Appeals to direct the District Court to dismiss the complaint or enter
summary judgment in his favor. Alternatively, the Treasurer asked the Court of
Appeals to order the District Court to vacate its order denying summary judgment
and resolve that motion as a matter of law without discovery or fact finding or
to certify the issues for interlocutory appeal. The Third Circuit Court of
Appeals denied the motion and petition on February 20, 1996. Discovery is
proceeding in this matter. The State intends to vigorously defend this action.
Beth Israel Hospital, et al. v. Essential Health Services Commission. This
case represents a challenge by eleven New Jersey hospitals to the .53% hospital
assessment authorized by the Health Care Reform Act of 1992, specifically
N.J.S.A. 26:2H-18.62. Amounts collected pursuant to the assessment are paid into
the hospital and other health care initiatives account of the Health Care
Subsidy Fund, to be used for various health care programs. Specifically, the
funds are currently used for those programs previously established pursuant to
N.J.S.A. 26:2H-18.47. In this appeal of the assessment, filed with the Appellate
Division on December 6, 1993, appellants argue that collection of the assessment
is invalid in the absence of Hospital Rate Setting Commission approval of the
approved revenue base used in the calculation. At the same time, appellants
filed an application for injunctive relief, seeking to stay any collection,
which application was denied. In a decision dated July 10, 1995, the Appellate
Division rejected appellants' contention that the respondents were prohibited
from collecting the assessment. However, the court also found that the hospitals
had not been afforded an opportunity to be heard on the assessment, and thus
remanded the case to the Essential Health Services Commission for a hearing.
Because the Commission has been abolished by L. 1995, c. 133, and its
responsibilities assigned to the Department of Health, the Department of Health
held the hearing on August 30, 1995. By letters dated March 26, 1996, the
Department of Health affirmed the prior assessments. The hospitals filed a
notice of appeal challenging that decision on May 10, 1996. The State intends to
vigorously defend this action.
Tort, Contract and Other Claims. At any given time, there are various
numbers of claims and cases pending against the State, State agencies and
employees, seeking recovery of monetary damages that are primarily paid out of
the fund created pursuant to the New Jersey Tort Claims Act (N.J.S.A. 59:1-1, et
seq.). The State does not formally estimate its reserve representing potential
exposure for these claims and cases. The State is unable to estimate its
exposure for these claims and cases.
The State routinely receives notices of claim seeking substantial sums of
money. The majority of those claims have historically proven to be of
substantially less value than the amount originally claimed. Under the New
Jersey Tort Claims Act, any tort litigation against the State must be preceded
by a notice of claim, which affords the State the opportunity for a six-month
investigation prior to the filing of any suit against it.
In addition, at any given time, there are various numbers of contract and
other claims against the State and State agencies, including environmental
claims asserted against the State, among other parties, arising from the alleged
disposal of hazardous waste. Claimants in such matters are seeking recovery of
monetary damages or other relief which, if granted, would require the
expenditure of funds. The State is unable to estimate its exposure for these
claims.
At any given time, there are various numbers of claims and cases pending
against the University of Medicine and Dentistry and its employees, seeking
recovery of monetary damages that are primarily paid out of the Self Insurance
Reserve Fund created pursuant to the New Jersey Tort Claims Act (N.J.S.A.
59:1-1, et seq.). An independent study estimated an aggregate potential exposure
of $86,795,000 for tort and medical malpractice claims pending as of June 30,
1996. In addition, at any given time, there are various numbers of contract and
other claims against the University of Medicine and Dentistry, seeking recovery
of monetary damages or other relief which, if granted, would require the
expenditure of funds. The State is unable to estimate its exposure for these
claims.
Currently, the State's general obligation bonds are rated AA+ by Standard &
Poor's, Aa1 by Moody's, and AA+ by Fitch. From time to time agencies may change
their ratings.
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APPENDIX G
ECONOMIC AND FINANCIAL CONDITIONS IN NEW YORK
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 specific issuers. The summary is based
primarily upon one or more publicly available offering statements relating to
debt offerings of state issuers; however, it has not been updated nor will it be
updated during the year. The Trust has not independently verified the
information.
In recent years, New York State (sometimes referred to herein as the
"State" or "New York"), some of its agencies, instrumentalities and public
authorities and certain of its municipalities have faced serious financial
difficulties that could have an adverse effect on the sources of payment for, or
the market value of, the New York State Municipal Securities in which each Fund
invests.
NEW YORK STATE
Current Economic Outlook. The national economy has resumed a more robust
rate of growth after a "soft landing" in 1995, with over 11 million jobs added
nationally since early 1992. The State economy has continued to expand, but
growth remains somewhat slower than in the nation. Although the State has added
approximately 240,000 jobs since late 1992, employment growth in the State has
been hindered during recent years by significant cutbacks in the computer and
instrument manufacturing, utility, defense and banking industries. Government
downsizing has also moderated these job gains.
The State expects modest economic growth in New York's economy during the
first half of the 1996 calendar year, but some slowdown is projected during the
second half of the year due to government cutbacks and tight fiscal constraints
on health and social services. On an average annual basis, the State's
employment growth is expected to be up slightly and personal income is expected
to record moderate gains from the 1995 rate. Overall employment growth is
projected to be 0.8 percent in 1996 and 0.6 percent in 1997 while personal
income growth is projected to be 5.2 percent in 1996 and 4.7 percent in 1997.
State Financial Plan for the 1996-1997 Fiscal Year. The State's budget for
the 1996-1997 fiscal year (April 1, 1996-March 31, 1997) was enacted by the
Legislature on July 13, 1996, more than three months after the start of the
fiscal year. Prior to adoption of the budget, the Legislature enacted
appropriations for disbursements considered to be necessary for State operations
and other purposes, including necessary appropriations for all State-supported
debt service. The State Financial Plan for the 1996-1997 fiscal year (the "State
Financial Plan") is based on the State's budget as enacted by the Legislature
and signed into law by the Governor, as well as actual results through the
second quarter of the 1996-1997 fiscal year.
The State Financial Plan projects a General Fund balanced on a cash basis
with total projected receipts of $33.573 billion and total disbursements of
$33.243 billion, representing increases of $765 million and $564 million,
respectively, from the prior fiscal year. The State Financial Plan includes gap
closing actions to offset a previously projected budget gap of $3.9 billion for
the 1996-1997 fiscal year. Such gap closing actions include reductions in the
State workforce, spending reductions in health care and education programs,
projected increases in tax collections, pension and debt service savings and the
use of certain reserve funds. There can be no assurance that additional gap
closing measures will not be required and there is no assurance that any such
measures will enable the State to achieve a balanced budget for its 1996-1997
fiscal year.
The State Financial Plan is based upon forecasts of national and State
economic activity. Economic forecasts have frequently failed to predict
accurately the timing and magnitude of changes in the national and State
economies. Many uncertainties exist in forecasts of both the national and State
economies, including consumer attitudes toward spending, Federal financial and
monetary policies, the availability of credit and the condition of the world
economy, which could have an adverse effect on the State. There can be no
assurance that the State economy will not experience worse-than-predicted
results in the 1996-1997 and subsequent fiscal years, with corresponding
material and adverse effects on the State's projections of receipts and
disbursements.
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Special Considerations for Future Fiscal Years. Owing to uncertainties in
the forecasts of both national and State economics, the State could face
substantial potential budget gaps in future years resulting from a significant
disparity between tax revenues from a lower recurring receipts base and the
spending required to maintain State programs at mandated levels. Any such
recurring imbalance would be exacerbated by the use by the State of nonrecurring
resources to achieve budgetary balance in a particular fiscal year. To correct
any recurring budgetary imbalance, the State would need to take significant
actions to align recurring receipts and disbursements in future fiscal years.
The State Financial Plan contains actions that provide nonrecurring
resources or savings as well as actions that impose baseline losses of receipts.
The Division of the Budget estimates the net amount of nonrecurring resources
used in the State Financial Plan to be at least $1.3 billion. In addition to
these nonrecurring actions, the adoption of a three-year 20% reduction in the
State's personal income tax in 1995 in combination with business tax reductions
enacted in 1994 will reduce State tax receipts by as much as $4.5 billion by the
1997-1998 fiscal year.
On August 13, 1996, the State Comptroller released a report in which he
estimated that the State faces a potential imbalance in receipts and
disbursements of approximately $3 billion for the State's 1997-98 fiscal year
and approximately $3.2 billion for the State's 1998-99 fiscal year. The Governor
is required to submit a balanced budget to the State Legislature and has
indicated he will close any potential imbalance in the 1997-98 Financial Plan
primarily through General Fund expenditure reductions and without increases in
taxes or deferrals of scheduled tax reductions. It is expected that the State's
1997-98 Financial Plan will reflect a continuing strategy of substantially
reduced State spending, including agency consolidations, reductions in the State
workforce, and efficiency and productivity initiatives. There can be no
assurance, however, that the State's actions will be sufficient to preserve
budget balances in the then-current or future fiscal years.
On August 22, 1996, the President signed into law the Personal
Responsibility and Work Opportunity Reconciliation Act of 1996. The new law
abolishes the federal Aid to Families with Dependent Children program (AFDC),
and creates a new Temporary Assistance to Needy Families program (TANF) funded
with a fixed federal block grant to states. The new law also imposes (with
certain exceptions) a five-year durational limit on TANF recipients, requires
that virtually all recipients be engaged in work or community service activities
within two years of receiving benefits, and limits assistance provided to
certain immigrants and other classes of individuals. States are required to
comply with the new federal welfare reform law no later than July 1, 1997.
States who fail to meet these federally mandated job participation rates, or who
fail to conform with certain other federal standards, face potential sanctions
in the form of a reduced federal block grant.
On October 16, 1996, the Governor submitted the State's TANF implementation
plan to the federal government as required under the new federal welfare law.
Submission of this plan to the federal government requires New York State to
begin compliance with certain time limits on welfare benefits and permits the
State to become eligible for approximately $2.36 billion in federal block grant
funding. The Governor has indicated that he plans to introduce legislation
necessary to conform with federal law for consideration by the Legislature
either before the end of calendar 1996 or in the 1997 legislative session. Given
the size and scope of the changes required under federal law, it is likely that
these proposals will produce extensive public discussions. There can be no
assurances that the State legislature will enact welfare reform proposals as
submitted by the Governor and as required under federal law.
It is expected that funding levels provided under the federal TANF block
grant will be higher than currently anticipated in the State Financial Plan.
However, the net fiscal impact of any changes to the State's welfare programs
that are necessary to conform with federal law will be dependent upon such
factors as the ability of the State to avoid any federal fiscal penalties, the
level of additional resources required to comply with any new State and/or
federal requirements, and the division of non-federal welfare costs between the
State and its localities.
Prior Fiscal Years. The State ended its 1995-1996 fiscal year in balance,
with a reported 1995-1996 General Fund cash surplus of $445 million. Prior to
adoption of the State's 1995-1996 fiscal year budget, the State had projected a
potential budget gap of approximately $5 billion, which was closed primarily
through spending reductions, cost containment measures, State agency actions and
local assistance reforms.
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In July, 1995, the State Comptroller issued its audit of the State's
1994-1995 fiscal year prepared in accordance with generally accepted auditing
standards. The State completed its 1994-1995 fiscal year with a General Fund
operating deficit of $1.426 billion, as compared with an operating surplus of
$914 million for the previous fiscal year. The 1994-1995 fiscal year deficit was
caused by several factors, including the use of $1.026 billion of the 1993-1994
fiscal year surplus in the 1994-1995 fiscal year and the adoption of changes in
accounting methodologies by the State Comptroller.
Local Government Assistance Corporation. In 1990, as part of a state fiscal
reform program, legislation was enacted creating the Local Government Assistance
Corporation ("LGAC"), a public benefit corporation empowered to issue long-term
obligations to fund certain payments to local governments traditionally funded
through the State's annual seasonal borrowing. As of June, 1995, LGAC has issued
bonds to provide net proceeds of $4.7 billion completing the program. The impact
of LGAC's borrowing is that the State is able to meet its cash flow needs
without relying on short-term seasonal borrowing.
Financing Activities. State financing activities include general obligation
debt of the State and State-guaranteed debt, to which the full faith and credit
of the State has been pledged, as well as lease-purchase and
contractual-obligation financings, moral obligation financings and other
financings through public authorities and municipalities, where the State's
obligation to make payments for debt service is generally subject to annual
appropriation by the State Legislature.
As of March 31, 1996, the total amount of outstanding general obligation
debt was approximately $5.047 billion, including $293 million in Bond
Anticipation Notes; the total amount of moral obligation debt was approximately
$7.269 billion and $20.343 billion of bonds issued primarily in connection with
lease-purchase and contractual-obligation financing of State capital programs
were outstanding.
Public Authorities. The fiscal stability of the State is related, in part,
to the fiscal stability of its public authorities. The State anticipates that
its capital programs will be financed, in part, by borrowings of State and
public authorities in the 1996-1997 fiscal year. Public authorities are not
subject to the constitutional restrictions on the incurrence of debt which apply
to the State itself, and may issue bonds and notes within the amounts of, and as
otherwise restricted by, their legislative authorization. As of September 30,
1995, the latest data available, there were 17 public authorities that had
outstanding debt of $100 million or more and the aggregate outstanding debt,
including refunding bonds, of these 17 public authorities was $73.45 billion.
The State's access to the public credit markets could be impaired and the market
price of its outstanding debt may be adversely affected, if any of its public
authorities were to default on their respective obligations.
Ratings. Currently, Moody's Investors Service, Inc. ("Moody's"), Standard &
Poor's Rating Services ("Standard & Poor's") and Fitch Investors Services, Inc.
("Fitch") rate New York State's outstanding general obligation bonds "A", "A-"
and "A+", respectively. Ratings reflect only the respective views of such
organizations, and explanation of the significance of such ratings must be
obtained from the rating agency furnishing the same. There is no assurance that
a particular rating will continue for any given period of time or that any such
rating will not be revised downward or withdrawn entirely if, in the judgment of
the agency originally establishing the rating, circumstances so warrant. A
downward revision or withdrawal of such ratings may have an effect on the market
price of the New York Municipal Bonds in which each Fund invests.
Litigation. The State is a defendant in numerous legal proceedings
including, but not limited to, claims asserted against the State arising from
alleged torts, alleged breaches of contracts, condemnation proceedings and other
alleged violations of State and Federal laws. State programs are frequently
challenged on State and Federal constitutional grounds. Adverse developments in
legal proceedings or the initiation of new proceedings could affect the ability
of the State to maintain a balanced State Financial Plan in any given fiscal
year. The State believes that the State Financial Plan includes sufficient
reserves for the payment of judgments that may be required during the 1996-1997
fiscal year. There can be no assurance, however, that an adverse decision in one
or more legal proceedings would not exceed the amount of such reserves for the
payment of judgments or materially impair the State's financial operations.
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Other Localities. Certain localities in addition to the City could have
financial problems leading to requests for additional State assistance during
the State's 1996-1997 fiscal year and thereafter. The potential impact on the
State of such actions by localities is not included in the projections of the
State receipts and disbursements in the State's 1996-1997 fiscal year.
Fiscal difficulties experienced by the City of Yonkers ("Yonkers") resulted
in the creation of the Financial Control Board for Yonkers (the "Yonkers Board")
by the State in 1984. The Yonkers Board is charged with oversight of the fiscal
affairs of Yonkers. Future actions taken by the Governor or the State
Legislature to assist Yonkers could result in the allocation of State resources
in amounts that cannot yet be determined.
NEW YORK CITY
General. More than any other municipality, the fiscal health of New York
City (sometimes referred to as the "City") has a significant effect on the
fiscal health of the State. The national economic downturn which began in July
1990 adversely affected the local economy, which had been declining since late
1989. As a result, the City experienced job losses in 1990 and 1991 and real
Gross City Product ("GCP") fell in those two years. Beginning in calendar year
1992, the improvement in the national economy helped stabilize conditions in the
City. Employment losses moderated toward year-end and real GCP increased,
boosted by strong wage gains. However, after noticeable improvements in the
City's economy during the calendar year 1994, economic growth slowed in calendar
year 1995, and the City's current four-year financial plan assumes that moderate
economic growth will continue through calendar year 2000.
For each of the 1981 through 1996 fiscal years, the City achieved balanced
operating results as reported in accordance with generally accepted accounting
principles ("GAAP"). The City was required to close substantial budget gaps in
recent fiscal years in order to maintain balanced operating results. There can
be no assurance that the City will continue to maintain a balanced budget as
required by State law without additional reductions in City services or
entitlement programs or tax or other revenue increases which could adversely
affect the City's economic base.
Pursuant to the laws of the State, the Mayor is responsible for preparing
the City's four-year financial plan, including the City's current financial plan
for the 1997 through 2000 fiscal years (the "1997-2000 Financial Plan" or the
"City Financial Plan"). The City's projections set forth in the City Financial
Plan are based on various assumptions and contingencies which are uncertain and
which may not materialize. Changes in major assumptions could significantly
affect the City's ability to balance its budget as required by State law and to
meet its annual cash flow and financing requirements.
Implementation of the City Financial Plan is also dependent upon the City's
ability to market its securities successfully in the public credit markets. The
City's financing program for fiscal years 1997 through 2000 contemplates the
issuance of $7.7 billion of general obligation bonds and $5.0 billion of bonds
to be issued by the proposed New York City Infrastructure Finance Authority to
finance education and transportation capital projects. The creation of the
Infrastructure Finance Authority, which is subject to the enactment of
legislation by the State, is being proposed by the City as part of the City's
effort to avoid certain State constitutional limitations on the amount of
general obligation debt the City is authorized to issue. The City's projections
indicate that projected issuance of City debt may exceed its general debt limit
by the end of the 1997 fiscal year unless legislation is enacted creating the
Infrastructure Finance Authority or other legislative initiatives are identified
and implemented. Without the Infrastructure Finance Authority or other
legislative relief, the City's general obligation financed capital program with
respect to new capital projects would be virtually brought to a halt through the
fiscal year 2000. In addition, the City issues revenue notes and tax
anticipation notes to finance its seasonal working capital requirements. The
success of projected public sales of City bonds and notes and Infrastructure
Finance Authority bonds, if and when authorized, will be subject to prevailing
market conditions, and no assurance can be given that such sales will be
completed. If the City were unable to sell its general obligation bonds and
notes or the proposed Infrastructure Finance Authority were unable to sell its
bonds, the City would be prevented from meeting its planned operating and
capital expenditures.
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1997-2000 Financial Plan. The City Financial Plan for the 1997 through 2000
fiscal years projects revenues and expenditures for the 1997 fiscal year (July
1, 1996-June 30, 1997) for the City balanced in accordance with GAAP and
reflects proposed actions to close a previously projected budget gap of
approximately $2.6 billion. Such gap-closing actions primarily include spending
reductions for Medicaid and welfare programs, City agency spending reductions,
additional State aid, pension and debt service savings and the sale of certain
City assets. The City Financial Plan also sets forth projections for the 1998
through 2000 fiscal years and outlines a proposed gap-closing program to close
projected budget gaps of $1.7 billion, $2.7 billion and $3.4 billion for the
1998 through 2000 fiscal years, respectively, after successful implementation of
the gap-closing program for the 1997 fiscal year.
The City's projections set forth in the City Financial Plan are based on
various assumptions and contingencies which are uncertain and which may not
materialize. Changes in major assumptions could significantly affect the City's
ability to balance its budget as required by State law and to meet its annual
cash flow and financing requirements. Such assumptions and contingencies include
the condition of the regional and local economies, the impact on real estate tax
revenues of the real estate market, employment growth, wage increases for City
employees consistent with those assumed in the City Financial Plan, continuation
of interest earnings assumptions for pension fund assets, the ability of the
City's hospital and education entities to maintain balanced budgets, provision
of State and federal aid, the impact of Federal welfare reforms on City revenues
and adoption of the budget by the City Council in substantially the form
submitted by the Mayor. The City Financial Plan also assumes the timely
extension by the State Legislature of the current rate structures for personal
income, corporation and sales taxes imposed by the City.
The City Financial Plan is also subject to the ability of the City to
implement the expenditure reductions, sell the assets and obtain the debt
service savings outlined in the City Financial Plan. In addition, the City may
incur expenditures which exceed those projected in the City Financial Plan.
There can be no assurance that additional gap-closing measures will not be
required to enable the City to achieve a balanced budget in a particular fiscal
year. Certain of the proposed actions are subject to negotiation with the City's
municipal unions. Various other actions proposed for the 1998 through 2000
fiscal years are subject to approval by the Governor and the State legislature.
The City depends on the State for State aid both to enable the City to
balance its budget and to meet its cash requirements. If the State experiences
revenue shortfalls or spending increases beyond its projections during the
current or subsequent fiscal years, such developments could result in reductions
in anticipated State aid to the City. In addition, there can be no assurance
that the State budget in any given State fiscal year will be adopted by the
April 1 statutory deadline and that there will not be adverse effects on the
City's cash flow and additional City expenditures as a result of such reductions
or delays.
The City's financial plans have been the subject of extensive public
comment and criticim. On July 16, 1996, the City Comptroller issued a report on
the City Financial Plan which identified budget risks of up to $941 million,
$2.58 billion, $3.53 billion and $4.31 billion for the City's 1997, 1998, 1999
and 2000 fiscal years, respectively. On July 18, 1996, the New York State
Financial Control Board issued a report on the City Financial Plan which
identified budget risks of $594 million, $1.08 billion, $851 million and $813
million for the City's 1997, 1998, 1999 and 2000 fiscal years, respectively. On
July 18, 1996, the Office of the State Deputy Comptroller of New York issued a
report on the City Financial Plan which identified budget risks of up to $848
million, $1.39 billion, $1.09 billion and $1.12 billion for the City's 1997,
1998, 1999 and 2000 fiscal years, respectively. Each of the reports noted that
the City Financial Plan achieves budget balance for the 1997 fiscal year only
with the inclusion of approximately $1.5 billion in non-recurring resources. On
October 31, 1996, the City's Independent Budget Office ("IBO") released a report
assessing the costs that could be incurred by the City as a result of recent
federal welfare reforms. Assuming continued moderate economic performance, the
IBO report projects that the City's cost of providing welfare could increase by
$33 million in 1999, growing to $269 million by 2002. Moreover, if the
requirement that all recipients work after two years of receiving benefits is
enforced, these additional costs could total $723 million in 1999 and
approximately $1 billion annually through 2002, reflecting substantial costs for
worker training and supervision of new workers and increased child care costs.
The report further noted that, if economic performance weakened, resulting in an
increased number of
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public assistance cases, potential costs to the City could substantially
increase. It is reasonable to expect that such reports will continue to be
issued and to engender public comment.
Ratings. As of November 21, 1996, Moody's rated the City's general
obligation bonds "Baa1", Standard & Poor's rated such bonds "BBB+" and Fitch
rated such bonds "A-". On February 28, 1996, Fitch placed the City's general
obligation bonds on FitchAlert with negative implications. On November 5, 1996,
Fitch removed the City's general obligation bonds from FitchAlert, although
Fitch stated that the outlook remains negative. On July 10, 1995, Standard &
Poor's revised downward its ratings on outstanding general obligation bonds of
the City from "A-" to "BBB+". Such ratings reflect only the view of Moody's,
Standard & Poor's and Fitch, from which an explanation of the significance of
such ratings may be obtained. There is no assurance that such ratings will
continue for any given period of time or that they will not be revised downward
or withdrawn entirely. Any such downward revision or withdrawal could have an
adverse effect on the market prices of City bonds.
Outstanding Indebtedness. As of September 30, 1996, the City had
approximately $25.1 billion of long-term debt and as of October 1, 1996, the New
York City Municipal Water Finance Authority (the "Water Authority") had
approximately $6.6 billion of net long-term debt.
Debt service on Water Authority obligations is secured by fees and charges
collected from the users of the City's water and sewer system. State and federal
regulations require the City's water supply to meet certain standards to avoid
filtration. The City's water supply now meets all technical standards and the
City's current efforts are directed toward protection of the watershed area. The
City has taken the position that increased regulatory, enforcement and other
efforts to protect its water supply, relating to such matters as land use and
sewage treatment, will preserve the high quality of water in the upstate water
supply system and prevent the need for filtration. The U.S. Environmental
Protection Agency has granted the City a waiver of filtration regulations
through 1996 and has stated it will issue a waiver through April, 2002 if the
City and State implement certain protective actions estimated to cost
approximately $400 million. If filtration of the City's water supply is
ultimately required, the capital expenditure required could be between $4
billion and $5 billion. Such an expenditure could cause significant increases in
City water and sewer charges.
Litigation. The City is a defendant in a significant number of lawsuits.
Such litigation includes, but is not limited to, routine litigation incidental
to the performance of its governmental and other functions, actions commenced
and claims asserted against the City arising out of alleged constitutional
violations, alleged torts, alleged breaches of contracts and other alleged
violations of law and condemnation proceedings and other tax and miscellaneous
actions. While the ultimate outcome and fiscal impact, if any, on the
proceedings and claims are not currently predictable, adverse determination in
certain of them might have a material adverse effect upon the City's ability to
carry out the City Financial Plan. As of June 30, 1996, the City estimated its
potential future liability on account of all outstanding claims to be
approximately $2.8 billion.
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APPENDIX H
ECONOMIC AND FINANCIAL CONDITIONS IN PENNSYLVANIA
The following information is a brief summary of factors affecting the
economy of the State and does not purport to be a complete description of such
factors. Other factors will affect issuers. The summary is based primarily upon
one or more publicly available offering statements relating to debt offerings of
state issuers, however, it has not been updated nor will it be updated during
the year. The Trust has not independently verified the information.
Many factors affect the financial condition of the Commonwealth of
Pennsylvania (also referred to as the "Commonwealth") and its political
subdivisions, such as social, environmental and economic conditions, many of
which are not within the control of such entities. Pennsylvania and certain of
its counties, cities and school districts and public bodies, most notably the
City of Philadelphia, have from time to time in the past encountered financial
difficulties which have adversely affected their respective credit standings.
Such difficulties could affect outstanding obligations of such entities,
including obligations held by the Fund. Further, the Washington-based Center on
Budget and Policy Priorities issued a report in the spring of 1996 stating that
recent and proposed state tax cuts, combined with structural problems in the
state's revenue system, will lead to a $600 million annual deficit within five
years. Governor Ridge's administration has challenged that report.
The General Fund, the Commonwealth's largest fund, receives all tax
revenues, non-tax revenues and Federal grants and entitlements that are not
specified by law to be deposited elsewhere. The majority of the Commonwealth's
operating and administrative expenses are payable from the General Fund. Debt
service on all bonded indebtedness of the Commonwealth, except that issued for
highway purposes or for the benefit of other special revenue funds, is payable
from the General Fund.
For the five year period fiscal 1991 through fiscal 1995, total revenues
and other sources rose at a 9.1% average annual rate while expenditures and
other uses grew by 7.4% annually. Over two-thirds of the increase in total
revenues and other sources during this period occurred during fiscal 1992 when a
$2.7 billion tax increase was enacted to address a fiscal 1991 budget deficit
and to fund increased expenditures for fiscal 1992. For the four year period
from fiscal 1992 through fiscal 1995, total revenues and other sources increased
at an annual average of 3.3%, less than one-half the rate of increase for the
five year period beginning with fiscal 1991. This slower rate of growth was due,
in part, to tax reductions and other tax law revisions that restrained the
growth of tax receipts for the fiscal years 1993, 1994 and 1995.
Expenditures and other uses followed a pattern similar to that for
revenues, although with smaller growth rates, during the fiscal years 1991
through 1995. Program areas having the largest increase in costs for the fiscal
years 1991 through 1995 were for protection of persons and property, due to an
expansion of state prisons, and for public health and welfare, due to rising
caseloads, program utilization and increased prices. Recent efforts to restrain
the rapid expansion of public health and welfare program costs have resulted in
expenditure increases at or below the total rate of increase for total
expenditures in each fiscal year.
Fiscal 1995 was the fourth consecutive fiscal year the Commonwealth
reported an increase in the fiscal year-end unappropriated balance. The fiscal
1995 unappropriated surplus (prior to reserves for transfer to the Tax
Stabilization Fund) was $540 million, an increase of $204.2 million over the
fiscal 1994 unappropriated surplus (prior to transfers). Commonwealth revenues
were $459.4 million (2.9%) above the estimate of revenues used at the time the
budget was enacted. The higher than estimated revenues from tax sources were due
to faster economic growth in the national and state economy than had been
projected when the budget was adopted. Expenditures from Commonwealth revenues
(excluding pooled financing expenditures), including $65.5 million of
supplemental appropriations enacted at the close of the 1995 fiscal year,
totaled $15,674 million, representing an increase of 5% over spending during
fiscal 1994.
For GAAP purposes, the General Fund recorded a $49.8 million deficit for
fiscal 1995, leading to a decline in the fund balance to $688.3 million at June
30, 1995. The two items which predominately contributed to the decline in the
fund balance were (i) the use of a more comprehensive procedure to compute the
liabilities for certain public welfare programs, leading to an increase for the
year-end accruals, and (ii) a change in the
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methodology used to calculate the year-end accrual for corporate tax payables
which increased the tax refund liability by $72 million for the 1995 fiscal year
when compared to the previous fiscal year.
The fiscal 1996 unappropriated surplus (prior to transfer to the Tax
Stabilization Reserve Fund) was $183.8 million, $65.5 million above estimate.
Net expenditures and encumbrances from Commonwealth revenues, including $113
million of supplemental appropriations (but excluding pooled financing
expenditures) totalled $16,162.9 million. Expenditures exceeded available
revenues and lapses by $253.2 million. The difference was funded from a planned
partial drawdown of the $437 million fiscal year adjusted beginning
unappropriated surplus.
Commonwealth revenues (prior to tax refunds) for fiscal 1996 increased by
$113.9 million over the prior year to $16,338.5 million (representing a growth
rate of .7%). Tax rate reductions and other tax law changes substantially
reduced the amount and rate of revenue growth for the fiscal year. It is
estimated the tax changes enacted for the fiscal year reduced Commonwealth
revenues by $283.4 million. The most significant tax changes enacted for the
fiscal year were (i) acceleration of the reduction of the corporate net income
tax rate to 9.99%; (ii) double weighing of the sales factor of the corporate net
income apportionment calculation; (iii) an increase in the maximum annual
allowance for a net operating loss deduction from .5 million to $1 million; (iv)
an increase in the basic exemption amount for the capital stock and franchise
tax; (v) the repeal of the tax on annuities; and (vi) the elimination of
inheritance tax on transfers of certain property to surviving spouses.
The enacted fiscal 1997 budget provides for expenditures from Commonwealth
revenues of $16,375.8 million, an increase of .6% over appropriated amounts from
Commonwealth revenues for fiscal 1996. The fiscal 1997 budget is based on
anticipated Commonwealth revenues (before refunds) of $16,744.5 million, an
increase over actual fiscal 1996 revenues of 2.5%. The revenue estimate includes
provision for a $15 million tax credit program enacted with the fiscal 1997
budget for businesses creating new jobs. Staggered corporation tax years will
cause fiscal 1997 revenues to continue to be affected by the business tax
reductions enacted during the two prior completed fiscal years. Those
reductions, together with the new jobs creation tax credit, cause revenue growth
comparisons between fiscal 1996 and 1997 to be understated. When these tax
changes are taken into account, revenues in the fiscal 1997 budget are
anticipated to increase at the rate of 3%. The fiscal 1997 revenue estimate is
based on a forecast of the national economy for real gross domestic product to
slow to a growth rate of 2% for 1996 and below 1.5% for 1997. This is based on
the assumption that the Federal Reserve Board does not cut interest rates and
that foreign economic growth is weak. The consequence of this economic scenario
is a U.S. economy with very low growth, slow gains in consumer spending,
declining inflation rates, but increasing unemployment.
Increased authorized spending for fiscal 1997 is driven largely by
increased costs of the corrections and probation and payroll programs. The
fiscal 1997 budget contains an appropriation increase in excess of $110 million
for these programs. The fiscal 1997 budget also contains some departmental
restructurings.
Providing funding for certain program increases required reductions and
savings in other programs funded from the General Fund. A major reform of the
current welfare system was enacted in May, 1996 to encourage recipients toward
self-sufficiency through work requirements, to provide temporary support for
families showing personal responsibility and to maintain safeguards for those
who cannot help themselves.
The fiscal 1997 budget anticipates receiving $60 million of proceeds from
the securitization of $151.7 million of loans held by the Sunny Day Fund. This
fund was created to finance large-scale economic development loans to attract
significant employment opportunities to the Commonwealth. Its funding was
generally obtained from General Fund appropriations. The fund has been abolished
and its loans have been transferred to the Pennsylvania Industrial Development
Fund, which will issue bonds secured by its loan reserves (including the Sunny
Day Fund). These bond proceeds will be used to refund outstanding debt of the
Commonwealth. The effect of this transaction on the fiscal 1997 budget is to
reduce the amount of debt service needed to be appropriated from the General
Fund by at least $60 million.
The fiscal 1997 budget is based on the presumption that federally enacted
reforms to Medicaid will raise the federal reimbursement percentage for those
costs to 57% from an approximate 53% rate for fiscal 1996. The
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higher reimbursement rate was anticipated to provide an additional $260 million
of federal funds during fiscal 1997 and enable the Commonwealth to reduce its
appropriations for the medical assistance program by a like amount for fiscal
1997. However, the U.S. Congress has not approved the legislation making these
changes and current expectations are that additional federal funds will not be
available at the time and in the amount as anticipated in the approved fiscal
1997 budget. The Commonwealth expects to use intergovernmental transfer funds
obtained through a pooling transaction to help make up the loss of this funding.
The fiscal 1997 budget assumes a drawdown of the $153.3 million fiscal year
beginning unappropriated surplus to fund the enacted level of appropriations
within the current estimate of revenues.
A disaster emergency was declared by the Governor and a federal major
disaster declaration was made by the President of the United States for certain
counties in the Commonwealth for a blizzard and subsequent flooding in January,
1996. Substantial damage to public and private facilities occurred and many
municipalities' financial resources have been strained by the costs of
responding to these weather-related conditions. A special session of the General
Assembly was convened by the Governor to consider legislation to respond to
these needs. Legislation was enacted that authorized $110 million of general
obligation debt to provide for the state's share of the required match for
federal public assistance and disaster mitigation funds. The legislation also
appropriated $13 million from tax amnesty receipts to fund the state match for
the federal individual assistance program, and authorized the use of current
Motor License Fund revenues for capital projects to repair flood damaged state
highways and bridges.
Pennsylvania has historically been identified as a heavy industry state
although that reputation has changed over the last thirty years as the coal,
steel and railroad industries declined and the Commonwealth's business
environment readjusted to reflect a more diversified industrial base. This
economic readjustment was a direct result of a long-term shift in jobs,
investment and workers away from the northeast part of the nation. Currently,
the major sources of growth in Pennsylvania are in the service sector, including
trade, medical and the health services, education and financial institutions.
Nonagricultural employment in Pennsylvania over the last ten years
increased at an annual rate of 1.02%. This compares to a .36% rate for the
Middle Atlantic region and 1.8% rate for the United States as a whole during the
period 1986 through 1995. For the last three years, employment in the
Commonwealth has increased 3.4%, as compared to 2.9% growth in the Middle
Atlantic region. The unemployment rate in Pennsylvania for August, 1996, stood
at a seasonably adjusted rate of 5.3%. The seasonably adjusted national
unemployment rate for August, 1996, was 5.1%.
The current Constitutional provisions pertaining to Commonwealth debt
permit the issuance of the following types of debt: (i) debt to suppress
insurrection or rehabilitate areas affected by disaster, (ii) electorate
approved debt, (iii) debt for capital projects subject to an aggregate debt
limit of 1.75 times the annual average tax revenues of the preceding five fiscal
years and (iv) tax anticipation notes payable in the fiscal year of issuance.
All debt except tax anticipation notes must be amortized in substantial and
regular amounts.
Debt service on all bonded indebtedness of Pennsylvania, except that issued
for highway purposes or the benefit of other special revenue funds, is payable
from Pennsylvania's General Fund, which receives all Commonwealth revenues that
are not specified by law to be deposited elsewhere. As of June 30, 1996, the
Commonwealth had $5,054.5 million of general obligation debt outstanding.
Other state-related obligations include "moral obligations". Moral
obligation indebtedness may be issued by the Pennsylvania Housing Finance Agency
("PHFA"), a state agency which provides financing for housing for lower and
moderate income families, and The Hospitals and Higher Education Facilities
Authority of Philadelphia, a municipal authority organized by the City of
Philadelphia to, among other things, acquire and prepare various sites for use
as intermediate care facilities for the mentally retarded. PHFA's bonds, but not
its notes, are partially secured by a capital reserve fund required to be
maintained by PHFA in an amount equal to the maximum annual debt service on its
outstanding bonds in any succeeding calendar year. PHFA is not permitted to
borrow additional funds as long as any deficiency exists in the capital reserve
fund.
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The Commonwealth, through several of its departments and agencies, has
entered into various agreements to lease, as lessee, certain real property and
equipment, and to make lease payments for the use of such property and
equipment. Some of those leases and their respective lease payments are, with
the Commonwealth approval, pledged as security for debt obligations issued by
certain public authorities or other entities within the state. All lease
payments due from Commonwealth departments and agencies are subject to and
dependent upon an annual spending authorization approved through the
Commonwealth's annual budget process. The Commonwealth is not required by law to
appropriate or otherwise provide monies from which the lease payments are to be
made. The obligations to be paid from such lease payments are not bonded debt of
the Commonwealth.
Certain state-created agencies have statutory authorization to incur debt
for which state appropriations to pay debt service thereon is not required. The
debt of these agencies is funded by assets of, or revenues derived from the
various projects financed and is not an obligation of the Commonwealth. Some of
these agencies, however, are indirectly dependent on Commonwealth operating
appropriations. In addition, the Commonwealth maintains pension plans covering
all state employees, public school employees and employees of certain state-
related organizations. For the fiscal year ended in 1995, the State Employees'
Retirement System had a $443 million surplus and the Public School Employees'
Retirement System had a total unfunded actuarial accrued liability of $3,102
million.
The City of Philadelphia is the largest city in the Commonwealth with an
estimated population of 1,585,577 according to the 1990 Census. Legislation
providing for the establishment of Pennsylvania Intergovernmental Cooperation
Authority ("PICA") to assist Philadelphia in remedying fiscal emergencies was
enacted by the Pennsylvania General Assembly and approved by the Governor in
June, 1991. PICA is designed to provide assistance through the issuance of
funding debt and to make factual findings and recommendations to Philadelphia
concerning its budgetary and fiscal affairs. At this time, Philadelphia is
operating under a five year fiscal plan approved by PICA on April 30, 1996.
PICA has issued $1.76 billion of its Special Tax Revenue Bonds. This
financial assistance has included the refunding of certain city general
obligation bonds, funding of capital projects and the liquidation of the
Cumulative General Fund balance deficit as of June 30, 1992 of $224.9 million.
The audited General Fund balance of Philadelphia as of June 30, 1995 shows a
surplus of approximately $80.5 million, up from approximately $15.4 million as
of June 30, 1994.
No further bonds are to be issued by PICA for the purpose of financing a
capital project or deficit as the authority for such bond sales expired December
31, 1994. PICA's authority to issue debt for the purpose of financing a cash
flow deficit expires on December 31, 1996. Its ability to refund existing
outstanding debt is unrestricted. PICA had $1,146,175,000 in special revenue
bonds outstanding as of June 30, 1996.
There is various litigation pending against the Commonwealth, its officers
and employees. In 1978, the Pennsylvania General Assembly approved a limited
waiver of sovereign immunity. Damages for any loss are limited to $250,000 for
each person and $1 million for each accident. The Supreme Court held that this
limitation is constitutional. Approximately 3,500 suits against the Commonwealth
are pending.
The following are among the cases with respect to which the Office of
Attorney General and the Office of General Counsel have determined that an
adverse decision may have a material effect on government operations of the
Commonwealth:
Baby Neal v. Commonwealth, et al.
In 1990, the American Civil Liberties Union and other various named
plaintiffs filed an action against the Commonwealth in Federal court seeking an
order that would require the Commonwealth to provide additional funding for
child welfare services. No figures for the amount of funding sought are
available. However, a similar lawsuit filed in the Commonwealth Court of
Pennsylvania was resolved through a court approved settlement which provides,
among other things, for Commonwealth funding for such services in fiscal year
1991 and a commitment to pay Pennsylvania counties $30 million over five years.
In December 1994, the Third Circuit Court of Appeals reversed the District
Court's denial of the plaintiff's motion for class certification with respect
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to the interests of 16 minor plaintiffs. As a result, the District Court has
recently certified the class and the parties have resumed discovery.
County of Allegheny v. Commonwealth of Pennsylvania
On December 7, 1987, the Supreme Court of Pennsylvania held that the
statutory scheme for county funding of the judicial system is in conflict with
the Pennsylvania Constitution. However, judgment was stayed in order to afford
the General Assembly an opportunity to enact appropriate funding legislation
consistent with its opinion. Since that time, the Supreme Court has denied
various actions and motions by several Pennsylvania municipalities to compel the
Commonwealth to comply with the Supreme Court's 1987 decision or to restore
funding for local courts and district justices to levels existing in 1987. On
December 7, 1992, the State Association of County Commissioners filed a new
action in mandamus seeking to compel the Commonwealth to comply with the Supreme
Court's decision in County of Allegheny. The Commonwealth has filed a response
in opposition to the new action. The Court issued the writ on July 26, 1996, and
appointed a special master to devise and submit a plan for implementation.
Recently, the President of the Senate and the Speaker of the House filed a
petition seeking reconsideration from the Court. The General Assembly has yet to
consider legislation implementing the Pennsylvania Supreme Court's judgment.
Fidelity Bank v. Commonwealth of Pennsylvania
On November 30, 1989, Fidelity Bank, N.A. ("Fidelity") filed an action
challenging the constitutional validity of a 1989 amendment increasing the bank
shares tax and related legislation. The Commonwealth Court ruled in favor of the
Commonwealth finding no constitutional deficiencies in the tax increase, but
invalidating one element of the legislation which provided a credit to new banks
(the "new bank tax credit"). Fidelity, the Commonwealth and certain intervener
banks appealed to the Pennsylvania Supreme Court. However, pursuant to a
Settlement Agreement dated as of April 21, 1995, the Commonwealth agreed to
enter a credit in favor of Fidelity in the amount of $4,100,000 in settlement of
the constitutional and non-constitutional issues. The credit represents
approximately 5% of the potential claim of Fidelity, had the constitutional
issues been resolved in its favor.
Pursuant to a separate Settlement Agreement dated as of April 21, 1995, the
Commonwealth also settled with the intervening banks with respect to issues
concerning the new bank tax credit.
Notwithstanding the foregoing settlements, other banks have filed
protective petitions which are currently pending at the various administrative
agencies challenging the validity of the 1989 tax increase. Depending on the
outcome of those administrative appeals, one or more of these banks may seek to
raise the issues which were adjudicated by Fidelity, although not brought to
resolution by the Pennsylvania Supreme Court.
Pennsylvania Association of Rural and Small Schools (PARSS) v. Casey
In January 1991, an association of rural and small schools and several
other parties filed a lawsuit against then Governor Robert P. Casey and former
Secretary of Education, Donald M. Carroll challenging the constitutionality of
the Commonwealth system for funding local school districts. The litigation
consists of two parallel cases, one in the Commonwealth Court of Pennsylvania
and one in the United States District Court for the Middle District of
Pennsylvania. The federal court case has been indefinitely stayed pending
resolution of the state court case. The Judge in the state court case has issued
an order scheduling trial to commence January 6, 1997. Because of the number of
witnesses identified by the petitioners and the interviews that had not been
previously disclosed, the Court has authorized the Commonwealth respondents to
conduct additional discovery depositions.
Austin v. Department of Corrections, et al.
In November 1990, the American Civil Liberties Union filed a class action
lawsuit in the United States District Court for the Eastern District of
Pennsylvania on behalf of inmate populations in various Pennsylvania
correctional institutions, challenging the conditions of confinement and seeking
injunctive relief. On January 17,
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1995, the Court approved a Settlement Agreement between the parties, pursuant to
which the Commonwealth paid $1.3 million in attorneys' fees to the plaintiffs'
attorneys, with an additional $100,000 to be paid upon dismissal of a
preliminary injunction relating to certain health issues. The parties are
presently complying with monitoring provisions outlined in the Settlement
Agreement. The monitoring phase will expire on January 8, 1998. The attorneys'
fees for the 3-year monitoring period will not exceed $60,000 in any one year.
Envirotest/Synterra Partners
On December 15, 1995, Envirotest Systems Corporation, Envirotest Partners
("Envirotest") and the Commonwealth of Pennsylvania entered into a Settlement
Agreement pursuant to which the parties settled all claims which Envirotest
might have against the Commonwealth arising from the suspension of an emissions
testing program. Under the Settlement Agreement, Envirotest is to receive $145
million, with interest at 6% per annum, in payments of $25 million in 1995, and
$40 million each in 1996, 1997 and 1998. An additional $15 million may be
required to be paid in 1998 depending on the results of property liquidations by
Envirotest.
Pennsylvania Human Relations Commission v. School District of Philadelphia, et
al. v. Commonwealth of Pennsylvania, et al.
On November 3, 1995, the Commonwealth of Pennsylvania and the Governor of
Pennsylvania, along with the City of Philadelphia and the Mayor of Philadelphia,
were joined as additional respondents in an enforcement action commenced in
Commonwealth Court in 1973 by the Pennsylvania Human Relations Commission
against the School District of Philadelphia pursuant to the Pennsylvania Human
Relations Act. The enforcement action was pursued to remedy unintentional
conditions of segregation in the public schools of Philadelphia. The
Commonwealth and the City were joined in the "remedial phase" of the proceeding
"to determine their liability, if any, to pay additional costs necessary to
remedy the unlawful conditions found to exist in the Philadelphia public
schools."
On February 28, 1996, the School District of Philadelphia filed a
third-party complaint against the Commonwealth of Pennsylvania asking
Commonwealth Court to require the Commonwealth to "supply such funding as is
necessary for full compliance with the November 28, 1994 and other remedial
orders of the Commonwealth Court." In addition, a group of interveners on March
4, 1996 filed a third-party complaint against the Commonwealth of Pennsylvania
and the City of Philadelphia requesting Commonwealth Court to declare that "it
is the obligation of the Commonwealth and the City to supply the additional
funds identified as necessary for the District to fully comply with the orders
of the Commonwealth Court," and to require the Commonwealth and the City to
supply such additional funding as is necessary for the District to comply with
the orders.
On April 30, 1996, Commonwealth Court Judge Doris A. Smith overruled the
Commonwealth's and City's preliminary objections seeking dismissal of the claims
against them. The Commonwealth and the City thereafter filed answers to the
complaints, asserting numerous defenses. The Commonwealth also asserted a
cross-claim against the City of Philadelphia claiming that if any party is
liable, sole liability rests with the City; in the alternative, the Commonwealth
argued that if it is held to be liable, it has a right of indemnity of
contribution against the City.
Trial commenced on May 30, 1996. During the course of the trial, upon
motion of the Commonwealth, the Pennsylvania Supreme Court on July 3, 1996
assumed extraordinary plenary jurisdiction and directed Judge Smith to conclude
the proceedings within 60 days and to file with the Supreme Court findings of
fact, conclusions of law and a final opinion.
On August 20, 1996, Judge Smith issued an Opinion and Order pursuant to
which judgment was entered in favor of the School District of Philadelphia and
the interveners and against the Commonwealth of Pennsylvania and the Governor of
Pennsylvania. Judgment was also entered in favor of the City of Philadelphia and
the Mayor of Philadelphia with respect to the intervener's claim and on the
cross-claim filed by the Commonwealth and Governor. The Judge ordered the
Commonwealth and Governor to submit a plan to the Court within thirty days
detailing the means by which the Commonwealth will effectuate the transfer of
additional funds payable to the
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<PAGE>
School District of Philadelphia to enable it to comply with the remedial order
during fiscal year 1996-1997 and any future years during which the School
District establishes its fiscal incapacity to fund the remedial programs. Judge
Smith specifically found that "[b]ecause of the lack of adequate funds to comply
with the remedial order, the School District is entitled to additional resources
for 1996-1997 of $45.1 million."
On August 30, 1996, the Commonwealth filed exceptions to the Findings of
Fact, Conclusions of Law and Opinion and Order of Judge Smith along with a
Motion to Vacate the purported Order and a Notice of Appeal and Jurisdictional
Statement.
On September 10, 1996, the Pennsylvania Supreme Court issued an order
granting the Commonwealth's Motion to Vacate and directed its Prothonotary to
establish a briefing schedule and date for oral argument. It also issued a
further order limiting the issues to be addressed and stated that the
Commonwealth Court is divested of jurisdiction of the matter and all further
proceedings in the Commonwealth Court are stayed pending further order of the
Supreme Court. The Supreme Court retained jurisdiction in the matter.
Currently, Pennsylvania general obligation bonds are rated AA- by Standard
& Poor's and Fitch, and A1 by Moody's. There can be no assurance that the
economic conditions on which these ratings are based will continue or that
particular bond issues will not be adversely affected by changes in economic or
political conditions.
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<PAGE>
APPENDIX I
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.
Short-term Notes: The four ratings of Moody's for short-term notes are
MIG1/VMIG1, MIG2/VMIG2, MIG3/VMIG3 and MIG4/VMIG4; MIG1/VMIG1 denotes "best
quality . . . strong protection by established cash flows"; MIG2/VMIG2 denotes
"high quality" with ample margins of protection; MIG3/VMIG3 notes are of
"favorable quality . . . but . . . lacking the undeniable strength of the
preceding grades"; MIG4/VMIG4 notes are of "adequate quality . . . protection
commonly regarded as required of an investment security is present . . . there
is specific risk."
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<PAGE>
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; Baa--considered as medium grade obligations, i.e, they are neither
highly protected nor poorly secured.
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 earnings coverage of fixed
financial charges and high internal cash generation; and well established access
to a range of financial markets and assured sources of alternate liquidity.
Issuers rated Prime-2 (or 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 RATINGS SERVICES' ("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.
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 obligation;
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<PAGE>
III. Protection afforded by, and relative position of, the obligation
in the event of bankruptcy, reorganization or other arrangement under the
laws of bankruptcy and other laws affecting creditors' rights.
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 Debt rated "BB", "B", "CCC", "CC" and "C" is regarded, on balance, as
B predominately speculative with respect to capacity to pay interest and
CCC repay principal in accordance with the terms of the obligation. "BB"
CC indicates the lowest degree of speculation and "C" the highest degree of
C speculation. While such debt will likely have some quality and protective
characteristics, these are outweighed by large uncertainties or major
exposures to adverse conditions.
C1 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.
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 a 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
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<PAGE>
timely payment. Issues in this category are further refined with the designation
1, 2 or 3 to indicate the relative degree of safety. These categories 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.
--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 Standard & Poor'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.
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<PAGE>
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.
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 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 arrow)(right arrow)
Declining (down arrow)
Uncertain (up arrow)(down arrow)
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<PAGE>
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.
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.
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Plus (+) or Minus (-): Plus or minus signs are used with a rating symbol to
indicate the relative position of a credit within the rating category. Plus and
minus signs, however, are not used in the "DDD", "DD", or "D" categories.
DESCRIPTION OF FITCH INVESTMENT GRADE SHORT-TERM RATINGS
Fitch's short-term ratings apply to debt obligations that are payable on
demand or have original maturities of generally up to three years, including
commercial paper, certificates of deposit, medium-term notes, and municipal and
investment notes.
The short-term rating places greater emphasis than a long-term rating on
the existence of liquidity necessary to meet the issuer's obligations in a
timely manner.
Fitch short-term ratings are as follows:
F-1+ Exceptionally Strong Credit Quality. Issues assigned this rating are
regarded as having the strongest degree of assurance for timely payment.
F-1 Very Strong Credit Quality. Issues assigned this rating reflect an
assurance of timely payment only slightly less in degree than issues
rated "F-1+".
F-2 Good Credit Quality. Issues assigned this rating have a satisfactory
degree of assurance for timely payment, but the margin of safety is not
as great as for issues assigned "F-1+" and "F-1" ratings.
F-3 Fair Credit Quality. Issues assigned this rating have characteristics
suggesting that the degree of assurance for timely payment is adequate;
however, near-term adverse changes could cause these securities to be
rated below investment grade.
F-4 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.
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INDEPENDENT AUDITORS' REPORT
The Board of Trustees and Shareholders,
Merrill Lynch Multi-State Limited Maturity
Municipal Series Trust:
We have audited the accompanying statements of assets and liabilities, including
the schedules of investments, of Merrill Lynch Limited Maturity Municipal Bond
Funds for Arizona, California, Florida, Massachusetts, Michigan, New Jersey, New
York, and Pennsylvania of the Merrill Lynch Multi-State Limited Maturity
Municipal Series Trust (the "Trust") as of July 31, 1996, the related statements
of operations for the year then ended and changes in net assets for each of the
years in the two-year period then ended and the financial highlights for each of
the years in the two-year period then ended and for the period November 26, 1993
(commencement of operations) to July 31, 1994. These financial statements and
the financial highlights are the responsibility of the Trust's management. Our
responsibility is to express an opinion on these financial statements and the
financial highlights based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements and the financial
highlights are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. Our procedures included confirmation of securities owned at July 31,
1996 by correspondence with the custodian and brokers. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such financial statements and financial highlights present
fairly, in all material respects, the financial position of Merrill Lynch
Limited Maturity Municipal Bond Funds for Arizona, California, Florida,
Massachusetts, Michigan, New Jersey, New York, and Pennsylvania of the Merrill
Lynch Multi-State Limited Maturity Municipal Series Trust as of July 31, 1996,
the results of their operations, the changes in their net assets, and the
financial highlights for the respective stated periods in conformity with
generally accepted accounting principles.
Deloitte & Touche LLP
Princeton, New Jersey
September 6, 1996
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<TABLE>
<S> <C>
++Highest short-term rating by Moody's Investors Service, Inc.
Ratings of issues shown have not been audited by Deloitte & Touche LLP.
</FN>
</TABLE>
See Notes to Financial Statements.
<TABLE>
California Limited Maturity Municipal Bond Fund
<CAPTION>
S&P Moody's Face Value
STATE Ratings Ratings Amount Issue (Note 1a)
<S> <C> <C> <C> <C> <C>
California--97.2% California Educational Facilities Authority,
Revenue Refunding Bonds:
NR* A1 $ 500 (Loyola Marymount University), 5.70% due 10/01/2002 $ 528
NR* A 685 (Saint Mary's College), 4.90% due 10/01/2003 688
AAA Aaa 500 California Health Facilities Financing Authority,
Revenue Refunding Bonds (Catholic Healthcare West),
Series A, 5.30% due 7/01/2003 (d) 516
California Pollution Control Financing Authority,
PCR, Refunding, VRDN (a):
A-1 NR* 600 (Pacific Gas and Electric Co.), AMT, Series G, 3.50% due 2/01/2016 600
A1+ VMIG1++ 400 (Shell Oil Company Project), Series C, 3.30% due 11/01/2000 400
California Pollution Control Financing Authority,
Resource Recovery Revenue Bonds, VRDN, AMT (a):
NR P1 500 (Delano Project), Series 1991, 3.65% due 8/01/2019 500
NR P1 200 Refunding (Ultra Power Malaga Project), Series A, 3.70%
due 4/01/2017 200
California State, GO, UT:
A+ A1 750 6.75% due 10/01/2003 840
</TABLE>
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<TABLE>
<S> <C> <C> <C> <C> <C>
A+ A1 1,000 6.10% due 9/01/2004 1,083
AAA Aaa 750 6.35% due 11/01/2004 (b) 829
AAA Aaa 600 California State Public Works Board, Lease Revenue Bonds
(Department of Corrections--State Prison/Central
California Women's Facility, Madera County), Series A, 7%
due 9/01/2000 (e) 669
AAA Aaa 500 California Statewide Communities Development Authority,
Lease Revenue Refunding Bonds
(Oakland Convention Center Project), 5.70% due 10/01/2002 (d) 527
A+ NR* 700 East Bay, California, Municipal Utility District, Water System
Revenue Bonds, Sub-Series, 7.40% due 6/01/2000 (e) 785
AAA Aaa 200 Los Angeles, California, Department of Airports, Airport Revenue
Refunding Bonds, Series A, 6% due 5/15/2005 (b) 215
AA- Aa 650 Los Angeles, California, Department of Water and Power, Electric
Plant Revenue Bonds, 6% due 4/01/2002 694
Los Angeles, California, Harbor Department Revenue Bonds, AMT,
Series B:
AA Aa 275 6% due 8/01/2000 289
AA Aa 295 6% due 8/01/2001 312
AA Aa 500 6% due 8/01/2004 535
Los Angeles County, California, Metropolitan Transportation
Authority, Sales Tax Revenue Bonds (Proposition C-Second Senior):
A1+ VMIG1++ 200 Refunding, VRDN, Series A, 3.25% due 7/01/2020 (a)(c) 200
AAA Aaa 400 Series B, 8% due 7/01/2003 (d) 474
AA- Aa1 1,000 Los Angeles County, California, Public Works Financing Authority,
Revenue Refunding Bonds (Capital Construction), 4.80% due 3/01/2004 990
A1+ NR* 400 Moor Park, California, M/F Mortgage Revenue Refunding Bonds
(Le Club Apartments Project), VRDN, Series A,
3.25% due 11/01/2015 (a) 400
AAA Aaa 750 San Diego County, California, Regional Transportation Commission,
Sales Tax Revenue Bonds (Second Senior Sales Tax), Series A,
4% due 4/01/1997 (b) 752
AAA Aaa 700 San Francisco, California, City and County Sewer Revenue Bonds,
Series A, 5.375% due 10/01/1999 (b) 723
AAA Aaa 500 Santa Clara County, California, Financing Authority, Lease Revenue
Bonds (VMC Facility Replacement
Project), Series A, 5.80% due 11/15/2000 (d) 527
AAA Aaa 500 University of California, Revenue Refunding Bonds (Multi-Purpose
Projects), Series C, 10% due 9/01/2001 (d) 620
Puerto Rico--1.3% A1+ VMIG1++ 200 Puerto Rico Commonwealth, Government Development Bank,
Refunding, VRDN, 3.20% due 12/01/2015 (a) 200
Total Investments (Cost--$14,538)--98.5% 15,096
Other Assets Less Liabilities--1.5% 225
-------
Net Assets--100.0% $15,321
=======
<FN>
(a)The interest rate is subject to change periodically based upon
prevailing market rates. The interest rate shown is the rate in
effect at July 31, 1996.
(b)FGIC Insured.
(c)MBIA Insured.
(d)AMBAC Insured.
(e)Prerefunded.
*Not Rated.
++Highest short-term rating by Moody's Investors Service, Inc.
Ratings of issues shown have not been audited by Deloitte & Touche LLP.
</FN>
</TABLE>
See Notes to Financial Statements.
Portfolio
Abbreviations
To simplify the listings of Merrill
Lynch Multi-State Limited Maturity
Municipal Series Trust's portfolio
holdings in the Schedule of
Investments, we have abbreviated
the names of many of the securities
according to the list at right.
AMT Alternative Minimum Tax (subject to)
COP Certificates of Participation
DATES Daily Adjustable Tax-Exempt Securities
EDA Economic Development Authority
GO General Obligation Bonds
HFA Housing Finance Agency
IDA Industrial Development Authority
IDR Industrial Development Revenue Bonds
M/F Multi-Family
PCR Pollution Control Revenue Bonds
TAN Tax Anticipation Notes
TRAN Tax Revenue AnticipationNotes
UPDATES Unit Priced Demand Adjustable
Tax-Exempt Securities
UT Unlimited Tax
VRDN Variable Rate Demand Notes
J-3
<PAGE>
MERRILL LYNCH MULTI-STATE LIMITED MATURITY MUNICIPAL TRUST, JULY 31, 1996
<TABLE>
SCHEDULE OF INVESTMENTS (continued) (in Thousands)
<CAPTION>
Florida Limited Maturity Municipal Bond Fund
S&P Moody's Face Value
STATE Ratings Ratings Amount Issue (Note 1a)
<S> <C> <C> <C> <C> <C>
Florida--92.0% AAA Aaa $ 1,000 Broward County, Florida, School District, UT, 7.125%
due 2/15/1999 (e) $ 1,088
Dade County, Florida, Aviation Revenue Refunding Bonds,
Series A (b):
AAA Aaa 300 5.60% due 10/01/2004 315
AAA Aaa 1,000 AMT, 5.25% due 10/01/1997 1,014
A1+ VMIG1++ 1,200 Dade County, Florida, IDA, IDR (Dolphins Stadium Project),
VRDN, Series D, 3.55% due 1/01/2016 (a) 1,200
AAA Aaa 800 Dade County, Florida, Special Obligation, Refunding, Series B,
4.80% due 10/01/2002 (b) 807
AAA Aaa 1,185 Dunedin, Florida, Hospital Revenue Bonds (Mease Health Care),
6.75% due 11/15/2001 (d)(e) 1,325
Florida State Board of Education, Capital Outlay (Public Education):
AA Aa 850 Refunding, 5.50% due 6/01/2001 884
AAA Aaa 1,000 Refunding, Series A, 7.25% due 6/01/2000 (e) 1,114
AA Aa 1,000 Series B, 5.625% due 6/01/2005 1,047
Florida State Division, Bond Finance Department, General Services
Revenue Bonds (Department of Natural Resources Preservation):
AAA Aaa 1,730 Refunding (Save Our Coast), Series A, 6.30% due 7/01/2004 (d) 1,853
AAA Aaa 1,000 Series 2000-A, 5.75% due 7/01/2000 (d) 1,047
AAA Aaa 1,900 Series 2000-A, 6.40% due 7/01/2002 (b) 2,072
A A 100 Hillsborough County, Florida, Capital Improvement Revenue Bonds
(County Center Project), Second Series,
6.75% due 7/01/2002 (e) 112
Jacksonville, Florida, Electric Authority, Revenue Refunding
Bonds (Saint John's), Issue 2:
AA Aa1 1,000 Series 6-C, 6.50% due 10/01/2001 1,082
AA Aa1 1,000 (Special Obligation) Series 6-B, 6.65% due 10/01/2002 1,081
NR VMIG1++ 300 Jacksonville, Florida, Health Facilities Authority, Hospital
Revenue Refunding Bonds (Genesis Rehabilitation Hospital), VRDN,
3.65% due 5/01/2021 (a) 300
AAA Aaa 1,000 Kissimmee, Florida, Water and Sewer Revenue Refunding Bonds,
5.50% due 10/01/2003 (b) 1,042
AA- Aa 800 Lakeland, Florida, Electric and Water Revenue Bonds, 6.70%
due 10/01/1999 856
AAA Aaa 500 Lee County, Florida, Capital Improvement Revenue Bonds,
Sub-Series 2, 6.75% due 10/01/1997 (d)(e) 526
AAA Aaa 1,200 North Miami, Florida, Health Facilities Authority, Health Facility
Revenue Bonds (Bon Secours Health System Project), 6% due
8/15/2002 (e)(f) 1,303
AAA Aaa 1,300 Okaloosa County, Florida, School Board Sales Tax Revenue Bonds,
5% due 9/01/1997 (c) 1,316
AAA Aaa 1,000 Palm Bay, Florida, Utility Revenue Bonds (Palm Bay Utility Corp.
Project), Series B, 6.20% due 10/01/2002 (d)(e) 1,099
SP1+ NR* 250 Palm Beach County, Florida, School District, TAN, 4.50% due 9/27/1996 250
NR* Baa1 1,440 Pembroke Pines, Florida, Special Assessment No. 94-1, 4.80% due
11/01/1998 1,448
A1 VMIG1++ 200 Pinellas County, Florida, Health Facilities Authority, Revenue
Refunding Bonds (Pooled Hospital Loan Program),
DATES, 3.70% due 12/01/2015 (a) 200
AAA Aaa 1,235 Saint Lucie County, Florida, School Board, COP, Series A,
7.25% due 7/01/2000 (b)(e) 1,378
Puerto Rico--5.4% A Baa1 500 Puerto Rico Commonwealth, GO, UT, 5.55% due 7/01/2001 517
A Baa1 1,000 Puerto Rico Commonwealth, Refunding, Improvement Bonds,
UT, 5.30% due 7/01/2004 1,013
Total Investments (Cost--$26,691)--97.4% 27,289
Other Assets Less Liabilities--2.6% 733
-------
Net Assets--100.0% $28,022
=======
<FN>
(a)The interest rate is subject to change periodically based upon
prevailing market rates. The interest rate shown is the rate in
effect at July 31, 1996.
(b)AMBAC Insured.
(c)FSA Insured.
(d)MBIA Insured.
(e)Prerefunded.
*Not Rated.
++Highest short-term rating by Moody's Investors Service, Inc.
Ratings of issues shown have not been audited by Deloitte & Touche LLP.
</FN>
</TABLE>
See Notes to Financial Statements.
J-4
<PAGE>
<TABLE>
Massachusetts Limited Maturity Municipal Bond Fund
<CAPTION>
S&P Moody's Face Value
STATE Ratings Ratings Amount Issue (Note 1a)
<S> <C> <C> <C> <C> <C>
Massachusetts-- NR* A1 $ 295 Boston, Massachusetts, Economic Development and Industrial Corp.,
97.2% Public Parking Facility, Series 1990,
5% due 7/01/2000 $ 291
AAA Aaa 300 Chelsea, Massachusetts, School Project Loan Act of 1948, UT, 6%
due 6/15/2002 (c) 319
AAA Aaa 215 Fall River, Massachusetts, GO, 6.30% due 6/01/1998 (b) 223
A1+ NR* 200 Holyoke, Massachusetts, PCR, Refunding (Holyoke Water Power
Project), VRDN, 3.25% due 11/01/2013 (a) 200
AAA Aaa 400 Lynn, Massachusetts, Water and Sewer Commission, Refunding,
4.95% due 12/01/2002 (e) 405
A+ A1 100 Massachusetts Bay Transportation Authority, Massachusetts General
Transportation System, Series A, 4.90% due 3/01/2004 100
AAA Aaa 250 Massachusetts Educational Loan Authority, EducationalLoan
Revenue Bonds, AMT, Issue E, Series B, 5.50% due 7/01/2001 (c) 258
BBB+ A 500 Massachusetts Municipal Wholesale Electric Company, Power Supply
System, Revenue Refunding Bonds, Series B, 6.375% due 7/01/2001 533
A+ A1 750 Massachusetts State, GO, Refunding, Series B, 6.25% due 8/01/2001 802
Massachusetts State Health and Educational Facilities Authority
Revenue Bonds:
A1+ VMIG1++ 200 (Capital Assets Program), VRDN, Series D, 3.45% due 1/01/2035 (a)(b) 200
A1+ VMIG1++ 300 (Harvard University), VRDN, Series I, 3.50% due 8/01/2017 (a) 300
AAA Aaa 200 Refunding (Baystate Medical Center), Series D, 4.60% due 7/01/2002 (e) 197
AAA Aaa 540 Massachusetts State HFA, Housing Revenue Refunding Bonds
(Insured-Rental), AMT, Series A, 5.90% due 7/01/2003 (c) 553
NR* MIG1++ 100 Massachusetts State Industrial Finance Agency, Health Care
Facility Revenue Bonds (Beverly Enterprises, Inc.), VRDN, 3.40%
due 10/01/2022 (a) 100
NR* VMIG1++ 300 Massachusetts State Industrial Finance Agency, PCR, Refunding
(North East Power Company), VRDN, 3.55% due 8/01/1996 (a) 300
AAA Aaa 320 Massachusetts State Industrial Finance Agency, Revenue Bonds
(Babson College), Series A, 5.40% due 10/01/2003 (b) 331
Massachusetts State Port Authority, Revenue Refunding Bonds, VRDN (a):
A1+ P1 100 AMT, Series B, 2.65% due 7/01/2018 100
A1+ P1 200 Series A, 3.45% due 7/01/2015 200
AA A1 300 Massachusetts State Special Obligation Revenue Bonds (Highway
Improvement Loan), Series A, 5.90% due 6/01/2001 316
AAA Aaa 500 Massachusetts State Water Resource Authority, Series A, 6.75%
due 7/15/2002 (d) 561
NR* A1 500 New England Educational Loan Marketing Corp., Massachusetts Student
Loan Revenue Bonds, AMT, Sub-Issue F, 6.60% due 9/01/2002 538
NR* NR* 365 South Hadley, Massachusetts, Industrial Revenue Bonds (South Hadley
Health Care), AMT, Series A, 5% due 12/01/1996 364
Total Investments (Cost--$7,011)--97.2% 7,191
Other Assets Less Liabilities--2.8% 205
-------
Net Assets--100.0% $ 7,396
=======
<FN>
(a)The interest rate is subject to change periodically based upon
prevailing market rates. The interest rate shown is the rate in
effect at July 31, 1996.
(b)MBIA Insured.
(c)AMBAC Insured.
(d)Prerefunded.
(e)FGIC Insured.
*Not Rated.
++Highest short-term rating by Moody's Investors Service, Inc.
Ratings of issues shown have not been audited by Deloitte & Touche LLP.
</FN>
</TABLE>
See Notes to Financial Statements.
J-5
<PAGE>
MERRILL LYNCH MULTI-STATE LIMITED MATURITY MUNICIPAL TRUST, JULY 31, 1996
<TABLE>
SCHEDULE OF INVESTMENTS (continued) (in Thousands)
<CAPTION>
Michigan Limited Maturity Municipal Bond Fund
S&P Moody's Face Value
STATE Ratings Ratings Amount Issue (Note 1a)
<S> <C> <C> <C> <C> <C>
Michigan--90.0% A1+ VMIG1++$ 200 Bruce Township, Michigan, Hospital Finance Authority,
Health Care System Revenue Bonds (Sisters
Charity-Saint Joseph's), VRDN, Series A, 3.45% due 5/01/2018 (a)(d) $ 200
AAA Aaa 250 Dearborn, Michigan, Economic Development Corp., Hospital
Revenue Bonds (Oakwood Obligated Group),
Series A, 6.95% due 8/15/2001 (d)(e) 279
AAA Aaa 200 Detroit, Michigan, Distributable State Aid, Refunding Bonds,
UT, 5.70% due 5/01/2001 (b) 208
AAA Aaa 250 Detroit, Michigan, Water Supply System, Revenue Refunding Bonds,
6.20% due 7/01/2004 (c) 270
AAA Aaa 200 Eastern Michigan University, Revenue Refunding Bonds, 5.40%
due 6/01/1998 (b) 204
Michigan Municipal Bond Authority Revenue Bonds:
AAA Aaa 200 (Local Government Loan Program), Series C, 5.50% due 5/01/2003 (d) 207
AA Aa 500 Refunding (Local Government--Qualified School), Series A, 6%
due 5/01/2001 527
AA Aa 200 (State Revolving Fund), 7% due 10/01/2004 226
AA- A1 200 Michigan State Building Authority, Revenue Refunding Bonds,
Series I, 6.40% due 10/01/2004 216
AA- A1 200 Michigan State Comprehensive Transportation, Revenue Refunding Bonds,
Series B, 5.625% due 5/15/2003 209
A1+ NR* 200 Michigan State Housing Development Authority, Rental Housing Revenue
Refunding Bonds, VRDN, Series C, 3.50% due 4/01/2019 (a) 200
AA Aa 200 Michigan State Recreation Program, GO, 6% due 11/01/2004 215
AAA Aaa 150 Michigan State South Central Power Agency, Power Supply System
Revenue Refunding Bonds, 7% due 11/01/1996 (b)(e) 154
A1+ VMIG1++ 100 Michigan State Strategic Fund, Limited Obligation Revenue Bonds
(United Waste Systems, Inc. Project), VRDN, AMT, 3.65% due
4/01/2010 (a) 100
AAA Aaa 160 Michigan State Underground Storage Tank, Financial Assurance
Authority, Revenue Refunding Bonds, Series I, 6% due 5/01/2004 (b) 171
AAA Aaa 235 Royal Oak, Michigan, Refunding, UT, 4% due 10/01/1997 (b) 235
Puerto Rico--6.8% A Baa1 265 Puerto Rico Commonwealth, GO, UT, 5.55% due 7/01/2001 274
Total Investments (Cost--$3,771)--96.8% 3,895
Other Assets Less Liabilities--3.2% 130
-------
Net Assets--100.0% $ 4,025
=======
<FN>
(a)The interest rate is subject to change periodically based upon
prevailing market rates. The interest rate shown is the rate in
effect at July 31, 1996.
(b)AMBAC Insured.
(c)FGIC Insured.
(d)MBIA Insured.
(e)Prerefunded.
*Not Rated.
++Highest short-term rating by Moody's Investor's Service, Inc.
Ratings of issues shown have not been audited by Deloitte & Touche LLP.
</FN>
</TABLE>
See Notes to Financial Statements.
J-6
<PAGE>
<TABLE>
New Jersey Limited Maturity Municipal Bond Fund
<CAPTION>
S&P Moody's Face Value
STATE Ratings Ratings Amount Issue (Note 1a)
<S> <C> <C> <C> <C> <C>
New Jersey--99.8% AAA Aaa $ 600 Elizabeth, New Jersey, General Improvement and Sewer Utility
Refunding Bonds, GO, UT, 6% due 8/15/2004 (b) $ 643
SP1+ VMIG1++ 400 Mercer County, New Jersey, Improvement Authority Revenue
Bonds, VRDN, 3.25% due 11/01/1998 (a) 400
AA+ Aa1 400 Monmouth County, New Jersey, General Improvement Bonds, GO,
UT, 6.625% due 8/01/2000 425
NR* Aa1 400 New Jersey EDA, Economic Development Revenue Bonds (400
International Drive Partners), VRDN, 3.20% due 9/01/2005 (a) 400
New Jersey, EDA, Industrial and Economic Development Revenue Bonds (a):
NR* NR* 100 (Burmah Castrol Inc.), VRDN, 3.30% due 8/01/2005 100
A-1 NR* 100 (Toys `R' Us, Inc.), DATES, 3.05% due 4/01/2019 100
AAA Aaa 1,000 New Jersey, EDA, Market Transition Facility Revenue Bonds,
Senior Lien, Series A, 7% due 7/01/2004 (c) 1,132
New Jersey, EDA, Natural Gas Facilities Revenue Bonds, VRDN,
Series A (a)(b):
A-1 VMIG1++ 100 (NUI Corp. Project), AMT, 3.75% due 7/01/2005 100
A1+ VMIG1++ 300 Refunding (New Jersey Natural Gas Co.), 3.40% due 8/01/2030 300
NR* Aaa 300 New Jersey EDA, Revenue Bonds (Hoffman-La Roche Incorporated
Project), VRDN, AMT, 3.55% due 11/01/2011 (a) 300
AAA Aaa 100 New Jersey Health Care Facilities Financing Authority Revenue
Bonds (Carrier Foundation), VRDN, Series C, 3.60% due 7/01/2005 (a)(d) 100
A1+ VMIG1++ 400 New Jersey Sports and Exposition Authority Revenue Bonds
(State Contract), VRDN, Series C, 3.30% due 9/01/2024 (a)(c) 400
A+ Aa 1,000 New Jersey State Transportation Trust Fund Authority, Transportation
System Revenue Bonds, Series A, 6% due 6/15/2000 (e) 1,050
BBB+ Baa1 400 New Jersey State Turnpike Authority, Turnpike Revenue Bonds,
Series A, 5.70% due 1/01/2001 412
AA Aa 400 North Brunswick Township, New Jersey, Board of Education Refunding
Bonds, GO, UT, 6.25% due 2/01/2004 434
NR* Aa 400 Ocean County, New Jersey, Utilities Authority, Wastewater Revenue
Bonds, UT, Series A, 6.125% due 1/01/2003 429
AAA Aaa 1,310 Port Authority of New York and New Jersey, Consolidated Refunding
Bonds, AMT, UT, 97th Series, 7.10% due 7/15/2004 (d) 1,485
AA+ Aaa 400 Union County, New Jersey (General Improvement and County
Collection), UT, 4.40% due 9/01/1998 403
Total Investments (Cost--$8,322)--99.8% 8,613
Other Assets Less Liabilities--0.2% 14
-------
Net Assets--100.0% $ 8,627
=======
<FN>
(a)The interest rate is subject to change periodically based upon
prevailing market rates. The interest rate shown is the rate in
effect at July 31, 1996.
(b)AMBAC Insured.
(c)MBIA Insured.
(d)FGIC Insured.
(e)Prerefunded.
*Not Rated.
++Highest short-term rating by Moody's Investors Service, Inc.
Ratings of issues shown have not been audited by Deloitte & Touche LLP.
</FN>
</TABLE>
See Notes to Financial Statements.
J-7
<PAGE>
MERRILL LYNCH MULTI-STATE LIMITED MATURITY MUNICIPAL TRUST, JULY 31, 1996
<TABLE>
SCHEDULE OF INVESTMENTS (concluded) (in Thousands)
<CAPTION>
New York Limited Maturity Municipal Bond Fund
S&P Moody's Face Value
STATE Ratings Ratings Amount Issue (Note 1a)
<S> <C> <C> <C> <C> <C>
New York--100.4% Nassau County, New York, General Improvement Bonds, UT (c):
AAA Aaa $ 400 Series O, 5.625% due 8/01/2004 $ 421
AAA Aaa 700 Series Q, 5.10% due 8/01/2003 714
A1+ VMIG1++ 100 New York City, New York, GO, VRDN, UT, Series B,
Sub-Series B-10, 3.35% due 8/15/2024 (a) 100
AAA Aaa 750 New York City, New York, IDA, Civic Facilities Revenue Bonds
(USTA National Tennis Center Project), 6% due 11/15/2003 (d) 802
A1+ NR* 1,400 New York City, New York, IDA, IDR (Japan Airlines Company Ltd.
Project), VRDN, AMT, 3.65% due 11/01/2015 (a) 1,400
AA- Aa 800 New York City, New York, Municipal Assistance Corporation,
Series 68, 7.10% due 7/01/2000 869
New York City, New York, Municipal Water Finance Authority,
Water and Sewer System Revenue Bonds, VRDN (a)(c):
A1+ VMIG1++ 500 Series C, 3.55% due 6/15/2023 500
A1+ VMIG1++ 300 Series G, 3.55% due 6/15/2024 300
BBB+ Baa1 610 New York City, New York, Refunding, UT, Series A, 6% due 8/01/2000 630
New York State Dormitory Authority Revenue Bonds:
AAA Aaa 500 (College and University Educational Loan), AMT, 6.30% due
7/01/2002 (e) 541
BBB Aaa 750 (Department of Health-Issue), 7.70% due 7/01/2000 (b) 849
AAA Aaa 670 (Rensselaer Polytechnic Institute), 4.90% due 7/01/2004 (e) 672
NR* VMIG1++ 400 New York State Energy Research and Development Authority, Electric
Facilities Revenue Bonds (Long Island Lighting Co.), VRDN, AMT,
Series B, 3.35% due 11/01/2023 (a) 400
A- Aa 400 New York State Environmental Facilities Corporation, PCR (State
Water--Revolving Fund), Series E, 5.60% due 6/15/1999 414
A1+ NR* 200 New York State Environmental Facilities Corporation, Resource
Recovery Revenue Bonds (OFS Equity Huntington Project), VRDN,
AMT, 3.65% due 11/01/2014 (a) 200
A- A 600 New York State Environmental Quality, GO, 6% due 12/01/2004 643
A- A 735 New York State, GO, Refunding, Series B, 6.25% due 8/15/2004 798
A1+ VMIG1++ 400 New York State HFA, Revenue Bonds (Normandie Court--I Project),
VRDN, 2.20% due 8/01/2016 (a) 400
New York State Local Government Assistance Corporation Revenue Bonds:
A A 625 Series A, 7% due 4/01/2005 692
AAA Aaa 600 Series D, 7% due 4/01/2002 (b) 679
New York State Medical Care Facilities, Finance Agency Revenue
Bonds, Series A:
AA Aa 655 (Adult Day Care), 6% due 11/15/2003 690
AAA Aaa 725 (Mental Health Services Facilities), 7.75% due 2/15/2001 (b) 832
NR* Aa3 500 (Saratoga Hospital Project), 5.25% due 11/01/2004 505
AA NR* 675 New York State Tax Exempt Revenue Bonds (Rochester Museum &
Science), 5.60% due 12/01/2015 688
BBB Baa1 450 New York State Urban Development Corporation, Revenue Refunding
Bonds (Center for Industrial Innovation), 4.60% due 1/01/1998 451
AAA Aaa 760 Port Authority of New York and New Jersey, Refunding (Construction),
AMT, UT, 97th Series, 7.10% due 7/15/2003 (c) 855
AA A1 700 Rockland County, New York, Sewer District, UT, 7.70% due 6/01/1997 (b) 736
AA A1 800 Syracuse, New York, GO, 5.70% due 6/15/2002 843
A+ Aa 340 Triborough Bridge and Tunnel Authority, New York, Revenue Bonds,
Series R, 6.90% due 1/01/2000 366
Total Investments (Cost--$17,666)--100.4% 17,990
Liabilities in Excess of Other Assets--(0.4%) (70)
-------
Net Assets--100.0% $17,920
=======
<FN>
(a)The interest rate is subject to change periodically based upon
prevailing market rates. The interest rate shown is the rate in
effect at July 31, 1996.
(b)Prerefunded.
(e)MBIA Insured.
*Not Rated.
++Highest short-term rating by Moody's Investors Service, Inc.
</TABLE>
J-8
<PAGE>
<TABLE>
<S> <C>
(c)FGIC Insured.
(d)FSA Insured.
Ratings of issues shown have not been audited by Deloitte & Touche LLP.
</FN>
</TABLE>
See Notes to Financial Statements.
<TABLE>
Pennsylvania Limited Maturity Municipal Bond Fund
<CAPTION>
S&P Moody's Face Value
STATE Ratings Ratings Amount Issue (Note 1a)
<S> <C> <C> <C> <C> <C>
Pennsylvania-- NR* A1 $ 200 Allegheny County, Pennsylvania, IDA, Revenue Refunding Bonds
82.6% (Commercial Development Parkway Center Mall Project), VRDN,
Series A, 3.75% due 5/01/2009 (d) $ 200
AAA Aaa 400 Beaver County, Pennsylvania, Hospital Authority, Revenue
Refunding Bonds (Beaver County Medical Center
Inc.), 5.70% due 7/01/1999 (c) 413
A1+ P1 100 Beaver County, Pennsylvania, IDA, PCR, Refunding (Duquesne
Light Project--Beaver Valley), VRDN, Series A,
3.45% due 8/01/2020 (d) 100
A1+ P1 200 Delaware County, Pennsylvania, IDA, PCR (BP Oil Inc. Project),
UPDATES, 3.60% due 12/01/2009 (d) 200
AA Aa 250 Delaware County, Pennsylvania, Refunding Bonds, GO, UT, 4.80%
due 10/01/2004 248
A1+ Aaa 250 Lehigh County, Pennsylvania, Authority Water Revenue Bonds,
VRDN, 3.60% due 11/01/2004 (b)(d) 250
NR* VMIG1++ 400 Pennsylvania Energy Development Authority, Energy Development
Revenue Bonds (B&W Ebensburg Project),
VRDN, AMT, 3.70% due 12/01/2011 (d) 400
Pennsylvania State Higher Educational Facilities Authority,
College and University Revenue Refunding Bonds, Series A:
A+ Aa 380 (Thomas Jefferson University), 5.75% due 8/15/1998 392
AA Aa 275 (University of Pennsylvania), 4.70% due 9/01/1997 277
AAA Aaa 300 Pennsylvania State, Refunding (Projects--First), UT, Series A,
6.60% due 1/01/2001 (c) 324
AA- A1 1,100 Pennsylvania State University, Refunding, 5.85% due 3/01/2002 1,158
Philadelphia, Pennsylvania, Hospitals and Higher Education
Facilities Authority, Hospital Revenue Bonds:
NR* Aaa 1,000 (Children's Hospital of Philadelphia Project), Series A, 6.50%
due 2/15/2002 (e) 1,101
A- NR* 650 (Children's Seashore House), Series B, 7% due 8/15/2003 705
SP1+ MIG1++ 400 Philadelphia, Pennsylvania, School District, TRAN, 4.50%
due 6/30/1997 402
SP-1 MIG1++ 400 Philadelphia, Pennsylvania, TRAN, Series A, 4.50% due 6/30/1997 402
AAA Aaa 400 Union County, Pennsylvania, Higher Educational Facilities Authority
Revenue Refunding Bonds (Bucknell University), 6% due 4/01/2002 (f) 423
AAA Aaa 325 Washington County, Pennsylvania, Lease Authority, Municipal
Facility (Shadyside Hospital Project), Series C,
Sub-Series C1-A, 7.45% due 6/15/2000 (a)(c)(e) 366
Puerto Rico--11.7% A- Baa1 1,000 Puerto Rico Municipal Finance Agency, GO, UT, Series A, 5.80%
due 7/01/2004 1,037
Total Investments (Cost--$8,237)--94.3% 8,398
Other Assets Less Liabilities--5.7% 507
-------
Net Assets--100.0% $ 8,905
=======
<FN>
(a)Escrowed to maturity.
(b)Secured by escrow.
(c)AMBAC Insured.
(d)The interest rate is subject to change periodically based on
prevailing market rates. The rates shown are those in effect at
July 31, 1996.
(e)Prerefunded.
(f)MBIA Insured.
*Not Rated.
++Highest short-term rating by Moody's Investors Service, Inc.
Ratings of issues shown have not been audited by Deloitte & Touche LLP.
</FN>
</TABLE>
See Notes to Financial Statements.
J-9
<PAGE>
MERRILL LYNCH MULTI-STATE LIMITED MATURITY MUNICIPAL TRUST, JULY 31, 1996
<TABLE>
STATEMENTS OF ASSETS AND LIABILITIES
<CAPTION>
Arizona California Florida Massachusetts
Limited Limited Limited Limited
As of July 31, 1996 Maturity Maturity Maturity Maturity
<S> <C> <C> <C> <C> <C>
Assets: Investments, at value* (Note 1a) $ 4,136,875 $ 15,096,081 $ 27,288,445 $ 7,190,978
Cash 56,502 37,176 76,040 168,110
Receivables:
Interest 25,595 240,691 347,804 73,352
Securities sold 241,346 -- 433,216 --
Investment adviser (Note 2) 19,404 -- -- 24,485
Beneficial interest sold -- 1,708 -- --
Deferred organization expenses
(Note 1e) -- 8,453 28,115 4,599
Prepaid registration fees and
other assets (Note 1e) 16,154 643 11,244 10,162
------------ ------------ ------------ ------------
Total assets 4,495,876 15,384,752 28,184,864 7,471,686
------------ ------------ ------------ ------------
Liabilities: Payables:
Beneficial interest redeemed -- 711 75,095 10,129
Dividends to shareholders
(Note 1f) 4,209 12,435 25,396 6,526
Investment adviser (Note 2) -- 1,933 8,332 --
Distributor (Note 2) 1,000 3,122 4,630 1,472
Accrued expenses and other
liabilities 38,639 45,740 49,326 57,389
------------ ------------ ------------ ------------
Total liabilities 43,848 63,941 162,779 75,516
------------ ------------ ------------ ------------
Net Assets: Net assets $ 4,452,028 $ 15,320,811 $ 28,022,085 $ 7,396,170
============ ============ ============ ============
Net Assets Class A Shares of beneficial
Consist of: interest, $.10 par value,
unlimited shares authorized $ 8,069 $ 31,471 $ 79,091 $ 17,264
Class B Shares of beneficial
interest, $.10 par value,
unlimited shares authorized 28,629 98,750 137,513 45,949
Class C Shares of beneficial
interest, $.10 par value,
unlimited shares authorized 1,339 549 521 2,113
Class D Shares of beneficial
interest, $.10 par value,
unlimited shares authorized 6,142 21,753 64,376 8,934
Paid-in capital in excess
of par 4,334,656 15,140,165 28,023,107 7,494,663
Accumulated realized capital
losses on investments --net
(Note 5) (71,438) (529,724) (879,594) (352,257)
Unrealized appreciation on
investments --net 144,631 557,847 597,071 179,504
------------ ------------ ------------ ------------
Net assets $ 4,452,028 $ 15,320,811 $ 28,022,085 $ 7,396,170
============ ============ ============ ============
Net Asset Value: Class A: Net assets $ 813,180 $ 3,161,461 $ 7,874,368 $ 1,719,269
============ ============ ============ ============
Shares outstanding 80,693 314,706 790,910 172,634
============ ============ ============ ============
Net asset value $ 10.08 $ 10.05 $ 9.96 $ 9.96
============ ============ ============ ============
Class B: Net assets $ 2,884,780 $ 9,918,998 $ 13,690,359 $ 4,576,988
============ ============ ============ ============
Shares outstanding 286,287 987,501 1,375,127 459,494
============ ============ ============ ============
Net asset value $ 10.08 $ 10.04 $ 9.96 $ 9.96
============ ============ ============ ============
Class C: Net assets $ 135,060 $ 55,114 $ 51,502 $ 210,323
============ ============ ============ ============
Shares outstanding 13,395 5,486 5,204 21,134
============ ============ ============ ============
Net asset value $ 10.08 $ 10.05 $ 9.90 $ 9.95
============ ============ ============ ============
Class D: Net assets $ 619,008 $ 2,185,238 $ 6,405,856 $ 889,590
============ ============ ============ ============
Shares outstanding 61,417 217,532 643,764 89,337
============ ============ ============ ============
Net asset value $ 10.08 $ 10.05 $ 9.95 $ 9.96
============ ============ ============ ============
*Identified cost $ 3,992,244 $ 14,538,234 $ 26,691,374 $ 7,011,474
============ ============ ============ ============
</TABLE>
J-10
<PAGE>
<TABLE>
<CAPTION>
Michigan New Jersey New York Pennsylvania
Limited Limited Limited Limited
As of July 31, 1996 Maturity Maturity Maturity Maturity
<S> <C> <C> <C> <C> <C>
Assets: Investments, at value* (Note 1a) $ 3,895,326 $ 8,613,187 $ 17,990,267 $ 8,398,278
Cash 77,643 56,519 16,531 39,650
Receivables:
Beneficial interest sold -- -- 627,229 --
Securities sold -- 51,148 -- 507,488
Interest 49,221 80,725 206,771 124,471
Investment adviser (Note 2) 24,857 16,407 20,090 7,414
Deferred organization expenses
(Note 1e) 4,045 6,610 7,246 6,183
Prepaid registration fees and
other assets (Note 1e) 7,914 10,280 5,166 8,464
------------ ------------ ------------ ------------
Total assets 4,059,006 8,834,876 18,873,300 9,091,948
------------ ------------ ------------ ------------
Liabilities: Payables:
Securities purchased -- 100,000 845,597 --
Beneficial interest redeemed -- 32,288 26,087 129,736
Dividends to shareholders
(Note 1f) 3,791 7,948 16,817 7,827
Distributor (Note 2) 590 1,674 3,304 2,044
Accrued expenses and other
liabilities 29,554 65,879 61,371 47,840
------------ ------------ ------------ ------------
Total liabilities 33,935 207,789 953,176 187,447
------------ ------------ ------------ ------------
Net Assets: Net assets $ 4,025,071 $ 8,627,087 $ 17,920,124 $ 8,904,501
============ ============ ============ ============
Net Assets Class A Shares of beneficial
Consist of: interest, $.10 par value,
unlimited shares authorized $ 16,499 $ 26,344 $ 37,016 $ 8,240
Class B Shares of beneficial
interest, $.10 par value,
unlimited shares authorized 18,522 50,942 100,111 61,965
Class C Shares of beneficial
interest, $.10 par value,
unlimited shares authorized 12 2,970 2,130 12
Class D Shares of beneficial
interest, $.10 par value,
unlimited shares authorized 5,446 5,343 38,884 17,865
Paid-in capital in excess
of par 4,031,709 8,543,116 17,678,636 8,756,463
Accumulated realized capital
losses on investments--net
(Note 5) (171,774) (293,217) (261,279) (100,866)
Unrealized appreciation on
investments --net 124,657 291,589 324,626 160,822
------------ ------------ ------------ ------------
Net assets $ 4,025,071 $ 8,627,087 $ 17,920,124 $ 8,904,501
============ ============ ============ ============
Net Asset Value: Class A: Net assets $ 1,640,666 $ 2,662,645 $ 3,723,308 $ 832,986
============ ============ ============ ============
Shares outstanding 164,986 263,436 370,162 82,402
============ ============ ============ ============
Net asset value $ 9.94 $ 10.11 $ 10.06 $ 10.11
============ ============ ============ ============
Class B: Net assets $ 1,841,924 $ 5,152,224 $ 10,070,519 $ 6,263,404
============ ============ ============ ============
Shares outstanding 185,219 509,424 1,001,114 619,654
============ ============ ============ ============
Net asset value $ 9.94 $ 10.11 $ 10.06 $ 10.11
============ ============ ============ ============
Class C: Net assets $ 1,163 $ 271,989 $ 214,138 $ 1,188
============ ============ ============ ============
Shares outstanding 117 29,696 21,296 117
============ ============ ============ ============
Net asset value $ 9.94 $ 9.16 $ 10.06 $ 10.15
============ ============ ============ ============
Class D: Net assets $ 541,318 $ 540,229 $ 3,912,159 $ 1,806,923
============ ============ ============ ============
Shares outstanding 54,464 53,434 388,837 178,650
============ ============ ============ ============
Net asset value $ 9.94 $ 10.11 $ 10.06 $ 10.11
============ ============ ============ ============
*Identified cost $ 3,770,669 $ 8,321,598 $ 17,665,641 $ 8,237,456
============ ============ ============ ============
See Notes to Financial Statements.
</TABLE>
J-11
<PAGE>
MERRILL LYNCH MULTI-STATE LIMITED MATURITY MUNICIPAL TRUST, JULY 31, 1996
<TABLE>
STATEMENT OF OPERATIONS
<CAPTION>
Arizona California Florida Massachusetts
Limited Limited Limited Limited
For the Year Ended July 31, 1996 Maturity Maturity Maturity Maturity
<S> <C> <C> <C> <C> <C>
Investment Interest and amortization of
Income (Note 1d): premium and discount earned $ 291,905 $ 748,162 $ 1,527,243 $ 424,149
Expenses: Investment advisory fees (Note 2) 21,459 54,033 108,720 30,736
Professional fees 41,571 48,058 52,985 53,005
Accounting services (Note 2) 30,172 38,245 34,053 53,983
Account maintenance and
distribution fees--Class B (Note 2) 15,724 35,889 53,229 17,257
Printing and shareholder reports 10,156 20,449 47,046 20,077
Registration fees (Note 1e) 24,744 19,983 13,634 18,980
Trustees' fees and expenses 3,015 7,114 13,676 4,419
Amortization of organization
expenses (Note 1e) -- 3,653 12,163 1,990
Custodian fees 2,321 1,167 5,841 2,964
Pricing fees 2,329 4,831 4,015 2,981
Transfer agent fees--Class B
(Note 2) 2,475 3,153 4,405 2,733
Account maintenance fees--Class D
(Note 2) 655 1,776 6,850 565
Transfer agent fees--Class A
(Note 2) 444 846 2,031 1,247
Transfer agent fees--Class D
(Note 2) 319 451 1,551 264
Account maintenance and
distribution fees --Class C
(Note 2) 68 103 20 558
Transfer agent fees--Class C
(Note 2) 33 27 10 182
Other 669 -- 2,049 2,701
------------ ------------ ------------ ------------
Total expenses before
reimbursement 156,154 239,778 362,278 214,642
Reimbursement of expenses (Note 2) (93,656) (54,497) (24,123) (126,014)
------------ ------------ ------------ ------------
Total expenses after reimbursement 62,498 185,281 338,155 88,628
------------ ------------ ------------ ------------
Investment income--net 229,407 562,881 1,189,088 335,521
------------ ------------ ------------ ------------
Realized & Realized gain (loss) on
Unrealized Gain investments--net (691) (14,506) (1,278) 18,219
(Loss) on Change in unrealized appreciation
Investments--Net on investments--net (45,086) 102,333 (174,866) (13,084)
(Notes 1b, 1d & 3): ------------ ------------ ------------ ------------
Net Increase in Net Assets
Resulting from Operations $ 183,630 $ 650,708 $ 1,012,944 $ 340,656
============ ============ ============ ============
<CAPTION>
Michigan New Jersey New York Pennsylvania
Limited Limited Limited Limited
For the Year Ended July 31, 1996 Maturity Maturity Maturity Maturity
<S> <C> <C> <C> <C> <C>
Investment Interest and amortization of
Income (Note 1d): premium and discount earned $ 225,785 $ 462,228 $ 793,554 $ 415,685
Expenses: Accounting services (Note 2) 47,178 43,508 62,140 43,426
Professional fees 44,286 43,780 42,051 40,761
Investment advisory fees (Note 2) 16,413 33,770 57,995 30,196
Account maintenance and
distribution fees--Class B
(Note 2) 7,629 22,973 34,048 24,307
Printing and shareholder reports -- 18,765 20,581 14,335
Registration fees (Note 1e) 11,903 13,375 19,353 --
Trustees' fees and expenses 2,243 4,589 6,879 197
Custodian fees 2,326 3,420 4,702 3,352
Transfer agent fees--Class B
(Note 2) 1,782 2,895 3,938 3,550
Pricing fees 2,119 2,271 4,161 2,169
</TABLE>
J-12
<PAGE>
<TABLE>
<S> <C> <C> <C> <C> <C>
Amortization of organization
expenses (Note 1e) 1,748 2,860 3,131 2,675
Transfer agent fees--Class A
(Note 2) 1,420 991 1,306 391
Account maintenance fees--
Class D (Note 2) 415 310 2,638 725
Transfer agent fees--Class D
(Note 2) 302 115 858 300
Account maintenance and
distribution fees--Class C
(Note 2) 1 174 206 41
Transfer agent fees--Class C
(Note 2) 6 53 70 20
Other -- 1,275 4,638 --
------------ ------------ ------------ ------------
Total expenses before
reimbursement 139,771 195,124 268,695 166,445
Reimbursement of expenses
(Note 2) (96,532) (98,714) (146,290) (71,504)
------------ ------------ ------------ ------------
Total expenses after
reimbursement 43,239 96,410 122,405 94,941
------------ ------------ ------------ ------------
Investment income--net 182,546 365,818 671,149 320,744
------------ ------------ ------------ ------------
Realized & Realized gain (loss) on
Unrealized investments--net 10,083 (12,586) 27,501 364
Gain (Loss) on Change in unrealized appreciation
Investments--Net on investments--net (23,665) (41,469) (22,206) 12,631
(Notes 1b, 1d & 3): ------------ ------------ ------------ ------------
Net Increase in Net Assets
Resulting from Operations $ 168,964 $ 311,763 $ 676,444 $ 333,739
============ ============ ============ ============
See Notes to Financial Statements.
</TABLE>
<TABLE>
STATEMENTS OF CHANGES IN NET ASSETS
<CAPTION>
Arizona Limited Maturity California Limited Maturity
For the Year Ended For the Year Ended
July 31, July 31,
Increase (Decrease) in Net Assets: 1996 1995 1996 1995
<S> <C> <C> <C> <C> <C>
Operations: Investment income--net $ 229,407 $ 305,477 $ 562,881 $ 612,890
Realized loss on investments
--net (691) (48,045) (14,506) (365,740)
Change in unrealized appreciation/
depreciation on investments--net (45,086) 182,975 102,333 501,542
Investments--Net ------------ ------------ ------------ ------------
Net increase in net assets
resulting from operations 183,630 440,407 650,708 748,692
------------ ------------ ------------ ------------
Dividends to Investment income--net:
Shareholders Class A (37,685) (78,637) (130,650) (159,781)
(Note 1f): Class B (164,444) (226,411) (362,918) (422,409)
Class C (1,762) (33) (2,149) (585)
Class D (25,516) (396) (67,164) (30,115)
------------ ------------ ------------ ------------
Net decrease in net assets
resulting from dividends to
shareholders (229,407) (305,477) (562,881) (612,890)
------------ ------------ ------------ ------------
Beneficial Interest Net increase (decrease) in net
Transactions assets derived from beneficial
(Note 4): interest transactions (1,767,011) (1,547,482) (491,496) 354,485
------------ ------------ ------------ ------------
Net Assets: Total increase (decrease) in
net assets (1,812,788) (1,412,552) (403,669) 490,287
Beginning of year 6,264,816 7,677,368 15,724,480 15,234,193
------------ ------------ ------------ ------------
End of year $ 4,452,028 $ 6,264,816 $ 15,320,811 $ 15,724,480
============ ============ ============ ============
See Notes to Financial Statements.
</TABLE>
J-13
<PAGE>
<TABLE>
STATEMENTS OF CHANGES IN NET ASSETS (concluded)
<CAPTION>
Florida Massachusetts
Limited Maturity Limited Maturity
For the Year Ended For the Year Ended
July 31, July 31,
Increase (Decrease) in Net Assets: 1996 1995 1996 1995
<S> <C> <C> <C> <C> <C>
Operations: Investment income--net $ 1,189,088 $ 1,343,126 $ 335,521 $ 505,228
Realized gain (loss) on
investments --net (1,278) (425,603) 18,219 (370,476)
Change in unrealized appreciation/
depreciation on investments--net (174,866) 839,494 (13,084) 274,970
------------ ------------ ------------ ------------
Net increase in net assets
resulting from operations 1,012,944 1,757,017 340,656 409,722
------------ ------------ ------------ ------------
Dividends & Investment income--net:
Distributions to Class A (361,872) (531,680) (118,129) (252,210)
Shareholders Class B (557,931) (756,233) (180,877) (242,775)
(Note 1f): Class C (522) (32) (14,474) (7,683)
Class D (268,763) (55,181) (22,041) (2,560)
Realized gain on investments
--net
Class A -- -- -- (7,555)
Class B -- -- -- (7,096)
Class C -- -- -- (476)
Class D -- -- -- (8)
------------ ------------ ------------ ------------
Net decrease in net assets
resulting from dividends and
distributions to shareholders (1,189,088) (1,343,126) (335,521) (520,363)
------------ ------------ ------------ ------------
Beneficial Interest Net decrease in net assets
Transactions derived from beneficial
(Note 4): interest transactions (5,075,030) (187,273) (2,526,578) (6,114,591)
------------ ------------ ------------ ------------
Net Assets: Total increase (decrease)
in net assets (5,251,174) 226,618 (2,521,443) (6,225,232)
(1,026,965) (793,586)
Beginning of year 33,273,259 33,046,641 9,917,613 16,142,845
------------ ------------ ------------ ------------
End of year $ 28,022,085 $ 33,273,259 $ 7,396,170 $ 9,917,613
============ ============ ============ ============
<CAPTION>
Michigan
Limited Maturity
For the Year Ended
July 31,
Increase (Decrease) in Net Assets: 1996 1995
<S> <C> <C> <C>
Operations: Investment income--net $ 182,546 $ 235,302
Realized gain (loss) on
investments--net 10,083 (132,641)
Change in unrealized appreciation/
depreciation on investments--net (23,665) 150,310
------------ ------------
Net increase in net assets
resulting from operations 168,964 252,971
------------ ------------
Dividends & Investment income--net:
Distributions to Class A (85,288) (123,016)
Shareholders Class B (80,829) (102,718)
(Note 1f): Class C (41) (33)
Class D (16,388) (9,535)
Realized gain on investments--net
Class A -- --
Class B -- --
Class C -- --
Class D -- --
------------ ------------
Net decrease in net assets
resulting from dividends and
distributions to shareholders (182,546) (235,302)
------------ ------------
Beneficial Interest Net decrease in net assets
Transactions derived from beneficial
(Note 4): interest transactions (1,013,383) (811,255)
------------ ------------
Net Assets: Total increase (decrease)
in net assets (1,026,965) (793,586)
Beginning of year 5,052,036 5,845,622
------------ ------------
End of year $ 4,025,071 $ 5,052,036
============ ============
<CAPTION>
New Jersey New York
Limited Maturity Limited Maturity
For the Year Ended For the Year Ended
July 31, July 31,
Increase (Decrease) in Net Assets: 1996 1995 1996 1995
<S> <C> <C> <C> <C> <C>
Operations: Investment income--net $ 365,818 $ 441,857 $ 671,149 $ 634,544
Realized gain (loss) on
investments--net (12,586) (190,903) 27,501 (166,770)
Change in unrealized appreciation/
depreciation on investments--net (41,469) 328,757 (22,206) 337,132
------------ ------------ ------------ ------------
Net increase in net assets
resulting from operations 311,763 579,711 676,444 804,906
------------ ------------ ------------ ------------
Dividends & Investment income--net:
Distributions to Class A (107,284) (147,854) (174,431) (247,259)
Shareholders Class B (241,855) (287,858) (381,150) (370,411)
(Note 1f): Class C (4,447) (761) (5,588) (219)
Class D (12,232) (5,384) (109,980) (16,655)
------------ ------------ ------------ ------------
Net decrease in net assets
resulting from dividends to
shareholders (365,818) (441,857) (671,149) (634,544)
------------ ------------ ------------ ------------
Beneficial Interest Net increase (decrease) in net
Transactions assets derived from beneficial
(Note 4): interest transactions (1,750,465) (3,524,093) 1,937,339 774,385
------------ ------------ ------------ ------------
Net Assets: Total increase (decrease) in
net assets (1,804,520) (3,386,239) 1,942,634 944,747
Beginning of year 10,431,607 13,817,846 15,977,490 15,032,743
------------ ------------ ------------ ------------
End of year $ 8,627,087 $ 10,431,607 $ 17,920,124 $ 15,977,490
============ ============ ============ ============
<CAPTION>
Pennsylvania
Limited Maturity
For the Year Ended
July 31,
Increase (Decrease) in Net Assets: 1996 1995
<S> <C> <C> <C>
Operations: Investment income--net $ 320,744 $ 385,356
Realized gain (loss) on
investments--net 364 (38,604)
Change in unrealized appreciation/
depreciation on investments--net 12,631 150,668
------------ ------------
Net increase in net assets
resulting from operations 333,739 497,420
------------ ------------
Dividends & Investment income--net:
Distributions to Class A (37,384) (43,161)
Shareholders Class B (254,375) (334,652)
(Note 1f): Class C (1,049) (32)
Class D (27,936) (7,511)
------------ ------------
</TABLE>
J-14
<PAGE>
<TABLE>
<S> <C>
Net decrease in net assets
resulting from dividends to
shareholders. (320,744) (385,356)
------------ ------------
Beneficial Interest Net increase (decrease) in net
Transactions assets derived from beneficial
(Note 4): interest transactions 150,949 (1,893,824)
------------ ------------
Net Assets: Total increase (decrease) in
net assets 163,944 (1,781,760)
Beginning of year 8,740,557 10,522,317
------------ ------------
End of year $ 8,904,501 $ 8,740,557
============ ============
See Notes to Financial Statements.
</TABLE>
<TABLE>
FINANCIAL HIGHLIGHTS
<CAPTION>
Arizona Limited Maturity
Class A Class B
The following per share data For the For the
and ratios have been derived from Period Period
information provided in the For the Nov. 26, For the Nov. 26,
financial statements. Year Ended 1993++ to Year Ended 1993++ to
July 31, July 31, July 31, July 31,
Increase (Decrease) in Net Asset Value: 1996 1995 1994 1996 1995 1994
<S> <C> <C> <C> <C> <C> <C> <C>
Per Share Net asset value, beginning of period $ 10.17 $ 9.97 $ 10.00 $ 10.16 $ 9.97 $ 10.00
Operating ------- ------- ------- ------- ------- -------
Performance: Investment income--net .41 .43 .23 .37 .39 .20
Realized and unrealized gain (loss)
on investments--net (.09) .20 (.03) (.08) .19 (.03)
------- ------- ------- ------- ------- -------
Total from investment operations .32 .63 .20 .29 .58 .17
------- ------- ------- ------- ------- -------
Less dividends from investment
income--net (.41) (.43) (.23) (.37) (.39) (.20)
------- ------- ------- ------- ------- -------
Net asset value, end of period $ 10.08 $ 10.17 $ 9.97 $ 10.08 $ 10.16 $ 9.97
======= ======= ======= ======= ======= =======
Total Investment Based on net asset value per share 3.16% 6.47% 2.02%+++ 2.88% 5.99% 1.78%+++
Return:** ======= ======= ======= ======= ======= =======
Ratios to Average Expenses, net of reimbursement .74% .35% .02%* 1.09% .72% .38%*
Net Assets: ======= ======= ======= ======= ======= =======
Expenses 2.27% 2.05% 1.82%* 2.61% 2.44% 2.18%*
======= ======= ======= ======= ======= =======
Investment income--net 4.01% 4.31% 3.37%* 3.65% 3.95% 3.02%*
======= ======= ======= ======= ======= =======
Supplemental Net assets, end of period
Data: (in thousands) $ 813 $ 1,054 $ 2,103 $ 2,885 $ 5,191 $ 5,575
======= ======= ======= ======= ======= =======
Portfolio turnover 43.53% 182.58% 142.37% 43.53% 182.58% 142.37%
======= ======= ======= ======= ======= =======
<FN>
*Annualized.
**Total investment returns exclude the effects of sales loads.
++Commencement of Operations.
+++Aggregate total investment return.
</FN>
</TABLE>
See Notes to Financial Statements.
J-15
<PAGE>
<TABLE>
FINANCIAL HIGHLIGHTS (continued)
<CAPTION>
Arizona Limited Maturity
Class C Class D
The following per share data and For the For the
ratios have been derived from For the Period For the Period
information provided in the Year Oct. 21, Year Oct. 21,
financial statements. Ended 1994++ to Ended 1994++ to
July 31, July 31, July 31, July 31,
Increase (Decrease) in Net Asset Value: 1996 1995 1996 1995
<S> <C> <C> <C> <C> <C>
Per Share Net asset value, beginning of period $ 10.17 $ 9.89 $ 10.17 $ 9.89
Operating -------- -------- -------- --------
Performance: Investment income--net .37 .29 .40 .33
Realized and unrealized gain (loss)
on investments--net (.09) .28 (.09) .28
-------- -------- -------- --------
Total from investment operations .28 .57 .31 .61
-------- -------- -------- --------
Less dividends from investment
income--net (.37) (.29) (.40) (.33)
-------- -------- -------- --------
Net asset value, end of period $ 10.08 $ 10.17 $ 10.08 $ 10.17
======== ======== ======== ========
Total Investment Based on net asset value per share 2.78% 5.90%+++ 3.05% 6.34%+++
Return:** ======== ======== ======== ========
Ratios to Average Expenses, net of reimbursement 1.03% 1.05%* .90% .55%*
Net Assets: ======== ======== ======== ========
Expenses 2.80% 2.79%* 2.42% 2.39%*
======== ======== ======== ========
Investment income--net 3.86% 3.80%* 3.88% 4.31%*
======== ======== ======== ========
Supplemental Net assets, end of period
Data: (in thousands) $ 135 $ 1 $ 619 $ 19
======== ======== ======== ========
Portfolio turnover 43.53% 182.58% 43.53% 182.58%
======== ======== ======== ========
</TABLE>
<TABLE>
<CAPTION>
California Limited Maturity
Class A Class B
The following per share data and For the For the
ratios have been derived from Period Period
information provided in the For the Nov. 26, For the Nov. 26,
financial statements. Year Ended 1993++ to Year Ended 1993++ to
July 31, July 31, July 31, July 31,
Increase (Decrease) in Net Asset Value: 1996 1995 1994 1996 1995 1994
<S> <C> <C> <C> <C> <C> <C> <C>
Per Share Net asset value, beginning of period $ 9.99 $ 9.88 $ 10.00 $ 9.99 $ 9.88 $ 10.00
Operating ------- ------- ------- ------- ------- -------
Performance: Investment income--net .39 .42 .24 .36 .39 .21
Realized and unrealized gain (loss)
on investments--net .06 .11 (.12) .05 .11 (.12)
------- ------- ------- ------- ------- -------
Total from investment operations .45 .53 .12 .41 .50 .09
------- ------- ------- ------- ------- -------
Less dividends from investment
income--net (.39) (.42) (.24) (.36) (.39) (.21)
------- ------- ------- ------- ------- -------
Net asset value, end of period $ 10.05 $ 9.99 $ 9.88 $ 10.04 $ 9.99 $ 9.88
======= ======= ======= ======= ======= =======
Total Investment Based on net asset value per share 4.56% 5.60% 1.23%+++ 4.08% 5.23% .99%+++
Return:** ======= ======= ======= ======= ======= =======
Ratios to Average Expenses, net of reimbursement .94% .40% .02%* 1.30% .76% .38%*
Net Assets: ======= ======= ======= ======= ======= =======
Expenses 1.30% 1.44% 1.16%* 1.66% 1.80% 1.52%*
======= ======= ======= ======= ======= =======
Investment income--net 3.89% 4.36% 3.54%* 3.53% 4.00% 3.19%*
======= ======= ======= ======= ======= =======
</TABLE>
J-16
<PAGE>
<TABLE>
<S> <C> <C> <C> <C> <C> <C> <C>
Supplemental Net assets, end of period
Data: (in thousands) $ 3,162 $ 3,527 $ 3,804 $ 9,919 $10,363 $11,430
======= ======= ======= ======= ======= =======
Portfolio turnover 11.09% 124.72% 130.10% 11.09% 124.72% 130.10%
======= ======= ======= ======= ======= =======
</TABLE>
<TABLE>
<CAPTION>
California Limited Maturity
Class C Class D
The following per share data For the For the
and ratios have been derived from For the Period For the Period
information provided in the Year Oct. 21, Year Oct. 21,
financial statements. Ended 1994++ to Ended 1994++ to
July 31, July 31, July 31, July 31,
Increase (Decrease) in Net Asset Value: 1996 1995 1996 1995
<S> <C> <C> <C> <C> <C>
Per Share Net asset value, beginning of period $ 9.99 $ 9.76 $ 9.99 $ 9.76
Operating -------- -------- -------- --------
Performance: Investment income--net .37 .31 .38 .33
Realized and unrealized gain on
investments--net .06 .23 .06 .23
-------- -------- -------- --------
Total from investment operations .43 .54 .44 .56
-------- -------- -------- --------
Less dividends from investment
income--net (.37) (.31) (.38) (.33)
-------- -------- -------- --------
Net asset value, end of period $ 10.05 $ 9.99 $ 10.05 $ 9.99
======== ======== ======== ========
Total Investment Based on net asset value per share 4.35% 5.60%+++ 4.46% 5.85%+++
Return:** ======== ======== ======== ========
Ratios to Average Expenses, net of reimbursement 1.14% .82%* 1.06% .66%*
Net Assets: ======== ======== ======== ========
Expenses 1.50% 1.98%* 1.40% 1.81%*
======== ======== ======== ========
Investment income--net 3.69% 4.04%* 3.77% 4.28%*
======== ======== ======== ========
Supplemental Net assets, end of period
Data: (in thousands) $ 55 $ 64 $ 2,185 $ 1,771
======== ======== ======== ========
Portfolio turnover 11.09% 124.72% 11.09% 124.72%
======== ======== ======== ========
<FN>
*Annualized.
**Total investment returns exclude the effects of sales loads.
++Commencement of Operations.
+++Aggregate total investment return.
</FN>
</TABLE>
See Notes to Financial Statements.
J-17
<PAGE>
<TABLE>
FINANCIAL HIGHLIGHTS (continued)
<CAPTION>
Florida Limited Maturity
Class A Class B
The following per share data and For the For the
ratios have been derived from Period Period
information provided in the For the Nov. 26, For the Nov. 26,
financial statements. Year Ended 1993++ to Year Ended 1993++ to
July 31, July 31, July 31, July 31,
Increase (Decrease) in Net Asset Value: 1996 1995 1994 1996 1995 1994
<S> <C> <C> <C> <C> <C> <C> <C>
Per Share Net asset value, beginning of period $ 10.02 $ 9.87 $ 10.00 $ 10.02 $ 9.88 $ 10.00
Operating ------- ------- ------- ------- ------- -------
Performance: Investment income--net .40 .43 .24 .37 .40 .21
Realized and unrealized gain (loss)
on investments--net (.06) .15 (.13) (.06) .14 (.12)
------- ------- ------- ------- ------- -------
Total from investment operations .34 .58 .11 .31 .54 .09
------- ------- ------- ------- ------- -------
Less dividends from investment
income--net (.40) (.43) (.24) (.37) (.40) (.21)
------- ------- ------- ------- ------- -------
Net asset value, end of period $ 9.96 $ 10.02 $ 9.87 $ 9.96 $ 10.02 $ 9.88
======= ======= ======= ======= ======= =======
Total Investment Based on net asset value per share 3.45% 6.05% 1.12%+++ 3.08% 5.57% .99%+++
Return:** ======= ======= ======= ======= ======= =======
Ratios to Average Expenses, net of reimbursement .89% .39% .02%* 1.24% .75% .38%*
Net Assets: ======= ======= ======= ======= ======= =======
Expenses .97% 1.03% .86%* 1.32% 1.38% 1.23%*
======= ======= ======= ======= ======= =======
Investment income--net 4.01% 4.39% 3.54%* 3.66% 4.05% 3.19%*
======= ======= ======= ======= ======= =======
Supplemental Net assets, end of period
Data: (in thousands) $ 7,874 $ 9,849 $14,868 $13,690 $16,213 $18,179
======= ======= ======= ======= ======= =======
Portfolio turnover 39.90% 138.97% 136.71% 39.90% 138.97% 136.71%
======= ======= ======= ======= ======= =======
</TABLE>
<TABLE>
<CAPTION>
Florida Limited Maturity
Class C Class D
The following per share data and For the For the
ratios have been derived from For the Period For the Period
information provided in the Year Oct. 21, Year Oct. 21,
financial statements. Ended 1994++ to Ended 1994++ to
July 31, July 31, July 31, July 31,
Increase (Decrease) in Net Asset Value: 1996 1995 1996 1995
<S> <C> <C> <C> <C> <C>
Per Share Net asset value, beginning of period $ 10.01 $ 9.76 $ 10.01 $ 9.76
Operating -------- -------- -------- --------
Performance: Investment income--net . .36 .29 .39 .33
Realized and unrealized gain (loss)
on investments --net (.11) .25 (.06) .25
-------- -------- -------- --------
Total from investment operations .25 .54 .33 .58
-------- -------- -------- --------
Less dividends from investment
income--net (.36) (.29) (.39) (.33)
-------- -------- -------- --------
Net asset value, end of period $ 9.90 $ 10.01 $ 9.95 $ 10.01
======== ======== ======== ========
Total Investment Based on net asset value per share 2.48% 5.65%+++ 3.35% 6.07%+++
Return:** ======== ======== ======== ========
Ratios to Average Expenses, net of reimbursement 1.21% 1.09%* .99% .67%*
Net Assets: ======== ======== ======== ========
Expenses 1.23% 1.67%* 1.07% 1.19%*
======== ======== ======== ========
Investment income--net 3.75% 3.83%* 3.91% 4.23%*
======== ======== ======== ========
</TABLE>
J-18
<PAGE>
<TABLE>
<S> <C> <C> <C> <C> <C>
Supplemental Net assets, end of period
Data: (in thousands) $ 52 $ 1 $ 6,406 $ 7,210
======== ======== ======== ========
Portfolio turnover 39.90% 138.97% 39.90% 138.97%
======== ======== ======== ========
</TABLE>
<TABLE>
<CAPTION>
Massachusetts Limited Maturity
Class A Class B
The following per share data and For the For the
ratios have been derived from Period Period
information provided in the For the Nov. 26, For the Nov. 26,
financial statements. Year Ended 1993++ to Year Ended 1993++ to
July 31, July 31, July 31, July 31,
Increase (Decrease) in Net Asset Value: 1996 1995 1994 1996 1995 1994
<S> <C> <C> <C> <C> <C> <C> <C>
Per Share Net asset value, beginning of period $ 9.96 $ 9.95 $ 10.00 $ 9.96 $ 9.95 $ 10.00
Operating ------- ------- ------- ------- ------- -------
Performance: Investment income--net .40 .44 .25 .37 .40 .22
Realized and unrealized gain (loss)
on investments--net -- .02 (.05) -- .02 (.05)
------- ------- ------- ------- ------- -------
Total from investment operations .40 .46 .20 .37 .42 .17
------- ------- ------- ------- ------- -------
Less dividends and distributions:
Investment income--net (.40) (.44) (.25) (.37) (.40) (.22)
Realized gain on investments--net -- (.01) -- -- (.01) --
------- ------- ------- ------- ------- -------
Total dividends and distributions (.40) (.45) (.25) (.37) (.41) (.22)
------- ------- ------- ------- ------- -------
Net asset value, end of period $ 9.96 $ 9.96 $ 9.95 $ 9.96 $ 9.96 $ 9.95
======= ======= ======= ======= ======= =======
Total Investment Based on net asset value per share 4.08% 4.79% 2.01%+++ 3.70% 4.41% 1.77%+++
Return:** ======= ======= ======= ======= ======= =======
Ratios to Average Expenses, net of reimbursement .77% .37% .03%* 1.16% .74% .38%*
Net Assets: ======= ======= ======= ======= ======= =======
Expenses 2.15% 1.71% 1.17%* 2.61% 2.08% 1.54%*
======= ======= ======= ======= ======= =======
Investment income--net 4.04% 4.45% 3.69%* 3.66% 4.08% 3.28%*
======= ======= ======= ======= ======= =======
Supplemental Net assets, end of period
Data: (in thousands) $ 1,719 $ 4,453 $ 8,097 $ 4,577 $ 4,800 $ 8,046
======= ======= ======= ======= ======= =======
Portfolio turnover 22.71% 89.96% 57.80% 22.71% 89.96% 57.80%
======= ======= ======= ======= ======= =======
<FN>
*Annualized.
**Total investment returns exclude the effects of sales loads.
++Commencement of Operations.
+++Aggregate total investment return.
</FN>
</TABLE>
See Notes to Financial Statements.
J-19
<PAGE>
MERRILL LYNCH MULTI-STATE LIMITED MATURITY MUNICIPAL TRUST, JULY 31, 1996
<TABLE>
FINANCIAL HIGHLIGHTS (continued)
<CAPTION>
Massachusetts Limited Maturity
Class C Class D
The following per share data and For the For the
ratios have been derived from For the Period For the Period
information provided in the Year Oct. 21, Year Oct. 21,
financial statements. Ended 1994++ to Ended 1994++ to
July 31, July 31, July 31, July 31,
Increase (Decrease) in Net Asset Value: 1996 1995 1996 1995
<S> <C> <C> <C> <C> <C>
Per Share Net asset value, beginning of period $ 9.96 $ 9.82 $ 9.96 $ 9.82
Operating -------- -------- -------- --------
Performance: Investment income--net .39 .33 .39 .34
Realized and unrealized gain (loss)
on investments--net (.01) .15 -- .15
-------- -------- -------- --------
Total from investment operations .38 .48 .39 .49
-------- -------- -------- --------
Less dividends and distributions:
Investment income--net (.39) (.33) (.39) (.34)
Realized gain on investments
--net -- (.01) -- (.01)
-------- -------- -------- --------
Total dividends and distributions (.39) (.34) (.39) (.35)
-------- -------- -------- --------
Net asset value, end of period $ 9.95 $ 9.96 $ 9.96 $ 9.96
======== ======== ======== ========
Total Investment Based on net asset value per
Return:** share 3.81% 5.00%+++ 3.97% 5.09%+++
======== ======== ======== ========
Ratios to Average Expenses, net of reimbursement .94% .67%* .93% .70%*
Net Assets: ======== ======== ======== ========
Expenses 2.37% 2.23%* 2.42% 2.31%*
======== ======== ======== ========
Investment income--net 3.88% 4.32%* 3.89% 4.21%*
======== ======== ======== ========
Supplemental Net assets, end of period
Data: (in thousands) $ 210 $ 413 $ 890 $ 253
======== ======== ======== ========
Portfolio turnover 22.71% 89.96% 22.71% 89.96%
======== ======== ======== ========
</TABLE>
<TABLE>
<CAPTION>
Michigan Limited Maturity
Class A Class B
The following per share data and For the For the
ratios have been derived from Period Period
information provided in the For the Nov. 26, For the Nov. 26,
financial statements. Year Ended 1993++ to Year Ended 1993++ to
July 31, July 31, July 31, July 31,
Increase (Decrease) in Net Asset Value: 1996 1995 1994 1996 1995 1994
<S> <C> <C> <C> <C> <C> <C> <C>
Per Share Net asset value, beginning of period $ 9.98 $ 9.92 $ 10.00 $ 9.98 $ 9.92 $ 10.00
Operating ------- ------- ------- ------- ------- -------
Performance: Investment income--net .41 .44 .24 .37 .40 .22
Realized and unrealized gain (loss)
on investments--net (.04) .06 (.08) (.04) .06 (.08)
------- ------- -------- ------- ------- -------
Total from investment operations .37 .50 .16 .33 .46 .14
------- ------- ------- ------- ------- -------
Less dividends from investment
income--net (.41) (.44) (.24) (.37) (.40) (.22)
------- ------- ------- ------- ------- -------
Net asset value, end of period $ 9.94 $ 9.98 $ 9.92 $ 9.94 $ 9.98 $ 9.92
======= ======= ======= ======= ======= =======
Total Investment Based on net asset value per share 3.71% 5.16% 1.66%+++ 3.32% 4.78% 1.42%+++
Return:** ======= ======= ======= ======= ======= =======
Ratios to Average Expenses, net of reimbursement .74% .27% .02%* 1.10% .65% .38%*
Net Assets ======= ======= ======= ======= ======= =======
Expenses 2.78% 2.18% 2.01%* 3.14% 2.56% 2.38%*
======= ======= ======= ======= ======= =======
</TABLE>
J-20
<PAGE>
<TABLE>
<S> <C> <C> <C> <C> <C> <C> <C>
Investment income--net 4.06% 4.42% 3.59%* 3.70% 4.09% 3.21%*
======= ======= ======= ======= ======= =======
Supplemental Net assets, end of period
Data: (in thousands) $ 1,641 $ 2,302 $ 3,435 $ 1,842 $ 2,494 $ 2,411
======= ======= ======= ======= ======= =======
Portfolio turnover 32.92% 93.08% 204.15% 32.92% 93.08% 204.15%
======= ======= ======= ======= ======= =======
</TABLE>
<TABLE>
<CAPTION>
Michigan Limited Maturity
Class C Class D
For the For the
The following per share data and ratios For the Period For the Period
have been derived from information Year Oct. 21, Year Oct. 21
provided in the financial statements. Ended 1994++ to Ended 1994++ to
July 31, July 31, July 31, July 31,
Increase (Decrease) in Net Asset Value: 1996 1995 1996 1995
<S> <C> <C> <C> <C> <C>
Per Share Net asset value, beginning of period $ 9.98 $ 9.76 $ 9.97 $ 9.76
Operating -------- -------- -------- --------
Performance: Investment income--net . .36 .30 .40 .34
Realized and unrealized gain (loss)
on investments--net (.04) .22 (.03) .21
-------- -------- -------- --------
Total from investment operations .32 .52 .37 .55
-------- -------- -------- --------
Less dividends from investment
income--net (.36) (.30) (.40) (.34)
-------- -------- -------- --------
Net asset value, end of period $ 9.94 $ 9.98 $ 9.94 $ 9.97
======== ======== ======== ========
Total Investment Based on net asset value per share 3.20% 5.40%+++ 3.71% 5.72%+++
Return:** ======== ======== ======== ========
Ratios to Average Expenses, net of reimbursement 1.24% .96%* .87% .44%*
Net Assets: ======== ======== ======== ========
Expenses 3.31% 2.90%* 3.06% 2.38%*
======== ======== ======== ========
Investment income--net 3.57% 3.80%* 3.94% 4.47%*
======== ======== ======== ========
Supplemental Net assets, end of period
Data: (in thousands) $ 1 $ 1 $ 541 $ 254
======== ======== ======== ========
Portfolio turnover 32.92% 93.08% 32.92% 93.08%
======== ======== ======== ========
<FN>
*Annualized.
**Total investment returns exclude the effects of sales loads.
++Commencement of Operations.
+++Aggregate total investment return.
</FN>
</TABLE>
See Notes to Financial Statements.
J-21
<PAGE>
MERRILL LYNCH MULTI-STATE LIMITED MATURITY MUNICIPAL TRUST, JULY 31, 1996
<TABLE>
FINANCIAL HIGHLIGHTS (continued)
<CAPTION>
New Jersey Limited Maturity
Class A Class B
The following per share data and For the For the
ratios have been derived from Period Period
information provided in the For the Nov. 26, For the Nov. 26,
financial statements. Year Ended 1993++ to Year Ended 1993++ to
July 31, July 31, July 31, July 31,
Increase (Decrease) in Net Asset Value: 1996 1995 1994 1996 1995 1994
<S> <C> <C> <C> <C> <C> <C> <C>
Per Share Net asset value, beginning of period $ 10.15 $ 9.94 $ 10.00 $ 10.16 $ 9.95 $ 10.00
Operating ------- ------- ------- ------- ------- -------
Performance: Investment income--net .41 .42 .23 .37 .38 .20
Realized and unrealized gain (loss)
on investments--net (.04) .21 (.06) (.05) .21 (.05)
------- ------- ------- ------- ------- -------
Total from investment operations .37 .63 .17 .32 .59 .15
------- ------- ------- ------- ------- -------
Less dividends from investment
income--net (.41) (.42) (.23) (.37) (.38) (.20)
------- ------- ------- ------- ------- -------
Net asset value, end of period $ 10.11 $ 10.15 $ 9.94 $ 10.11 $ 10.16 $ 9.95
======= ======= ======= ======= ======= =======
Total Investment Based on net asset value per share 3.68% 6.45% 1.73%+++ 3.21% 6.07% 1.59%+++
Return:** ======= ======= ======= ======= ======= =======
Ratios to Average Expenses, net of reimbursement .76% .34% .03%* 1.10% .73% .38%*
Net Assets: ======= ======= ======= ======= ======= =======
Expenses 1.78% 1.69% 1.14%* 2.12% 2.15% 1.52%*
======= ======= ======= ======= ======= =======
Investment income--net 4.02% 4.10% 3.45%* 3.67% 3.80% 3.04%*
======= ======= ======= ======= ======= =======
Supplemental Net assets, end of period
Data: (in thousands) $ 2,663 $ 2,401 $ 5,933 $ 5,152 $ 7,593 $ 7,885
======= ======= ======= ======= ======= =======
Portfolio turnover 6.57% 131.56% 205.04% 6.57% 131.56% 205.04%
======= ======= ======= ======= ======= =======
</TABLE>
<TABLE>
<CAPTION>
New Jersey Limited Maturity
Class C Class D
The following per share data For the For the
and ratios have been derived For the Period For the Period
from information provided in the Year Oct. 21, Year Oct. 21,
financial statements. Ended 1994++ to Ended 1994++ to
July 31, July 31, July 31, July 31,
Increase (Decrease) in Net Asset Value: 1996 1995 1996 1995
<S> <C> <C> <C> <C> <C>
Per Share Net asset value, beginning of period $ 9.20 $ 9.86 $ 10.16 $ 9.85
Operating -------- -------- -------- --------
Performance: Investment income--net . .34 .26 .40 .32
Realized and unrealized gain (loss)
on investments--net (.04) (.66) (.05) .31
-------- -------- -------- --------
Total from investment operations .30 (.40) .35 .63
-------- -------- -------- --------
Less dividends from investment
income--net (.34) (.26) (.40) (.32)
-------- -------- -------- --------
Net asset value, end of period $ 9.16 $ 9.20 $ 10.11 $ 10.16
======== ======== ======== ========
Total Investment Based on net asset value per share 3.24% (4.01%)+++ 3.48% 6.51%+++
Return:** ======== ======== ======== ========
Ratios to Average Expenses, net of reimbursement 1.00% .55%* .84% .62%*
Net Assets: ======== ======== ======== ========
Expenses 2.04% 2.22%* 1.86% 2.07%*
======== ======== ======== ========
Investment income--net 3.82% 4.06%* 3.93% 4.17%*
======== ======== ======== ========
</TABLE>
J-22
<PAGE>
<TABLE>
<S> <C> <C> <C> <C> <C>
Supplemental Net assets, end of period
Data: (in thousands) $ 272 $ 1 $ 540 $ 437
======== ======== ======== ========
Portfolio turnover 6.57% 131.56% 6.57% 131.56%
======== ======== ======== ========
</TABLE>
<TABLE>
<CAPTION>
New York Limited Maturity
Class A Class B
For the For the
The following per share data and ratios Period Period
have been derived from information For the Nov. 26, For the Nov. 26,
provided in the financial statements. Year Ended 1993++ to Year Ended 1993++ to
July 31, July 31, July 31, July 31,
Increase (Decrease) in Net Asset Value: 1996 1995 1994 1996 1995 1994
<S> <C> <C> <C> <C> <C> <C> <C>
Per Share Net asset value, beginning of period $ 10.05 $ 9.91 $ 10.00 $ 10.05 $ 9.91 $ 10.00
Operating ------- ------- ------- ------- ------- -------
Performance: Investment income--net .43 .44 .25 .40 .41 .22
Realized and unrealized gain (loss)
on investments--net .01 .14 (.09) .01 .14 (.09)
------- ------- ------- ------- ------- -------
Total from investment operations .44 .58 .16 .41 .55 .13
------- ------- ------- ------- ------- -------
Less dividends from investment
income--net (.43) (.44) (.25) (.40) (.41) (.22)
------- ------- ------- ------- ------- -------
Net asset value, end of period $ 10.06 $ 10.05 $ 9.91 $ 10.06 $ 10.05 $ 9.91
======= ======= ======= ======= ======= =======
Total Investment Based on net asset value per share 4.46% 6.03% 1.61%+++ 4.08% 5.66% 1.37%+++
Return:** ======= ======= ======= ======= ======= =======
Ratios to Average Expenses, net of reimbursement .50% .33% .03%* .87% .69% .38%*
Net Assets: ======= ======= ======= ======= ======= =======
Expenses 1.38% 1.30% 1.24%* 1.75% 1.65% 1.60%*
======= ======= ======= ======= ======= =======
Investment income--net 4.28% 4.49% 3.68%* 3.91% 4.11% 3.31%*
======= ======= ======= ======= ======= =======
Supplemental Net assets, end of period
Data: (in thousands) $ 3,723 $ 4,811 $ 5,290 $10,071 $ 8,822 $ 9,743
======= ======= ======= ======= ======= =======
Portfolio turnover 51.47% 139.16% 152.73% 51.47% 139.16% 152.73%
======= ======= ======= ======= ======= =======
<FN>
*Annualized.
**Total investment returns exclude the effects of sales loads.
++Commencement of Operations.
+++Aggregate total investment return.
</FN>
</TABLE>
See Notes to Financial Statements.
J-23
<PAGE>
MERRILL LYNCH MULTI-STATE LIMITED MATURITY MUNICIPAL TRUST, JULY 31, 1996
<TABLE>
FINANCIAL HIGHLIGHTS (concluded)
<CAPTION>
New York Limited Maturity
Class C Class D
The following per share data and For the For the
ratios have been derived from For the Period For the Period
information provided in the financial Year Oct. 21, Year Oct. 21,
statements. Ended 1994++ to Ended 1994++ to
July 31, July 31, July 31, July 31,
Increase (Decrease) in Net Asset Value: 1996 1995 1996 1995
<S> <C> <C> <C> <C> <C>
Per Share Net asset value, beginning of period $ 10.05 $ 9.78 $ 10.05 $ 9.78
Operating -------- -------- -------- --------
Performance: Investment income--net . .42 .30 .42 .34
Realized and unrealized gain on
investments--net .01 .27 .01 .27
-------- -------- -------- --------
Total from investment operations .43 .57 .43 .61
-------- -------- -------- --------
Less dividends from investment
income--net (.42) (.30) (.42) (.34)
-------- -------- -------- --------
Net asset value, end of period $ 10.06 $ 10.05 $ 10.06 $ 10.05
======== ======== ======== ========
Total Investment Based on net asset value per share 4.28% 5.97%+++ 4.35% 6.37%+++
Return:** ======== ======== ======== ========
Ratios to Average Expenses, net of reimbursement .71% .63%* .62% .48%*
Net Assets: ======== ======== ======== ========
Expenses 1.59% 1.63%* 1.49% 1.48%*
======== ======== ======== ========
Investment income--net 4.06% 4.21%* 4.16% 4.47%*
======== ======== ======== ========
Supplemental Net assets, end of period
Data: (in thousands) $ 214 $ 38 $ 3,912 $ 2,306
======== ======== ======== ========
Portfolio turnover 51.47% 139.16% 51.47% 139.16%
======== ======== ======== ========
</TABLE>
<TABLE>
Pennsylvania Limited Maturity
<CAPTION>
Class A Class B
The following per share data and For the For the
ratios have been derived from Period Period
information provided in the For the Nov. 26, For the Nov. 26,
financial statements. Year Ended 1993++ to Year Ended 1993++ to
July 31, July 31, July 31, July 31,
Increase (Decrease) in Net Asset Value: 1996 1995 1994 1996 1995 1994
<S> <C> <C> <C> <C> <C> <C> <C>
Per Share Net asset value, beginning of period $ 10.10 $ 9.95 $ 10.00 $ 10.10 $ 9.95 $ 10.00
Operating ------- ------- ------- ------- ------- -------
Performance: Investment income--net .41 .42 .23 .37 .39 .21
Realized and unrealized gain (loss)
on investments--net .01 .15 (.05) .01 .15 (.05)
------- ------- ------- ------- ------- -------
Total from investment operations .42 .57 .18 .38 .54 .16
------- ------- ------- ------- ------- -------
Less dividends from investment
income--net (.41) (.42) (.23) (.37) (.39) (.21)
------- ------- ------- ------- ------- -------
Net asset value, end of period $ 10.11 $ 10.10 $ 9.95 $ 10.11 $ 10.10 $ 9.95
======= ======= ======= ======= ======= =======
Total Investment Based on net asset value per share 4.18% 5.89% 1.85%+++ 3.80% 5.51% 1.61%+++
Return:** ======= ======= ======= ======= ======= =======
Ratios to Average Expenses, net of reimbursement .80% .38% .02%* 1.15% .73% .38%*
Net Assets: ======= ======= ======= ======= ======= =======
Expenses 1.63% 1.90% 1.48%* 1.99% 2.25% 1.83%*
======= ======= ======= ======= ======= =======
Investment income--net 4.01% 4.25% 3.46%* 3.65% 3.87% 3.05%*
======= ======= ======= ======= ======= =======
</TABLE>
J-24
<PAGE>
<TABLE>
<S> <C> <C> <C> <C> <C> <C> <C>
Supplemental Net assets, end of period
Data: (in thousands) $ 833 $ 943 $ 990 $ 6,264 $ 7,414 $ 9,532
======= ======= ======= ======= ======= =======
Portfolio turnover 30.90% 141.52% 237.47% 30.90% 141.52% 237.47%
======= ======= ======= ======= ======= =======
</TABLE>
<TABLE>
<CAPTION>
Pennsylvania Limited Maturity
Class C Class D
For the For the
The following per share data and ratios For the Period For the Period
have been derived from information Year Oct. 21, Year Oct. 21
provided in the financial statements Ended 1994++ to Ended 1994++ to
July 31, July 31, July 31, July 31,
Increase (Decrease) in Net Asset Value: 1996 1995 1996 1995
<S> <C> <C> <C> <C> <C>
Per Share Net asset value, beginning of period $ 10.10 $ 9.84 $ 10.10 $ 9.84
Operating -------- -------- -------- --------
Performance: Investment income--net . .38 .29 .40 .33
Realized and unrealized gain on
investments--net .05 .26 .01 .26
-------- -------- -------- --------
Total from investment operations .43 .55 .41 .59
-------- -------- -------- --------
Less dividends from investment
income--net (.38) (.29) (.40) (.33)
-------- -------- -------- --------
Net asset value, end of period $ 10.15 $ 10.10 $ 10.11 $ 10.10
======== ======== ======== ========
Total Investment Based on net asset value per share 4.28% 5.68%+++ 4.07% 6.10%+++
Return:** ======== ======== ======== ========
Ratios to Average Expenses, net of reimbursement .97% 1.05%* .96% .57%*
Net Assets: ======== ======== ======== ========
Expenses 1.83% 2.55%* 1.71% 2.08%*
======== ======== ======== ========
Investment income--net 3.84% 3.77%* 3.84% 4.30%*
======== ======== ======== ========
Supplemental Net assets, end of period
Data: (in thousands) $ 1 $ 1 $ 1,807 $ 382
======== ======== ======== ========
Portfolio turnover 30.90% 141.52% 30.90% 141.52%
======== ======== ======== ========
<FN>
*Annualized.
**Total investment returns exclude the effects of sales loads.
++Commencement of Operations.
+++Aggregate total investment return.
</FN>
</TABLE>
See Notes to Financial Statements.
J-25
<PAGE>
MERRILL LYNCH MULTI-STATE LIMITED MATURITY MUNICIPAL TRUST, JULY 31, 1996
NOTES TO FINANCIAL STATEMENTS
1. Significant Accounting Policies:
Merrill Lynch Multi-State Limited Maturity Municipal Series Trust (the "Trust")
is registered under the Investment Company Act of 1940 as a non-diversified,
open-end management investment company consisting of eight separate series:
Merrill Lynch Arizona Limited Maturity Municipal Bond Fund, Merrill Lynch
California Limited Maturity Municipal Bond Fund, Merrill Lynch Florida Limited
Maturity Municipal Bond Fund, Merrill Lynch Massachusetts Limited Maturity
Municipal Bond Fund, Merrill Lynch Michigan Limited Maturity Municipal Bond
Fund, Merrill Lynch New Jersey Limited Maturity Municipal Bond Fund, Merrill
Lynch New York Limited Maturity Municipal Bond Fund, and Merrill Lynch
Pennsylvania Limited Maturity Municipal Bond Fund. Each series of the Trust is
referred to herein as a "Fund." The Trust offers four classes of shares under
the Merrill Lynch Select Pricing SM System. Shares of Class A and Class D are
sold with a front-end sales charge. Shares of Class B and Class C may be subject
to a contingent deferred sales charge. All classes of shares have identical
voting, dividend, liquidation and other rights and the same terms and
conditions, except that Class B, Class C and Class D Shares bear certain
expenses related to the account maintenance of such shares, and Class B and
Class C Shares also bear certain expenses related to the distribution of such
shares. Each class has exclusive voting rights with respect to matters relating
to its account maintenance and distribution expenditures. The following is a
summary of significant accounting policies followed by the Trust.
(a) Valuation of investments--Municipal bonds and other portfolio securities in
which the Funds invest are traded primarily in the over-the-counter municipal
bond and money markets and are valued at the last available bid price in the
over-the-counter market or on the basis of yield equivalents as obtained from
one or more dealers that make markets in the securities. Financial futures
contracts and options thereon, which are traded on exchanges, are valued at
their settlement prices as of the close of such exchanges. Short-term
investments with remaining maturities of sixty days or less are valued at
amortized cost, which approximates market value. Securities and assets for which
market quotations are not readily available are valued at fair value as
determined in good faith by or under the direction of the Board of Trustees of
the Trust, including valuations furnished by a pricing service retained by the
Trust, which may utilize a matrix system for valuations. The procedures of the
pricing service and its valuations are reviewed by the officers of the Trust
under the general supervision of the Trustees.
(b) Derivative financial instruments--The Fund may engage in various portfolio
strategies to seek to increase its return by hedging its portfolio against
adverse movements in the debt markets. Losses may arise due to changes in the
value of the contract or if the counterparty does not perform under the
contract.
*Financial futures contracts--The Funds may purchase or sell interest rate
futures contracts and options on such futures contracts for the purpose of
hedging the market risk on existing securities or the intended purchase of
securities. Futures contracts are contracts for delayed delivery of securities
at a specific future date and at a specific price or yield. Upon entering into a
contract, the Fund deposits and maintains as collateral such initial margin as
required by the exchange on which the transaction is effected. Pursuant to the
contract, the Fund agrees to receive from or pay to the broker an amount of cash
equal to the daily fluctuation in value of the contract. Such receipts or
payments are known as variation margin and are recorded by the Fund as
unrealized gains or losses. When the contract is closed, the Fund records a
realized gain or loss equal to the difference between the value of the contract
at the time it was opened and the value at the time it was closed.
(c) Income taxes--It is each Fund's policy to comply with the requirements of
the Internal Revenue Code applicable to regulated investment companies and to
distribute substantially all of its taxable income to its shareholders.
Therefore, no Federal income tax provision is required.
(d) Security transactions and investment income--Security transactions are
recorded on the dates the transactions are entered into (the trade dates).
Interest income is recognized on the accrual basis. Discounts and market
premiums are amortized into interest income. Realized gains and losses on
security transactions are determined on the identified cost basis.
(e) Deferred organization expenses and prepaid registration fees--Deferred
organization expenses are charged to expense on a straight-line basis over a
five-year period beginning with commencement of operations. Prepaid registration
fees are charged to expense as the related shares are issued.
(f) Dividends and distributions--Dividends from net investment income are
declared daily and paid monthly. Distributions of capital gains are recorded on
the ex-dividend dates.
2. Investment Advisory Agreement and Transactions with Affiliates: The Trust has
entered into an Investment Advisory Agreement with Fund Asset Management, L.P.
("FAM"). The general partner of FAM is Princeton Services, Inc. ("PSI"), an
indirect wholly-owned subsidiary of Merrill Lynch & Co., Inc. ("ML & Co."),
which is the limited partner. The Trust has also entered into a Distribution
Agreement and Distribution Plans with Merrill Lynch Funds Distributor, Inc.
("MLFD" or "Distributor"), a wholly-owned subsidiary of Merrill Lynch Group,
Inc.
FAM is responsible for the management of each Fund's portfolio and provides the
necessary personnel, facilities, equipment and certain other services necessary
to the operations of each Fund. For such services, each Fund pays a monthly fee
at the annual rate of 0.35% of each Fund's average daily net assets. The
Investment Advisory Agreement obligates FAM to reimburse each Fund to the extent
each Fund's expenses (excluding interest, taxes, distribution fees, brokerage
fees and commissions, and extraordinary items) exceed 2.5% of the Fund's first
$30 million of average daily net assets, 2.0% of the next $70 million of average
daily net assets and 1.5% of the average daily net assets in excess thereof.
FAM's obligation to reimburse each Fund is limited to the amount of the
management fee. No fee payment will be made during any fiscal year which will
cause such expenses to exceed expense limitations at the time of such payment.
J-26
<PAGE>
For the year ended July 31, 1996, FAM had voluntarily waived management fees
and reimbursed each Fund for additional expenses as follows:
Arizona California Florida
Limited Limited Limited
Maturity Maturity Maturity
Management fee $21,459 $54,033 $24,123
Additional expenses 72,197 464 --
Massachusetts Michigan New Jersey
Limited Limited Limited
Maturity Maturity Maturity
Management fee $30,736 $16,413 $33,770
Additional expenses 95,278 80,119 64,944
New York Pennsylvania
Limited Maturity Limited Maturity
Management fee $57,995 $30,196
Additional expenses 88,295 41,308
Pursuant to the distribution plans (the "Distribution Plans") adopted by the
Trust in accordance with Rule 12b-1 under the Investment Company Act of 1940,
the Fund pays the Distributor ongoing account maintenance and distribution fees.
The Distributor voluntarily did not collect any Class C distribution fees for
the year ended July 31, 1996. The fees are accrued daily and paid monthly at
annual rates based upon the average daily net assets of the shares as follows:
Account Maintenance Fee Distribution Fee
Class B 0.15% 0.20%
Class C 0.15% 0.20%
Class D 0.10% --
Pursuant to a sub-agreement with the Distributor, Merrill Lynch, Pierce, Fenner
& Smith Inc. ("MLPF&S"), a subsidiary of ML & Co., also provides account
maintenance and distribution services to the Trust. The ongoing account
maintenance fee compensates the Distributor and MLPF&S for providing account
maintenance services to Class B, Class C and Class D shareholders. The ongoing
distribution fee compensates the Distributor and MLPF&S for providing
shareholder and distribution-related services to Class B and Class C
shareholders.
For the year ended July 31, 1996, MLFD earned underwriting discounts and MLPF&S
earned dealer concessions on sales of the Fund's Class A and Class D Shares as
follows:
Arizona California Florida Massachusetts
Limited Limited Limited Limited
Maturity Maturity Maturity Maturity
Class A:
MLFD $ 17 $ 67 $ 22 $ 93
MLPF&S 446 513 475 871
Class D:
MLFD $ 14 $ 299 $ 373 $ 298
MLPF&S 227 2,849 2,570 3,089
Michigan New Jersey New York Pennsylvania
Limited Limited Limited Limited
Maturity Maturity Maturity Maturity
Class A:
MLFD $ 4 $ 2 $ 1 --
MLPF&S 98 237 33 $ 5
Class D:
MLFD $ 59 $ 31 $ 476 $ 14
MLPF&S 420 1,097 4,314 519
MLPF&S received contingent deferred sales charges relating to transactions in
Class B Shares of beneficial interest as follows:
Class B
Shares
Arizona Limited Maturity $10,222
California Limited Maturity 3,456
Florida Limited Maturity 18,456
Massachusetts Limited Maturity 4,849
Michigan Limited Maturity 6,724
New Jersey Limited Maturity 8,141
New York Limited Maturity 6,475
Pennsylvania Limited Maturity 3,775
Merrill Lynch Financial Data Services, Inc. ("MLFDS"), a wholly-owned
subsidiary of ML & Co., is the Trust's transfer agent.
Accounting services are provided to the Trust by FAM at cost.
Certain officers and/or trustees of the Trust are officers and/or directors of
FAM, PSI, MLPF&S, MLFD, MLFDS, and/or ML & Co.
3. Investments: Purchases and sales of investments, excluding short-term
securities, for the year ended July 31, 1996 were as follows:
Purchases Sales
Arizona Limited Maturity $ 1,965,889 $ 2,436,738
California Limited Maturity 3,066,927 1,317,493
Florida Limited Maturity 10,307,012 10,835,712
Massachusetts Limited Maturity 1,610,060 3,817,465
Michigan Limited Maturity 1,291,375 1,370,658
New Jersey Limited Maturity 452,439 647,468
New York Limited Maturity 10,824,437 6,698,374
Pennsylvania Limited Maturity 2,033,165 2,014,355
Net realized and unrealized gains (losses) as of July 31, 1996 were
as follows:
Realized Unrealized
Arizona Limited Maturity Gains (Losses) Gains
Long-term investments $ 1,540 $ 144,631
Short-term investments 11 --
Financial futures contracts (2,242) --
--------- ---------
Total $ (691) $ 144,631
========= =========
J-27
<PAGE>
MERRILL LYNCH MULTI-STATE LIMITED MATURITY MUNICIPAL TRUST, JULY 31, 1996
NOTES TO FINANCIAL STATEMENTS (continued)
Realized Unrealized
California Limited Maturity Gains (Losses) Gains
Long-term investments $ (10,233) $ 557,847
Short-term investments 960 --
Financial futures contracts (5,233) --
--------- ---------
Total $ (14,506) $ 557,847
========= =========
Realized Unrealized
Florida Limited Maturity Gains (Losses) Gains
Long-term investments $ 9,277 $ 597,062
Short-term investments 658 9
Financial futures contracts (11,213) --
--------- ---------
Total $ (1,278) $ 597,071
========= =========
Realized Unrealized
Massachusetts Limited Maturity Gains (Losses) Gains
Long-term investments $ 21,469 $ 179,504
Financial futures contracts (3,250) --
--------- ---------
Total $ 18,219 $ 179,504
========= =========
Realized Unrealized
Michigan Limited Maturity Gains (Losses) Gains
Long-term investments $ 9,749 $ 124,657
Short-term investments 1,954 --
Financial futures contracts (1,620) --
--------- ---------
Total $ 10,083 $ 124,657
========= =========
Realized Unrealized
New Jersey Limited Maturity Gains (Losses) Gains
Long-term investments $ (9,159) $ 291,589
Short-term investments 218 --
Financial futures contracts (3,645) --
--------- ---------
Total $ (12,586) $ 291,589
========= =========
Realized Unrealized
New York Limited Maturity Gains (Losses) Gains
Long-term investments $ 33,981 $ 324,626
Financial futures contracts (6,480) --
--------- ---------
Total $ 27,501 $ 324,626
========= =========
Realized Unrealized
Pennsylvania Limited Maturity Gains (Losses) Gains
Long-term investments $ 3,604 $ 160,822
Financial futures contracts (3,240) --
--------- ---------
Total $ 364 $ 160,822
========= =========
As of July 31, 1996, net unrealized appreciation and the aggregate
cost of investments for Federal income tax purposes were as follows:
Limited Gross Gross Net Aggregate
Maturity Unrealized Unrealized Unrealized Cost of
Fund Appreciation Depreciation Appreciation Investments
Arizona $144,631 -- $144,631 $ 3,992,244
California 535,204 -- 535,204 14,560,877
Florida 618,787 $ (21,716) 597,071 26,691,374
Massachusetts 183,699 (4,195) 179,504 7,011,474
Michigan 109,879 (101) 109,778 3,785,548
New Jersey 291,589 -- 291,589 8,321,598
New York 324,626 -- 324,626 17,665,641
Pennsylvania 161,811 (989) 160,822 8,237,456
4. Beneficial Interest Transactions:
Net increase (decrease) in net assets derived from beneficial interest
transactions for the years ended July 31, 1996 and July 31, 1995 were as
follows:
Increase (Decrease) in For the Year Ended July 31,
Beneficial Interest Transactions 1996 1995
Arizona Limited Maturity $ (1,767,011) $ (1,547,482)
California Limited Maturity (491,496) 354,485
Florida Limited Maturity (5,075,030) (187,273)
Massachusetts Limited Maturity (2,526,578) (6,114,591)
Michigan Limited Maturity (1,013,383) (811,255)
New Jersey Limited Maturity (1,750,465) (3,524,093)
New York Limited Maturity 1,937,339 774,385
Pennsylvania Limited Maturity 150,949 (1,893,824)
Transactions in shares of beneficial interest for each class were as follows:
Arizona Limited Maturity
Class A Shares for the Year Dollar
Ended July 31, 1996 Shares Amount
Shares sold 5,200 $ 52,303
Shares issued to shareholders in
reinvestment of dividends 1,441 14,637
----------- -----------
Total issued 6,641 66,940
Shares redeemed (29,641) (304,005)
----------- -----------
Net decrease (23,000) $ (237,065)
=========== ===========
J-28
<PAGE>
Arizona Limited Maturity
Class A Shares for the Year Dollar
Ended July 31, 1995 Shares Amount
Shares sold 34,228 $ 339,577
Shares issued to shareholders in
reinvestment of dividends 3,317 33,017
----------- -----------
Total issued 37,545 372,594
Shares redeemed (144,716) (1,448,887)
----------- -----------
Net decrease (107,171) $(1,076,293)
=========== ===========
Arizona Limited Maturity
Class B Shares for the Year Dollar
Ended July 31, 1996 Shares Amount
Shares sold 43,937 $ 449,980
Shares issued to shareholders in
reinvestment of dividends 7,003 66,184
----------- -----------
Total issued 50,940 516,164
Shares redeemed (275,350) (2,797,058)
----------- -----------
Net decrease (224,410) $(2,280,894)
=========== ===========
Class B Shares for the Year Dollar
Ended July 31, 1995 Shares Amount
Shares sold 327,604 $ 3,257,316
Shares issued to shareholders in
reinvestment of dividends 10,498 104,547
----------- -----------
Total issued 338,102 3,361,863
Shares redeemed (386,410) (3,852,363)
----------- -----------
Net decrease (48,308) $ (490,500)
=========== ===========
Arizona Limited Maturity
Class C Shares for the Year Dollar
Ended July 31, 1996 Shares Amount
Shares sold 13,124 $ 132,973
Shares issued to shareholders in
reinvestment of dividends 162 1,633
----------- -----------
Total issued 13,286 134,606
Shares redeemed (4) (41)
----------- -----------
Net increase 13,282 $ 134,565
=========== ===========
Class C Shares for the Period Dollar
October 21, 1994++ to July 31, 1995 Shares Amount
Shares sold 110 $ 1,091
Shares issued to shareholders in
reinvestment of dividends 3 29
----------- -----------
Net increase 113 $ 1,120
=========== ===========
++Commencement of Operations.
Arizona Limited Maturity
Class D Shares for the Year Dollar
Ended July 31, 1996 Shares Amount
Shares sold 104,371 $ 1,066,013
Shares issued to shareholders in
reinvestment of dividends 2,220 22,565
----------- -----------
Total issued 106,591 1,088,578
Shares redeemed (47,001) (472,195)
----------- -----------
Net increase 59,590 $ 616,383
=========== ===========
Class D Shares for the Period Dollar
October 21, 1994++ to July 31, 1995 Shares Amount
Shares sold 1,801 $ 17,929
Shares issued to shareholders in
reinvestment of dividends 26 262
----------- -----------
Net increase 1,827 $ 18,191
=========== ===========
++Commencement of Operations.
California Limited Maturity
Class A Shares for the Year Dollar
Ended July 31, 1996 Shares Amount
Shares sold 8,087 $ 80,919
Shares issued to shareholders in
reinvestment of dividends 3,445 34,639
----------- -----------
Total issued 11,532 115,558
Shares redeemed (49,796) (500,770)
----------- -----------
Net decrease (38,264) $ (385,212)
=========== ===========
Class A Shares for the Year Dollar
Ended July 31, 1995 Shares Amount
Shares sold 81,782 $ 801,557
Shares issued to shareholders in
reinvestment of dividends 4,844 47,495
----------- -----------
Total issued 86,626 849,052
Shares redeemed (118,656) (1,147,698)
----------- -----------
Net decrease (32,030) $ (298,646)
=========== ===========
California Limited Maturity
Class B Shares for the Year Dollar
Ended July 31, 1996 Shares Amount
Shares sold 210,376 $ 2,110,120
Shares issued to shareholders in
reinvestment of dividends 15,717 158,020
----------- -----------
Total issued 226,093 2,268,140
Automatic conversion of shares (7,895) (80,134)
Shares redeemed (267,935) (2,686,717)
----------- -----------
Net decrease (49,737) $ (498,711)
=========== ===========
J-29
<PAGE>
MERRILL LYNCH MULTI-STATE LIMITED MATURITY MUNICIPAL TRUST, JULY 31, 1996
NOTES TO FINANCIAL STATEMENTS (continued)
California Limited Maturity
Class B Shares for the Year Dollar
Ended July 31, 1995 Shares Amount
Shares sold 275,065 $ 2,701,344
Shares issued to shareholders in
reinvestment of dividends 19,605 192,424
----------- -----------
Total issued 294,670 2,893,768
Shares redeemed (414,211) (4,043,475)
----------- -----------
Net decrease (119,541) $(1,149,707)
=========== ===========
California Limited Maturity
Class C Shares for the Year Dollar
Ended July 31, 1996 Shares Amount
Shares sold 24 $ 250
Shares issued to shareholders in
reinvestment of dividends 8 78
----------- -----------
Total issued 32 328
Shares redeemed (983) (9,913)
----------- -----------
Net decrease (951) $ (9,585)
=========== ===========
Class C Shares for the Period Dollar
October 21, 1994++ to July 31, 1995 Shares Amount
Shares sold 6,910 $ 68,864
Shares issued to shareholders in
reinvestment of dividends 26 260
----------- -----------
Total issued 6,936 69,124
Shares redeemed (499) (4,971)
----------- -----------
Net increase 6,437 $ 64,153
=========== ===========
++Commencement of Operations.
California Limited Maturity
Class D Shares for the Year Dollar
Ended July 31, 1996 Shares Amount
Shares sold 105,834 $ 1,060,270
Automatic conversion of shares 7,895 80,134
Shares issued to shareholders in
reinvestment of dividends 1,093 10,986
----------- -----------
Total issued 114,822 1,151,390
Shares redeemed (74,548) (749,378)
----------- -----------
Net increase 40,274 $ 402,012
=========== ===========
Class D Shares for the Period Dollar
October 21, 1994++ to July 31, 1995 Shares Amount
Shares sold 299,589 $ 2,938,426
Shares issued to shareholders in
reinvestment of dividends 404 4,019
----------- -----------
Total issued 299,993 2,942,445
Shares redeemed (122,736) (1,203,760)
----------- -----------
Net increase 177,257 $ 1,738,685
=========== ===========
++Commencement of Operations.
Florida Limited Maturity
Class A Shares for the Year Dollar
Ended July 31, 1996 Shares Amount
Shares sold 91,796 $ 926,979
Shares issued to shareholders in
reinvestment of dividends 11,780 118,180
----------- -----------
Total issued 103,576 1,045,159
Shares redeemed (296,045) (2,960,805)
----------- -----------
Net decrease (192,469) $(1,915,646)
=========== ===========
Class A Shares for the Year Dollar
Ended July 31, 1995 Shares Amount
Shares sold 189,974 $ 1,875,261
Shares issued to shareholders in
reinvestment of dividends 24,282 237,815
----------- -----------
Total issued 214,256 2,113,076
Shares redeemed (736,537) (7,241,200)
----------- -----------
Net decrease (522,281) $(5,128,124)
=========== ===========
Florida Limited Maturity
Class B Shares for the Year Dollar
Ended July 31, 1996 Shares Amount
Shares sold 374,709 $ 3,773,344
Shares issued to shareholders in
reinvestment of dividends 28,155 282,558
----------- -----------
Total issued 402,864 4,055,902
Shares redeemed (646,498) (6,500,752)
----------- -----------
Net decrease (243,634) $(2,444,850)
=========== ===========
Class B Shares for the Year Dollar
Ended July 31, 1995 Shares Amount
Shares sold 1,210,069 $11,716,749
Shares issued to shareholders in
reinvestment of dividends 40,299 395,075
----------- -----------
Total issued 1,250,368 12,111,824
Shares redeemed (1,472,459) (14,333,879)
----------- -----------
Net decrease (222,091) $(2,222,055)
=========== ===========
Florida Limited Maturity
Class C Shares for the Year Dollar
Ended July 31, 1996 Shares Amount
Shares sold 6,623 $ 65,559
Shares issued to shareholders in
reinvestment of dividends 4 41
----------- -----------
Total issued 6,627 65,600
Shares redeemed (1,536) (15,483)
----------- -----------
Net increase 5,091 $ 50,117
=========== ===========
J-30
<PAGE>
Florida Limited Maturity
Class C Shares for the Period Dollar
October 21, 1994++ to July 31, 1995 Shares Amount
Shares sold 110 $ 1,074
Shares issued to shareholders in
reinvestment of dividends 3 31
----------- -----------
Net increase 113 $ 1,105
=========== ===========
++Commencement of Operations.
Florida Limited Maturity
Class D Shares for the Year Dollar
Ended July 31, 1996 Shares Amount
Shares sold 316,584 $ 3,192,506
Shares issued to shareholders in
reinvestment of dividends 4,342 43,518
----------- -----------
Total issued 320,926 3,236,024
Shares redeemed (397,363) (4,000,675)
----------- -----------
Net decrease (76,437) $ (764,651)
=========== ===========
Class D Shares for the Period Dollar
October 21, 1994++ to July 31, 1995 Shares Amount
Shares sold 835,832 $ 8,301,886
Shares issued to shareholders in
reinvestment of dividends 1,523 15,096
----------- -----------
Total issued 837,355 8,316,982
Shares redeemed (117,154) (1,155,181)
----------- -----------
Net increase 720,201 $ 7,161,801
=========== ===========
++Commencement of Operations.
Massachusetts Limited Maturity
Class A Shares for the Year Dollar
Ended July 31, 1996 Shares Amount
Shares sold 22,851 $ 226,189
Shares issued to shareholders in
reinvestment of dividends 7,410 74,223
----------- -----------
Total issued 30,261 300,412
Shares redeemed (304,602) (3,055,529)
----------- -----------
Net decrease (274,341) $(2,755,117)
=========== ===========
Class A Shares for the Year Dollar
Ended July 31, 1995 Shares Amount
Shares sold 113,925 $ 1,124,479
Shares issued to shareholders in
reinvestment of dividends &
distributions 18,553 182,392
----------- -----------
Total issued 132,478 1,306,871
Shares redeemed (499,178) (4,904,822)
----------- -----------
Net decrease (366,700) $(3,597,951)
=========== ===========
Massachusetts Limited Maturity
Class B Shares for the
Year Ended Dollar
July 31, 1996 Shares Amount
Shares sold 163,902 $ 1,649,909
Shares issued to shareholders in
reinvestment of dividends 9,837 98,401
----------- -----------
Total issued 173,739 1,748,310
Shares redeemed (195,993) (1,955,850)
----------- -----------
Net decrease (22,254) $ (207,540)
=========== ===========
Class B Shares for the
Year Ended Dollar
July 31, 1995 Shares Amount
Shares sold 144,229 $ 1,416,046
Shares issued to shareholders in
reinvestment of dividends &
distributions 12,243 120,528
----------- -----------
Total issued 156,472 1,536,574
Shares redeemed (483,231) (4,711,225)
----------- -----------
Net decrease (326,759) $(3,174,651)
=========== ===========
Massachusetts Limited Maturity
Class C Shares for the
Year Ended Dollar
July 31, 1996 Shares Amount
Shares issued to shareholders in
reinvestment of dividends 1,201 $ 12,027
Shares redeemed (21,496) (212,811)
----------- -----------
Net decrease (20,295) $ (200,784)
=========== ===========
Class C Shares for the
Period October 21, 1994++ to Dollar
July 31, 1995 Shares Amount
Shares sold 61,378 $ 600,360
Shares issued to shareholders in
reinvestment of dividends &
distributions 667 6,580
----------- -----------
Total issued 62,045 606,940
Shares redeemed (20,616) (199,766)
----------- -----------
Net increase 41,429 $ 407,174
=========== ===========
++Commencement of Operations.
Massachusetts Limited Maturity
Class D Shares for the
Year Ended Dollar
July 31, 1996 Shares Amount
Shares sold 101,394 $ 1,009,332
Shares issued to shareholders in
reinvestment of dividends 1,553 15,510
----------- -----------
Total issued 102,947 1,024,842
Shares redeemed (38,979) (387,979)
----------- -----------
Net increase 63,968 $ 636,863
=========== ===========
J-31
<PAGE>
MERRILL LYNCH MULTI-STATE LIMITED MATURITY MUNICIPAL TRUST, JULY 31, 1996
NOTES TO FINANCIAL STATEMENTS (continued)
Massachusetts Limited Maturity
Class D Shares for the Period Dollar
October 21, 1994++ to July 31, 1995 Shares Amount
Shares sold 32,116 $ 317,241
Shares issued to shareholders in
reinvestment of dividends &
distributions 123 1,219
----------- -----------
Total issued 32,239 318,460
Shares redeemed (6,870) (67,623)
----------- -----------
Net increase 25,369 $ 250,837
=========== ===========
++Commencement of Operations.
Michigan Limited Maturity
Class A Shares for the Year Dollar
Ended July 31, 1996 Shares Amount
Shares sold 40,664 $ 405,188
Shares issued to shareholders in
reinvestment of dividends 1,529 15,293
----------- -----------
Total issued 42,193 420,481
Shares redeemed (107,949) (1,077,796)
----------- -----------
Net decrease (65,756) $ (657,315)
=========== ===========
Class A Shares for the Year Dollar
Ended July 31, 1995 Shares Amount
Shares sold 28,337 $ 279,211
Shares issued to shareholders in
reinvestment of dividends 3,430 33,654
----------- -----------
Total issued 31,767 312,865
Shares redeemed (147,187) (1,432,908)
----------- -----------
Net decrease (115,420) $(1,120,043)
=========== ===========
Michigan Limited Maturity
Class B Shares for the Year Dollar
Ended July 31, 1996 Shares Amount
Shares sold 36,451 $ 365,718
Shares issued to shareholders in
reinvestment of dividends 5,013 50,143
----------- -----------
Total issued 41,464 415,861
Shares redeemed (106,251) (1,063,510)
----------- -----------
Net decrease (64,787) $ (647,649)
=========== ===========
Class B Shares for the Year Dollar
Ended July 31, 1995 Shares Amount
Shares sold 116,190 $ 1,105,484
Shares issued to shareholders in
reinvestment of dividends 6,029 83,311
----------- -----------
Total issued 122,219 1,188,795
Shares redeemed (115,161) (1,122,677)
----------- -----------
Net increase 7,058 $ 66,118
=========== ===========
Michigan Limited Maturity
Class C Shares for the
Year Ended Dollar
July 31, 1996 Shares Amount
Shares issued to shareholders in
reinvestment of dividends 4 $ 41
----------- -----------
Net increase 4 $ 41
=========== ===========
Class C Shares for the
Period October 21, 1994++ to Dollar
July 31, 1995 Shares Amount
Shares sold 110 $ 1,073
Shares issued to shareholders in
reinvestment of dividends 3 32
----------- -----------
Net increase 113 $ 1,105
=========== ===========
++Commencement of Operations.
Michigan Limited Maturity
Class D Shares for the
Year Ended Dollar
July 31, 1996 Shares Amount
Shares sold 29,731 $ 298,909
Shares issued to shareholders in
reinvestment of dividends 1,126 11,245
----------- -----------
Total issued 30,857 310,154
Shares redeemed (1,878) (18,614)
----------- -----------
Net increase 28,979 $ 291,540
=========== ===========
Class D Shares for the
Period October 21, 1994++ to Dollar
July 31, 1995 Shares Amount
Shares sold 64,155 $ 622,185
Shares issued to shareholders in
reinvestment of dividends 689 6,780
----------- -----------
Total issued 64,844 628,965
Shares redeemed (39,359) (387,400)
----------- -----------
Net increase 25,485 $ 241,565
=========== ===========
++Commencement of Operations.
New Jersey Limited Maturity
Class A Shares for the
Year Ended Dollar
July 31, 1996 Shares Amount
Shares sold 102,101 $ 1,042,636
Shares issued to shareholders in
reinvestment of dividends 8,892 90,367
----------- -----------
Total issued 110,993 1,133,003
Shares redeemed (83,997) (856,193)
----------- -----------
Net increase 26,996 $ 276,810
=========== ===========
J-32
<PAGE>
New Jersey Limited Maturity
Class A Shares for the Year Dollar
Ended July 31, 1995 Shares Amount
Shares sold 147,003 $ 1,452,568
Shares issued to shareholders in
reinvestment of dividends 6,968 69,363
----------- -----------
Total issued 153,971 1,521,931
Shares redeemed (514,441) (5,055,460)
----------- -----------
Net decrease (360,470) $(3,533,529)
=========== ===========
New Jersey Limited Maturity
Class B Shares for the Year Dollar
Ended July 31, 1996 Shares Amount
Shares sold 107,343 $ 1,095,824
Shares issued to shareholders in
reinvestment of dividends 14,061 143,043
----------- -----------
Total issued 121,404 1,238,867
Shares redeemed (359,338) (3,646,563)
----------- -----------
Net decrease (237,934) $(2,407,696)
=========== ===========
Class B Shares for the Year Dollar
Ended July 31, 1995 Shares Amount
Shares sold 318,885 $ 3,174,748
Shares issued to shareholders in
reinvestment of dividends 18,151 180,493
----------- -----------
Total issued 337,036 3,355,241
Shares redeemed (382,526) (3,775,067)
----------- -----------
Net decrease (45,490) $ (419,826)
=========== ===========
New Jersey Limited Maturity
Class C Shares for the Year Dollar
Ended July 31, 1996 Shares Amount
Shares sold 29,124 $ 272,904
Shares issued to shareholders in
reinvestment of dividends 459 4,199
----------- -----------
Net increase 29,583 $ 277,103
=========== ===========
Class C Shares for the Period Dollar
October 21, 1994++ to July 31, 1995 Shares Amount
Shares sold 65,242 $ 620,177
Shares issued to shareholders in
reinvestment of dividends 67 621
----------- -----------
Total issued 65,309 620,798
Shares redeemed (65,196) (622,061)
----------- -----------
Net increase (decrease) 113 $ (1,263)
=========== ===========
++Commencement of Operations.
New Jersey Limited Maturity
Class D Shares for the Year Dollar
Ended July 31, 1996 Shares Amount
Shares sold 47,184 $ 477,087
Shares issued to shareholders in
reinvestment of dividends 728 7,411
----------- -----------
Total issued 47,912 484,498
Shares redeemed (37,500) (381,180)
----------- -----------
Net increase 10,412 $ 103,318
=========== ===========
Class D Shares for the Period Dollar
October 21, 1994++ to July 31, 1995 Shares Amount
Shares sold 69,049 $ 691,844
Shares issued to shareholders in
reinvestment of dividends 348 3,514
----------- -----------
Total issued 69,397 695,358
Shares redeemed (26,375) (264,833)
----------- -----------
Net increase 43,022 $ 430,525
=========== ===========
++Commencement of Operations.
New York Limited Maturity
Class A Shares for the Year Dollar
Ended July 31, 1996 Shares Amount
Shares sold 44,189 $ 446,602
Shares issued to shareholders in
reinvestment of dividends 11,547 116,691
----------- -----------
Total issued 55,736 563,293
Shares redeemed (164,328) (1,659,912)
----------- -----------
Net decrease (108,592) $(1,096,619)
=========== ===========
Class A Shares for the Year Dollar
Ended July 31, 1995 Shares Amount
Shares sold 189,338 $ 1,861,355
Shares issued to shareholders in
reinvestment of dividends 16,001 157,598
----------- -----------
Total issued 205,339 2,018,953
Shares redeemed (260,265) (2,576,091)
----------- -----------
Net decrease (54,926) $ (557,138)
=========== ===========
New York Limited Maturity
Class B Shares for the Year Dollar
Ended July 31, 1996 Shares Amount
Shares sold 465,594 $ 4,716,623
Shares issued to shareholders in
reinvestment of dividends 17,959 181,459
----------- -----------
Total issued 483,553 4,898,082
Automatic conversion of shares (3,459) (34,832)
Shares redeemed (356,773) (3,612,208)
----------- -----------
Net increase 123,321 $ 1,251,042
=========== ===========
J-33
<PAGE>
MERRILL LYNCH MULTI-STATE LIMITED MATURITY MUNICIPAL TRUST, JULY 31, 1996
NOTES TO FINANCIAL STATEMENTS (concluded)
New York Limited Maturity
Class B Shares for the Year Dollar
Ended July 31, 1995 Shares Amount
Shares sold 331,365 $ 3,261,544
Shares issued to shareholders in
reinvestment of dividends 18,265 180,012
----------- -----------
Total issued 349,630 3,441,556
Shares redeemed (454,750) (4,436,666)
----------- -----------
Net decrease (105,120) $ (995,110)
=========== ===========
New York Limited Maturity
Class C Shares for the Year Dollar
Ended July 31, 1996 Shares Amount
Shares sold 20,376 $ 206,729
Shares issued to shareholders in
reinvestment of dividends 398 4,008
----------- -----------
Total issued 20,774 210,737
Shares redeemed (3,295) (32,843)
----------- -----------
Net increase 17,479 $ 177,894
=========== ===========
Class C Shares for the
Period October 21, 1994++ to Dollar
July 31, 1995 Shares Amount
Shares sold 3,813 $ 38,224
Shares issued to shareholders in
reinvestment of dividends 4 40
----------- -----------
Net increase 3,817 $ 38,264
=========== ===========
++Commencement of Operations.
New York Limited Maturity
Class D Shares for the Year Dollar
Ended July 31, 1996 Shares Amount
Shares sold 162,557 $ 1,636,956
Automatic conversion of shares 3,456 34,832
Shares issued to shareholders in
reinvestment of dividends 6,809 68,734
----------- -----------
Total issued 172,822 1,740,522
Shares redeemed (13,363) (135,500)
----------- -----------
Net increase 159,459 $ 1,605,022
=========== ===========
Class D Shares for the
Period October 21, 1994++ to Dollar
July 31, 1995 Shares Amount
Shares sold 271,406 $ 2,697,692
Shares issued to shareholders in
reinvestment of dividends 754 7,474
----------- -----------
Total issued 272,160 2,705,166
Shares redeemed (42,782) (416,797)
----------- -----------
Net increase 229,378 $ 2,288,369
=========== ===========
++Commencement of Operations.
Pennsylvania Limited Maturity
Class A Shares for the
Year Ended Dollar
July 31, 1996 Shares Amount
Shares sold 5,556 $ 56,865
Shares issued to shareholders in
reinvestment of dividends 1,095 11,133
----------- -----------
Total issued 6,651 67,998
Shares redeemed (17,647) (179,041)
----------- -----------
Net decrease (10,996) $ (111,043)
=========== ===========
Class A Shares for the
Year Ended Dollar
July 31, 1995 Shares Amount
Shares sold 33,049 $ 326,744
Shares issued to shareholders in
reinvestment of dividends 1,339 13,282
----------- -----------
Total issued 34,388 340,026
Shares redeemed (40,535) (402,246)
----------- -----------
Net decrease (6,147) $ (62,220)
=========== ===========
J-34
<PAGE>
Pennsylvania Limited Maturity
Class B Shares for the Year Dollar
Ended July 31, 1996 Shares Amount
Shares sold 89,391 $ 910,583
Shares issued to shareholders in
reinvestment of dividends 17,173 174,586
----------- -----------
Total issued 106,564 1,085,169
Shares redeemed (220,973) (2,241,767)
----------- -----------
Net decrease (114,409) $(1,156,598)
=========== ===========
Class B Shares for the Year Dollar
Ended July 31, 1995 Shares Amount
Shares sold 151,037 $ 1,497,108
Shares issued to shareholders in
reinvestment of dividends 23,340 231,300
----------- -----------
Total issued 174,377 1,728,408
Shares redeemed (398,422) (3,933,111)
----------- -----------
Net decrease (224,045) $(2,204,703)
=========== ===========
Pennsylvania Limited Maturity
Class C Shares for the Year Dollar
Ended July 31, 1996 Shares Amount
Shares sold 7,571 $ 82,082
Shares issued to shareholders in
reinvestment of dividends 83 850
----------- -----------
Total issued 7,654 82,932
Shares redeemed (7,650) (82,673)
----------- -----------
Net increase 4 $ 259
=========== ===========
Class C Shares for the Period Dollar
October 21, 1994++ to July 31, 1995 Shares Amount
Shares sold 110 $ 1,082
Shares issued to shareholders in
reinvestment of dividends 3 31
----------- -----------
Net increase 113 $ 1,113
=========== ===========
++Commencement of Operations.
Pennsylvania Limited Maturity
Class D Shares for the
Year Ended Dollar
July 31, 1996 Shares Amount
Shares sold 155,680 $ 1,569,272
Shares issued to shareholders in
reinvestment of dividends 1,844 18,653
----------- -----------
Total issued 157,524 1,587,925
Shares redeemed (16,678) (169,594)
----------- -----------
Net increase 140,846 $ 1,418,331
=========== ===========
Class D Shares for the Period Dollar
October 21, 1994++ to July 31, 1995 Shares Amount
Shares sold 37,328 $ 367,223
Shares issued to shareholders in
reinvestment of dividends 476 4,763
----------- -----------
Net increase 37,804 $ 371,986
=========== ===========
++Commencement of Operations.
5. Capital Loss Carryforward:
At July 31, 1996, each Fund of the Trust had an approximate net capital loss
carryforward as follows: $69,000 in the Arizona Limited Maturity Fund, of which
$66,000 expires in 2003 and $3,000 expires in 2004; $434,000 in the California
Limited Maturity Fund, of which $156,000 expires in 2003 and $278,000 expires in
2004; $718,000 in the Florida Limited Maturity Fund, of which $518,000 expires
in 2003 and $200,000 expires in 2004; $340,000 in Massachusetts Limited Maturity
Fund, of which $70,000 expires in 2003 and $270,000 expires in 2004; $138,000 in
the Michigan Limited Maturity Fund, of which $53,000 expires in 2003 and $85,000
expires in 2004; $281,000 in the New Jersey Limited Maturity Fund, of which
$98,000 expires in 2003 and $183,000 expires in 2004; $207,000 in the New York
Limited Maturity Fund, of which $122,000 expires in 2002, $2,000 expires in 2003
and $83,000 expires in 2004; and $91,000 in the Pennsylvania Limited Maturity
Fund, all of which expires in 2003. These amounts will be available to offset
like amounts of any future taxable gains.
J-35
<PAGE>
TABLE OF CONTENTS
Page
----
Investment Objectives and Policies............. 2
Description of Municipal Bonds and Temporary
Investments.................................. 5
Description of Municipal Bonds............... 5
Description of Temporary Investments and
Variable Rate Demand Obligations........... 6
Repurchase Agreements........................ 7
Financial Futures Transactions and Options... 8
Investment Restrictions........................ 12
Management of the Trust........................ 14
Trustees and Officers........................ 14
Compensation of Trustees..................... 15
Management and Advisory Arrangements......... 16
Purchase of Shares............................. 17
Initial Sales Charge Alternatives--Class A
and Class D Shares......................... 18
Reduced Initial Sales Charges................ 20
Distribution Plans........................... 22
Limitations on the Payment of Deferred Sales
Charges.................................... 23
Redemption of Shares........................... 25
Deferred Sales Charges--Class B and Class
C Shares................................... 25
Portfolio Transactions......................... 26
Determination of Net Asset Value............... 27
Shareholder Services........................... 28
Investment Account........................... 28
Automatic Investment Plans................... 28
Automatic Reinvestment of Dividends and
Capital Gains Distributions................ 28
Systematic Withdrawal Plans--Class A and
Class D Shares............................. 29
Exchange Privilege........................... 29
Distributions and Taxes........................ 32
Federal...................................... 32
Environmental Tax............................ 34
Tax Treatment of Financial Futures Contracts
and Options Thereon........................ 34
State........................................ 35
Performance Data............................... 38
General Information............................ 47
Description of Shares........................ 47
Computation of Offering Price Per Share...... 48
Independent Auditors......................... 49
Custodian.................................... 49
Transfer Agent............................... 49
Legal Counsel................................ 49
Reports to Shareholders...................... 50
Additional Information....................... 50
Appendices..................................... A-1
Independent Auditors' Report................... J-1
Financial Statements........................... J-2
Code # 16926--1196
[LOGO] MERRILL LYNCH
Merrill Lynch Multi-
State Limited Maturity
Municipal Series Trust
Merrill Lynch Arizona Limited
Maturity Municipal Bond Fund
Merrill Lynch California Limited
Maturity Municipal Bond Fund
Merrill Lynch Florida Limited
Maturity Municipal Bond Fund
Merrill Lynch Massachusetts Limited
Maturity Municipal Bond Fund
Merrill Lynch Michigan Limited
Maturity Municipal Bond Fund
Merrill Lynch New Jersey Limited
Maturity Municipal Bond Fund
Merrill Lynch New York Limited
Maturity Municipal Bond Fund
Merrill Lynch Pennsylvania Limited
Maturity Municipal Bond Fund
STATEMENT OF
ADDITIONAL
INFORMATION
November 27, 1996
Distributor:
Merrill Lynch
Funds Distributor, Inc.
<PAGE>
EXHIBIT 17(d)
Page 1
<PAGE>
Page 2
MERRILL LYNCH
MULTI-STATE
LIMITED MATURITY
MUNICIPAL
SERIES TRUST
FUND LOGO
Annual Report
July 31, 1997
Officers and Trustees
Arthur Zeikel, President and Trustee
James H. Bodurtha, Trustee
Herbert I. London, Trustee
Robert R. Martin, Trustee
Joseph L. May, Trustee
Andre F. Perold, Trustee
Terry K. Glenn, Executive Vice President
Vincent R. Giordano, Senior Vice President
Donald C. Burke, Vice President
Edward J. Andrews, Vice President
Peter J. Hayes, Vice President
Helen M. Sheehan, Vice President
<PAGE>
Page 3
Gerald M. Richard, Treasurer
Lawrence A. Rogers, Secretary
Custodian
The Bank of New York
90 Washington Street, 12th Floor
New York, NY 10005
Transfer Agent
Merrill Lynch Financial Data Services, Inc.
4800 Deer Lake Drive East
Jacksonville, FL 32246-6484
(800) 637-3863
This report is not authorized for use as an offer of sale or a solicitation of
an offer to buy shares of the Trust unless accompanied or preceded by the
Trust's current prospectus. Past performance results shown in this report should
not be considered a representation of future performance. Investment return and
principal value of shares will fluctuate so that shares, when redeemed, may be
worth more or less than their original cost. Statements and other information
herein are as dated and are subject to change.
Merrill Lynch Multi-State
Limited Maturity
Municipal Series Trust
Box 9011
Princeton, NJ
08543-9011
Printed on post-consumer recycled paper
TO OUR SHAREHOLDERS
The Municipal Market Environment
During the three months ended July 31, 1997, a number of very favorable factors
combined to push both tax-exempt and taxable bond yields to recent historic
lows. A slowing domestic economy, a continued benign, if not improving,
inflationary environment, a declining Federal budget deficit with resultant
reduced Treasury borrowing needs, and a successful Congressional budget accord
all resulted in significant declines in fixed-income yields. By the end of July,
three-year US Treasury note yields declined approximately
<PAGE>
Page 4
62 basis points (0.62%) to 5.77%, their lowest level in almost a year.
Similarly, as measured by Municipal Market Data, three-year municipal AAA
general obligation bond yields fell over 60 basis points to end the July 31,
1997 quarter at 4%, their lowest level of the year.
The decline in tax-exempt bond yields in recent months was even more impressive
given that the municipal market has lost much of the technical support it had
enjoyed for over a year. In previous quarters, new tax-exempt bond issuance
declined or remained stable. However, during the last three months of 1997, many
municipal bond issuers took this opportunity to both issue new debt and
refinance older, higher-couponed issues with lower-yielding issues.
Consequently, during the July quarter, new tax-exempt bond issuance totaled over
$54 billion, an increase of over 15% versus the July 31, 1996 quarter.
The decline in municipal bond yields has also resulted in some reduction in
retail investor demand. In earlier episodes of rapidly declining interest rates,
individual investor demand initially fell until investors became more acclimated
to the current levels. If interest rates stabilize, we expect investor demand to
return to earlier levels. In addition, this past June and July, municipal bond
investors received over $50 billion in assets from coupon income payments, bond
maturities, and the proceeds from early bond redemptions. Despite the continued
allure of the US equity market, most of these assets are expected to be
reallocated to the municipal bond market as investors adjust to the new
investment environment.
Looking forward, given the extent of the recent bond market rally, some
retrenchment or at least a period of consolidation is likely. However, the
positive backdrop of modest economic growth and low inflation suggests that any
such adjustment is not likely to be excessive. Despite recent increases in new
bond issuance, supply for all of 1997 is not expected to be materially different
than earlier estimates of approximately $175 billion. It is likely that the
recent increase in issuance has largely borrowed from that originally scheduled
for later this year. Additionally, any significant increase in tax-exempt bond
yields will prevent any further bond refinancings, reducing future supply.
Unless the current positive economic fundamentals undergo immediate and
meaningful deterioration, any increase in municipal bond yields is likely to be
viewed as an opportunity to purchase more attractively priced tax-exempt
securities.
Fiscal Year in Review
Merrill Lynch Arizona Limited Maturity Municipal Bond Fund During much of the
fiscal year ended July 31, 1997, we maintained a somewhat defensive strategy in
response to concerns surrounding Federal Reserve Board monetary policy. We
maintained the Fund's
<PAGE>
Page 5
average portfolio maturity at just under 4 years for much of the fiscal year,
which benefited the Fund's total returns in the favorable interest rate
environment which characterized most of the period. Because we had pursued a
more aggressive stance in the beginning of the Fund's fiscal year, we were able
to maintain a core position of higher-yielding securities which provided our
shareholders with a more attractive yield than a money market fund.
At the close of the year ended July 31, 1997, Merrill Lynch Arizona Limited
Maturity Municipal Bond Fund's net assets were $3.3 million. During the July
quarter, we maintained cash reserves of approximately 27% of net assets and an
average portfolio maturity of about 3.5 years. We maintained a somewhat
defensive posture during the July quarter as we had in the first quarter of the
year because it appeared that the economy was operating at a strong pace and
that the Federal Reserve Board was likely to continue to raise interest rates.
We believed that securities in the two-year--ten-year range would be most
vulnerable to a move by the Federal Reserve Board.
At July 31, 1997, we began to extend our average portfolio maturity and slowly
decrease our cash reserves. While the future of interest rates remains
uncertain, the Fund's core composition leaves us well positioned, in our view.
We expect to maintain our current portfolio strategy during upcoming months,
continuing to reduce our cash reserves as economic data indicate a more neutral
Federal Reserve Board policy.
Merrill Lynch California Limited
Maturity Municipal Bond Fund
During the Fund's fiscal year, we used periods of rising interest rates as
buying opportunities to lock in attractive yields. Conversely, we used periods
of falling interest rates to take advantage of market strength and to book
capital gains. Additionally, quality spreads have narrowed so much, especially
in the last six months, that purchases were concentrated on higher-rated
securities since there was little yield advantage to purchasing lower-rated
issuers. This strategy served to enhance the Fund's performance by enabling us
to maintain a yield well above that of similar tax-exempt money funds while
keeping the net asset values of the Fund as stable as possible, especially as
compared to longer-term bond funds.
During the quarter ended July 31, 1997, unemployment in the state of California
was below one million, its lowest level in seven years. For example, the
unemployment rate in May 1997 was 6.3%, down from 7.3% in May 1996. The
California economy is stronger and more balanced then ever, with less dependence
on defense and aerospace. Services and manufacturing were the leading sectors in
job creation during the last four quarters. Services relating to business,
motion
<PAGE>
Page 6
pictures, television, engineering, management, amusement and recreation added
207,000 new jobs and manufacturing relating to high tech companies added another
43,000 new jobs. In 1997, non-farm employment is projected to grow 3.7%,
compared to 2.5% nationwide. In 1996, personal income grew by more than $50
billion, or 6.5%. In 1997, California's personal income growth is projected to
be 9.9%. California is the nation's leading exporter, with total volume of
approximately $300 billion. Exports of California-made goods rose more than 8%
in 1997, nearly double the growth of exports nationwide.
As of July 31, 1997, the state had not passed its budget. Revenues are projected
to be $960 million over budget plans this year. Governor Wilson is also
proposing a $1 billion income tax cut that would begin in 1999 since the state's
tax revenues have grown considerably.
At the close of the year ended July 31, 1997, Merrill Lynch California Limited
Maturity Municipal Bond Fund's net assets stood at approximately $14.1 million,
a decrease of approximately 5% from the April quarter. As we discussed in our
April shareholder letter, we expected to maintain a more aggressive investment
posture in the July quarter under the premise that growth in the second quarter
would slow considerably from the rapid first quarter pace. This posture enhanced
performance considerably as second quarter gross domestic product slowed to 2.2%
from 4.9% in the first quarter and inflation as measured by the core producer
price index and core consumer price index declined. Five-year municipal bond
yields declined almost 65 basis points during this period.
We expect to maintain a less aggressive posture in the months ahead as continued
strong employment and personal income growth and a reacceleration of consumer
spending could raise some inflationary concerns among investors. We will
continue to monitor economic statistics closely in an effort to seek to enhance
return while limiting any net asset value deterioration.
Merrill Lynch Florida Limited
Maturity Municipal Bond Fund
During the Fund's fiscal year, we used periods of rising interest rates as
buying opportunities to lock in attractive yields. Conversely, we used periods
of falling interest rates to take advantage of market strength and to book
capital gains. Additionally, quality spreads have narrowed so much, especially
in the last six months, that purchases were concentrated on higher-rated
securities since there was little yield advantage to purchasing lower-rated
issuers. This strategy served to enhance the Fund's performance by maintaining a
yield well above that of similar tax-exempt money funds, while at the same time
keeping the net asset
<PAGE>
Page 7
values of the Fund as stable as possible, especially as compared to longer-term
bond funds.
During the quarter ended July 31, 1997, Governor Lawton Chiles signed into law
the state's $42.2 billion fiscal 1998 budget. During the signing, the Governor
chided state legislators for not making available additional funds for building
new schools. Children between the ages of 5 and 17 years now account for 2.2
million, or 16%, of the state's population. That figure is expected to rise to
more than 2.5 million by the year 2000. The state's public school system is
growing by about 60,000 new students each year. This rapidly growing group will
require additional debt issuance in order to have school facilities and programs
maintained.
The state of Florida continues to show steady economic development, transforming
itself from a narrow-based economy of agricultural and seasonal tourism into a
service and trade economy with substantial insurance, banking and export
participation in addition to being a year-round tourist attraction.
Fiscal results for 1996 and 1997 are shaping up as stronger than expected. Sales
tax growth in 1996 reached 7.4% compared to the 4% growth rate assumed in the
fiscal 1997 budget. According to the state's economic reports, non-agricultural
employment growth was 2.8% for the 12-month period ended March 31, 1997.
At the close of the year ended July 31, 1997, Merrill Lynch Florida Limited
Maturity Municipal Bond Fund's net assets stood at approximately $25.7 million,
an increase of approximately 8% from the April quarter. As we discussed in our
April shareholder letter, we had expected to maintain a more aggressive
investment posture in the July quarter under the premise that growth in the
second quarter would slow considerably from the rapid first quarter pace. This
posture enhanced performance considerably as second quarter gross domestic
product slowed to 2.2% from 4.9% in the first quarter and inflation as measured
by the core producer price index and core consumer price index declined. Five-
year municipal bond yields declined almost 65 basis points during this period.
We expect to maintain a less aggressive posture in the months ahead as continued
strong employment and personal income growth and a reacceleration of consumer
spending could raise some inflationary concerns among investors. We will
continue to monitor economic statistics closely in an effort to seek to enhance
return while limiting any net asset value deterioration.
Merrill Lynch Massachusetts Limited
Maturity Municipal Bond Fund
During much of the Fund's fiscal year, we maintained the Fund's
<PAGE>
Page 8
average portfolio maturity in the 4-year--4.5-year range, with cash reserves
fluctuating between 7%--15% of net assets. We used periods of rising interest
rates as buying opportunities to lock in attractive yields. We decreased the
Fund's cash reserve position and increased its average portfolio maturity during
such periods of rising interest rates. Conversely, we used periods of falling
interest rates to take advantage of market strength and to book capital gains,
increasing the Fund's cash reserve position and decreasing its average portfolio
maturity. Additionally, quality spreads have narrowed so much, especially in the
last six months, that purchases were concentrated on higher-rated securities
since there was little yield advantage to purchasing lower-rated issuers. This
strategy served to enhance the Fund's performance by maintaining a yield well
above that of tax-exempt money funds, while at the same time keeping the net
asset value of the Fund as stable as possible, especially as compared to longer-
term bond funds.
During the July quarter, the economy of the commonwealth of Massachusetts
continued its trend of positive growth. This economic growth has been broad-
based, encompassing most major industries and being fueled by three major growth
industries. These industries were the high tech, financial services and business
services industries. In addition, consumer confidence is at its highest level
since the early 1990s, while income growth is once again above the national
average. Strength in the housing sector has led to housing prices registering
new highs, especially around the Boston area. The one caveat to this economic
growth is that the Massachusetts economy is becoming increasingly supply
constrained. With unemployment levels down to about 4%, labor shortages, which
were once limited to highly skilled occupations, are now being reported for
unskilled occupations. These labor shortages could be an obstacle to continued
strong economic growth in the future.
Governor Weld, who resigned his post as Governor to pursue an ambassadorship to
Mexico, signed his final budget during the July 31, 1997 quarter. The total 1998
fiscal budget amounted to $18.4 billion and represented the commonwealth's
eighth consecutive balanced budget. This 1998 fiscal budget increases spending
by 3.8% over last year's budget and includes increases of $259 million for
education reform, $288 million in aid to cities and towns, and about $50 million
for higher education. In addition, newly appointed Governor Cellucci,
recognizing the commonwealth's positive economic situation, proposed a bill
which would reduce personal income taxes over four years to 5% from 5.95%.
Merrill Lynch Michigan Limited
Maturity Municipal Bond Fund
During the Fund's fiscal year, we used periods of rising interest rates as
buying opportunities to lock in attractive yields.
<PAGE>
Page 9
Conversely, we used periods of falling interest rates to take advantage of
market strength and to book capital gains. Additionally, quality spreads have
narrowed so much, especially in the last six months, that purchases were
concentrated on higher-rated securities since there was little yield advantage
to purchasing lower-rated issuers. This strategy served to enhance the Fund's
performance by maintaining a yield well above that of tax-exempt money funds,
while at the same time keeping the net asset values of the Fund as stable as
possible, especially as compared to longer-term bond funds.
During the quarter ended July 31, 1997, Michigan's unemployment rate fell to 4%
in June and set another record for the lowest seasonally adjusted unemployment
rate since the Michigan Employment Security Agency began taking estimates in
1970. Job gains were centered in the service and goods producing sectors.
Service employment moved up by 36,000, mainly in response to seasonal gains in
retail trade and services following the arrival of warmer weather. Goods
producing jobs climbed by 23,000 as a result of seasonal growth in the
construction industry.
According to the August 1997 edition of World Trade, Detroit ranks first among
US cities in exporting. From 1993 to 1995, Detroit experienced a surge in
exporting of nearly 63%. This increase was driven by the trade flow between
Mexico, Canada and the United States. Michigan was a major beneficiary of the
North American Free Trade Agreement.
During the July quarter, the Michigan Senate tried to pass a bill to increase
the state's gasoline tax by four cents a gallon in order to raise $400 million
for Michigan's aging roads and bridges. The bill is still up for consideration.
At the close of the year ended July 31, 1997, Merrill Lynch Michigan Limited
Maturity Municipal Bond Fund's net assets stood at approximately $4.3 million, a
decrease of approximately 9% from the April quarter. As we discussed in our
April shareholder letter, we maintained a maturity stance of approximately 4.3
years at the outset of the July quarter under the premise that growth in the
second quarter would slow considerably from the rapid first quarter pace. This
positioning, as well as some cash outflows, helped us move the Fund's maturity
to a more aggressive 4.9 years in mid-May. This posture enhanced performance
considerably as second quarter gross domestic product slowed to 2.2% from 4.9%
in the first quarter and inflation as measured by the core producer price index
and core consumer price index declined. Five-year municipal bond yields declined
almost 65 basis points during this period.
We expect to maintain a less aggressive posture in the upcoming
<PAGE>
Page 10
months as continued strong employment and personal income growth and a
reacceleration of consumer spending could raise some inflationary concerns again
in the marketplace. We will continue to monitor economic statistics closely in
an effort to seek to enhance return while limiting any net asset value
deterioration.
Merrill Lynch New Jersey Limited
Maturity Municipal Bond Fund
During much of the Fund's fiscal year, we maintained the Fund's average
portfolio maturity at close to 5 years, the maximum allowed by the Fund's
prospectus. This longer average portfolio maturity benefited the Fund's total
returns because demand for New Jersey state-specific securities was strong. In
addition, the short-term nature of the Fund offered an attractive alternative to
a long-term bond fund without the same net asset value fluctuation. During the
same period, cash reserves fluctuated between approximately 15%--20% of net
assets. During much of the fiscal year, which was characterized by a favorable
interest rate environment, we maintained the Fund's fully invested position,
which contributed to the Fund's positive investment results. Our aggressive
posture at the onset of the year provided the Fund with a core position of
higher-yielding securities which also aided the Fund's performance.
New Jersey Governor Christine Todd Whitman signed a $16.8 billion budget for the
fiscal year which began July 1, 1997, an increase of 5% as compared to last
year's budget. Also during the three months ended July 31, 1997, the state sold
$2.75 billion in Federally taxable pension bonds, the largest sale of long-term
municipal debt. Proceeds from the sale were used to shore up the state's
underfunded pension system. The state continues to see moderate economic growth,
and in June the unemployment rate was 5.5%. This compares to a national rate of
4.8%. Since May 1992, New Jersey has recaptured 78% of the jobs lost in the lows
of the recession.
For much of the three-month period ended July 31, 1997, we maintained cash
reserves of approximately 23% of net assets and an average portfolio maturity of
about 3.5 years. We maintained a defensive portfolio maturity strategy for most
of the three-month period in response to the uncertainty surrounding Federal
Reserve Board policy and the direction of short-term interest rates. In this
environment, we believed that the municipal market was most vulnerable inside of
ten years. In addition, demand for New Jersey municipal securities resulting
from coupon payments in tandem with very little supply made New Jersey state-
specific paper trade at aggressive levels for most of the three months. At July
31, 1997, we began to selectively extend the Fund's average portfolio maturity
with the purchase of AAA-rated securities which we expect to outperform lesser-
quality securities in turbulent markets.
<PAGE>
Page 11
Merrill Lynch New York Limited
Maturity Municipal Bond Fund
During the Fund's fiscal year, we used periods of rising interest rates as
buying opportunities to lock in attractive yields. Conversely, we used periods
of falling interest rates to take advantage of market strength and to book
capital gains. Additionally, quality spreads have narrowed so much, especially
in the last six months, that purchases were concentrated on higher-rated
securities since there was little yield advantage to purchasing lower-rated
issuers. This strategy served to enhance the Fund's performance by maintaining a
yield well above that of similar tax-exempt money funds, while at the same time
keeping the net asset values of the Fund as stable as possible, especially as
compared to longer-term bond funds.
During the quarter ended July 31, 1997, Governor Pataki and the state
legislature finally passed a $68 billion budget, 121 days over the deadline. The
budget included a $750 million increase in school aid and $2.2 billion in
homeowner tax cuts over five years. The budget deal also seeks voter approval in
November for a $2.4 billion bond act to build and repair schools with large
increases in state budgets for additional construction over the next five years.
On a negative note, the budget plan increases spending, is 5% larger than last
year's budget and is $2 billion more than Governor Pataki originally proposed.
The budget continues to avoid the state's structural fiscal shortcomings which
have been glossed over by rising personal income, strong tax receipts and the
profits generated by the strong stock market. The state continues to be fiscally
vulnerable to a dip in consumer spending and a slowdown in economic performance.
According to a mid-year report on New York City's economy by State Comptroller
H. Carl McCall, personal income is on track to grow 6.6% this year. The
securities industry is likely to generate $8 billion in profits for the city
this year. Also, the city's real estate market continued to recover and
inflation grew just 2.1%, the slowest first half pace since 1986.
At the close of the year ended July 31, 1997, Merrill Lynch New York Limited
Maturity Municipal Bond Fund's net assets stood at approximately $14.6 million,
a decrease of approximately 5% from the April quarter. As we discussed in our
April shareholder letter, we had expected to maintain a more aggressive
investment posture in the July quarter under the premise that growth in the
second quarter would slow considerably from the rapid first quarter pace. This
posture enhanced performance considerably as second quarter gross domestic
product slowed to 2.2% from 4.9% in the first quarter and inflation as measured
by the core producer price index and core consumer price index declined. Five-
year municipal bond yields
<PAGE>
Page 12
declined almost 65 basis points during this period.
We expect to maintain a less aggressive posture in the months ahead as continued
strong employment and personal income growth and a reacceleration of consumer
spending could raise some inflationary concerns among investors. We will
continue to monitor economic statistics closely in an effort to seek to enhance
return while limiting any net asset value deterioration.
Merrill Lynch Pennsylvania Limited
Maturity Municipal Bond Fund
During much of the fiscal year ended July 31, 1997, we maintained a somewhat
defensive strategy in response to concerns surrounding Federal Reserve Board
monetary policy. We maintained the Fund's average portfolio maturity in the 3.5-
year--4.0-year range for much of the fiscal year which, together with a limited
cash reserve position of 13%--15% of net assets, benefited the Fund's total
returns in the favorable interest rate environment which characterized most of
the Fund's fiscal year. Our aggressive stance in the beginning of the Fund's
fiscal year provided us with a core position of higher-yielding securities which
provided our shareholders with a more attractive yield than a money market fund.
During the three-month period ended July 31, 1997, the commonwealth of
Pennsylvania's legislature approved its $17 billion budget. The budget included
$167 million in tax cuts for businesses and an increase of 3.7% in commonwealth
spending as compared to last year. Also during the three-month period, the
Philadelphia Federal Reserve Board reported that business activity in the region
had risen to its highest level in a year, signaling that manufacturing activity
is picking up. In addition, job growth in the construction and service
industries was strong.
During the July quarter, we maintained cash reserves of approximately 15% of net
assets and an average portfolio maturity of 3.5 years. We maintained a somewhat
defensive average portfolio maturity during the quarter because it appeared that
the economy was continuing to operate at a very strong pace and that the Federal
Reserve Board was likely to continue to raise short-term interest rates. Despite
the fact that the Federal Reserve Board did not raise interest rates, the Fund's
limited cash position aided its performance during the period because of the
limited availability of Pennsylvania intermediate-term municipal bonds and
because the Fund's aggressive stance at the onset of the year provided the Fund
with a core position of higher-yielding securities. While the future direction
of interest rates remains uncertain, the composition of the Fund leaves us
positioned to perform well, in our view. We expect to maintain our current
strategy in the coming months.
<PAGE>
Page 13
Sincerely,
(Arthur Zeikel)
Arthur Zeikel
President
(Vincent R. Giordano)
Vincent R. Giordano
Senior Vice President
(Edward J. Andrews)
Edward J. Andrews
Vice President and Portfolio Manager
(Peter J. Hayes)
Peter J. Hayes
Vice President and Portfolio Manager
(Helen M. Sheehan)
Helen M. Sheehan
Vice President and Portfolio Manager
September 9, 1997
PERFORMANCE DATA
About Fund
<PAGE>
Page 14
Performance
Investors are able to purchase shares of the Trust through the Merrill Lynch
Select Pricing SM System, which offers four pricing alternatives:
* Class A Shares incur a maximum initial sales charge (front-end load) of 1% and
bear no ongoing distribution or account maintenance fees. Class A Shares are
available only to eligible investors.
* Class B Shares are subject to a maximum contingent deferred sales charge of 1%
if redeemed during the first year, decreasing 1% the next year to 0%. In
addition, Class B Shares are subject to a distribution fee of 0.20% and an
account maintenance fee of 0.15%. These shares automatically convert to Class
D Shares after approximately 10 years. (There is no initial sales charge for
automatic share conversions.)
* Class C Shares are subject to a distribution fee of 0.20% and an account
maintenance fee of 0.15%. In addition, Class C Shares are subject to a 1%
contingent deferred sales charge if redeemed within one year of purchase.
* Class D Shares incur a maximum initial sales charge of 1% and an account
maintenance fee of 0.10% (but no distribution fee).
None of the past results shown should be considered a representation of future
performance. Figures shown in the "Average Annual Total Return" tables assume
reinvestment of all dividends and capital gains distributions at net asset value
on the payable date. Investment return and principal value of shares will
fluctuate so that shares, when redeemed, may be worth more or less than their
original cost. Dividends paid to each class of shares will vary because of the
different levels of account maintenance, distribution and transfer agency fees
applicable to each class, which are deducted from the income available to be
paid to shareholders.
<PAGE>
Page 15
<TABLE>
<CAPTION>
Recent
Performance
Results*
Standardized
12 Month 3 Month 30-day Yield
12 Month 3 Month Total Total As of
7/31/97 4/30/97 7/31/96 % Change % Change Return Return 7/31/97
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Arizona Limited Maturity Class A Shares $10.17 $ 9.99 $10.08 +0.89% +1.80% +4.62%(1) +2.72%(2) 3.37%
Arizona Limited Maturity Class B Shares 10.17 9.99 10.08 +0.89 +1.80 +4.25(3) +2.63(4) 3.04
Arizona Limited Maturity Class C Shares 10.18 10.00 10.08 +0.99 +1.80 +4.55(5) +2.68(6) 3.22
Arizona Limited Maturity Class D Shares 10.18 10.00 10.08 +0.99 +1.80 +4.62(7) +2.70(8) 3.27
California Limited Maturity Class A Shares 10.22 9.98 10.05 +1.69 +2.40 +5.57(9) +3.42(10) 3.46
California Limited Maturity Class B Shares 10.21 9.98 10.04 +1.69 +2.30 +5.20(11) +3.23(12) 3.14
California Limited Maturity Class C Shares 10.22 9.98 10.05 +1.69 +2.40 +5.39(13) +3.37(14) 3.32
California Limited Maturity Class D Shares 10.22 9.98 10.05 +1.69 +2.40 +5.47(15) +3.39(16) 3.36
Florida Limited Maturity Class A Shares 10.07 9.86 9.96 +1.10 +2.13 +5.20(17) +3.15(10) 3.51
Florida Limited Maturity Class B Shares 10.07 9.86 9.96 +1.10 +2.13 +4.83(18) +3.06(12) 3.19
Florida Limited Maturity Class C Shares 10.00 9.80 9.90 +1.01 +2.04 +4.93(19) +3.02(20) 3.37
Florida Limited Maturity Class D Shares 10.06 9.86 9.95 +1.11 +2.03 +5.10(21) +3.02(22) 3.41
Massachusetts Limited Maturity Class A Shares 10.04 9.86 9.96 +0.80 +1.83 +4.86(23) +2.86(24) 3.59
Massachusetts Limited Maturity Class B Shares 10.04 9.87 9.96 +0.80 +1.72 +4.49(7) +2.66(2) 3.26
Massachusetts Limited Maturity Class C Shares 10.03 9.86 9.95 +0.80 +1.72 +4.70(19) +2.72(22) 3.47
Massachusetts Limited Maturity Class D Shares 10.04 9.86 9.96 +0.80 +1.83 +4.76(25) +2.84(26) 3.49
Michigan Limited Maturity Class A Shares 10.09 9.88 9.94 +1.51 +2.13 +5.61(27) +3.16(24) 3.62
Michigan Limited Maturity Class B Shares 10.09 9.88 9.94 +1.51 +2.13 +5.22(13) +3.06(2) 3.28
Michigan Limited Maturity Class C Shares 10.09 9.88 9.94 +1.51 +2.13 +5.22(28) +3.05(12) 3.12
Michigan Limited Maturity Class D Shares 10.08 9.87 9.94 +1.41 +2.13 +5.40(29) +3.14(22) 3.52
New Jersey Limited Maturity Class A Shares 10.14 10.00 10.11 +0.30 +1.40 +4.19(21) +2.30(12) 3.32
New Jersey Limited Maturity Class B Shares 10.15 10.01 10.11 +0.40 +1.40 +3.92(30) +2.21(31) 2.99
New Jersey Limited Maturity Class C Shares 9.19 9.06 9.16 +0.33 +1.43 +4.06(32) +2.30(33) 3.20
New Jersey Limited Maturity Class D Shares 10.15 10.00 10.11 +0.40 +1.50 +4.18(34) +2.38(35) 3.22
New York Limited Maturity Class A Shares 10.23 9.99 10.06 +1.69 +2.40 +6.09(36) +3.53(37) 3.86
New York Limited Maturity Class B Shares 10.23 9.99 10.06 +1.69 +2.40 +5.71(38) +3.43(39) 3.54
New York Limited Maturity Class C Shares 10.23 9.99 10.06 +1.69 +2.40 +5.91(40) +3.48(41) 3.72
New York Limited Maturity Class D Shares 10.23 9.99 10.06 +1.69 +2.40 +5.98(42) +3.50(43) 3.77
Pennsylvania Limited Maturity Class A Shares 10.23 10.07 10.11 +1.19 +1.59 +5.04(44) +2.56(16) 3.41
Pennsylvania Limited Maturity Class B Shares 10.23 10.07 10.11 +1.19 +1.59 +4.66(45) +2.47(6) 3.08
Pennsylvania Limited Maturity Class C Shares 10.27 10.11 10.15 +1.18 +1.58 +4.68(46) +2.48(8) 3.15
Pennsylvania Limited Maturity Class D Shares 10.24 10.07 10.11 +1.29 +1.69 +5.04(47) +2.64(20) 3.31
</TABLE>
*Investment results shown do not reflect sales charges; results
shown would be lower if a sales charge was included.
(1)Percent change includes reinvestment of $0.367 per share ordinary income
dividends.
(2)Percent change includes reinvestment of $0.091 per share ordinary income
dividends.
(3)Percent change includes reinvestment of $0.331 per share ordinary income
dividends.
(4)Percent change includes reinvestment of $0.082 per share ordinary income
dividends.
(5)Percent change includes reinvestment of $0.350 per share ordinary income
dividends.
(6)Percent change includes reinvestment of $0.087 per share ordinary income
dividends.
(7)Percent change includes reinvestment of $0.357 per share
<PAGE>
Page 16
ordinary income dividends.
(8)Percent change includes reinvestment of $0.089 per share ordinary income
dividends.
(9)Percent change includes reinvestment of $0.376 per share ordinary income
dividends.
(10)Percent change includes reinvestment of $0.099 per share ordinary income
dividends.
(11)Percent change includes reinvestment of $0.340 per share ordinary income
dividends.
(12)Percent change includes reinvestment of $0.090 per share ordinary income
dividends.
(13)Percent change includes reinvestment of $0.358 per share ordinary income
dividends.
(14)Percent change includes reinvestment of $0.095 per share ordinary income
dividends.
(15)Percent change includes reinvestment of $0.366 per share ordinary income
dividends.
(16)Percent change includes reinvestment of $0.096 per share ordinary income
dividends.
(17)Percent change includes reinvestment of $0.396 per share ordinary income
dividends.
(18)Percent change includes reinvestment of $0.360 per share ordinary income
dividends.
(19)Percent change includes reinvestment of $0.377 per share ordinary income
dividends.
(20)Percent change includes reinvestment of $0.094 per share ordinary income
dividends.
(21)Percent change includes reinvestment of $0.385 per share ordinary income
dividends.
(22)Percent change includes reinvestment of $0.097 per share ordinary income
dividends.
(23)Percent change includes reinvestment of $0.393 per share ordinary income
dividends.
(24)Percent change includes reinvestment of $0.100 per share ordinary income
dividends.
(25)Percent change includes reinvestment of $0.383 per share ordinary income
dividends.
(26)Percent change includes reinvestment of $0.098 per share ordinary income
dividends.
(27)Percent change includes reinvestment of $0.394 per share ordinary income
dividends.
(28)Percent change includes reinvestment of $0.359 per share ordinary income
dividends.
(29)Percent change includes reinvestment of $0.384 per share ordinary income
dividends.
(30)Percent change includes reinvestment of $0.349 per share ordinary income
dividends.
(31)Percent change includes reinvestment of $0.081 per share ordinary income
dividends.
<PAGE>
Page 17
(32)Percent change includes reinvestment of $0.335 per share ordinary income
dividends.
(33)Percent change includes reinvestment of $0.078 per share ordinary income
dividends.
(34)Percent change includes reinvestment of $0.375 per share ordinary income
dividends.
(35)Percent change includes reinvestment of $0.088 per share ordinary income
dividends.
(36)Percent change includes reinvestment of $0.427 per share ordinary income
dividends.
(37)Percent change includes reinvestment of $0.110 per share ordinary income
dividends.
(38)Percent change includes reinvestment of $0.391 per share ordinary income
dividends.
(39)Percent change includes reinvestment of $0.101 per share ordinary income
dividends.
(40)Percent change includes reinvestment of $0.410 per share ordinary income
dividends.
(41)Percent change includes reinvestment of $0.106 per share ordinary income
dividends.
(42)Percent change includes reinvestment of $0.417 per share ordinary income
dividends.
(43)Percent change includes reinvestment of $0.108 per share ordinary income
dividends.
(44)Percent change includes reinvestment of $0.379 per share ordinary income
dividends.
(45)Percent change includes reinvestment of $0.342 per share ordinary income
dividends.
(46)Percent change includes reinvestment of $0.346 per share ordinary income
dividends.
(47)Percent change includes reinvestment of $0.369 per share ordinary income
dividends.
PERFORMANCE DATA (continued)
Arizona Limited
Maturity
Total Return
Based on a $10,000
Investment
A line graph depicting the growth of an investment in the Fund's Class A Shares
and Class B Shares compared to growth of an investment in the ML U1AO Index.
Beginning and ending values are:
<PAGE>
Page 18
<TABLE>
<CAPTION>
11/26/93** 7/97
<S> <C> <C>
Arizona Limited Maturity++--
Class A Shares* $ 9,900 $11,606
Arizona Limited Maturity++--
Class B Shares* $10,000 $11,571
Merrill Lynch U1AO Index++++ $10,000 $11,721
</TABLE>
A line graph depicting the growth of an investment in the Fund's Class C Shares
and Class D Shares compared to growth of an investment in the ML U1AO Index.
Beginning and ending values are:
<TABLE>
<CAPTION>
10/21/94** 7/97
<S> <C> <C>
Arizona Limited Maturity++--
Class C Shares* $10,000 $11,380
Arizona Limited Maturity++--
Class D Shares* $ 9,900 $11,350
Merrill Lynch U1AO Index++++ $10,000 $11,478
</TABLE>
*Assuming maximum sales charge, transaction costs and other operating
expenses, including advisory fees.
**Commencement of Operations.
++Arizona Limited Maturity invests in a portfolio of securities consisting
primarily of intermediate-term investment-grade obligations issued by or on
behalf of the State of Arizona or its political subdivisions, agencies or
instrumentalities, and obligations of other qualifying issuers.
++++This unmanaged Index is comprised of AAA-rated bonds maturing within three
years.
Past performance is not predictive of future performance.
Arizona Limited
Maturity
Average Annual
Total Return
<PAGE>
Page 19
<TABLE>
<CAPTION>
% Return Without % Return With
Class A Shares* Sales Charge Sales Charge**
<S> <C> <C>
Year Ended 6/30/97 +4.16% +3.11%
Inception (11/26/93) through 6/30/97 +4.21 +3.92
<CAPTION>
% Return % Return
Class B Shares++ Without CDSC With CDSC++++
<S> <C> <C>
Year Ended 6/30/97 +3.78% +2.78%
Inception (11/26/93) through 6/30/97 +3.84 +3.84
<CAPTION>
% Return % Return
Class C Shares++ Without CDSC With CDSC++++
<S> <C> <C>
Year Ended 6/30/97 +3.98% +2.98%
Inception (10/21/94) through 6/30/97 +4.51 +4.51
<CAPTION>
% Return Without % Return With
Class D Shares* Sales Charge Sales Charge**
<S> <C> <C>
Year Ended 6/30/97 +4.05% +3.01%
Inception (10/21/94) through 6/30/97 +4.79 +4.40
</TABLE>
*Maximum sales charge is 1%.
**Assuming maximum sales charge.
++Maximum contingent deferred sales charge is 1% and reduced to 0% after 1
year.
++++Assuming payment of applicable contingent deferred sales charge.
California Limited
Maturity
Total Return
Based on a $10,000
Investment
A line graph depicting the growth of an investment in the Fund's Class A Shares
and Class B Shares compared to growth of an investment in the ML U1AO Index.
Beginning and ending values are:
<PAGE>
Page 20
<TABLE>
<CAPTION>
11/25/93** 7/97
<S> <C> <C>
California Limited Maturity++--
Class A Shares* $ 9,900 $11,682
California Limited Maturity++--
Class B Shares* $10,000 $11,636
Merrill Lynch U1AO Index++++ $10,000 $11,721
</TABLE>
A line graph depicting the growth of an investment in the Fund's Class C Shares
and Class D Shares compared to growth of an investment in the ML U1AO Index.
Beginning and ending values are:
<TABLE>
<CAPTION>
10/21/94** 7/97
<S> <C> <C>
California Limited Maturity++--
Class C Shares* $10,000 $11,614
California Limited Maturity++--
Class D Shares* $ 9,900 $11,545
Merrill Lynch U1AO Index++++ $10,000 $11,478
</TABLE>
*Assuming maximum sales charge, transaction costs and other operating
expenses, including advisory fees.
**Commencement of Operations.
++California Limited Maturity invests in a portfolio of securities consisting
primarily of intermediate-term investment-grade obligations issued by or on
behalf of the State of California or its political subdivisions, agencies or
instrumentalities, and obligations of other qualifying issuers.
++++This unmanaged Index is comprised of AAA-rated bonds maturing within three
years.
Past performance is not predictive of future performance.
California Limited
Maturity
Average Annual
Total Return
California Limited Maturity
<PAGE>
Page 21
<TABLE>
<CAPTION>
% Return Without % Return With
Class A Shares* Sales Charge Sales Charge**
<S> <C> <C>
Year Ended 6/30/97 +5.13% +4.08%
Inception (11/26/93) through 6/30/97 +4.31 +4.02
<CAPTION>
% Return % Return
Class B Shares++ Without CDSC With CDSC++++
<S> <C> <C>
Year Ended 6/30/97 +4.66% +3.66%
Inception (11/26/93) through 6/30/97 +3.91 +3.91
<CAPTION>
% Return % Return
Class C Shares++ Without CDSC With CDSC++++
<S> <C> <C>
Year Ended 6/30/97 +4.96% +3.96%
Inception (10/21/94) through 6/30/97 +5.17 +5.17
<CAPTION>
% Return Without % Return With
Class D Shares* Sales Charge Sales Charge**
<S> <C> <C>
Year Ended 6/30/97 +5.03% +3.98%
Inception (10/21/94) through 6/30/97 +5.33 +4.94
</TABLE>
*Maximum sales charge is 1%.
**Assuming maximum sales charge.
++Maximum contingent deferred sales charge is 1% and reduced to 0% after
1 year.
++++Assuming payment of applicable contingent deferred sales charge.
PERFORMANCE DATA (continued)
Florida Limited
Maturity
Total Return
Based on a $10,000
Investment
A line graph depicting the growth of an investment in the Fund's Class A Shares
and Class B Shares compared to growth of an investment in the ML U1AO Index.
Beginning and ending values are:
<PAGE>
Page 22
<TABLE>
<CAPTION>
11/26/93** 7/97
<S> <C> <C>
Florida Limited Maturity++--
Class A Shares* $ 9,900 $11,554
Florida Limited Maturity++--
Class B Shares* $10,000 $11,521
Merrill Lynch U1AO Index++++ $10,000 $11,721
</TABLE>
A line graph depicting the growth of an investment in the Fund's Class C Shares
and Class D Shares compared to growth of an investment in the ML U1AO Index.
Beginning and ending values are:
<TABLE>
<CAPTION>
10/21/94** 7/97
<S> <C> <C>
Florida Limited Maturity++--
Class C Shares* $10,000 $11,360
Florida Limited Maturity++--
Class D Shares* $ 9,900 $11,406
Merrill Lynch U1AO Index++++ $10,000 $11,478
</TABLE>
*Assuming maximum sales charge, transaction costs and other operating
expenses, including advisory fees.
**Commencement of Operations.
++Florida Limited Maturity invests in a portfolio of securities consisting
primarily of intermediate-term investment-grade obligations issued by or on
behalf of the State of Florida or its political subdivisions, agencies or
instrumentalities, and obligations of other qualifying issuers.
++++This unmanaged Index is comprised of AAA-rated bonds maturing within three
years.
Past performance is not predictive of future performance.
Florida Limited
Maturity
Average Annual
Total Return
Florida Limited Maturity
<PAGE>
Page 23
<TABLE>
<CAPTION>
% Return Without % Return With
Class A Shares* Sales Charge Sales Charge**
<S> <C> <C>
Year Ended 6/30/97 +4.79% +3.74%
Inception (11/26/93) through 6/30/97 +4.04 +3.75
<CAPTION>
% Return % Return
Class B Shares++ Without CDSC With CDSC++++
<S> <C> <C>
Year Ended 6/30/97 +4.42% +3.42%
Inception (11/26/93) through 6/30/97 +3.67 +3.67
<CAPTION>
% Return % Return
Class C Shares++ Without CDSC With CDSC++++
<S> <C> <C>
Year Ended 6/30/97 +4.62% +3.62%
Inception (10/21/94) through 6/30/97 +4.42 +4.42
<CAPTION>
% Return Without % Return With
Class D Shares* Sales Charge Sales Charge**
<S> <C> <C>
Year Ended 6/30/97 +4.68% +3.64%
Inception (10/21/94) through 6/30/97 +4.97 +4.58
</TABLE>
*Maximum sales charge is 1%.
**Assuming maximum sales charge.
++Maximum contingent deferred sales charge is 1% and reduced to 0% after 1
year.
++++Assuming payment of applicable contingent deferred sales charge.
Massachusetts Limited
Maturity
Total Return
Based on a $10,000
Investment
A line graph depicting the growth of an investment in the Fund's Class A Shares
and Class B Shares compared to growth of an investment in the ML U1AO Index.
Beginning and ending values are:
<PAGE>
Page 24
<TABLE>
<CAPTION>
11/26/93** 7/97
<S> <C> <C>
Massachusetts Limited Maturity++--
Class A Shares* $ 9,900 $11,550
Massachusetts Limited Maturity++--
Class B Shares* $10,000 $11,514
Merrill Lynch U1AO Index++++ $10,000 $11,721
</TABLE>
A line graph depicting the growth of an investment in the Fund's Class C Shares
and Class D Shares compared to growth of an investment in the ML U1AO Index.
Beginning and ending values are:
<TABLE>
<CAPTION>
10/21/94** 7/97
<S> <C> <C>
Massachusetts Limited Maturity++--
Class C Shares* $10,000 $11,413
Massachusetts Limited Maturity++--
Class D Shares* $ 9,900 $11,332
Merrill Lynch U1AO Index++++ $10,000 $11,478
</TABLE>
*Assuming maximum sales charge, transaction costs and other operating
expenses, including advisory fees.
**Commencement of Operations.
++Massachusetts Limited Maturity invests in a portfolio of securities
consisting primarily of intermediate-term investment-grade obligations
issued by or on behalf of the Commonwealth of Massachusetts or its political
subdivisions, agencies or instrumentalities, and obligations of other
qualifying issuers.
++++This unmanaged Index is comprised of AAA-rated bonds maturing within three
years.
Past performance is not predictive of future performance.
<PAGE>
Page 25
Massachusetts
Limited Maturity
Average Annual
Total Return
Massachusetts Limited Maturity
<TABLE>
<CAPTION>
% Return Without % Return With
Class A Shares* Sales Charge Sales Charge**
<S> <C> <C>
Year Ended 6/30/97 +4.53% +3.48%
Inception (11/26/93) through 6/30/97 +4.08 +3.79
<CAPTION>
% Return % Return
Class B Shares++ Without CDSC With CDSC++++
<S> <C> <C>
Year Ended 6/30/97 +4.15% +3.15%
Inception (11/26/93) through 6/30/97 +3.71 +3.71
<CAPTION>
% Return % Return
Class C Shares++ Without CDSC With CDSC++++
<S> <C> <C>
Year Ended 6/30/97 +4.37% +3.37%
Inception (10/21/94) through 6/30/97 +4.63 +4.63
<CAPTION>
% Return Without % Return With
Class D Shares* Sales Charge Sales Charge**
<S> <C> <C>
Year Ended 6/30/97 +4.32% +3.28%
Inception (10/21/94) through 6/30/97 +4.71 +4.32
</TABLE>
*Maximum sales charge is 1%.
**Assuming maximum sales charge.
++Maximum contingent deferred sales charge is 1% and reduced to 0% after 1
year.
++++Assuming payment of applicable contingent deferred sales charge.
<PAGE>
Page 26
PERFORMANCE DATA (continued)
Michigan Limited
Maturity
Total Return
Based on a $10,000
Investment
A line graph depicting the growth of an investment in the Fund's Class A Shares
and Class B Shares compared to growth of an investment in the ML U1AO Index.
Beginning and ending values are:
<TABLE>
<CAPTION>
11/26/93** 7/97
<S> <C> <C>
Michigan Limited Maturity++--
Class A Shares* $ 9,900 $11,592
Michigan Limited Maturity++--
Class B Shares* $10,000 $11,553
Merrill Lynch U1AO Index++++ $10,000 $11,721
</TABLE>
A line graph depicting the growth of an investment in the Fund's Class C Shares
and Class D Shares compared to growth of an investment in the ML U1AO Index.
Beginning and ending values are:
<TABLE>
<CAPTION>
10/21/94** 7/97
<S> <C> <C>
Michigan Limited Maturity++--
Class C Shares* $10,000 $11,445
Michigan Limited Maturity++--
Class D Shares* $ 9,900 $11,441
Merrill Lynch U1AO Index++++ $10,000 $11,478
</TABLE>
*Assuming maximum sales charge, transaction costs and other operating
expenses, including advisory fees.
**Commencement of Operations.
++Michigan Limited Maturity invests in a portfolio of securities consisting
primarily of intermediate-term investment-grade obligations issued by or on
behalf of the State of Michigan or its political subdivisions, agencies or
instrumentalities, and obligations of other qualifying issuers.
++++This unmanaged Index is comprised of AAA-rated bonds maturing within three
years.
Past performance is not predictive of future performance.
Michigan Limited
Maturity
Average Annual
Total Return
Michigan Limited Maturity
<PAGE>
Page 27
% Return Without % Return With
Class A Shares* Sales Charge Sales Charge**
<TABLE>
<S> <C> <C>
Year Ended 6/30/97 +4.87% +3.82%
Inception (11/26/93) through 6/30/97 +4.10 +3.81
<CAPTION>
% Return % Return
Class B Shares++ Without CDSC With CDSC++++
<S> <C> <C>
Year Ended 6/30/97 +4.49% +3.49%
Inception (11/26/93) through 6/30/97 +3.72 +3.72
<CAPTION>
% Return % Return
Class C Shares++ Without CDSC With CDSC++++
<S> <C> <C>
Year Ended 6/30/97 +4.50% +3.50%
Inception (10/21/94) through 6/30/97 +4.64 +4.64
<CAPTION>
% Return Without % Return With
Class D Shares* Sales Charge Sales Charge**
<S> <C> <C>
Year Ended 6/30/97 +4.77% +3.72%
Inception (10/21/94) through 6/30/97 +5.00 +4.61
</TABLE>
*Maximum sales charge is 1%.
**Assuming maximum sales charge.
++Maximum contingent deferred sales charge is 1% and reduced to 0%
after 1 year.
++++Assuming payment of applicable contingent deferred sales charge.
New Jersey
Limited Maturity
Total Return
Based on a $10,000
Investment
New Jersey Limited Maturity
A line graph depicting the growth of an investment in the Fund's
Class A Shares and Class B Shares compared to growth of an
investment in the ML U1AO Index. Beginning and ending values are:
<TABLE>
<CAPTION>
11/26/93** 7/97
<S> <C> <C>
New Jersey Limited Maturity++--
Class A Shares* $ 9,900 $11,581
</TABLE>
<PAGE>
Page 28
<TABLE>
<S> <C> <C>
New Jersey Limited Maturity++--
Class B Shares* $10,000 $11,556
Merrill Lynch U1AO Index++++ $10,000 $11,721
</TABLE>
A line graph depicting the growth of an investment in the Fund's
Class C Shares and Class D Shares compared to growth of an
investment in the ML U1AO Index. Beginning and ending values are:
<TABLE>
<CAPTION>
10/21/94** 7/97
<S> <C> <C>
New Jersey Limited Maturity++--
Class C Shares* $10,000 $10,313
New Jersey Limited Maturity++--
Class D Shares* $ 9,900 $11,368
Merrill Lynch U1AO Index++++ $10,000 $11,478
</TABLE>
*Assuming maximum sales charge, transaction costs and other
operating expenses, including advisory fees.
**Commencement of Operations.
++New Jersey Limited Maturity invests in a portfolio of securities
consisting primarily of intermediate-term investment-grade
obligations issued by or on behalf of the State of New Jersey or
its political subdivisions, agencies or instrumentalities, and
obligations of other qualifying issuers.
++++This unmanaged Index is comprised of AAA-rated bonds maturing
within three years.
Past performance is not predictive of future performance.
New Jersey
Limited Maturity
Average Annual
Total Return
New Jersey Limited Maturity
<TABLE>
<CAPTION>
% Return Without % Return With
Class A Shares* Sales Charge Sales Charge**
<S> <C> <C>
Year Ended 6/30/97 +4.12% +3.08%
</TABLE>
<PAGE>
Page 29
<TABLE>
<S> <C> <C>
Inception (11/26/93) through 6/30/97 +4.20 +3.91
<CAPTION>
% Return % Return
Class B Shares++ Without CDSC With CDSC++++
<S> <C> <C>
Year Ended 6/30/97 +3.75% +2.75%
Inception (11/26/93) through 6/30/97 +3.83 +3.83
<CAPTION>
% Return % Return
Class C Shares++ Without CDSC With CDSC++++
<S> <C> <C>
Year Ended 6/30/97 +3.98% +2.98%
Inception (10/21/94) through 6/30/97 +0.80 +0.80
<CAPTION>
% Return Without % Return With
Class D Shares* Sales Charge Sales Charge**
<S> <C> <C>
Year Ended 6/30/97 +4.02% +2.98%
Inception (10/21/94) through 6/30/97 +4.89 +4.50
</TABLE>
*Maximum sales charge is 1%.
**Assuming maximum sales charge.
++Maximum contingent deferred sales charge is 1% and reduced to 0%
after 1 year.
++++Assuming payment of applicable contingent deferred sales charge.
PERFORMANCE DATA (concluded)
New York Limited
Maturity
Total Return
Based on a $10,000
Investment
A line graph depicting the growth of an investment in the Fund's
Class A Shares and Class B Shares compared to growth of an
investment in the ML U1AO Index. Beginning and ending values are:
<TABLE>
<CAPTION>
11/26/93** 7/97
<S> <C> <C>
New York Limited Maturity++--
Class A Shares* $ 9,900 $11,820
</TABLE>
<PAGE>
Page 30
<TABLE>
<S> <C> <C>
New York Limited Maturity++--
Class B Shares* $10,000 $11,784
Merrill Lynch U1AO Index++++ $10,000 $11,721
</TABLE>
A line graph depicting the growth of an investment in the Fund's
Class C Shares and Class D Shares compared to growth of an
investment in the ML U1AO Index. Beginning and ending values are:
<TABLE>
<CAPTION>
10/21/94** 7/97
<S> <C> <C>
New York Limited Maturity++--
Class C Shares* $10,000 $11,703
New York Limited Maturity++--
Class D Shares* $ 9,900 $11,646
Merrill Lynch U1AO Index++++ $10,000 $11,478
</TABLE>
*Assuming maximum sales charge, transaction costs and other
operating expenses, including advisory fees.
**Commencement of Operations.
++New York Limited Maturity invests in a portfolio of securities
consisting primarily of intermediate-term investment-grade
obligations issued by or on behalf of the State of New York or
its political subdivisions, agencies or instrumentalities, and
obligations of other qualifying issuers.
++++This unmanaged Index is comprised of AAA-rated bonds maturing
within three years.
Past performance is not predictive of future performance.
New York Limited
Maturity
Average Annual
Total Return
New York Limited Maturity
<TABLE>
<CAPTION>
% Return Without % Return With
Class A Shares* Sales Charge Sales Charge**
<S> <C> <C>
Year Ended 6/30/97 +5.25% +4.20%
</TABLE>
<PAGE>
Page 31
<TABLE>
<S> <C> <C>
Inception (11/26/93) through 6/30/97 +4.61 +4.32
<CAPTION>
% Return % Return
Class B Shares++ Without CDSC With CDSC++++
<S> <C> <C>
Year Ended 6/30/97 +4.87% +3.87%
Inception (11/26/93) through 6/30/97 +4.24 +4.24
<CAPTION>
% Return % Return
Class C Shares++ Without CDSC With CDSC++++
<S> <C> <C>
Year Ended 6/30/97 +5.07% +4.07%
Inception (10/21/94) through 6/30/97 +5.42 +5.42
<CAPTION>
% Return Without % Return With
Class D Shares* Sales Charge Sales Charge**
<S> <C> <C>
Year Ended 6/30/97 +5.14% +4.09%
Inception (10/21/94) through 6/30/97 +5.66 +5.27
</TABLE>
*Maximum sales charge is 1%.
**Assuming maximum sales charge.
++Maximum contingent deferred sales charge is 1% and reduced to 0%
after 1 year.
++++Assuming payment of applicable contingent deferred sales charge.
Pennsylvania
Limited Maturity
Total Return
Based on a $10,000
Investment
A line graph depicting the growth of an investment in the Fund's
Class A Shares and Class B Shares compared to growth of an
investment in the ML U1AO Index. Beginning and ending values are:
<TABLE>
<CAPTION>
11/26/93** 7/97
<S> <C> <C>
Pennsylvania Limited Maturity++--
Class A Shares* $ 9,900 $11,684
</TABLE>
<PAGE>
Page 32
<TABLE>
<S> <C> <C>
Pennsylvania Limited Maturity++--
Class B Shares* $10,000 $11,648
Merrill Lynch U1AO Index++++ $10,000 $11,721
</TABLE>
A line graph depicting the growth of an investment in the Fund's
Class C Shares and Class D Shares compared to growth of an
investment in the ML U1AO Index. Beginning and ending values are:
<TABLE>
<CAPTION>
10/21/94** 7/97
<S> <C> <C>
Pennsylvania Limited Maturity++--
Class C Shares* $10,000 $11,536
Pennsylvania Limited Maturity++--
Class D Shares* $ 9,900 $11,482
Merrill Lynch U1AO Index++++ $10,000 $11,478
</TABLE>
*Assuming maximum sales charge, transaction costs and other
operating expenses, including advisory fees.
**Commencement of Operations.
++Pennsylvania Limited Maturity invests in a portfolio of securities
consisting primarily of intermediate-term investment-grade
obligations issued by or on behalf of the Commonwealth of Pennsylvania
or its political subdivisions, agencies or instrumentalities, and
obligations of other qualifying issuers.
++++This unmanaged Index is comprised of AAA-rated bonds maturing
within three years.
Past performance is not predictive of future performance.
Pennsylvania
Limited Maturity
Average Annual
Total Return
Pennsylvania Limited Maturity
<TABLE>
<CAPTION>
% Return Without % Return With
Class A Shares* Sales Charge Sales Charge**
<S> <C> <C>
Year Ended 6/30/97 +4.63% +3.58%
Inception (11/26/93) through 6/30/97 +4.43 +4.14
</TABLE>
<PAGE>
Page 33
<TABLE>
<CAPTION>
% Return % Return
Class B Shares++ Without CDSC With CDSC++++
<S> <C> <C>
Year Ended 6/30/97 +4.25% +3.25%
Inception (11/26/93) through 6/30/97 +4.05 +4.05
<CAPTION>
% Return % Return
Class C Shares++ Without CDSC With CDSC++++
<S> <C> <C>
Year Ended 6/30/97 +4.27% +3.27%
Inception (10/21/94) through 6/30/97 +5.07 +5.07
<CAPTION>
% Return Without % Return With
Class D Shares* Sales Charge Sales Charge**
<S> <C> <C>
Year Ended 6/30/97 +4.42% +3.38%
Inception (10/21/94) through 6/30/97 +5.24 +4.84
</TABLE>
*Maximum sales charge is 1%.
**Assuming maximum sales charge.
++Maximum contingent deferred sales charge is 1% and reduced to 0%
after 1 year.
++++Assuming payment of applicable contingent deferred sales charge.
Portfolio
Abbreviations
To simplify the listings of Merrill Lynch Multi-State Limited
Maturity Municipal Series Trust's portfolio holdings in the Schedule
of Investments, we have abbreviated the names of many of the
securities according to the list at right.
ACES SM Adjustable Convertible Extendable
Securities
AMT Alternative Minimum Tax (subject to)
BAN Bond Anticipation Notes
COP Certificates of Participation
EDA Economic Development Authority
GO General Obligation Bonds
IDA Industrial Development Authority
IDR Industrial Development Revenue Bonds
M/F Multi-Family
<PAGE>
Page 34
PCR Pollution Control Revenue Bonds
TRAN Tax Revenue AnticipationNotes
UT Unlimited Tax
VRDN Variable Rate Demand Notes
<TABLE>
<CAPTION>
SCHEDULE OF INVESTMENTS (in Thousands)
Arizona Limited Maturity Municipal Bond Fund
S&P Moody's Face Value
STATE Ratings Ratings Amount Issue (Note 1a)
<S> <C> <C> <C> <C> <C>
Arizona--87.1% A-1 P1 $ 100 Apache County, Arizona, IDA, IDR (Tucson Electric Power--
Springerville Project), VRDN, Series C, 3.75% due 12/15/2018 (a) $ 100
A1+ VMIG1++ 100 Arizona Health Facilities Authority Revenue Bonds (Arizona
Voluntary Hospital Federation), VRDN, Series B, 3.70% due
10/01/2015 (a)(c) 100
AAA Aaa 200 Arizona State Transportation Board, Excise Tax Revenue Bonds
(Maricopa County Regional Area Roads), Series A, 5.75% due
7/01/2004 (b) 217
NR* Aaa 100 Arizona Water Infrastructure, Finance Authority Revenue Bonds
(Water Quality Financial Assistance), Series A, 4.50% due
7/01/2003 (d) 101
AA- A1 200 Central Arizona Water Conservation District, Contract Revenue
Bonds (Central Arizona Project), Series B, 6.50% due 5/01/2001 (e) 220
NR* VMIG1++ 120 Chandler, Arizona, IDA, IDR, Refunding (SMP II, LP), VRDN, 3.50%
due 12/01/2015 (a) 120
A1+ P1 100 Maricopa County, Arizona, Pollution Control Corporation, PCR,
Refunding (Arizona Public Service Company), VRDN, Series B, 3.55%
due 5/01/2029 (a) 100
AAA Aaa 480 Phoenix, Arizona, Airport Revenue Refunding Bonds, AMT, Series C,
5.70% due 7/01/2003 (d) 512
AA- Aa 200 Phoenix, Arizona, Civic Improvement Corporation, Water System
Revenue Bonds, Junior Lien, 5% due 7/01/2006 208
AA+ Aa1 250 Phoenix, Arizona, Refunding, UT, 5.70% due 7/01/1999 258
A+ Aa 200 Pima County, Arizona, Refunding, Series A, 5.60% due 7/01/1999 206
AAA Aaa 200 Pima County, Arizona, Sewer Revenue Bonds, 6.20% due 7/01/2002
(b)(e) 220
A1+ P1 100 Pinal County, Arizona, IDA, PCR (Magma Copper/Newmont Mining
Corporation), VRDN, 3.70% due 12/01/2009 (a) 100
A1+ NR* 100 Tempe, Arizona, IDA, M/F Revenue Bonds (Elliots Crossing), VRDN,
3.754% due 10/01/2008 (a) 100
A+ A1 150 Tucson, Arizona, Street and Highway User Revenue Refunding Bonds,
5.90% due 7/01/2003 163
AAA Aaa 200 Yuma County, Arizona, Jail District Revenue Bonds, 4.30% due
7/01/1999 (b) 201
</TABLE>
<PAGE>
Page 35
<TABLE>
<S> <C> <C> <C> <C> <C>
Puerto Rico-- A1+ VMIG1++ 100 Puerto Rico Commonwealth, Government Development Bank, Refunding,
3.0% VRDN, 3.25% due 12/01/2015 (a) 100
Total Investments (Cost--$2,939)--90.1% 3,026
Other Assets Less Liabilities--9.9% 331
-------
Net Assets--100.0% $ 3,357
=======
</TABLE>
(a)The interest rate is subject to change periodically based
upon prevailing market rates. The interest rate shown is
the rate in effect at July 31, 1997.
(b)AMBAC Insured.
(c)FGIC Insured.
(d)MBIA Insured.
(e)Prerefunded.
*Not Rated.
++Highest short-term rating by Moody's Investors Service,
Inc. Ratings of issues shown have not been audited by
Deloitte & Touche LLP.
See Notes to Financial Statements.
<TABLE>
<CAPTION>
California Limited Maturity Municipal Bond Fund
S&P Moody's Face Value
STATE Ratings Ratings Amount Issue (Note 1a)
<S> <C> <C> <C> <C> <C>
California--97.0% NR* A1 $ 500 California Educational Facilities Authority, Revenue Refunding
Bonds (Loyola Marymount University), 5.70% due 10/01/2002 $ 537
AAA Aaa 500 California Health Facilities Financing Authority, Revenue
Refunding Bonds (Catholic Healthcare West), Series A, 5.30% due
7/01/2003 (d) 528
A-1 VMIG1++ 200 California Pollution Control Financing Authority, Resource
Recovery Revenue Bonds (Atlantic Richfield Company Project), VRDN,
AMT, Series A, 3.55% due 12/01/2024 (a) 200
AA Aaa 500 California State Department of Water Resources, Water System
Revenue Bonds (Central Valley Project), Series I, 6.95% due
6/01/2000 (e) 547
California State, GO, UT:
A+ A1 750 6.75% due 10/01/2003 855
AAA Aaa 750 6.35% due 11/01/2004 (b) 848
California State Public Works Board, Lease Revenue Bonds,
Series A (e):
</TABLE>
<PAGE>
Page 36
<TABLE>
<S> <C> <C> <C> <C> <C>
AAA Aaa 600 (Department of Corrections--State Prison/Central California
Women's Facility, Madera County), 7% due 9/01/2000 664
AAA Aaa 500 (Various University of California Projects), 6.40% due
12/01/2002 (d) 564
AAA Aaa 500 California Statewide Communities Development Authority, Lease
Revenue Refunding Bonds (Oakland Convention Center Project),
5.70% due 10/01/2002 (d) 537
NR* Aa2 100 California Statewide Communities Development Authority, Solid Waste
Facilities Revenue Bonds (Chevron U.S.A. Inc. Project), VRDN, AMT,
3.50% due 12/15/2024 (a) 100
AAA Aaa 500 Contra Costa, California, Transportation Authority, Sales Tax
Revenue Bonds, Series A, 6% due 3/01/2007 (b) 561
A+ NR* 700 East Bay, California, Municipal Utility District, Water System
Revenue Bonds, Sub-Series, 7.40% due 6/01/2000 (e) 776
AAA Aaa 200 Los Angeles, California, Department of Airports, Airport Revenue
Refunding Bonds, Series A, 6% due 5/15/2005 (b) 222
A+ Aa3 650 Los Angeles, California, Department of Water and Power, Electric
Plant Revenue Bonds, 6% due 4/01/2002 702
Los Angeles, California, Harbor Department Revenue Bonds, AMT,
Series B:
AA Aa3 275 6% due 8/01/2000 289
AA Aa3 295 6% due 8/01/2001 314
AA Aa3 500 6% due 8/01/2004 542
Los Angeles County, California, Metropolitan Transportation
Authority, Sales Tax Revenue Bonds (Proposition C--Second Senior):
A1+ VMIG1++ 200 Refunding, VRDN, Series A, 3.35% due 7/01/2020 (a)(c) 200
AAA Aaa 400 Series B, 8% due 7/01/2003 (d) 478
AA- Aa1 1,000 Los Angeles County, California, Public Works Financing Authority,
Revenue Refunding Bonds (Capital Construction), 4.80% due 3/01/2004 1,025
AA Aa 700 Metropolitan Water District, Southern California, Waterworks Revenue
Bonds, 5.60% due 7/01/2006 747
AAA Aaa 700 San Francisco, California, City and County Sewer Revenue Bonds,
Series A, 5.375% due 10/01/1999 (b) 722
AAA Aaa 500 Santa Clara County, California, Financing Authority, Lease Revenue
Bonds (VMC Facility Replacement Project), Series A, 5.80% due
11/15/2000 (d) 529
SP1+ MIG1++ 600 Santa Clara County, California, TRAN, 4.75% due 10/01/1998 606
AAA Aaa 500 University of California, Revenue Refunding Bonds (Multi-Purpose
Projects), Series C, 10% due 9/01/2001 (d) 610
Puerto Rico-- A1+ VMIG1++ 200 Puerto Rico Commonwealth, Government Development Bank, Refunding,
1.4% VRDN, 3.25% due 12/01/2015 (a) 200
Total Investments (Cost--$13,139)--98.4% 13,903
Other Assets Less Liabilities--1.6% 226
-------
Net Assets--100.0% $14,129
=======
</TABLE>
<PAGE>
Page 37
(a)The interest rate is subject to change periodically based
upon prevailing market rates. The interest rate shown is
the rate in effect at July 31, 1997.
(b)FGIC Insured.
(c)MBIA Insured.
(d)AMBAC Insured.
(e)Prerefunded.
*Not Rated.
++Highest short-term ratings by Moody's Investors Service,
Inc. Ratings of issues shown have not been audited by
Deloitte & Touche LLP.
See Notes to Financial Statements.
SCHEDULE OF INVESTMENTS (continued)
<TABLE>
<CAPTION>
Florida Limited Maturity Municipal Bond Fund
S&P Moody's Face Value
STATE Ratings Ratings Amount Issue (Note 1a)
<S> <C> <C> <C> <C> <C>
Florida--95.5% AAA Aaa $ 1,000 Broward County, Florida, School District, UT, 7.125% due
2/15/1999 (f) $ 1,066
Dade County, Florida, Aviation Revenue Refunding Bonds,
Series A (b):
AAA Aaa 300 5.60% due 10/01/2004 323
AAA Aaa 1,000 AMT, 5.25% due 10/01/1997 1,002
AA- VMIG1++ 400 Dade County, Florida, IDA, Exempt Facilities Revenue Refunding
Bonds (Florida Power and Light Company), VRDN, 3.60% due
6/01/2021 (a) 400
AAA Aaa 1,000 Dade County, Florida, School District, UT, 5.75% due 8/01/2001 (c) 1,060
AAA Aaa 1,185 Dunedin, Florida, Hospital Revenue Bonds (Mease Health Care),
6.75% due 11/15/2001 (d)(f) 1,327
Florida State Board of Education, Capital Outlay (Public
Education):
AA+ Aa2 850 Refunding, 5.50% due 6/01/2001 893
AAA Aaa 1,000 Refunding, Series A, 7.25% due 6/01/2000 (f) 1,103
AA+ Aa2 1,000 Series B, 5.625% due 6/01/2005 1,082
AAA Aaa 800 Florida State Board of Regents, University System Improvement
Revenue Bonds, 7% due 7/01/2004 (d) 927
AAA Aaa 580 Florida State Department of Transportation Revenue Bonds (Alligator
Alley), 6.25% due 7/01/2007 (c) 660
Florida State Division, Bond Finance Department, General Services
Revenue Bonds (Department of Natural Resources), Series A:
AAA Aaa 1,900 (Preservation 2000), 6.40% due 7/01/2002 (b) 2,084
</TABLE>
<PAGE>
Page 38
<TABLE>
<S> <C> <C> <C> <C> <C>
AAA Aaa 1,730 Refunding (Save Our Coast), 6.30% due 7/01/2004 (d) 1,864
A A3 100 Hillsborough County, Florida, Capital Improvement Revenue Bonds
(County Center Project), Second Series, 6.75% due 7/01/2002 (f) 113
Jacksonville, Florida, Electric Authority, Revenue Refunding Bonds
(Saint John's River), Issue 2:
AA Aa1 1,000 Series 6-C, 6.50% due 10/01/2001 1,086
AA Aa1 1,000 (Special Obligation), Series 6-B, 6.65% due 10/01/2002 1,087
AAA Aaa 1,000 Jacksonville, Florida, Excise Taxes Revenue Bonds, AMT, Series B,
5.20% due 10/01/2004 (c) 1,037
NR* VMIG1++ 900 Jacksonville, Florida, Health Facilities Authority, Hospital
Revenue Refunding Bonds (Genesis Rehabilitation Hospital), VRDN,
3.65% due 5/01/2021 (a) 900
AAA Aaa 1,200 North Miami, Florida, Health Facilities Authority, Health Facility
Revenue Bonds (Bon Secours Health System Project), 6% due 8/15/2002
(e)(f) 1,317
AA- Aaa 1,000 Orlando, Florida, Utilities Commission, Water and Electric Revenue
Bonds, Series A, 6.50% due 10/01/2001 (f) 1,109
AAA Aaa 1,000 Palm Bay, Florida, Utility Revenue Bonds (Palm Bay Utility
Corporation Project), Series B, 6.20% due 10/01/2002 (d)(f) 1,109
NR* Baa1 1,360 Pembroke Pines, Florida, Special Assessment No. 94-1, 4.80% due
11/01/1998 1,372
A1+ VMIG1++ 200 Saint Lucie County, Florida, PCR, Refunding (Florida Power and
Light Company Project), VRDN, 3.55% due 1/01/2026 (a) 200
AAA Aaa 1,235 Saint Lucie County, Florida, School Board, COP, Series A, 7.25%
due 7/01/2000 (b)(f) 1,366
Puerto Rico--4.1% A Baa1 1,000 Puerto Rico Commonwealth, Refunding, Improvement Bonds, UT, 5.30%
due 7/01/2004 1,045
Total Investments (Cost--$24,755)--99.6% 25,532
Other Assets Less Liabilities--0.4% 98
-------
Net Assets--100.0% $25,630
=======
</TABLE>
(a)The interest rate is subject to change periodically based
upon prevailing market rates. The interest rate shown is
the rate in effect at July 31, 1997.
(b)AMBAC Insured.
(c)FGIC Insured.
(d)MBIA Insured.
(e)FSA Insured.
(f)Prerefunded.
*Not Rated.
++Highest short-term rating by Moody's Investors Service,
Inc. Ratings of issues shown have not been audited by
Deloitte & Touche LLP.
See Notes to Financial Statements.
<PAGE>
Page 39
<TABLE>
<CAPTION>
Massachusetts Limited Maturity Municipal Bond Fund
S&P Moody's Face Value
STATE Ratings Ratings Amount Issue (Note 1a)
<S> <C> <C> <C> <C> <C>
Massachusetts-- NR* A1 $ 285 Boston, Massachusetts, Economic Development and Industrial
95.3% Corporation, Public Parking Facility, Series 1990,
5% due 7/01/2015 $ 290
AAA Aaa 250 Boston, Massachusetts, GO, UT, Series A, 5% due 11/01/2004 (e) 259
AAA Aaa 300 Chelsea, Massachusetts, School Project Loan Act of 1948, UT, 6%
due 6/15/2002 (b) 323
AAA Aaa 215 Fall River, Massachusetts, GO, 6.30% due 6/01/1998 (d) 219
NR* Aa3 225 Framingham, Massachusetts, GO, 4.50% due 7/15/2005 227
AAA Aaa 200 Lynn, Massachusetts, Water and Sewer Commission, Refunding, 4.95%
due 12/01/2002 (e) 206
A+ A1 100 Massachusetts Bay Transportation Authority, Massachusetts General
Transportation System, Series A, 4.90% due 3/01/2004 102
AAA Aaa 250 Massachusetts Education Loan Authority, Education Loan Revenue
Refunding Bonds, AMT, Issue E, Series B, 5.50% due 7/01/2001 (b) 261
A+ A1 750 Massachusetts State, GO, Refunding, Series B, 6.25% due 8/01/2001 806
Massachusetts State Health and Educational Facilities Authority
Revenue Bonds:
A1+ VMIG1++ 200 (Capital Asset Program), VRDN, Series B, 3.45% due 7/01/2005
(a)(d) 200
A1+ VMIG1++ 100 (Capital Asset Program), VRDN, Series C, 3.50% due 7/01/2005
(a)(d) 100
AAA Aaa 200 Refunding (Baystate Medical Center), Series D, 4.60% due
7/01/2002 (e) 202
NR* MIG1++ 100 Massachusetts State Industrial Finance Agency, Health Care Facility
Revenue Bonds (Beverly Enterprises--DEDHM), VRDN, 3.65% due
4/01/2009 (a) 100
AAA Aaa 200 Massachusetts State Industrial Finance Agency, Revenue Refunding
Bonds (Worcester Polytechnic), Series II, 4.50% due 9/01/2002 (d) 202
AA A1 300 Massachusetts State Special Obligation Revenue Bonds (Highway
Improvement Loan), Series A, 5.90% due 6/01/2001 318
AAA Aaa 250 Massachusetts State Water Resource Authority, Series A, 6.75% due
7/15/2002 (c) 282
NR* Aaa 150 Nantucket, Massachusetts, GO, 5.75% due 7/15/2005 (d) 163
NR* A1 500 New England Education Loan Marketing Corporation, Massachusetts
Student Loan Revenue Bonds, AMT, Sub-Issue F, 6.60% due 9/01/2002 536
AA Aa1 100 Peabody, Massachusetts, GO, Series A, 4.50% due 8/01/2000 101
Puerto Rico--5.4% A Baa1 250 Puerto Rico Public Buildings Authority, Guaranteed Public Education
</TABLE>
<PAGE>
Page 40
<TABLE>
<S> <C>
and Health Facilities, Refunding, Series K, 6.60% due 7/01/2004 276
Total Investments (Cost--$5,006)--100.7% 5,173
Liabilities in Excess of Other Assets--(0.7%) (37)
-------
Net Assets--100.0% $ 5,136
=======
</TABLE>
(a)The interest rate is subject to change periodically based
upon prevailing market rates. The interest rate shown is
the rate in effect at July 31, 1997.
(b)AMBAC Insured.
(c)Prerefunded.
(d)MBIA Insured.
(e)FGIC Insured.
*Not Rated.
++Highest short-term ratings by Moody's Investors Service,
Inc.
Ratings of issues shown have not been audited by Deloitte &
Touche LLP.
See Notes to Financial Statements.
<TABLE>
<CAPTION>
SCHEDULE OF INVESTMENTS (continued) (In Thousands)
Michigan Limited Maturity Municipal Bond Fund
S&P Moody's Face Value
STATE Ratings Ratings Amount Issue (Note 1a)
<S> <C> <C> <C> <C> <C>
Michigan--91.5% AAA Aaa $ 200 Anchor Bay, Michigan, School District, UT, 6.30% due 5/01/2004 (c) $ 222
AA Aa2 110 Ann Arbor, Michigan, School District, Public Schools, Refunding,
UT, 4.75% due 5/01/2000 112
AAA Aaa 105 Chelsea, Michigan, School District, UT, 6.75% due 5/01/2002 (b) 116
AAA Aaa 150 Chippewa Valley, Michigan, Schools, Refunding, UT, 4.90% due
5/01/2004 (b) 154
AAA Aaa 250 Dearborn, Michigan, Economic Development Corporation, Hospital
Revenue Bonds (Oakwood Obligated Group), Series A, 6.95% due
8/15/2001 (c)(d) 280
AAA Aaa 200 Detroit, Michigan, Refunding (Distributable State Aid), UT, 5.70%
due 5/01/2001 (a) 210
AAA Aaa 250 Detroit, Michigan, Water Supply System, Revenue Refunding Bonds,
6.20% due 7/01/2004 (b) 274
AAA Aaa 200 Eastern Michigan University, General Revenue Refunding Bonds,
5.40% due 6/01/1998 (a) 203
AAA Aaa 200 Gull Lake, Michigan, Community School District, GO, UT, 6.80%
</TABLE>
<PAGE>
Page 41
<TABLE>
<S> <C> <C> <C> <C> <C>
due 5/01/2001 (b)(d) 222
Michigan Municipal Bond Authority Revenue Bonds:
AAA Aaa 200 (Local Government Loan Program), Series C, 5.50% due
5/01/2003 (c) 212
AA Aa2 450 Refunding (Local Government--Qualified School), Series A, 6%
due 5/01/2001 478
AA+ Aa1 200 (State Revolving Fund), 7% due 10/01/2004 (e) 231
AA- A1 200 Michigan State Building Authority, Revenue Refunding Bonds,
Series I, 6.40% due 10/01/2004 218
AA- A1 200 Michigan State Comprehensive Transportation, Revenue Refunding
Bonds, Series B, 5.625% due 5/15/2003 213
NR* Aaa 100 Michigan State Hospital Finance Authority Revenue Bonds (McLaren
Obligated Group), Series A, 7.50% due 9/15/2001 (d) 114
AA Aa2 200 Michigan State Recreation Program, GO, 6% due 11/01/2004 219
AAA Aaa 160 Michigan State, Underground Storage Tank Financial Assurance
Authority, Revenue Refunding Bonds, Series I, 6% due 5/01/2004 (a) 175
AAA Aaa 235 Royal Oak, Michigan, Refunding, UT, 4% due 10/01/1997 (a) 235
Puerto Rico--5.3% AAA Aaa 200 Puerto Rico Public Buildings Authority, Guaranteed Public
Education and Health Facilities, Series L, 6.875% due
7/01/2002 (d) 227
Total Investments (Cost--$3,953)--96.8% 4,115
Other Assets Less Liabilities--3.2% 136
-------
Net Assets--100.0% $ 4,251
=======
</TABLE>
(a)AMBAC Insured.
(b)FGIC Insured.
(c)MBIA Insured.
(d)Prerefunded.
(e)Escrowed to maturity.
*Not Rated.
Ratings of issues shown have not been audited by Deloitte &
Touche LLP.
See Notes to Financial Statements.
<TABLE>
<CAPTION> New Jersey Limited Maturity Municipal Bond Fund
S&P Moody's Face Value
STATE Ratings Ratings Amount Issue (Note 1a)
<S> <C> <C> <C> <C> <C>
New Jersey-- NR* Aaa $ 300 Bergen County, New Jersey, General Improvement Bonds, UT, 5.20%
105.5% due 10/01/1999 $ 308
</TABLE>
<PAGE>
Page 42
<TABLE>
<S> <C> <C> <C> <C>
NR* NR* 400 East Orange, New Jersey, BAN (Water and Sewer), GO, UT, 4.75% due
8/28/1997 400
AAA Aaa 600 Elizabeth, New Jersey, General Improvement and Sewer Utility,
Refunding, GO, UT, 6% due 8/15/2004 (b) 659
SP1+ VMIG1++ 300 Mercer County, New Jersey, Improvement Authority Revenue Bonds,
VRDN, 3.35% due 11/01/1998 (a) 300
AA+ Aaa 400 Monmouth County, New Jersey, General Improvement Bonds, GO, UT,
6.625% due 8/01/2000 419
AAA Aaa 300 Morris County, New Jersey, General Improvement Bonds, GO, 4.625%
due 8/15/2003 307
NR* NR* 195 New Brunswick, New Jersey, Temporary Notes, UT, 4% due 12/09/1997 195
AAA Aaa 1,000 New Jersey EDA, Market Transition Facility Revenue Bonds, Senior
Lien, Series A, 7% due 7/01/2004 (c) 1,148
A1+ VMIG1++ 300 New Jersey EDA, Natural Gas Facilities Revenue Bonds (NUI
Corporation Project), VRDN, AMT, Series A, 3.30% due 6/01/2026
(a)(b) 300
A1+ Aaa 200 New Jersey EDA, Water Facilities Revenue Refunding Bonds (United
Water of New Jersey, Inc. Project), VRDN, AMT, Series A, 3% due
11/01/2026 (a)(b) 200
A1+ VMIG1++ 200 New Jersey Sports and Exposition Authority Revenue Bonds (State
Contract), VRDN, Series C, 3.45% due 9/01/2024 (a)(c) 200
AAA Aaa 300 New Jersey State Educational Facilities Authority Revenue Bonds
(Princeton University), Series E, 4.05% due 7/01/2000 301
NR* Aaa 200 New Jersey State Transportation Trust Fund Authority (Trans-
portation System), Series A, 5.40% due 12/15/2002 (e) 212
AAA VMIG1++ 300 New Jersey State Turnpike Authority, Turnpike Revenue Refunding
Bonds, VRDN, Series D, 3.30% due 1/01/2018 (a)(d) 300
NR* Aa2 400 Ocean County, New Jersey, Utilities Authority, Wastewater Revenue
Bonds, Series A, 6.125% due 1/01/2003 436
A1+ VMIG1++ 300 Port Authority of New York and New Jersey, Special Obligation
Revenue Bonds (Versatile Structure Obligation), VRDN, Series 3,
3.55% due 6/01/2020 (a) 300
AAA Aaa 125 Somerset County, New Jersey, GO, UT, 5.875% due 12/01/2001 134
A1+ P1 200 Union County, New Jersey, Industrial Pollution Control Financing
Authority, Refunding (Exxon Project), 3.10% due 10/01/2024 200
AA+ Aaa 340 Union County, New Jersey, Refunding, GO, UT, 5.875% due 3/01/1999 350
Total Investments (Cost--$6,483)--105.5% 6,669
Liabilities in Excess of Other Assets--(5.5%) (346)
-------
Net Assets--100.0% $ 6,323
=======
</TABLE>
(a)The interest rate is subject to change periodically based
upon prevailing market rates. The interest rate shown is
the rate in effect at July 31, 1997.
(b)AMBAC Insured.
(c)MBIA Insured.
<PAGE>
Page 43
(d)FGIC Insured.
(e)Escrowed to maturity.
*Not Rated.
++Highest short-term rating by Moody's Investors Service,
Inc. Ratings of issues shown have not been audited by
Deloitte & Touche LLP.
See Notes to Financial Statements.
SCHEDULE OF INVESTMENTS (concluded)
<TABLE>
<CAPTION>
New York Limited Maturity Municipal Bond Fund
S&P Moody's Face Value
STATE Ratings Ratings Amount Issue (Note 1a)
<S> <C> <C> <C> <C> <C>
New York--98.5% AAA Aaa $ 600 Clifton Park, New York, Water Authority, Water System Revenue
Bonds, Series A, 6.375% due 10/01/2002 (b)(c) $ 671
Nassau County, New York, General Improvement Bonds, UT (c):
AAA Aaa 400 Series O, 5.625% due 8/01/2004 430
AAA Aaa 700 Series Q, 5.10% due 8/01/2003 729
AAA Aaa 750 New York City, New York, IDA, Civic Facilities Revenue Bonds
(USTA National Tennis Center Project), 6% due 11/15/2003 (d) 819
AA Aa2 800 New York City, New York, Municipal Assistance Corporation, Series
68, 7.10% due 7/01/2000 860
New York City, New York, Municipal Water Finance Authority, Water
and Sewer System Revenue Bonds, VRDN (a)(c):
A1+ VMIG1++ 600 Series A, 3.60% due 6/15/2025 600
A1+ VMIG1++ 100 Series G, 3.65% due 6/15/2024 100
BBB+ Baa1 610 New York City, New York, Refunding, UT, Series A, 6% due 8/01/2000 641
New York State Dormitory Authority Revenue Bonds:
AAA Aaa 500 (College and University Education Loans), AMT, 6.30% due
7/01/2002 (e) 547
AA Aa 700 Refunding (Cornell University), 5% due 7/01/2005 732
A- Aa 400 New York State Environmental Facilities Corporation, PCR, State
Water Revolving Fund (New York City Municipal Water Finance
Authority Project), Series E, 5.60% due 6/15/1999 412
A- A2 600 New York State Environmental Quality, GO, 6% due 12/01/2004 658
New York State, GO:
A- A2 505 6% due 7/15/2006 559
A- A2 735 Refunding, Series B, 6.25% due 8/15/2004 815
New York State Local Government Assistance Corporation (b):
A A3 625 Series A, 7% due 4/01/2001 698
AAA Aaa 600 Series D, 7% due 4/01/2002 682
New York State Medical Care Facilities Finance Agency, Revenue
Bonds, Series A:
AAA Aaa 725 (Mental Health Services Facilities), 7.75% due 2/15/2001 (b) 825
</TABLE>
<PAGE>
Page 44
<TABLE>
<S> <C> <C> <C> <C>
AA Aa 650 (Secured Mortgage Program, Adult Day Care), 6% due
11/15/2003 (f) 702
AA NR* 675 New York State Tax Exempt Revenue Bonds (Rochester Museum and
Science), 5.60% due 12/01/2015 679
AAA VMIG1++ 100 New York State Thruway Authority, General Revenue Bonds, VRDN,
3.60% due 1/01/2024 (a)(c) 100
BBB Baa1 450 New York State Urban Development Corporation, Revenue Refunding
Bonds (Center for Industrial Innovation Project), 4.60% due
1/01/1998 451
AAA Aaa 760 Port Authority of New York and New Jersey, Refunding, AMT, UT,
Consolidated 97th Series, 7.10% due 7/15/2003 (c) 867
A1+ VMIG1++ 200 Syracuse, New York, IDA, Civic Facility Revenue Bonds (Multi-
Modal Syracuse University Project), VRDN, 3.50% due 3/01/2023 (a) 200
Triborough Bridge and Tunnel Authority, New York, Revenue Bonds:
A+ Aa 340 Series R, 6.90% due 1/01/2000 363
A1+ VMIG1++ 200 Special Obligation, VRDN, 3.60% due 1/01/2024 (a)(c) 200
Total Investments (Cost--$13,801)--98.5% 14,340
Other Assets Less Liabilities--1.5% 225
-------
Net Assets--100.0% $14,565
=======
</TABLE>
(a)The interest rate is subject to change periodically based
upon prevailing market rates. The interest rate shown is
the rate in effect at July 31, 1997.
(b)Prerefunded.
(c)FGIC Insured.
(d)FSA Insured.
(e)MBIA Insured.
(f)SONYMA Insured.
*Not Rated.
++Highest short-term rating by Moody's Investors Service,
Inc. Ratings of issues shown have not been audited by
Deloitte & Touche LLP.
See Notes to Financial Statements.
<TABLE>
<CAPTION>
Pennsylvania Limited Maturity Municipal Bond Fund
S&P Moody's Face Value
STATE Ratings Ratings Amount Issue (Note 1a)
<S> <C> <C> <C> <C> <C>
Pennsylvania-- NR* VMIG1++ $ 100 Allegheny County, Pennsylvania, Hospital Development Authority
83.6% Revenue Bonds (Presbyterian University Hospital), ACES, Series B1,
3.60% due 3/01/2018 (a) $ 100
</TABLE>
<PAGE>
Page 45
<TABLE>
<S> <C> <C> <C> <C> <C>
AAA Aaa 400 Beaver County, Pennsylvania, Hospital Authority, Revenue Refunding
Bonds (Medical Center of Beaver County, Inc.), 5.70% due
7/01/1999 (e) 412
AA Aa 1,000 Bucks County, Pennsylvania, UT, Series A, 5.95% due 3/01/2000 1,047
NR* NR* 300 Emmaus, Pennsylvania, General Authority Revenue Bonds, VRDN, Sub-
Series E-9, 3.70% due 3/01/2024 (a) 300
A1+ NR* 300 Harrisburg, Pennsylvania, Authority Revenue Bonds (Pooled
Financing Fund), VRDN, 3.85% due 7/01/2021 (a) 300
A1+ Aaa 150 Lehigh County, Pennsylvania, Authority Water Revenue Bonds, VRDN,
3.60% due 11/01/2004 (a)(d) 150
NR* VMIG1++ 300 Pennsylvania Energy Development Authority, Energy Development
Revenue Bonds (B&W Ebensburg Project), VRDN, AMT, 3.70% due
12/01/2011 (a) 300
Pennsylvania State Higher Educational Facilities Authority,
College and University Revenue Refunding Bonds, Series A:
A+ Aa3 380 (Thomas Jefferson University), 5.75% due 8/15/1998 387
AA Aa2 275 (University of Pennsylvania), 4.70% due 9/01/1997 275
AAA Aaa 255 Pennsylvania State Turnpike Commission, Turnpike Revenue
Refunding Bonds, Series O, 5.35% due 12/01/2002 (d) 269
Philadelphia, Pennsylvania, Hospitals and Higher Education
Facilities Authority, Hospital Revenue Bonds:
NR* Aaa 1,000 (Children's Hospital of Philadelphia Project), Series A, 6.50%
due 2/15/2002 (e) 1,109
A- NR* 650 (Children's Seashore House), Series B, 7% due 8/15/2003 724
SP1+ MIG1++ 300 Philadelphia, Pennsylvania, TRAN, Series A, 4.50% due 6/30/1998 301
AAA Aaa 400 Union County, Pennsylvania, Higher Educational Facilities
Financing Authority, Revenue Refunding Bonds (Bucknell University),
6% due 4/01/2002 (b) 430
AAA Aaa 325 Washington County, Pennsylvania, Lease Authority, Municipal
Facility Pooled Capital Revenue Bonds (Shadyside Hospital Project),
Series C, Sub-Series C1-A, 7.45% due 6/15/2000 (c)(e)(f) 363
Puerto Rico-- A- Baa1 1,000 Puerto Rico Municipal Finance Agency, GO, UT, Series A, 5.80% due
13.8% 7/01/2004 1,067
Total Investments (Cost--$7,317)--97.4% 7,534
Other Assets Less Liabilities--2.6% 205
-------
Net Assets--100.0% $ 7,739
=======
</TABLE>
(a)The interest rate is subject to change periodically based
upon prevailing market rates. The interest rate shown is
the rate in effect at July 31, 1997.
(b)MBIA Insured.
(c)AMBAC Insured.
(d)FGIC Insured.
(e)Prerefunded.
<PAGE>
Page 46
(f)Escrowed to maturity.
*Not Rated.
++Highest short-term ratings by Moody's Investors Service,
Inc.
Ratings of issues shown have not been audited by Deloitte &
Touche LLP.
See Notes to Financial Statements.
STATEMENTS OF ASSETS AND LIABILITIES
<TABLE>
<CAPTION>
Arizona California Florida Massachusetts
Limited Limited Limited Limited
As of July 31, 1997 Maturity Maturity Maturity Maturity
<S> <C> <C> <C> <C> <C>
Assets: Investments, at value* (Note 1a) $ 3,025,568 $ 13,903,394 $ 25,532,248 $ 5,173,140
Cash 323,206 64,339 12,766 59,786
Receivables:
Interest 15,409 217,188 329,785 60,377
Securities sold 101,366 -- -- --
Investment adviser (Note 2) 16,241 -- -- 21,354
Deferred organization expenses
(Note 1e) -- 4,810 15,985 2,615
Prepaid registration fees and other
assets (Note 1e) 11,380 336 10,220 7,698
------------ ------------ ------------ ------------
Total assets 3,493,170 14,190,067 25,901,004 5,324,970
------------ ------------ ------------ ------------
Liabilities: Payables:
Beneficial interest redeemed -- -- 176,001 36,244
Securities purchased 101,467 -- -- 101,326
Dividends to shareholders (Note 1f) 2,974 14,836 26,116 5,338
Investment adviser (Note 2) -- 1,867 7,566 --
Distributor (Note 2) 680 2,558 4,071 942
Accrued expenses and other liabilities 30,654 42,090 57,374 45,369
------------ ------------ ------------ ------------
Total liabilities 135,775 61,351 271,128 189,219
------------ ------------ ------------ ------------
Net Assets: Net assets $ 3,357,395 $ 14,128,716 $ 25,629,876 $ 5,135,751
============ ============ ============ ============
Net Assets Class A Shares of beneficial interest,
Consist of: $.10 par value, unlimited shares
authorized $ 6,974 $ 30,855 $ 63,324 $ 13,507
Class B Shares of beneficial interest,
$.10 par value, unlimited shares
</TABLE>
<PAGE>
Page 47
<TABLE>
<S> <C> <C> <C> <C> <C>
authorized 20,997 67,326 113,852 27,957
Class C Shares of beneficial interest,
$.10 par value, unlimited shares
authorized 355 561 597 2,741
Class D Shares of beneficial interest,
$.10 par value, unlimited shares
authorized 4,684 39,561 76,841 6,956
Paid-in capital in excess of par 3,221,545 13,698,568 25,375,965 5,218,428
Undistributed (accumulated) realized
capital gains (losses) on investments
--net (Note 5) 16,274 (472,718) (777,982) (300,979)
Unrealized appreciation on investments
--net 86,566 764,563 777,279 167,141
------------ ------------ ------------ ------------
Net assets $ 3,357,395 $ 14,128,716 $ 25,629,876 $ 5,135,751
============ ============ ============ ============
Net Asset Value: Class A: Net assets $ 709,319 $ 3,152,191 $ 6,375,611 $ 1,355,818
============ ============ ============ ============
Shares outstanding 69,741 308,546 633,237 135,068
============ ============ ============ ============
Net asset value $ 10.17 $ 10.22 $ 10.07 $ 10.04
============ ============ ============ ============
Class B: Net assets $ 2,135,376 $ 6,876,961 $ 11,461,594 $ 2,806,894
============ ============ ============ ============
Shares outstanding 209,967 673,258 1,138,517 279,567
============ ============ ============ ============
Net asset value $ 10.17 $ 10.21 $ 10.07 $ 10.04
============ ============ ============ ============
Class C: Net assets $ 36,084 $ 57,282 $ 59,716 $ 274,926
============ ============ ============ ============
Shares outstanding 3,545 5,607 5,969 27,406
============ ============ ============ ============
Net asset value $ 10.18 $ 10.22 $ 10.00 $ 10.03
============ ============ ============ ============
Class D: Net assets $ 476,616 $ 4,042,282 $ 7,732,955 $ 698,113
============ ============ ============ ============
Shares outstanding 46,841 395,606 768,414 69,563
============ ============ ============ ============
Net asset value $ 10.18 $ 10.22 $ 10.06 $ 10.04
============ ============ ============ ============
*Identified cost $ 2,939,002 $ 13,138,831 $ 24,754,969 $ 5,005,999
============ ============ ============ ============
</TABLE>
<PAGE>
Page 48
<TABLE>
<CAPTION>
Michigan New Jersey New York Pennsylvania
Limited Limited Limited Limited
As of July 31, 1997 Maturity Maturity Maturity Maturity
<S> <C> <C> <C> <C> <C>
Assets: Investments, at value* (Note 1a) $ 4,115,441 $ 6,668,628 $ 14,340,013 $ 7,534,238
Cash 90,032 50,867 63,618 30,350
Receivables:
Interest 58,775 85,004 190,115 117,057
Securities sold -- 52,156 -- 100,010
Beneficial interest sold -- -- 12,515 84,550
Investment adviser (Note 2)
Deferred organization expenses
(Note 1e) 2,302 3,758 4,123 3,516
Prepaid registration fees and other
assets (Note 1e) 243 7,803 7,385 5,267
------------ ------------ ------------ ------------
Total assets 4,289,935 6,870,691 14,622,987 7,884,078
------------ ------------ ------------ ------------
Liabilities: Payables:
Securities purchased -- 441,227 -- 100,000
Beneficial interest redeemed -- 68,809 619 4,035
Dividends to shareholders (Note 1f) 4,454 5,671 15,836 7,338
Distributor (Note 2) 548 1,286 2,764 1,677
Accrued expenses and other liabilities 33,588 31,097 38,433 32,371
------------ ------------ ------------ ------------
Total liabilities 38,590 548,090 57,652 145,421
------------ ------------ ------------ ------------
Net Assets: Net assets $ 4,251,345 $ 6,322,601 $ 14,565,335 $ 7,738,657
============ ============ ============ ============
Net Assets Class A Shares of beneficial interest,
Consist of: $.10 par value, unlimited shares
authorized $ 13,557 $ 17,100 $ 25,477 $ 7,190
Class B Shares of beneficial interest,
$.10 par value, unlimited shares
authorized 13,979 40,478 80,271 50,185
Class C Shares of beneficial interest,
$.10 par value, unlimited shares
authorized 12 2,624 659 77
Class D Shares of beneficial interest,
$.10 par value, unlimited shares
authorized 14,589 2,350 36,009 18,177
Paid-in capital in excess of par 4,198,169 6,241,536 14,108,036 7,509,162
Accumulated realized capital losses
on investments--net (Note 5) (150,077) (167,187) (224,431) (63,042)
Accumulated distributions in excess
of realized gain on investments--net
(Note 1f) (1,779) -- -- --
Unrealized appreciation on investments
--net 162,895 185,700 539,314 216,908
</TABLE>
<PAGE>
Page 49
<TABLE>
<S> <C> <C> <C> <C> <C>
------------ ------------ ------------ ------------
Net assets $ 4,251,345 $ 6,322,601 $ 14,565,335 $ 7,738,657
============ ============ ============ ============
Net Asset Value: Class A: Net assets $ 1,368,162 $ 1,734,544 $ 2,605,219 $ 735,726
============ ============ ============ ============
Shares outstanding 135,574 170,998 254,768 71,902
============ ============ ============ ============
Net asset value $ 10.09 $ 10.14 $ 10.23 $ 10.23
============ ============ ============ ============
Class B: Net assets $ 1,410,732 $ 4,108,454 $ 8,209,327 $ 5,134,207
============ ============ ============ ============
Shares outstanding 139,786 404,782 802,714 501,850
============ ============ ============ ============
Net asset value $ 10.09 $ 10.15 $ 10.23 $ 10.23
============ ============ ============ ============
Class C: Net assets $ 1,231 $ 241,191 $ 67,418 $ 7,869
============ ============ ============ ============
Shares outstanding 122 26,241 6,593 766
============ ============ ============ ============
Net asset value $ 10.09 $ 9.19 $ 10.23 $ 10.27
============ ============ ============ ============
Class D: Net assets $ 1,471,220 $ 238,412 $ 3,683,371 $ 1,860,855
============ ============ ============ ============
Shares outstanding 145,888 23,497 360,094 181,770
============ ============ ============ ============
Net asset value $ 10.08 $ 10.15 $ 10.23 $ 10.24
============ ============ ============ ============
*Identified cost $ 3,952,546 $ 6,482,928 $ 13,800,699 $ 7,317,330
============ ============ ============ ============
</TABLE>
See Notes to Financial Statements.
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Arizona California Florida Massachusetts
Limited Limited Limited Limited
For the Year Ended July 31, 1997 Maturity Maturity Maturity Maturity
<S> <C> <C> <C> <C> <C>
Investment Income Interest and amortization of premium
(Note 1d): and discount earned $ 173,856 $ 704,598 $ 1,312,846 $ 312,359
Expenses: Accounting services (Note 2) 33,811 32,283 64,974 48,536
Investment advisory fees (Note 2) 13,268 51,013 90,513 22,132
Professional fees 34,098 35,408 39,407 44,247
</TABLE>
<PAGE>
Page 50
<TABLE>
<S> <C> <C> <C> <C>
Account maintenance and distribution
fees--Class B (Note 2) 8,883 30,557 42,610 13,723
Registration fees (Note 1e) 22,601 12,833 13,791 21,398
Printing and shareholder reports 5,160 18,633 32,385 6,388
Trustees' fees and expenses 2,403 7,290 13,411 3,557
Amortization of organization expenses
(Note 1e) -- 3,643 12,130 1,984
Custodian fees 2,727 3,358 4,381 2,369
Pricing fees 2,247 4,169 3,044 2,512
Transfer agent fees--Class B (Note 2) 1,885 2,947 3,404 2,061
Account maintenance fees--Class D
(Note 2) 373 2,646 6,193 717
Transfer agent fees--Class A (Note 2) 503 868 1,591 606
Transfer agent fees--Class D (Note 2) 239 710 1,334 307
Account maintenance and distribution
fees--Class C (Note 2) 157 84 116 402
Transfer agent fees--Class C (Note 2) 81 28 29 130
Other 2,695 13,781 3,186 2,069
------------ ------------ ------------ ------------
Total expenses before reimbursement 131,131 220,251 332,499 173,138
Reimbursement of expenses (Note 2) (85,705) (29,150) -- (95,062)
------------ ------------ ------------ ------------
Total expenses after reimbursement 45,426 191,101 332,499 78,076
------------ ------------ ------------ ------------
Investment income--net 128,430 513,497 980,347 234,283
------------ ------------ ------------ ------------
Realized & Realized gain on investments--net 87,712 57,005 101,611 51,279
Unrealized Change in unrealized appreciation on
Gain (Loss) on investments--net (58,065) 206,716 180,208 (12,363)
Investments--Net ------------ ------------ ------------ ------------
(Notes 1b, 1d & 3): Net Increase in Net Assets Resulting
from Operations $ 158,077 $ 777,218 $ 1,262,166 $ 273,199
============ ============ ============ ============
<CAPTION>
Michigan New Jersey New York Pennsylvania
Limited Limited Limited Limited
For the Year Ended July 31, 1997 Maturity Maturity Maturity Maturity
<S> <C> <C> <C> <C> <C>
Investment Income Interest and amortization of premium
(Note 1d): and discount earned $ 208,473 $ 347,105 $ 812,885 $ 402,719
Expenses: Professional fees 39,131 35,447 34,696 38,410
Accounting services (Note 2) 41,011 26,609 34,860 42,078
Investment advisory fees (Note 2) 14,977 25,494 57,645 29,758
Registration fees (Note 1e) 22,074 16,112 20,605 16,392
</TABLE>
<PAGE>
Page 51
<TABLE>
<S> <C> <C> <C> <C> <C>
Account maintenance and distribution
fees--Class B (Note 2) 5,934 15,927 32,533 20,568
Printing and shareholder reports 5,905 -- 19,539 4,570
Trustees' fees and expenses 2,071 3,919 8,418 4,231
Pricing fees 3,369 1,913 3,925 2,379
Custodian fees 1,853 3,205 3,614 2,902
Amortization of organization expenses
(Note 1e) 1,743 2,852 3,123 2,668
Transfer agent fees--Class B (Note 2) 952 2,147 3,545 2,641
Account maintenance fees--Class D
(Note 2) 1,085 409 4,216 1,831
Transfer agent fees--Class A (Note 2) 634 805 848 280
Transfer agent fees--Class D (Note 2) 442 164 1,276 651
Account maintenance and distribution
fees--Class C (Note 2) 1 402 234 7
Transfer agent fees--Class C (Note 2) 4 118 75 9
Other 14,366 1,694 -- 2,196
------------ ------------ ------------ ------------
Total expenses before reimbursement 155,552 137,217 229,152 171,571
Reimbursement of expenses (Note 2) (107,880) (51,282) (76,880) (64,142)
------------ ------------ ------------ ------------
Total expenses after reimbursement 47,672 85,935 152,272 107,429
------------ ------------ ------------ ------------
Investment income--net 160,801 261,170 660,613 295,290
------------ ------------ ------------ ------------
Realized & Realized gain on investments--net 21,697 126,030 36,848 37,824
Unrealized Change in unrealized appreciation on
Gain (Loss) on investments--net 38,238 (105,889) 214,688 56,086
Investments--Net ------------ ------------ ------------ ------------
(Notes 1b, 1d & 3): Net Increase in Net Assets Resulting
from Operations $ 220,736 $ 281,311 $ 912,149 $ 389,200
============ ============ ============ ============
</TABLE>
See Notes to Financial Statements.
STATEMENTS OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
Arizona Limited Maturity California Limited Maturity
For the Year For the Year
Ended July 31, Ended July 31,
Increase (Decrease) in Net Assets: 1997 1996 1997 1996
<S> <C> <C> <C> <C> <C>
Operations: Investment income--net $ 128,430 $ 229,407 $ 513,497 $ 562,881
Realized gain (loss) on investments
</TABLE>
<PAGE>
Page 52
<TABLE>
<S> <C> <C> <C> <C> <C>
--net 87,712 (691) 57,005 (14,506)
Change in unrealized appreciation on
investments--net (58,065) (45,086) 206,716 102,333
------------ ------------ ------------ ------------
Net increase in net assets resulting
from operations 158,077 183,630 777,218 650,708
------------ ------------ ------------ ------------
Dividends to Investment income--net:
Shareholders Class A (28,232) (37,685) (117,926) (130,650)
(Note 1f): Class B (83,293) (164,444) (295,984) (362,918)
Class C (3,632) (1,762) (1,999) (2,149)
Class D (13,273) (25,516) (97,588) (67,164)
------------ ------------ ------------ ------------
Net decrease in net assets resulting
from dividends to shareholders (128,430) (229,407) (513,497) (562,881)
------------ ------------ ------------ ------------
Beneficial Interest Net decrease in net assets derived
Transactions from beneficial interest transactions (1,124,280) (1,767,011) (1,455,816) (491,496)
(Note 4): ------------ ------------ ------------ ------------
Net Assets: Total decrease in net assets (1,094,633) (1,812,788) (1,192,095) (403,669)
Beginning of year 4,452,028 6,264,816 15,320,811 15,724,480
------------ ------------ ------------ ------------
End of year $ 3,357,395 $ 4,452,028 $ 14,128,716 $ 15,320,811
============ ============ ============ ============
See Notes to Financial Statements.
</TABLE>
STATEMENTS OF CHANGES IN NET ASSETS (concluded)
<TABLE>
<CAPTION>
Florida Massachusetts Michigan
Limited Maturity Limited Maturity Limited Maturity
For the Year For the Year For the Year
Increase (Decrease) Ended July 31, Ended July 31, Ended July 31,
in Net Assets: 1997 1996 1997 1996 1997 1996
<S> <C> <C> <C> <C> <C> <C> <C>
Operations: Investment
income--net $ 980,347 $ 1,189,088 $ 234,283 $ 335,521 $ 160,801 $ 182,546
Realized gain
(loss) on
investments
--net 101,611 (1,278) 51,279 18,219 21,697 10,083
Change in
</TABLE>
<PAGE>
Page 53
<TABLE>
<S> <C> <C> <C> <C> <C> <C> <C>
unrealized
appreciation
on investments
--net 180,208 (174,866) (12,363) (13,084) 38,238 (23,665)
------------ ------------ ------------ ------------ ------------ ------------
Net increase
in net assets
resulting from
operations 1,262,166 1,012,944 273,199 340,656 220,736 168,964
------------ ------------ ------------ ------------ ------------ ------------
Dividends & Investment
Distributions to income--net:
Shareholders Class A (295,532) (361,872) (56,023) (118,129) (58,806) (85,288)
(Note 1f): Class B (441,468) (557,931) (140,428) (180,877) (60,388) (80,829)
Class C (2,960) (522) (10,189) (14,474) (43) (41)
Class D (240,387) (268,763) (27,643) (22,041) (41,564) (16,388)
In excess of
realized gain
on investments
--net:
Class A -- -- -- -- (568) --
Class B -- -- -- -- (668) --
Class C -- -- -- -- --++ --
Class D -- -- -- -- (543) --
------------ ------------ ------------ ------------ ------------ ------------
Net decrease
in net assets
resulting from
dividends and
distributions
to shareholders (980,347) (1,189,088) (234,283) (335,521) (162,580) (182,546)
------------ ------------ ------------ ------------ ------------ ------------
Beneficial Interest Net increase
Transactions (decrease) in
(Note 4): net assets
derived from
beneficial
interest trans-
actions (2,674,028) (5,075,030) (2,299,335) (2,526,578) 168,118 (1,013,383)
------------ ------------ ------------ ------------ ------------ ------------
Net Assets: Total increase
(decrease) in
net assets (2,392,209) (5,251,174) (2,260,419) (2,521,443) 226,274 (1,026,965)
Beginning of
year 28,022,085 33,273,259 7,396,170 9,917,613 4,025,071 5,052,036
------------ ------------ ------------ ------------ ------------ ------------
End of year $ 25,629,876 $ 28,022,085 $ 5,135,751 $ 7,396,170 $ 4,251,345 $ 4,025,071
============ ============ ============ ============ ============ ============
</TABLE>
<PAGE>
Page 54
<TABLE>
<CAPTION>
New Jersey New York Pennsylvania
Limited Maturity Limited Maturity Limited Maturity
For the Year For the Year For the Year
Increase (Decrease) Ended July 31, Ended July 31, Ended July 31,
in Net Assets: 1997 1996 1997 1996 1997 1996
<S> <C> <C> <C> <C> <C> <C> <C>
Operations: Investment
income--net $ 261,170 $ 365,818 $ 660,613 $ 671,149 $ 295,290 $ 320,744
Realized gain
(loss) on
investments
--net 126,030 (12,586) 36,848 27,501 37,824 364
Change in
unrealized
appreciation
on investments
--net (105,889) (41,469) 214,688 (22,206) 56,086 12,631
------------ ------------ ------------ ------------ ------------ ------------
Net increase
in net assets
resulting from
operations 281,311 311,763 912,149 676,444 389,200 333,739
------------ ------------ ------------ ------------ ------------ ------------
Dividends to Investment
Shareholders income--net:
(Note 1f): Class A (78,571) (107,284) (118,733) (174,431) (29,558) (37,384)
Class B (157,456) (241,855) (360,967) (381,150) (198,819) (254,375)
Class C (9,799) (4,447) (6,313) (5,588) (181) (1,049)
Class D (15,344) (12,232) (174,600) (109,980) (66,732) (27,936)
------------ ------------ ------------ ------------ ------------ ------------
Net decrease
in net assets
resulting from
dividends to
shareholders (261,170) (365,818) (660,613) (671,149) (295,290) (320,744)
------------ ------------ ------------ ------------ ------------ ------------
Beneficial Interest Net increase
Transactions (decrease) in
(Note 4): net assets
derived from
beneficial
interest
</TABLE>
<PAGE>
Page 55
<TABLE>
<S> <C> <C> <C> <C> <C> <C> <C>
transactions (2,324,627) (1,750,465) (3,606,325) 1,937,339 (1,259,754) 150,949
------------ ------------ ------------ ------------ ------------ ------------
Net Assets: Total increase
(decrease) in
net assets (2,304,486) (1,804,520) (3,354,789) 1,942,634 (1,165,844) 163,944
Beginning of
year 8,627,087 10,431,607 17,920,124 15,977,490 8,904,501 8,740,557
------------ ------------ ------------ ------------ ------------ ------------
End of year $ 6,322,601 $ 8,627,087 $ 14,565,335 $ 17,920,124 $ 7,738,657 $ 8,904,501
============ ============ ============ ============ ============ ============
++Amount is less than $1.
See Notes to Financial Statements.
</TABLE>
FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
Arizona Limited Maturity
Class A
For the
Period
The following per share data and ratios have been derived Nov. 26,
from information provided in the financial statements. For the Year 1993++ to
Ended July 31, July 31,
Increase (Decrease) in Net Asset Value: 1997 1996 1995 1994
<S> <C> <C> <C> <C> <C>
Per Share Net asset value, beginning of period $ 10.08 $ 10.17 $ 9.97 $ 10.00
Operating ------- ------- ------- -------
Performance: Investment income--net .37 .41 .43 .23
Realized and unrealized gain (loss) on investments--net .09 (.09) .20 (.03)
------- ------- ------- -------
Total from investment operations .46 .32 .63 .20
------- ------- ------- -------
Less dividends from investment income--net (.37) (.41) (.43) (.23)
------- ------- ------- -------
Net asset value, end of period $ 10.17 $ 10.08 $ 10.17 $ 9.97
======= ======= ======= =======
Total Investment Based on net asset value per share 4.62% 3.16% 6.47% 2.02%+++
Return:** ======= ======= ======= =======
Ratios to Average Expenses, net of reimbursement .94% .74% .35% .02%*
Net Assets: ======= ======= ======= =======
</TABLE>
<PAGE>
Page 56
<TABLE>
<S> <C> <C> <C> <C> <C>
Expenses 3.21% 2.27% 2.05% 1.82%*
======= ======= ======= =======
Investment income--net 3.64% 4.01% 4.31% 3.37%*
======= ======= ======= =======
Supplemental Net assets, end of period (in thousands) $ 709 $ 813 $ 1,054 $ 2,103
Data: ======= ======= ======= =======
Portfolio turnover 38.21% 43.53% 182.58% 142.37%
======= ======= ======= =======
<CAPTION>
Arizona Limited Maturity
Class B
For the
Period
The following per share data and ratios have been derived Nov. 26,
from information provided in the financial statements. For the Year 1993++ to
Ended July 31, July 31,
Increase (Decrease) in Net Asset Value: 1997 1996 1995 1994
<S> <C> <C> <C> <C> <C>
Per Share Net asset value, beginning of period $ 10.08 $ 10.16 $ 9.97 $ 10.00
Operating ------- ------- ------- -------
Performance: Investment income--net .33 .37 .39 .20
Realized and unrealized gain (loss) on investments--net .09 (.08) .19 (.03)
------- ------- ------- -------
Total from investment operations .42 .29 .58 .17
------- ------- ------- -------
Less dividends from investment income--net (.33) (.37) (.39) (.20)
------- ------- ------- -------
Net asset value, end of period $ 10.17 $ 10.08 $ 10.16 $ 9.97
======= ======= ======= =======
Total Investment Based on net asset value per share 4.25% 2.88% 5.99% 1.78%+++
Return:** ======= ======= ======= =======
Ratios to Average Expenses, net of reimbursement 1.30% 1.09% .72% .38%*
Net Assets: ======= ======= ======= =======
Expenses 3.56% 2.61% 2.44% 2.18%*
======= ======= ======= =======
Investment income--net 3.28% 3.65% 3.95% 3.02%*
======= ======= ======= =======
Supplemental Net assets, end of period (in thousands) $ 2,135 $ 2,885 $ 5,191 $ 5,575
Data: ======= ======= ======= =======
Portfolio turnover 38.21% 43.53% 182.58% 142.37%
======= ======= ======= =======
</TABLE>
<PAGE>
Page 57
*Annualized.
**Total investment returns exclude the effects of sales loads.
++Commencement of Operations.
+++Aggregate total investment return.
See Notes to Financial Statements.
FINANCIAL HIGHLIGHTS (continued)
<TABLE>
<CAPTION>
Arizona Limited Maturity
Class C Class D
The following per share data For the For the
and ratios have been derived Period Period
from information provided in Oct. 21, Oct. 21,
the financial statements. For the Year 1994++ to For the Year 1994++ to
Ended July 31, July 31, Ended July 31, July 31,
Increase (Decrease) in Net Asset Value: 1997 1996 1995 1997 1996 1995
<S> <C> <C> <C> <C> <C> <C> <C>
Per Share Net asset value, beginning of period $ 10.08 $ 10.17 $ 9.89 $ 10.08 $ 10.17 $ 9.89
Operating ------- ------- ------- ------- ------- -------
Performance: Investment income--net .35 .37 .29 .36 .40 .33
Realized and unrealized gain (loss) on
investments--net .10 (.09) .28 .10 (.09) .28
------- ------- ------- ------- ------- -------
Total from investment operations .45 .28 .57 .46 .31 .61
------- ------- ------- ------- ------- -------
Less dividends from investment
income--net (.35) (.37) (.29) (.36) (.40) (.33)
------- ------- ------- ------- ------- -------
Net asset value, end of period $ 10.18 $ 10.08 $ 10.17 $ 10.18 $ 10.08 $ 10.17
======= ======= ======= ======= ======= =======
Total Investment Based on net asset value per share 4.55% 2.78% 5.90%+++ 4.62% 3.05% 6.34%+++
Return:** ======= ======= ======= ======= ======= =======
Ratios to Average Expenses, net of reimbursement 1.11% 1.03% 1.05%* 1.04% .90% .55%*
Net Assets: ======= ======= ======= ======= ======= =======
Expenses 3.35% 2.80% 2.79%* 3.29% 2.42% 2.39%*
======= ======= ======= ======= ======= =======
Investment income--net 3.48% 3.86% 3.80%* 3.56% 3.88% 4.31%*
======= ======= ======= ======= ======= =======
Supplemental Net assets, end of period
Data: (in thousands) $ 36 $ 135 $ 1 $ 477 $ 619 $ 19
======= ======= ======= ======= ======= =======
Portfolio turnover 38.21% 43.53% 182.58% 38.21% 43.53% 182.58%
======= ======= ======= ======= ======= =======
</TABLE>
<PAGE>
Page 58
<TABLE>
<CAPTION>
California Limited Maturity
Class A
For the
Period
The following per share data and ratios have been derived Nov. 26,
from information provided in the financial statements. For the Year 1993++ to
Ended July 31, July 31,
Increase (Decrease) in Net Asset Value: 1997 1996 1995 1994
<S> <C> <C> <C> <C> <C>
Per Share Net asset value, beginning of period $ 10.05 $ 9.99 $ 9.88 $ 10.00
Operating ------- ------- ------- -------
Performance: Investment income--net .38 .39 .42 .24
Realized and unrealized gain (loss) on investments--net .17 .06 .11 (.12)
------- ------- ------- -------
Total from investment operations .55 .45 .53 .12
------- ------- ------- -------
Less dividends from investment income--net (.38) (.39) (.42) (.24)
------- ------- ------- -------
Net asset value, end of period $ 10.22 $ 10.05 $ 9.99 $ 9.88
======= ======= ======= =======
Total Investment Based on net asset value per share 5.57% 4.56% 5.60% 1.23%+++
Return:** ======= ======= ======= =======
Ratios to Average Expenses, net of reimbursement 1.08% .94% .40% .02%*
Net Assets: ======= ======= ======= =======
Expenses 1.28% 1.30% 1.44% 1.16%*
======= ======= ======= =======
Investment income--net 3.75% 3.89% 4.36% 3.54%*
======= ======= ======= =======
Supplemental Net assets, end of period (in thousands) $ 3,152 $ 3,162 $ 3,527 $ 3,804
Data: ======= ======= ======= =======
Portfolio turnover 26.86% 11.09% 124.72% 130.10%
======= ======= ======= =======
</TABLE>
<PAGE>
Page 59
<TABLE>
<CAPTION>
California Limited Maturity
Class B
For the
Period
The following per share data and ratios have been derived Nov. 26,
from information provided in the financial statements. For the Year 1993++ to
Ended July 31, July 31,
Increase (Decrease) in Net Asset Value: 1997 1996 1995 1994
<S> <C> <C> <C> <C> <C>
Per Share Net asset value, beginning of period $ 10.04 $ 9.99 $ 9.88 $ 10.00
Operating ------- ------- ------- -------
Performance: Investment income--net .34 .36 .39 .21
Realized and unrealized gain (loss) on investments--net .17 .05 .11 (.12)
------- ------- ------- -------
Total from investment operations .51 .41 .50 .09
------- ------- ------- -------
Less dividends from investment income--net (.34) (.36) (.39) (.21)
------- ------- ------- -------
Net asset value, end of period $ 10.21 $ 10.04 $ 9.99 $ 9.88
======= ======= ======= =======
Total Investment Based on net asset value per share 5.20% 4.08% 5.23% .99%+++
Return:** ======= ======= ======= =======
Ratios to Average Expenses, net of reimbursement 1.44% 1.30% .76% .38%*
Net Assets: ======= ======= ======= =======
Expenses 1.64% 1.66% 1.80% 1.52%*
======= ======= ======= =======
Investment income--net 3.39% 3.53% 4.00% 3.19%*
======= ======= ======= =======
Supplemental Net assets, end of period (in thousands) $ 6,877 $ 9,919 $10,363 $11,430
Data: ======= ======= ======= =======
Portfolio turnover 26.86% 11.09% 124.72% 130.10%
======= ======= ======= =======
<CAPTION>
California Limited Maturity
Class C Class D
The following per share data For the For the
and ratios have been derived Period Period
from information provided in Oct. 21, Oct. 21,
the financial statements. For the Year 1994++ to For the Year 1994++ to
Ended July 31, July 31, Ended July 31, July 31,
Increase (Decrease) in Net Asset Value: 1997 1996 1995 1997 1996 1995
<S> <C> <C> <C> <C> <C> <C> <C>
Per Share Net asset value, beginning of period $ 10.05 $ 9.99 $ 9.76 $ 10.05 $ 9.99 $ 9.76
Operating ------- ------- ------- ------- ------- -------
Performance: Investment income--net .36 .37 .31 .37 .38 .33
Realized and unrealized gain on
investments--net .17 .06 .23 .17 .06 .23
</TABLE>
<PAGE>
Page 60
<TABLE>
<S> <C> <C> <C> <C> <C> <C> <C>
------- ------- ------- ------- ------- -------
Total from investment operations .53 .43 .54 .54 .44 .56
------- ------- ------- ------- ------- -------
Less dividends from investment
income--net (.36) (.37) (.31) (.37) (.38) (.33)
------- ------- ------- ------- ------- -------
Net asset value, end of period $ 10.22 $ 10.05 $ 9.99 $ 10.22 $ 10.05 $ 9.99
======= ======= ======= ======= ======= =======
Total Investment Based on net asset value per share 5.39% 4.35% 5.60%+++ 5.47% 4.46% 5.85%+++
Return:** ======= ======= ======= ======= ======= =======
Ratios to Average Expenses, net of reimbursement 1.25% 1.14% .82%* 1.15% 1.06% .66%*
Net Assets: ======= ======= ======= ======= ======= =======
Expenses 1.45% 1.50% 1.98%* 1.35% 1.40% 1.81%*
======= ======= ======= ======= ======= =======
Investment income--net 3.58% 3.69% 4.04%* 3.69% 3.77% 4.28%*
======= ======= ======= ======= ======= =======
Supplemental Net assets, end of period
Data: (in thousands) $ 57 $ 55 $ 64 $ 4,043 $ 2,185 $ 1,771
======= ======= ======= ======= ======= =======
Portfolio turnover 26.86% 11.09% 124.72% 26.86% 11.09% 124.72%
======= ======= ======= ======= ======= =======
</TABLE>
*Annualized.
**Total investment returns exclude the effects of sales loads.
++Commencement of Operations.
+++Aggregate total investment return.
See Notes to Financial Statements.
<PAGE>
Page 61
FINANCIAL HIGHLIGHTS (continued)
<TABLE>
<CAPTION>
Florida Limited Maturity
Class A
For the
Period
The following per share data and ratios have been derived Nov. 26,
from information provided in the financial statements. For the Year 1993++ to
Ended July 31, July 31,
Increase (Decrease in Net Asset Value: 1997 1996 1995 1994
<S> <C> <C> <C> <C> <C>
Per Share Net asset value, beginning of period $ 9.96 $ 10.02 $ 9.87 $ 10.00
Operating ------- ------- ------- -------
Performance: Investment income--net .40 .40 .43 .24
Realized and unrealized gain (loss) on investments--net .11 (.06) .15 (.13)
------- ------- ------- -------
Total from investment operations .51 .34 .58 .11
------- ------- ------- -------
Less dividends from investment income--net (.40) (.40) (.43) (.24)
------- ------- ------- -------
Net asset value, end of period $ 10.07 $ 9.96 $ 10.02 $ 9.87
======= ======= ======= =======
Total Investment Based on net asset value per share 5.20% 3.45% 6.05% 1.12%+++
Return:** ======= ======= ======= =======
Ratios to Average Expenses, net of reimbursement 1.09% .89% .39% .02%*
Net Assets: ======= ======= ======= =======
Expenses 1.09% .97% 1.03% .86%*
======= ======= ======= =======
Investment income--net 3.98% 4.01% 4.39% 3.54%*
======= ======= ======= =======
Supplemental Net assets, end of period (in thousands) $ 6,376 $ 7,874 $ 9,849 $14,868
Data: ======= ======= ======= =======
Portfolio turnover 35.67% 39.90% 138.97% 136.71%
======= ======= ======= =======
<CAPTION>
Florida Limited Maturity
Class B
For the
Period
The following per share data and ratios have been derived Nov. 26,
from information provided in the financial statements. For the Year 1993++ to
Ended July 31, July 31,
Increase (Decrease) in Net Asset Value: 1997 1996 1995 1994
<S> <C> <C> <C> <C> <C>
Per Share Net asset value, beginning of period $ 9.96 $ 10.02 $ 9.88 $ 10.00
Operating ------- ------- ------- -------
Performance: Investment income--net .36 .37 .40 .21
Realized and unrealized gain (loss) on investments--net .11 (.06) .14 (.12)
------- ------- ------- -------
Total from investment operations .47 .31 .54 .09
------- ------- ------- -------
Less dividends from investment income--net (.36) (.37) (.40) (.21)
------- ------- ------- -------
Net asset value, end of period $ 10.07 $ 9.96 $ 10.02 $ 9.88
</TABLE>
<PAGE>
Page 62
<TABLE>
<S> <C> <C> <C> <C> <C>
======= ======= ======= =======
Total Investment Based on net asset value per share 4.83% 3.08% 5.57% .99%+++
Return:** ======= ======= ======= =======
Ratios to Average Expenses, net of reimbursement 1.45% 1.24% .75% .38%*
Net Assets: ======= ======= ======= =======
Expenses 1.45% 1.32% 1.38% 1.23%*
======= ======= ======= =======
Investment income--net 3.63% 3.66% 4.05% 3.19%*
======= ======= ======= =======
Supplemental Net assets, end of period (in thousands) $11,461 $13,690 $16,213 $18,179
Data: ======= ======= ======= =======
Portfolio turnover 35.67% 39.90% 138.97% 136.71%
======= ======= ======= =======
<CAPTION>
Florida Limited Maturity
Class C Class D
The following per share data For the For the
and ratios have been derived Period Period
from information provided in Oct. 21, Oct. 21,
the financial statements. For the Year 1994++ to For the Year 1994++ to
Ended July 31, July 31, Ended July 31, July 31,
Increase (Decrease) in Net Asset Value: 1997 1996 1995 1997 1996 1995
<S> <C> <C> <C> <C> <C> <C> <C>
Per Share Net asset value, beginning of period $ 9.90 $ 10.01 $ 9.76 $ 9.95 $ 10.01 $ 9.76
Operating ------- ------- ------- ------- ------- -------
Performance: Investment income--net .38 .36 .29 .39 .39 .33
Realized and unrealized gain (loss)
on investments--net .10 (.11) .25 .11 (.06) .25
------- ------- ------- ------- ------- -------
Total from investment operations .48 .25 .54 .50 .33 .58
------- ------- ------- ------- ------- -------
Less dividends from investment
income--net (.38) (.36) (.29) (.39) (.39) (.33)
------- ------- ------- ------- ------- -------
Net asset value, end of period $ 10.00 $ 9.90 $ 10.01 $ 10.06 $ 9.95 $ 10.01
======= ======= ======= ======= ======= =======
Total Investment Based on net asset value per share 4.93% 2.48% 5.65%+++ 5.10% 3.35% 6.07%+++
Return:** ======= ======= ======= ======= ======= =======
Ratios to Average Expenses, net of reimbursement 1.26% 1.21% 1.09%* 1.19% .99% .67%*
Net Assets: ======= ======= ======= ======= ======= =======
Expenses 1.26% 1.23% 1.67%* 1.19% 1.07% 1.19%*
</TABLE>
<PAGE>
Page 63
<TABLE>
<S> <C> <C> <C> <C> <C> <C> <C>
======= ======= ======= ======= ======= =======
Investment income--net 3.83% 3.75% 3.83%* 3.88% 3.91% 4.23%*
======= ======= ======= ======= ======= =======
Supplemental Net assets, end of period
Data: (in thousands) $ 60 $ 52 $ 1 $ 7,733 $ 6,406 $ 7,210
======= ======= ======= ======= ======= =======
Portfolio turnover 35.67% 39.90% 138.97% 35.67% 39.90% 138.97%
======= ======= ======= ======= ======= =======
<CAPTION>
Massachusetts Limited Maturity
Class A
For the
Period
The following per share data and ratios have been derived Nov. 26,
from information provided in the financial statements. For the Year 1993++ to
Ended July 31, July 31,
Increase (Decrease) in Net Asset Value: 1997 1996 1995 1994
<S> <C> <C> <C> <C> <C>
Per Share Net asset value, beginning of period $ 9.96 $ 9.96 $ 9.95 $ 10.00
Operating ------- ------- ------- -------
Performance: Investment income--net .39 .40 .44 .25
Realized and unrealized gain (loss) on investments--net .08 --++++ .02 (.05)
------- ------- ------- -------
Total from investment operations .47 .40 .46 .20
------- ------- ------- -------
Less dividends and distributions:
Investment income--net (.39) (.40) (.44) (.25)
Realized gain on investments--net -- -- (.01) --
------- ------- ------- -------
Total dividends and distributions (.39) (.40) (.45) (.25)
------- ------- ------- -------
Net asset value, end of period $ 10.04 $ 9.96 $ 9.96 $ 9.95
======= ======= ======= =======
Total Investment Based on net asset value per share 4.86% 4.08% 4.79% 2.01%+++
Return:** ======= ======= ======= =======
Ratios to Average Expenses, net of reimbursement .99% .77% .37% .03%*
Net Assets: ======= ======= ======= =======
Expenses 2.52% 2.15% 1.71% 1.17%*
======= ======= ======= =======
Investment income--net 3.95% 4.04% 4.45% 3.69%*
======= ======= ======= =======
Supplemental Net assets, end of period (in thousands) $ 1,356 $ 1,719 $ 4,453 $ 8,097
Data: ======= ======= ======= =======
Portfolio turnover 22.93% 22.71% 89.96% 57.80%
======= ======= ======= =======
</TABLE>
<PAGE>
Page 64
<TABLE>
<CAPTION>
Massachusetts Limited Maturity
Class B
For the
Period
The following per share data and ratios have been derived Nov. 26,
from information provided in the financial statements. For the Year 1993++ to
Ended July 31, July 31,
Increase (Decrease) in Net Asset Value: 1997 1996 1995 1994
<S> <C> <C> <C> <C> <C>
Per Share Net asset value, beginning of period $ 9.96 $ 9.96 $ 9.95 $ 10.00
Operating ------- ------- ------- -------
Performance: Investment income--net .36 .37 .40 .22
Realized and unrealized gain (loss) on investments--net .08 --++++ .02 (.05)
------- ------- ------- -------
Total from investment operations .44 .37 .42 .17
------- ------- ------- -------
Less dividends and distributions:
Investment income--net (.36) (.37) (.40) (.22)
Realized gain on investments--net -- -- (.01) --
------- ------- ------- -------
Total dividends and distributions (.36) (.37) (.41) (.22)
------- ------- ------- -------
Net asset value, end of period $ 10.04 $ 9.96 $ 9.96 $ 9.95
======= ======= ======= =======
Total Investment Based on net asset value per share 4.49% 3.70% 4.41% 1.77%+++
Return:** ======= ======= ======= =======
Ratios to Average Expenses, net of reimbursement 1.35% 1.16% .74% .38%*
Net Assets: ======= ======= ======= =======
Expenses 2.84% 2.61% 2.08% 1.54%*
======= ======= ======= =======
Investment income--net 3.58% 3.66% 4.08% 3.28%*
======= ======= ======= =======
Supplemental Net assets, end of period (in thousands) $ 2,807 $ 4,577 $ 4,800 $ 8,046
Data: ======= ======= ======= =======
Portfolio turnover 22.93% 22.71% 89.96% 57.80%
======= ======= ======= =======
</TABLE>
*Annualized.
**Total investment returns exclude the effects of sales loads.
++Commencement of Operations.
++++Amount is less than $.01 per share.
+++Aggregate total investment return.
See Notes to Financial Statements.
<PAGE>
Page 65
FINANCIAL HIGHLIGHTS (continued)
<TABLE>
<CAPTION>
Massachusetts Limited Maturity
Class C Class D
The following per share data For the For the
and ratios have been derived Period Period
from information provided in Oct. 21, Oct. 21,
the financial statements. For the Year 1994++ to For the Year 1994++ to
Ended July 31, July 31, Ended July 31, July 31,
Increase (Decrease) in Net Asset Value: 1997 1996 1995 1997 1996 1995
<S> <C> <C> <C> <C> <C> <C> <C>
Per Share Net asset value, beginning of period $ 9.95 $ 9.96 $ 9.82 $ 9.96 $ 9.96 $ 9.82
Operating ------- ------- ------- ------- ------- -------
Performance: Investment income--net .38 .39 .33 .38 .39 .34
Realized and unrealized gain (loss)
on investments--net .08 (.01) .15 .08 --++++ .15
------- ------- ------- ------- ------- -------
Total from investment operations .46 .38 .48 .46 .39 .49
------- ------- ------- ------- ------- -------
Less dividends and distributions:
Investment income--net (.38) (.39) (.33) (.38) (.39) (.34)
Realized gain on investments--net -- -- (.01) -- -- (.01)
------- ------- ------- ------- ------- -------
Total dividends and distributions (.38) (.39) (.34) (.38) (.39) (.35)
------- ------- ------- ------- ------- -------
Net asset value, end of period $ 10.03 $ 9.95 $ 9.96 $ 10.04 $ 9.96 $ 9.96
======= ======= ======= ======= ======= =======
Total Investment Based on net asset value per share 4.70% 3.81% 5.00%+++ 4.76% 3.97% 5.09%+++
Return:** ======= ======= ======= ======= ======= =======
Ratios to Average Expenses, net of reimbursement 1.15% .94% .67%* 1.09% .93% .70%*
Net Assets: ======= ======= ======= ======= ======= =======
Expenses 2.69% 2.37% 2.23%* 2.62% 2.42% 2.31%*
======= ======= ======= ======= ======= =======
Investment income--net 3.80% 3.88% 4.32%* 3.85% 3.89% 4.21%*
======= ======= ======= ======= ======= =======
Supplemental Net assets, end of period
Data: (in thousands) $ 275 $ 210 $ 413 $ 698 $ 890 $ 253
======= ======= ======= ======= ======= =======
Portfolio turnover 22.93% 22.71% 89.96% 22.93% 22.71% 89.96%
======= ======= ======= ======= ======= =======
</TABLE>
<PAGE>
Page 66
<TABLE>
<CAPTION>
Michigan Limited Maturity
Class A
For the
Period
The following per share data and ratios have been derived Nov. 26,
from information provided in the financial statements. For the Year 1993++ to
Ended July 31, July 31,
Increase (Decrease) in Net Asset Value: 1997 1996 1995 1994
<S> <C> <C> <C> <C> <C>
Per Share Net asset value, beginning of period $ 9.94 $ 9.98 $ 9.92 $ 10.00
Operating ------- ------- ------- -------
Performance: Investment income--net .39 .41 .44 .24
Realized and unrealized gain (loss) on investments--net .15 (.04) .06 (.08)
------- ------- ------- -------
Total from investment operations .54 .37 .50 .16
------- ------- ------- -------
Less dividends and distributions:
Investment income--net (.39) (.41) (.44) (.24)
In excess of realized gain on investments--net --++++ -- -- --
------- ------- ------- -------
Total dividends and distributions (.39) (.41) (.44) (.24)
------- ------- ------- -------
Net asset value, end of period $ 10.09 $ 9.94 $ 9.98 $ 9.92
======= ======= ======= =======
Total Investment Based on net asset value per share 5.61% 3.71% 5.16% 1.66%+++
Return:** ======= ======= ======= =======
Ratios to Average Expenses, net of reimbursement .94% .74% .27% .02%*
Net Assets: ======= ======= ======= =======
Expenses 3.50% 2.78% 2.18% 2.01%*
======= ======= ======= =======
Investment income--net 3.93% 4.06% 4.42% 3.59%*
======= ======= ======= =======
Supplemental Net assets, end of period (in thousands) $ 1,368 $ 1,641 $ 2,302 $ 3,435
Data: ======= ======= ======= =======
Portfolio turnover 13.24% 32.92% 93.08% 204.15%
======= ======= ======= =======
</TABLE>
<PAGE>
Page 67
<TABLE>
<CAPTION>
Michigan Limited Maturity
Class B
For the
Period
The following per share data and ratios have been derived Nov. 26,
from information provided in the financial statements. For the Year 1993++ to
Ended July 31, July 31,
Increase (Decrease) in Net Asset Value: 1997 1996 1995 1994
<S> <C> <C> <C> <C> <C>
Per Share Net asset value, beginning of period $ 9.94 $ 9.98 $ 9.92 $ 10.00
Operating ------- ------- ------- -------
Performance: Investment income--net .36 .37 .40 .22
Realized and unrealized gain (loss) on investments--net .15 (.04) .06 (.08)
------- ------- ------- -------
Total from investment operations .51 .33 .46 .14
------- ------- ------- -------
Less dividends and distributions:
Investment income--net (.36) (.37) (.40) (.22)
In excess of realized gain on investments--net --++++ -- -- --
------- ------- ------- -------
Total dividends and distributions (.36) (.37) (.40) (.22)
------- ------- ------- -------
Net asset value, end of period $ 10.09 $ 9.94 $ 9.98 $ 9.92
======= ======= ======= =======
Total Investment Based on net asset value per share 5.22% 3.32% 4.78% 1.42%+++
Return:** ======= ======= ======= =======
Ratios to Average Expenses, net of reimbursement 1.31% 1.10% .65% .38%*
Net Assets: ======= ======= ======= =======
Expenses 3.86% 3.14% 2.56% 2.38%*
======= ======= ======= =======
Investment income--net 3.56% 3.70% 4.09% 3.21%*
======= ======= ======= =======
Supplemental Net assets, end of period (in thousands) $ 1,411 $ 1,842 $ 2,494 $ 2,411
Data: ======= ======= ======= =======
Portfolio turnover 13.24% 32.92% 93.08% 204.15%
======= ======= ======= =======
</TABLE>
<PAGE>
Page 68
<TABLE>
<CAPTION>
Michigan Limited Maturity
Class C Class D
The following per share data For the For the
and ratios have been derived Period Period
from information provided in Oct. 21, Oct. 21,
the financial statements. For the Year 1994++ to For the Year 1994++ to
Ended July 31, July 31, Ended July 31, July 31,
Increase (Decrease) in Net Asset Value: 1997 1996 1995 1997 1996 1995
<S> <C> <C> <C> <C> <C> <C> <C>
Per Share Net asset value, beginning of period $ 9.94 $ 9.98 $ 9.76 $ 9.94 $ 9.97 $ 9.76
Operating ------- ------- ------- ------- ------- -------
Performance: Investment income--net .36 .36 .30 .38 .40 .34
Realized and unrealized gain (loss)
on investments--net .15 (.04) .22 .14 (.03) .21
------- ------- ------- ------- ------- -------
Total from investment operations .51 .32 .52 .52 .37 .55
------- ------- ------- ------- ------- -------
Less dividends and distributions:
Investment income--net (.36) (.36) (.30) (.38) (.40) (.34)
In excess of realized gain on
investments--net --++++ -- -- --++++ -- --
------- ------- ------- ------- ------- -------
Total dividends and distributions (.36) (.36) (.30) (.38) (.40) (.34)
------- ------- ------- ------- ------- -------
Net asset value, end of period $ 10.09 $ 9.94 $ 9.98 $ 10.08 $ 9.94 $ 9.97
======= ======= ======= ======= ======= =======
Total Investment Based on net asset value per share 5.22% 3.20% 5.40%+++ 5.40% 3.71% 5.72%+++
Return:** ======= ======= ======= ======= ======= =======
Ratios to Average Expenses, net of reimbursement 1.32% 1.24% .96%* 1.04% .87% .44%*
Net Assets: ======= ======= ======= ======= ======= =======
Expenses 3.81% 3.31% 2.90%* 3.48% 3.06% 2.38%*
======= ======= ======= ======= ======= =======
Investment income--net 3.56% 3.57% 3.80%* 3.83% 3.94% 4.47%*
======= ======= ======= ======= ======= =======
Supplemental Net assets, end of period
Data: (in thousands) $ 1 $ 1 $ 1 $ 1,471 $ 541 $ 254
======= ======= ======= ======= ======= =======
Portfolio turnover 13.24% 32.92% 93.08% 13.24% 32.92% 93.08%
======= ======= ======= ======= ======= =======
</TABLE>
*Annualized.
**Total investment returns exclude the effects of sales loads.
++Commencement of Operations.
++++Amount is less than $.01 per share.
+++Aggregate total investment return.
See Notes to Financial Statements.
<PAGE>
Page 69
FINANCIAL HIGHLIGHTS (continued)
<TABLE>
<CAPTION>
New Jersey Limited Maturity
Class A
For the
Period
The following per share data and ratios have been derived Nov. 26,
from information provided in the financial statements. For the Year 1993++ to
Ended July 31, July 31,
Increase (Decrease) in Net Asset Value: 1997 1996 1995 1994
<S> <C> <C> <C> <C> <C>
Per Share Net asset value, beginning of period $ 10.11 $ 10.15 $ 9.94 $ 10.00
Operating ------- ------- ------- -------
Performance: Investment income--net .38 .41 .42 .23
Realized and unrealized gain (loss) on investments--net .03 (.04) .21 (.06)
------- ------- ------- -------
Total from investment operations .41 .37 .63 .17
------- ------- ------- -------
Less dividends from investment income--net (.38) (.41) (.42) (.23)
------- ------- ------- -------
Net asset value, end of period $ 10.14 $ 10.11 $ 10.15 $ 9.94
======= ======= ======= =======
Total Investment Based on net asset value per share 4.19% 3.68% 6.45% 1.73%+++
Return:** ======= ======= ======= =======
Ratios to Average Expenses, net of reimbursement .94% .76% .34% .03%*
Net Assets: ======= ======= ======= =======
Expenses 1.65% 1.78% 1.69% 1.14%*
======= ======= ======= =======
Investment income--net 3.82% 4.02% 4.10% 3.45%*
======= ======= ======= =======
Supplemental Net assets, end of period (in thousands) $ 1,735 $ 2,663 $ 2,401 $ 5,933
Data: ======= ======= ======= =======
Portfolio turnover 32.89% 6.57% 131.56% 205.04%
======= ======= ======= =======
</TABLE>
<PAGE>
Page 70
<TABLE>
<CAPTION>
New Jersey Limited Maturity
Class B
For the
Period
The following per share data and ratios have been derived Nov. 26,
from information provided in the financial statements. For the Year 1993++ to
Ended July 31, July 31,
Increase (Decrease) in Net Asset Value: 1997 1996 1995 1994
<S> <C> <C> <C> <C> <C>
Per Share Net asset value, beginning of period $ 10.11 $ 10.16 $ 9.95 $ 10.00
Operating ------- ------- ------- -------
Performance: Investment income--net .35 .37 .38 .20
Realized and unrealized gain (loss) on investments--net .04 (.05) .21 (.05)
------- ------- ------- -------
Total from investment operations .39 .32 .59 .15
------- ------- ------- -------
Less dividends from investment income--net (.35) (.37) (.38) (.20)
------- ------- ------- -------
Net asset value, end of period $ 10.15 $ 10.11 $ 10.16 $ 9.95
======= ======= ======= =======
Total Investment Based on net asset value per share 3.92% 3.21% 6.07% 1.59%+++
Return:** ======= ======= ======= =======
Ratios to Average Expenses, net of reimbursement 1.30% 1.10% .73% .38%*
Net Assets: ======= ======= ======= =======
Expenses 2.00% 2.12% 2.15% 1.52%*
======= ======= ======= =======
Investment income--net 3.46% 3.67% 3.80% 3.04%*
======= ======= ======= =======
Supplemental Net assets, end of period (in thousands) $ 4,109 $ 5,152 $ 7,593 $ 7,885
Data: ======= ======= ======= =======
Portfolio turnover 32.89% 6.57% 131.56% 205.04%
======= ======= ======= =======
<CAPTION>
New Jersey Limited Maturity
Class C Class D
The following per share data For the For the
and ratios have been derived Period Period
from information provided in Oct. 21, Oct. 21,
the financial statements. For the Year 1994++ to For the Year 1994++ to
Ended July 31, July 31, Ended July 31, July 31,
Increase (Decrease) in Net Asset Value: 1997 1996 1995 1997 1996 1995
<S> <C> <C> <C> <C> <C> <C> <C>
Per Share Net asset value, beginning of period $ 9.16 $ 9.20 $ 9.86 $ 10.11 $ 10.16 $ 9.85
Operating ------- ------- ------- ------- ------- -------
Performance: Investment income--net .33 .34 .26 .37 .40 .32
Realized and unrealized gain (loss)
on investments--net .03 (.04) (.66) .04 (.05) .31
------- ------- ------- ------- ------- -------
Total from investment operations .36 .30 (.40) .41 .35 .63
------- ------- ------- ------- ------- -------
Less dividends from investment
</TABLE>
<PAGE>
Page 71
<TABLE>
<S> <C> <C> <C> <C> <C> <C> <C>
income--net (.33) (.34) (.26) (.37) (.40) (.32)
------- ------- ------- ------- ------- -------
Net asset value, end of period $ 9.19 $ 9.16 $ 9.20 $ 10.15 $ 10.11 $ 10.16
======= ======= ======= ======= ======= =======
Total Investment Based on net asset value per share 4.06% 3.24% (4.01%)+++ 4.18% 3.48% 6.51%+++
Return:** ======= ======= ======= ======= ======= =======
Ratios to Average Expenses, net of reimbursement 1.10% 1.00% .55%* 1.04% .84% .62%*
Net Assets: ======= ======= ======= ======= ======= =======
Expenses 1.80% 2.04% 2.22%* 1.78% 1.86% 2.07%*
======= ======= ======= ======= ======= =======
Investment income--net 3.66% 3.82% 4.06%* 3.75% 3.93% 4.17%*
======= ======= ======= ======= ======= =======
Supplemental Net assets, end of period
Data: (in thousands) $ 241 $ 272 $ 1 $ 238 $ 540 $ 437
======= ======= ======= ======= ======= =======
Portfolio turnover 32.89% 6.57% 131.56% 32.89% 6.57% 131.56%
======= ======= ======= ======= ======= =======
<CAPTION>
New York Limited Maturity
Class A
For the
Period
The following per share data and ratios have been derived Nov. 26,
from information provided in the financial statements. For the Year 1993++ to
Ended July 31, July 31,
Increase (Decrease) in Net Asset Value: 1997 1996 1995 1994
<S> <C> <C> <C> <C> <C>
Per Share Net asset value, beginning of period $ 10.06 $ 10.05 $ 9.91 $ 10.00
Operating ------- ------- ------- -------
Performance: Investment income--net .43 .43 .44 .25
Realized and unrealized gain (loss) on investments--net .17 .01 .14 (.09)
------- ------- ------- -------
Total from investment operations .60 .44 .58 .16
------- ------- ------- -------
Less dividends from investment income--net (.43) (.43) (.44) (.25)
------- ------- ------- -------
Net asset value, end of period $ 10.23 $ 10.06 $ 10.05 $ 9.91
======= ======= ======= =======
Total Investment Based on net asset value per share 6.09% 4.46% 6.03% 1.61%+++
Return:** ======= ======= ======= =======
Ratios to Average Expenses, net of reimbursement .70% .50% .33% .03%*
Net Assets: ======= ======= ======= =======
Expenses 1.16% 1.38% 1.30% 1.24%*
</TABLE>
<PAGE>
Page 72
<TABLE>
<CAPTION>
======= ======= ======= =======
<S> <C> <C> <C> <C> <C>
Investment income--net 4.24% 4.28% 4.49% 3.68%*
======= ======= ======= =======
Supplemental Net assets, end of period (in thousands) $ 2,605 $ 3,723 $ 4,811 $ 5,290
Data: ======= ======= ======= =======
Portfolio turnover 36.53% 51.47% 139.16% 152.73%
======= ======= ======= =======
<CAPTION>
New York Limited Maturity
Class B
For the
Period
The following per share data and ratios have been derived Nov. 26,
from information provided in the financial statements. For the Year 1993++ to
Ended July 31, July 31,
Increase (Decrease) in Net Asset Value: 1997 1996 1995 1994
<S> <S> <C> <C> <C> <C>
Per Share Net asset value, beginning of period $ 10.06 $ 10.05 $ 9.91 $ 10.00
Operating ------- ------- ------- -------
Performance: Investment income--net .39 .40 .41 .22
Realized and unrealized gain (loss) on investments--net .17 .01 .14 (.09)
------- ------- ------- -------
Total from investment operations .56 .41 .55 .13
------- ------- ------- -------
Less dividends from investment income--net (.39) (.40) (.41) (.22)
------- ------- ------- -------
Net asset value, end of period $ 10.23 $ 10.06 $ 10.05 $ 9.91
======= ======= ======= =======
Total Investment Based on net asset value per share 5.71% 4.08% 5.66% 1.37%+++
Return:** ======= ======= ======= =======
Ratios to Average Expenses, net of reimbursement 1.05% .87% .69% .38%*
Net Assets: ======= ======= ======= =======
Expenses 1.52% 1.75% 1.65% 1.60%*
======= ======= ======= =======
Investment income--net 3.88% 3.91% 4.11% 3.31%*
======= ======= ======= =======
Supplemental Net assets, end of period (in thousands) $ 8,209 $10,071 $ 8,822 $ 9,743
Data: ======= ======= ======= =======
Portfolio turnover 36.53% 51.47% 139.16% 152.73%
======= ======= ======= =======
</TABLE>
*Annualized.
<PAGE>
Page 73
**Total investment returns exclude the effects of sales loads.
++Commencement of Operations.
+++Aggregate total investment return.
See Notes to Financial Statements.
FINANCIAL HIGHLIGHTS (concluded)
<TABLE>
<CAPTION>
New York Limited Maturity
Class C Class D
The following per share data For the For the
and ratios have been derived Period Period
from information provided in Oct. 21, Oct. 21,
the financial statements. For the Year 1994++ to For the Year 1994++ to
Ended July 31, July 31, Ended July 31, July 31,
Increase (Decrease) in Net Asset Value: 1997 1996 1995 1997 1996 1995
<S> <C> <C> <C> <C> <C> <C> <C>
Per Share Net asset value, beginning of period $ 10.06 $ 10.05 $ 9.78 $ 10.06 $ 10.05 $ 9.78
Operating ------- ------- ------- ------- ------- -------
Performance: Investment income--net .41 .42 .30 .42 .42 .34
Realized and unrealized gain on
investments--net .17 .01 .27 .17 .01 .27
------- ------- ------- ------- ------- -------
Total from investment operations .58 .43 .57 .59 .43 .61
------- ------- ------- ------- ------- -------
Less dividends from investment
income--net (.41) (.42) (.30) (.42) (.42) (.34)
------- ------- ------- ------- ------- -------
Net asset value, end of period $ 10.23 $ 10.06 $ 10.05 $ 10.23 $ 10.06 $ 10.05
======= ======= ======= ======= ======= =======
Total Investment Based on net asset value per share 5.91% 4.28% 5.97%+++ 5.98% 4.35% 6.37%+++
Return:** ======= ======= ======= ======= ======= =======
Ratios to Average Expenses, net of reimbursement .86% .71% .63%* .80% .62% .48%*
Net Assets: ======= ======= ======= ======= ======= =======
Expenses 1.32% 1.59% 1.63%* 1.26% 1.49% 1.48%*
======= ======= ======= ======= ======= =======
Investment income--net 4.05% 4.06% 4.21%* 4.14% 4.16% 4.47%*
======= ======= ======= ======= ======= =======
Supplemental Net assets, end of period
Data: (in thousands) $ 68 $ 214 $ 38 $ 3,683 $ 3,912 $ 2,306
======= ======= ======= ======= ======= =======
</TABLE>
<PAGE>
Page 74
<TABLE>
<S> <C> <C> <C> <C> <C> <C>
Portfolio turnover 36.53% 51.47% 139.16% 36.53% 51.47% 139.16%
======= ======= ======= ======= ======= =======
<CAPTION>
Pennsylvania Limited Maturity
Class A
For the
Period
The following per share data and ratios have been derived Nov. 26,
from information provided in the financial statements. For the Year 1993++ to
Ended July 31, July 31,
Increase (Decrease) in Net Asset Value: 1997 1996 1995 1994
<S> <C> <C> <C> <C> <C>
Per Share Net asset value, beginning of period $ 10.11 $ 10.10 $ 9.95 $ 10.00
Operating ------- ------- ------- -------
Performance: Investment income--net .38 .41 .42 .23
Realized and unrealized gain (loss) on investments--net .12 .01 .15 (.05)
------- ------- ------- -------
Total from investment operations .50 .42 .57 .18
------- ------- ------- -------
Less dividends from investment income--net (.38) (.41) (.42) (.23)
------- ------- ------- -------
Net asset value, end of period $ 10.23 $ 10.11 $ 10.10 $ 9.95
======= ======= ======= =======
Total Investment Based on net asset value per share 5.04% 4.18% 5.89% 1.85%+++
Return:** ======= ======= ======= =======
Ratios to Average Expenses, net of reimbursement .99% .80% .38% .02%*
Net Assets: ======= ======= ======= =======
Expenses 1.75% 1.63% 1.90% 1.48%*
======= ======= ======= =======
Investment income--net 3.74% 4.01% 4.25% 3.46%*
======= ======= ======= =======
Supplemental Net assets, end of period (in thousands) $ 736 $ 833 $ 943 $ 990
Data: ======= ======= ======= =======
Portfolio turnover 20.88% 30.90% 141.52% 237.47%
======= ======= ======= =======
</TABLE>
<PAGE>
Page 75
<TABLE>
<CAPTION>
Pennsylvania Limited Maturity
Class B
For the
Period
The following per share data and ratios have been derived Nov. 26,
from information provided in the financial statements. For the Year 1993++ to
Ended July 31, July 31,
Increase (Decrease) in Net Asset Value: 1997 1996 1995 1994
Per Share Net asset value, beginning of period $ 10.11 $ 10.10 $ 9.95 $ 10.00
Operating ------- ------- ------- -------
Performance:
<S> <C> <C> <C> <C> <C>
Investment income--net .34 .37 .39 .21
Realized and unrealized gain (loss) on investments--net .12 .01 .15 (.05)
------- ------- ------- -------
Total from investment operations .46 .38 .54 .16
------- ------- ------- -------
Less dividends from investment income--net (.34) (.37) (.39) (.21)
------- ------- ------- -------
Net asset value, end of period $ 10.23 $ 10.11 $ 10.10 $ 9.95
======= ======= ======= =======
Total Investment Based on net asset value per share 4.66% 3.80% 5.51% 1.61%+++
Return:** ======= ======= ======= =======
Ratios to Average Expenses, net of reimbursement 1.35% 1.15% .73% .38%*
Net Assets: ======= ======= ======= =======
Expenses 2.11% 1.99% 2.25% 1.83%*
======= ======= ======= =======
Investment income--net 3.38% 3.65% 3.87% 3.05%*
======= ======= ======= =======
Supplemental Net assets, end of period (in thousands) $ 5,134 $ 6,264 $ 7,414 $ 9,532
Data: ======= ======= ======= =======
Portfolio turnover 20.88% 30.90% 141.52% 237.47%
======= ======= ======= =======
<CAPTION>
Pennsylvania Limited Maturity
Class C Class D
The following per share data For the For the
and ratios have been derived Period Period
from information provided in Oct. 21, Oct. 21,
the financial statements. For the Year 1994++ to For the Year 1994++ to
Ended July 31, July 31, Ended July 31, July 31,
Increase (Decrease) in Net Asset Value: 1997 1996 1995 1997 1996 1995
<S> <C> <C> <C> <C> <C> <C> <C>
Per Share Net asset value, beginning of period $ 10.15 $ 10.10 $ 9.84 $ 10.11 $ 10.10 $ 9.84
Operating ------- ------- ------- ------- ------- -------
Performance: Investment income--net .35 .38 .29 .37 .40 .33
Realized and unrealized gain
on investments--net .12 .05 .26 .13 .01 .26
------- ------- ------- ------- ------- -------
Total from investment operations .47 .43 .55 .50 .41 .59
------- ------- ------- ------- ------- -------
</TABLE>
<PAGE>
Page 76
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C> <C>
Less dividends from investment
income--net (.35) (.38) (.29) (.37) (.40) (.33)
------- ------- ------- ------- ------- -------
Net asset value, end of period $ 10.27 $ 10.15 $ 10.10 $ 10.24 $ 10.11 $ 10.10
======= ======= ======= ======= ======= =======
Total Investment Based on net asset value per share 4.68% 4.28% 5.68%+++ 5.04% 4.07% 6.10%+++
Return:** ======= ======= ======= ======= ======= =======
Ratios to Average Expenses, net of reimbursement 1.28% .97% 1.05%* 1.09% .96% .57%*
Net Assets: ======= ======= ======= ======= ======= =======
Expenses 2.02% 1.83% 2.55%* 1.85% 1.71% 2.08%*
======= ======= ======= ======= ======= =======
Investment income--net 3.46% 3.84% 3.77%* 3.64% 3.84% 4.30%*
======= ======= ======= ======= ======= =======
Supplemental Net assets, end of period
Data: (in thousands) $ 8 $ 1 $ 1 $ 1,861 $ 1,807 $ 382
======= ======= ======= ======= ======= =======
Portfolio turnover 20.88% 30.90% 141.52% 20.88% 30.90% 141.52%
======= ======= ======= ======= ======= =======
</TABLE>
[FN]
*Annualized.
**Total investment returns exclude the effects of sales loads.
++Commencement of Operations.
+++Aggregate total investment return.
See Notes to Financial Statements.
NOTES TO FINANCIAL STATEMENTS
1. Significant Accounting Policies:
Merrill Lynch Multi-State Limited Maturity Municipal Series Trust
(the "Trust") is registered under the Investment Company Act of
1940 as a non-diversified, open-end management investment company
consisting of eight separate series: Merrill Lynch Arizona Limited
Maturity Municipal Bond Fund, Merrill Lynch California Limited
Maturity Municipal Bond Fund, Merrill Lynch Florida Limited Maturity
Municipal Bond Fund, Merrill Lynch Massachusetts Limited Maturity
Municipal Bond Fund, Merrill Lynch Michigan Limited Maturity
Municipal Bond Fund, Merrill Lynch New Jersey Limited Maturity
Municipal Bond Fund, Merrill Lynch New York Limited Maturity
Municipal Bond Fund, and Merrill Lynch Pennsylvania Limited Maturity
<PAGE>
Page 77
Municipal Bond Fund. Each series of the Trust is referred to herein
as a "Fund". The Trust offers four classes of shares under the
Merrill Lynch Select Pricing SM System. Shares of Class A and Class
D are sold with a front-end sales charge. Shares of Class B and
Class C may be subject to a contingent deferred sales charge. All
classes of shares have identical voting, dividend, liquidation and
other rights and the same terms and conditions, except that Class B,
Class C and Class D Shares bear certain expenses related to the
account maintenance of such shares, and Class B and Class C Shares
also bear certain expenses related to the distribution of such
shares. Each class has exclusive voting rights with respect to
matters relating to its account maintenance and distribution
expenditures. The following is a summary of significant accounting
policies followed by the Trust.
(a) Valuation of investments--Municipal bonds and other portfolio
securities in which the Funds invest are traded primarily in the
over-the-counter municipal bond and money markets and are valued at
the last available bid price in the over-the-counter market or on
the basis of yield equivalents as obtained from one or more dealers
that make markets in the securities. Financial futures contracts and
options thereon, which are traded on exchanges, are valued at their
settlement prices as of the close of such exchanges. Short-term
investments with remaining maturities of sixty days or less are
valued at amortized cost, which approximates market value.
Securities and assets for which market quotations are not readily
available are valued at fair value as determined in good faith by or
under the direction of the Board of Trustees of the Trust, including
valuations furnished by a pricing service retained by the Trust,
which may utilize a matrix system for valuations. The procedures of
the pricing service and its valuations are reviewed by the officers
of the Trust under the general supervision of the Trustees.
(b) Derivative financial instruments--Each Fund may engage in
various portfolio strategies to seek to increase its return by
hedging its portfolio against adverse movements in the debt markets.
Losses may arise due to changes in the value of the contract or if
the counterparty does not perform under the contract.
* Financial futures contracts--The Funds may purchase or sell
interest rate futures contracts and options on such futures
contracts for the purpose of hedging the market risk on existing
securities or the intended purchase of securities. Futures contracts
are contracts for delayed delivery of securities at a specific
future date and at a specific price or yield. Upon entering into a
contract, the Funds deposit and maintain as collateral such initial
margin as required by the exchange on which the transaction is
effected. Pursuant to the contract, the Funds agree to receive from
or pay to the broker an amount of cash equal to the daily
<PAGE>
Page 78
fluctuation in value of the contract. Such receipts or payments are
known as variation margin and are recorded by the Funds as
unrealized gains or losses. When the contract is closed, the Funds
record a realized gain or loss equal to the difference between the
value of the contract at the time it was opened and the value at the
time it was closed.
(c) Income taxes--It is each Fund's policy to comply with the
requirements of the Internal Revenue Code applicable to regulated
investment companies and to distribute substantially all of its
taxable income to its shareholders. Therefore, no Federal income tax
provision is required.
(d) Security transactions and investment income--Security
transactions are recorded on the dates the transactions are entered
into (the trade dates). Interest income is recognized on the accrual
basis. Discounts and market premiums are amortized into interest
income. Realized gains and losses on security transactions are
determined on the identified cost basis.
(e) Deferred organization expenses and prepaid registration fees--
Deferred organization expenses are charged to expense on a straight-
line basis over a five-year period beginning with commencement of
operations. Prepaid registration fees are charged to expense as the
related shares are issued.
(f) Dividends and distributions--Dividends from net investment
income are declared daily and paid monthly. Distributions of capital
gains are recorded on the ex-dividend dates. Distributions in excess
of realized capital gains are due primarily to differing tax
treatments for post-October losses.
2. Investment Advisory Agreement and Transactions
with Affiliates:
The Trust has entered into an Investment Advisory Agreement with
Fund Asset Management, L.P. ("FAM"). The general partner of FAM is
Princeton Services, Inc. ("PSI"), an indirect wholly-owned
subsidiary of Merrill Lynch & Co., Inc. ("ML & Co."), which is the
limited partner. The Trust has also entered into a Distribution
Agreement and Distribution Plans with Merrill Lynch Funds
Distributor, Inc. ("MLFD" or "Distributor"), a wholly-owned
subsidiary of Merrill Lynch Group, Inc.
FAM is responsible for the management of each Fund's portfolio and
provides the necessary personnel, facilities, equipment and certain
other services necessary to the operations of each Fund. For such
services, each Fund pays a monthly fee at the annual rate of 0.35%
of that Fund's average daily net assets.
<PAGE>
Page 79
For the year ended July 31, 1997, FAM had voluntarily waived
management fees and reimbursed each Fund for additional expenses as
follows:
<TABLE>
<CAPTION>
Arizona California Florida
Limited Limited Limited
Maturity Maturity Maturity
<S> <C> <C> <C>
Management fee $13,268 $29,150 --
Additional expenses $72,437 -- --
Massachusetts Michigan New Jersey
Limited Limited Limited
Maturity Maturity Maturity
Management fee $22,132 $14,977 $25,494
Additional expenses $72,930 $92,903 $25,788
New York Pennsylvania
Limited Limited
Maturity Maturity
Management fee $57,645 $29,758
Additional expenses $19,235 $34,384
</TABLE>
Pursuant to the distribution plans (the "Distribution Plans")
adopted by the Trust in accordance with Rule 12b-1 under the
Investment Company Act of 1940, the Funds pay the Distributor
ongoing account maintenance and distribution fees. The fees are
accrued daily and paid monthly at annual rates based upon the
average daily net assets of the shares as follows:
Account Maintenance Fee Distribution Fee
Class B 0.15% 0.20%
Class C 0.15% 0.20%
Class D 0.10% --
Pursuant to a sub-agreement with the Distributor, Merrill Lynch,
Pierce, Fenner & Smith Inc. ("MLPF&S"), a subsidiary of ML & Co.,
also provides account maintenance and distribution services to the
Trust. The ongoing account maintenance fee compensates the
Distributor and MLPF&S for providing account maintenance services to
Class B, Class C and Class D shareholders. The ongoing distribution
fee compensates the Distributor and MLPF&S for providing shareholder
and distribution-related services to Class B and Class C
shareholders.
<PAGE>
Page 80
For the year ended July 31, 1997, MLFD earned underwriting discounts
and MLPF&S earned dealer concessions on sales of the Funds' Class A
and Class D Shares as follows:
<TABLE>
<CAPTION>
Arizona California Florida Massachusetts
Limited Limited Limited Limited
Maturity Maturity Maturity Maturity
<S> <C> <C> <C> <C>
Class A:
MLFD $ 7 -- $ 68 --
MLPF&S $ 194 -- $563 --
Class D:
MLFD $ 199 $ 224 $ 55 $ 9
MLPF&S $2,172 $2,155 $521 $205
Michigan New Jersey New York Pennsylvania
Limited Limited Limited Limited
Maturity Maturity Maturity Maturity
Class A:
MLFD $ 8 -- -- --
MLPF&S $ 68 -- $ 5 --
Class D:
MLFD $ 46 $ 2 $ 70 $ 5
MLPF&S $ 350 $ 48 $767 $210
<CAPTION>
MLPF&S received contingent deferred sales charges relating to
transactions in Class B Shares as follows:
Class B
Shares
<S> <C>
Arizona Limited Maturity $ 427
California Limited Maturity 6,833
Florida Limited Maturity 7,396
Massachusetts Limited Maturity 3,151
Michigan Limited Maturity 397
New Jersey Limited Maturity 4,461
New York Limited Maturity 18,743
Pennsylvania Limited Maturity 878
</TABLE>
Furthermore, MLPF&S received contingent deferred sales charges of
<PAGE>
Page 81
$2,001 relating to transactions subject to front end sales charge
waivers in Class D Shares.
Merrill Lynch Financial Data Services, Inc. ("MLFDS"), a wholly-
owned subsidiary of ML & Co., is the Trust's transfer agent.
NOTES TO FINANCIAL STATEMENTS (continued)
Accounting services are provided to the Trust by FAM at cost.
Certain officers and/or trustees of the Trust are officers and/or
directors of FAM, PSI, MLFD, MLFDS, and/or ML & Co.
3. Investments:
Purchases and sales of investments, excluding short-term securities,
for the year ended July 31, 1997 were as follows:
<TABLE>
<CAPTION>
Purchases Sales
<S> <C> <C>
Arizona Limited Maturity $ 1,019,574 $ 2,070,874
California Limited Maturity 3,276,869 3,471,729
Florida Limited Maturity 8,642,572 10,107,246
Massachusetts Limited Maturity 1,215,165 2,253,678
Michigan Limited Maturity 1,155,783 479,425
New Jersey Limited Maturity 1,661,522 3,793,860
New York Limited Maturity 5,241,711 6,943,659
Pennsylvania Limited Maturity 1,309,108 1,728,529
<CAPTION>
Net realized and unrealized gains (losses) as of July 31, 1997 were
as follows:
Realized Unrealized
Arizona Limited Maturity Gains Gains
<S> <C> <C>
Long-term investments $ 87,712 $ 86,566
--------- ---------
Total $ 87,712 $ 86,566
========= =========
</TABLE>
<PAGE>
Page 82
<TABLE>
Realized Unrealized
California Limited Maturity Gains Gains
<S> <C> <C>
Long-term investments $ 57,005 $ 764,034
Short-term investments -- 529
--------- ---------
Total $ 57,005 $ 764,563
========= =========
Realized Unrealized
Florida Limited Maturity Gains Gains
Long-term investments $ 101,556 $ 777,279
Short-term investments 55 --
--------- ---------
Total $ 101,611 $ 777,279
========= =========
Realized Unrealized
Massachusetts Limited Maturity Gains Gains
Long-term investments $ 51,279 $ 167,141
--------- ---------
Total $ 51,279 $ 167,141
========= =========
Realized Unrealized
Michigan Limited Maturity Gains Gains
Long-term investments $ 21,697 $ 162,895
--------- ---------
Total $ 21,697 $ 162,895
========= =========
Unrealized
Realized Gains
New Jersey Limited Maturity Gains (Losses)
Long-term investments $ 126,030 $ 186,033
Short-term investments -- (333)
--------- ---------
Total $ 126,030 $ 185,700
========= =========
</TABLE>
<PAGE>
Page 83
<TABLE>
<CAPTION>
Realized Unrealized
New York Limited Maturity Gains Gains
<S> <C> <C>
Long-term investments $ 36,848 $ 539,314
--------- ---------
Total $ 36,848 $ 539,314
========= =========
Realized Unrealized
Pennsylvania Limited Maturity Gains Gains
Long-term investments $ 37,824 $ 216,756
Short-term investments -- 152
--------- ---------
Total $ 37,824 $ 216,908
========= =========
</TABLE>
As of July 31, 1997, net unrealized appreciation and the aggregate
cost of investments for Federal income tax purposes were as follows:
<TABLE>
<CAPTION>
Limited Gross Gross Net Aggregate
Maturity Unrealized Unrealized Unrealized Cost of
Fund Appreciation Depreciation Appreciation Investments
<S> <C> <C> <C> <C>
Arizona $ 86,566 -- $ 86,566 $ 2,939,002
California 741,290 -- 741,290 13,161,474
Florida 815,581 $ (38,302) 777,279 24,754,969
Massachusetts 167,141 -- 167,141 5,005,999
Michigan 162,895 -- 162,895 3,952,546
New Jersey 186,033 (333) 185,700 6,482,928
New York 539,314 -- 539,314 13,800,699
Pennsylvania 216,908 -- 216,908 7,317,330
</TABLE>
4. Beneficial Interest Transactions:
Net increase (decrease) in net assets derived from beneficial
interest transactions for the years ended July 31, 1997 and July 31,
1996 were as follows:
<TABLE>
<CAPTION>
For the For the
Year Ended Year Ended
July 31, 1997 July 31, 1996
<S> <C> <C>
Arizona Limited Maturity $ (1,124,280) $(1,767,011)
California Limited Maturity (1,455,816) (491,496)
Florida Limited Maturity (2,674,028) (5,075,030)
Massachusetts Limited Maturity (2,299,335) (2,526,578)
Michigan Limited Maturity 168,118 (1,013,383)
New Jersey Limited Maturity (2,324,627) (1,750,465)
</TABLE>
<PAGE>
Page 84
<TABLE>
<S> <C> <C>
New York Limited Maturity (3,606,325) 1,937,339
Pennsylvania Limited Maturity (1,259,754) 150,949
</TABLE>
Transactions in shares of beneficial interest for each class were as
follows:
Arizona Limited Maturity
<TABLE>
<CAPTION>
Class A Shares for the Year Dollar
Ended July 31, 1997 Shares Amount
<S> <C> <C>
Shares sold 2,059 $ 20,756
Shares issued to shareholders in
reinvestment of dividends 898 9,047
---------- ----------
Total issued 2,957 29,803
Shares redeemed (13,909) (139,681)
---------- ----------
Net decrease (10,952) $ (109,878)
========== ==========
Arizona Limited Maturity
Class A Shares for the Year Dollar
Ended July 31, 1996 Shares Amount
Shares sold 5,200 $ 52,303
Shares issued to shareholders in
reinvestment of dividends 1,441 14,637
---------- ----------
Total issued 6,641 66,940
Shares redeemed (29,641) (304,005)
---------- ----------
Net decrease (23,000) $ (237,065)
========== ==========
Arizona Limited Maturity
Class B Shares for the Year Dollar
Ended July 31, 1997 Shares Amount
Shares sold 20,264 $ 204,323
Shares issued to shareholders in
reinvestment of dividends 4,028 40,606
---------- ----------
Total issued 24,292 244,929
Automatic conversion of shares (1,018) (10,248)
</TABLE>
<PAGE>
Page 85
<TABLE>
<S> <C> <C>
Shares redeemed (99,594) (1,001,882)
---------- ----------
Net decrease (76,320) $ (767,201)
========== ==========
Arizona Limited Maturity
Class B Shares for the Year Dollar
Ended July 31, 1996 Shares Amount
Shares sold 43,937 $ 449,980
Shares issued to shareholders in
reinvestment of dividends 7,003 66,184
----------- -----------
Total issued 50,940 516,164
Shares redeemed (275,350) (2,797,058)
----------- -----------
Net decrease (224,410) $(2,280,894)
=========== ===========
Arizona Limited Maturity
Class C Shares for the Year Dollar
Ended July 31, 1997 Shares Amount
Shares sold 100 $ 1,008
Shares issued to shareholders in
reinvestment of dividends 357 3,609
---------- ----------
Total issued 457 4,617
Shares redeemed (10,307) (103,073)
---------- ----------
Net decrease (9,850) $ (98,456)
========== ==========
Arizona Limited Maturity
Class C Shares for the Year Dollar
Ended July 31, 1996 Shares Amount
Shares sold 13,124 $ 132,973
Shares issued to shareholders in
reinvestment of dividends 162 1,633
----------- -----------
Total issued 13,286 134,606
Shares redeemed (4) (41)
----------- -----------
Net increase 13,282 $ 134,565
=========== ===========
</TABLE>
<PAGE>
Page 86
<TABLE>
<CAPTION>
Arizona Limited Maturity
Class D Shares for the Year Dollar
Ended July 31, 1997 Shares Amount
<S> <C> <C>
Shares sold 27,128 $ 271,439
Automatic conversion of shares 1,018 10,248
Shares issued to shareholders in
reinvestment of dividends 597 6,023
---------- ----------
Total issued 28,743 287,710
Shares redeemed (43,319) (436,455)
---------- ----------
Net decrease (14,576) $ (148,745)
========== ==========
Arizona Limited Maturity
Class D Shares for the Year Dollar
Ended July 31, 1996 Shares Amount
Shares sold 104,371 $ 1,066,013
Shares issued to shareholders in
reinvestment of dividends 2,220 22,565
----------- -----------
Total issued 106,591 1,088,578
Shares redeemed (47,001) (472,195)
----------- -----------
Net increase 59,590 $ 616,383
=========== ===========
California Limited Maturity
Class A Shares for the Year Dollar
Ended July 31, 1997 Shares Amount
Shares sold 1,377 $ 13,897
Shares issued to shareholders in
reinvestment of dividends 3,031 30,528
---------- ----------
Total issued 4,408 44,425
Shares redeemed (10,568) (106,294)
---------- ----------
Net decrease (6,160) $ (61,869)
========== ==========
</TABLE>
<PAGE>
Page 87
NOTES TO FINANCIAL STATEMENTS (continued)
California Limited Maturity
<TABLE>
<CAPTION>
Class A Shares for the Year Dollar
Ended July 31, 1996 Shares Amount
<S> <C> <C>
Shares sold 8,087 $ 80,919
Shares issued to shareholders in
reinvestment of dividends 3,445 34,639
---------- ----------
Total issued 11,532 115,558
Shares redeemed (49,796) (500,770)
---------- ----------
Net decrease (38,264) $ (385,212)
========== ==========
California Limited Maturity
Class B Shares for the Year Dollar
Ended July 31, 1997 Shares Amount
Shares sold 204,154 $ 2,058,619
Shares issued to shareholders in
reinvestment of dividends 13,782 138,778
----------- -----------
Total issued 217,936 2,197,397
Automatic conversion of shares (28,044) (284,252)
Shares redeemed (504,135) (5,083,745)
----------- -----------
Net decrease (314,243) $(3,170,600)
=========== ===========
California Limited Maturity
Class B Shares for the Year Dollar
Ended July 31, 1996 Shares Amount
Shares sold 210,376 $ 2,110,120
Shares issued to shareholders in
reinvestment of dividends 15,717 158,020
----------- -----------
Total issued 226,093 2,268,140
Automatic conversion of shares (7,895) (80,134)
Shares redeemed (267,935) (2,686,717)
----------- -----------
Net decrease (49,737) $ (498,711)
========== ==========
</TABLE>
<PAGE>
Page 88
California Limited Maturity
<TABLE>
<CAPTION>
Class C Shares for the Year Dollar
Ended July 31, 1997 Shares Amount
<S> <C> <C>
Shares sold 115 $ 1,152
Shares issued to shareholders in
reinvestment of dividends 6 62
---------- ----------
Net increase 121 $ 1,214
========== ==========
California Limited Maturity
<CAPTION>
Class C Shares for the Year Dollar
Ended July 31, 1996 Shares Amount
<S> <C> <C>
Shares sold 24 $ 250
Shares issued to shareholders in
reinvestment of dividends 8 78
---------- ----------
Total issued 32 328
Shares redeemed (983) (9,913)
---------- ----------
Net decrease (951) $ (9,585)
========== ==========
California Limited Maturity
<CAPTION>
Class D Shares for the Year Dollar
Ended July 31, 1997 Shares Amount
<S> <C> <C>
Shares sold 285,173 $ 2,849,538
Automatic conversion of shares 3,978 284,252
Shares issued to shareholders in
reinvestment of dividends 28,044 40,114
----------- -----------
Total issued 317,195 3,173,904
Shares redeemed (139,121) (1,398,465)
----------- -----------
Net increase 178,074 $ 1,775,439
=========== ===========
California Limited Maturity
<CAPTION>
Class D Shares for the Year Dollar
Ended July 31, 1996 Shares Amount
<S> <C> <C>
Shares sold 105,834 $1,060,270
</TABLE>
<PAGE>
Page 89
<TABLE>
<S> <C> <C>
Automatic conversion of shares 7,895 80,134
Shares issued to shareholders in
reinvestment of dividends 1,093 10,986
---------- ----------
Total issued 114,822 1,151,390
Shares redeemed (74,548) (749,378)
---------- ----------
Net increase 40,274 $ 402,012
========== ==========
Florida Limited Maturity
Class A Shares for the Year Dollar
Ended July 31, 1997 Shares Amount
Shares sold 70,813 $ 705,043
Shares issued to shareholders in
reinvestment of dividends 6,542 65,182
----------- -----------
Total issued 77,355 770,225
Shares redeemed (235,028) (2,340,687)
----------- -----------
Net decrease (157,673) $(1,570,462)
=========== ===========
Florida Limited Maturity
Class A Shares for the Year Dollar
Ended July 31, 1996 Shares Amount
Shares sold 91,796 $ 926,979
Shares issued to shareholders in
reinvestment of dividends 11,780 118,180
----------- -----------
Total issued 103,576 1,045,159
Shares redeemed (296,045) (2,960,805)
----------- -----------
Net decrease (192,469) $(1,915,646)
=========== ===========
Florida Limited Maturity
Class B Shares for the Year Dollar
Ended July 31, 1997 Shares Amount
Shares sold 344,717 $ 3,439,385
Shares issued to shareholders in
reinvestment of dividends 20,341 202,648
----------- -----------
</TABLE>
<PAGE>
Page 90
<TABLE>
<S> <C> <C>
Total issued 365,058 3,642,033
Automatic conversion of shares (3,635) (36,364)
Shares redeemed (598,033) (5,967,067)
----------- -----------
Net decrease (236,610) $(2,361,398)
=========== ===========
Florida Limited Maturity
Class B Shares for the Year Dollar
Ended July 31, 1996 Shares Amount
Shares sold 374,709 $ 3,773,344
Shares issued to shareholders in
reinvestment of dividends 28,155 282,558
----------- -----------
Total issued 402,864 4,055,902
Shares redeemed (646,498) (6,500,752)
----------- -----------
Net decrease (243,634) $(2,444,850)
=========== ===========
Florida Limited Maturity
Class C Shares for the Year Dollar
Ended July 31, 1997 Shares Amount
Shares sold 5,712 $ 56,834
Shares issued to shareholders in
reinvestment of dividends 140 1,387
----------- -----------
Total issued 5,852 58,221
Shares redeemed (5,087) (50,009)
----------- -----------
Net increase 765 $ 8,212
=========== ===========
Florida Limited Maturity
Class C Shares for the Year Dollar
Ended July 31, 1996 Shares Amount
Shares sold 6,623 $ 65,559
Shares issued to shareholders in
reinvestment of dividends 4 41
----------- -----------
Total issued 6,627 65,600
Shares redeemed (1,536) (15,483)
----------- -----------
</TABLE>
<PAGE>
Page 91
<TABLE>
<S> <C> <C>
Net increase 5,091 $ 50,117
=========== ===========
Florida Limited Maturity
Class D Shares for the Year Dollar
Ended July 31, 1997 Shares Amount
Shares sold 362,564 $ 3,617,894
Automatic conversion of shares 3,635 36,364
Shares issued to shareholders in
reinvestment of dividends 5,285 52,650
----------- -----------
Total issued 371,484 3,706,908
Shares redeemed (246,834) (2,457,288)
----------- -----------
Net increase 124,650 $ 1,249,620
=========== ===========
Florida Limited Maturity
Class D Shares for the Year Dollar
Ended July 31, 1996 Shares Amount
Shares sold 316,584 $3,192,506
Shares issued to shareholders in
reinvestment of dividends 4,342 43,518
---------- ----------
Total issued 320,926 3,236,024
Shares redeemed (397,363) (4,000,675)
---------- ----------
Net decrease (76,437) $ (764,651)
========== ==========
Massachusetts Limited Maturity
Class A Shares for the Year Dollar
Ended July 31, 1997 Shares Amount
Shares sold 544 $ 5,403
Shares issued to shareholders in
reinvestment of dividends 2,690 26,809
---------- ----------
Total issued 3,234 32,212
Shares redeemed (40,800) (406,101)
---------- ----------
Net decrease (37,566) $ (373,889)
========== ==========
</TABLE>
<PAGE>
Page 92
Massachusetts Limited Maturity
<TABLE>
<CAPTION>
Class A Shares for the Year Dollar
Ended July 31, 1996 Shares Amount
<S> <C> <C>
Shares sold 22,851 $ 226,189
Shares issued to shareholders in
reinvestment of dividends 7,410 74,223
----------- -----------
Total issued 30,261 300,412
Shares redeemed (304,602) (3,055,529)
----------- -----------
Net decrease (274,341) $(2,755,117)
=========== ===========
Massachusetts Limited Maturity
Class B Shares for the Year Dollar
Ended July 31, 1997 Shares Amount
Shares sold 80,283 $ 797,169
Shares issued to shareholders in
reinvestment of dividends 8,004 79,781
----------- -----------
Total issued 88,287 876,950
Shares redeemed (268,214) (2,667,983)
----------- -----------
Net decrease (179,927) $(1,791,033)
=========== ===========
NOTES TO FINANCIAL STATEMENTS (continued)
Massachusetts Limited Maturity
Class B Shares for the Year Dollar
Ended July 31, 1996 Shares Amount
Shares sold 163,902 $ 1,649,909
Shares issued to shareholders in
reinvestment of dividends 9,837 98,401
----------- -----------
Total issued 173,739 1,748,310
Shares redeemed (195,993) (1,955,850)
----------- -----------
Net decrease (22,254) $ (207,540)
=========== ===========
</TABLE>
<PAGE>
Page 93
Massachusetts Limited Maturity
<TABLE>
<CAPTION>
Class C Shares for the Year Dollar
Ended July 31, 1997 Shares Amount
<S> <C> <C>
Shares sold 5,459 $ 54,530
Shares issued to shareholders in
reinvestment of dividends 814 8,108
----------- -----------
Total issued 6,273 62,638
Shares redeemed (1) (4)
----------- -----------
Net increase 6,272 $ 62,634
=========== ===========
Massachusetts Limited Maturity
Class C Shares for the Year Dollar
Ended July 31, 1996 Shares Amount
Shares issued to shareholders in
reinvestment of dividends 1,201 $ 12,027
Shares redeemed (21,496) (212,811)
---------- ----------
Net decrease (20,295) $ (200,784)
========== ==========
Massachusetts Limited Maturity
Class D Shares for the Year Dollar
Ended July 31, 1997 Shares Amount
Shares sold 2,377 $ 23,756
Shares issued to shareholders in
reinvestment of dividends 1,383 13,787
---------- ----------
Total issued 3,760 37,543
Shares redeemed (23,534) (234,590)
---------- ----------
Net decrease (19,774) $ (197,047)
========== ==========
Massachusetts Limited Maturity
Class D Shares for the Year Dollar
Ended July 31, 1996 Shares Amount
Shares sold 101,394 $ 1,009,332
Shares issued to shareholders in
</TABLE>
<PAGE>
Page 94
<TABLE>
<S> <C> <C>
reinvestment of dividends 1,553 15,510
----------- -----------
Total issued 102,947 1,024,842
Shares redeemed (38,979) (387,979)
----------- -----------
Net increase 63,968 $ 636,863
=========== ===========
Michigan Limited Maturity
Class A Shares for the Year Dollar
Ended July 31, 1997 Shares Amount
Shares sold 5,703 $ 56,930
Shares issued to shareholders in
reinvestment of dividends and
distributions 1,551 15,476
----------- -----------
Total issued 7,254 72,406
Shares redeemed (36,666) (365,673)
----------- -----------
Net decrease (29,412) $ (293,267)
=========== ===========
Michigan Limited Maturity
Class A Shares for the Year Dollar
Ended July 31, 1996 Shares Amount
Shares sold 40,664 $ 405,188
Shares issued to shareholders in
reinvestment of dividends 1,529 15,293
----------- -----------
Total issued 42,193 420,481
Shares redeemed (107,949) (1,077,796)
----------- -----------
Net decrease (65,756) $ (657,315)
=========== ===========
Michigan Limited Maturity
Class B Shares for the Year Dollar
Ended July 31, 1997 Shares Amount
Shares sold 13,836 $ 138,203
Shares issued to shareholders in
reinvestment of dividends and
distributions 4,077 40,660
----------- -----------
</TABLE>
<PAGE>
Page 95
<TABLE>
<S> <C> <C>
Total issued 17,913 178,863
Automatic conversion of shares (68) (679)
Shares redeemed (63,278) (630,594)
----------- -----------
Net decrease (45,433) $ (452,410)
=========== ===========
Michigan Limited Maturity
Class B Shares for the Year Dollar
Ended July 31, 1996 Shares Amount
Shares sold 36,451 $ 365,718
Shares issued to shareholders in
reinvestment of dividends 5,013 50,143
----------- -----------
Total issued 41,464 415,861
Shares redeemed (106,251) (1,063,510)
----------- -----------
Net decrease (64,787) $ (647,649)
=========== ===========
Michigan Limited Maturity
Class C Shares for the Year Dollar
Ended July 31, 1997 Shares Amount
Shares issued to shareholders in
reinvestment of dividends and
distributions 5 $ 43
---------- ----------
Net increase 5 $ 43
========== ==========
Michigan Limited Maturity
Class C Shares for the Year Dollar
Ended July 31, 1996 Shares Amount
Shares issued to shareholders in
reinvestment of dividends 4 $ 41
---------- ----------
Net increase 4 $ 41
========== ==========
Michigan Limited Maturity
Class D Shares for the Year Dollar
</TABLE>
<PAGE>
Page 96
<TABLE>
<CAPTION>
Ended July 31, 1997 Shares Amount
<S> <C> <C>
Shares sold 105,057 $ 1,052,902
Automatic conversion of shares 68 679
Shares issued to shareholders in
reinvestment of dividends and
distributions 2,967 26,287
----------- -----------
Total issued 108,092 1,079,868
Shares redeemed (16,668) (166,116)
----------- -----------
Net increase 91,424 $ 913,752
=========== ===========
Michigan Limited Maturity
Class D Shares for the Year Dollar
Ended July 31, 1996 Shares Amount
Shares sold 29,731 $ 298,909
Shares issued to shareholders in
reinvestment of dividends 1,126 11,245
----------- -----------
Total issued 30,857 310,154
Shares redeemed (1,878) (18,614)
----------- -----------
Net increase 28,979 $ 291,540
=========== ===========
New Jersey Limited Maturity
Class A Shares for the Year Dollar
Ended July 31, 1997 Shares Amount
Shares sold 29,509 $ 298,665
Shares issued to shareholders in
reinvestment of dividends 6,491 65,586
----------- -----------
Total issued 36,000 364,251
Shares redeemed (128,438) (1,299,753)
----------- -----------
Net decrease (92,438) $ (935,502)
=========== ===========
New Jersey Limited Maturity
</TABLE>
<PAGE>
Page 97
<TABLE>
Class A Shares for the Year Dollar
Ended July 31, 1996 Shares Amount
<S> <C> <C>
Shares sold 102,101 $ 1,042,636
Shares issued to shareholders in
reinvestment of dividends 8,892 90,367
----------- -----------
Total issued 110,993 1,133,003
Shares redeemed (83,997) (856,193)
----------- -----------
Net decrease 26,996 $ 276,810
=========== ===========
New Jersey Limited Maturity
Class B Shares for the Year Dollar
Ended July 31, 1997 Shares Amount
Shares sold 109,899 $ 1,202,983
Shares issued to shareholders in
reinvestment of dividends 19,246 104,274
----------- -----------
Total issued 129,145 1,307,257
Automatic conversion of shares (5,707) (57,581)
Shares redeemed (228,080) (2,301,791)
----------- -----------
Net decrease (104,642) $(1,052,115)
=========== ===========
New Jersey Limited Maturity
Class B Shares for the Year Dollar
Ended July 31, 1996 Shares Amount
Shares sold 107,343 $ 1,095,824
Shares issued to shareholders in
reinvestment of dividends 14,061 143,043
----------- -----------
Total issued 121,404 1,238,867
Shares redeemed (359,338) (3,646,563)
----------- -----------
Net decrease (237,934) $(2,407,696)
=========== ===========
New Jersey Limited Maturity
Class C Shares for the Year Dollar
Ended July 31, 1997 Shares Amount
Shares issued to shareholders in
reinvestment of dividends 115 $ 1,052
</TABLE>
<PAGE>
Page 98
<TABLE>
<S> <C> <C>
Shares redeemed (3,570) (32,559)
----------- -----------
Net decrease (3,455) $ (31,507)
=========== ===========
NOTES TO FINANCIAL STATEMENTS (continued)
New Jersey Limited Maturity
Class C Shares for the Year Dollar
Ended July 31, 1996 Shares Amount
Shares sold 29,124 $ 272,904
Shares issued to shareholders in
reinvestment of dividends 459 4,199
----------- -----------
Net increase 29,583 $ 277,103
=========== ===========
New Jersey Limited Maturity
Class D Shares for the Year Dollar
Ended July 31, 1997 Shares Amount
Shares sold 5,980 $ 60,387
Automatic conversion of shares 5,707 57,581
Shares issued to shareholders in
reinvestment of dividends 1,286 13,017
----------- -----------
Total issued 12,973 130,985
Shares redeemed (42,910) (436,488)
----------- -----------
Net decrease (29,937) $ (305,503)
=========== ===========
New Jersey Limited Maturity
Class D Shares for the Year Dollar
Ended July 31, 1996 Shares Amount
Shares sold 47,184 $ 477,087
Shares issued to shareholders in
reinvestment of dividends 728 7,411
----------- -----------
Total issued 47,912 484,498
Shares redeemed (37,500) (381,180)
----------- -----------
</TABLE>
<PAGE>
Page 99
<TABLE>
<S> <C> <C>
Net increase 10,412 $ 103,318
=========== ===========
New York Limited Maturity
Class A Shares for the Year Dollar
Ended July 31, 1997 Shares Amount
Shares sold 44,236 $ 449,232
Shares issued to shareholders in
reinvestment of dividends 6,902 69,615
----------- -----------
Total issued 51,138 518,847
Shares redeemed (166,532) (1,682,059)
----------- -----------
Net decrease (115,394) $(1,163,212)
=========== ===========
New York Limited Maturity
Class A Shares for the Year Dollar
Ended July 31, 1996 Shares Amount
Shares sold 44,189 $ 446,602
Shares issued to shareholders in
reinvestment of dividends 11,547 116,691
----------- -----------
Total issued 55,736 563,293
Shares redeemed (164,328) (1,659,912)
----------- -----------
Net decrease (108,592) $(1,096,619)
=========== ===========
New York Limited Maturity
Class B Shares for the Year Dollar
Ended July 31, 1997 Shares Amount
Shares sold 112,364 $ 1,134,351
Shares issued to shareholders in
reinvestment of dividends 16,732 168,855
----------- -----------
Total issued 129,096 1,303,206
Automatic conversion of shares (2,526) (25,482)
Shares redeemed (324,970) (3,274,497)
----------- -----------
Net decrease (198,400) $(1,996,773)
=========== ===========
</TABLE>
<PAGE>
Page 100
<TABLE>
<CAPTION>
New York Limited Maturity
Class B Shares for the Year Dollar
Ended July 31, 1996 Shares Amount
<S> <C> <C>
Shares sold 465,594 $ 4,716,623
Shares issued to shareholders in
reinvestment of dividends 17,959 181,459
----------- -----------
Total issued 483,553 4,898,082
Automatic conversion of shares (3,459) (34,832)
Shares redeemed (356,773) (3,612,208)
----------- -----------
Net increase 123,321 $ 1,251,042
=========== ===========
New York Limited Maturity
Class C Shares for the Year Dollar
Ended July 31, 1997 Shares Amount
Shares sold 231 $ 2,324
Shares issued to shareholders in
reinvestment of dividends 597 6,021
----------- -----------
Total issued 828 8,345
Shares redeemed (15,531) (156,196)
----------- -----------
Net decrease (14,703) $ (147,851)
=========== ===========
New York Limited Maturity
Class C Shares for the Year Dollar
Ended July 31, 1996 Shares Amount
Shares sold 20,376 $ 206,729
Shares issued to shareholders in
reinvestment of dividends 398 4,008
----------- -----------
Total issued 20,774 210,737
Shares redeemed (3,295) (32,843)
----------- -----------
Net increase 17,479 $ 177,894
=========== ===========
</TABLE>
<PAGE>
Page 101
<TABLE>
<CAPTION>
New York Limited Maturity
Class D Shares for the Year Dollar
Ended July 31, 1997 Shares Amount
<S> <C> <C>
Shares sold 115,750 $ 1,166,743
Automatic conversion of shares 2,525 25,482
Shares issued to shareholders in
reinvestment of dividends 15,637 157,823
----------- -----------
Total issued 133,912 1,350,048
Shares redeemed (162,655) (1,648,537)
----------- -----------
Net decrease (28,743) $ (298,489)
=========== ===========
New York Limited Maturity
Class D Shares for the Year Dollar
Ended July 31, 1996 Shares Amount
Shares sold 162,557 $ 1,636,956
Automatic conversion of shares 3,456 34,832
Shares issued to shareholders in
reinvestment of dividends 6,809 68,734
----------- -----------
Total issued 172,822 1,740,522
Shares redeemed (13,363) (135,500)
----------- -----------
Net increase 159,459 $ 1,605,022
=========== ===========
Pennsylvania Limited Maturity
Class A Shares for the Year Dollar
Ended July 31, 1997 Shares Amount
Shares sold 43,588 $ 440,757
Shares issued to shareholders in
reinvestment of dividends 1,049 10,642
----------- -----------
Total issued 44,637 451,399
Shares redeemed (55,137) (556,742)
----------- -----------
Net decrease (10,500) $ (105,343)
=========== ===========
</TABLE>
<PAGE>
Page 102
Pennsylvania Limited Maturity
<TABLE>
<CAPTION>
Class A Shares for the Year Dollar
Ended July 31, 1996 Shares Amount
<S> <C> <C>
Shares sold 5,556 $ 56,865
Shares issued to shareholders in
reinvestment of dividends 1,095 11,133
----------- -----------
Total issued 6,651 67,998
Shares redeemed (17,647) (179,041)
----------- -----------
Net decrease (10,996) $ (111,043)
=========== ===========
Pennsylvania Limited Maturity
Class B Shares for the Year Dollar
Ended July 31, 1997 Shares Amount
Shares sold 121,296 $ 1,230,117
Shares issued to shareholders in
reinvestment of dividends 13,043 132,224
----------- -----------
Total issued 134,339 1,362,341
Shares redeemed (252,143) (2,554,888)
----------- -----------
Net decrease (117,804) $(1,192,547)
=========== ===========
Pennsylvania Limited Maturity
Class B Shares for the Year Dollar
Ended July 31, 1996 Shares Amount
Shares sold 89,391 $ 910,583
Shares issued to shareholders in
reinvestment of dividends 17,173 174,586
----------- -----------
Total issued 106,564 1,085,169
Shares redeemed (220,973) (2,241,767)
----------- -----------
Net decrease (114,409) $(1,156,598)
=========== ===========
Pennsylvania Limited Maturity
Class C Shares for the Year Dollar
Ended July 31, 1997 Shares Amount
Shares sold 727 $ 7,411
Shares issued to shareholders in
reinvestment of dividends 17 175
</TABLE>
<PAGE>
Page 103
<TABLE>
<S> <C> <C>
----------- -----------
Total issued 744 7,586
Shares redeemed (95) (974)
----------- -----------
Net increase 649 $ 6,612
=========== ===========
Pennsylvania Limited Maturity
Class C Shares for the Year Dollar
Ended July 31, 1996 Shares Amount
Shares sold 7,571 $ 82,082
Shares issued to shareholders in
reinvestment of dividends 83 850
----------- -----------
Total issued 7,654 82,932
Shares redeemed (7,650) (82,673)
----------- -----------
Net increase 4 $ 259
=========== ===========
Pennsylvania Limited Maturity
Class D Shares for the Year Dollar
Ended July 31, 1997 Shares Amount
Shares sold 2,512 $ 25,556
Shares issued to shareholders in
reinvestment of dividends 5,768 58,513
----------- -----------
Total issued 8,280 84,069
Shares redeemed (5,160) (52,545)
----------- -----------
Net increase 3,120 $ 31,524
=========== ===========
NOTES TO FINANCIAL STATEMENTS (concluded)
Pennsylvania Limited Maturity
Class D Shares for the Year Dollar
Ended July 31, 1996 Shares Amount
Shares sold 155,680 $ 1,569,272
Shares issued to shareholders in
reinvestment of dividends 1,844 18,653
</TABLE>
<PAGE>
Page 104
<TABLE>
<S> <C> <C>
----------- -----------
Total issued 157,524 1,587,925
Shares redeemed (16,678) (169,594)
----------- -----------
Net increase 140,846 $ 1,418,331
=========== ===========
</TABLE>
5. Capital Loss Carryforward:
At July 31, 1997, each Fund of the Trust had an approximate net
capital loss carryforward as follows: $400,000 in the California
Limited Maturity Fund, of which $122,000 expires in 2003 and
$278,000 expires in 2004; $687,000 in the Florida Limited Maturity
Fund, of which $487,000 expires in 2003 and $200,000 expires in
2004; $298,000 in the Massachusetts Limited Maturity Fund, of which
$28,000 expires in 2003 and $270,000 expires in 2004; $138,000 in
the Michigan Limited Maturity Fund, of which $53,000 expires in 2003
and $85,000 expires in 2004; $167,000 in the New Jersey Limited
Maturity Fund, all of which expires in 2004; $190,000 in the New
York Limited Maturity Fund, of which $105,000 expires in 2002,
$2,000 expires in 2003 and $83,000 expires in 2004; and $60,000 in
the Pennsylvania Limited Maturity Fund, all of which expires in
2003. These amounts will be available to offset like amounts of any
future taxable gains.
<AUDIT-REPORT>
INDEPENDENT AUDITORS' REPORT
The Board of Trustees and Shareholders,
Merrill Lynch Multi-State Limited Maturity
Municipal Series Trust:
We have audited the accompanying statements of assets and
liabilities, including the schedules of investments, of Merrill
Lynch Limited Maturity Municipal Bond Funds for Arizona, California,
Florida, Massachusetts, Michigan, New Jersey, New York and
Pennsylvania of the Merrill Lynch Multi-State Limited Maturity
Municipal Series Trust (the "Trust") as of July 31, 1997, the
related statements of operations for the year then ended and changes
in net assets for each of the years in the two-year period then
ended, and the financial highlights for each of the years in the
three-year period then ended and the period November 26, 1993
(commencement of operations) to July 31, 1994. These financial
statements and the financial highlights are the responsibility of
the Trust's management. Our responsibility is to express an opinion
on these financial statements and the financial highlights based on
<PAGE>
Page 105
our audits.
We conducted our audits in accordance with generally accepted
auditing standards. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial
statements and the financial highlights are free of material
misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements.
Our procedures included confirmation of securities owned at July 31,
1997 by correspondence with the custodian and brokers. An audit also
includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide
a reasonable basis for our opinion.
In our opinion, such financial statements and financial highlights
present fairly, in all material respects, the financial position of
Merrill Lynch Limited Maturity Municipal Bond Funds for Arizona,
California, Florida, Massachusetts, Michigan, New Jersey, New York
and Pennsylvania of the Merrill Lynch Multi-State Limited Maturity
Municipal Series Trust as of July 31, 1997, the results of their
operations, the changes in their net assets, and the financial
highlights for the respective stated periods in conformity with
generally accepted accounting principles.
Deloitte & Touche LLP
Princeton, New Jersey
September 12, 1997
IMPORTANT TAX INFORMATION (unaudited)
All of the net investment income distributions paid monthly by
Merrill Lynch Multi-State Limited Maturity Municipal Series Trust
during its taxable year ended July 31, 1997 qualify as tax-exempt
interest dividends for Federal income tax purposes.
Additionally, there were no capital gains distributions made by any
Fund of the Trust during the year.
Please retain this information for your records.
<PAGE>
EXHIBIT 17(e)
Page 1
<PAGE>
Page 2
MERRILL LYNCH
MUNICIPAL BOND
FUND, INC.
FUND LOGO
Annual Report
June 30, 1997
This report is not authorized for use as an offer of sale or a
solicitation of an offer to buy shares of the Fund unless
accompanied or preceded by the Fund's current prospectus. Past
performance results shown in this report should not be considered a
representation of future performance. Investment return and
principal value of shares will fluctuate so that shares, when
redeemed, may be worth more or less than their original cost.
Statements and other information herein are as dated and are
subject to change.
Merrill Lynch
Municipal Bond Fund, Inc.
Box 9011
Princeton, NJ
08543-9011
<PAGE>
Page 3
Printed on post-consumer recycled paper
MERRILL LYNCH MUNICIPAL BOND FUND, INC.
Officers and
Directors
Arthur Zeikel, President and Director
Ronald W. Forbes, Director
Cynthia A. Montgomery, Director
Charles C. Reilly, Director
Kevin A. Ryan, Director
Richard R. West, Director
Terry K. Glenn, Executive Vice President
Vincent R. Giordano, Senior Vice President
Donald C. Burke, Vice President
Peter J. Hayes, Vice President
Kenneth A. Jacob, Vice President
Gerald M. Richard, Treasurer
Barbara G. Fraser, Secretary
Custodian
The Bank of New York
90 Washington Street, 12th Floor
New York, NY 10286
Transfer Agent
Merrill Lynch Financial Data Services, Inc.
4800 Deer Lake Drive East
Jacksonville, FL 32246-6484
(800) 637-3863
Important Tax
Information
(unaudited)
All of the net investment income distributions declared daily by
Merrill Lynch Municipal Bond Fund, Inc. during its taxable year
<PAGE>
Page 4
ended June 30, 1997 qualify as tax-exempt interest dividends for
Federal income tax purposes.
Additionally, the following table summarizes the taxable ordinary
income distributions declared by the Limited Maturity Portfolio's
Class A, Class B, Class C and Class D Shares during the year.
<TABLE>
<CAPTION>
Record Payable Ordinary
Date Date Income
<S> <C> <C> <C>
Limited Maturity
Portfolio 12/18/96 12/31/96 $.016908
</TABLE>
There were no capital gains distributions declared during
the year.
Please retain this information for your records.
DEAR SHAREHOLDER
The Municipal Market
Environment
The combination of continued, if not diminishing, low inflation and
economic growth that was clearly slowing from the rapid first
quarter 1997 growth allowed long-term, fixed-income yields to
gradually decline during the three months ended June 30, 1997.
Yields slowly fell during April and early May as investor concerns
regarding additional Federal Reserve Board (FRB) action in late May
constrained significant price appreciation. However, with no FRB
move in late May and weak employment growth in early June, bond
yields fell sharply throughout most of June. US Treasury bond yields
declined 35 basis points (0.35%) to 6.75% during the June 1997
quarter. As measured by the Bond Buyer Revenue Bond Index, yields on
long-term uninsured municipal revenue bonds declined to their lowest
level in a year by mid-June. They rose somewhat to end the June
quarter at 5.82%, a decline of over 25 basis points.
During the quarter ended June 30, 1997, the municipal bond market
was outperformed by its taxable counterpart for the first time in
more than a year. This was for the most part the result of a
deterioration in the strong technical position that had supported
the tax-exempt bond market's performance in recent quarters. During
the three months ended June 30, 1997, approximately $55 billion long-
term, tax-exempt securities were issued, an increase of almost 10%
compared to the June 1996 quarter's supply. In recent past quarters,
municipal supply volume was essentially stable or moderately
<PAGE>
Page 5
declining. Even with the significant increase in volume recorded
during the June 1997 quarter, new-issue volume thus far in 1997 has
totaled approximately $95 billion, an increase of 2% compared to the
same period in 1996. The decline in bond yields during the June
quarter has led many issuers to accelerate financing plans to take
advantage of current low rates. Over $21 billion long-term tax-
exempt bonds were issued in June, 1997 alone, an increase of over
15% compared to June 1996 issuance. Additionally, the State of New
Jersey issued $2.8 billion in taxable municipal debt during June
which further added to an already heavy supply position.
Investor demand remained strong during the June quarter. Property
and casualty insurance companies continued to be very active
investors in the municipal bond market, particularly in the
15-year--20-year maturity range. Additionally, during June and July,
municipal bond market investors are expected to receive over $50
billion in payment from tax-exempt bond maturities, coupon payments
and the proceeds from advanced and current refundings. It is
expected that, despite the continued allure of the US equity market,
much of the assets will be reinvested in tax-advantage products
suggesting that investor demand will remain strong in the coming
months.
Additionally, in recent months, much of the new bond issuance was
dominated by a number of larger issues. These included $350 million
in New York Municipal Assistance Corp. issues, $1 billion in New
York City general obligation bonds, $930 million in Port Authority
of New York and New Jersey issues, $565 million in Puerto Rico
Building Authority issues, $600 million in State of California
bonds, $256 million in Los Angeles Metropolitan Transportation
Authority issues, $350 million in Orange County, Florida sales tax
revenue bonds, and $300 million in State of Florida bonds. These and
other bond issues were usually underwritten in states with high
state income taxes and consequently were able to be issued at yields
that were relatively unattractive to residents in other states. This
tended to ameliorate the recent increase in supply as general market
investors tended to ignore much of this specialty-state supply in
favor of higher-yielding issues.
The present economic situation remains nearly ideal. The domestic
economy continues to grow steadily with little, if any, sign of a
resurgence in inflation. Recent economic growth generated
considerable unexpected tax revenues for the Federal government.
Forecasts for the 1997 Federal fiscal deficit were reduced to under
$100 billion, a level not seen since the early 1980s. Such a reduced
Federal deficit enhances the prospect for balanced Federal budget.
All of these factors support a scenario of steady, or even falling,
interest rates in the coming years. Present annual estimates of
future municipal bond issuance remain centered around $175 billion
<PAGE>
Page 6
indicating that the recent increase in supply should return to the
levels seen earlier this year. This should ensure that tax-exempt
products remain an attractive investment alternative throughout
1997.
Fiscal Year in Review
Insured Portfolio and
National Portfolio
During the 12 months ended June 30, 1997, the municipal market was
characterized by enormous volatility within a tight trading range.
Therefore, our investment strategy for the Insured and National
Portfolios focused on capturing this range by purchasing long-term
municipal securities as Treasury bond yields approached 7%, and
selling these securities in rallies toward 6.50%. For the past 12
months, this formula served the Portfolios well on several
occasions. The beginning of 1996 was a period of low interest rates
with long-term Treasury yields at the 6% level. The Portfolios were
defensively postured with a focus on yield, and this structure
served the Fund well as interest rates rose into the middle of the
fiscal year. From that time, quality municipal bonds backed up to
yield of 6%, a point where strong retail demand has historically
entered the market. The result was a subsequent market rally
stemming from a picture of a slowing economy and reduced national
budget deficit. The Portfolios were more aggressively positioned in
anticipation of a stronger technical outlook for the municipal
market.
The beginning of 1997 saw another rise in long-term Treasury yields
to just under 7%, and the process of buying long-term municipal
bonds began again, although at relatively richer levels. The tighter
technical position of the municipal market created a significant
outperformance of municipal bonds over the US Treasury market. As we
approach the second half of 1997, the municipal market is back down
to levels where it normally loses retail support. Professional
traders and arbitrageurs normally account for most activity at these
prices. We intend to reduce the Fund's duration, as we focus on
protecting net asset valuation until the FRB finishes its tightening
phase and a more sustained drop in yields can be forecast.
Limited Maturity Portfolio
The Limited Maturity Portfolio's fiscal year ended June 30, 1997 was
marked by investor confusion over the direction of FRB policy, thus
creating considerable volatility in the market place. In view of
this, our strategy consisted of a series of shifts in response to
market volatility and economic data. We used periods of rising
interest rates as a buying opportunity to lock in attractive yields.
<PAGE>
Page 7
Conversely, we used periods of falling interest rates to take
advantage of market strength and book capital gains by increasing
cash reserves and reducing average portfolio maturity. We took the
opposite investment stance in periods of rising interest rates. In
addition, quality spreads narrowed so much, especially in the last
six months, that we concentrated purchases on higher-rated
securities, since there was little yield advantage to purchasing
lower-rated issues. This strategy served to enhance the performance
of the Fund by maintaining an alternative yield while at the same
time keeping the net asset values as stable as possible, especially
when compared to longer-term bond funds.
In Conclusion
We appreciate your ongoing interest in Merrill Lynch Municipal Bond
Fund, Inc., and we look forward to serving your investment needs in
the months and years to come.
Sincerely,
(Arthur Zeikel)
Arthur Zeikel
President
(Vincent R. Giordano)
Vincent R. Giordano
Senior Vice President
(Kenneth A. Jacob)
Kenneth A. Jacob
Vice President and Portfolio Manager
(Peter J. Hayes)
Peter J. Hayes
Vice President and Portfolio Manager
August 15, 1997
<PAGE>
Page 8
PERFORMANCE DATA
About Fund
Performance
Investors are able to purchase shares of the Fund through the
Merrill Lynch Select Pricing SM System, which offers four pricing
alternatives:
* Class A Shares incur a maximum initial sales charge (front-end
load) of 4% and bear no ongoing distribution or account maintenance
fees for Insured and National Portfolios. Limited Maturity Portfolio
incurs a maximum initial sales charge (front-end load) of 1% and
bears no ongoing distribution or account maintenance fees.
* Class B Shares are subject to a maximum contingent deferred sales
charge of 4% if redeemed during the first year, decreasing 1% each
year thereafter to 0% after the fourth year for Insured and National
Portfolios. Limited Maturity Portfolio is subject to a maximum
contingent deferred sales charge of 1% if redeemed within one year
of purchase. In addition, Insured and National Portfolios are
subject to a distribution fee of 0.50% and an account maintenance
fee of 0.25%. Limited Maturity Portfolio is subject to a
distribution fee of 0.20% and an account maintenance fee of 0.15%.
All three classes of shares automatically convert to Class D Shares
after approximately 10 years. (There is no initial sales charge for
automatic share conversions.)
* Class C Shares are subject to a distribution fee of 0.55% and an
account maintenance fee of 0.25% for Insured and National
Portfolios. Limited Maturity Portfolio is subject to a distribution
fee of 0.20% and an account maintenance fee of 0.15%. In addition,
Class C Shares are subject to a 1% contingent deferred sales charge
if redeemed within one year of purchase.
* Class D Shares incur a maximum initial sales charge of 4% and an
account maintenance fee of 0.25% (but no distribution fee) for
Insured and National Portfolios. Limited Maturity Portfolio incurs a
maximum initial sales charge of 1% and an account maintenance fee of
0.10% (but no distribution fee).
<PAGE>
Page 9
None of the past results shown should be considered a representation
of future performance. Figures shown in the "Average Annual Total
Return" tables as well as the total returns and cumulative total
returns in the "Performance Summary" tables assume reinvestment of
all dividends and capital gains distributions at net asset value on
the payable date. Investment return and principal value of shares
will fluctuate so that shares, when redeemed, may be worth more or
less than their original cost. Dividends paid to each class of
shares will vary because of the different levels of account
maintenance, distribution and transfer agency fees applicable to
each class, which are deducted from the income available to be paid
to shareholders.
Insured Portfolio's
Class A and
Class B Shares
Total Return
Based on a $10,000
Investment
A line graph depicting the growth of an investment in the Fund's Class A
and Class B Shares compared to the growth of an investment in the
Lehman Brothers Municipal Bond Index. Beginning and ending values are:
<TABLE>
<CAPTION>
6/87 6/97
<S> <C> <C>
Insured Portfolio++--
Class A Shares $ 9,600 $20,450
Lehman Brothers Municipal
Bond Index++++ $10,000 $21,940
10/21/88** 6/97
Insured Portfolio++--
Class B Shares $10,000 $17,806
Lehman Brothers Municipal
Bond Index++++ $10,000 $19,568
</TABLE>
*Assuming maximum sales charge, transaction costs and other
operating expenses, including advisory fees.
**Commencement of Operations.
<PAGE>
Page 10
++The Insured Portfolio invests primarily in long-term, investment-
grade municipal bonds (bonds rated Baa or better) covered by
portfolio insurance guaranteeing the timely payment of principal at
maturity and interest.
++++This unmanaged Index consists of revenue bonds, prerefunded
bonds, general obligation bonds and insured bonds, all of which
mature within 30 years.
Past performance is not predictive of future performance.
Insured Portfolio's
Class A and
Class B Shares
Average Annual
Total Return
<TABLE>
<CAPTION>
% Return Without % Return With
Class A Shares* Sales Charge Sales Charge**
<S> <C> <C>
Year Ended 6/30/97 +7.72% +3.41%
Five Years Ended 6/30/97 +6.54 +5.67
Ten Years Ended 6/30/97 +7.86 +7.42
</TABLE>
*Maximum sales charge is 4%.
**Assuming maximum sales charge.
<TABLE>
<CAPTION>
% Return % Return
Class B Shares* Without CDSC With CDSC**
<S> <C> <C>
Year Ended 6/30/97 +6.78% +2.78%
Five Years Ended 6/30/97 +5.71 +5.71
Inception (10/21/88) through 6/30/97 +6.86 +6.86
</TABLE>
*Maximum contingent deferred sales charge is 4% and is reduced to 0%
after 4 years.
**Assuming payment of applicable contingent deferred sales charge.
Insured Portfolio's
Class C and
Class D Shares
<PAGE>
Page 11
Total Return
Based on a $10,000
Investment
A line graph depicting the growth of an investment in the Fund's Class C
and Class D Shares compared to the growth of an investment in the
Lehman Brothers Municipal Bond Index. Beginning and ending values are:
<TABLE>
<CAPTION>
10/21/94 6/97
<S> <C> <C>
Insured Portfolio++--
Class C Shares* $10,000 $12,171
Insured Portfolio++--
Class D Shares* $ 9,600 $11,861
Lehman Brothers Municipal
Bond Index++++ $10,000 $12,702
</TABLE>
*Assuming maximum sales charge, transaction costs and other
operating expenses, including advisory fees.
**Commencement of Operations.
++The Insured Portfolio invests primarily in long-term, investment-
grade municipal bonds (bonds rated Baa or better) covered by
portfolio insurance guaranteeing the timely payment of principal at
maturity and interest.
++++This unmanaged Index consists of revenue bonds, prerefunded
bonds, general obligation bonds and insured bonds, all of which
mature within 30 years.
Past performance is not predictive of future performance.
Insured Portfolio's
Class C and
Class D Shares
Average Annual
Total Return
<TABLE>
<CAPTION>
% Return % Return
Class C Shares* Without CDSC With CDSC**
<S> <C> <C>
Year Ended 6/30/97 +6.86% +5.86%
Inception (10/21/94) through 6/30/97 +7.57 +7.57
</TABLE>
<PAGE>
Page 12
*Maximum contingent deferred sales charge is 1% and is reduced to 0%
after 1 year.
**Assuming payment of applicable contingent deferred sales charge.
<TABLE>
<CAPTION>
% Return Without % Return With
Class D Shares* Sales Charge Sales Charge**
<S> <C> <C>
Year Ended 6/30/97 +7.46% +3.16%
Inception (10/21/94) through 6/30/97 +8.18 +6.55
</TABLE>
*Maximum sales charge is 4%.
**Assuming maximum sales charge.
PERFORMANCE DATA (continued)
National Portfolio's
Class A and
Class B Shares
Total Return
Based on a $10,000
Investment
A line graph depicting the growth of an investment in the Fund's Class A
and Class B Shares compared to the growth of an investment in the
Lehman Brothers Municipal Bond Index. Beginning and ending values are:
<TABLE>
<CAPTION>
6/87 6/97
<S> <C> <C>
National Portfolio++--
Class A Shares* $ 9,600 $20,747
Lehman Brothers Municipal
Bond Index++++ $10,000 $21,940
10/21/88** 6/97
National Portfolio++--
Class B Shares* $10,000 $18,119
</TABLE>
<PAGE>
Page 13
<TABLE>
<S> <C> <C>
Lehman Brothers Municipal
Bond Index++++ $10,000 $19,568
</TABLE>
*Assuming maximum sales charge, transaction costs and other
operating expenses, including advisory fees.
**Commencement of Operations.
++The National Portfolio invests primarily in long-term, medium- to
lower-grade municipal bonds (bonds rated Baa, bonds rated below Baa
and bonds unrated of comparable quality) offering higher yields but
subject to greater risks than investment-grade municipal bonds.
++++This unmanaged Index consists of revenue bonds, prerefunded
bonds, general obligation bonds and insured bonds, all of which
mature within 30 years.
Past performance is not predictive of future performance.
National Portfolio's
Class A and
Class B Shares
Average Annual
Total Return
<TABLE>
<CAPTION>
% Return Without % Return With
Class A Shares* Sales Charge Sales Charge**
<S> <C> <C>
Year Ended 6/30/97 +8.84% +4.49%
Five Years Ended 6/30/97 +7.00 +6.13
Ten Years Ended 6/30/97 +8.01 +7.57
</TABLE>
*Maximum sales charge is 4%.
**Assuming maximum sales charge.
<TABLE>
<CAPTION>
% Return % Return
Class B Shares* Without CDSC With CDSC**
<S> <C> <C>
Year Ended 6/30/97 +7.92% +3.92%
Five Years Ended 6/30/97 +6.20 +6.20
Inception (10/21/88) through 6/30/97 +7.08 +7.08
</TABLE>
*Maximum contingent deferred sales charge is 4% and is reduced to 0%
<PAGE>
Page 14
after 4 years.
**Assuming payments of applicable contingent deferred sales charge.
National Portfolio's
Class C and
Class D Shares
Total Return
Based on a $10,000
Investment
A line graph depicting the growth of an investment in the Fund's Class C
and Class D Shares compared to the growth of an investment in the
Lehman Brothers Municipal Bond Index. Beginning and ending values are:
<TABLE>
<CAPTION>
10/21/94 6/97
<S> <C> <C>
National Portfolio++--
Class C Shares* $10,000 $12,358
National Portfolio++--
Class D Shares* $ 9,600 $12,053
Lehman Brothers Municipal
Bond Index++++ $10,000 $12,702
</TABLE>
*Assuming maximum sales charge, transaction costs and other
operating expenses, including advisory fees.
**Commencement of Operations.
++The National Portfolio invests primarily in long-term, medium- to
lower-grade municipal bonds (bonds rated Baa, bonds rated below Baa
and bonds unrated of comparable quality) offering higher yields but
subject to greater risks than investment-grade municipal bonds.
++++This unmanaged Index consists of revenue bonds, prerefunded
bonds, general obligation bonds and insured bonds, all of which
mature within 30 years.
Past performance is not predictive of future performance.
National Portfolio's
Class C and
Class D Shares
<PAGE>
Page 15
Average Annual
Total Return
<TABLE>
<CAPTION>
% Return % Return
Class C Shares* Without CDSC With CDSC**
<S> <C> <C>
Year Ended 6/30/97 +7.97% +6.97%
Inception (10/21/94) through 6/30/97 +8.19 +8.19
</TABLE>
*Maximum contingent deferred sales charge is 1% and is reduced to 0%
after 1 year.
**Assuming payment of applicable contingent deferred sales charge.
<TABLE>
<CAPTION>
% Return Without % Return With
Class D Shares* Sales Charge Sales Charge**
<S> <C> <C>
Year Ended 6/30/97 +8.57% +4.23%
Inception (10/21/94) through 6/30/97 +8.83 +7.19
</TABLE>
*Maximum sales charge is 4%.
**Assuming maximum sales charge.
Limited Maturity
Portfolio's
Class A and
Class B Shares
Total Return
Based on a $10,000
Investment
A line graph depicting the growth of an investment in the Fund's Class A
and Class B Shares compared to the growth of an investment in the
Lehman Brothers Municipal Bond Index and the Lehman Brothers 3-Year
General Obligation Bond Index. Beginning and ending values are:
<TABLE>
<CAPTION>
6/87 6/97
<S> <C> <C>
Limited Maturity Portfolio++--
Class A Shares* $ 9,900 $16,204
Lehman Brothers Municipal
Bond Index++++ $10,000 $21,940
</TABLE>
<PAGE>
Page 16
<TABLE>
<S> <C> <C>
Lehman Brothers 3-Year General
Obligation Bond Index++++++ $10,000 $17,871
</TABLE>
<TABLE>
<CAPTION>
11/02/92** 6/97
<S> <C> <C>
Limited Maturity Portfolio++--
Class B Shares* $10,000 $11,805
Lehman Brothers Municipal
Bond Index++++ $10,000 $13,589
Lehman Brothers 3-Year General
Obligation Bond Index++++++ $10,000 $12,615
</TABLE>
*Assuming maximum sales charge, transaction costs and other
operating expenses, including advisory fees.
**Commencement of Operations.
++The Limited Maturity Portfolio invests primarily in investment-
grade municipal bonds (bonds rated Baa or better) with a maximum
maturity not to exceed 4 years.
++++This unmanaged Index consists of revenue bonds, prerefunded
bonds, general obligation bonds and insured bonds, all of which
mature within 30 years.
++++++This unmanaged Index consists of state and local government
obligation bonds that mature in 3 years--4 years, rated Baa or
better.
Past performance is not predictive of future performance.
Limited Maturity
Portfolio's
Class A and
Class B Shares
Average Annual
Total Return
<TABLE>
<CAPTION>
% Return Without % Return With
Class A Shares* Sales Charge Sales Charge**
<S> <C> <C>
Year Ended 6/30/97 +4.40% +3.35%
Five Years Ended 6/30/97 +4.04 +3.84
Ten Years Ended 6/30/97 +5.05 +4.94
</TABLE>
<PAGE>
Page 17
*Maximum sales charge is 1%.
**Assuming maximum sales charge.
<TABLE>
<CAPTION>
% Return % Return
Class B Shares* Without CDSC With CDSC**
<S> <C> <C>
Year Ended 6/30/97 +4.13% +3.13%
Inception (11/2/92) through 6/30/97 +3.63 +3.63
</TABLE>
*Maximum contingent deferred sales charge is 1% and is reduced to 0%
after 1 year.
**Assuming payment of applicable contingent deferred sales charge.
PERFORMANCE DATA (continued)
Limited Maturity
Portfolio's
Class C and
Class D Shares
Total Return
Based on a $10,000
Investment
A line graph depicting the growth of an investment in the Fund's Class C
and Class D Shares compared to the growth of an investment in the
Lehman Brothers Municipal Bond Index and the Lehman Brothers 3-Year
General Obligation Bond Index. Beginning and ending values are:
<TABLE>
<CAPTION>
10/21/94 6/97
<S> <C> <C>
Limited Maturity Portfolio++--
Class C Shares* $10,000 $11,097
Limited Maturity Portfolio++--
Class D Shares* $ 9,900 $11,102
Lehman Brothers Municipal
Bond Index++++ $10,000 $12,702
Lehman Brothers 3-Year General
Obligation Bond Index++++++ $10,000 $11,655
</TABLE>
<PAGE>
*Assuming maximum sales charge, transaction costs and other
operating expenses, including advisory fees.
**Commencement of Operations.
++The Limited Maturity Portfolio invests primarily in investment-
grade municipal bonds (bonds rated Baa or better) with a maximum
maturity rate not to exceed 4 years.
++++This unmanaged Index consists of revenue bonds, prerefunded
bonds, general obligation bonds and insured bonds, all of which
mature within 30 years.
++++++This unmanaged Index consists of state and local government
obligation bonds that mature in 3 years--4 years, rated Baa or
better.
Past performance is not predictive of future performance.
Limited Maturity
Portfolio's
Class C and
Class D Shares
Average Annual
Total Return
<TABLE>
<CAPTION>
% Return % Return
Class C Shares* Without CDSC With CDSC**
<S> <C> <C>
Year Ended 6/30/97 +4.11% +3.11%
Inception (10/21/94) through 6/30/97 +3.95 +3.95
</TABLE>
*Maximum contingent deferred sales charge is 1% and is reduced to 0%
after 1 year.
**Assuming payment of applicable contingent deferred sales charge.
<TABLE>
<CAPTION>
% Return Without % Return With
Class D Shares* Sales Charge Sales Charge**
<S> <C> <C>
Year Ended 6/30/97 +4.40% +3.35%
Inception (10/21/94) through 6/30/97 +4.35 +3.96
</TABLE>
*Maximum sales charge is 1%.
**Assuming maximum sales charge.
<PAGE>
Recent
Performance
Results*
<TABLE>
<CAPTION>
12 Month 3 Month Standardized
6/30/97 3/31/97 6/30/96 % Change % Change 30-Day Yield
<S> <C> <C> <C> <C> <C> <C>
Insured Portfolio Class A Shares $ 8.06 $ 7.88 $ 7.91 +1.90% +2.28% 4.91%
Insured Portfolio Class B Shares 8.05 7.87 7.91 +1.77 +2.29 4.36
Insured Portfolio Class C Shares 8.06 7.88 7.91 +1.90 +2.28 4.30
Insured Portfolio Class D Shares 8.06 7.88 7.91 +1.90 +2.28 4.66
National Portfolio Class A Shares 10.38 10.16 10.11 +2.67 +2.17 4.92
National Portfolio Class B Shares 10.37 10.16 10.11 +2.57 +2.07 4.37
National Portfolio Class C Shares 10.38 10.16 10.11 +2.67 +2.17 4.32
National Portfolio Class D Shares 10.39 10.17 10.12 +2.67 +2.16 4.68
Limited Maturity Portfolio Class A Shares 9.93 9.90 9.91 +0.20 +0.30 3.90
Limited Maturity Portfolio Class B Shares 9.94 9.90 9.91 +0.30 +0.40 3.58
Limited Maturity Portfolio Class C Shares 9.91 9.87 9.88 +0.30 +0.41 3.56
Limited Maturity Portfolio Class D Shares 9.94 9.90 9.91 +0.30 +0.40 3.80
Insured Portfolio Class A Shares--Total Return +7.72(1) +3.71(2)
Insured Portfolio Class B Shares--Total Return +6.78(3) +3.52(4)
Insured Portfolio Class C Shares--Total Return +6.86(5) +3.50(6)
Insured Portfolio Class D Shares--Total Return +7.46(7) +3.64(8)
National Portfolio Class A Shares--Total Return +8.84(9) +3.65(10)
National Portfolio Class B Shares--Total Return +7.92(11) +3.36(12)
National Portfolio Class C Shares--Total Return +7.97(13) +3.45(14)
National Portfolio Class D Shares--Total Return +8.57(15) +3.59(16)
Limited Maturity Portfolio Class A Shares--Total Return +4.40(17) +1.30(18)
Limited Maturity Portfolio Class B Shares--Total Return +4.13(19) +1.31(20)
Limited Maturity Portfolio Class C Shares--Total Return +4.11(21) +1.31(22)
Limited Maturity Portfolio Class D Shares--Total Return +4.40(23) +1.38(4)
</TABLE>
*Investment results shown do not reflect sales charges; results
shown would be lower if a sales charge was included.
(1)Percent change includes reinvestment of $0.445 per share
ordinary income dividends.
(2)Percent change includes reinvestment of $0.111 per share
ordinary income dividends.
(3)Percent change includes reinvestment of $0.384 per share
ordinary income dividends.
(4)Percent change includes reinvestment of $0.096 per share
ordinary income dividends.
(5)Percent change includes reinvestment of $0.380 per share
ordinary income dividends.
(6)Percent change includes reinvestment of $0.095 per share
<PAGE>
Page 20
ordinary income dividends.
(7)Percent change includes reinvestment of $0.425 per share
ordinary income dividends.
(8)Percent change includes reinvestment of $0.106 per share
ordinary income dividends.
(9)Percent change includes reinvestment of $0.599 per share
ordinary income dividends.
(10)Percent change includes reinvestment of $0.149 per share
ordinary income dividends.
(11)Percent change includes reinvestment of $0.521 per share
ordinary income dividends.
(12)Percent change includes reinvestment of $0.130 per share
ordinary income dividends.
(13)Percent change includes reinvestment of $0.516 per share
ordinary income dividends.
(14)Percent change includes reinvestment of $0.129 per share
ordinary income dividends.
(15)Percent change includes reinvestment of $0.574 per share
ordinary income dividends.
(16)Percent change includes reinvestment of $0.143 per share
ordinary income dividends.
(17)Percent change includes reinvestment of $0.407 per share
ordinary income dividends.
(18)Percent change includes reinvestment of $0.098 per share
ordinary income dividends.
(19)Percent change includes reinvestment of $0.371 per share
ordinary income dividends.
(20)Percent change includes reinvestment of $0.090 per share
ordinary income dividends.
(21)Percent change includes reinvestment of $0.369 per share
ordinary income dividends.
(22)Percent change includes reinvestment of $0.089 per share
ordinary income dividends.
(23)Percent change includes reinvestment of $0.397 per share
ordinary income dividends.
<PAGE>
Page 21
PERFORMANCE DATA (concluded)
Performance
Summary--
Class A Shares
<TABLE>
<CAPTION>
Beginning/Ending Net Asset Value Dividends Paid* % Change**
Period Limited Limited Limited
Covered Insured National Maturity Insured National Maturity Insured National Maturity
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
10/21/77-12/31/77 $9.80/9.80 -- -- $ 0.09 -- -- + 0.94% -- --
1978 9.80/8.97 -- -- 0.48 -- -- - 3.69 -- --
1979++ 8.97/8.39 $ 9.60/9.60 $ 9.90/9.88 0.53 $ 0.11 $0.10 - 0.77 + 1.17% +0.86%
1980 8.39/6.86 9.60/8.54 9.88/9.74 0.60 0.79 0.64 -11.46 - 3.00 +5.14
1981 6.86/5.66 8.54/7.34 9.74/9.78 0.65 0.90 0.77 - 8.49 - 3.82 +8.64
1982 5.66/6.81 7.34/8.71 9.78/9.89 0.67 0.93 0.80 +33.96 +33.16 +9.67
1983 6.81/6.97 8.71/9.01 9.89/9.76 0.65 0.89 0.67 +12.20 +14.04 +5.57
1984 6.97/6.88 9.01/8.96 9.76/9.74 0.65 0.90 0.67 + 8.49 +10.00 +6.91
1985 6.88/7.53 8.96/9.86 9.74/9.75 0.64 0.88 0.63 +19.56 +20.76 +6.71
1986 7.53/8.18 9.86/10.67 9.75/9.90 0.61(1) 1.01(1) 0.56 +17.24 +19.08 +7.47
1987 8.18/7.56 10.67/9.76 9.90/9.68 0.68(2) 0.86(2) 0.53(2) + 0.86 - 0.40 +3.18
1988 7.56/7.79 9.76/10.11 9.68/9.68 0.57 0.76 0.56 +10.92 +11.71 +5.90
1989 7.79/7.94 10.11/10.25 9.68/9.74 0.57 0.75 0.59 + 9.49 + 9.11 +6.93
1990 7.94/7.86 10.25/10.09 9.74/9.72 0.61(3) 0.73 0.60 + 7.07 + 5.85 +6.11
1991 7.86/8.18 10.09/10.49 9.72/9.88 0.60(4) 0.82(4) 0.54 +12.07 +12.58 +7.39
1992 8.18/8.27 10.49/10.55 9.88/9.97 0.63(5) 0.89(5) 0.45 + 9.04 + 9.35 +5.62
1993 8.27/8.60 10.55/10.91 9.97/10.01 0.71(6) 0.94(6) 0.38 +12.85 +12.59 +4.30
1994 8.60/7.43 10.91/9.40 10.01/9.77 0.60(7) 0.81(7) 0.37 - 6.76 - 6.55 +1.35
1995 7.43/8.25 9.40/10.44 9.77/9.98 0.45 0.60 0.38 +17.43 +17.83 +6.13
1996 8.25/8.07 10.44/10.33 9.98/9.94 0.45 0.60 0.40 + 3.43 + 4.93 +3.72
1/1/97-6/30/97 8.07/8.06 10.33/10.38 9.94/9.93 0.21 0.28 0.19 + 2.66 + 3.41 +1.88
------ ------ -----
Total $11.65 $14.45 $9.83
Cumulative total return as of 6/30/97: +275.65%** +382.46%** +172.64%**
</TABLE>
Performance
Summary--
Class B Shares
<TABLE>
<CAPTION>
Beginning/Ending Net Asset Value Dividends Paid* % Change***
Period Limited Limited Limited
Covered Insured National Maturity**** Insured National Maturity**** Insured National Maturity****
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
10/21/88--12/31/88 $7.81/7.78 $10.14/10.11 -- $0.11 $0.14 -- + 0.97% + 1.08% --
1989 7.78/7.94 10.11/10.25 -- 0.51 0.67 -- + 8.81 + 8.29 --
1990 7.94/7.86 10.25/10.09 -- 0.55(3) 0.66 -- + 6.28 + 5.05 --
1991 7.86/8.17 10.09/10.49 -- 0.54(4) 0.75(4) -- +11.10 +11.74 --
1992 8.17/8.27 10.49/10.55 $ 9.93/9.97 0.56(5) 0.81(5) $0.06 + 8.35 + 8.53 +1.05%
1993 8.27/8.59 10.55/10.90 9.97/10.01 0.64(6) 0.85(6) 0.35 +11.88 +11.65 +3.93
1994 8.59/7.43 10.90/9.39 10.01/9.77 0.53(7) 0.73(7) 0.34 - 7.36 - 7.27 +1.03
1995 7.43/8.24 9.39/10.44 9.77/9.98 0.39 0.52 0.34 +16.41 +17.07 +5.75
1996 8.24/8.07 10.44/10.33 9.98/9.94 0.39 0.52 0.37 + 2.77 + 4.14 +3.35
1/1/97-6/30/97 8.07/8.05 10.33/10.37 9.94/9.94 0.18 0.25 0.17 + 2.15 + 2.93 +1.81
</TABLE>
<PAGE>
Page 22
<TABLE>
<S> <C> <C>
----- ----- -----
Total $4.40 $5.90 $1.63
Cumulative total return as of 6/30/97: +78.06%*** +81.19%*** +18.05%***
</TABLE>
Performance
Summary--
Class C Shares
<TABLE>
<CAPTION>
Beginning/Ending Net Asset Value Dividends Paid* % Change***
Period Limited Limited Limited
Covered Insured National Maturity Insured National Maturity Insured National Maturity
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
10/21/94-12/31/94 $7.68/7.43 $ 9.85/9.40 $ 9.83/9.77 $0.22(7) $0.31(7) $0.07 - 0.41% - 1.39% +0.11%
1995 7.43/8.25 9.40/10.44 9.77/10.00 0.38 0.52 0.34 +16.50 +16.89 +5.92
1996 8.25/8.07 10.44/10.33 10.00/9.91 0.38 0.52 0.36 + 2.59 + 4.09 +2.80
1/1/97-6/30/97 8.07/8.06 10.33/10.38 9.91/9.91 0.18 0.25 0.17 + 2.25 + 3.00 +1.80
----- ----- -----
Total $1.16 $1.60 $0.94
Cumulative total return as of 6/30/97: +21.71%*** +23.58%*** +10.97%***
</TABLE>
Performance
Summary--
Class D Shares
<TABLE>
<CAPTION>
Beginning/Ending Net Asset Value Dividends Paid* % Change**
Period Limited Limited Limited
Covered Insured National Maturity Insured National Maturity Insured National Maturity
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
10/21/94--12/31/94 $7.68/7.43 $ 9.85/9.40 $9.83/9.77 $0.23(7) $0.32(7) $0.07 - 0.30% - 1.29% +0.13%
1995 7.43/8.25 9.40/10.45 9.77/9.98 0.43 0.57 0.37 +17.14 +17.65 +6.03
1996 8.25/8.07 10.45/10.34 9.98/9.94 0.43 0.58 0.39 + 3.17 + 4.67 +3.62
1/1/97-6/30/97 8.07/8.06 10.34/10.39 9.94/9.94 0.20 0.27 0.18 + 2.53 + 3.29 +1.93
----- ----- -----
Total $1.29 $1.74 $1.01
Cumulative total return as of 6/30/97: +23.55%** +25.56%** +12.13%**
</TABLE>
*Figures may include short-term capital gains distributions.
**Figures do not include sales charges; results would be lower if sales charge
was included.
<PAGE>
Page 23
***Figures do not reflect deduction of any sales charges; results would be
lower if sales charge was deducted.
****Limited Maturity Portfolio commenced operations on 11/02/92.
++For National and Limited Maturity Portfolios, period covered is from
11/02/79 to 12/31/79.
(1)Includes capital gains of $0.011 and $0.178 for the Insured and National
Portfolios, respectively.
(2)Includes capital gains of $0.098, $0.073 and $0.012 for the Insured,
National and Limited Maturity Portfolios, respectively.
(3)Includes capital gains of $0.064 for the Insured Portfolio.
(4)Includes capital gains of $0.058 and $0.060 for the Insured and National
Portfolios, respectively.
(5)Includes capital gains of $0.084 and $0.130 for the Insured and National
Portfolios, respectively.
(6)Includes capital gains of $0.181 and $0.157 for the Insured and National
Portfolios, respectively.
(7)Includes capital gains of $0.141 and $ 0.209 for the Insured and National
Portfolios, respectively.
Portfolio
Abbreviations
To simplify the listings of
Merrill Lynch Municipal
Bond Fund, Inc.'s portfolio
holdings in the Schedule of
Investments, we have
abbreviated the names of
many of the securities
according to the list at right.
AMT Alternative Minimum Tax (subject to)
BAN Bond Anticipation Notes
COP Certificates of Participation
EDA Economic Development Authority
GAN Grant Anticipation Notes
GO General Obligation Bonds
HDA Housing Development Authority
HFA Housing Finance Agency
IDA Industrial Development Authority
IDR Industrial Development Revenue Bonds
INFLOS Inverse Floating Rate Municipal Bonds
IRS Inverse Rate Securities
LEVRRS Leveraged Reverse Rate Securities
<PAGE>
Page 24
M/F Multi-Family
PCR Pollution Control Revenue Bonds
RIB Residual Interest Bonds
RITR Residual Interest Tax Receipts
S/F Single-Family
TAN Tax Anticipation Notes
TRAN Tax Revenue Anticipation Notes
UT Unlimited Tax
VRDN Variable Rate Demand Notes
SCHEDULE OF INVESTMENTS
<TABLE>
<CAPTION>
(in Thousands)
Municipal Bonds Insured Portfolio
S&P Moody's Face Value
STATE Ratings Ratings Amount Issue (Note 1a)
<S> <C> <C> <C> <C> <C>
Alabama--0.2% AAA Aaa $ 1,625 Alabama Water Pollution Control Authority, Revolving
Fund Loan, Series A, 6.75% due 8/15/2017 (b) $ 1,789
AAA Aaa 1,250 Mobile, Alabama, GO, Refunding and Capital Improvement
Bonds, 10.875% due 11/01/2007 (c) 1,697
Alaska--0.8% Kenai Peninsula Borough, Alaska, GO (b):
AAA Aaa 6,450 8.40% due 1/01/2000 7,059
AAA Aaa 8,460 8.40% due 1/01/2001 9,526
Arizona--1.5% AAA Aaa 6,750 Arizona State Municipal Financing Program, COP,
Series 34, 7.25% due 8/01/2009 (g) 8,091
AAA Aaa 3,800 Maricopa County, Arizona, IDA, Health Facilities Revenue
Bonds (Saint Joseph's Care Center Project), Series A, 7.75%
due 7/01/2020 (e) 4,170
AAA Aaa 4,000 Maricopa County, Arizona, IDA, Hospital Facility Revenue
Refunding Bonds (Samaritan Health Services), Series A, 7% due
12/01/2013 (e) 4,336
AAA Aaa 7,000 Maricopa County, Arizona, Unified School District No.097
(Deer Valley Project), UT, 1986 Series E, 10% due 7/01/2000 (h) 8,109
AAA Aaa 6,000 Mesa, Arizona, Utility System Revenue Bonds, 5.375%
due 7/01/2017 (h) 5,975
California--1.6% AAA Aaa 5,245 Los Angeles, California, Metropolitan Transportation
Authority, Revenue Refunding Bonds (General Union Station),
Series A, 5.25% due 7/01/2013 (i) 5,217
AAA Aaa 5,000 Los Angeles County, California, Public Works Finance
Authority (Lease Revenue Multiple Capital Facility
Project), Series V-B, 5.125% due 12/01/2017 (b) 4,754
</TABLE>
<PAGE>
Page 25
<TABLE>
<S> <C> <C> <C> <C> <C>
AAA Aaa 8,800 Northern California Power Agency, Multiple Capital Facilities
Revenue Bonds, RIB, 8.837% due 9/02/2025 (d) (e) 10,296
AAA Aaa 5,900 Oakland, California, Redevelopment Agency, Refunding Bonds,
INFLOS, 7.966% due 9/01/2019 (d) (e) 6,114
AAA Aaa 5,000 University of California Revenue Bonds (Multiple Purpose
Projects), Series D, 6.375% due 9/01/2024 (e) 5,399
Colorado--0.9% AAA Aaa 590 La Plata County, Colorado, School District Number 9, GO
(R Durango), UT, 6.60% due 11/01/2017 (h) 643
A1+ VMIG1++ 2,000 Moffat County, Colorado, PCR, Refunding (Pacificorp
Projects), VRDN, 5.50% due 5/01/2013 (b) (f) 2,000
Municipal Subdistrict Northern Colorado, Water Conservancy
District, Revenue Refunding Bonds, Series F (b):
Aaa Aaa 4,470 6.15% due 12/01/2005 4,893
Aaa Aaa 4,250 6.25% due 12/01/2006 4,706
Aaa Aaa 5,055 6.35% due 12/01/2007 5,660
Delaware--0.2% AAA Aaa 3,750 Delaware State Health Facilities Authority, Crossover
Revenue Refunding Bonds (Medical Center of Delaware),
7% due 10/01/2015 (e) 4,004
Florida--3.9% Florida State Division, Board of Finance, Department of
General Services Revenue Bonds, Series 2000-A (b):
AAA Aaa 23,490 (Department of Enviromental Preservation),
5% due 7/01/2012 22,743
AAA Aaa 14,630 (Department of Enviromental Preservation),
5% due 7/01/2013 14,069
AAA Aaa 5,000 (Department of Natural Resource Preservation),
6.75% due 7/01/2013 5,423
AAA Aaa 1,000 Florida State Turnpike Authority, Turnpike Revenue Bonds,
Series A, 7.125% due 7/01/2001 (a) (b) 1,118
AAA Aaa 500 Jacksonville, Florida, Health Facilities Authority,
Hospital Revenue Refunding and Improvement Bonds
(Baptist Medical Center Project), 11.50% due 10/01/2012 (c) 819
AAA Aaa 10,000 Lee County, Florida, Hospital Board of Directors,
Hospital Revenue, INFLOS, 9.063% due 4/01/2020 (d) (e) 11,400
AAA Aaa 3,950 Orange County, Florida, HFA, Mortgage Revenue Refunding
Bonds, Series A, 7.60% due 1/01/2024 (h) (j) 4,191
AAA Aaa 5,790 Orange County, Florida, Health Facilities Authority
Revenue Bonds (Hospital--Orlando Regional Healthcare),
Series A, 6.25% due 10/01/2006 (e) 6,379
AAA Aaa 2,000 Port Saint Lucie, Florida, Special Assessment Revenue Bonds,
Assessment District No. 1, Phase II, 5.40% due 10/01/2016 (e) 1,979
AAA Aaa 4,900 Saint John's River, Florida, Water Management District,
Revenue Refunding Bonds (Land Acquisition), 5.125% due
7/01/2016 (i) 4,685
AAA Aaa 2,850 South Broward Hospital District, Florida, Hospital
Revenue Bonds, RIB, Series C, 9.034% due 5/01/2001 (a) (b) (d) 3,384
AAA Aaa 2,240 West Coast Regional Water Supply Authority, Florida,
</TABLE>
<PAGE>
Page 26
<TABLE>
<S> <C> <C> <C> <C> <C>
Capital Improvement Revenue Bonds (Hillsborough County Project),
10.40% due 10/01/2010 (a) (b) 3,185
Georgia--2.2% A1+ VMIG1++ 6,200 Burke County, Georgia, Development Authority, PCR
(Oglethorpe Power Corporation), VRDN, Series A,
4.15% due 1/01/2016 (f) (h) 6,200
AAA Aaa 4,000 Chatam County, Georgia, School District, UT, 6.75%
due 8/01/2003 (a) (e) 4,526
AAA Aaa 20,000 Georgia Municipal Electric Authority, Power Revenue
Bonds, Series EE, 7% due 1/01/2025 (b) 24,293
AAA Aaa 9,000 Georgia Municipal Electric Authority, Special Obligation
Bonds (Fifth Crossover Series, Project One), 6.40% due
1/01/2013 (b) 10,007
Hawaii--3.7% Hawaii State Airport System Revenue Bonds:
AAA Aaa 21,795 AMT, 7.30% due 7/01/2020 (b) 23,591
AAA Aaa 23,200 AMT, Second Series, 7.50% due 7/01/2020 (h) 25,240
AAA Aaa 10,000 Refunding, Series 1993, 6.45% due 7/01/2013 (e) 10,909
AAA Aaa 5,000 Hawaii State Department of Budget and Finance, Special
Purpose Mortgage Revenue Bonds (Hawaiian Electric Company,
AMT, Series C, 7.375% due 12/01/2020 (e) 5,463
Hawaii State, GO (h):
AAA Aaa 2,920 Series CH, UT, 6% due 11/01/2005 3,146
AAA Aaa 2,000 Series CN, 5.25% due 3/01/2017 1,938
AAA Aaa 4,500 Hawaii State Harbor Capital Improvement Revenue
Bonds, AMT, 7% due 7/01/2017 (e) 4,833
Illinois--11.6% AAA Aaa 28,200 Chicago, Illinois, GO, Series A-1, 5.125% due
1/01/2025 (b) 26,257
AAA Aaa 48,835 Chicago, Illinois, Refunding, Series B, 5.125%
due 1/01/2025 (h) 45,406
AAA Aaa 24,000 Chicago, Illinois, Wastewater Transmission Revenue
Refunding Bonds, 5.125% due 1/01/2025 (h) 22,315
AAA Aaa 3,000 Chicago, Illinois, Water Revenue Bonds, 5% due 11/01/2015 (h) 2,818
AAA Aaa 7,000 Cleveland, Ohio, Public Power System, Revenue Refunding
Bonds (First Mortgage, Series 1), 5.25% due 11/15/2016 (e) 6,825
Illinois Health Facilities Authority Revenue Bonds:
AAA Aaa 3,250 (Elmhurst Memorial Hospital), 6.625% due 1/01/2022 (h) 3,498
AAA Aaa 2,000 (Methodist Health Project), RIB, 9.628% due 5/01/2021 (b) (d) 2,303
AAA Aaa 28,900 Refunding (Sinai Health System), 6% due 2/15/2024 (b) 29,397
AAA Aaa 10,000 (Rush Presbyterian-Saint Luke's Medical Center),
INFLOS, 9.615% due 10/01/2024 (d) (e) 11,550
Illinois State, GO, Refunding Bonds, UT (h):
AAA Aaa 5,000 5.125% due 12/01/2013 4,862
AAA Aaa 5,750 5.125% due 12/01/2016 5,461
AAA Aaa 4,520 Illinois State Sales Tax Revenue Bonds, Series W,
5% due 6/15/2016 (h) 4,266
</TABLE>
<PAGE>
Page 27
SCHEDULE OF INVESTMENTS (continued)
<TABLE>
<CAPTION>
(in Thousands)
Municipal Bonds Insured Portfolio
S&P Moody's Face Value
STATE Ratings Ratings Amount Issue (Note 1a)
<S> <C> <C> <C> <C> <C>
Illinois Metropolitan Pier and Exposition Authority, Illinois,
(concluded) Dedicated State Tax Revenue Bonds (McCormick Place
Expansion Project):
AAA Aaa $ 6,070 Refunding, Series A, 6% due 12/15/2006 (b) $ 6,556
AAA Aaa 16,660 Refunding, Series A, 6.10% due 12/15/2015 (e) (k) 5,851
AAA Aaa 8,330 Refunding, Series A, 6.10% due 12/15/2016 (e) (k) 2,764
AAA Aaa 9,400 Refunding, Series A, 6.05% due 12/15/2018 (e) (k) 2,756
AAA Aaa 13,550 Refunding, Series A, 6.03% due 12/15/2022 (e) (k) 3,120
AAA Aaa 49,575 Refunding, Series A, 6.09% due 12/15/2023 (e) (k) 10,740
AAA Aaa 14,305 Refunding, Series A, 6.24% due 6/15/2024 (e) (k) 3,006
AAA Aaa 6,260 Refunding, Series A, 6.02% due 6/15/2025 (e) (k) 1,238
AAA Aaa 5,000 Refunding, Series B, 5.867% due 6/15/2018 (e) (k) 1,509
AAA Aaa 6,600 Series A, 6.50% due 6/15/2003 (a) (b) 7,366
AAA Aaa 3,000 Series A, 5.87% due 6/15/2020 (h) (k) 802
AAA Aaa 26,000 Regional Transportation Authority, Illinois,
Series A, 6.25% due 6/01/2024 (b) 27,565
Indiana--1.6% AAA Aaa 2,470 Indiana State Employment Development Commission,
Environmental Revenue Bonds (Public Service
Company of Indiana, Inc.), AMT, 7.50% due 3/15/2015 (e) 2,671
AAA Aaa 4,040 Indianapolis, Indiana, Local Public Improvement
Bond Bank, Series A, 7.90% due 2/01/2002 (a) (g) 4,607
AAA Aaa 4,340 Jasper County, Indiana, PCR, Refunding (Northern
Indiana Public Service), 7.10% due 7/01/2017 (e) 4,758
AAA Aaa 4,510 Munster, Indiana, School Building Corp. (First
Mortgage), 5.75% due 1/15/2021 (e) 4,516
AAA Aaa 5,000 Penn, Indiana, High School Building Corp. (First
Mortgage), 6.125% due 1/15/2016 (e) 5,223
Rockport, Indiana, PCR, Refunding:
A1 Aaa 4,200 (AEP Generating Co. Project), VRDN, Series A,
5.50% due 7/01/2025 (b) (f) 4,200
AAA Aaa 5,800 (Indiana--Michigan Power), Series B, 7.60%
due 3/01/2016 (h) 6,421
Iowa--0.3% AAA Aaa 5,000 Des Moines, Iowa, Parking Facilities Revenue
Refunding Bonds, Series A, 7.25% due 7/01/2015 (h) 5,361
Kentucky--0.6% AAA Aaa 11,470 Kentucky Development Finance Authority, Hospital
Revenue Refunding and Improvement Bonds (Saint Elizabeth
Medical Center), Series A, 9% due 11/01/2000 (h) 13,101
</TABLE>
<PAGE>
Page 28
<TABLE>
<S> <C> <C> <C> <C> <C>
Louisiana--0.4% A1 VMIG1++ 10,000 Louisiana Public Facilities Authority, Hospital
Revenue Bonds (Willis-Knighton Medical Center Project),
VRDN, 4.15% due 9/01/2025 (b) (f) 10,000
Maryland--0.4% Maryland State Health and Higher Educational Facilities
Authority Revenue Bonds (University of Maryland
Medical Systems) (h):
AAA Aaa 2,250 Series A, 7% due 7/01/2001 (a) 2,504
AAA Aaa 4,400 Series B, 7% due 7/01/2022 5,284
Massachusetts AAA Aaa 13,000 Massachusetts Bay Transportation Authority, COP,
- --5.3% Series A, 7.65% due 8/01/2000 (a) (i) 14,477
Massachusetts Bay Transportation Authority (Massachusetts
General Transportation), Series A (h):
AAA Aaa 4,325 6% due 3/01/2006 4,670
AAA Aaa 4,610 6% due 3/01/2007 4,993
AAA Aaa 4,690 Massachusetts Educational Loan Authority, Education
Loan Revenue Bonds, AMT, Issue D, Series A,
7.25% due 1/01/2009 (e) 5,027
Massachusetts State Consolidated Loan (b):
AAA Aaa 5,110 Series A, 5% due 3/01/2010 5,002
AAA Aaa 5,420 Series D, 5% due 11/01/2016 5,093
Massachusetts State Health and Educational Facilities
Authority Revenue Bonds:
AAA Aaa 10,000 (Beth Israel), INFLOS, 8.319% due 7/01/2025 (b) (d) 10,400
A1+ VMIG1++ 500 (Capital Assets Program), VRDN, Series D, 5.35%
due 1/01/2035 (e) (f) 500
AAA Aaa 3,100 (Saint Elizabeth's Hospital), LEVRRS, Series E,
9.37% due 8/12/2021 (d) (i) 3,565
AAA Aaa 19,755 Massachusetts State, HFA, Housing Revenue Refunding
Bonds (Insured Rental), AMT, Series A, 6.75% due
7/01/2028 (b) 20,648
AAA Aaa 12,250 Massachusetts State, HFA, M/F Housing Refunding Bonds,
Series A, 6.15% due 7/01/2018 (e) 12,591
AAA Aaa 4,020 Massachusetts State Insured Revenue Refunding Bonds,
Series B, 5.40% due 11/01/2007 (e) 4,184
AAA Aaa 3,250 Massachusetts State Port Authority Revenue Bonds, 13%
due 7/01/2013 (c) 5,448
Massachusetts State Water Resources Authority
Revenue Bonds, Series B (e):
AAA Aaa 2,730 5% due 12/01/2016 2,574
AAA Aaa 10,000 5% due 12/01/2025 9,112
Michigan--2.5% AAA Aaa 5,000 Michigan State Building Authority, Revenue Refunding
Bonds, Series I, 6.25% due 10/01/2020 (e) 5,351
Aaa Aaa 6,915 Michigan State, HDA, Rental Housing Revenue Bonds,
Series B, 6.15% due 10/01/2015 (e) 7,090
AAA Aaa 10,000 Michigan State Strategic Fund Limited Obligation, Revenue
</TABLE>
<PAGE>
Page 29
<TABLE>
<S> <C> <C> <C> <C> <C>
Refunding Bonds (Detroit Edison Co.) Series AA,
6.40% due 9/01/2025 (e) 10,757
Monroe County, Michigan, PCR (Detroit Edison
Company Project), AMT:
AAA Aaa 16,500 (Monroe and Fermi Plants), Series 1, 7.65% due
9/01/2020 (h) 18,078
AAA Aaa 9,745 Series I-B, 7.50% due 9/01/2019 (b) 10,556
Mississippi--0.1% AAA Aaa 1,320 Harrison County, Mississippi, Wastewater Management
District, Revenue Refunding Bonds (Wastewater
Treatment Facilities), Series A, 8.50% due 2/01/2013 (h) 1,751
Missouri--0.2% AAA Aaa 3,500 Sikeston, Missouri, Electric Revenue Refunding Bonds,
6.25% due 6/01/2002 (a) (e) 3,830
Nebraska--0.4% AAA Aaa 9,000 Nebraska Public Power District Revenue Refunding Bonds,
6.125% due 1/01/2015 (e) 9,387
Nevada--2.5% AAA Aaa 3,450 Clark County, Nevada, Airport Revenue Bonds, 6.90%
due 6/01/2001 (a) (h) 3,757
AAA Aaa 45,000 Washoe County, Nevada, Water Facility Revenue Bonds
(Sierra Pacific Power), AMT, 6.65% due 6/01/2017 (e) 48,527
New Jersey--7.1% AAA Aaa 3,350 Cape May County, New Jersey, Industrial Pollution Control
Financing Authority, Revenue Refunding Bonds
(Atlantic City Electric Company Project), Series A,
6.80% due 3/01/2021 (e) 3,957
Casino Reinvestment Development Authority, New Jersey,
Parking Fee Revenue Bonds, Series A (i):
AAA Aaa 3,730 6% due 10/01/2005 4,013
AAA Aaa 3,955 6% due 10/01/2006 4,263
AAA Aaa 4,190 6% due 10/01/2007 4,519
AAA Aaa 28,750 New Jersey EDA, Natural Gas Facilities, Revenue
Refunding Bonds (NUI Corp.), Series A, 6.35% due
10/01/2022 (b) 31,029
A1+ VMIG1++ 1,100 New Jersey Sports and Exposition Authority Revenue
Bonds (State Contract), VRDN, Series C, 3.95% due
9/01/2024 (e) (f) 1,100
New Jersey State Housing and Mortgage Finance Agency
Revenue Bonds (Home Buyer), AMT (e):
AAA Aaa 8,790 Series D, 7.70% due 10/01/2029 9,204
AAA Aaa 23,890 Series M, 7% due 10/01/2026 25,442
New Jersey State Transit Corp., Capital, GAN, Series A (i):
AAA Aaa 15,000 5% due 9/01/2000 15,265
AAA Aaa 35,000 5.25% due 9/01/2001 36,008
New Jersey State Turnpike Authority, Turnpike Revenue
Refunding Bonds:
AAA Aaa 4,215 Series C, 6.50% due 1/01/2008 (b) 4,738
AAA VMIG1++ 6,100 VRDN, Series D, 3.80% due 1/01/2018 (f) (h) 6,100
</TABLE>
<PAGE>
Page 30
SCHEDULE OF INVESTMENTS (continued)
<TABLE>
<CAPTION>
(in Thousands)
Municipal Bonds Insured Portfolio
S&P Moody's Face Value
STATE Ratings Ratings Amount Issue (Note 1a)
<S> <C> <C> <C> <C> <C>
New York--10.7% Nassau County, New York, General Improvement,
UT, Series V (b):
AAA Aaa $ 5,305 5.25% due 3/01/2015 $ 5,197
AAA Aaa 2,845 5.25% due 3/01/2016 2,769
New York City, New York, GO, UT:
AAA Aaa 15,000 Series B, 6.25% due 8/15/2008 (b) 16,376
AAA Aaa 8,175 Series E, 6% due 8/01/2007 (h) 8,809
AAA Aaa 13,770 Series G, 6% due 10/15/2007 (b) 14,855
AAA Aaa 31,000 Series I, 6% due 4/15/2012 (i) 32,509
AAA Aaa 2,500 Series L, 5.20% due 8/01/2008 (e) 2,515
AAA Aaa 10,095 Series M, 5.30% due 6/01/2012 (b) 10,006
AAA Aaa 15,000 Series M, 5.50% due 6/01/2017 (b) 14,874
New York City, New York, GO, UT, Series I (b):
AAA Aaa 2,825 7.25% due 8/15/1999 (a) 3,043
AAA Aaa 7,150 7.25% due 8/15/2013 7,636
AAA Aaa 4,385 7.25% due 8/15/2016 4,693
New York City, New York, Municipal Water Finance Authority,
Water and Sewer System Revenue Bonds:
AAA Aaa 28,510 RITR, 6.945% due 6/15/2026 (d) (e) 29,294
AAA Aaa 5,010 Series C, 6.20% due 6/15/2021 (b) 5,282
A1+ VMIG1++ 1,000 Series C, VRDN, 5.50% due 6/15/2023 (f) (h) 1,000
AAA Aaa 1,500 New York City, New York, Refunding, UT, Series E, 6.20%
due 8/01/2008 (e) 1,637
AAA Aaa 2,500 New York State Dormitory Authority Revenue Bonds
(City University), Third Generation Reserves,
Series 2, 6.25% due 7/01/2019 (e) 2,639
AAA Aaa 1,650 New York State Environmental Facilities Corporation,
Special Obligation Revenue Refunding Bonds
(Riverbank State Park), 5.50% due 4/01/2016 (b) 1,647
AAA Aaa 2,015 New York State Medical Care Facilities Finance Agency,
Revenue Improvement Bonds (Mental Health
Services), Series C, 7.375% due 8/15/2019 (e) 2,161
Aaa Aaa 9,125 New York State Medical Care Facilities Financial Agency
Revenue Bonds (Mental Health Services), Series E, 6.25%
due 8/15/2019 (h) 9,650
AAA VMIG1++ 13,700 New York State Thruway Authority, General Revenue Bonds,
VRDN, 5.45% due 1/01/2024 (f) (h) 13,700
</TABLE>
<PAGE>
Page 31
<TABLE>
<S> <C> <C> <C> <C> <C>
AAA Aaa 12,000 New York State Thruway Authority, Highway and Bridge
Trust Fund, Series B, 5.125% due 4/01/2015 (e) 11,585
Niagara Falls, New York, Public Improvement Bonds, UT (e):
AAA Aaa 2,975 6.90% due 3/01/2023 3,313
AAA Aaa 3,190 6.90% due 3/01/2024 3,553
AAA Aaa 11,940 Suffolk County, New York, Water Authority, Water Works
Revenue Bonds, 5% due 6/01/2011 (e) 11,613
Ohio--1.1% AAA Aaa 2,710 Clermont County, Ohio, Hospital Facilities Revenue
Refunding Bonds (Mercy Health Systems), Series A,
7.50% due 9/01/2001 (a) (b) 3,028
AAA Aaa 12,000 Cleveland, Ohio, Public Power System Revenue Bonds,
First Mortgage, Series A, 7% due 11/15/2004 (a) (e) 13,930
AAA Aaa 1,550 Cleveland, Ohio, Water Works Revenue Bonds (First Mortgage),
Series F-92 A, 6.50% due 1/01/2002 (a) (b) 1,704
AAA Aaa 3,500 Ohio State Building Authority, State Facilities (Adult
Correctional), Series A, 6% due 4/01/2004 (b) 3,762
Oklahoma--1.3% AAA Aaa 10,500 Central Oklahoma, Transportation and Packaging Authority,
Packaging Systems Revenue Refunding, 5.25% due 7/01/2016 (i) 10,169
AAA Aaa 9,280 Grand River Dam Authority, Oklahoma, Revenue Refunding
Bonds, 5.50% due 6/01/2009 (b) 9,718
AAA Aaa 7,500 Oklahoma State Industrial Authority, Hospital Revenue
Bonds (Baptist Medical Center), Series A, 7% due 8/15/2000
(a) (b) 8,212
Oregon--0.2% Port Portland, Oregon, International Airport Revenue
Bonds (Portland International Airport), Series Seven-B,
AMT (e):
AAA Aaa 3,865 7.10% due 1/01/2012 (a) 4,511
AAA Aaa 135 7.10% due 7/01/2021 146
Pennsylvania AAA Aaa 2,000 Allegheny County, Pennsylvania, Higher Education Building
- --5.4% Authority Revenue Bonds (Duquesne University Project),
5% due 3/01/2016 (b) 1,882
AAA Aaa 1,750 Allegheny County, Pennsylvania, Hospital Development Authority
Revenue Bonds (Mercy Hospital of Pittsburgh), 6.75% due
4/01/2001 (a) (b) 1,922
AAA Aaa 6,900 Beaver County, Pennsylvania, Hospital Authority Revenue
Bonds (Medical Center of Beaver, Pennsylvania Inc.), Series A,
6.25% due 7/01/2022 (b) 7,218
AAA Aaa 3,365 Beaver County, Pennsylvania, IDA, PCR, Refunding (Ohio Edison
Company/Mansfield), Series A, 7% due 6/01/2021 (h) 3,675
AAA Aaa 7,590 Erie County, Pennsylvania, Prison Authority, Lease Revenue
Bonds, 6.25% due 11/01/2001 (a) (e) 8,144
AAA Aaa 1,155 Exeter Township Pennsylvania School District, UT, 6.65%
due 5/15/2002 (a) (h) 1,265
Pennsylvania State Higher Educational Assistance Agency,
Student Loan Revenue Bonds, AMT, RIB (d):
</TABLE>
<PAGE>
Page 32
<TABLE>
<S> <C> <C> <C> <C> <C>
AAA Aaa 15,000 9.317% due 9/03/2026 (b) 16,856
AAA Aaa 8,000 Series B, 10.749% due 3/01/2020 (e) 9,160
AAA Aaa 18,600 Series B, 7.955% due 3/01/2022 (b) 19,321
Pennsylvania State Higher Educational Facilities Authority,
College and University Revenue Bonds:
AAA Aaa 1,500 (Bryn Mawr College), 6.50% due 12/01/1999 (a) (h) 1,607
AAA Aaa 4,250 (Temple University), First Series, 6.50% due 4/01/2021 (e) 4,566
AAA Aaa 10,000 Pennsylvania State Higher Educational Facilities Authority,
Health Services Revenue Refunding (Allegheny Delaware Valley),
Series A, 5.875% due 11/15/2016 (e) 10,228
Pennsylvania State Second Series, GO, UT (b):
AAA Aaa 8,875 5% due 11/15/2014 8,468
AAA Aaa 1,000 5% due 11/15/2015 950
AAA Aaa 6,000 Philadelphia, Pennsylvania, Gas Works Revenue Bonds,
12th Series B, 7% due 5/15/2020 (c) (e) 7,013
AAA Aaa 5,000 Philadelphia, Pennsylvania, School District, Series B,
5.50% due 9/01/2015 (b) 4,977
AAA Aaa 4,020 Philadelphia, Pennsylvania, Water and Sewer Authority,
Water and Wastewater Revenue Bonds, 5.60% due 8/01/2018 (e) 3,976
Rhode Island AAA Aaa 6,100 Rhode Island Depositors Economic Protection Corporation,
- --1.4% Special Obligation Bonds, Series A, 6.625% due 8/01/2002
(a) (i) 6,792
AAA Aaa 3,775 Rhode Island State Consolidated Capital Development Loan,
Series A, 6% due 8/01/2007 (e) 4,096
Rhode Island State Health and Educational Building
Corporation Revenue Bonds:
AAA Aaa 1,500 Higher Education Facility, Refunding (Rhode Island
School Design), 5.625% due 6/01/2026 (e) 1,472
AAA Aaa 12,800 (Rhode Island Hospital), INFLOS, 9.487% due
8/15/2021 (d) (h) 15,568
South AAA Aaa 5,000 Florence County, South Carolina, Hospital Revenue
Carolina--1.6% Bonds (McLeod Regional Medical Center Project),
6.75% due 11/01/2020 (h) 5,374
AAA Aaa 4,000 Piedmont, South Carolina, Municipal Power Agency,
Electric Revenue Refunding Bonds, 6.30% due 1/01/2022 (e) 4,263
South Carolina State Public Service Authority, Revenue
Refunding Bonds, Series A (b):
AAA Aaa 17,090 6.375% due 7/01/2021 18,425
AAA Aaa 4,200 6.25% due 1/01/2022 4,452
Texas--14.3% Austin, Texas, Utility System, Combined Revenue Bonds,
Prior Lien (e):
AAA Aaa 11,190 9.25% due 5/15/2004 (a) 14,160
AAA Aaa 5,000 6.25% due 11/15/2019 5,273
AAA Aaa 20,000 Austin, Texas, Utility System, Combined Revenue
Refunding Bonds, Series A, 5.25% due 5/15/2016 (i) 19,348
Brazos River Authority, Texas, PCR (Texas Utilities
</TABLE>
<PAGE>
Page 33
<TABLE>
<S> <C> <C> <C> <C> <C>
Electric Company Project), AMT:
AAA Aaa 6,000 Refunding, 6.50% due 12/01/2027 (b) 6,422
AAA Aaa 12,000 Series B, 6.625% due 6/01/2022 (h) 12,882
AAA Aaa 12,400 Brazos River Authority, Texas, Revenue Refunding
Bonds (Houston Light and Power Co.), Series B,
7.20% due 12/01/2018 (h) 13,387
Brownsville, Texas, Utility System, Revenue
Refunding Bonds:
AAA Aaa 20,000 6.25% due 9/01/2014 (e) 21,862
AAA Aaa 2,000 5.25% due 9/01/2015 (b) 1,952
</TABLE>
<TABLE>
SCHEDULE OF INVESTMENTS (concluded) (in Thousands)
<CAPTION>
Municipal Bonds Insured Portfolio
S&P Moody's Face Value
STATE Ratings Ratings Amount Issue (Note 1a)
<S> <C> <C> <C> <C> <C>
Texas AAA Aaa $ 5,000 Harris County, Texas, Hospital District Mortgage,
(concluded) Revenue Refunding Bonds, 7.40% due 2/15/2010 (b) $ 5,974
Harris County, Texas, Toll Road Revenue Bonds,
Senior Lien:
AAA Aaa 11,455 Senior Lien, Refunding, 5% due 8/15/2016 (h) 10,756
AAA Aaa 20,430 Senior Lien, Refunding, Series A, 6.50% due
8/15/2002 (a) (b) 22,645
AAA Aaa 10,305 Senior Lien, Refunding, Series A, 6.50% due
8/15/2002 (a) (h) 11,422
AAA Aaa 1,000 Senior Lien, Series A, 6.25% due 8/15/2015 (e) 1,069
AAA Aaa 2,750 Senior Lien, Series A, 6.50% due 8/15/2017 (b) 2,994
AAA Aaa 11,100 Senior Lien, Series A, 6.375% due 8/15/2024 (e) 11,953
AAA Aaa 1,695 Series A, 6.50% due 8/15/2011 (h) 1,845
Houston, Texas, Water and Sewer System Revenue Bonds,
Junior Lien, Series A (e):
AAA Aaa 7,615 6.375% due 12/01/2022 8,242
AAA Aaa 19,770 Refunding, 6.125% due 12/01/2015 20,708
AAA Aaa 8,000 Refunding, 6.20% due 12/01/2023 8,400
AAA Aaa 3,500 Houston, Texas, Water Conveyance System Contract,
COP, Series J, 6.25% due 12/15/2013 (b) 3,854
AAA Aaa 5,000 Matagorda County, Texas, Navigation District No. 1, PCR
(Central Power and Light Company Project), AMT, 7.50%
due 3/01/2020 (b) 5,404
AAA Aaa 11,800 Matagorda County, Texas, Navigation District No. 1,
Revenue Refunding Bonds (Houston Light and
Power Co.), Series A, 6.70% due 3/01/2027 (b) 12,838
A1 Aaa 15,400 North Central, Texas, Health Facility Development Corp.
</TABLE>
<PAGE>
Page 34
<TABLE>
<S> <C> <C> <C> <C> <C>
Revenue Bonds (Methodist Hospital, Dallas), VRDN, Series B,
5.50% due 10/01/2015 (f) (g) 15,400
Nueces River Authority, Texas, Water Supply Facilities
Revenue (Corpus Christi Lake Project) (i):
AAA Aaa 3,705 5.25% due 7/15/2013 3,642
AAA Aaa 3,900 5.25% due 7/15/2014 3,814
A1 VMIG1++ 16,500 Sabine River Authority, Texas, PCR, Refunding (Texas
Utilities Project), VRDN, Series A, 5.50% due
3/01/2026 (b) (f) 16,500
AAA Aaa 3,000 San Antonio, Texas, Electric and Gas Revenue Bonds,
Series 95, 5.375% due 2/01/2016 (e) 2,943
AAA Aaa 15,000 Southwest Higher Education Authority Incorporated,
Texas, Revenue Refunding Bonds (Southern Methodist University),
Series B, 6.25% due 10/01/2022 (h) 15,931
Texas State Municipal Power Agency, Revenue Refunding Bonds:
AAA Aaa 3,520 5.25% due 9/01/2007 (e) 3,643
AAA Aaa 3,150 Series A, 6.75% due 9/01/2012 (b) 3,424
AAA Aaa 5,095 Texas State Public Finance Authority, Building Revenue
Bonds, Series A, 5% due 8/01/2016 (b) 4,790
Utah--1.7% AAA Aaa 12,855 Intermountain Power Agency, Utah, Power Supply Revenue
Refunding Bonds, Series B, 6% due 7/01/2006 (e) 13,836
AAA Aaa 14,000 Salt Lake City, Utah, Hospital Revenue Refunding Bonds
(IHC Hospitals, Inc.), INFLOS, 9.491% due
5/15/2020 (b) (d) 16,327
AA- Aaa 1,000 Uintah County, Utah, PCR (Desert Generation and
Transmission Cooperative--National Rural Utilities
Company), Series 1984 F-2, 10.50% due 6/15/2001 (a) 1,218
AAA Aaa 2,650 Utah State Board of Regents, Student Loan Revenue Bonds,
AMT, Series F, 7.45% due 11/01/2008 (b) 2,773
Vermont--1.0% AAA Aaa 18,950 Vermont, HFA, Home Mortgage Purchase Bonds, AMT,
Series B, 7.60% due 12/01/2024 (e) 19,986
Virginia--3.1% AAA Aaa 5,000 Danville, Virginia, IDA, Hospital Revenue Refunding
Bonds (Danville Regional Medical Center),
6.50% due 10/01/2019 (h) 5,394
AAA Aaa 4,000 Loudoun County, Virginia, Sanitation Authority,
Water and Sewer Revenue Refunding Bonds, 5.125% due
1/01/2026 (h) 3,769
AAA Aaa 20,000 Upper Occoquan, Virginia, Sewer Authority Regional,
Revenue Bonds, Series A, 4.75% due 7/01/2029 (e) 17,429
Virginia State, HDA, Commonwealth Mortgage, AMT,
Series A, Sub-Series A-4 (e):
AAA Aaa 5,000 6.30% due 7/01/2014 5,195
AAA Aaa 11,215 6.35% due 7/01/2018 11,535
AAA Aaa 19,000 6.45% due 7/01/2028 19,584
Washington--2.9% Seattle, Washington, Metropolitan Seattle Municipality,
</TABLE>
<PAGE>
Page 35
<TABLE>
<S> <C> <C> <C> <C> <C>
Sewer Revenue Bonds, Series W (e):
AAA Aaa 3,730 6.25% due 1/01/2020 3,949
AAA Aaa 2,465 6.25% due 1/01/2022 2,610
AAA Aaa 4,485 6.25% due 1/01/2023 4,749
AAA Aaa 33,535 Seattle, Washington, Municipal Light and Power
Revenue Bonds, 6.625% due 7/01/2020 (h) 36,944
University of Washington, University Revenue Bonds
(Housing and Dining) (e):
AAA Aaa 2,785 7% due 12/01/2001 (a) 3,121
AAA Aaa 465 7% due 12/01/2021 512
AAA Aaa 7,000 Washington State Health Care Facilities Authority
Revenue Bonds (Southwest Washington
Hospital--Vancouver), 7.125% due 10/01/2019 (g) 7,492
West AAA Aaa 23,150 Marshall County, West Virginia, PCR, Refunding
Virginia--2.4% (Ohio Power Company--Kammer Plant Project), Series B,
5.45% due 7/01/2014 (e) 23,197
AAA Aaa 11,465 Mason County, West Virginia, PCR, Refunding (Appalachian
Power Co.), Series I, 6.85% due 6/01/2022 (e) 12,570
AAA Aaa 12,250 Pleasants County, West Virginia, PCR (Potomac
Pleasants), Series 95-C, 6.15% due 5/01/2015 (b) 12,930
Wisconsin--3.5% Milwaukee County, Wisconsin, GO, UT, Series A (e):
AAA Aaa 2,975 5.25% due 10/01/2011 2,969
AAA Aaa 2,975 5.25% due 10/01/2012 2,956
AAA Aaa 9,000 Superior, Wisconsin, Limited Obligation Revenue
Refunding Bonds (Midwest Energy Resources), Series E,
6.90% due 8/01/2021 (h) 10,630
AAA Aaa 6,500 Wisconsin Public Power System Inc., Power Supply
System Revenue Bonds, Series A, 6.875% due
7/01/2001 (a) (b) 7,199
Wisconsin State Health and Educational Facilities
Authority Revenue Bonds:
AAA Aaa 6,520 Refunding (Sister's Sorrowful Mother), Series A,
6.125% due 8/15/2022 (e) 6,657
AAA Aaa 8,545 Refunding (Waukesha Memorial Hospital), Series A,
5.50% due 8/15/2015 (b) 8,448
AAA Aaa 1,500 (Saint Luke's Medical Center Project), 7.10%
due 8/15/2019 (e) 1,638
AAA Aaa 5,655 (Waukesha Memorial Hospital), Series B, 7.25%
due 8/15/2000 (a) (b) 6,233
Wisconsin State Veteran's Housing Loans, AMT,
Series B (e):
AAA Aaa 7,920 6.50% due 5/01/2020 8,330
AAA Aaa 17,130 6.50% due 5/01/2025 17,908
Wyoming--0.0% A1 VMIG1++ 400 Sweetwater County, Wyoming, PCR, Refunding
(PacificCorp. Projects), VRDN, 5.50% due
11/01/2024 (b) (f) 400
</TABLE>
<PAGE>
Page 36
<TABLE>
<S> <C>
Total Investments (Cost--$1,910,410)--98.6% 2,023,013
Other Assets Less Liabilities--1.4% 29,221
-----------
Net Assets--100.0% $ 2,052,234
===========
</TABLE>
(a)Prerefunded.
(b)AMBAC Insured.
(c)Escrowed to maturity.
(d)The interest rate is subject to change periodically and
inversely based upon prevailing market rates. The interest
rate shown is the rate in effect at June 30, 1997.
(e)MBIA Insured.
(f)The interest rate is subject to change periodically based upon
prevailing market rates. The interest rate shown is the rate
in effect at June 30, 1997.
(g)BIG Insured.
(h)FGIC Insured.
(i)FSA Insured.
(j)GNMA Collateralized.
(k)Represents a zero coupon bond; the interest rate shown is the
effective yield at the time of purchase by the Portfolio.
++Highest short-term rating issued by Moody's Investors Service,
Inc.
Ratings of issues shown have not been audited by Deloitte &
Touche LLP.
See Notes to Financial Statements.
<TABLE>
<CAPTION>
SCHEDULE OF INVESTMENTS (in Thousands)
Municipal Bonds National Portfolio
S&P Moody's Face Value
STATE Ratings Ratings Amount Issue (Note 1a)
<S> <C> <C> <C> <C> <C>
Alaska--2.5% Valdez, Alaska, Marine Terminal Revenue Refunding Bonds:
AA Aa2 $ 6,000 (British Petroleum Pipeline), Series B, 7% due
12/01/2025 $ 6,584
AA Aa3 27,150 (Sohio Pipeline--British Petroleum Oil), 7.125%
due 12/01/2025 30,123
</TABLE>
<PAGE>
Page 37
<TABLE>
<S> <C> <C> <C> <C> <C>
California--3.7% NR* NR* 6,000 Antioch, California, Improvement Bond Act of 1915
(Assessment District No.27--Lone Tree), Series E,
7.125% due 9/02/2016 6,189
A Aaa 10,350 California State Public Works Board, Lease Revenue
Bonds (Department of Corrections--Monterey County,
Soledad II), Series A, 7% due 11/01/2004 (j) 12,143
NR* NR* 4,000 Long Beach, California, Special Tax Community
Facilities (District No.3--Pine Avenue), 6.375% due 9/01/2023 4,001
A NR* 8,975 Palmdale, California, Civic Authority, Revenue Refunding
Bonds (Merged Redevelopment Project), Series A,
6.60% due 9/01/2034 9,800
AAA Aaa 18,755 Riverside County, California, Asset Leasing Corp.,
Leasehold Revenue Bonds (Riverside County Hospital
Project), 6%** due 6/01/2023 (f) 4,151
AAA Aaa 20,000 San Diego, California, Public Facilities Financing
Authority, Sewer Revenue Bonds, 5% due 5/15/2020 (e) 18,510
Colorado--2.8% Denver, Colorado, City and County Airport Revenue Bonds, AMT:
BBB Baa1 3,000 Series A, 7.50% due 11/15/2023 3,410
BBB Baa1 8,570 Series A, 8% due 11/15/2025 9,507
BBB Baa1 13,000 Series B, 7.25% due 11/15/2023 14,335
BBB Baa1 13,150 Series D, 7.75% due 11/15/2021 14,678
Connecticut--0.3% AA- Baa1 4,550 Connecticut State Resource Recovery Authority, Resource
Recovery Revenue Bonds (American Refunding Fuel), AMT,
Series A, 8% due 11/15/2015 4,875
Delaware--0.6% AAA NR* 7,500 Delaware State Health Facilities Authority, Revenue
Refunding Bonds (Beebe Medical Center Project),
8.50% due 6/01/2000 (j) 8,481
District of District of Columbia General Fund Recovery Bonds, VRDN, UT (a):
Columbia--1.3% A1+ VMIG1++ 6,300 Series B-1, 5.25% due 6/01/2003 6,300
A1+ VMIG1++ 8,200 Series B-3, 5.25% due 6/01/2003 8,200
A+ A1 3,750 District of Columbia Revenue Bonds (Georgetown
University), RIB, 8.683% due 4/25/2022 (k) 4,186
Florida--4.3% AAA Aaa 16,070 Dade County, Florida, Refunding, Seaport, UT, 5.125%
due 10/01/2026 (f) 15,130
AAA Aaa 8,140 Dade County, Florida, Special Obligation Refunding Bonds,
Series B, 5% due 10/01/2035 (c) 7,432
AAA Aaa 6,330 Florida HFA (Antigua Club Apartments), AMT, Series A-1,
7% due 2/01/2035 (c) 6,791
NR* Aaa 8,860 Florida HFA, Home Ownership Revenue Bonds, AMT,
Series G1, 7.90% due 3/01/2022 (i) 9,333
NR* NR* 5,000 Grand Haven Community Development District, Florida,
Special Assessment, Series A, 6.30% due 5/01/2002 4,995
AA Aa3 5,000 Hillsborough County, Florida, IDA, PCR, Refunding
(Tampa Electric Company Project), Series 91, 7.875%
</TABLE>
<PAGE>
Page 38
<TABLE>
<S> <C> <C> <C> <C> <C>
due 8/01/2021 5,703
A- NR* 2,700 Leesburg, Florida, Hospital Revenue Capital Improvement
Bonds (Leesburg Regional Medical Center Project),
Series 91-A, 7.50% due 7/01/2002 (j) 3,109
AAA NR* 4,345 Orange County, Florida, HFA, Mortgage Revenue Bonds, AMT,
Series A, 8.375% due 3/01/2021 (i) 4,587
AAA Aaa 5,850 South Broward, Florida, Hospital District, RIB,
Series C, 9.034% due 5/01/2001 (c) (j) (k) 6,947
Georgia--1.8% A1 VMIG1++ 3,580 Floyd County, Georgia, Development Authority, PCR,
Georgia Power Co. (Plt Hammond Project), VRDN,
5.60% due 9/01/2026 (a) 3,580
AAA Aaa 20,000 Metropolitan Atlanta, Georgia, Rapid Transit Authority,
Sales Tax Revenue Bonds, Second Indenture, Series A,
6.90% due 7/01/2004 (f) (j) 22,966
Idaho--0.1% AA NR* 1,675 Idaho Housing Agency, S/F Mortgage, AMT, Series E,
7.875% due 7/01/2024 (b) 1,803
Illinois--5.1% AA- Aa3 8,000 Chicago, Illinois, Gas Supply Revenue Bonds (Peoples
Gas, Light & Coke Company Project), AMT, Series A,
8.10% due 5/01/2020 8,785
Chicago, Illinois, O'Hare International Airport,
Special Facilities Revenue Bonds (United Airlines, Inc.):
BB+ Baa2 4,675 AMT, Series B, 8.95% due 5/01/2018 5,295
BB+ Baa2 13,565 Series 1984-B, 8.85% due 5/01/2018 15,346
AAA Aaa 16,000 Chicago, Illinois, Water Revenue Bonds, 5% due 11/01/2025 (e) 14,580
BBB NR* 3,500 Illinois Development Finance Authority, Revenue
Refunding Bonds (Community Rehabilitation Providers),
Series A, 6% due 7/01/2015 3,477
A+ Aa2 5,100 Illinois HDA, Residential Mortgage Revenue Bonds,
RIB, AMT, Series C-2, 9.471% due 2/01/2018 (k) 5,514
Illinois Health Facilities Authority Revenue Bonds:
AAA Aaa 1,500 (Methodist Health Project), RIB, 9.628% due
5/01/2021 (c) (k) 1,727
BBB NR* 2,625 Refunding (Saint Elizabeth's Hospital--Chicago),
7.75% due 7/01/2016 2,907
AAA Aaa 11,000 (Rush Presbyterian--Saint Luke's Medical Center),
INFLOS, 9.615% due 10/01/2024 (f) (k) 12,705
NR* A1 4,400 Southwestern Illinois Development Authority, Sewer
Facilities Revenue Bonds (Monsanto Company Project),
AMT, 7.30% due 7/15/2015 4,871
Indiana--1.8% NR* Aaa 9,500 Indiana State Educational Facilities Authority Revenue
Bonds (University of Notre Dame Project),
6.70% due 3/01/2025 10,519
A+ NR* 9,100 Indianapolis, Indiana, Local Public Improvement Bond
Bank, Refunding, Series D, 6.75% due 2/01/2020 9,931
AA- Aa2 5,700 Petersburg, Indiana, PCR, Refunding (Indianapolis
</TABLE>
<PAGE>
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<TABLE>
<S> <C> <C> <C> <C> <C>
Power & Light Company Project), 6.625% due 12/01/2024 6,144
Iowa--0.7% NR* NR* 9,000 Iowa Finance Authority, Health Care Facilities,
Revenue Refunding Bonds (Care Initiatives Project),
9.25% due 7/01/2025 10,652
Kansas--1.7% Wichita, Kansas, Hospital Revenue Bonds, RIB (f) (k):
AAA Aaa 12,000 Series III-A, 8.702% due 10/01/2017 13,740
AAA Aaa 10,000 Series III-B, 8.691% due 10/21/2022 11,450
Kentucky--2.0% AAA Aaa 18,500 Louisville and Jefferson County, Kentucky, Metropolitan
Sewer District, Sewer and Drain System Revenue
Refunding Bonds, Series A, 5.25% due 5/15/2027 (f) 17,642
NR* NR* 4,500 Perry County, Kentucky, Solid Waste Disposal Revenue
Bonds (TJ International Project), AMT, 7% due 6/01/2024 4,725
AA- Aa2 6,345 Trimble County, Kentucky, PCR (Louisville Gas and
Electric Company), AMT, Series A, 7.625% due 11/01/2020 6,949
Louisiana--4.1% NR* Baa2 37,850 Lake Charles, Louisiana, Harbor and Terminal District
Port Facilities, Revenue Refunding Bonds (Trunkline LNG
Company Project), 7.75% due 8/15/2022 43,018
Port New Orleans, Louisiana, IDR, Refunding (Continental
Grain Company Project):
BB NR* 10,000 7.50% due 7/01/2013 10,785
BB NR* 5,000 6.50% due 1/01/2017 5,101
BBB Baa2 1,100 Saint Charles Parish, Louisiana, PCR (Union Carbide
Project), AMT, 7.35% due 11/01/2022 1,183
Maine--0.3% NR* Aa2 3,815 Maine State Housing Authority, Mortgage Purchase, AMT,
Series B-4, 6.90% due 11/15/2026 3,990
Maryland--0.5% AA- Aa 7,000 Maryland State Stadium Authority, Sports Facilities
Lease Revenue Bonds, AMT, Series D, 7.60% due 12/15/2019 7,618
Massachusetts AAA Aaa 6,000 Massachusetts Bay Transportation Authority,
- --5.0% Series B, 7.875% due 3/01/2001 (j) 6,811
AAA Aaa 7,500 Massachusetts State, HFA, Revenue Bonds (Residential
Development) Series C, 6.90% due 11/15/2021 (d) 8,015
Massachusetts State Health and Educational Facilities
Authority Revenue Bonds:
AAA NR* 6,900 (North Adams Regional Hospital), Series A, 9.625%
due 7/01/1999 (j) 7,736
NR* B2 12,350 Refunding (New England Memorial Hospital), Series B,
6.25% due 7/01/2023 9,880
Massachusetts State Water Resources Authority:
AAA Aaa 12,500 Series A, 6.50% due 12/01/2001 (j) 13,766
AAA Aaa 30,000 Series B, 5% due 12/01/2025 (f) 27,335
</TABLE>
<PAGE>
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<TABLE>
<CAPTION>
SCHEDULE OF INVESTMENTS (continued) (in Thousands)
Municipal Bonds National Portfolio
S&P Moody's Face Value
STATE Ratings Ratings Amount Issue (Note 1a)
<S> <C> <C> <C> <C> <C>
Michigan--2.1% A A $ 3,500 Michigan State Hospital Finance Authority, Hospital
Revenue Bonds (Detroit Medical Center), Series A,
7.50% due 8/15/2011 $ 3,848
AAA Aaa 15,000 Michigan State Hospital Finance Authority
(Sisters of Mercy), INFLOS, 8.514% due 2/15/2022 (h) (k) 16,275
BBB Baa1 9,350 Monroe County, Michigan, PCR (Detroit Edison
Company Project), AMT, Series A, 7.75% due 12/01/2019 10,100
Minnesota--1.5% Minnesota State, HFA, S/F Mortgage:
AA+ Aa 6,080 AMT, Series A, 7.45% due 7/01/2022 (b) 6,402
AA+ Aa2 4,250 Series F, 6.30% due 7/01/2025 4,397
AA+ NR* 3,000 Rochester, Minnesota, Health Care Facilities Revenue
Bonds (Mayo Foundation), IRS, Series H, 7.875% due
11/15/2015 (k) 3,229
AAA NR* 8,070 Saint Paul, Minnesota, Housing and Redevelopment
Authority, S/F Mortgage Revenue Refunding Bonds,
Series C, 6.95% due 12/01/2031 8,403
Mississippi--0.7% BBB Baa 5,950 Lowndes County, Mississippi, Hospital Revenue
Refunding Bonds (Golden Triangle Medical Center),
8.50% due 2/01/2010 6,552
NR* Aaa 4,195 Mississippi Home Corporation, S/F Mortgage Revenue Bonds
(Access Program), AMT, Final Tranche, Series A, 6.90%
due 6/01/2024 (i) 4,423
Missouri & BBB NR* 11,400 Bi-State Development Agency, Missouri and Illinois,
Illinois-- Metropolitan No. 5, Refunding (American Commonwealth
0.8% Lines, Inc.), 7.75% due 6/01/2010 12,457
Nebraska--0.3% AAA Aaa 3,400 Nebraska Investment Finance Authority, S/F Mortgage
Revenue Bonds, AMT, Series 2, RIB, 11.177% due
9/10/2030 (i) (k) 3,787
New Hampshire-- A+ Aa 2,685 New Hampshire State, HFA, S/F Residential Mortgage,
0.2% AMT, 7.90% due 7/01/2022 2,840
New Jersey--1.2% NR* NR* 6,495 New Jersey Health Care Facilities Financing Authority
Revenue Bonds (Riverwood Center), Series A,
9.90% due 7/01/2001 (j) 7,852
AA- A3 9,500 University of Medicine and Dentistry of New Jersey,
</TABLE>
<PAGE>
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<TABLE>
<S> <C> <C> <C> <C> <C>
Series C, 7.20% due 12/01/1999 (j) 10,332
New York--14.6% Metropolitan Transportation Authority, New York,
Service Contract Refunding Bonds (Commuter Facilities),
Series 5:
BBB Baa1 2,145 6.90% due 7/01/2006 2,330
BBB Baa1 5,000 7% due 7/01/2012 5,399
New York City, New York, GO, UT:
AAA Aaa 7,240 Series A, 7.75% due 8/15/2001 (j) 8,254
BBB+ Aaa 9,385 Series A, 7.75% due 8/15/2001 (j) 10,699
BBB+ Baa1 280 Series A, 7.75% due 8/15/2017 311
BBB+ Baa1 4,000 Series B, 8.25% due 6/01/2006 4,803
BBB+ Baa1 10,000 Series B, Fiscal 92, 7.75% due 2/01/2011 11,177
BBB+ Baa1 4,500 Series B, Fiscal 92, 7.75% due 2/01/2012 5,030
BBB+ Baa1 2,875 Series B, Fiscal 92, 7.75% due 2/01/2013 3,213
BBB+ Baa1 1,650 Series B, Fiscal 92, 7.75% due 2/01/2014 1,844
AAA Aaa 1,865 Series D, 7.70% due 2/01/2002 (j) 2,140
BBB+ Aaa 3,495 Series D, Group C, 8% due 8/01/2001 (j) 4,009
AAA Aaa 5,495 Series F, 8.25% due 11/15/2001 (j) 6,402
New York City, New York, Municipal Water Finance
Authority, Water and Sewer System Revenue Bonds:
A- Aaa 11,685 Series 93-B, 6.50% due 6/15/2002 (j) 12,856
A- Aaa 10,000 Series A, 6.75% due 6/15/2001 (j) 10,952
AAA Aaa 10,000 Series B, 5.875% due 6/15/2026 (h) 10,185
A1 VMIG1++ 3,000 Series RI-2, RITR, 7.025% due 6/15/2025 (k) 3,150
New York State Dormitory Authority Revenue Bonds (State
University Educational Facilities):
BBB+ Baa1 6,735 Refunding, Series B, 7.375% due 5/15/2014 7,318
BBB+ Baa1 2,000 Refunding, Series B, 7% due 5/15/2016 2,135
BBB+ Baa1 5,000 Series A, 7.50% due 5/15/2013 5,978
New York State Local Government Assistance Corporation:
A Aaa 6,000 Series A, 7% due 4/01/2002 (j) 6,757
A Aaa 10,000 Series B, 7.25% due 4/01/2001 (j) 11,182
A A3 10,000 Series C, 6.25% due 4/01/2018 10,475
A A3 18,810 Series D, 5% due 4/01/2023 17,065
New York State Medical Care Facilities, Finance
Agency Revenue Bonds (New York Hospital Mortgage),
Series A (b) (c):
AAA Aaa 8,400 6.75% due 8/15/2014 9,223
AAA Aaa 9,100 6.80% due 8/15/2024 10,020
BBB Aaa 10,000 New York State Urban Development Corporation Revenue
Bonds (State Facilities), 7.50% due 4/01/2001 (j) 11,268
AAA Aaa 4,000 Niagara Falls, New York, Commission Toll Bridge, Revenue
Refunding Bonds, Series B, 5.25% due 10/01/2021 (e) 3,775
AAA Aaa 6,800 Port Authority of New York and New Jersey, Consolidated
Revenue Bonds, 104th Series, 3rd Installment,
4.75% due 1/15/2026 6,007
A+ Aa 12,750 Triborough Bridge and Tunnel Authority, New York,
General Purpose Revenue Bonds, Series B, 5.20% due
</TABLE>
<PAGE>
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<TABLE>
<S> <C> <C> <C> <C> <C>
1/01/2027 12,035
North A1+ NR* 5,000 Raleigh-Durham, North Carolina, Airport Authority,
Carolina--0.3% Special Facilities Revenue Refunding Bonds (American Airlines),
VRDN, Series B, 5.50% due 11/01/2015 (a) 5,000
Ohio--2.7% AAA Aaa 20,300 Cleveland, Ohio, Public Power System Revenue Bonds
(First Mortgage), Series A, 7% due 11/15/2004 (f) (j) 23,565
Ohio, HFA, S/F Mortgage Revenue Bonds, AMT (i):
AAA Aaa 9,100 RIB, Series B-4, 9.578% due 3/31/2031 (k) 9,942
AAA NR* 1,895 Series B, 8.25% due 12/15/2019 2,003
AAA NR* 4,295 Series C, 7.85% due 9/01/2021 4,565
Pennsylvania BBB Baa 10,000 Pennsylvania Convention Center Authority, Revenue
- --3.8% Refunding Bonds, Series A, 6.75% due 9/01/2019 10,787
Pennsylvania HFA, Refunding:
AA Aa2 8,800 RIB, AMT, Series 1991-31C, 9.68% due 10/01/2023 (k) 9,647
AAA Aaa 7,850 (Rental Housing), 6.50% due 7/01/2023 (d) 8,122
AAA A1 5,000 Pennsylvania State, 3rd Series A, UT, 6.50% due 11/15/2001 (j) 5,473
AAA Aaa 10,000 Pennsylvania State Higher Educational Assistance Agency,
Student Loan Revenue Bonds, RIB, AMT, 9.317%
due 9/03/2026 (c) (k) 11,238
NR* NR* 2,000 Pennsylvania State Higher Educational Facilities
Authority, College and University Revenue Bonds
(Eastern College), Series B, 8% due 10/15/2025 2,139
AAA Aaa 4,800 Pittsburgh, Pennsylvania, Water and Sewer Authority,
Water and Sewer System, Revenue Refunding Bonds,
Series A, 6.75% due 9/01/2001 (e) (j) 5,309
AAA Aaa 2,500 York County, Pennsylvania, Hospital Authority Revenue
Bonds (York Hospital), 7% due 1/01/2001 (c) (j) 2,754
Rhode AAA Aaa 5,250 Rhode Island Depositors Economic Protection Corporation,
Island--0.4% Special Obligation Bonds, Series A, 6.95% due 8/01/2002 (j) 5,923
South AAA Aaa 2,500 Spartanburg County, South Carolina, Hospital Revenue
Carolina--0.2% Bonds (Health Services District Inc.), Series A,
5.50% due 4/15/2027 (f) 2,439
</TABLE>
<PAGE>
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SCHEDULE OF INVESTMENTS (concluded)
<TABLE>
<CAPTION>
(In Thousands)
Municipal Bonds National Portfolio
S&P Moody's Face Value
STATE Ratings Ratings Amount Issue (Note 1a)
<S> <C> <C> <C> <C> <C>
South AAA Aa1 $ 9,085 South Dakota HDA, Homeownership Mortgage, Series A,
Dakota--0.7% 7.15% due 5/01/2027 $ 9,551
Tennessee--1.9% NR* Aaa 10,000 Knox County, Tennessee, Health, Educational and
Housing Facilities Board, Hospital Facilities Revenue
Bonds (Baptist Health System of East Tennessee),
8.60% due 4/15/1999 (j) 10,916
AAA Aaa 14,750 Metropolitan Government, Nashville and Davidson County,
Tennessee (Meharry Medical College Project), 6.875% due
12/01/2004 (j) 16,999
Texas--16.8% AAA Aaa 10,000 Bexar County, Texas, Health Facilities Development
Corporation, Revenue Refunding Bonds (Baptist Health
Systems), Series A, 5.25% due 11/15/2027 (f) 9,326
Brazos River Authority, Texas, PCR (Texas Utilities
Electric Company Project), AMT, Series A:
BBB+ Baa1 2,095 8.25% due 1/01/2019 2,230
BBB+ Baa1 18,150 7.875% due 3/01/2021 19,958
A- A2 12,350 Brazos River Authority, Texas, Revenue Refunding Bonds
(Houston Light and Power), Series 1989-A, 7.625% due 5/01/2019 13,175
BBB Baa1 7,250 Gulf Coast Waste Disposal Authority, Texas, Revenue Bonds
(Champion International Corporation), AMT, 7.45% due 5/01/2026 7,890
AA Aa3 19,000 Harris County, Texas, Health Facilities Development
Corporation, Health Care System Revenue Bonds
(Sisters of Charity), 7.10% due 7/01/2001 (j) 21,183
Harris County, Texas, Health Facilities Development
Corporation, Hospital Revenue Bonds:
A1+ NR* 200 (Methodist Hospital), 5.50% due 12/01/2025 (a) 200
AAA Aaa 10,150 RITR, Series 12, 8.07% due 10/01/2024 (k) 11,317
AAA Aaa 10,000 Refunding (Memorial Hospital System Project), Series A,
5.50% due 6/01/2024 (f) 9,766
AAA Aa3 12,470 (Saint Luke's Episcopal Hospital Project), Series A,
6.75% due 2/15/2001 (j) 13,667
AAA Aaa 11,100 Harris County, Texas, Toll Road Revenue Bonds, Senior Lien,
Series A, 6.375% due 8/15/2024 (f) 11,953
Houston, Texas, Water and Sewer System, Revenue Refunding
Bonds, Junior Lien, Series A:
AAA Aaa 10,000 6.20% due 12/01/2023 (f) 10,501
AAA Aaa 10,000 5.25% due 12/01/2025 (e) 9,518
BB Ba1 8,095 Jefferson County, Texas, Health Facilities Development
Corporation, Hospital Revenue Bonds (Baptist
Healthcare System Project), 8.875% due 6/01/2021 8,523
AA Aa 12,000 North Central Texas, Health Facilities Development
Corporation Revenue Bonds (Baylor University
Medical Center), INFLOS, Series A, 9.715% due
5/15/2001 (j) (k) 14,415
BB Ba 3,000 Odessa, Texas, Junior College District, Revenue
Refunding Bonds, Series A, 8.125% due 12/01/2018 3,258
A+ Aa 5,195 Texas Housing Agency, Residential Development Mortgage
</TABLE>
<PAGE>
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<TABLE>
<S> <C> <C> <C> <C> <C>
Revenue Bonds, Series A, 7.50% due 7/01/2015 (i) 5,538
Texas State Turnpike Authority, Dallas North Thruway
Revenue Bonds (President George Bush Turnpike) (e):
AAA Aaa 15,000 5.25% due 1/01/2023 14,311
AAA Aaa 30,000 5% due 1/01/2025 27,608
AA Aa 4,440 Texas State Veteran's Housing Assistance (Fund II),
AMT, UT, Series A, 7% due 12/01/2025 4,713
AA Aa 16,000 Texas State Water Development, Series A, B, and C,
5.25% due 8/01/2028 15,338
AAA Aa1 15,000 Texas Water Development Revenue Board, State Revolving
Fund, Senior-Lien, Series B, 5.125% due 7/15/2018 14,321
Utah--3.6% A1+ VMIG1++ 10,300 Emery County, Utah, PCR, Refunding (Pacificorp Projects),
VRDN, 4.10% due 11/01/2024 (a) (c) 10,300
A+ A1 20,000 Intermountain Power Agency, Utah, Power Supply Revenue
Refunding Bonds, Series D, 5% due 7/01/2021 18,254
AAA Aaa 5,000 Murray City, Utah, Hospital Revenue Bonds (IHC Health
Services Inc.), 4.75% due 5/15/2020 (f) 4,351
AAA Aaa 5,500 Utah County, Utah, Hospital Revenue Bonds (IHC Health
Services, Inc.), 5.25% due 8/15/2026 5,120
AAA Aaa 13,250 Weber County, Utah, Municipal Building Authority,
Lease Revenue Bonds, 7.50% due 12/15/2004 (j) 15,795
Virginia--1.5% AAA Aaa 20,000 Prince William County, Virginia, Service Authority,
Water and Sewer System, Revenue Refunding Bonds,
5% due 7/01/2021 (e) 18,328
AA+ Aa1 4,000 Virginia State, HDA, Commonwealth Mortgage, Series A,
7.15% due 1/01/2033 4,183
Washington--3.3% AA Aaa 10,000 Washington State, GO, Series B, UT, 6.75% due 6/01/2001 (j) 10,845
AAA Aaa 13,860 Washington State, GO, Series C, 5% due 1/01/2022 (e) 12,863
AAA NR* 18,070 Washington State Housing Finance Commission, S/F
Mortgage Revenue Refunding Bonds, AMT, Series E,
7.10% due 7/01/2022 (g) 18,878
AA- Aaa 5,000 Washington State Public Power Supply System, Revenue
Refunding Bonds (Nuclear Project No. 1), Series A,
6.875% due 7/01/2001 (j) 5,538
West NR* NR* 4,000 Upshur County, West Virginia, Solid Waste Disposal
Virginia--0.9% Revenue Bonds (TJ International Project), AMT,
7% due 7/15/2025 4,218
AAA Aaa 8,400 West Virginia State, Housing Development Fund,
Housing Finance, Series D, 7.05% due 11/01/2024 8,854
Wisconsin--1.9% AA Aa 4,925 Wisconsin Housing and EDA, Home Ownership Revenue Bonds,
Series A, 7.10% due 3/01/2023 5,186
Wisconsin Housing and EDA, Housing Revenue Bonds:
A A1 5,400 Series B, 7.05% due 11/01/2022 5,716
A A1 5,105 Series C, 7% due 5/01/2015 5,405
</TABLE>
<PAGE>
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<TABLE>
<S> <C>
AAA Aaa 11,400 Wisconsin State Health and Educational Facilities
Authority Revenue Bonds (Wausau Hospitals Inc.), Series B,
6.70% due 8/15/2020 (c) 12,205
Total Investments (Cost--$1,357,588)--98.0% 1,448,055
Other Assets Less Liabilities--2.0% 29,832
----------
Net Assets--100.0% $1,477,887
==========
</TABLE>
(a)The interest rate is subject to change periodically based upon
prevailing market rates. The interest rate shown is the rate in
effect at June 30, 1997.
(b)FHA Insured.
(c)AMBAC Insured.
(d)FNMA Collateralized.
(e)FGIC Insured.
(f)MBIA Insured.
(g)GNMA/FNMA Collateralized.
(h)FSA Insured.
(i)GNMA Collateralized.
(j)Prerefunded.
(k)The interest rate is subject to change periodically and
inversely based upon prevailing market rates. The interest rate
shown is the rate in effect at June 30, 1997.
*Not Rated.
**Represents a zero coupon bond; the interest rate shown is the
effective yield at the time of purchase by the Portfolio.
++Highest short-term rating issued by Moody's Investors Service,
Inc.
Ratings of issues shown have not been audited by Deloitte &
Touche LLP.
See Notes to Financial Statements.
SCHEDULE OF INVESTMENTS
<TABLE>
<CAPTION>
(in Thousands)
Municipal Bonds Limited Maturity Portfolio
S&P Moody's Face Value
STATE Ratings Ratings Amount Issue (Note 1a)
<S> <C> <C> <C> <C> <C>
Alabama--1.0% A1+ NR* $ 4,100 Birmingham, Alabama, Medical Clinic Board Revenue
Bonds (U.A.H.S.F.), VRDN, 5.50% due 12/01/2026 (b) $ 4,100
</TABLE>
<PAGE>
Page 46
<TABLE>
<S> <C> <C> <C> <C> <C>
Arizona--1.2% AAA Aaa 5,000 Phoenix, Arizona, Airport Revenue Refunding Bonds,
Series A, 5.55% due 7/01/2000 (d) 5,174
Arkansas--0.1% NR* Aa 460 Arkansas State Student Loan Authority Revenue Bonds,
AMT, Senior Series A-1, 5.50% due 12/01/1998 467
California--2.4% SP1+ VMIG1++ 5,000 Los Angeles County, California, Local Educational
Agencies, COP, TRAN, Series B, 4.50% due 9/30/1998 (e) 5,026
SP1+ NR* 5,000 Santa Barbara County, California, TRAN, Series A, 4.50%
due 10/01/1998 5,029
Connecticut--2.7% AAA Aaa 2,160 Bridgeport, Connecticut, Refunding, GO, UT, Series A,
4.40% due 9/01/1998 (c) 2,171
AAA Aaa 8,900 Connecticut State Special Assessment (Unemployment
Compensation Advance Fund), Revenue Refunding Bonds,
Series A, 5.50% due 5/15/2001 (c) 9,255
District of A1+ VMIG1++ 10,000 District of Columbia, General Fund Recovery
Columbia-- Bonds, VRDN, UT, Series B-2, 5.25% due 6/01/2003 (b) 10,000
2.4%
Florida--1.4% AAA Aaa 4,000 Florida School Boards Association Incorporated,
Lease Revenue Bonds (Orange County School Board
Project), 6.80% due 7/01/1998 (c) 4,116
A1+ VMIG1++ 1,500 Hillsborough County, Florida, IDA, PCR, Refunding
(Tampa Electric Company Project), VRDN, 4% due
5/15/2018 (b) 1,500
Georgia--2.5% A NR* 6,410 Burke County, Georgia, Development Authority, PCR,
Refunding (Oglethorpe Power Corporation) (Plant
Vogtle Project), Series B, 3.95% due 1/01/1999 6,375
AAA Aaa 4,000 Georgia Municipal Electric Authority, General Power
Revenue Refunding Bonds, Series D, 6% due
1/01/2000 (c) 4,157
Hawaii--2.1% AAA Aaa 3,200 Hawaii State, GO, Refunding, Series CO, 6% due 3/01/2001 (f) 3,366
A+ Aa3 5,250 Hawaii State, GO, UT, Series CH, 4.75% due 11/01/1999 5,311
Illinois--7.8% AA- NR* 10,000 Chicago, Illinois, Board of Education, COP (School
Reform Equipment Acquisition), 4.60% due 12/01/1999 10,038
AA- Baa1 5,000 Chicago, Illinois, School Finance Authority, 7.25%
due 6/01/1998 5,116
AAA Aaa 3,000 Cook County, Illinois, High School District No. 205,
Revenue Refunding Bonds (Thorton Township), UT, 5.60%
due 6/01/1998 (f) (g) 3,048
AA Aa1 6,425 Cook County, Illinois, Township High School District
No. 211 (Palatine and Schaumb), 4.25% due 12/01/1998 6,444
Illinois State Refunding, GO, UT:
</TABLE>
<PAGE>
Page 47
<TABLE>
<S> <C> <C> <C> <C> <C>
AA- Aa3 4,600 3.90% due 12/01/1998 4,587
AAA Aaa 3,500 5.125% due 12/01/1999 (f) 3,576
Kentucky--2.2% Kentucky State Property and Buildings Commission,
Revenue Refunding Bonds:
A+ A 5,000 (Project No. 55), 4.10% due 9/01/1998 5,004
A+ A 4,000 (Project No. 59), 5% due 11/01/1998 4,048
Louisiana--5.9% A1+ VMIG1++ 5,000 Louisiana State Recovery District, Sales Tax
Revenue Bonds, 4.25% due 7/01/1998 (d) (g) 5,021
AAA Aaa 19,230 Louisiana State Refunding, GO, Series A, 5.50%
due 8/01/1998 (f) 19,546
Massachusetts AAA Aaa 2,005 Massachusetts State Health and Educational
- --2.9% Facilities Authority Revenue Bonds (New England Medical
Center Hospitals), Series G, 3.80% due 7/01/1997 (d) 2,005
A- A1 10,160 New England Education Loan Marketing Corporation
Refunding Bonds (Massachusetts Student Loan),
Series D, 4.75% due 7/01/1998 10,231
Michigan--3.8% AAA Aaa 8,000 Detroit, Michigan, Distributable State Aid, 7.20%
due 5/01/1999 (a) (c) 8,576
AA- A1 6,000 Michigan State Building Authority, Revenue Refunding
Bonds, Series I, 5.80% due 10/01/1998 6,127
NR* VMIG1++ 800 Michigan State Strategic Fund, Solid Waste Disposal
Revenue Bonds (Grayling Generating Project),
VRDN, AMT, 4.25% due 1/01/2014 (b) 800
Minnesota--1.3% AAA Aaa 2,385 Metropolitan Council, Minnesota, St. Paul Metropolitan
Area Transit, UT, Series C, 4.75% due 2/01/2000 2,414
AAA Aaa 2,965 Minnesota State, HFA (Rental Housing), Refunding,
Series D, 4.50% due 8/01/1999 (d) 2,983
Mississippi--2.4% NR* Aaa 10,000 Mississippi Higher Education Assistance Corporation,
Student Loan Revenue Bonds, AMT, Series B, 4.80%
due 9/01/1998 10,061
Nebraska--1.5% A+ A1 6,250 Nebraska Public Power District Revenue Bonds (Consumer
Public Power District), 4.90% due 7/01/1998 6,309
New Jersey--3.6% A A1 2,000 Camden County, New Jersey, Improvement Authority, Solid
Waste Disposal, Revenue Refunding Bonds (Landfill Project),
4% due 7/01/1997 2,000
NR* NR* 3,000 New Jersey State, EDA, Economic Growth Revenue Bonds
(Greater Mercer County), VRDN, Series C, 4.25% due
11/01/2011 (b) 3,000
AAA Aaa 5,715 New Jersey State Educational Facilities Authority
Revenue Bonds (Higher Education Facilities Trust Fund),
Series A, 5.125% due 9/01/1999 (c) 5,829
</TABLE>
<PAGE>
Page 48
<TABLE>
<S> <C> <C> <C> <C> <C>
AA+ Aa1 4,250 New Jersey State Refunding, UT, Series O, 5.10% due 2/15/2000 4,341
New York--10.4% AA- Aa2 4,550 Municipal Assistance Corporation, Refunding, Series E,
5.50% due 7/01/2000 4,700
A1+ VMIG1++ 100 New York City, New York, Municipal Water Finance Authority,
Water and Sewer System Revenue Bonds, VRDN, Series G, 5.50%
due 6/15/2024 (b) (f) 100
New York State Dormitory Authority Revenue Bonds
(Consolidated City University System), Series A:
BBB Baa1 6,675 4.50% due 7/01/1998 6,711
BBB Baa1 10,885 4.75% due 7/01/1999 10,945
AAA Aaa 3,000 New York State Dormitory Authority Revenue Bonds
(State University Educational), Series A, 7.125% due
5/15/1999 (a) 3,218
A- A2 11,820 New York State GO, Refunding, 7.80% due 11/15/1998 12,397
BBB Aaa 5,000 New York State Urban Development Corporation Revenue
Bonds (State Facilities), 7.50% due 4/01/2001 (a) 5,634
Ohio--12.4% AAA Aaa 2,000 Cincinnati, Ohio, City School District, TAN, Series B,
5% due 12/01/1998 (c) 2,026
NR* Aa1 6,000 Franklin County, Ohio, Hospital Revenue Refunding
Bonds (US Health Corp.), Series B, 4.50% due 6/01/2000 6,005
Ohio State Air Quality Development Authority, Revenue
Refunding Bonds (Ohio Edison Project), Series A:
A1+ VMIG1++ 7,500 3.95% due 2/01/1998 7,502
A1+ VMIG1++ 7,000 4.35% due 8/01/1998 7,003
NR* Aaa 6,700 Ohio State Buillding Authority, Correctional Facilities,
Series A, 7.35% due 8/01/1999 (a) 7,251
AAA Aa1 12,400 Ohio State Highway, GO, Series V, 4.70% due 5/15/2000 12,556
AAA Aaa 3,500 Ohio State Public Facilities Commission, Higher
Education Capital Facilities, Series II-A, 4.375% due
11/01/1999 (d) 3,516
NR* Aaa 6,000 Student Loan Funding Corporation, Cincinnati, Ohio,
Student Loan Revenue Refunding Bonds, AMT, Series C,
5.70% due 7/01/1999 6,123
Oklahoma--0.6% AA Aa 2,400 Tulsa, Oklahoma, GO, UT, 5.125% due 5/01/1999 2,443
</TABLE>
<PAGE>
Page 49
<TABLE>
<CAPTION>
SCHEDULE OF INVESTMENTS (concluded) (in Thousands)
Municipal Bonds Limited Maturity Portfolio
S&P Moody's Face Value
STATE Ratings Ratings Amount Issue (Note 1a)
<S> <C> <C> <C> <C> <C>
Oregon--0.7% A1+ VMIG1++ $ 3,000 Port Saint Helens, Oregon, PCR (Portland General Electric
Company Project), VRDN, Series A, 5.40% due 4/01/2010 (b) $ 3,000
Pennsylvania A1+ P1 4,000 Beaver County, Pennsylvania, IDA, PCR, Refunding
- --4.1% (Ohio Edison Co.), Series A, 4.30% due 10/01/1997 4,006
AAA Aaa 8,675 Pennsylvania State Refunding Bonds, GO, UT, 5.25%
due 11/15/1998 (f) 8,818
AAA Aaa 4,145 Pittsburgh, Pennsylvania, Refunding, UT, Series A,
5% due 3/01/2000 (d) 4,214
South Carolina-- AA- A1 8,250 Greenville County, South Carolina, School District,
2.0% UT, 4% due 3/01/1999 8,235
Tennessee--2.9% AA NR* 11,885 Clarksville, Tennessee, Public Building Authority,
Revenue Refunding Bonds (Pooled Loan Program),
4.40% due 12/01/1998 11,926
Texas--6.6% Brazos, Texas, Higher Education Authority Incorporated,
Student Loan Revenue Refunding Bonds, AMT:
NR* Aaa 2,200 Senior Lien, Series A-2, 5.45% due 6/01/1998 2,228
NR* Aa 5,135 Series C-1, 5.60% due 11/01/1997 5,163
Harris County, Texas, Health Facilities Development
Corporation, Hospital Revenue Bonds, VRDN (b):
A1+ NR* 5,900 (Methodist Hospital), 5.50% due 12/01/2025 5,900
AAA NR* 1,000 (Saint Luke's Episcopal Hospital), Series B, 5.50%
due 9/15/1997 (a) 1,000
AAA NR* 100 (Saint Luke's Episcopal Hospital), Series D, 5.50%
due 9/15/1997 (a) 100
AA+ Aa3 6,700 Houston, Texas, Independent School District, Public
Property Financial Contractual Obligation, 5% due
7/15/1999 6,816
AAA Aaa 2,600 Houston, Texas, Water and Sewer Systems, Revenue
Refunding Bonds, Junior Lien, Series C, 5.90% due
12/01/1999 (c) 2,701
NR* Aaa 2,455 Panhandle-Plains, Texas, Higher Education Authority
Incorporated, Student Loan Revenue Refunding Bonds,
Series C, 4.15% due 9/01/1997 2,456
A+ A2 2,000 Texas Municipal Power Agency, Revenue Refunding Bonds,
GO, Series A, 4.25% due 9/01/1997 2,001
Utah--1.1% AAA Aaa 4,700 Utah State Building and Highway, GO, UT, 4.40% due 7/01/1999 4,730
Virginia--0.6% AA Aa 2,555 Virginia State Transportation Board, Transportation
Contract Revenue Bonds (US Route 58 Corridor),
Series B, 5% due 5/15/2000 2,604
Washington--4.7% AAA Aaa 5,000 Seattle, Washington, Municipality Metropolitan Seattle
Sewer Revenue Bonds, Series U, 6.60% due 1/01/2001 (a) (f) 5,448
AA- Aa1 4,890 Washington State Public Power Supply System, Revenue
</TABLE>
<PAGE>
Page 50
<TABLE>
<S> <C> <C> <C> <C> <C>
Refunding Bonds (Nuclear Project No. 2), Series A,
3.75% due 7/01/1997 4,890
AA Aa1 4,655 Washington State Refunding Bonds, GO, Series R-96B,
5% due 7/01/1998 4,705
Washington State Refunding Bonds, Motor Vehicle Fuel Tax:
AA Aa1 2,000 Series R-94B, 4.20% due 9/01/1998 2,005
AA Aa1 2,285 Series R-96A, 5% due 7/01/1998 2,310
Wisconsin--8.0% NR* NR* 4,500 Ashland County, Wisconsin, Promissary Notes, GO,
4.25% due 9/01/1997 4,502
NR* VMIG1++ 4,000 Mequon, Wisconsin, BAN, 4.10% due 11/01/1998 3,999
A A1 2,795 Wisconsin Housing and Economic Development Authority,
Housing Revenue Refunding Bonds, Series C, 4.30% due 11/01/1997 2,801
AA Aa2 11,000 Wisconsin State, GO, Refunding, UT, Series 3, 4.25%
due 11/01/1999 11,026
AA Aa2 4,385 Wisconsin State, GO, Series C, 5.50% due 5/01/2000 4,527
AAA NR* 5,720 Wisconsin State Health and Educational Facilities
Authority Revenue Bonds (Medical College of Wisconsin),
Series D, 7.35% due 12/01/2000 (a) 6,339
Wyoming--0.1% NR* P1 500 Uinta County, Wyoming, PCR, Refunding (Chevron USA Inc.
Project), VRDN, 5.50% due 8/15/2020 (b) 500
Total Investments (Cost--$422,830)--101.4% 424,231
Liabilities in Excess of Other Assets--(1.4%) (5,824)
----------
Net Assets--100.0% $ 418,407
==========
</TABLE>
(a)Prerefunded.
(b)The interest rate is subject to change periodically based upon
prevailing market rates. The interest rate shown is the rate
in effect at June 30, 1997.
(c)AMBAC Insured.
(d)MBIA Insured.
(e)FSA Insured.
(f)FGIC Insured.
(g)Escrowed to maturity.
*Not Rated.
++Highest short-term rating issued by Moody's Investors Service,
Inc. Ratings of issues shown have not been audited by Deloitte &
Touche LLP.
See Notes to Financial Statements.
<PAGE>
Page 51
STATEMENTS OF ASSETS AND LIABILITIES
<TABLE>
<CAPTION>
Limited
Insured National Maturity
As of June 30, 1997 Portfolio Portfolio Portfolio
<S> <C> <C> <C> <C>
Assets: Investments, at value* (Note 1a) $2,023,013,288 $1,448,054,588 $ 424,230,840
Cash 341,447 27,022 8,214
Receivables:
Interest 33,075,339 24,381,071 5,787,339
Securities sold 790,557 32,781,265 --
Capital shares sold 495,726 2,646,269 150,322
Prepaid registration fees and
other assets (Note 1e) 62,244 45,650 35,641
-------------- -------------- --------------
Total assets 2,057,778,601 1,507,935,865 430,212,356
-------------- -------------- --------------
Liabilities: Payables:
Securities purchased -- 25,674,754 10,052,250
Capital shares redeemed 2,061,664 1,683,390 1,193,090
Dividends to shareholders (Note 1f) 2,087,176 1,569,055 319,585
Investment adviser (Note 2) 594,019 563,269 113,098
Distributor (Note 2) 352,997 276,962 17,801
Accrued expenses and other liabilities 448,645 281,479 109,734
-------------- -------------- --------------
Total liabilities 5,544,501 30,048,909 11,805,558
-------------- -------------- --------------
Net Assets: Net assets $2,052,234,100 $1,477,886,956 $ 418,406,798
============== ============== ==============
Net Assets Class A Common Stock, $0.10
Consist of: par value++ $ 17,887,640 $ 9,478,498 $ 3,459,447
Class B Common Stock, $0.10
par value++++ 6,953,748 4,001,411 546,268
Class C Common Stock, $0.10
par value++++++ 147,978 270,686 1,085
Class D Common Stock, $0.10
par value++++++++ 476,701 491,440 205,079
Paid-in capital in excess of par 1,918,211,598 1,431,757,690 417,358,735
Accumulated realized capital losses
on investments--net (Note 5) (4,046,911) (58,579,321) (4,564,588)
Unrealized appreciation on
investments--net 112,603,346 90,466,552 1,400,772
-------------- -------------- --------------
Net assets $2,052,234,100 $1,477,886,956 $ 418,406,798
============== ============== ==============
</TABLE>
<PAGE>
Page 52
<TABLE>
<S> <C> <C> <C> <C>
Net Asset Class A:
Value: Net assets $1,441,784,905 $ 983,649,868 $ 343,640,605
============== ============== ==============
Shares outstanding 178,876,402 94,784,980 34,594,470
============== ============== ==============
Net asset value and redemption
price per share $ 8.06 $ 10.38 $ 9.93
============== ============== ==============
Class B:
Net assets $ 560,105,263 $ 415,103,109 $ 54,275,249
============== ============== ==============
Shares outstanding 69,537,481 40,014,114 5,462,680
============== ============== ==============
Net asset value and redemption
price per share $ 8.05 $ 10.37 $ 9.94
============== ============== ==============
Class C:
Net assets $ 11,922,182 $ 28,095,834 $ 107,551
============== ============== ==============
Shares outstanding 1,479,783 2,706,856 10,849
============== ============== ==============
Net asset value and redemption
price per share $ 8.06 $ 10.38 $ 9.91
============== ============== ==============
Class D:
Net assets $ 38,421,750 $ 51,038,145 $ 20,383,393
============== ============== ==============
Shares outstanding 4,767,006 4,914,399 2,050,790
============== ============== ==============
Net asset value and redemption
price per share $ 8.06 $ 10.39 $ 9.94
============== ============== ==============
*Identified cost $1,910,409,942 $1,357,588,036 $ 422,830,068
============== ============== ==============
++Authorized shares--Class A 500,000,000 375,000,000 150,000,000
============== ============== ==============
++++Authorized shares--Class B 375,000,000 375,000,000 150,000,000
============== ============== ==============
++++++Authorized shares--Class C 375,000,000 375,000,000 150,000,000
============== ============== ==============
++++++++Authorized shares--Class D 500,000,000 375,000,000 150,000,000
============== ============== ==============
</TABLE>
See Notes to Financial Statements.
<PAGE>
Page 53
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Limited
Insured National Maturity
For the Year Ended June 30, 1997 Portfolio Portfolio Portfolio
<S> <C> <C> <C> <C>
Investment Interest and amortization of premium
Income (Note 1d): and discount earned $ 134,133,814 $ 93,607,495 $ 20,199,235
-------------- -------------- --------------
Expenses: Investment advisory fees (Note 2) 8,042,098 6,961,453 1,552,369
Account maintenance and
distribution fees--Class B (Note 2) 4,901,030 3,073,016 222,614
Transfer agent fees--Class A (Note 2) 497,705 353,478 82,086
Transfer agent fees--Class B (Note 2) 275,141 186,850 18,726
Accounting services (Note 2) 249,511 142,298 41,718
Custodian fees 186,028 130,167 43,968
Account maintenance and distribution
fees--Class C (Note 2) 134,437 162,696 634
Registration fees (Note 1e) 184,229 94,978 1,102
Account maintenance fees--Class D (Note 2) 116,523 126,564 17,810
Printing and shareholder reports 115,250 66,878 28,907
Professional fees 93,805 67,598 21,232
Pricing services 30,251 27,987 11,936
Directors' fees and expenses 25,803 21,508 5,615
Transfer agent fees--Class D (Note 2) 15,283 18,048 3,561
Transfer agent fees--Class C (Note 2) 7,771 9,161 69
Other 51,012 22,915 5,612
-------------- -------------- --------------
Total expenses 14,925,877 11,465,595 2,057,959
-------------- -------------- --------------
Investment income--net 119,207,937 82,141,900 18,141,276
-------------- -------------- --------------
Realized & Realized gain on investments--net 37,935,579 18,687,317 1,870,059
Unrealized Gain on Change in unrealized appreciation on
Investments--Net investments--net 5,465,463 18,217,116 104,267
(Notes 1b, 1d -------------- -------------- --------------
& 3): Net Increase in Net Assets Resulting
from Operations $ 162,608,979 $ 119,046,333 $ 20,115,602
============== ============== ==============
See Notes to Financial Statements.
</TABLE>
<PAGE>
Page 54
STATEMENTS OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
Insured Portfolio National Portfolio
For the Year For the Year
Ended June 30, Ended June 30,
Increase (Decrease) in Net Assets: 1997 1996 1997 1996
<S> <C> <C> <C> <C> <C>
Operations: Investment income--net $ 119,207,937 $ 131,085,773 $ 82,141,900 $ 83,697,410
Realized gain (loss)
on investments--net 37,935,579 (3,897,219) 18,687,317 3,774,748
Change in unrealized
appreciation/depreciation
on investments--net 5,465,463 3,149,618 18,217,116 10,373,235
-------------- -------------- -------------- --------------
Net increase in net assets
resulting from operations 162,608,979 130,338,172 119,046,333 97,845,393
-------------- -------------- -------------- --------------
Dividends & Investment income--net:
Distributions to Class A (84,438,105) (92,116,281) (57,401,862) (60,489,070)
Shareholders Class B (31,486,251) (36,347,050) (20,879,493) (20,995,504)
(Note 1f): Class C (800,743) (626,972) (1,024,766) (462,078)
Class D (2,482,838) (1,995,470) (2,835,779) (1,750,758)
Realized gain on investments--net:
Class A -- -- -- --
Class B -- -- -- --
Class C -- -- -- --
Class D -- -- -- --
-------------- -------------- -------------- --------------
Net decrease in net assets resulting
from dividends and distributions
to shareholders. (119,207,937) (131,085,773) (82,141,900) (83,697,410)
-------------- -------------- -------------- --------------
Capital Share Net increase (decrease) in net
Transactions assets derived from capital
(Note 4): share transactions (357,799,862) (155,203,186) 916,838 (78,305,357)
-------------- -------------- -------------- --------------
Net Assets: Total increase (decrease)
in net assets (314,398,820) (155,950,787) 37,821,271 (64,157,374)
Beginning of year 2,366,632,920 2,522,583,707 1,440,065,685 1,504,223,059
-------------- -------------- -------------- --------------
End of year $2,052,234,100 $2,366,632,920 $1,477,886,956 $1,440,065,685
============== ============== ============== ==============
</TABLE>
See Notes to Financial Statements.
<PAGE>
Page 55
STATEMENTS OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
Limited Maturity Portfolio
For the Year
Ended June 30,
Increase (Decrease) in Net Assets: 1997 1996
<S> <C> <C> <C>
Operations: Investment income--net $ 18,141,276 $ 21,711,132
Realized gain (loss)
on investments--net 1,870,059 1,322,566
Change in unrealized
appreciation/depreciation
on investments--net 104,267 (1,526,762)
-------------- --------------
Net increase in net assets
resulting from operations 20,115,602 21,506,936
-------------- --------------
Dividends & Investment income--net:
Distributions to Class A (15,176,552) (18,019,083)
Shareholders Class B (2,274,531) (3,055,609)
(Note 1f): Class C (6,456) (25,939)
Class D (683,737) (610,501)
Realized gain on investments--net:
Class A (666,000) --
Class B (108,061) --
Class C (293) --
Class D (28,170) --
-------------- --------------
Net decrease in net assets resulting
from dividends and distributions
to shareholders. (18,943,800) (21,711,132)
-------------- --------------
Capital Share Net increase (decrease) in net
Transactions assets derived from capital
(Note 4): share transactions (86,916,618) (176,922,554)
-------------- --------------
Net Assets: Total increase (decrease)
in net assets (85,744,816) (177,126,750)
Beginning of year 504,151,614 681,278,364
-------------- --------------
End of year $ 418,406,798 $ 504,151,614
============== ==============
</TABLE>
See Notes to Financial Statements.
<PAGE>
Page 56
FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
The following per share data and ratios
have been derived from information Insured Portfolio
provided in the financial statements. Class A
For the Year Ended June 30,
Increase (Decrease)
in Net Asset Value: 1997 1996 1995 1994 1993
<S> <C> <C> <C> <C> <C> <C>
Per Share Net asset value,
Operating beginning of year $ 7.91 $ 7.92 $ 7.88 $ 8.64 $ 8.26
Performance: ------------ ------------ ------------ ------------ ------------
Investment income--net .45 .44 .46 .47 .50
Realized and unrealized
gain (loss) on
investments--net .15 (.01) .18 (.53) .49
------------ ------------ ------------ ------------ ------------
Total from investment
operations .60 .43 .64 (.06) .99
------------ ------------ ------------ ------------ ------------
Less dividends and
distributions:
Investment income--net (.45) (.44) (.46) (.47) (.50)
Realized gain on
investments--net -- -- (.14) (.23) (.11)
------------ ------------ ------------ ------------ ------------
Total dividends and
distributions (.45) (.44) (.60) (.70) (.61)
------------ ------------ ------------ ------------ ------------
Net asset value,
end of year $ 8.06 $ 7.91 $ 7.92 $ 7.88 $ 8.64
============ ============ ============ ============ ============
Total Investment Based on net asset
Return:* value per share 7.72% 5.51% 8.60% (1.08%) 12.41%
============ ============ ============ ============ ============
Ratios to Average Expenses .44% .43% .43% .42% .42%
Net Assets: ============ ============ ============ ============ ============
Investment income--net 5.58% 5.55% 5.78% 5.53% 5.94%
============ ============ ============ ============ ============
</TABLE>
<PAGE>
Page 57
<TABLE>
<S> <C> <C> <C> <C> <C> <C>
Supplemental Net assets, end of
Data: year (in thousands) $ 1,441,785 $ 1,572,835 $ 1,706,064 $ 1,941,741 $ 2,225,188
============ ============ ============ ============ ============
Portfolio turnover 74.40% 78.49% 35.61% 28.34% 43.86%
============ ============ ============ ============ ============
<CAPTION>
The following per share data and ratios
have been derived from information Insured Portfolio
provided in the financial statements. Class B
For the Year Ended June 30,
Increase (Decrease)
in Net Asset Value: 1997 1996 1995 1994 1993
<S> <C> <C> <C> <C> <C> <C>
Per Share Net asset value,
Operating beginning of year $ 7.91 $ 7.92 $ 7.87 $ 8.63 $ 8.26
Performance: ------------ ------------ ------------ ------------ ------------
Investment income--net .39 .38 .40 .40 .44
Realized and unrealized
gain (loss) on
investments--net .14 (.01) .19 (.53) .48
------------ ------------ ------------ ------------ ------------
Total from investment
operations .53 .37 .59 (.13) .92
------------ ------------ ------------ ------------ ------------
Less dividends and
distributions:
Investment income--net (.39) (.38) (.40) (.40) (.44)
Realized gain on
investments--net -- -- (.14) (.23) (.11)
------------ ------------ ------------ ------------ ------------
Total dividends and
distributions (.39) (.38) (.54) (.63) (.55)
------------ ------------ ------------ ------------ ------------
Net asset value,
end of year $ 8.05 $ 7.91 $ 7.92 $ 7.87 $ 8.63
============ ============ ============ ============ ============
Total Investment Based on net asset
Return:* value per share 6.78% 4.71% 7.91% (1.81%) 11.44%
============ ============ ============ ============ ============
Ratios to Average Expenses 1.19% 1.19% 1.19% 1.17% 1.18%
Net Assets: ============ ============ ============ ============ ============
Investment income--net 4.82% 4.80% 5.03% 4.78% 5.17%
============ ============ ============ ============ ============
Supplemental Net assets, end of
Data: year (in thousands) $ 560,105 $ 723,090 $ 782,748 $ 866,193 $ 911,307
</TABLE>
<PAGE>
Page 58
<TABLE>
<S> <C> <C> <C> <C> <C>
============ ============ ============ ============ ============
Portfolio turnover 74.40% 78.49% 35.61% 28.34% 43.86%
============ ============ ============ ============ ============
</TABLE>
*Total investment returns exclude the effects of sales loads.
See Notes to Financial Statements.
FINANCIAL HIGHLIGHTS (continued)
<TABLE>
<CAPTION>
The following per share
data and ratios have been Insured Portfolio
derived from information Class C Class D
provided in the financial For the Period For the Period
statements. For the Year Oct 21, 1994++ For the Year Oct 21, 1994++
Ended June 30, to June 30, Ended June 30, to June 30,
Increase (Decrease) in -------------------------------- ---------------------------------
Net Asset Value: 1997 1996 1995 1997 1996 1995
<S> <C> <C> <C> <C> <C> <C> <C>
Per Share Net asset value,
Operating beginning of period $ 7.91 $ 7.92 $ 7.68 $ 7.91 $ 7.92 $ 7.68
Performance: ---------- ---------- ---------- ---------- ---------- ----------
Investment income--net .38 .38 .27 .43 .42 .29
Realized and unrealized
gain (loss) on
investments--net .15 (.01) .38 .15 (.01) .38
---------- ---------- ---------- ---------- ---------- ----------
Total from investment
operations .53 .37 .65 .58 .41 .67
---------- ---------- ---------- ---------- ---------- ----------
Less dividends and
distributions:
Investment income--net (.38) (.38) (.27) (.43) (.42) (.29)
Realized gain on
investments--net -- -- (.14) -- -- (.14)
---------- ---------- ---------- ---------- ---------- ----------
Total dividends and
distributions (.38) (.38) (.41) (.43) (.42) (.43)
---------- ---------- ---------- ---------- ---------- ----------
Net asset value,
end of period $ 8.06 $ 7.91 $ 7.92 $ 8.06 $ 7.91 $ 7.92
========== ========== ========== ========== ========== ==========
Total Investment Based on net asset
Return:** value per share 6.86% 4.65% 8.83%+++ 7.46% 5.25% 9.24%+++
</TABLE>
<PAGE>
Page 59
<TABLE>
<S> <C> <C> <C> <C> <C> <C> <C>
========== ========== ========== ========== ========== ==========
Ratios to Average Expenses 1.25% 1.24% 1.23%* .69% .68% .68%*
Net Assets: ========== ========== ========== ========== ========== ==========
Investment income--net 4.77% 4.75% 4.93%* 5.33% 5.31% 5.50%*
========== ========== ========== ========== ========== ==========
Supplemental Net assets, end of
Data: period (in thousands) $ 11,922 $ 18,936 $ 7,756 $ 38,422 $ 51,772 $ 26,015
========== ========== ========== ========== ========== ==========
Portfolio turnover 74.40% 78.49% 35.61% 74.40% 78.49% 35.61%
========== ========== ========== ========== ========== ==========
<CAPTION>
The following per share data and ratios
have been derived from information National Portfolio
provided in the financial statements. Class A
For the Year Ended June 30,
Increase (Decrease)
in Net Asset Value: 1997 1996 1995 1994 1993
<S> <C> <C> <C> <C> <C> <C>
Per Share Net asset value,
Operating beginning of year $ 10.11 $ 10.02 $ 10.08 $ 11.02 $ 10.64
Performance: ------------ ------------ ------------ ------------ ------------
Investment income--net .60 .60 .60 .62 .67
Realized and unrealized
gain (loss) on
investments--net .27 .09 .15 (.64) .57
------------ ------------ ------------ ------------ ------------
Total from investment
operations .87 .69 .75 (.02) 1.24
------------ ------------ ------------ ------------ ------------
Less dividends and
distributions:
Investment income--net (.60) (.60) (.60) (.62) (.67)
Realized gain on
investments--net -- -- (.19) (.30) (.19)
In excess of realized
gain on investments--net -- -- (.02) -- --
------------ ------------ ------------ ------------ ------------
Total dividends and
distributions (.60) (.60) (.81) (.92) (.86)
------------ ------------ ------------ ------------ ------------
Net asset value,
end of year $ 10.38 $ 10.11 $ 10.02 $ 10.08 $ 11.02
============ ============ ============ ============ ============
</TABLE>
<PAGE>
Page 60
<TABLE>
<S> <C> <C> <C> <C> <C> <C>
Total Investment Based on net asset
Return:** value per share 8.84% 6.98% 7.89% (.47%) 12.19%
============ ============ ============ ============ ============
Ratios to Average Expenses .55% .56% .56% .55% .55%
Net Assets: ============ ============ ============ ============ ============
Investment income--net 5.86% 5.89% 6.01% 5.72% 6.23%
============ ============ ============ ============ ============
Supplemental Net assets, end of
Data: year (in thousands) $ 983,650 $ 983,550 $ 1,059,440 $ 1,203,181 $ 1,353,805
============ ============ ============ ============ ============
Portfolio turnover 99.52% 95.09% 103.65% 73.33% 65.43%
============ ============ ============ ============ ============
<CAPTION>
The following per share data and ratios
have been derived from information National Portfolio
provided in the financial statements. Class B
For the Year Ended June 30,
Increase (Decrease)
in Net Asset Value: 1997 1996 1995 1994 1993
<S> <C> <C> <C> <C> <C> <C>
Per Share Net asset value,
Operating beginning of year $ 10.11 $ 10.02 $ 10.07 $ 11.02 $ 10.63
Performance: ------------ ------------ ------------ ------------ ------------
Investment income--net .52 .52 .52 .54 .59
Realized and unrealized
gain (loss) on
investments--net .26 .09 .16 (.65) .58
------------ ------------ ------------ ------------ ------------
Total from investment
operations .78 .61 .68 (.11) 1.17
------------ ------------ ------------ ------------ ------------
Less dividends and
distributions:
Investment income--net (.52) (.52) (.52) (.54) (.59)
Realized gain on
investments--net -- -- (.19) (.30) (.19)
In excess of realized
gain on investments--net -- -- (.02) -- --
------------ ------------ ------------ ------------ ------------
Total dividends and
distributions (.52) (.52) (.73) (.84) (.78)
------------ ------------ ------------ ------------ ------------
Net asset value,
end of year $ 10.37 $ 0.11 $ 10.02 $ 10.07 $ 11.02
============ ============ ============ ============ ============
</TABLE>
<PAGE>
Page 61
<TABLE>
<S> <C> <C> <C> <C> <C> <C>
Total Investment Based on net asset
Return:** value per share 7.92% 6.17% 7.28% (1.39%) 11.45%
============ ============ ============ ============ ============
Ratios to Average Expenses 1.31% 1.32% 1.32% 1.30% 1.31%
Net Assets: ============ ============ ============ ============ ============
Investment income--net 5.10% 5.13% 5.25% 4.97% 5.46%
============ ============ ============ ============ ============
Supplemental Net assets, end of
Data: year (in thousands) $ 415,103 $ 399,341 $ 419,933 $ 459,169 $ 424,071
============ ============ ============ ============ ============
Portfolio turnover 99.52% 95.09% 103.65% 73.33% 65.43%
============ ============ ============ ============ ============
</TABLE>
<TABLE>
<CAPTION>
The following per share
data and ratios have been National Portfolio
derived from information Class C Class D
provided in the financial For the Period For the Period
statements. For the Year Oct 21, 1994++ For the Year Oct 21, 1994++
Ended June 30, to June 30, Ended June 30, to June 30,
Increase (Decrease) in -------------------------------- ---------------------------------
Net Asset Value: 1997 1996 1995 1997 1996 1995
<S> <C> <C> <C> <C> <C> <C> <C>
Per Share Net asset value,
Operating beginning of period $ 10.11 $ 10.03 $ 9.85 $ 10.12 $ 10.03 $ 9.85
Performance: ---------- ---------- ---------- ---------- ---------- ----------
Investment income--net .52 .52 .36 .58 .57 .40
Realized and unrealized
gain on investments--net .27 .08 .39 .27 .09 .39
---------- ---------- ---------- ---------- ---------- ----------
Total from investment
operations .79 .60 .75 .85 .66 .79
---------- ---------- ---------- ---------- ---------- ----------
Less dividends and
distributions:
Investment
income--net (.52) (.52) (.36) (.58) (.57) (.40)
Realized gain on
investments--net -- -- (.19) -- -- (.19)
In excess of
realized gain on
investments--net -- -- (.02) -- -- (.02)
---------- ---------- ---------- ---------- ---------- ----------
Total dividends and
distributions (.52) (.52) (.57) (.58) (.57) (.61)
---------- ---------- ---------- ---------- ---------- ----------
Net asset value,
end of period $ 10.38 $ 10.11 $ 10.03 $ 10.39 $ 10.12 $ 10.03
========== ========== ========== ========== ========== ==========
</TABLE>
<PAGE>
Page 62
<TABLE>
<S> <C> <C> <C> <C> <C> <C> <C>
Total Investment Based on net asset
Return:** value per share 7.97% 6.01% 7.97%+++ 8.57% 6.71% 8.37%+++
========== ========== ========== ========== ========== ==========
Ratios to Average Expenses 1.36% 1.37% 1.37%* .80% .81% .81%*
Net Assets: ========== ========== ========== ========== ========== ==========
Investment income--net 5.04% 5.08% 5.21%* 5.60% 5.64% 5.78%*
========== ========== ========== ========== ========== ==========
Supplemental Net assets, end of
Data: period (in thousands) $ 28,096 $ 13,291 $ 5,195 $ 51,038 $ 43,884 $ 19,656
========== ========== ========== ========== ========== ==========
Portfolio turnover 99.52% 95.09% 103.65% 99.52% 95.09% 103.65%
========== ========== ========== ========== ========== ==========
</TABLE>
*Annualized.
**Total investment returns exclude the effects of sales loads.
++Commencement of Operations
+++Aggregate total investment return.
See Notes to Financial Statements.
FINANCIAL HIGHLIGHTS (concluded)
<TABLE>
<CAPTION>
The following per share data and ratios
have been derived from information Limited Maturity Portfolio
provided in the financial statements. Class A
For the Year Ended June 30,
Increase (Decrease)
in Net Asset Value: 1997 1996 1995 1994 1993
<S> <C> <C> <C> <C> <C> <C>
Per Share Net asset value,
Operating beginning of year $ 9.91 $ 9.92 $ 9.87 $ 10.01 $ 9.91
Performance: ------------ ----------- ------------ ------------ ------------
Investment income--net .39 .38 .38 .37 .41
Realized and unrealized
gain (loss) on
investments--net .04 (.01) .05 (.14) .10
------------ ----------- ------------ ------------ ------------
Total from investment
operations .43 .37 .43 .23 .51
------------ ----------- ------------ ------------ ------------
</TABLE>
<PAGE>
Page 63
<TABLE>
<S> <C> <C> <C> <C> <C> <C>
Less dividends and
distributions:
Investment income--net (.39) (.38) (.38) (.37) (.41)
Realized gain on
investments--net (.02) -- -- -- --
------------ ----------- ------------ ------------ ------------
Total dividends and
distributions (.41) (.38) (.38) (.37) (.41)
------------ ----------- ------------ ------------ ------------
Net asset value,
end of year $ 9.93 $ 9.91 $ 9.92 $ 9.87 $ 10.01
============ =========== ============ ============ ============
Total Investment Based on net asset
Return:** value per share 4.40% 3.75% 4.53% 2.30% 5.28%
============ =========== ============ ============ ============
Ratios to Average Expenses .39% .44% .41% .40% .41%
Net Assets: ============ =========== ============ ============ ============
Investment income--net 3.93% 3.83% 3.86% 3.68% 4.13%
============ =========== ============ ============ ============
Supplemental Net assets, end of
Data: year (in thousands) $ 343,641 $ 417,097 $ 536,474 $ 790,142 $ 846,736
============ =========== ============ ============ ============
Portfolio turnover 61.90% 88.32% 37.33% 45.67% 65.43%
============ =========== ============ ============ ============
<CAPTION>
The following per share data and ratios
have been derived from information Limited Maturity Portfolio
provided in the financial statements. Class B
For the Year Ended June 30,
Increase (Decrease)
in Net Asset Value: 1997 1996 1995 1994 1993
<S> <C> <C> <C> <C> <C> <C>
Per Share Net asset value,
Operating beginning of period $ 9.91 $ 9.92 $ 9.87 $ 10.01 $ 9.93
Performance: ------------ ----------- ------------ ------------- ------------
Investment income--net .36 .35 .35 .33 .24
Realized and unrealized
gain (loss) on
investments--net .05 (.01) .05 (.14) .08
------------ ----------- ------------ ------------- ------------
Total from investment
operations .41 .34 .40 .19 .32
------------ ----------- ------------ ------------- ------------
</TABLE>
<PAGE>
Page 64
<TABLE>
<S> <C> <C> <C> <C> <C> <C>
Less dividends and
distributions:
Investment income--net (.36) (.35) (.35) (.33) (.24)
Realized gain on
investments--net (.02) -- -- -- --
------------ ----------- ------------ ------------- ------------
Total dividends and
distributions (.38) (.35) (.35) (.33) (.24)
------------ ----------- ------------ ------------- ------------
Net asset value,
end of period $ 9.94 $ 9.91 $ 9.92 $ 9.87 $ 10.01
============ =========== ============ ============ ============
Total Investment Based on net asset
Return:** value per share 4.13% 3.37% 4.14% 1.98% 3.26%+++
============ =========== ============ ============ ============
Ratios to Average Expenses .75% .80% .78% .76% .76%*
Net Assets: ============ =========== ============ ============ ============
Investment income--net 3.58% 3.46% 3.50% 3.33% 3.60%*
============ =========== ============ ============ ============
Supplemental Net assets, end of
Data: period (in thousands) $ 54,275 $ 71,075 $ 129,581 $ 145,534 $ 95,179
============ =========== ============ ============ ============
Portfolio turnover 61.90% 88.32% 37.33% 45.67% 65.43%
============ =========== ============ ============ ============
<CAPTION>
The following per share
data and ratios have been Limited Maturity Portfolio
derived from information Class C Class D
provided in the financial For the Period For the Period
statements. For the Year Oct 21, 1994++ For the Year Oct 21, 1994++
Ended June 30, to June 30, Ended June 30, to June 30,
Increase (Decrease) in -------------------------------- -----------------------------------
Net Asset Value: 1997 1996 1995 1997 1996 1995
<S> <C> <C> <C> <C> <C> <C> <C>
Per Share Net asset value,
Operating beginning of period $ 9.88 $ 9.92 $ 9.83 $ 9.91 $ 9.93 $ 9.83
Performance: ---------- ---------- ---------- ---------- ---------- ----------
Investment income--net .35 .34 .25 .38 .37 .26
Realized and unrealized
gain (loss) on
investments--net .05 (.04) .09 .05 (.02) .10
---------- ---------- ---------- ---------- ---------- ----------
Total from investment
operations .40 .30 .34 .43 .35 .36
---------- ---------- ---------- ---------- ---------- ----------
</TABLE>
<PAGE>
Page 65
<TABLE>
<S> <C> <C> <C> <C> <C> <C> <C>
Less dividends
and distributions:
Investment income--net (.35) (.34) (.25) (.38) (.37) (.26)
Realized gain on
investments--net (.02) -- -- (.02) -- --
---------- ---------- ---------- ---------- ---------- ----------
Total dividends and
distributions (.37) (.34) (.25) (.40) (.37) (.26)
---------- ---------- ---------- ---------- ---------- ----------
Net asset value,
end of period $ 9.91 $ 9.88 $ 9.92 $ 9.94 $ 9.91 $ 9.93
========== ========== ========== ========== ========== ==========
Total Investment Based on net asset
Return:** value per share 4.11% 2.97% 3.52%+++ 4.40% 3.55% 3.73%+++
========== ========== ========== ========== ========== ==========
Ratios to Average Expenses .75% .80% .70%* .48% .54% .53%*
Net Assets: ========== ========== ========== ========== ========== ==========
Investment income--net 3.57% 3.41% 3.61%* 3.84% 3.71% 3.78%*
========== ========== ========== ========== ========== ==========
Supplemental Net assets, end of
Data: period (in thousands) $ 108 $ 94 $ 3,965 $ 20,383 $ 15,886 $ 11,258
========== ========== ========== ========== ========== ==========
Portfolio turnover 61.90% 88.32% 37.33% 61.90% 88.32% 37.33%
========== ========== ========== ========== ========== ==========
</TABLE>
*Annualized.
**Total investment returns exclude the effects of sales loads.
++Commencement of Operations.
+++Aggregate total investment return.
See Notes to Financial Statements.
NOTES TO FINANCIAL STATEMENTS
1. Significant Accounting Policies:
Merrill Lynch Municipal Bond Fund, Inc. (the "Fund") is registered
under the Investment Company Act of 1940 as a diversified, open-end
management investment company. The Fund's Portfolios offer four
classes of shares under the Merrill Lynch Select Pricing SM System.
Shares of Class A and Class D are sold with a front-end sales
<PAGE>
Page 66
charge. Shares of Class B and Class C may be subject to a contingent
deferred sales charge. All classes of shares have identical voting,
dividend, liquidation and other rights and the same terms and
conditions, except that Class B, Class C and Class D Shares bear
certain expenses related to the account maintenance of such shares,
and Class B and Class C Shares also bear certain expenses related to
the distribution of such shares. Each class has exclusive voting
rights with respect to matters relating to its account maintenance
and distribution expenditures. The following is a summary of
significant accounting policies followed by the Fund.
(a) Valuation of investments--Insured Portfolio: Where bonds in the
Portfolio have not been insured pursuant to policies obtained by the
issuer, the Fund has obtained insurance with respect to the payment
of interest and principal of each bond. Such insurance is valid as
long as the bonds are held by the Fund.
All Portfolios: Municipal bonds and money market securities are
traded primarily in the over-the-counter markets and are valued at
the most recent bid price or yield equivalent as obtained from
dealers that make markets in such securities. Positions in futures
contracts and options thereon, which are traded on exchanges, are
valued at closing prices as of the close of such exchanges. Assets
for which market quotations are not readily available are valued at
fair value on a consistent basis using methods determined in good
faith by the Fund's Board of Directors, including valuations
furnished by a pricing service retained by the Fund, which may
utilize a matrix system for valuations. The procedures of the
pricing service and its valuations are reviewed by the officers of
the Fund under the general supervision of the Board of Directors.
(b) Derivative financial instruments--The Fund may engage in various
portfolio strategies to seek to increase its return by hedging its
portfolio against adverse movements in the debt markets. Losses may
arise due to changes in the value of the contract or if the
counterparty does not perform under the contract.
* Financial futures contracts--The National and Limited Maturity
Portfolios (the "Portfolios") may purchase or sell interest rate
futures contracts and options on such futures contracts for the
purpose of hedging the market risk on existing securities or the
intended purchase of securities. Futures contracts are contracts for
delayed delivery of securities at a specific future date and at a
specific price or yield. Upon entering into a contract, the
Portfolios deposit and maintain as collateral such initial margin as
required by the exchange on which the transaction is effected.
Pursuant to the contract, the Portfolios agree to receive from or
pay to the broker an amount of cash equal to the daily fluctuation
in value of the contract. Such receipts or payments are known as
<PAGE>
Page 67
variation margin and are recorded by the Portfolios as unrealized
gains or losses. When the contract is closed, the Portfolios record
a realized gain or loss equal to the difference between the value of
the contract at the time it was opened and the value at the time it
was closed.
(c) Income taxes--It is the Fund's policy to comply with the
requirements of the Internal Revenue Code applicable to regulated
investment companies and to distribute substantially all of its
taxable income to its shareholders. Therefore, no Federal income tax
provision is required.
(d) Security transactions and investment income--Security
transactions are recorded on the dates the transactions are entered
into (the trade dates). Interest income is recognized on the accrual
basis. Discounts and market premiums are amortized into interest
income. Realized gains and losses on security transactions are
determined on the identified cost basis.
(e) Prepaid registration fees--Prepaid registration fees are charged
to expenses as the related shares are issued.
(f) Dividends and distributions--Dividends from net investment
income are declared daily and paid monthly. Distributions of capital
gains are recorded on the ex-dividend dates.
2. Investment Advisory Agreement and Transactions
with Affiliates:
The Fund has entered into an Investment Advisory Agreement with Fund
Asset Management, L.P. ("FAM"). The general partner of FAM is
Princeton Services, Inc. ("PSI"), an indirect wholly-owned
subsidiary of Merrill Lynch & Co., Inc. ("ML & Co."), which is the
limited partner. The Fund has also entered into a Distribution
Agreement and Distribution Plans with Merrill Lynch Funds
Distributor, Inc. ("MLFD" or "Distributor"), a wholly-owned
subsidiary of Merrill Lynch Group, Inc.
FAM is responsible for the management of the Fund's portfolios and
provides the necessary personnel, facilities, equipment and certain
other services necessary to the operation of the Fund. For such
services, FAM receives at the end of each month a fee with respect
to each Portfolio at the annual rates set forth below which are
based upon the average daily value of the Fund's net assets.
<PAGE>
Page 68
<TABLE>
<CAPTION>
Rate of Advisory Fee
Aggregate of Average Daily Limited
Net Assets of the Three Insured National Maturity
Combined Portfolios Portfolio Portfolio Portfolio
<S> <C> <C> <C>
Not exceeding $250 million .40 % .50 % .40 %
In excess of $250 million
but not exceeding $400 million .375 .475 .375
In excess of $400 million
but not exceeding $550 million .375 .475 .35
In excess of $550 million
but not exceeding $1.5 billion .375 .475 .325
In excess of $1.5 billion .35 .475 .325
</TABLE>
Pursuant to the distribution plans (the "Distribution Plans")
adopted by the Fund in accordance with Rule 12b-1 under the
Investment Company Act of 1940, the Fund pays the Distributor
ongoing account maintenance and distribution fees. The fees are
accrued daily and paid monthly at annual rates based upon the
average daily net assets of the shares as follows:
<TABLE>
<CAPTION>
Account Maintenance Fees Distribution Fees
Limited Limited
Insured National Maturity Insured National Maturity
Portfolio Portfolio Portfolio Portfolio Portfolio Portfolio
<S> <C> <C> <C> <C> <C> <C>
Class B .25% .25% .15% .50% .50% .20%
Class C .25% .25% .15% .55% .55% .20%
Class D .25% .25% .10% -- -- --
</TABLE>
Pursuant to a sub-agreement with the Distributor, Merrill Lynch,
Pierce, Fenner & Smith Inc. ("MLPF&S"), a subsidiary of ML & Co.,
also provides account maintenance and distribution services to the
Fund. The ongoing account maintenance fee compensates the
Distributor and MLPF&S for providing account maintenance services to
Class B, Class C and Class D shareholders. The ongoing distribution
fee compensates the Distributor and MLPF&S for providing shareholder
and distribution-related services to Class B and Class C
shareholders.
For the year ended June 30, 1997, MLFD earned underwriting
discounts and direct commissions and MLPF&S earned dealer
concessions on sales of the Fund's Class A and Class D Shares
follows:
<PAGE>
Page 69
<TABLE>
<CAPTION>
Limited
Insured National Maturity
Portfolio Portfolio Portfolio
<S> <C> <C> <C>
Class A Shares:
MLFD $ 24,532 $ 16,659 $ 1,139
MLPF&S 168,171 149,402 11,295
Class D Shares:
MLFD 7,722 11,866 1,634
MLPF&S 69,053 98,975 20,019
</TABLE>
For the year ended June 30, 1997, MLPF&S received contingent
deferred sales charges of $1,906,615 relating to transactions in
Class B Shares, amounting to $979,435, $868,705 and $58,475 in the
Insured, National and Limited Maturity Portfolios, respectively, and
$17,583, relating to transactions in Class C Shares, amounting to
$6,915, $10,273 and $395 in the Insured, National and Limited
Maturity Portfolios, respectively, and $358,940 relating to
transactions in Class D Shares, amounting to $180,983 and $177,957
in the Insured and National Portfolios, respectively.
Merrill Lynch Financial Data Services, Inc. ("MLFDS"), a wholly-
owned subsidiary of ML & Co., is the Fund's transfer agent.
Accounting services are provided to the Fund by FAM at cost.
Certain officers and/or directors of the Fund are officers and/or
directors of FAM, PSI, MLFD, MLFDS, and/or ML & Co.
3. Investments:
Purchases and sales of investments, excluding short-term securities,
for the year ended June 30, 1997 were as follows:
<TABLE>
<CAPTION>
Purchases Sales
<S> <C> <C>
Insured Portfolio $1,539,869,960 $1,795,948,640
National Portfolio 1,385,982,904 1,395,027,690
Limited Maturity Portfolio 259,616,429 327,912,199
</TABLE>
Net realized and unrealized gains (losses) as of June 30, 1997 were
as follows:
<PAGE>
Page 70
<TABLE>
<CAPTION>
Realized Unrealized
Insured Portfolio Gains Gains
<S> <C> <C>
Long-term investments $ 37,935,579 $ 112,603,346
-------------- --------------
Total $ 37,935,579 $ 112,603,346
============== ==============
<CAPTION>
Realized Unrealized
National Portfolio Gains (Losses) Gains
<S> <C> <C>
Long-term investments $ 22,647,030 $ 90,466,552
Financial futures contracts (3,959,713) --
-------------- --------------
Total $ 18,687,317 $ 90,466,552
============== ==============
</TABLE>
NOTES TO FINANCIAL STATEMENTS (continued)
<TABLE>
<CAPTION>
Realized Unrealized
Limited Maturity Portfolio Gains Gains
<S> <C> <C>
Long-term investments $ 1,870,059 $ 1,388,965
Short-term investments -- 11,807
-------------- --------------
Total $ 1,870,059 $ 1,400,772
============== ==============
</TABLE>
As of June 30, 1997 net unrealized appreciation/depreciation for
Federal income tax purposes were as follows:
<TABLE>
<CAPTION>
Gross Gross Net
Unrealized Unrealized Unrealized
Appreciation Depreciation Appreciation
<S> <C> <C> <C>
Insured Portfolio $114,126,818 $ (1,772,618) $112,354,200
National Portfolio 92,758,314 (2,333,380) 90,424,934
Limited Maturity
Portfolio 1,811,320 (410,548) 1,400,772
</TABLE>
The aggregate cost of investments at June 30, 1997 for Federal
income tax purposes was $1,910,659,088 for the Insured Portfolio,
$1,357,629,654 for the National Portfolio, and $422,830,068 for the
Limited Maturity Portfolio.
4. Capital Share Transactions:
Net increase (decrease) on net assets derived from capital share
<PAGE>
Page 71
transactions for years ended June 30, 1997 and June 30, 1996 were
$(357,799,862) and $(155,203,186), respectively, for the Insured
Portfolio; $916,838 and $(78,305,357), respectively for the National
Portfolio and $(86,916,618) and $(176,922,554), respectively, for
the Limited Maturity Portfolio.
Transactions in capital shares for each class were as follows:
Insured Portfolio
<TABLE>
<CAPTION>
Class A Shares for the Year Dollar
Ended June 30, 1997 Shares Amount
<S> <C> <C>
Shares sold 4,575,281 $ 36,693,201
Shares issued to shareholders
in reinvestment of dividends 4,476,285 35,809,346
-------------- --------------
Total issued 9,051,566 72,502,547
Shares redeemed (28,976,583) (232,180,607)
-------------- --------------
Net decrease (19,925,017) $ (159,678,060)
============== ==============
<CAPTION>
Insured Portfolio
Class A Shares for the Year Dollar
Ended June 30, 1996 Shares Amount
<S> <C> <C>
Shares sold 5,469,354 $ 44,001,252
Shares issued to shareholders
in reinvestment of dividends 4,986,858 40,042,330
-------------- --------------
Total issued 10,456,212 84,043,582
Shares redeemed (27,028,706) (217,178,396)
-------------- --------------
Net decrease (16,572,494) $ (133,134,814)
============== ==============
<CAPTION>
Insured Portfolio
Class B Shares for the Year Dollar
Ended June 30, 1997 Shares Amount
<S> <C> <C>
Shares sold 5,729,555 $ 45,791,612
Shares issued to shareholders
in reinvestment of dividends 2,004,591 16,028,058
-------------- --------------
Total issued 7,734,146 61,819,670
</TABLE>
<PAGE>
Page 72
<TABLE>
<S> <C> <C>
Automatic conversion of shares (654,971) (5,237,060)
Shares redeemed (29,004,786) (232,763,104)
-------------- --------------
Net decrease (21,925,611) $ (176,180,494)
============== ==============
Insured Portfolio
<CAPTION>
Class B Shares for the Year Dollar
Ended June 30, 1996 Shares Amount
<S> <C> <C>
Shares sold 13,419,351 $ 107,963,983
Shares issued to shareholders
in reinvestment of dividends 2,346,122 18,823,418
-------------- --------------
Total issued 15,765,473 126,787,401
Automatic conversion of shares (355,991) (2,835,885)
Shares redeemed (22,831,309) (183,110,029)
-------------- --------------
Net decrease (7,421,827) $ (59,158,513)
============== ==============
Insured Portfolio
<CAPTION>
Class C Shares for the Year Dollar
Ended June 30, 1997 Shares Amount
<S> <C> <C>
Shares issued to shareholders
in reinvestment of dividends 65,517 524,081
-------------- --------------
Total issued 808,127 6,478,705
Shares redeemed (1,722,393) (13,923,454)
-------------- --------------
Net decrease (914,266) $ (7,444,749)
============== ==============
Insured Portfolio
<CAPTION>
Class C Shares for the Year Dollar
Ended June 30, 1996 Shares Amount
<S> <C> <C>
Shares sold 1,893,607 $ 15,225,385
Shares issued to shareholders
in reinvestment of dividends 53,775 431,720
-------------- --------------
Total issued 1,947,382 15,657,105
Shares redeemed (532,614) (4,266,135)
-------------- --------------
</TABLE>
<PAGE>
Page 73
<TABLE>
<S> <C> <C>
Net increase 1,414,768 $ 11,390,970
============== ==============
Insured Portfolio
<CAPTION>
Class D Shares for the Year Dollar
Ended June 30, 1997 Shares Amount
<S> <C> <C>
Shares sold 12,779,520 $ 101,973,172
Automatic conversion of shares 654,971 5,237,060
Shares issued to shareholders
in reinvestment of dividends 147,570 1,180,790
-------------- --------------
Total issued 13,582,061 108,391,022
Shares redeemed (15,359,300) (122,887,581)
-------------- --------------
Net decrease (1,777,239) $ (14,496,559)
============== ==============
Insured Portfolio
<CAPTION>
Class D Shares for the Year Dollar
Ended June 30, 1996 Shares Amount
<S> <C> <C>
Shares sold 14,968,451 $ 120,849,832
Automatic conversion of shares 355,872 2,835,885
Shares issued to shareholders
in reinvestment of dividends 118,797 953,911
-------------- --------------
Total issued 15,443,120 124,639,628
Shares redeemed (12,181,923) (98,940,457)
-------------- --------------
Net increase 3,261,197 $ 25,699,171
============== ==============
National Portfolio
<CAPTION>
Class A Shares for the Year Dollar
Ended June 30, 1997 Shares Amount
<S> <C> <C>
Shares sold 7,233,788 $ 74,396,433
Shares issued to shareholders
in reinvestment of dividends 2,685,525 27,558,310
-------------- --------------
Total issued 9,919,313 101,954,743
Shares redeemed (12,395,672) (127,128,438)
-------------- --------------
Net decrease (2,476,359) $ (25,173,695)
============== ==============
</TABLE>
<PAGE>
Page 74
National Portfolio
<TABLE>
<CAPTION>
Class A Shares for the Year Dollar
Ended June 30, 1996 Shares Amount
<S> <C> <C>
Shares sold 1,874,548 $ 19,100,358
Shares issued to shareholders
in reinvestment of dividends 2,851,242 29,021,298
-------------- --------------
Total issued 4,725,790 48,121,656
Shares redeemed (13,151,450) (133,904,005)
-------------- --------------
Net decrease (8,425,660) $ (85,782,349)
============== ==============
National Portfolio
<CAPTION>
Class B Shares for the Year Dollar
Ended June 30, 1997 Shares Amount
<S> <C> <C>
Shares sold 11,777,487 $ 121,489,230
Shares issued to shareholders
in reinvestment of dividends 975,743 10,006,225
-------------- --------------
Total issued 12,753,230 131,495,455
Automatic conversion of shares (495,542) (5,075,762)
Shares redeemed (11,745,518) (120,476,972)
-------------- --------------
Net increase 512,170 $ 5,942,721
============== ==============
National Portfolio
<CAPTION>
Class B Shares for the Year Dollar
Ended June 30, 1996 Shares Amount
<S> <C> <C>
Shares sold 6,798,097 $ 69,266,670
Shares issued to shareholders
in reinvestment of dividends 964,834 9,817,408
-------------- --------------
Total issued 7,762,931 79,084,078
Automatic conversion of shares (175,462) (1,776,371)
Shares redeemed (9,989,397) (101,634,492)
-------------- --------------
Net decrease (2,401,928) $ (24,326,785)
============== ==============
</TABLE>
National Portfolio
<PAGE>
Page 75
<TABLE>
<CAPTION>
Class C Shares for the Year Dollar
Ended June 30, 1997 Shares Amount
<S> <C> <C>
Shares sold 2,182,254 $ 22,508,694
Shares issued to shareholders
in reinvestment of dividends 56,394 579,121
-------------- --------------
Total issued 2,238,648 23,087,815
Shares redeemed (845,937) (8,691,227)
-------------- --------------
Net increase 1,392,711 $ 14,396,588
============== ==============
National Portfolio
<CAPTION>
Class C Shares for the Year Dollar
Ended June 30, 1996 Shares Amount
<S> <C> <C>
Shares sold 1,026,234 $ 10,483,940
Shares issued to shareholders
in reinvestment of dividends 22,712 231,247
-------------- --------------
Total issued 1,048,946 10,715,187
Shares redeemed (252,941) (2,580,645)
-------------- --------------
Net increase 796,005 $ 8,134,542
============== ==============
National Portfolio
<CAPTION>
Class D Shares for the Year Dollar
Ended June 30, 1997 Shares Amount
<S> <C> <C>
Shares sold 10,536,060 $ 108,053,333
Automatic conversion of shares 495,032 5,075,762
Shares issued to shareholders
in reinvestment of dividends 114,893 1,179,969
-------------- --------------
Total issued 11,145,985 114,309,064
Shares redeemed (10,568,675) (108,557,840)
-------------- --------------
Net increase 577,310 $ 5,751,224
============== ==============
</TABLE>
NOTES TO FINANCIAL STATEMENTS (concluded)
National Portfolio
<PAGE>
Page 76
<TABLE>
<CAPTION>
Class D Shares for the Year Dollar
Ended June 30, 1996 Shares Amount
<S> <C> <C>
Shares sold 13,624,624 $ 139,439,739
Automatic conversion of shares 175,315 1,776,371
Shares issued to shareholders
in reinvestment of dividends 74,448 759,889
-------------- --------------
Total issued 13,874,387 141,975,999
Shares redeemed (11,497,765) (118,306,764)
-------------- --------------
Net increase 2,376,622 $ 23,669,235
============== ==============
Limited Maturity Portfolio
<CAPTION>
Class A Shares for the Year Dollar
Ended June 30, 1997 Shares Amount
<S> <C> <C>
Shares sold 2,507,909 $ 24,924,435
Shares issued to shareholders
in reinvestment of dividends and
distributions 920,017 9,134,741
-------------- --------------
Total issued 3,427,926 34,059,176
Shares redeemed (10,923,304) (108,467,108)
-------------- --------------
Net decrease (7,495,378) $ (74,407,932)
============== ==============
Limited Maturity Portfolio
<CAPTION>
Class A Shares for the Year Dollar
Ended June 30, 1996 Shares Amount
<S> <C> <C>
Shares sold 2,286,543 $ 22,746,544
Shares issued to shareholders
in reinvestment of dividends 1,098,806 10,929,822
-------------- --------------
Total issued 3,385,349 33,676,366
Shares redeemed (15,364,211) (152,811,221)
-------------- --------------
Net decrease (11,978,862) $ (119,134,855)
============== ==============
</TABLE>
Limited Maturity Portfolio
<PAGE>
Page 77
<TABLE>
<CAPTION>
Class B Shares for the Year Dollar
Ended June 30, 1997 Shares Amount
<S> <C> <C>
Shares sold 1,746,766 $ 17,337,114
Shares issued to shareholders
in reinvestment of dividends and
distributions 156,709 1,556,287
-------------- --------------
Total issued 1,903,475 18,893,401
Automatic conversion of shares (11,559) (114,986)
Shares redeemed (3,599,880) (35,740,926)
-------------- --------------
Net decrease (1,707,964) $ (16,962,511)
============== ==============
Limited Maturity Portfolio
<CAPTION>
Class B Shares for the Year Dollar
Ended June 30, 1996 Shares Amount
<S> <C> <C>
Shares sold 1,855,378 $ 18,448,441
Shares issued to shareholders
in reinvestment of dividends 196,945 1,959,129
-------------- --------------
Total issued 2,052,323 20,407,570
Automatic conversion of shares (1,991) (19,792)
Shares redeemed (7,937,046) (78,947,865)
-------------- --------------
Net decrease (5,886,714) $ (58,560,087)
============== ==============
Limited Maturity Portfolio
<CAPTION>
Class C Shares for the Year Dollar
Ended June 30, 1997 Shares Amount
<S> <C> <C>
Shares sold 125,730 $ 1,243,007
Shares issued to shareholders
in reinvestment of dividends and
distributions 526 5,211
-------------- --------------
Total issued 126,256 1,248,218
Shares redeemed (124,926) (1,236,530)
-------------- --------------
Net increase 1,330 $ 11,688
============== ==============
</TABLE>
Limited Maturity Portfolio
<PAGE>
Page 78
<TABLE>
<CAPTION>
Class C Shares for the Year Dollar
Ended June 30, 1996 Shares Amount
<S> <C> <C>
Shares sold 1,035,202 $ 10,296,541
Shares issued to shareholders
in reinvestment of dividends 1,535 15,247
-------------- --------------
Total issued 1,036,737 10,311,788
Shares redeemed (1,426,909) (14,189,010)
-------------- --------------
Net decrease (390,172) $ (3,877,222)
============== ==============
Limited Maturity Portfolio
<CAPTION>
Class D Shares for the Year Dollar
Ended June 30, 1997 Shares Amount
<S> <C> <C>
Shares sold 3,468,693 $ 34,441,741
Automatic conversion of shares 11,555 114,986
Shares issued to shareholders
in reinvestment of dividends and
distributions 40,524 402,564
-------------- --------------
Total issued 3,520,772 34,959,291
Shares redeemed (3,072,180) (30,517,154)
-------------- --------------
Net increase 448,592 $ 4,442,137
============== ==============
Limited Maturity Portfolio
<CAPTION>
Class D Shares for the Year Dollar
Ended June 30, 1996 Shares Amount
<S> <C> <C>
Shares sold 5,319,786 $ 52,931,793
Automatic conversion of shares 1,989 19,792
Shares issued to shareholders
in reinvestment of dividends 32,445 322,874
-------------- --------------
Total issued 5,354,220 53,274,459
Shares redeemed (4,886,241) (48,624,849)
-------------- --------------
Net increase 467,979 $ 4,649,610
============== ==============
</TABLE>
5. Capital Loss Carryforward:
At June 30, 1997, the Fund had a net capital loss carryforward as follows:
Approximately $4,620,000 in the Insured Portfolio, of which $1,981,000 expires
in 2003 and $2,639,000 expires in 2004;
<PAGE>
Page 79
approximately $48,141,000 in the National Portfolio, of which $19,665,000
expires in 2003 and $28,476,000 expires in 2004; and approximately $4,658,000 in
the Limited Maturity Portfolio, of which $2,590,000 expires in 1998, $22,000
expires in 1999, $25,000 expires in 2002, and $2,021,000 expires in 2003. These
amounts will be available to offset like amounts of any future taxable gains.
<AUDIT-REPORT>
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Shareholders,
Merrill Lynch Municipal Bond Fund, Inc.:
We have audited the accompanying statements of assets and liabilities, including
the schedules of investments, of the Insured, National and Limited Maturity
Portfolios of Merrill Lynch Municipal Bond Fund, Inc. as of June 30, 1997, the
related statements of operations for the year then ended and changes in net
assets for each of the years in the two-year period then ended, and the
financial highlights for each of the years in the five-year period then ended.
These financial statements and the financial highlights are the responsibility
of the Fund's management. Our responsibility is to express an opinion on these
financial statements and the financial highlights based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements and the financial
highlights are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. Our procedures included confirmation of securities owned at June 30,
1997 by correspondence with the custodian and brokers. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such financial statements and financial highlights present
fairly, in all material respects, the financial position of the Insured,
National and Limited Maturity Portfolios of Merrill Lynch Municipal Bond Fund,
Inc. as of June 30, 1997, the results of their operations, the changes in their
net assets, and the financial highlights for the respective stated periods in
conformity with generally accepted accounting principles.
Deloitte & Touche LLP
Princeton, New Jersey
August 15, 1997
