<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JULY 22, 1997
SECURITIES ACT FILE NO. 33-20580
INVESTMENT COMPANY ACT FILE NO. 811-5011
================================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
FORM N-1A
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 [X]
PRE-EFFECTIVE AMENDMENT NO. [ ]
POST-EFFECTIVE AMENDMENT NO. 10 [X]
(Check appropriate box or boxes)
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940 [X]
AMENDMENT NO. 89 [X]
(Check appropriate box or boxes)
------------------------
CMA CALIFORNIA MUNICIPAL MONEY FUND
of CMA Multi-State Municipal Series Trust
(Exact Name of Registrant as Specified in Charter)
<TABLE>
<S> <C> <C>
800 Scudders Mill Road 08536
Plainsboro, New Jersey (Zip Code)
(Address of Principal Executive
Offices)
</TABLE>
Registrant's Telephone Number, including Area Code (609) 282-2800
Arthur Zeikel
CMA Multi-State Municipal Series Trust
800 Scudders Mill Road, Plainsboro, New Jersey
Mailing Address: P.O. Box 9011, Princeton, New Jersey 08543-9011
(Name and Address of Agent for Service)
------------------------
Copies to:
Counsel for the Trust:
Brown & Wood LLP
One World Trade Center
New York, New York 10048-0557
Attention: Thomas R. Smith, Jr., Esq.
Philip L. Kirstein, Esq.
Fund Asset Management, L.P.
P.O. Box 9011
Princeton, New Jersey 08543-9011
Kevin J. Moynihan, Esq.
Merrill Lynch, Pierce, Fenner & Smith Incorporated
World Financial Center, North Tower, New York, New York 10281
It is proposed that this filing will become effective (check appropriate
box)
[X] immediately upon filing pursuant to paragraph (b),
or
[ ] on (date) pursuant to paragraph (b), or
[ ] 60 days after filing pursuant to paragraph (a)(1),
or
[ ] on (date) pursuant to paragraph (a)(1), or
[ ] 75 days after filing pursuant to paragraph (a)(2),
or
[ ] on (date) pursuant to paragraph (a)(2) of Rule 485.
If appropriate, check the following box:
[ ] this post-effective amendment designates a new
effective date for a previously filed
post-effective amendment.
The Registrant has registered an indefinite number of its shares under the
Securities Act of 1933 pursuant to Rule 24f-2 under the Investment Company Act
of 1940. The notice required by such Rule for the Registrant's most recent
fiscal year was filed on May 22, 1997.
================================================================================
<PAGE> 2
CMA CALIFORNIA MUNICIPAL MONEY FUND
CMA MULTI-STATE MUNICIPAL SERIES TRUST
REGISTRATION STATEMENT ON FORM N-1A
CROSS REFERENCE SHEET
<TABLE>
<CAPTION>
N-1A ITEM NO. LOCATION
- ------------------------------------------------------ ----------------------------------------
<S> <C> <C> <C> <C>
PART A
Item 1. Cover Page........................... Cover Page
Item 2. Synopsis............................. Fee Table
Item 3. Condensed Financial Information...... Financial Highlights; Yield Information
Item 4. General Description of Registrant.... Investment Objectives and Policies;
Organization of the Trust
Item 5. Management of the Fund............... Fee Table; Management of the Trust;
Portfolio Transactions; Inside Back
Cover Page
Item 5A. Management's Discussion of Fund
Performance........................ Not Applicable
Item 6. Capital Stock and Other Securities... Organization of the Trust
Item 7. Purchase of Securities Being
Offered............................ Cover Page; Fee Table; Purchase of
Shares; Redemption of Shares; Inside
Back Cover Page
Item 8. Redemption or Repurchase............. Fee Table; Purchase of Shares;
Redemption of Shares
Item 9. Pending Legal Proceedings............ Not Applicable
PART B
Item 10. Cover Page........................... Cover Page
Item 11. Table of Contents.................... Cover Page
Item 12. General Information and History...... Not Applicable
Item 13. Investment Objectives and Policies... Investment Objectives and Policies
Item 14. Management of the Fund............... Management of the Trust
Item 15. Control Persons and Principal Holders
of Securities...................... Management of the Trust; General
Information--Additional Information
Item 16. Investment Advisory and Other
Services........................... Management of the Trust; Purchase and
Redemption of Shares; General
Information
Item 17. Brokerage Allocation................. Portfolio Transactions
Item 18. Capital Stock and Other Securities... General Information--Description of
Series and Shares
Item 19. Purchase, Redemption and Pricing of
Securities Being Offered........... Purchase and Redemption of Shares;
Determination of Net Asset Value
Item 20. Tax Status........................... Taxes
Item 21. Underwriters......................... Purchase and Redemption of Shares
Item 22. Calculation of Performance Data...... Yield Information
Item 23. 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> 3
<PAGE> 1
CMA MULTI-STATE MUNICIPAL SERIES TRUST
<TABLE>
<S> <C>
CMA ARIZONA MUNICIPAL MONEY FUND CMA NEW JERSEY MUNICIPAL MONEY FUND
CMA CALIFORNIA MUNICIPAL MONEY FUND CMA NEW YORK MUNICIPAL MONEY FUND
CMA CONNECTICUT MUNICIPAL MONEY FUND CMA NORTH CAROLINA MUNICIPAL MONEY FUND
CMA MASSACHUSETTS MUNICIPAL MONEY FUND CMA OHIO MUNICIPAL MONEY FUND
CMA MICHIGAN MUNICIPAL MONEY FUND CMA PENNSYLVANIA MUNICIPAL MONEY FUND
</TABLE>
------------------------
This document comprises the Prospectuses of CMA Arizona Municipal Money
Fund, CMA California Municipal Money Fund, CMA Connecticut Municipal Money Fund,
CMA Massachusetts Municipal Money Fund, CMA Michigan Municipal Money Fund, CMA
New Jersey Municipal Money Fund, CMA New York Municipal Money Fund, CMA North
Carolina Municipal Money Fund, CMA Ohio Municipal Money Fund and CMA
Pennsylvania Municipal Money Fund (the "CMA State Funds" or the "Funds"), ten of
the fourteen money market mutual funds (collectively, the "CMA Funds"), the
shares of which are offered to participants in the Cash Management Account(R)
("CMA" or "CMA account") financial service program of Merrill Lynch, Pierce,
Fenner & Smith Incorporated ("Merrill Lynch") to provide a medium for the
investment of free credit cash balances held in CMA accounts.
------------------------
A CMA account is a conventional Merrill Lynch cash securities account or
margin securities account ("Securities Account") which is linked to the CMA
Funds, to money market deposit accounts maintained with depository institutions
and to a Visa(R) card/check account ("Visa Account"). Merrill Lynch markets its
margin account under the name Investor CreditLine(SM) service. Subscribers to
the CMA service may automatically invest free credit balances held in their CMA
accounts in shares of one of the CMA Funds, or such balances may be deposited
automatically with a depository institution through the Insured Savings(SM)
Account (the "Insured Savings Account"). The CMA Funds and the Insured Savings
Account are collectively referred to as the "Money Accounts."
Each CMA Fund is a no-load money market mutual fund seeking current income,
preservation of capital and liquidity available from investing in short-term
securities. The CMA Money Fund invests in money market securities generally; the
CMA Government Securities Fund invests in direct U.S. Government obligations;
the CMA Tax-Exempt Fund invests in tax-exempt securities and pays dividends
exempt from federal income taxation; the CMA Treasury Fund invests in U.S.
Treasury securities; and each of the CMA State Funds invests in tax-exempt
securities and pays dividends exempt from federal and a particular state's (and,
in certain instances, city's) income taxes.
Free credit balances held in CMA accounts will be invested automatically in
or deposited through the Money Account selected by the CMA subscriber as his or
her Primary Money Account. The subscriber may make manual investments in any of
the CMA Funds as described under "Purchase of Shares." The subscriber may change
the Primary Money Account designation at any time by following the procedures
set forth under "Purchase of Shares."
Merrill Lynch charges a program participation fee for the CMA service which
presently is $100 per year for individuals (an additional $25 annual program fee
is charged for participation in the CMA Visa(R) Gold Program described in the
CMA Program Description). A different fee may be charged to certain group plans
and special accounts. Merrill Lynch reserves the right to change the fee for the
CMA service or the CMA Visa Gold Program at any time. As described under
"Purchase of Shares," shares of the CMA Funds may be purchased directly through
the Funds' Transfer Agent by investors who are not subscribers to the CMA
program. Shareholders of the CMA Funds not subscribing to the CMA program will
not be charged the CMA program fee but will not receive any of the additional
services available to CMA program subscribers.
------------------------
The information in this document should be read in conjunction with the
description of the Merrill Lynch Cash Management Account program which is
furnished to all CMA subscribers. Reference is made to such description for
information with respect to the CMA program, including the fees related thereto.
Information concerning the other CMA Funds is contained in the prospectus
relating to each of such Funds and information concerning the Insured Savings
Account is contained in the Insured Savings Account Fact Sheet. All CMA
subscribers are furnished with the prospectuses of CMA Money Fund, CMA
Government Securities Fund, CMA Tax-Exempt Fund and CMA Treasury Fund and the
Insured Savings Account Fact Sheet. For more information about the Merrill Lynch
Cash Management Account program, call toll-free from anywhere in the U.S.,
1-800-CMA-INFO (1-800-262-4636).
<PAGE> 2
PROSPECTUS
- -----------------
JULY 22, 1997
CMA MULTI-STATE MUNICIPAL SERIES TRUST
<TABLE>
<S> <C>
CMA ARIZONA MUNICIPAL MONEY FUND CMA NEW JERSEY MUNICIPAL MONEY FUND
CMA CALIFORNIA MUNICIPAL MONEY FUND CMA NEW YORK MUNICIPAL MONEY FUND
CMA CONNECTICUT MUNICIPAL MONEY FUND CMA NORTH CAROLINA MUNICIPAL MONEY FUND
CMA MASSACHUSETTS MUNICIPAL MONEY FUND CMA OHIO MUNICIPAL MONEY FUND
CMA MICHIGAN MUNICIPAL MONEY FUND CMA PENNSYLVANIA MUNICIPAL MONEY FUND
</TABLE>
P.O. BOX 9011, PRINCETON, NEW JERSEY 08543-9011 - PHONE NO. (609) 282-2800
CMA Multi-State Municipal Series Trust (the "Trust") consists of CMA Arizona
Municipal Money Fund (the "Arizona Fund"), CMA California Municipal Money Fund
(the "California Fund"), CMA Connecticut Municipal Money Fund (the "Connecticut
Fund"), CMA Massachusetts Municipal Money Fund (the "Massachusetts Fund"), CMA
Michigan Municipal Money Fund (the "Michigan Fund"), CMA New Jersey Municipal
Money Fund (the "New Jersey Fund"), CMA New York Municipal Money Fund (the "New
York Fund"), CMA North Carolina Municipal Money Fund (the "North Carolina
Fund"), CMA Ohio Municipal Money Fund (the "Ohio Fund") and CMA Pennsylvania
Municipal Money Fund (the "Pennsylvania Fund") (together, the "Funds"). Each
Fund is a non-diversified, no-load money market mutual fund seeking current
income exempt from federal income taxes, personal income taxes of the designated
state and, in certain instances, local personal income taxes, local personal
property taxes and/or state intangible personal property taxes. Each Fund also
seeks preservation of capital and liquidity. Each Fund seeks to achieve its
investment objectives by investing in a portfolio of short-term, high quality
obligations, the interest on which is exempt, in the opinion of counsel to the
issuer, from federal income taxes, personal income taxes of the designated state
and, in certain instances, local personal income taxes, local personal property
taxes and/or state intangible personal property taxes. 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. The Funds
also may invest in derivative or synthetic municipal instruments. See
"Investment Objectives and Policies--Portfolio Investments--Derivative or
Synthetic Municipal Instruments." All of the investments of each Fund will be in
securities with remaining maturities of 397 days (13 months) or less. The
dollar-weighted average maturity of each Fund's portfolio will be 90 days or
less. Dividends are declared and reinvested daily in the form of additional
shares at net asset value. There can be no assurance that the investment
objectives of any Fund will be realized. For more information on the Funds'
investment objectives and policies, please see "Investment Objectives and
Policies" on page 9. AN INVESTMENT IN A FUND IS NEITHER INSURED NOR GUARANTEED
BY THE U.S. GOVERNMENT. EACH FUND SEEKS TO MAINTAIN A CONSTANT $1.00 PER SHARE
NET ASSET VALUE. THERE CAN BE NO ASSURANCE THAT ANY FUND WILL BE ABLE TO
MAINTAIN A STABLE NET ASSET VALUE OF $1.00 PER SHARE.
Shares are offered at their net asset value. There is no minimum purchase
requirement for CMA program participants. Shares of a Fund also may be purchased
by individual investors maintaining accounts directly with the Trust's Transfer
Agent who do not subscribe to the CMA program. The minimum initial purchase for
non-CMA subscribers is $5,000 and the minimum subsequent purchase is $1,000.
Such investors will not receive any of the additional services available to CMA
program participants, such as the Visa Account or the automatic investment of
free credit balances. Each Fund has adopted a distribution and shareholder
servicing plan in compliance with Rule 12b-1 under the Investment Company Act of
1940, as amended (the "Investment Company Act"). See "Purchase of Shares."
------------------------
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 read carefully and retained for future reference. A statement
containing additional information about the Trust and each Fund, dated July 22,
1997 (the "Statement of Additional Information"), has been filed with the
Securities and Exchange Commission (the "Commission") and can be obtained
without charge by calling or writing to the Trust at the above telephone number
or address. The Statement of Additional Information is hereby incorporated by
reference into this Prospectus.
<PAGE> 3
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.
FEE TABLE
<TABLE>
<CAPTION>
NORTH
ARIZONA CALIFORNIA CONNECTICUT MASSACHUSETTS MICHIGAN NEW JERSEY NEW YORK CAROLINA OHIO PENNSYLVANIA
FUND FUND FUND FUND FUND FUND FUND FUND FUND FUND
------- ---------- ----------- ------------- -------- ---------- -------- -------- ---- ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
ANNUALIZED FUND
OPERATING EXPENSES
(AS A PERCENTAGE
OF AVERAGE NET
ASSETS) FOR THE
FISCAL YEAR ENDED
MARCH 31, 1997:
Management
Fees(a)....... 0.50% 0.44% 0.50% 0.50% 0.50% 0.49% 0.45% 0.50% 0.50% 0.50%
Rule 12b-1
Fees(b)....... 0.12 0.12 0.12 0.12 0.12 0.12 0.12 0.12 0.12 0.12
Other Expenses:
Dividend and
Transfer
Agency
Fees(c)..... 0.02 0.01 0.02 0.03 0.02 0.02 0.02 0.02 0.02 0.03
Other Fees.... 0.12 0.03 0.07 0.11 0.08 0.05 0.04 0.08 0.07 0.06
---- ---- ---- ---- ---- ---- ---- ---- ---- ----
Total Other
Expenses.... 0.14 0.04 0.09 0.14 0.10 0.07 0.06 0.10 0.09 0.09
---- ---- ---- ---- ---- ---- ---- ---- ---- ----
Total Fund
Operating
Expenses...... 0.76% 0.60% 0.71% 0.76% 0.72% 0.68% 0.63% 0.72% 0.71% 0.71%
==== ==== ==== ==== ==== ==== ==== ==== ==== ====
</TABLE>
- ---------------
(a) See "Management of the Trust--Management and Advisory Arrangements" -- page
26.
(b) See "Purchase of Shares" -- page 19.
(c) See "Management of the Trust--Transfer Agency Services" -- page 27.
EXAMPLE:
An investor would pay the following expenses on a $1,000 investment, assuming
the operating expense ratio set forth above for each Fund and a 5% annual return
throughout the period:
<TABLE>
<CAPTION>
CUMULATIVE
EXPENSES NORTH
PAYABLE FOR THE ARIZONA CALIFORNIA CONNECTICUT MASSACHUSETTS MICHIGAN NEW JERSEY NEW YORK CAROLINA OHIO PENNSYLVANIA
PERIOD OF: FUND FUND FUND FUND FUND FUND FUND FUND FUND FUND
- ------------------- ------- ---------- ----------- ------------- -------- ---------- -------- -------- ---- ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1 year............ $ 8 $ 6 $ 7 $ 8 $ 7 $ 7 $ 6 $ 7 $ 7 $ 7
3 years........... $24 $ 19 $23 $24 $ 23 $ 22 $ 20 $ 23 $23 $ 23
5 years........... $42 $ 33 $40 $42 $ 40 $ 38 $ 35 $ 40 $40 $ 40
10 years........... $94 $ 75 $88 $94 $ 89 $ 85 $ 79 $ 89 $88 $ 88
</TABLE>
MERRILL LYNCH CHARGES AN ANNUAL PROGRAM PARTICIPATION FEE, PRESENTLY $100
FOR INDIVIDUALS, FOR THE CMA SERVICE (AN ADDITIONAL FEE, PRESENTLY $25, IS
CHARGED FOR PARTICIPATION IN THE CMA VISA GOLD PROGRAM). SHAREHOLDERS OF THE
FUNDS WHOSE ACCOUNTS ARE MAINTAINED DIRECTLY WITH THE TRUST'S TRANSFER AGENT AND
WHO ARE NOT SUBSCRIBERS TO THE CMA PROGRAM WILL NOT BE CHARGED THE CMA PROGRAM
FEE BUT WILL NOT RECEIVE ANY OF THE ADDITIONAL SERVICES AVAILABLE TO CMA PROGRAM
SUBSCRIBERS.
2
<PAGE> 4
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. THE EXAMPLE SHOULD NOT BE CONSIDERED A REPRESENTATION OF PAST
OR FUTURE EXPENSES AND ACTUAL EXPENSES MAY BE MORE OR LESS THAN THOSE ASSUMED
FOR PURPOSES OF THE EXAMPLE.
FINANCIAL HIGHLIGHTS
Financial statements for the periods ended March 31, 1997 and the
independent auditors' report thereon for each Fund are included in the Statement
of Additional Information. The following per share data and ratios have been
derived from information provided in the financial statements of the Funds
audited by Deloitte & Touche LLP, independent auditors.
<TABLE>
<CAPTION>
ARIZONA FUND CALIFORNIA FUND
------------------------------------------------------ ------------------------------------
FOR THE
PERIOD
FOR THE FEBRUARY 8,
YEAR ENDED 1993+ FOR THE YEAR ENDED
MARCH 31, TO MARCH 31,
---------------------------------------- MARCH 31, ------------------------------------
1997 1996 1995 1994 1993 1997 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............................ $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
-------- -------- -------- ------- ------- ---------- ---------- ----------
Investment income--net............. .03 .03 .03 .02 .002 .03 .03 .03
-------- -------- -------- ------- ------- ---------- ---------- ----------
Total from investment operations... .03 .03 .03 .02 .002 .03 .03 .03
-------- -------- -------- ------- ------- ---------- ---------- ----------
Less dividends:
Investment income--net............ (.03) (.03) (.03) (.02) (.002) (.03) (.03) (.03)
-------- -------- -------- ------- ------- ---------- ---------- ----------
Net asset value, end of period..... $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
======== ======== ======== ======= ======= ========== ========== ==========
TOTAL INVESTMENT RETURN............ 2.84% 3.36% 2.83% 1.90% 1.78%* 2.88% 3.16% 2.66%
======== ======== ======== ======= ======= ========== ========== ==========
RATIOS TO AVERAGE NET ASSETS:
Expenses, net of reimbursement..... .76% .58% .54% .59% .46%* .60% .64% .63%
======== ======== ======== ======= ======= ========== ========== ==========
Expenses........................... .76% .77% .85% .98% 1.15%* .60% .64% .63%
======== ======== ======== ======= ======= ========== ========== ==========
Investment income--net............. 2.80% 3.27% 2.84% 1.89% 1.86%* 2.85% 3.11% 2.62%
======== ======== ======== ======= ======= ========== ========== ==========
SUPPLEMENTAL DATA:
Net assets, end of period
(in thousands).................... $169,551 $137,520 $103,717 $73,414 $41,437 $1,565,802 $1,421,140 $1,168,234
======== ======== ======== ======= ======= ========== ========== ==========
<CAPTION>
FOR THE
PERIOD
JULY 5,
1988+
TO
MARCH 31,
1994 1993 1992 1991 1990 1989
---------- ---------- ---------- ---------- ---------- ---------
<S> <C> <C> <C> <C> <C> <C>
INCREASE (DECREASE) IN
NET ASSET VALUE:
PER SHARE
OPERATING PERFORMANCE:
Net asset value, beginning of
period............................ $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
---------- ---------- ---------- ---------- ---------- --------
Investment income--net............. .02 .02 .03 .05 .05 .04
---------- ---------- ---------- ---------- ---------- --------
Total from investment operations... .02 .02 .03 .05 .05 .04
---------- ---------- ---------- ---------- ---------- --------
Less dividends:
Investment income--net............ (.02) (.02) (.03) (.05) (.05) (.04)
---------- ---------- ---------- ---------- ---------- --------
Net asset value, end of period..... $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
========== ========== ========== ========== ========== ========
TOTAL INVESTMENT RETURN............ 1.93% 2.25% 3.48% 4.96% 5.59% 5.41% *
========== ========== ========== ========== ========== ========
RATIOS TO AVERAGE NET ASSETS:
Expenses, net of reimbursement..... .62% .63% .63% .62% .65% .64% *
========== ========== ========== ========== ========== ========
Expenses........................... .62% .63% .63% .62% .65% .72% *
========== ========== ========== ========== ========== ========
Investment income--net............. 1.91% 2.22% 3.42% 4.83% 5.44% 5.43% *
========== ========== ========== ========== ========== ========
SUPPLEMENTAL DATA:
Net assets, end of period
(in thousands).................... $1,225,160 $1,014,800 $1,033,423 $1,163,288 $1,047,340 $702,698
========== ========== ========== ========== ========== ========
</TABLE>
- ---------------
* Annualized.
+ Commencement of Operations.
3
<PAGE> 5
<TABLE>
<CAPTION>
FINANCIAL HIGHLIGHTS (CONTINUED)
CONNECTICUT FUND MASSACHUSETTS FUND
---------------------------------------------------------------- -------------------------------
FOR THE
PERIOD
APRIL 29,
FOR THE YEAR ENDED 1991+ FOR THE YEAR ENDED
MARCH 31, TO MARCH 31,
---------------------------------------------------- MARCH 31, -------------------------------
1997 1996 1995 1994 1993 1992 1997 1996 1995
-------- -------- -------- -------- -------- --------- -------- -------- --------
<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................. $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
-------- -------- -------- -------- -------- -------- -------- -------- --------
Investment income--net..... .03 .03 .03 .02 .02 .03 .03 .03 .02
-------- -------- -------- -------- -------- -------- -------- -------- --------
Total from investment
operations................ .03 .03 .03 .02 .02 .03 .03 .03 .02
-------- -------- -------- -------- -------- -------- -------- -------- --------
Less dividends:
Investment income--net.... (.03) (.03) (.03) (.02) (.02) (.03) (.03) (.03) (.02)
-------- -------- -------- -------- -------- -------- -------- -------- --------
Net asset value, end of
period.................... $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
======== ======== ======== ======== ======== ======== ======== ======== ========
TOTAL INVESTMENT RETURN.... 2.79% 3.02% 2.54% 1.77% 2.20% 3.56% * 2.81% 3.05% 2.46%
======== ======== ======== ======== ======== ======== ======== ======== ========
RATIOS TO AVERAGE NET
ASSETS:
Expenses, net of
reimbursement............. .71% .72% .71% .70% .63% .41% * .76% .76% .76%
======== ======== ======== ======== ======== ======== ======== ======== ========
Expenses................... .71% .72% .71% .70% .73% .81% * .76% .76% .76%
======== ======== ======== ======== ======== ======== ======== ======== ========
Investment income--net..... 2.76% 2.97% 2.53% 1.76% 2.17% 3.46% * 2.78% 3.00% 2.43%
======== ======== ======== ======== ======== ======== ======== ======== ========
SUPPLEMENTAL DATA:
Net assets, end of period
(in thousands)............ $339,931 $313,362 $260,398 $250,038 $231,431 $197,895 $200,598 $189,482 $161,076
======== ======== ======== ======== ======== ======== ======== ======== ========
<CAPTION>
FOR THE
PERIOD
JULY 30,
1990+
TO
MARCH 31,
1994 1993 1992 1991
-------- -------- -------- ---------
<S> <<C> <C> <C> <C>
INCREASE (DECREASE) IN
NET ASSET VALUE:
PER SHARE
OPERATING PERFORMANCE:
Net asset value, beginning
of period................. $ 1.00 $ 1.00 $ 1.00 $ 1.00
-------- -------- -------- --------
Investment income--net..... .02 .02 .04 .03
-------- -------- -------- --------
Total from investment
operations................ .02 .02 .04 .03
-------- -------- -------- --------
Less dividends:
Investment income--net.... (.02) (.02) (.04) (.03)
-------- -------- -------- --------
Net asset value, end of
period.................... $ 1.00 $ 1.00 $ 1.00 $ 1.00
======== ======== ======== ========
TOTAL INVESTMENT RETURN.... 1.74% 2.20% 3.66% 5.04%*
======== ======== ======== ========
RATIOS TO AVERAGE NET
ASSETS:
Expenses, net of
reimbursement............. .78% .78% .85% .72%*
======== ======== ======== ========
Expenses................... .78% .78% .87% .97%*
======== ======== ======== ========
Investment income--net..... 1.72% 2.15% 3.56% 4.92%*
======== ======== ======== ========
SUPPLEMENTAL DATA:
Net assets, end of period
(in thousands)............ $150,804 $132,302 $116,340 $84,613
======== ======== ======== ========
</TABLE>
- ---------------
* Annualized.
+ Commencement of Operations.
4
<PAGE> 6
<TABLE>
<CAPTION>
FINANCIAL HIGHLIGHTS (CONTINUED)
MICHIGAN FUND NEW JERSEY FUND
---------------------------------------------------------------- ------------------------------
FOR THE
PERIOD
APRIL 29,
FOR THE YEAR ENDED 1991+ FOR THE YEAR ENDED
MARCH 31, TO MARCH 31,
---------------------------------------------------- MARCH 31, ------------------------------
1997 1996 1995 1994 1993 1992 1997 1996 1995
-------- -------- -------- -------- -------- --------- -------- -------- --------
<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.................. $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
-------- -------- -------- -------- -------- -------- -------- -------- --------
Investment income--net...... .03 .03 .03 .02 .02 .03 .03 .03 .02
-------- -------- -------- -------- -------- -------- -------- -------- --------
Total from investment
operations................. .03 .03 .03 .02 .02 .03 .03 .03 .02
-------- -------- -------- -------- -------- -------- -------- -------- --------
Less dividends:
Investment income--net..... (.03) (.03) (.03) (.02) (.02) (.03) (.03) (.03) (.02)
-------- -------- -------- -------- -------- -------- -------- -------- --------
Net asset value, end of
period..................... $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
======== ======== ======== ======== ======== ======== ======== ======== ========
TOTAL INVESTMENT RETURN..... 2.89% 3.13% 2.57% 1.81% 2.24% 3.62% * 2.81% 3.07% 2.52%
======== ======== ======== ======== ======== ======== ======== ======== ========
RATIOS TO AVERAGE NET
ASSETS:
Expenses, net of
reimbursement.............. .72% .73% .73% .72% .65% .54% * .68% .68% .71%
======== ======== ======== ======== ======== ======== ======== ======== ========
Expenses.................... .72% .73% .73% .72% .74% .80% * .68% .68% .71%
======== ======== ======== ======== ======== ======== ======== ======== ========
Investment income--net...... 2.84% 3.05% 2.54% 1.79% 2.22% 3.53% * 2.78% 3.02% 2.51%
======== ======== ======== ======== ======== ======== ======== ======== ========
SUPPLEMENTAL DATA:
Net assets, end of period
(in thousands)............. $272,969 $247,544 $220,171 $236,435 $200,200 $194,433 $683,361 $610,285 $525,747
======== ======== ======== ======== ======== ======== ======== ======== ========
<CAPTION>
FOR THE
PERIOD
JULY 30,
1990+
TO
MARCH 31,
1994 1993 1992 1991
-------- -------- -------- ---------
<S> <C> <C> <C> <C>
INCREASE (DECREASE) IN
NET ASSET VALUE:
PER SHARE
OPERATING PERFORMANCE:
Net asset value, beginning
of period.................. $ 1.00 $ 1.00 $ 1.00 $ 1.00
-------- -------- -------- --------
Investment income--net...... .02 .02 .03 .03
-------- -------- -------- --------
Total from investment
operations................. .02 .02 .03 .03
-------- -------- -------- --------
Less dividends:
Investment income--net..... (.02) (.02) (.03) (.03)
-------- -------- -------- --------
Net asset value, end of
period..................... $ 1.00 $ 1.00 $ 1.00 $ 1.00
======== ======== ======== ========
TOTAL INVESTMENT RETURN..... 1.82% 2.21% 3.49% 4.95% *
======== ======== ======== ========
RATIOS TO AVERAGE NET
ASSETS:
Expenses, net of
reimbursement.............. .70% .70% .74% .64% *
======== ======== ======== ========
Expenses.................... .70% .70% .74% .76% *
======== ======== ======== ========
Investment income--net...... 1.80% 2.16% 3.42% 4.74% *
======== ======== ======== ========
SUPPLEMENTAL DATA:
Net assets, end of period
(in thousands)............. $441,846 $388,903 $350,058 $356,475
======== ======== ======== ========
</TABLE>
- ---------------
* Annualized.
+ Commencement of Operations.
5
<PAGE> 7
<TABLE>
<CAPTION>
FINANCIAL HIGHLIGHTS (CONTINUED)
NEW YORK FUND
-----------------------------------------------------------------------------------------------------
FOR THE
PERIOD
JULY 5,
FOR THE YEAR ENDED 1988+
MARCH 31, TO
----------------------------------------------------------------------------------------- MARCH 31,
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............... $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
---------- ---------- -------- -------- -------- -------- -------- -------- --------
Investment
income--net.......... .03 .03 .03 .02 .02 .03 .05 .05 .04
---------- ---------- -------- -------- -------- -------- -------- -------- --------
Total from investment
operations........... .03 .03 .03 .02 .02 .03 .05 .05 .04
---------- ---------- -------- -------- -------- -------- -------- -------- --------
Less dividends:
Investment
income--net........ (.03) (.03) (.03) (.02) (.02) (.03) (.05) (.05) (.04)
---------- ---------- -------- -------- -------- -------- -------- -------- --------
Net asset value, end
of
period............... $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
========== ========== ======== ======== ======== ======== ======== ======== ========
TOTAL INVESTMENT
RETURN............... 2.92% 3.17% 2.59% 1.79% 2.19% 3.37% 4.86% 5.35% 5.04%*
========== ========== ======== ======== ======== ======== ======== ======== ========
RATIOS TO AVERAGE NET
ASSETS:
Expenses, net of
reimbursement........ .63% .64% .67% .67% .67% .68% .69% .71% .70%*
========== ========== ======== ======== ======== ======== ======== ======== ========
Expenses.............. .63% .64% .67% .67% .67% .68% .69% .72% .79%*
========== ========== ======== ======== ======== ======== ======== ======== ========
Investment
income--net.......... 2.88% 3.12% 2.59% 1.78% 2.16% 3.31% 4.73% 5.23% 5.14%*
========== ========== ======== ======== ======== ======== ======== ======== ========
SUPPLEMENTAL DATA:
Net assets, end of
period
(in thousands)....... $1,236,322 $1,132,264 $919,852 $772,760 $665,970 $625,768 $633,819 $544,197 $333,299
========== ========== ======== ======== ======== ======== ======== ======== ========
<CAPTION>
NORTH CAROLINA FUND
----------------------------------------------------------------
FOR THE
PERIOD
MAY 28,
FOR THE YEAR ENDED 1991+
MARCH 31, TO
---------------------------------------------------- MARCH 31,
1997 1996 1995 1994 1993 1992
-------- -------- -------- -------- -------- ---------
<S> <C> <C> <C> <C> <C> <C>
INCREASE (DECREASE) IN
NET ASSET VALUE:
PER SHARE
OPERATING
PERFORMANCE:
Net asset value,
beginning of
period............... $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
-------- -------- -------- -------- -------- --------
Investment
income--net.......... .03 .03 .03 .02 .02 .03
-------- -------- -------- -------- -------- --------
Total from investment
operations........... .03 .03 .03 .02 .02 .03
-------- -------- -------- -------- -------- --------
Less dividends:
Investment
income--net........ (.03) (.03) (.03) (.02) (.02) (.03)
-------- -------- -------- -------- -------- --------
Net asset value, end
of
period............... $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
======== ======== ======== ======== ======== ========
TOTAL INVESTMENT
RETURN............... 2.82% 3.13% 2.61% 1.85% 2.25% 3.49% *
======== ======== ======== ======== ======== ========
RATIOS TO AVERAGE NET
ASSETS:
Expenses, net of
reimbursement........ .72% .69% .62% .61% .57% .45% *
======== ======== ======== ======== ======== ========
Expenses.............. .72% .74% .72% .71% .73% .83% *
======== ======== ======== ======== ======== ========
Investment
income--net.......... 2.79% 3.08% 2.58% 1.84% 2.20% 3.25% *
======== ======== ======== ======== ======== ========
SUPPLEMENTAL DATA:
Net assets, end of
period
(in thousands)....... $274,180 $273,910 $278,704 $293,452 $235,384 $221,060
======== ======== ======== ======== ======== ========
</TABLE>
- ---------------
* Annualized.
+ Commencement of Operations.
6
<PAGE> 8
<TABLE>
<CAPTION>
FINANCIAL HIGHLIGHTS (CONCLUDED)
PENNSYLVANIA FUND
OHIO FUND ------------------------------
----------------------------------------------------------------
FOR THE
PERIOD
APRIL 29,
FOR THE YEAR ENDED 1991+ FOR THE YEAR ENDED
MARCH 31, TO MARCH 31,
---------------------------------------------------- MARCH 31, ------------------------------
1997 1996 1995 1994 1993 1992 1997 1996 1995
-------- -------- -------- -------- -------- --------- -------- -------- --------
<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........................ $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
-------- -------- -------- -------- -------- -------- -------- -------- --------
Investment income--net......... .03 .03 .03 .02 .02 .03 .03 .03 .03
-------- -------- -------- -------- -------- -------- -------- -------- --------
Total from investment
operations.................... .03 .03 .03 .02 .02 .03 .03 .03 .03
-------- -------- -------- -------- -------- -------- -------- -------- --------
Less dividends:
Investment income--net........ (.03) (.03) (.03) (.02) (.02) (.03) (.03) (.03) (.03)
-------- -------- -------- -------- -------- -------- -------- -------- --------
Net asset value, end of
period........................ $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
======== ======== ======== ======== ======== ======== ======== ======== ========
TOTAL INVESTMENT RETURN........ 2.99% 3.27% 2.65% 1.88% 2.27% 3.65% * 2.89% 3.20% 2.65%
======== ======== ======== ======== ======== ======== ======== ======== ========
RATIOS TO AVERAGE NET ASSETS:
Expenses, net of
reimbursement................. .71% .73% .74% .72% .74% .57% * .71% .72% .71%
======== ======== ======== ======== ======== ======== ======== ======== ========
Expenses....................... .71% .73% .74% .72% .74% .82% * .71% .72% .71%
======== ======== ======== ======== ======== ======== ======== ======== ========
Investment income--net......... 2.94% 3.21% 2.64% 1.86% 2.24% 3.52% * 2.86% 3.13% 2.64%
======== ======== ======== ======== ======== ======== ======== ======== ========
SUPPLEMENTAL DATA:
Net assets, end of period
(in thousands)................ $327,173 $282,187 $237,655 $213,655 $187,344 $192,173 $428,896 $416,729 $353,635
======== ======== ======== ======== ======== ======== ======== ======== ========
<CAPTION>
FOR THE
PERIOD
AUGUST
27,
1990+
TO
MARCH 31,
1994 1993 1992 1991
-------- -------- -------- ---------
<S> <C> <C> <C> <C>
INCREASE (DECREASE) IN
NET ASSET VALUE:
PER SHARE
OPERATING PERFORMANCE:
Net asset value, beginning of
period........................ $ 1.00 $ 1.00 $ 1.00 $ 1.00
-------- -------- -------- --------
Investment income--net......... .02 .02 .03 .03
-------- -------- -------- --------
Total from investment
operations.................... .02 .02 .03 .03
-------- -------- -------- --------
Less dividends:
Investment income--net........ (.02) (.02) (.03) (.03)
-------- -------- -------- --------
Net asset value, end of
period........................ $ 1.00 $ 1.00 $ 1.00 $ 1.00
======== ======== ======== ========
TOTAL INVESTMENT RETURN........ 1.87% 2.29% 3.58% 4.95% *
======== ======== ======== ========
RATIOS TO AVERAGE NET ASSETS:
Expenses, net of
reimbursement................. .72% .72% .77% .75% *
======== ======== ======== ========
Expenses....................... .72% .72% .77% .80% *
======== ======== ======== ========
Investment income--net......... 1.85% 2.22% 3.47% 4.75% *
======== ======== ======== ========
SUPPLEMENTAL DATA:
Net assets, end of period
(in thousands)................ $336,853 $318,954 $243,225 $225,622
======== ======== ======== ========
</TABLE>
- ---------------
* Annualized.
+ Commencement of Operations.
7
<PAGE> 9
YIELD INFORMATION
Set forth below are the annualized and compounded annualized yields for
each Fund for the indicated periods.
<TABLE>
<CAPTION>
ARIZONA CALIFORNIA CONNECTICUT MASSACHUSETTS MICHIGAN NEW JERSEY NEW YORK NORTH CAROLINA OHIO PENNSYLVANIA
FUND FUND FUND FUND FUND FUND FUND FUND FUND FUND
------- --------- ----------- ------------- --------- ---------- --------- -------------- ------- ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Seven-Day Period
Ended March 31,
1997
Annualized
Yield... 2.78% 2.80% 2.74% 2.80% 2.85% 2.81% 2.93% 2.77% 2.92% 2.83%
Compounded
Annualized
Yield... 2.82% 2.84% 2.78% 2.84% 2.89% 2.85% 2.97% 2.81% 2.96% 2.87%
Average
Maturity
of
Portfolio
at
End of
Period... 27 days 33 days 52 days 35 days 21 days 31 days 52 days 36 days 44 days 41 days
Seven-Day Period
Ended May 31,
1997
Annualized
Yield... 3.23% 3.21% 3.02% 3.15% 3.24% 3.23% 3.14% 3.15% 3.27% 3.14%
Compounded
Annualized
Yield... 3.28% 3.26% 3.07% 3.20% 3.29% 3.28% 3.19% 3.20% 3.32% 3.19%
Average
Maturity
of
Portfolio
at
End of
Period... 20 days 26 days 52 days 34 days 31 days 28 days 43 days 38 days 42 days 36 days
Thirty-Day Period
Ended May 31,
1997
Taxable
Equivalent
Yield*... 4.58% 4.51% 4.32% 4.42% 4.65% 4.51% 4.42% 4.54% 4.65% 4.53%
</TABLE>
- ---------------
* Based upon a federal income tax rate of 28%; does not take into account state
or local income taxes.
From time to time, each Fund may quote information regarding its yield for
certain seven-day periods and information as to the compounded annualized yield
for the same periods.
The yield of a Fund refers to the income generated by an investment in the
Fund over a stated seven-day period. This income is then annualized; that is,
the amount of income generated by the investment during that period is assumed
to be generated each seven-day period over a 52-week period and is shown as a
percentage of the investment. The compounded annualized yield is calculated
similarly but, when annualized, the income earned by an investment in a Fund is
assumed to be reinvested. The compounded annualized yield will be somewhat
higher than the yield because of the effect of the assumed reinvestment.
The yield on Fund shares normally will fluctuate on a daily basis.
Therefore, the yield for any given past period is not an indication or
representation by the Fund of future yields or rates of return on its shares. A
Fund's yield is affected by changes in interest rates on short-term tax-exempt
securities, average portfolio maturity, the types and quality of portfolio
securities held and operating expenses.
On occasion, each Fund may compare its yield to (i) the IBC's Tax-Free
Funds Average, an average compiled by IBC's Money Fund Report, a widely
recognized independent publication that monitors the performance of money market
mutual funds, (ii) the average yield reported by the Bank Rate Monitor National
Index(TM) for money market deposit accounts offered by the 100 leading banks and
thrift institutions in the ten largest standard metropolitan statistical areas,
(iii) yield data published by Lipper Analytical Services, Inc., (iv) performance
data published by Morningstar Publications, Inc., Money Magazine, U.S. News &
World Report, Business Week, CDA Investment Technology, Inc., Forbes Magazine
and Fortune Magazine, or (v) historical yield data relating to other central
asset accounts similar to the CMA program. As with yield quotations, yield
comparisons should not be considered indicative of a Fund's yield or relative
performance for
8
<PAGE> 10
any future period. Current yield information may not provide a basis for
comparison with bank deposits or other investments that pay a fixed yield over a
stated period of time. In addition, from time to time a Fund may include its
Morningstar risk-adjusted performance ratings in advertisements or supplemental
sales literature.
INVESTMENT OBJECTIVES AND POLICIES
INVESTMENT OBJECTIVES
The investment objectives of each Fund are to seek current income exempt
from federal and the designated state's personal income taxes and in certain
instances, local personal income taxes, local personal property taxes and/or
state intangible personal property taxes. Each Fund also seeks preservation of
capital and liquidity available from investing in a portfolio of short-term,
high quality tax-exempt securities. Each Fund seeks to achieve its objectives by
investing primarily in a portfolio of obligations with remaining maturities of
397 days (13 months) or less which are issued by or on behalf of the designated
states, their political subdivisions, agencies and instrumentalities, and
obligations of other qualifying issuers, such as issuers located in Puerto Rico,
the Virgin Islands and Guam and issuers of derivative or synthetic municipal
instruments, the interest from which is exempt, in the opinion of counsel to the
issuer, from federal income taxes, the designated state's income taxes and in
certain instances, local personal income taxes, local personal property taxes
and/or state intangible personal property taxes. Such obligations are herein
referred to as "State Municipal Securities." The investment objectives of the
Funds described in this paragraph are fundamental policies of each Fund and may
not be changed without a vote of the majority of the outstanding shares of the
respective Fund.
The Funds ordinarily do not intend to realize investment income not exempt
from federal income taxes, the personal income taxes of the designated states
or, if applicable, local personal income or property taxes and/or state
intangible personal property taxes. However, to the extent that suitable State
Municipal Securities are not available for investment by a Fund, that Fund may
purchase high quality obligations with remaining maturities of 397 days (13
months) or less which are issued by other states, their agencies and
instrumentalities and derivative or synthetic municipal instruments, the
interest income on which is exempt, in the opinion of counsel to the issuer,
from federal taxes but not state or, where relevant, local taxes. Such
obligations, either separately or together with State Municipal Securities, are
herein referred to as "Municipal Securities."
Except during temporary defensive periods, each Fund will invest at least
65% of its total assets in State Municipal Securities and at least 80% of its
net assets in Municipal Securities. The New Jersey Fund will invest at least 80%
of its total assets in New Jersey State Municipal Securities. However, interest
received on certain State Municipal Securities and Municipal Securities which
are classified as "private activity bonds" (in general, bonds that benefit
non-governmental entities) may be subject to an alternative minimum tax. The
percentage of each Fund's net assets invested in "private activity bonds" will
vary during the year. See "Taxes." Each Fund has the authority to invest as much
as 20% of its net assets in obligations that do not qualify as State Municipal
Securities or Municipal Securities. Such obligations include taxable money
market obligations, including repurchase agreements and purchase and sale
contracts, with maturities of 397 days (13 months) or less, and are referred to
herein as "Taxable Securities." In addition, each Fund except the New Jersey
Fund reserves the right as a defensive measure to invest temporarily more than
35% of its total
9
<PAGE> 11
assets in Municipal Securities other than its respective State Municipal
Securities and more than 20% of its net assets in Taxable Securities when, in
the opinion of Fund Asset Management, L.P. (the "Manager"), prevailing market or
financial conditions warrant. The New Jersey Fund reserves the right as a
defensive measure to invest temporarily more than 20% of its total assets in
Municipal Securities other than New Jersey Municipal Securities and more than
20% of its net assets in Taxable Securities when, in the opinion of the Manager,
prevailing market or financial conditions warrant.
As noted above, each Fund may invest a portion of its assets in certain
otherwise tax-exempt securities which are classified, under the Internal Revenue
Code of 1986, as amended (the "Code"), as "private activity bonds." A Fund's
policy with respect to investments in "private activity bonds" is not a
fundamental policy of that Fund and may be amended by the Trustees of the Trust
without the approval of the Fund's shareholders. Each Fund may invest more than
25% of its assets in Municipal Securities secured by bank letters of credit. In
view of this possible "concentration" in Municipal Securities with bank credit
enhancements, an investment in Fund shares should be made with an understanding
of the characteristics of the banking industry and the risks that such an
investment may entail. See "Other Factors."
The Funds are classified as non-diversified within the meaning of the
Investment Company Act, which means that a Fund is not limited by such 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" ("RIC") for purposes of the Code. See "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 each 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 each Fund's total assets, not more than 5% of the market value of such assets
will be invested in the securities of a single issuer and the respective Fund
will not own more than 10% of the outstanding voting securities of a single
issuer. A fund which elects to be classified as "diversified" under the
Investment Company 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, the Fund's yield 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.
POTENTIAL BENEFITS
Investment in Fund shares offers several potential benefits. The Funds are
investment vehicles designed to be suitable for investors of designated states
seeking income exempt from income taxation by those states as well as federal
income taxation and, where applicable, local personal income taxation, local
personal property taxation and state intangible personal property taxation. Each
Fund seeks to provide as high a tax-exempt yield potential as is available from
investments in the short-term State Municipal Securities in which it invests
utilizing professional management and block purchases of securities. The Funds
also provide liquidity because of their redemption features. The investor also
is relieved of the burdensome administrative details involved in managing a
portfolio of municipal securities. These benefits are at least partially offset
by the expenses involved in operating an investment company. Such expenses
primarily consist of the management fee, distribution fee and operational costs
of each Fund.
10
<PAGE> 12
PORTFOLIO INVESTMENTS
The State Municipal Securities in which the Funds invest include municipal
notes, municipal commercial paper, municipal bonds with a remaining maturity of
397 days (13 months) or less, variable rate demand obligations and
participations therein, and derivative or synthetic municipal instruments. The
Funds may invest in all types of municipal and tax-exempt instruments currently
outstanding or to be issued in the future which satisfy the short-term maturity
and quality standards of the Funds.
Certain of the instruments in which the Funds invest, including Variable
Rate Demand Obligations ("VRDOs") and derivative or synthetic short-term
municipal instruments ("Derivative Products"), effectively provide the Funds
with economic interests in long-term municipal bonds (or a portion of the income
derived therefrom), coupled with rights to demand payment of the principal
amounts of such instruments from designated persons (a "demand right"). Under
Commission rules, the Funds treat these instruments as having maturities shorter
than the stated maturity dates of the VRDOs or of the long-term bonds underlying
the Derivative Products (the "Underlying Bonds"). Such maturities are
sufficiently short-term to allow such instruments to qualify as eligible
investments for money market funds such as the Funds. A demand right is
dependent on the financial ability of the issuer of the demand right (or, if the
instrument is subject to credit enhancement, a bank or other financial
institution issuing a letter of credit or other credit enhancement supporting
the demand right), to purchase the instrument at its principal amount. In
addition, the right of a Fund to demand payment from the issuer of a demand
right may be subject to certain conditions, including the creditworthiness of
the Underlying Bond. If the issuer of a demand right is unable to purchase the
instrument, or if, because of conditions on the right of the Fund to demand
payment, the issuer of a demand right is not obligated to purchase the
instrument on demand, the Fund may be required to dispose of the instrument or
the Underlying Bond in the open market, which may be at a price which adversely
affects the Fund.
Variable Rate Demand Obligations. VRDOs are tax-exempt obligations which
utilize a floating or variable interest rate adjustment formula and provide an
unconditional right of demand to receive payment of the unpaid principal balance
plus accrued interest on a short notice period. The interest on a VRDO is
adjustable at periodic intervals to a rate calculated to maintain the market
value of the VRDO at approximately the par value of the VRDO on the adjustment
date. The adjustment may be based on an interest rate adjustment index.
The Funds also may invest in VRDOs in the form of participation interests
("Participating VRDOs") in variable rate tax-exempt obligations held by
financial institutions, typically commercial banks ("institutions").
Participating VRDOs provide the Funds with specified undivided interests (up to
100%) in the underlying obligations and the right to demand payment of the
unpaid principal balance plus accrued interest on the Participating VRDOs from
the institutions on a specified number of days' notice, presently not to exceed
30 days. In addition, each Participating VRDO is backed by an irrevocable letter
of credit or similar commitment of the institution. The Funds have undivided
interests in the underlying obligations and thus participate on the same basis
as the institutions in such obligations except that the institutions typically
retain fees out of the interest paid on the obligations for servicing the
obligations, providing the letters of credit or issuing the repurchase
commitments.
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.
11
<PAGE> 13
A VRDO with a demand notice period exceeding seven days will therefore be
subject to the Funds' restrictions on illiquid investments unless, in the
judgment of the Trustees, such VRDO is liquid. The Trustees may adopt guidelines
and delegate to the Managers 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 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 provided that certain conditions are met. It is presently
contemplated that each Fund will not invest more than a limited amount (not more
than 20%) of its total assets in Participating VRDOs.
Derivative Products. The Funds may invest in a variety of Derivative
Products. Derivative Products are typically structured by a bank, broker-dealer
or other financial institution. A Derivative Product generally consists of a
trust or partnership through which a Fund holds an interest in one or more
Underlying Bonds coupled with a conditional right to sell ("put") that Fund's
interest in the Underlying Bonds at par plus accrued interest to a financial
institution (a "Liquidity Provider"). Typically, a Derivative Product is
structured as a trust or partnership which provides for pass-through tax-exempt
income. There are currently three principal types of derivative structures: (1)
"Tender Option Bonds," which are instruments which 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 portions of income,
expenses, capital gains and losses associated with holding an underlying Bond in
accordance with a governing agreement. The Funds may also invest in other forms
of short-term Derivative Products eligible for investment by money market funds.
Investments in Derivative Products 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 a Fund. For example, the
tax-exempt treatment of the interest paid to holders of Derivative Products is
premised on the legal conclusion that the holders of such Derivative Products
have an ownership interest in the Underlying Bonds. While each Fund receives an
opinion of legal counsel to the effect that the income from each Derivative
Product 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
Derivative Products would be deemed taxable.
Municipal Lease Obligations. Also included within the general category of
the State Municipal Securities are participation certificates in a lease, an
installment purchase contract or a conditional sales contract (hereinafter
collectively called "lease obligations") entered into by the designated state or
a political subdivision thereof to finance the acquisition or construction of
equipment, land or facilities. Although lease obligations do not constitute
general obligations of the issuer for which the lessee's unlimited taxing power
is pledged, a lease obligation is frequently backed by the lessee's covenant to
budget for, appropriate and make the payments due under the lease obligation.
However, certain lease obligations contain "nonappropriation" clauses which
provide that the lessee 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 "nonappropriation" lease obligations are secured by the
leased property, disposition of the property in the event of foreclosure might
prove difficult. Certain investments in lease obligations may be illiquid. A
Fund may not invest in
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illiquid lease obligations if such investments, together with all other illiquid
investments, would exceed 10% of such Fund's net assets. A Fund may, however,
invest without regard to such limitation in lease obligations which the Manager,
pursuant to guidelines which have been adopted by the Board of Trustees and
subject to the supervision of the Board, determines to be liquid. Pursuant to
Guidelines which apply to the Funds and other funds managed by the Manager
(which funds may be able to invest in lower rated obligations than the Funds),
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 Investors
Service, Inc. ("Moody's"), or BBB or better by Standard & Poor's Ratings
Services ("Standard & Poor's") or Fitch Investors Service, Inc. ("Fitch").
Unrated lease obligations 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 unrated lease obligations,
the Manager must, among other things, also review the creditworthiness of the
municipality obligated to make payment under the lease obligation and make
certain specified determinations based on such factors as the existence of a
rating or credit enhancement such as insurance, the frequency of trades or
quotes for the obligation and the willingness of dealers to make a market in the
obligation.
SHORT-TERM MATURITY STANDARDS
All of the investments of the Funds will be in securities with remaining
maturities of 397 days (13 months) or less. The dollar-weighted average maturity
of each Fund's portfolio will be 90 days or less. For purposes of this
investment policy, 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 the Manager, will result in the obligation being valued in
the market as though it has such earlier maturity.
The maturities of VRDOs (including Participating VRDOs) are deemed to be
the longer of (i) the notice period required before a Fund is entitled to
receive payment of the principal amount of the VRDO on demand or (ii) the period
remaining until the VRDO's next interest rate adjustment. If not redeemed by the
Funds through the demand feature, VRDOs mature on a specified date which may
range up to 30 years from the date of issuance.
QUALITY STANDARDS
Each Fund's portfolio investments in municipal notes and short-term
tax-exempt commercial paper will be limited to those obligations which are
rated, or issued by issuers who have been rated, in one of the two highest
rating categories for short-term municipal debt obligations by a nationally
recognized statistical rating organization (an "NRSRO") or, if not rated, will
be of comparable quality as determined under procedures approved by the Trustees
of the Trust. Each Fund's investments in municipal bonds (which must have
maturities at the date of purchase of 397 days (13 months) or less) will be in
issuers who have received from the requisite NRSROs a rating, with respect to a
class of short-term debt obligations that is comparable in priority and security
with the investment, in one of the two highest rating categories for short-term
obligations or, if not rated, will be of comparable quality as determined by the
Trustees of the Trust. Currently, there are three NRSROs which rate municipal
obligations: Fitch, Moody's and Standard & Poor's. Certain tax-exempt
obligations (primarily VRDOs and Participating VRDOs) may be entitled to the
benefit of letters of credit or similar credit enhancements issued by financial
institutions. In such instances, in assessing the quality of such instruments,
the Trustees and the Manager will take into account not only the
creditworthiness of the issuers, but also the creditworthiness and type of
obligation of the financial institution. The type of obligation of the
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financial institution concerns, for example, whether the letter of credit or
similar credit enhancement being issued is conditional or unconditional. The
Funds also may purchase other types of municipal instruments if, in the opinion
of the Trustees or the Manager (as determined in accordance with the procedures
established by the Trustees), such obligations are equivalent to securities
having the ratings described above.
Taxable Securities in which the Funds invest will be rated, or will be
issued by issuers who have been rated, in one of the two highest rating
categories for short-term debt obligations by an NRSRO or, if not rated, will be
of comparable quality as determined by the Trustees of the Trust. Currently,
there are six NRSROs that rate Taxable Securities: Fitch, Moody's, Standard &
Poor's, Duff & Phelps Credit Ratings Co., IBCA Limited and its affiliate, IBCA
Inc. and Thomson BankWatch, Inc. The Funds may not invest in any security issued
by a depository institution unless such institution is organized and operating
in the United States, has total assets of at least $1 billion and is Federally
insured.
Preservation of capital is a prime investment objective of the Funds, and,
while the types of Municipal Securities in which the Funds invest are not
completely risk free, such securities generally are considered by the Manager to
have low risk of the failure of issuers or credit enhancers to pay principal,
interest and repurchase price, if applicable. These securities have a lower
payment risk compared to lower rated obligations and generally to longer term
obligations which entail the risk of changing conditions over a longer period of
time.
SPECIAL CONSIDERATIONS AND RISK FACTORS
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 Securities
and, therefore, it is more susceptible to factors adversely affecting issuers of
Municipal Securities in such state than is a tax-exempt mutual fund that is not
concentrated in issuers of State Municipal Securities to this degree. Because
each Fund's portfolio will be comprised primarily of short-term, high quality
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
Securities. Set forth below are special considerations and risk factors specific
to each Fund.
The Arizona Fund. Over the past several decades, Arizona'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, Arizona's efforts to diversify its
economy have enabled it to realize, and then sustain, increasing growth rates in
more recent years. Arizona 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. The Manager does not believe that the
current economic conditions in Arizona will have a significant adverse effect on
the Arizona Fund's ability to invest in high quality Arizona State Municipal
Securities. See Appendix A, "Economic and Financial Conditions in Arizona" in
the Statement of Additional Information.
The California Fund. Currently, California's general obligation bonds have
a Standard & Poor's rating of A+, a Moody's rating of A1 and a Fitch rating of
A+. No assurance can be given that such ratings will not be changed in the
future to reflect changes in the conditions of California's economy. See
Appendix B, "Economic and Financial Conditions in California" in the Statement
of Additional Information.
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The Connecticut Fund. Connecticut's economy relies in part on activities
that may be adversely affected by cyclical change, and recent declines in
defense spending have had a significant impact on unemployment levels. However,
unemployment levels have started to improve. Also favorably noted is
Connecticut's personal wealth level which, despite the poverty of certain of its
largest cities, continues to rank among the highest in the nation in terms of
per capita income. However, the State's rate of growth of personal income has
lagged behind the nation's rate for several years. The State has recorded
General Fund surpluses in fiscal years 1992 through 1996, but had accumulated a
General Fund deficit totaling $965.7 million through the end of fiscal year
1991. In 1991, such deficit was funded by the issuance of General Obligation
Economic Recovery Notes that were to be payable no later than June 30, 1996, but
certain of such notes have been rescheduled to be paid over the four fiscal
years ending June 30, 1999. The State's general obligation bonds are rated AA-
by Standard & Poor's, Aa3 by Moody's and AA by Fitch. The Manager does not
believe that the current economic conditions in Connecticut will have a
significant adverse effect on the Connecticut Fund's ability to invest in high
quality Connecticut State Municipal Securities. See Appendix C, "Economic and
Financial Conditions in Connecticut" in the Statement of Additional Information.
The Massachusetts Fund. Massachusetts is experiencing a moderate economic
recovery. The budgeted operating funds of Massachusetts 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, 1995 and 1996 with positive closing fund balances of $589.3
million, $726.0 million and $1.172 billion, respectively. As of June 24, 1997
and according to the Executive Office for Administration and Finance, fiscal
1997 is expected to end with positive budgetary fund balances totaling
approximately $979.6 million. Currently, Massachusetts' general obligation bonds
are rated by Standard & Poor's, Fitch and Moody's as A+, A+ and A-1,
respectively. From time to time, the rating agencies may further change their
ratings in response to budgetary matters or other economic indicators. The
Manager does not believe that the current economic conditions in Massachusetts
will have a significant adverse effect on the Massachusetts Fund's ability to
invest in high quality Massachusetts State Municipal Securities. See Appendix D,
"Economic and Financial Conditions in Massachusetts" in the Statement of
Additional Information.
The Michigan Fund. Michigan reported the General Fund in balance as of
September 30, 1996 after a transfer of $91.3 million to the Michigan Budget and
Economic Stabilization Fund, which after such transfer and certain transfers out
had an accrued balance of $1.15 billion. Michigan has reported balanced budgets
and year-end General Fund surpluses for each of the last five fiscal years.
Economically, Michigan remains closely tied to the economic cycles of the
automobile industry. Current increased automobile production has led to an
unemployment rate which, as of the date of this Prospectus, is below the
national average. Currently, Michigan's general obligation bonds are rated Aa by
Moody's, AA by Standard & Poor's and AA by Fitch. The Manager does not believe
that the current economic conditions in Michigan will have a significant adverse
effect on the Michigan Fund's ability to invest in high quality Michigan State
Municipal Securities. 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 recovery.
If the nation's economic growth rate slows, business expansion could become
somewhat more subdued in New Jersey. However, New Jersey's economy should have
enough momentum to keep its trend line pointing upwards. Its growth potential
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<PAGE> 17
is not yet limited by the labor supply constraints beginning to affect some
other parts of the country. Standard & Poor's, Moody's and Fitch have assigned
long-term ratings of AA+, Aa1, and AA+, respectively, to New Jersey State
general obligation bonds. The Manager does not believe that the current economic
conditions in New Jersey will have a significant adverse effect on the New
Jersey Fund's ability to invest in high quality New Jersey State Municipal
Securities. 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, New York City and
other New York public bodies have encountered financial difficulties which could
have an adverse effect with respect to the performance of the New York Fund.
Currently, Moody's, Standard & Poor's and Fitch rate New York State's general
obligation bonds A2, A- and A+, respectively, and Moody's, Standard & Poor's and
Fitch rate New York City's general obligation bonds Baa1, BBB+ and A-,
respectively. On February 28, 1996, Fitch placed New York City's general
obligation bonds on FitchAlert with negative implications. On November 5, 1996,
Fitch removed New York City's general obligation bonds from FitchAlert although
Fitch stated that the outlook remains negative. The Manager does not believe
that the current economic conditions in New York will have a significant adverse
effect on the New York Fund's ability to invest in high quality New York State
Municipal Securities. See Appendix G, "Economic and Financial Conditions in New
York" in the Statement of Additional Information.
The North Carolina Fund. North Carolina's fiscal year 1996 ended with a
positive General Fund balance. By law, a portion of such positive fund balance
was required to be reserved in the General Fund of North Carolina as part of a
"Savings Reserve" (subject to a maximum reserve of 5% of the preceding fiscal
year's operating appropriation). An additional portion of such unreserved credit
balance was reserved in the General Fund as part of a "Reserve for Repair and
Renovation of State Facilities" and certain other required reserves, leaving the
remaining unrestricted fund balance at the end of the year available for future
appropriations. Currently, Moody's, Standard & Poor's and Fitch rate North
Carolina's general obligation bonds Aaa, AAA, and AAA, respectively. The Manager
does not believe that the current economic conditions in North Carolina will
have a significant adverse effect on the North Carolina Fund's ability to invest
in high quality North Carolina State Municipal Securities. See Appendix H,
"Economic and Financial Conditions in North Carolina" in the Statement of
Additional Information.
The Ohio Fund. The Ohio State General Revenue Fund had a positive cash
balance at the end of May 1997, of $778.4 million. Economic activity in Ohio, as
in many other industrially developed states, tends to be more cyclical than in
some other states and in the nation as a whole. Currently, Ohio's general
obligation bonds are rated AA+, Aa1 and AA+ by Fitch, Moody's and Standard &
Poor's, respectively. The Manager does not believe that the current economic
conditions in Ohio will have a significant adverse effect on the Ohio Fund's
ability to invest in high quality Ohio Municipal Securities. See Appendix I,
"Economic and Financial Conditions in Ohio" 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. Factors which may negatively affect
economic conditions in Pennsylvania include adverse changes in employment rates,
Federal revenue sharing laws and laws with respect to tax-exempt financing. For
fiscal 1996, the Pennsylvania General Fund balance was drawn down $53.1 million
to $635.2
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million (determined on a "GAAP" basis). A planned draw down of the budgetary
unappropriated surplus during fiscal 1996 contributed to expenditures and other
uses exceeding revenues and other sources by $28 million. For fiscal 1997,
revenues are higher than expected and it is anticipated that there will be a
budget surplus at year-end. The enacted fiscal 1998 budget includes
approximately $170.6 million of tax reduction measures. Currently, Pennsylvania
general obligation bonds are rated AA- by Standard & Poor's and Fitch, and A1 by
Moody's. The Manager does not believe that the current economic conditions in
Pennsylvania will have a significant adverse effect on the Pennsylvania Fund's
ability to invest in high quality Pennsylvania Municipal Securities. See
Appendix J, "Economic and Financial Conditions in Pennsylvania" in the Statement
of Additional Information.
OTHER FACTORS
Management of the Funds will endeavor to be as fully invested as reasonably
practicable in order to maximize the yield on each Fund's portfolio. Not all
short-term municipal securities trade on the basis of same day settlements and,
accordingly, a portfolio of such securities cannot be managed on a daily basis
with the same flexibility as a portfolio of money market securities which can be
bought and sold on a same day basis. There may be times when a Fund has
uninvested cash resulting from an influx of cash due to large purchases of
shares or the maturing of portfolio securities. A Fund also may be required to
maintain cash reserves or incur temporary bank borrowings to make redemption
payments which are made on the same day the redemption request is received. Such
inability to be invested fully would lower the yield on such Fund's portfolio.
A Fund may invest more than 25% of the value of its total assets in
Municipal Securities which are related in such a way that an economic, business
or political development or change affecting one such security also would affect
the other securities; for example, securities the interest upon which is paid
from revenues of similar types of projects. As a result, the Funds may be
subject to greater risk as compared to mutual funds that do not follow this
practice.
In view of the possible "concentration" of the Funds in Municipal
Securities secured by bank letters of credit or guarantees, an investment in a
Fund should be made with an understanding of the characteristics of the banking
industry and the risks which such an investment may entail. Banks are subject to
extensive governmental regulations which may limit both the amounts and types of
loans and other financial commitments which may be made and interest rates and
fees which may be charged. The profitability of the banking industry is largely
dependent on the availability and cost of capital funds for the purpose of
financing lending operations under prevailing money market conditions.
Furthermore, general economic conditions play an important part in the
operations of this industry and exposure to credit losses arising from possible
financial difficulties of borrowers might affect a bank's ability to meet its
obligations under a letter of credit.
Changes to the Code limit the types and volume of securities qualifying for
the Federal income tax exemption of interest with the result that the volume of
new issues of Municipal Securities has declined substantially. Such changes may
affect the availability of Municipal Securities for investment by the Funds,
which could have a negative impact on the yield of the portfolios. Each Fund
reserves the right to suspend or otherwise limit sales of its shares if, as a
result of difficulties in acquiring portfolio securities or otherwise, it is
determined that it is not in the interests of the Fund's shareholders to issue
additional shares.
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WHEN-ISSUED AND DELAYED DELIVERY TRANSACTIONS
Municipal Securities 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 will make commitments to purchase such securities
only with the intention of actually acquiring the securities, but such Fund may
sell these securities prior to settlement date if it is deemed advisable. No new
when-issued commitments will be made if more than 40% of a Fund's net assets
would become so committed. Purchasing Municipal Securities 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 generally will decrease. Each Fund will maintain a separate account
at the Trust's custodian consisting of cash or liquid Municipal Securities
(valued on a daily basis) equal at all times to the amount of the when-issued
commitment.
REPURCHASE AGREEMENTS
Each Fund may invest in Taxable 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 which meets the creditworthiness standards adopted by the
Trustees. Under such agreements, the bank or primary dealer or an affiliate
thereof 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.
INVESTMENT RESTRICTIONS
The Trust has adopted a number of restrictions and policies relating to the
investment of each Fund's assets and its activities which are fundamental
policies and may not be changed without the approval of the holders of a
majority of the respective Fund's outstanding shares as defined in the
Investment Company Act. Among the more significant restrictions, no Fund may:
(i) purchase any securities other than securities referred to under "Investment
Objectives and Policies" in the Statement of Additional Information or herein;
(ii) borrow amounts in excess of 20% of its total assets taken at market value
(including the amount borrowed), and then only from banks as a temporary measure
for extraordinary or emergency purposes; the Funds will not purchase securities
while borrowings are outstanding; (iii) mortgage, pledge, hypothecate or in any
manner transfer as security for indebtedness any securities that it owns or
holds except in connection with certain specified transactions; (iv) invest in
securities which cannot be readily resold because of legal or contractual
restrictions or which are not otherwise readily marketable, including repurchase
agreements maturing in more than seven days, if, regarding all such securities,
more than 10% of its total assets (taken at market value at the time of each
investment) would be invested in such securities; and (v) invest more than 5% of
its total assets (taken at market value at the time of each investment) in
industrial revenue bonds where the entity supplying the revenues from which the
issue is to be paid, including predecessors, has a record of less than three
years of continuous operation.
In addition, to comply with tax requirements for qualification as
"regulated investment companies," the Funds' investments will be limited in a
manner such that, at the close of each quarter of each fiscal year,
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(a) no more than 25% of each Fund's total assets are invested in the securities
of a single issuer, and (b) with regard to at least 50% of each Fund's total
assets, no more than 5% of its total assets are invested in the securities of a
single issuer. For purposes of this restriction, the Funds will regard each
state and each political subdivision, agency or instrumentality of such state
and each multi-state agency of which such state is a member and each public
authority which issues securities on behalf of a private entity as a separate
issuer, except that if the security is backed only by the assets and revenues of
a non-governmental entity then the entity with the ultimate responsibility for
the payment of interest and principal may be regarded as the sole issuer. These
tax-related limitations may be changed by the Trustees of the Trust to the
extent necessary to comply with changes to the Federal tax requirements.
Investors are referred to the Statement of Additional Information for a
complete description of the Funds' investment restrictions.
PURCHASE OF SHARES
PURCHASE OF SHARES BY CMA SUBSCRIBERS
CMA Program. The shares of the Funds are offered to participants in the
CMA program to provide a medium for the investment of free credit balances held
in CMA accounts. Persons subscribing to the CMA program will have these balances
invested in shares of a CMA State Fund or CMA Money Fund, CMA Government
Securities Fund, CMA Tax-Exempt Fund or CMA Treasury Fund (collectively, the
"CMA National Funds" and together with the CMA State Funds, the "CMA Funds")
depending on which CMA Fund has been designated by the participant as the
primary investment account (the "Primary Money Account"). Alternatively,
subscribers may designate the Insured Savings Account as their Primary Money
Account. As described in the CMA Program Description, a subscriber to the CMA
service may elect to have free credit balances in the CMA account deposited in
individual money market deposit accounts established for such subscriber at
designated depository institutions pursuant to the Insured Savings Account. The
CMA Funds and the Insured Savings Account are collectively referred to as the
"Money Accounts." However, this Prospectus does not purport to describe the
other CMA Funds or the Insured Savings Account and prospective participants in
such CMA Funds or Insured Savings Account are referred to the Prospectus with
respect to each such CMA Fund and the Fact Sheet with respect to the Insured
Savings Account. All CMA subscribers are furnished with the prospectuses of the
CMA National Funds and the Insured Savings Account Fact Sheet, as well as the
CMA Program Description. To the extent not inconsistent with information
contained herein, information set forth in the CMA Program Description with
respect to the CMA National Funds also is applicable to each CMA State Fund.
Shareholders of a CMA State Fund may also maintain positions in one or more of
the CMA National Funds or the Insured Savings Account but may not maintain
positions in more than one CMA State Fund at any given time.
Merrill Lynch charges a program participation fee for the CMA service which
presently is $100 per year (an additional $25 annual program fee is charged for
participation in the CMA Visa(R) Gold Program described in the CMA Program
Description). A different fee may be charged to certain group plans and special
Accounts. Merrill Lynch reserves the right to change the fee for the CMA service
or the CMA Visa(R) Gold Program at any time. Shares of the CMA Funds may also be
purchased directly through the CMA Funds' Transfer Agent by investors who are
not subscribers to the CMA program. Shareholders of the CMA Funds
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not subscribing to the CMA program will not be charged the CMA program fee but
will not receive any of the additional services available to CMA program
subscribers.
Purchase of shares of a CMA Fund designated as the Primary Money Account
will be made pursuant to the CMA automatic purchase procedures described below.
Purchases of shares of the CMA Funds also may be made pursuant to the manual
procedures described below. If a Fund exercises its right to suspend or
otherwise limit sales of its shares, as discussed under "Investment Objectives
and Policies--Other Factors," amounts that would have been applied to the
purchase of such Fund's shares will be applied to the purchase of shares of one
of the other CMA Funds or the Insured Savings Account depending on which is
designated by the participant as the secondary investment account (the
"Secondary Money Account"). However, dividends declared on shares of the CMA
Fund designated as the Primary Money Account will continue to be reinvested in
that Fund. If the participant has not designated a Secondary Money Account,
additional purchases through the CMA program will be made in shares of CMA
Tax-Exempt Fund rather than in shares of the CMA Fund designated as the Primary
Money Account.
Subscribers to the CMA service have the option to change the designation of
their Primary Money Account at any time by notifying their Merrill Lynch
financial consultants. At that time, a subscriber may instruct his or her
financial consultant to redeem shares of a CMA Fund designated as the Primary
Money Account and to transfer the proceeds to the newly-designated Primary Money
Account.
Merrill Lynch reserves the right to terminate a subscriber's participation
in the CMA program for any reason.
Shares of the Funds are offered continuously for sale by Merrill Lynch. The
purchase price for shares of each Fund is the net asset value per share
(normally $1.00) next determined after receipt by the Fund of an automatic or
manual purchase order in proper form. Shares purchased will receive the next
dividend declared after such shares are issued which will be immediately prior
to the 12 noon pricing on the following business day. A purchase order will not
be effective until cash in the form of Federal funds becomes available to the
Fund (see the next paragraph for information as to when free credit balances
held in CMA accounts become available to the Funds). There are no minimum
investment requirements for CMA subscribers other than for manual purchases.
Automatic Purchases of Fund Shares by CMA Subscribers. Free credit
balances arising in a CMA account are invested automatically in shares of the
CMA Fund designated as the Primary Money Account not later than the first
business day of each week on which either the New York Stock Exchange (the
"NYSE") or New York banks are open, which normally will be Monday. Free credit
balances arising from the following transactions will be invested automatically
prior to the automatic weekly sweeps. Free credit balances arising from the sale
of securities which do not settle on the day of the transaction (such as most
common and preferred stock transactions) and from principal repayments on debt
securities become available to such Fund and will be invested in shares on the
business day following receipt of the proceeds with respect thereto in the CMA
account. Proceeds from the sale of shares of Merrill Lynch Ready Assets Trust,
Merrill Lynch U.S.A. Government Reserves and Merrill Lynch U.S. Treasury Money
Fund, and from the sale of securities settling on a same day basis, also become
available to such Fund and will be invested in shares on the next business day
following receipt. Free credit balances of $1,000 or more arising from cash
deposits into a CMA account, dividend and interest payments or any other source
become available to such Fund and are invested in shares on the next business
day following receipt in the CMA account unless such balance results from a cash
deposit
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made after the cashiering deadline of the Merrill Lynch office in which the
deposit is made, in which case the resulting free credit balances are invested
on the second following business day. A CMA participant desiring to make a cash
deposit should contact his or her Merrill Lynch financial consultant for
information concerning the local office's cashiering deadline, which is
dependent on such office's arrangements with its commercial banks. Free credit
balances of less than $1,000 are invested in shares in the automatic weekly
sweep.
Manual Purchases by CMA Subscribers. A subscriber to the CMA service may
make manual investments of $1,000 or more at any time in shares of a CMA Fund
not selected as his or her Primary Money Account. Manual purchases shall be
effective on the day following the day the order is placed with Merrill Lynch,
except that orders involving cash deposits made on the date of a manual purchase
shall become effective on the second business day thereafter if they are placed
after the cashiering deadline referred to in the preceding paragraph. As a
result, CMA customers who enter manual purchase orders which include cash
deposits made on that day after such cashiering deadline will not receive the
daily dividend which would have been received had their orders been entered
prior to the deadline. Since there is a three-day settlement period applicable
to the sale of most securities, delays may occur when an investor is liquidating
other investments for investment in a CMA Fund. In addition, manual purchases of
$500,000 or more can be made effective on the same day the order is placed with
Merrill Lynch provided that requirements as to timely notification and transfer
of a Federal funds wire in the proper amount are met. CMA customers desiring
further information on this method of purchasing shares should contact their
Merrill Lynch financial consultants.
All purchases of CMA Fund shares and dividend reinvestments will be
confirmed to CMA subscribers (rounded to the nearest share) in the CMA Account
Statement which is sent to all CMA participants monthly.
Merrill Lynch, in conjunction with another subsidiary of Merrill Lynch &
Co., Inc. ("ML & Co."), offers a modified version of the CMA account which has
been designed for corporations and other businesses. This account, the Working
Capital Management(SM) account ("WCMA(R)"), provides participants with the
features of a regular CMA account and also optional lines of credit. A brochure
describing the WCMA program, as well as information concerning charges for
participation in the program, is available from Merrill Lynch.
Participants in the WCMA program are able to invest funds in one or more
designated CMA Funds. Checks and other funds transmitted to a WCMA account
generally will be applied first, to the payment of pending securities
transactions or other charges in the participant's securities account, second,
to reduce outstanding balances in the lines of credit available through such
program and third, to purchase shares of the designated CMA Fund. To the extent
not otherwise applied, funds transmitted by Federal funds wire or an automated
clearinghouse service will be invested in shares of the designated CMA Fund on
the business day following receipt of such funds by Merrill Lynch. Funds
received in a WCMA account from the sale of securities will be invested in the
designated CMA Fund as described above. The amount payable on a check received
in a WCMA account prior to the cashiering deadline referred to above will be
invested on the second business day following receipt of the check by Merrill
Lynch. Redemptions of CMA Fund shares will be effected as described below under
"Redemption of Shares--Redemption of Shares by CMA Subscribers-- Automatic
Redemptions" to satisfy debit balances, such as those created by purchases of
securities or by checks written against a bank providing checking services to
WCMA participants. WCMA participants that have a line of credit will, however,
be permitted to maintain a minimum CMA Fund balance; for participants who elect
to maintain such a balance, debits from check usage will be satisfied through
the line of credit so
21
<PAGE> 23
that such balance is maintained. However, if the full amount of available credit
is not sufficient to satisfy the debit, it will be satisfied from the minimum
balance.
From time to time, Merrill Lynch also may offer the Funds to participants
in certain other programs sponsored by Merrill Lynch. Some or all of the
features of the CMA Account may not be available in such programs. For more
information on the services available under such programs, participants should
contact their financial consultants.
PURCHASE OF SHARES BY NON-CMA SUBSCRIBERS
Shares of the Funds may be purchased by individual investors who are not
subscribers to the CMA program but who maintain accounts directly with Merrill
Lynch Financial Data Services, Inc., the Trust's transfer agent (the "Transfer
Agent"). Such shareholders will not be charged the CMA program fee, but will not
receive any of the additional services available to CMA program participants
such as the Visa Account or the automatic investment of free credit balances.
The minimum initial purchase for non-CMA subscribers is $5,000 and the minimum
subsequent purchase is $1,000. Investors desiring to purchase shares directly
through the Transfer Agent as described below should contact Merrill Lynch
Financial Data Services, Inc., P.O. Box 45290, Jacksonville, Florida 32232-5290
or call (800) 221-7210.
Payment to the Transfer Agent. Investors who are not subscribers to the
CMA program may submit purchase orders directly by mail or otherwise to the
Transfer Agent. Purchase orders by mail should be sent to Merrill Lynch
Financial Data Services, Inc., P.O. Box 45290, Jacksonville, Florida 32232-5290.
Purchase orders which are sent by hand should be delivered to Merrill Lynch
Financial Data Services, Inc., 4800 Deer Lake Drive East, Jacksonville, Florida
32246-6484. Investors opening a new account must enclose a completed Purchase
Application which is available from the Transfer Agent. Existing shareholders
should enclose the detachable stub from a monthly account statement which they
have received. Checks should be made payable to Merrill Lynch, Pierce, Fenner &
Smith Incorporated. Certified checks are not necessary, but checks are accepted
subject to collection at full face value in U.S. funds and must be drawn in U.S.
dollars on a U.S. bank. Payments for the accounts of corporations, foundations
and other organizations may not be made by third party checks. Since there is a
three-day settlement period applicable to the sale of most securities, delays
may occur when an investor is liquidating other investments for investment in
one of the Funds.
The CMA Funds have been created for the purpose of being part of the CMA
program or as part of other Merrill Lynch central asset account programs, and
they do not offer certain typical money fund features such as exchange
privileges. There are money market funds which have investment objectives
similar to the CMA Funds and which offer check writing and exchange privileges,
including others sponsored by Merrill Lynch (Merrill Lynch, however, does not
sponsor money funds outside the CMA program which seek to provide income exempt
from state or city income taxes.) Prior to making an investment in any such
money fund, an investor should obtain and read the prospectus of such money
market fund.
Shares of each Fund are offered continuously for sale by Merrill Lynch
without a sales load at a public offering price equal to the net asset value
(normally $1.00 per share) next determined after a purchase order becomes
effective. Share purchase orders are effective on the date Federal funds become
available to the selling Fund. If Federal funds are available to such Fund prior
to 12 noon on any business day, the order will be effective on that day. Shares
purchased will begin accruing dividends on the day following the date of
purchase.
22
<PAGE> 24
------------------------
The Trust has entered into a distribution agreement with Merrill Lynch, a
wholly-owned subsidiary of ML & Co. (the "Distribution Agreement"), pursuant to
which Merrill Lynch acts as the distributor for the Funds.
Each Fund has adopted a separate distribution and shareholder servicing
plan (each a "Distribution Plan") in compliance with Rule 12b-1 under the
Investment Company Act. Pursuant to each Distribution Plan, Merrill Lynch
receives a distribution fee from each Fund at the end of each month at the
annual rate of 0.125% of average daily net assets of that Fund attributable to
subscribers to the CMA program and to investors maintaining securities accounts
at Merrill Lynch or maintaining accounts directly with the Transfer Agent who
are not subscribers to such program, except that the value of Fund shares in
accounts maintained directly with the Transfer Agent which are not serviced by
Merrill Lynch financial consultants will be excluded. Each Distribution Plan
reimburses Merrill Lynch only for actual expenses of the respective Fund
incurred during the fiscal year in which the fee is paid. The distribution fees
compensate Merrill Lynch financial consultants and other directly involved
branch office personnel for selling shares of the Funds and for providing direct
personal services to shareholders.
Set forth below are the fees paid by each Fund to Merrill Lynch pursuant to
its Distribution Plan for the year ended March 31, 1997.
<TABLE>
<CAPTION>
FEE PAID FOR
THE YEAR ENDED
MARCH 31, 1997
--------------
<S> <C>
Arizona Fund................................................... $ 185,231
California Fund................................................ $1,819,326
Connecticut Fund............................................... $ 383,286
Massachusetts Fund............................................. $ 228,987
Michigan Fund.................................................. $ 308,843
New Jersey Fund................................................ $ 759,664
New York Fund.................................................. $1,405,157
North Carolina Fund............................................ $ 326,935
Ohio Fund...................................................... $ 372,783
Pennsylvania Fund.............................................. $ 496,888
</TABLE>
REDEMPTION OF SHARES
Each Fund is required to redeem for cash all full and fractional shares of
such Fund. The redemption price of a Fund is the net asset value per share next
determined after receipt by the Transfer Agent of proper notice of redemption as
described in accordance with either the automatic or manual procedures set forth
below. If such notice is received by the Transfer Agent prior to the
determination of net asset value at 12 noon, New York time, on any day that the
NYSE or New York banks are open for business, the redemption will be effective
on such day. Payment of the redemption proceeds will be made on the same day the
redemption becomes effective. If the notice is received after 12 noon, the
redemption will be effective on the next business day and payment will be made
on such next day.
23
<PAGE> 25
REDEMPTION OF SHARES BY CMA SUBSCRIBERS
Automatic Redemptions. Redemptions will be effected automatically by
Merrill Lynch to satisfy debit balances in the Securities Account created by
activity therein or to satisfy debit balances created by Visa card purchases,
cash advances or checks written against the Visa Account. Each CMA account will
be scanned automatically for debits each business day prior to 12 noon. After
application of any free credit balances in the account to such debits, shares of
the designated Fund will be redeemed at net asset value at the 12 noon pricing,
and funds deposited pursuant to the Insured Savings Account will be withdrawn,
to the extent necessary to satisfy any remaining debits in either the Securities
Account or the Visa Account. Automatic redemptions or withdrawals will be made
first from the participant's Primary Money Account and then, to the extent
necessary, from Money Accounts not designated as the Primary Money Account.
Unless otherwise requested, in those instances where shareholders request
transactions that settle on a "same-day" basis (such as Federal funds wire
redemptions, branch office checks, transfers to other Merrill Lynch accounts and
certain securities transactions) the Fund shares necessary to effect such
transactions will be deemed to have been transferred to Merrill Lynch prior to
the Fund's declaration of dividends on that day. In such instances, shareholders
will receive all dividends declared and reinvested through the date immediately
preceding the date of redemption. Unless otherwise requested by the participant,
redemptions or withdrawals from non-Primary Money Accounts will be made in the
order the Money Accounts were established; thus, redemptions or withdrawals will
first be made from the non-Primary Money Account which the participant first
established. Margin loans through the Investor CreditLine(SM) service will be
utilized to satisfy debits remaining after the liquidation of all funds invested
in or deposited through Money Accounts, and shares of the Funds may not be
purchased, nor may deposits be made pursuant to the Insured Savings Account,
until all debits and margin loans in the account are satisfied.
As set forth in the current description of the CMA Program, it is expected
that participants whose Securities Accounts are margin accounts with or through
the Investor CreditLine(SM) service will be permitted to designate minimum
balances to be maintained in shares of a CMA Fund or in deposits made pursuant
to the Insured Savings Account (the "Minimum Money Accounts Balance"). If a
participant designates a Minimum Money Accounts Balance, the shares or deposits
representing such balance will not be redeemed or withdrawn until loans equal to
the available margin loan value of securities in the Securities Account have
been made. Participants considering the establishment of a Minimum Money
Accounts Balance should review the description of this service contained in the
description of the CMA program which is available from Merrill Lynch.
Manual Redemptions. Shareholders who are subscribers to the CMA program
may redeem shares of a Fund directly by submitting a written notice of
redemption directly to Merrill Lynch, which will submit the requests to the
Transfer Agent. Cash proceeds from the manual redemption of Fund shares
ordinarily will be mailed to the shareholder at his or her address of record or
on request, mailed or wired (if $10,000 or more) to his or her bank account.
Redemption requests should not be sent to a Fund or the Transfer Agent. If
inadvertently sent to a Fund or the Transfer Agent, such redemption requests
will be forwarded to Merrill Lynch. The notice requires the signatures of all
persons in whose names the shares are registered, signed exactly as their names
appear on their monthly statement. 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 "1934 Act"), 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,
24
<PAGE> 26
additional documents such as, but not limited to, trust instruments, death
certificates, appointments as executor or administrator, or certificates of
corporate authority may be required. Shareholders desiring to effect manual
redemptions should contact their Merrill Lynch financial consultants.
All redemptions of Fund shares will be confirmed to CMA subscribers in the
CMA Account Statement which is sent to all CMA participants monthly.
REDEMPTION OF SHARES BY NON-CMA SUBSCRIBERS
Shareholders may redeem shares of a Fund held in a Merrill Lynch securities
account directly as described above under "Redemption of Shares--Redemption of
Shares by CMA Subscribers--Manual Redemptions."
Shareholders maintaining an account directly with the Transfer Agent, who
are not CMA program participants, may redeem shares of a Fund by submitting a
written notice by mail directly to the Transfer Agent, Merrill Lynch Financial
Data Services, Inc., P.O. Box 45290, Jacksonville, Florida 32232-5290.
Redemption requests which are sent by hand should be delivered to Merrill Lynch
Financial Data Services, Inc., 4800 Deer Lake Drive East, Jacksonville, Florida
32246-6484. Cash proceeds from the manual redemption of Fund shares will be
mailed to the shareholder at his or her address of record. Redemption requests
should not be sent to a Fund or Merrill Lynch. If inadvertently sent to a Fund
or Merrill Lynch such redemption requests will be forwarded to the Transfer
Agent. The notice requires the signatures of all persons in whose names the
shares are registered, signed exactly as their names appear on their monthly
statement. 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
1934 Act, 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, additional documents such as, but not limited
to, trust instruments, death certificates, appointments as executor or
administrator, or certificates of corporate authority may be required.
------------------------
Shares of the Funds must be held in either a CMA account or through the
Transfer Agent. Shareholders who no longer maintain a CMA account will have
their shares automatically redeemed unless they elect to open an account for
such shares through the Transfer Agent. Such shareholders will no longer receive
any of the services available to CMA program participants.
At various times, a Fund may be requested to redeem shares, in manual or
automatic redemptions, with respect to which good payment has not yet been
received by Merrill Lynch. Such Fund may delay, or cause to be delayed, the
payment of the redemption proceeds until such time as it has assured itself that
good payment has been collected for the purchase of such shares. Normally, this
delay will not exceed 10 days. In addition, such Fund reserves the right not to
effect automatic redemptions where the shares to be redeemed have been purchased
by check within 15 days prior to the date the redemption request is received.
25
<PAGE> 27
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 Investment Company Act. The
Trustees of the Trust are responsible for the overall supervision of the
operations of the Funds and perform the various duties imposed on the directors
of investment companies by the Investment Company Act.
The Trustees of the Trust are:
ARTHUR ZEIKEL*--President of the Manager and its affiliate, Merrill
Lynch Asset Management, L.P. ("MLAM"); President and Director of Princeton
Services, Inc. ("Princeton Services"); Executive Vice President of ML &
Co.; Director of Merrill Lynch Funds Distributor, Inc.
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, 1990.
KEVIN A. RYAN--Professor of Education, Boston University; Founder and
current Director of the Boston University Center for the 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 Trust.
MANAGEMENT AND ADVISORY ARRANGEMENTS
The Manager is owned and controlled by ML & Co., a financial services
holding company and the parent of Merrill Lynch. The Manager acts as investment
adviser for the Funds and provides the Funds with management services pursuant
to a management agreement with the Trust (the "Management Agreement"). The
Manager or MLAM, an affiliate of the Manager, acts as the investment adviser for
more than 140 registered investment companies and provides investment advisory
services to individual and institutional accounts. As of May 31, 1997, MLAM and
the Manager had a total of approximately $252.5 billion in investment company
and other portfolio assets under management, including accounts of certain
affiliates of MLAM.
The Management Agreement with the Manager provides that, 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, subject to the review of the Board of Trustees. The
Manager performs certain of the other administrative services and provides all
of the office space, facilities, equipment and necessary personnel for portfolio
management of the Funds.
26
<PAGE> 28
As compensation for its services under the Management Agreement, the
Manager receives a fee from each Fund at the end of each month at the annual
rates of 0.50% of the first $500 million of average daily net assets of the
Fund, 0.425% of the average daily net assets in excess of $500 million but not
exceeding $1 billion and 0.375% of the average daily net assets in excess of $1
billion.
The Management Agreement obligates each Fund to pay certain expenses
incurred in its 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
Funds by the Manager and each Fund reimburses the Manager for its costs in
connection with such services. The Manager may waive all or a portion of its
management fee and may voluntarily assume all or a portion of a Fund's expenses.
The Manager may discontinue or reduce the amount of such waiver or assumption of
expenses at any time without notice.
Set forth in the chart below is certain management fee and expense
information for each Fund for the year ended March 31, 1997.
<TABLE>
<CAPTION>
NORTH
ARIZONA CALIFORNIA CONNECTICUT MASSACHUSETTS MICHIGAN NEW JERSEY NEW YORK CAROLINA OHIO PENNSYLVANIA
FUND FUND FUND FUND FUND FUND FUND FUND FUND FUND
-------- ---------- ----------- ------------- ---------- ---------- ---------- ---------- ---------- ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Management
Fee for
the
Year
Ended
March
31,
1997... $752,072 $6,413,612 $1,550,354 $ 938,904 $1,255,849 $2,990,679 $5,150,683 $1,331,895 $1,508,892 $2,013,273
Effective
Fee Rate
as of
March
31,
1997... .50% .44% .50% .50% .50% .49% .45% .50% .50% .50%
Reimbursement
for
Accounting
Services
for
the
Year
Ended
March
31,
1997... $ 50,699 $ 127,776 $ 60,088 $ 56,006 $ 53,569 $ 82,879 $ 106,293 $ 50,439 $ 52,081 $ 59,661
Ratio
of
Operating
Expenses
to
Average
Net
Assets
(Net
of
Reimbursement)
for the
Year
Ended
March
31,
1997... .76% .60% .71% .76% .72% .68% .63% .72% .71% .71%
</TABLE>
TRANSFER AGENCY SERVICES
Merrill Lynch Financial Data Services, Inc., which is a subsidiary of ML &
Co., acts as the Trust's Transfer Agent pursuant to a Transfer Agency,
Shareholder Servicing Agency, and Proxy 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 a fee at the rate of $10.00 per account
and the Transfer Agent is entitled to reimbursement from each Fund for certain
transaction charges and out-of-pocket expenses incurred by it under the Transfer
Agency Agreement. 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 on
a recordkeeping system, provided the recordkeeping system is maintained by a
wholly-owned subsidiary of ML & Co.
27
<PAGE> 29
Set forth below are the fees paid by each Fund, including out-of-pocket
expenses, to the Transfer Agent pursuant to the Transfer Agency Agreement for
the year ended March 31, 1997.
<TABLE>
<CAPTION>
FOR THE YEAR ENDED
MARCH 31, 1997
------------------
<S> <C>
Arizona Fund................................................ $ 22,921
California Fund............................................. $196,356
Connecticut Fund............................................ $ 46,705
Massachusetts Fund.......................................... $ 48,924
Michigan Fund............................................... $ 52,563
New Jersey Fund............................................. $121,906
New York Fund............................................... $205,845
North Carolina Fund......................................... $ 60,651
Ohio Fund................................................... $ 56,924
Pennsylvania Fund........................................... $102,555
</TABLE>
PORTFOLIO TRANSACTIONS
The portfolio securities in which the Funds invest are traded primarily in
the over-the-counter market. Where possible, the Funds will deal directly with
the dealers who make a market in the securities involved, except in those
circumstances where better prices and execution are available elsewhere. Such
dealers usually are acting as principals for their own accounts. On occasion,
securities may be purchased directly from the issuer. Such portfolio securities
generally are traded on a net basis and normally do not involve either brokerage
commissions or transfer taxes. The cost of executing portfolio transactions
primarily will consist of dealer spreads and underwriting commissions. Under the
Investment Company Act, persons affiliated with a Fund are prohibited from
dealing with such Fund as a principal in the purchase and sale of securities
unless an exemptive order allowing such transaction is obtained from the
Commission. The Trust has obtained exemptive relief permitting the Funds 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 State Municipal Securities for the Funds
from 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. An affiliated person of the Trust may serve as
its broker in over-the-counter transactions on behalf of a Fund conducted on an
agency basis. In allocating portfolio transactions, the Manager may take into
consideration the sale of shares of such Fund.
28
<PAGE> 30
Set forth below are the number of transactions engaged in by each Fund with
Merrill Lynch and the amount of securities involved for the year ended March 31,
1997.
<TABLE>
<CAPTION>
NUMBER OF AGGREGATE
TRANSACTIONS AMOUNT*
------------ ---------
<S> <C> <C>
Arizona Fund.......................................................... 5 $ 5.8
California Fund....................................................... 29 $364.4
Connecticut Fund...................................................... 42 $ 99.3
Massachusetts Fund.................................................... 39 $ 75.1
Michigan Fund......................................................... 7 $ 20.0
New Jersey Fund....................................................... 31 $ 88.4
New York Fund......................................................... 7 $ 71.4
North Carolina Fund................................................... 0 $ 0
Ohio Fund............................................................. 17 $ 52.1
Pennsylvania Fund..................................................... 3 $ 17.3
</TABLE>
- ---------------
* in millions
DIVIDENDS
All of the net income of each Fund is declared as dividends daily. Each
Fund's net income for dividend purposes is determined by the Manager at 12 noon,
New York time, on each day during which the NYSE or New York banks are open for
business immediately prior to the determination of each Fund's net asset value
on that day (see "Determination of Net Asset Value"). Net income of each Fund
(from the time of the immediately preceding determination thereof) consists of
interest accrued and/or original issue discount earned, less amortization of
premium and the estimated expenses of the Fund (including the fees payable to
the Manager and Merrill Lynch) applicable to that dividend period. Dividends of
each Fund are declared and reinvested daily in the form of additional full and
fractional shares of that Fund at net asset value.
DETERMINATION OF NET ASSET VALUE
The net asset value of each Fund is determined by the Manager once daily,
immediately after the daily declaration of dividends, as of 12 noon, New York
time, on each day during which the NYSE or New York banks are open for business.
It is anticipated that the net asset value of each Fund will remain constant at
$1.00 per share although this cannot be assured.
Each Fund values its portfolio securities based on their amortized cost.
This involves valuing an instrument at its cost and thereafter assuming a
constant amortization to maturity of any discount or premium, regardless of the
impact of fluctuating interest rates on the market value of the instrument.
29
<PAGE> 31
TAXES
FEDERAL
The Trust intends to continue to qualify each Fund for the special tax
treatment afforded RICs under the Code. As long as 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 the Funds to distribute substantially all of
such income.
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" 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. 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 advisers before purchasing Fund shares.
To the extent that any Fund's distributions are derived from interest on
its taxable investments or from an excess of net short-term capital gains over
net long-term capital losses ("ordinary income dividends"), such distributions
are considered ordinary income for federal income tax purposes. Distributions,
if any, from an excess of net long-term capital gains over net short-term
capital losses derived from the sale of securities ("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. 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). 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 "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
30
<PAGE> 32
used for industrial development or housing purposes). Income received on such
bonds is classified as an item of "tax preference", which could subject certain
investors in such bonds, including shareholders of the Funds, to an alternative
minimum tax. The Funds 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.
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 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.
If the value of assets held by a Fund declines, the Board of Trustees may
authorize a reduction in the number of outstanding shares in shareholders'
accounts so as to preserve a net asset value of $1.00 per share. After such a
reduction, the basis of eliminated shares would be added to the basis of
shareholders' remaining shares in such Fund, and any shareholders disposing of
shares at that time may recognize a capital 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 any of the Funds) 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 advisers regarding specific
questions as to Federal or foreign taxes.
STATE
The State Municipal Securities in which each Fund invests consist of
obligations with remaining maturities of 397 days (13 months) or less which are
issued by or on behalf of the designated state, its political subdivisions,
agencies and instrumentalities and obligations of other qualifying issuers, such
as issuers located in Puerto Rico, the Virgin Islands and Guam and issuers of
derivative or synthetic municipal instruments, the
31
<PAGE> 33
interest from which is exempt, in the opinion of counsel to the issuer, from
Federal income taxation and personal income taxation in the designated state
and, in certain circumstances, local personal income taxation, local personal
property taxation and/or state intangible personal property taxes in the
designated state.
Exempt-interest dividends attributable to interest income from State
Municipal Securities of a designated state generally will be exempt from state
personal income taxation (and certain other state or local taxes, where
applicable) to shareholders otherwise subject to personal income taxation or
other state or local taxes by such designated state. Shareholders subject to
income taxes or certain other state or local taxes, where applicable, by states
other than the Fund's designated state will realize a lower after-tax rate of
return than shareholders in the designated state since the dividends distributed
by a Fund generally will not be exempt, to any significant degree, from income
taxation or certain other state or local taxes, where applicable, 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 income
taxes (and, in certain circumstances, local personal income taxes, local
personal property taxes and/or state intangible personal property taxes).
Interest on indebtedness incurred or continued to purchase or carry Fund shares
generally will not be deductible for state income tax purposes to the extent
attributable to interest income exempt from income taxation by the designated
state. Further limitations on the deductibility of such interest may apply in
some states.
The foregoing description relates generally to state personal income tax
issues; investors should consult with their tax advisers with respect to such
taxes, other state or local taxes that may apply and the availability of any
exemptions from other state or local taxes. Additional considerations relating
to taxation in the various states is set forth under "Taxes" in the Statement of
Additional Information.
ORGANIZATION OF THE TRUST
The Trust is an unincorporated business trust organized on February 6, 1987
under the laws of Massachusetts. It is an open-end management investment company
comprised of separate series ("Series"), each of which is a separate portfolio
offering a separate class of shares to selected groups of purchasers. Each of
the Series is to be managed independently in order to provide to shareholders
who are residents of the state to which such Series relates as high a level of
income exempt from federal, state and (in certain instances) local income taxes
as is consistent with prudent investment management. At the date of this
Prospectus, the Arizona, California, Connecticut, Massachusetts, Michigan, New
Jersey, New York, North Carolina, Ohio and Pennsylvania Funds are the only
Series of the Trust offering their shares to the public. 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 a single
class. Shareholder approval is not required for the authorization of additional
Series of the Trust.
Shareholders are entitled to one vote for each full share held and to
fractional votes for fractional shares held in the election of Trustees (to the
extent hereafter provided) and on other matters submitted to the vote of
shareholders. All shares have equal voting rights, except that only shares of
the respective Series are entitled to vote on matters concerning only that
Series. The Declaration of Trust does not require that the Trust hold annual
meetings of shareholders. However, the Trust will be required to call special
meetings of shareholders in accordance with the requirements of the Investment
Company Act to seek approval of new management and advisory arrangements, of a
material increase in distribution fees or of a change in the fundamental
32
<PAGE> 34
policies, objectives or restrictions of the Trust. The Trust also would be
required to hold a special shareholders' meeting to elect new Trustees at such
time as less than a majority of the Trustees holding office have been elected by
shareholders. The Declaration of Trust provides that a shareholders' meeting may
be called for any reason at the request of 10% of the outstanding shares of the
Trust or by a majority of the Trustees. 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 the net
assets of such Series on liquidation or dissolution remaining after satisfaction
of outstanding liabilities. 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.
The Declaration of Trust establishing the Trust refers to the Trustees
under the Declaration of Trust collectively as Trustees, but not as individuals
or personally; and except for his or her own bad faith, willful misfeasance,
gross negligence or reckless disregard of his or her other duties, no Trustee,
shareholder, officer, employee or agent of the Trust shall be held to any
personal liability, nor shall resort be had to their private property for the
satisfaction of any obligation or claim of the Trust but the "Trust Property"
(as defined in the Declaration of Trust) only shall be liable. A copy of the
Declaration of Trust, together with all amendments thereto, is on file in the
office of the Commonwealth of Massachusetts.
SHAREHOLDER REPORTS AND INQUIRIES
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 45290
Jacksonville, FL 32232-5290
The written notification should include the shareholder's name, address,
tax identification number and Merrill Lynch 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)
221-7210.
SHAREHOLDER INQUIRIES
Shareholder inquiries may be addressed to a Fund at the address or
telephone number set forth on the cover page of this Prospectus.
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<PAGE> 35
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<PAGE> 36
[This page intentionally left blank]
<PAGE> 37
Manager
Fund Asset Management, L.P.
Administrative Offices:
800 Scudders Mill Road
Plainsboro, New Jersey
Mailing Address:
P.O. Box 9011
Princeton, New Jersey 08543-9011
Distributor
Merrill Lynch, Pierce, Fenner & Smith Incorporated
World Financial Center
North Tower
250 Vesey Street
New York, New York 10281
Custodian
State Street Bank and Trust Company
P.O. Box 351
Boston, Massachusetts 02101
Transfer Agent
Merrill Lynch Financial Data Services, Inc.
Administrative Offices:
4800 Deer Lake Drive East
Jacksonville, Florida 32246-6484
Mailing Address:
P.O. Box 45290
Jacksonville, Florida 32232-5290
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
Principal Office of the Trust
800 Scudders Mill Road
Plainsboro, New Jersey 08536
<PAGE> 38
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Fee Table............................. 2
Financial Highlights.................. 3
Yield Information..................... 8
Investment Objectives and Policies.... 9
Purchase of Shares.................... 19
Redemption of Shares.................. 23
Management of the Trust............... 26
Portfolio Transactions................ 28
Dividends............................. 29
Determination of Net Asset Value...... 29
Taxes................................. 30
Organization of the Trust............. 32
Shareholder Reports and Inquiries..... 33
</TABLE>
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 offers contained therein,
and, if given or made, such other information or representations must not be
relied upon as having been authorized by the Fund, the Manager or Merrill Lynch,
Pierce, Fenner & Smith Incorporated. This Prospectus does not constitute an
offering in any state in which such offering may not lawfully be made.
Code #16817-0797
CMA MULTI-STATE
MUNICIPAL SERIES TRUST
- - ARIZONA
- - CALIFORNIA
- - CONNECTICUT
- - MASSACHUSETTS
- - MICHIGAN
- - NEW JERSEY
- - NEW YORK
- - NORTH CAROLINA
- - OHIO
- - PENNSYLVANIA
PROSPECTUS
The enclosed prospectus describes ten fully managed municipal money market
funds. Shares of the Funds are offered to participants in the Cash Management
Account(R) ("CMA(R) Account") program of Merrill Lynch, Pierce, Fenner & Smith
Incorporated and to other individual investors who maintain accounts directly
with the Transfer Agent.
Investors should be aware that the Cash Management Account service is not a bank
account and that a shareholder's investment in a Fund is not insured by any
governmental agency. As with any investment in securities, the value of a
shareholder's investment in a Fund may fluctuate.
- ------------------------------------------------------
PRINCIPAL OFFICE OF THE TRUST:
800 SCUDDERS MILL ROAD
PLAINSBORO, NEW JERSEY 08536
JULY 22, 1997
(LOGO)
<PAGE> 39
STATEMENT OF ADDITIONAL INFORMATION
CMA MULTI-STATE MUNICIPAL SERIES TRUST
<TABLE>
<S> <C>
CMA ARIZONA MUNICIPAL MONEY FUND CMA NEW JERSEY MUNICIPAL MONEY FUND
CMA CALIFORNIA MUNICIPAL MONEY FUND CMA NEW YORK MUNICIPAL MONEY FUND
CMA CONNECTICUT MUNICIPAL MONEY FUND CMA NORTH CAROLINA MUNICIPAL MONEY FUND
CMA MASSACHUSETTS MUNICIPAL MONEY FUND CMA OHIO MUNICIPAL MONEY FUND
CMA MICHIGAN MUNICIPAL MONEY FUND CMA PENNSYLVANIA MUNICIPAL MONEY FUND
</TABLE>
P.O. BOX 9011, PRINCETON, NEW JERSEY 08543-9011 - PHONE NO. (609) 282-2800
CMA Multi-State Municipal Series Trust (the "Trust") consists of CMA
Arizona Municipal Money Fund (the "Arizona Fund"), CMA California Municipal
Money Fund (the "California Fund"), CMA Connecticut Municipal Money Fund (the
"Connecticut Fund"), CMA Massachusetts Municipal Money Fund (the "Massachusetts
Fund"), CMA Michigan Municipal Money Fund (the "Michigan Fund"), CMA New Jersey
Municipal Money Fund (the "New Jersey Fund"), CMA New York Municipal Money Fund
(the "New York Fund"), CMA North Carolina Municipal Money Fund (the "North
Carolina Fund"), CMA Ohio Municipal Money Fund (the "Ohio Fund") and CMA
Pennsylvania Municipal Money Fund (the "Pennsylvania Fund") (together, the
"Funds"). Each Fund is a non-diversified, no-load money market mutual fund
seeking current income exempt from federal income taxes, the designated state's
personal income taxes and, in certain instances, local personal income taxes,
local personal property taxes and/or state intangible personal property taxes.
Each Fund also seeks preservation of capital and liquidity available from
investing in a portfolio of short-term, high quality obligations, the interest
on which is exempt, in the opinion of counsel to the issuer, from federal income
taxes, personal income taxes of the designated state and, in certain instances,
local taxes. 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. The Funds also may invest in derivative or synthetic
municipal instruments. The Funds' shares are offered to participants in the Cash
Management Account(R) ("CMA" or "CMA account") financial service program of
Merrill Lynch, Pierce, Fenner & Smith Incorporated ("Merrill Lynch") to provide
a medium for the investment of free credit balances held in CMA accounts. A CMA
account is a conventional Merrill Lynch cash securities or margin securities
account ("Securities Account") which is linked to the Funds and certain other
mutual funds (collectively, the "CMA Funds"), money market deposit accounts
maintained with depository institutions and to a Visa(R) card/check account
("Visa Account"). Merrill Lynch markets its margin account under the name
Investor CreditLine(SM) service.
A customer of Merrill Lynch may subscribe to the CMA program with a minimum
of $20,000 in securities or cash. Subject to the conditions described in the
prospectus referred to below, free credit balances in the Securities Account of
CMA participants may be invested periodically in shares of one of the CMA Funds
or deposited with a depository institution through the Insured Savings(SM)
Account (the "Insured Savings Account"). This permits the subscriber to earn a
return on such funds pending further investment in other aspects of the CMA
program or utilization of the Visa Account. The shares of the Funds also may be
purchased by individual investors maintaining accounts directly with the
Transfer Agent who do not subscribe to the CMA program. The minimum initial
purchase for non-CMA subscribers is $5,000 and subsequent purchases must be
$1,000 or more.
Merrill Lynch charges a program participation fee for the CMA service which
presently is $100 per year for individuals (an additional $25 annual program fee
is charged for participation in the CMA Visa(R) Gold Program described in the
CMA Program Description). A different fee may be charged to certain group plans
and special accounts. Merrill Lynch reserves the right to change the fee for the
CMA service or the CMA Visa Gold Program at any time.
This Statement of Additional Information of the Fund is not a prospectus
and should be read in conjunction with the prospectus of the Funds dated July
22, 1997 (the "Prospectus"), which has been filed with the Securities and
Exchange Commission (the "Commission") and can be obtained without charge by
calling or writing to the Funds at the above telephone number or address. This
Statement of Additional Information has been incorporated by reference into the
Prospectus.
------------------------
THE DATE OF THIS STATEMENT OF ADDITIONAL INFORMATION IS JULY 22, 1997.
<PAGE> 40
INVESTMENT OBJECTIVES AND POLICIES
Each Fund is a non-diversified, no-load money market mutual fund investing
primarily in short-term, high quality obligations the interest on which is
exempt, in the opinion of counsel to the issuer, from federal and the designated
state's personal income taxes and, in certain instances, local personal income
taxes, local personal property taxes and/or state intangible personal property
taxes. Reference is made to "Investment Objectives and Policies" in the
Prospectus of the Funds for a discussion of the investment objectives and
policies of each Fund.
Each Fund is classified as non-diversified within the meaning of the
Investment Company Act of 1940, as amended (the "Investment Company Act"), which
means that the Fund is not limited by such 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"
("RIC") for purposes of the Internal Revenue Code of 1986, as amended (the
"Code"). See "Taxes."
As discussed in the Prospectus, the Funds may invest in variable rate
demand obligations ("VRDOs"). VRDOs are tax-exempt obligations which 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 on a short notice period. The interest on a VRDO is adjustable at
periodic intervals to a rate calculated to maintain the market value of the VRDO
at approximately the par value of the VRDO on adjustment date. The adjustment
may be based on an interest rate adjustment index.
The Funds also may invest in VRDOs in the form of participation interests
("Participating VRDOs") in variable rate tax-exempt obligations held by
financial institutions, typically commercial banks ("institutions").
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
institution on a specified number of days' notice, presently not to exceed 30
days. In addition, each Participating VRDO is backed by an irrevocable letter of
credit or similar commitment of the institution. A Fund that invests in a VRDO
has an undivided interest in an 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 or issuing the
repurchase commitment.
Each Fund has been advised by counsel to the Trust that the interest
received on Participating VRDOs will be treated as interest from tax-exempt
obligations as long as such 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 no Fund will invest more than a
limited amount of its total assets in Participating VRDOs.
The Funds can be expected to offer lower yields than longer-term municipal
bond funds because the types of securities in which the Funds will invest, as
described in the Prospectus (hereinafter referred to as "State Municipal
Securities" or "Municipal Securities"), have shorter maturities and therefore
tend to produce lower yields than longer-term municipal securities. Interest
rates in the short-term municipal securities market also may fluctuate more
widely from time to time than interest rates in the long-term municipal bond
market. Because the Funds invest solely in short-term securities, however, the
market value of each Fund's portfolio at any given time can be expected to
fluctuate less as a result of changes in interest rates. Because of the interest
rate adjustment formula on VRDOs (including Participating VRDOs), the VRDOs are
not comparable to fixed rate securities. A Fund's yield on VRDOs will decline
and its shareholders will forego the opportunity for capital appreciation during
periods when prevailing interest rates have declined. On the other hand, during
periods where prevailing interest rates have increased, a Fund's yield on VRDOs
will increase and its shareholders will have a reduced risk of capital
depreciation.
The Funds' portfolio investments in municipal notes and short-term
tax-exempt commercial paper will be limited to those obligations which are
rated, or issued by issuers who have been rated, in one of the two highest
rating categories for short-term municipal debt obligations by a nationally
recognized statistical rating
2
<PAGE> 41
organization (an "NRSRO") or, if not rated, will be of comparable quality as
determined by the Trustees of the Trust. The Funds' investments in municipal
bonds (which must have maturities at the date of purchase of 397 days (13
months) or less) will be in issuers who have received from the requisite NRSROs
a rating, with respect to a class of short-term debt obligations that is
comparable in priority and security with the investment, in one of the two
highest rating categories for short-term obligations or, if not rated, will be
of comparable quality as determined by the Trustees of the Trust. Currently,
there are three NRSROs which rate municipal obligations: Fitch Investors
Service, Inc. ("Fitch"), Moody's Investors Service, Inc. ("Moody's") and
Standard & Poor's Ratings Services ("Standard & Poor's"). Certain tax-exempt
obligations (primarily VRDOs and Participating VRDOs) may be entitled to the
benefit of letters of credit or similar credit enhancements issued by financial
institutions and, in such instances, the Board of Trustees and Fund Asset
Management, L.P. (the "Manager") will take into account the obligation of the
financial institution in assessing the quality of such instrument. The Funds may
also purchase other types of tax-exempt instruments
if, in the opinion of the Trustees, such obligations are equivalent to
securities having the ratings described above. For a description of Municipal
Securities and ratings, see Appendix K--"Information Concerning Municipal
Securities".
PURCHASE OF MUNICIPAL SECURITIES ON A DELAYED DELIVERY OR WHEN-ISSUED BASIS
Municipal Securities may at times 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. The Fund will make commitments to purchase such securities
only with the intention of actually acquiring the securities, but the Fund may
sell these securities prior to settlement date if it is deemed advisable. No new
when-issued commitments will be made if more than 40% of a Fund's net assets
would become so committed. Purchasing Municipal Securities 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 generally will decrease. The Funds will maintain separate accounts at
the Trust's custodian consisting of cash or liquid Municipal Securities (valued
on a daily basis) equal at all times to the amount of the when-issued
commitment.
TAXABLE MONEY MARKET SECURITIES
The Funds may invest in taxable money market securities subject to the
limitations set forth under "Investment Objectives and Policies" in the
Prospectus ("Taxable Securities"). The Taxable Securities in which the Funds may
invest 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.
These investments must have a stated maturity not in excess of 397 days (13
months) from the date of purchase.
The standards applicable to Taxable Securities in which the Funds invest
are essentially the same as those described above with respect to Municipal
Securities. The Funds may not invest in any security issued by a depository
institution unless such institution is organized and operating in the United
States, has total assets of at least $1 billion and is federally insured.
The Funds may invest in Taxable Securities pursuant to repurchase
agreements. Repurchase agreements may be entered into only with a member bank of
the Federal Reserve System or primary dealer in U.S. Government securities or an
affiliate thereof which meet the creditworthiness standards adopted by the Board
of Trustees. Under such agreements, the bank or primary dealer or an affiliate
thereof 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. Repurchase agreements may be construed
to be collateralized loans by the purchaser to the seller secured by the
securities transferred to the purchaser. In the case of a repurchase agreement,
a Fund will require the seller to provide additional collateral if the market
value of the securities falls below the
3
<PAGE> 42
repurchase price at any time during the term of the repurchase agreement. In the
event of default by the seller under a repurchase agreement construed to be a
collateralized loan, the underlying securities are not owned by the Fund but
only constitute collateral for the seller's obligation to pay the repurchase
price. Therefore, such 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 a repurchase agreement that is construed to be a collateralized
loan, instead of the contractual fixed rate of return, the rate of return to
such Fund shall be dependent upon intervening fluctuations of the market value
of such security and the accrued interest on the security. In such event, such
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.
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, even if the underlying securities are
tax-exempt securities, will not be considered tax-exempt interest.
From time to time, the Funds also may invest in money market securities
pursuant to purchase and sale contracts. While purchase and sale contracts are
similar to repurchase agreements, purchase and sale contracts are structured so
as to be in substance more like a purchase and sale of the underlying security
than is the case with repurchase agreements.
INVESTMENT RESTRICTIONS
The Trust has adopted a number of restrictions and policies relating to the
investment of each Fund's assets and activities, which are fundamental policies
and may not be changed without the approval of the holders of a majority of the
respective Fund's outstanding shares (for this purpose a majority of the shares
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). No Fund may: (1) purchase any securities other than
securities referred to under "Investment Objectives and Policies" in the
Prospectus and herein; (2) invest more than 5% of its total assets (taken at
market value at the time of each investment) in industrial revenue bonds where
the entity supplying the revenues from which the issue is to be paid, including
predecessors, has a record of less than three years of continuous operation; (3)
make investments for the purpose of exercising control or management; (4)
purchase securities of other investment companies, except in connection with a
merger, consolidation, acquisition or reorganization; (5) purchase or sell real
estate (provided that such restriction shall not apply to Municipal Securities
secured by real estate or interests therein or issued by companies which invest
in real estate or interests therein), commodities or commodity contracts,
interests in oil, gas or other mineral exploration or development programs; (6)
purchase any securities on margin, except for use of short-term credit necessary
for clearance of purchases and sales of portfolio securities; (7) make short
sales of securities or maintain a short position or invest in put, call,
straddle, or spread options or combinations thereof; provided, however, that
each Fund shall have the authority to purchase Municipal Securities subject to
put options as set forth herein under "Investment Objectives and Policies" and
Appendix K--"Information Concerning Municipal Securities"; (8) make loans to
other persons, provided that each Fund may purchase a portion of an issue of
Municipal Securities (the acquisition of a portion of an issue of Municipal
Securities or bonds, debentures or other debt securities which are not publicly
distributed is considered to be the making of a loan under the Investment
Company Act); (9) 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 including to meet
redemptions and to settle securities transactions. [Usually only "leveraged"
investment companies may borrow in excess of 5% of their assets; however, the
Funds will not borrow to increase income but only to meet redemption requests
which might otherwise require untimely dispositions of portfolio securities. The
Funds will not purchase securities while borrowings are outstanding except to
honor prior commitments. Interest paid on such borrowings will reduce net
income.]; (10) mortgage, pledge, hypothecate or in any manner transfer as
security for indebtedness any securities owned or held by the Fund except as may
be necessary in connection with borrowings mentioned in (9) above, and then such
mortgaging, pledging or hypothecating may not exceed 10% of its total assets,
taken at market value; (11) invest in securities with legal or contractual
4
<PAGE> 43
restrictions on resale for which no readily available market exists, including
repurchase agreements maturing in more than seven days, if, regarding all such
securities, more than 10% of its total assets (taken at market value), would be
invested in such securities; (12) act as an underwriter of securities, except to
the extent that the Fund technically may be deemed an underwriter when engaged
in the activities described in (8) above or insofar as the Fund may be deemed an
underwriter under the Securities Act of 1933 in selling portfolio securities;
and (13) purchase or retain the securities of any issuer, if those individual
officers and Trustees of the Trust, the Manager or any subsidiary thereof each
owning beneficially more than 1/2 of 1% of the securities of such issuer own in
the aggregate more than 5% of the securities of such issuer. In addition to the
foregoing, the Funds have undertaken with the State of Texas that they will not
invest in oil, gas or mineral leases.
In addition, to comply with tax requirements for qualification as a RIC,
each Fund's investments will be limited in a manner such that, at the close of
each quarter of each fiscal year, (a) no more than 25% of the Fund's total
assets are invested in the securities of a single issuer, and (b) with regard to
at least 50% of the Fund's total assets, no more than 5% of its total assets are
invested in the securities of a single issuer. For purposes of this restriction,
the Funds 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.
MANAGEMENT OF THE TRUST
TRUSTEES AND OFFICERS
Information about the Trustees and executive officers 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 (65)--President and Trustee(1)(2)--President of the Manager
(which term, as used herein, includes its corporate predecessors) since 1977;
President of Merrill Lynch Asset Management, L.P. ("MLAM")(which term, as used
herein, includes its corporate predecessors) since 1977; President and Director
of Princeton Services, Inc. ("Princeton Services") since 1993; Executive Vice
President of Merrill Lynch & Co., Inc. ("ML & Co.") since 1990; Director of
Merrill Lynch Funds Distributor, Inc. ("MLFD") since 1977.
RONALD W. FORBES (56)--Trustee(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)--Trustee(2)--Harvard Business School, Soldiers
Field Road, Boston, Massachusetts 02163. Professor, Harvard Business School
since 1989; Associate Professor, J.L. 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)--Trustee(2)--9 Hampton Harbor Road, Hampton Bays,
New York 11946. Self-employed financial consultant since 1990; President and
Chief Investment Officer of Verus 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)--Trustee(2)--127 Commonwealth Avenue, Chestnut Hill,
Massachusetts 02167. Founder and current Director of The Boston University
Center for the Advancement of Ethics and Character;
5
<PAGE> 44
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)--Trustee(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 (56)--Executive Vice President(1)(2)--Executive Vice
President of the Manager and MLAM since 1983; Executive Vice President and
Director of Princeton Services since 1993; President of MLFD since 1986 and
Director thereof since 1991; President of Princeton Administrators, L.P. since
1988.
VINCENT R. GIORDANO (52)--Senior Vice President and Portfolio
Manager(1)(2)--Senior Vice President of the Manager and MLAM since 1984; Senior
Vice President of Princeton Services since 1993.
EDWARD J. ANDREWS (37)--Vice President and Portfolio Manager(1)(2)--Vice
President of MLAM since 1991; investment officer in the Private Banking Division
of Citibank, N.A. from 1982 to 1991.
DONALD C. BURKE (37)--Vice President(1)(2)--Vice President and Director of
Taxation of MLAM since 1990.
PETER J. HAYES (38)--Vice President and Portfolio Manager(1)(2)--Vice
President of MLAM since 1988.
KENNETH A. JACOB (46)--Vice President and Portfolio Manager(1)(2)--Vice
President of MLAM since 1984.
KEVIN A. SCHIATTA (42)--Vice President and Portfolio Manager(1)(2)--Vice
President of MLAM since 1985.
HELEN MARIE SHEEHAN (37)--Vice President and Portfolio Manager(1)(2)--Vice
President of MLAM since 1991; Assistant Vice President of MLAM from 1989 to
1991; employee of MLAM since 1985.
STEVEN LEWIS (34)--Vice President and Portfolio Manager(1)(2)--Assistant
Vice President of MLAM since 1995.
DARRIN SANFILLIPPO (32)--Vice President and Portfolio
Manager(1)(2)--Assistant Vice President of MLAM since 1994.
GERALD M. RICHARD (48)--Treasurer(1)(2)--Senior Vice President and
Treasurer of the Manager and MLAM since 1984; Senior Vice President and
Treasurer of Princeton Services since 1993; Vice President of MLFD since 1981;
Treasurer since 1984.
ROBERT HARRIS (45)--Secretary(1)(2)--Vice President of MLAM since 1984 and
attorney associated with MLAM since 1980; Secretary of MLFD since 1982.
- ------------
(1) Interested person, as defined in the Investment Company Act, of the Trust.
(2) Such Trustee or officer is a director or officer of certain other investment
companies for which the Manager or MLAM acts as investment adviser.
At May 31, 1997, the Trustees and officers of the Trust as a group (18
persons) owned an aggregate of less than 1% of the outstanding shares of
beneficial interest of each Fund. At such date, Mr. Zeikel, an officer and
Trustee of the Trust, and the other officers of the Trust, owned less than 1% of
the outstanding shares of common stock of ML & Co.
COMPENSATION OF TRUSTEES
Pursuant to the terms of its management agreement with the Trust (the
"Management Agreement"), the Manager pays all compensation of officers and
employees of the Trust as well as the fees of all Trustees of the Trust who are
affiliated persons of ML & Co. or its subsidiaries. The Trust pays each
non-interested Trustee a
6
<PAGE> 45
fee of $4,000 per year plus a fee of $800 per meeting attended and pays all
Trustees' actual out-of-pocket expenses relating to attendance at meetings. The
Trust also pays an annual fee of $2,000 to members of its Audit and Nominating
Committee, which consists of all of the non-interested Trustees, and pays all
Trustees' actual out-of-pocket expenses relating to attendance at meetings. The
Chairman of the Audit and Nominating Committee receives an additional annual fee
of $1,000 per year.
Set forth below is each Fund's share of the allocated fees and expenses
paid to the non-interested Trustees for the year ended March 31, 1997.
<TABLE>
<CAPTION>
ARIZONA CALIFORNIA CONNECTICUT MASSACHUSETTS MICHIGAN NEW JERSEY NEW YORK NORTH CAROLINA OHIO PENNSYLVANIA
FUND FUND FUND FUND FUND FUND FUND FUND FUND FUND
- ------- ---------- ----------- ------------- -------- ---------- -------- -------------- ------ ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
$1,352 $ 13,262 $ 2,787 $ 1,774 $2,429 $5,849 $10,706 $2,436 $2,719 $3,930
</TABLE>
The following table sets forth for the fiscal year ended March 31, 1997
compensation paid by the Funds to the non-interested Trustees and for the
calendar year ended December 31, 1996 the aggregate compensation paid by all
investment companies advised by MLAM and its affiliate, FAM ("MLAM/FAM Advised
Funds") to the non-interested Trustees.
<TABLE>
<CAPTION>
AGGREGATE
COMPENSATION
FROM FUND AND
PENSION OR RETIREMENT MLAM/FAM ADVISED
COMPENSATION BENEFITS ACCRUED AS PART FUNDS PAID TO
NAME OF TRUSTEE FROM FUND OF FUND EXPENSE TRUSTEES(1)
------------ ------------------------ ----------------
<S> <C> <C> <C>
Arizona Fund
- --------------
Ronald W. Forbes(1)...................... $ 259 None $142,500
Cynthia A. Montgomery(1)................. $ 259 None $142,500
Charles C. Reilly(1)..................... $ 287 None $293,833
Kevin A. Ryan(1)......................... $ 259 None $142,500
Richard R. West(1)....................... $ 259 None $272,833
California Fund
- ----------------
Ronald W. Forbes(1)...................... $2,587 None $142,500
Cynthia A. Montgomery(1)................. $2,587 None $142,500
Charles C. Reilly(1)..................... $2,864 None $293,833
Kevin A. Ryan(1)......................... $2,587 None $142,500
Richard R. West(1)....................... $2,587 None $272,833
Connecticut Fund
- -------------------
Ronald W. Forbes(1)...................... $ 548 None $142,500
Cynthia A. Montgomery(1)................. $ 548 None $142,500
Charles C. Reilly(1)..................... $ 607 None $293,833
Kevin A. Ryan(1)......................... $ 548 None $142,500
Richard R. West(1)....................... $ 548 None $272,833
Massachusetts Fund
- ---------------------
Ronald W. Forbes(1)...................... $ 335 None $142,500
Cynthia A. Montgomery(1)................. $ 335 None $142,500
Charles C. Reilly(1)..................... $ 371 None $293,833
Kevin A. Ryan(1)......................... $ 335 None $142,500
Richard R. West(1)....................... $ 335 None $272,833
</TABLE>
7
<PAGE> 46
<TABLE>
<CAPTION>
AGGREGATE
COMPENSATION
FROM FUND AND
PENSION OR RETIREMENT MLAM/FAM ADVISED
COMPENSATION BENEFITS ACCRUED AS PART FUNDS PAID TO
NAME OF TRUSTEE FROM FUND OF FUND EXPENSE TRUSTEES(1)
------------ ------------------------ ----------------
<S> <C> <C> <C>
Michigan Fund
- ----------------
Ronald W. Forbes(1)...................... $ 468 None $142,500
Cynthia A. Montgomery(1)................. $ 468 None $142,500
Charles C. Reilly(1)..................... $ 520 None $293,833
Kevin A. Ryan(1)......................... $ 468 None $142,500
Richard R. West(1)....................... $ 468 None $272,833
New Jersey Fund
- ------------------
Ronald W. Forbes(1)...................... $1,136 None $142,500
Cynthia A. Montgomery(1)................. $1,136 None $142,500
Charles C. Reilly(1)..................... $1,261 None $293,833
Kevin A. Ryan(1)......................... $1,136 None $142,500
Richard R. West(1)....................... $1,136 None $272,833
New York Fund
- -----------------
Ronald W. Forbes(1)...................... $2,089 None $142,500
Cynthia A. Montgomery(1)................. $2,089 None $142,500
Charles C. Reilly(1)..................... $2,317 None $293,833
Kevin A. Ryan(1)......................... $2,089 None $142,500
Richard R. West(1)....................... $2,089 None $272,833
North Carolina Fund
- ----------------------
Ronald W. Forbes(1)...................... $ 503 None $142,500
Cynthia A. Montgomery(1)................. $ 503 None $142,500
Charles C. Reilly(1)..................... $ 558 None $293,833
Kevin A. Ryan(1)......................... $ 503 None $142,500
Richard R. West(1)....................... $ 503 None $272,833
Ohio Fund
- -----------
Ronald W. Forbes(1)...................... $ 520 None $142,500
Cynthia A. Montgomery(1)................. $ 520 None $142,500
Charles C. Reilly(1)..................... $ 575 None $293,833
Kevin A. Ryan(1)......................... $ 520 None $142,500
Richard R. West(1)....................... $ 520 None $272,833
Pennsylvania Fund
- -------------------
Ronald W. Forbes(1)...................... $ 757 None $142,500
Cynthia A. Montgomery(1)................. $ 757 None $142,500
Charles C. Reilly(1)..................... $ 840 None $293,833
Kevin A. Ryan(1)......................... $ 757 None $142,500
Richard R. West(1)....................... $ 757 None $272,833
</TABLE>
- ---------------
(1) The Trustees serve on the boards of MLAM/FAM Advised Funds as follows: Mr.
Forbes (25 registered investment companies consisting of 38 portfolios); Ms.
Montgomery (25 registered investment companies consisting of 38 portfolios);
Mr. Reilly (43 registered investment companies consisting of 56 portfolios);
Mr. Ryan (25 registered investment companies consisting of 38 portfolios);
and Mr. West (44 registered investment companies consisting of 66
portfolios).
8
<PAGE> 47
MANAGEMENT AND ADVISORY ARRANGEMENTS
Reference is made to "Management of the Trust--Management and Advisory
Arrangements" in the Prospectus of the Funds for certain information concerning
the management and advisory arrangements of the Funds.
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, subject to the review of the Board
of Trustees. The Manager performs certain of the other administrative services
and provides all of the office space, facilities, equipment and necessary
personnel for portfolio management of the Funds.
Securities held by the Funds also may be held by, or be appropriate
investments for, other funds or clients (collectively referred to as "clients")
for which the Manager or MLAM acts as an investment adviser. Because of
different investment objectives or other factors, a particular security may be
bought for one or more clients when one or more clients are selling the
security. If purchases or sales of securities for a Fund or other clients arise
for consideration at or about the same time, transactions in such securities
will be made, insofar as feasible, for the respective clients in a manner deemed
equitable to all by the Manager or MLAM. To the extent that transactions on
behalf of more than one client of the Manager or MLAM during the same period may
increase the demand for securities being purchased or the supply of securities
being sold, there may be an adverse effect on price.
The Manager presently receives a fee from each Fund at the end of each
month at the annual rates of 0.50% of the first $500 million of average daily
net assets of the Fund, 0.425% of the average daily net assets in excess of $500
million but not exceeding $1 billion and 0.375% of the average daily net assets
in excess of $1 billion.
In the interest of minimizing expenses of the Funds, the Manager may agree
voluntarily to assume a portion of the expenses of a Fund. The Manager may
discontinue or reduce such assumption of expenses at any time without notice.
Set forth below are the total management fees paid by each Fund to the
Manager and total management fees waived by the Manager for the years ended
March 31, 1997, 1996 and 1995:
<TABLE>
<CAPTION>
FOR THE YEAR ENDED MARCH 31,
------------------------------------------------------------------------------------------
1997 1996 1995
---------------------------- ---------------------------- ----------------------------
TOTAL FEE VOLUNTARILY TOTAL FEE VOLUNTARILY TOTAL FEE VOLUNTARILY
MANAGEMENT WAIVED BY MANAGEMENT WAIVED BY MANAGEMENT WAIVED BY
FEE MANAGER FEE MANAGER FEE MANAGER
---------- --------------- ---------- --------------- ---------- ---------------
<S> <C> <C> <C> <C> <C> <C>
Arizona Fund................. $ 752,072 $ -- $ 613,484 $ 229,188 $ 430,110 $ 267,373
California Fund.............. $6,413,612 $ -- $5,570,525 $ -- $5,371,374 $ --
Connecticut Fund............. $1,550,354 $ -- $1,393,151 $ -- $1,290,608 $ --
Massachusetts Fund........... $ 938,904 $ -- $ 864,244 $ -- $ 756,123 $ --
Michigan Fund................ $1,255,849 $ -- $1,202,870 $ -- $1,117,988 $ --
New Jersey Fund.............. $2,990,679 $ -- $2,760,878 $ -- $2,299,467 $ --
New York Fund................ $5,150,683 $ -- $4,591,599 $ -- $3,831,293 $ --
North Carolina Fund.......... $1,331,895 $ -- $1,326,840 $ 137,989 $1,474,176 $ 294,835
Ohio Fund.................... $1,508,892 $ -- $1,290,786 $ -- $1,078,893 $ --
Pennsylvania Fund............ $2,013,273 $ -- $1,939,951 $ -- $1,689,896 $ --
</TABLE>
The Management Agreement obligates the Manager to provide investment
advisory services, to furnish administrative services, office space and
facilities for management of the affairs of the Trust and each Fund and to pay
all compensation of and furnish office space for officers and employees 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 subsidiaries. Except for certain expenses
incurred by Merrill Lynch (see "Purchase and Redemption of Shares"), each Fund
pays all other expenses incurred in its operations and a portion of the Trust's
general administrative expenses allocated
9
<PAGE> 48
on the basis of the asset size of the respective Fund. Expenses that will be
borne directly by the Funds include 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 for by Merrill Lynch), fees
for legal and auditing services, Commission fees, interest, certain taxes, and
other expenses attributable to a particular Series. Expenses which will be
allocated on the basis of asset size of the respective Funds include fees and
expenses of non-interested Trustees, state franchise taxes, costs of printing
proxies and other expenses relating to shareholder meetings and other expenses
properly payable by the Trust. The organizational expenses of the Trust were
paid by the Trust and have been allocated among the Funds in a manner deemed
equitable by the Trustees. Depending upon the nature of a lawsuit, litigation
costs may be assessed to the specific Fund to which the lawsuit relates or
allocated on the basis of the asset size of the respective Funds. The Trustees
have determined that this is an appropriate method of allocation of expenses.
For information as to the distribution fee paid by the Funds to Merrill
Lynch pursuant to the Distribution Agreement, see "Purchase and Redemption of
Shares."
Duration and Termination. Unless earlier terminated as described below,
each Management Agreement will continue in effect from year to year if approved
annually (a) by the Trustees of the Trust or by a majority of the outstanding
voting shares of the respective Fund and (b) by a majority of the Trustees who
are not parties to such contract or interested persons (as defined in the
Investment Company 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 the vote of the shareholders of the respective Fund.
PURCHASE AND REDEMPTION OF SHARES
Reference is made to "Purchase of Shares" and to "Redemption of Shares" in
the Prospectus of the Funds for certain information as to the purchase and
redemption of Fund shares.
The Trust has entered into separate distribution agreements on behalf of
each Fund with Merrill Lynch as distributor (each, a "Distribution Agreement").
Each Distribution Agreement obligates Merrill Lynch to pay certain expenses in
connection with the offering of the shares of each Fund. After the prospectuses,
statements of additional information and periodic reports have been prepared,
set in type and mailed to shareholders, Merrill Lynch will pay for the printing
and distribution of copies thereof used in connection with the offering to
investors. Merrill Lynch also will pay 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.
Each Fund has adopted a separate distribution and shareholder servicing
plan (each, a "Distribution Plan") in compliance with Rule 12b-1 under the
Investment Company Act. Pursuant to each Distribution Plan, Merrill Lynch
receives a monthly distribution fee from each Fund at the annual rate of 0.125%
of average daily net assets of each Fund attributable to subscribers to the CMA
program and to investors maintaining securities accounts with Merrill Lynch or
maintaining accounts directly with the Transfer Agent who are not subscribers to
such program, except that the value of Fund shares in accounts maintained
directly with the Transfer Agent which are not serviced by Merrill Lynch
financial consultants will be excluded. The Distribution Plans reimburse Merrill
Lynch only for actual expenses incurred in the fiscal year in which the fees are
paid. The distribution fees principally compensate Merrill Lynch financial
consultants and other Merrill Lynch personnel for selling shares of the Funds
and for providing direct and personal services to shareholders. The distribution
fees are not compensation for the administrative and operational services
rendered to the Funds or their shareholders by Merrill Lynch which are covered
by the Management Agreements (see "Management of the Trust--Management and
Advisory Arrangements") between the Trust on behalf of each Fund and the
Manager. The Trustees believe that the Funds' expenditures under the
Distribution Plans benefit the Funds and their shareholders by providing better
shareholder services and by facilitating the sale and distribution of Fund
shares.
10
<PAGE> 49
Set forth below are the distribution fees paid by each Fund to Merrill
Lynch pursuant to their respective Distribution Plans for the years ended March
31, 1997, 1996 and 1995. All of the amounts expended were allocated to Merrill
Lynch personnel and to related administrative costs.
<TABLE>
<CAPTION>
FOR THE YEAR ENDED MARCH 31,
----------------------------------------
1997 1996 1995
---------- ---------- ----------
<S> <C> <C> <C>
Arizona Fund......................................... $ 185,231 $ 152,808 $ 106,900
California Fund...................................... $1,819,326 $1,565,337 $1,492,270
Connecticut Fund..................................... $ 383,286 $ 347,816 $ 320,966
Massachusetts Fund................................... $ 228,987 $ 215,451 $ 187,724
Michigan Fund........................................ $ 308,843 $ 299,263 $ 277,622
New Jersey Fund...................................... $ 759,664 $ 701,300 $ 573,696
New York Fund........................................ $1,405,157 $1,244,612 $1,013,471
North Carolina Fund.................................. $ 326,935 $ 330,722 $ 366,625
Ohio Fund............................................ $ 372,783 $ 322,038 $ 268,476
Pennsylvania Fund.................................... $ 496,888 $ 483,744 $ 420,594
</TABLE>
Among other things, the Distribution Plans provide that Merrill Lynch shall
provide and the Trustees of the Trust shall review quarterly reports of the
distribution expenses made by Merrill Lynch. The Distribution Plans further
provide that, so long as the Distribution Plans remain in effect, the selection
and nomination of Trustees of the Trust who are not "interested persons" of the
Trust as defined in the Investment Company Act ("Independent Trustees") shall be
committed to the discretion of the Independent Trustees then in office. A
Distribution Plan can be terminated at any time, without penalty, by the vote of
a majority of the Independent Trustees or by the vote of the holders of a
majority of the outstanding voting securities of the respective Fund. Finally, a
Distribution Plan cannot be amended to increase materially the amount to be
spent by the Fund thereunder without shareholder approval, and all material
amendments are required to be approved by vote of the Trustees of the Trust,
including a majority of the Independent Trustees, cast in person at a meeting
called for that purpose.
The right to receive payment with respect to any redemption of Fund shares
may be suspended by a Fund for a period of up to seven days. Suspensions of more
than seven days may not be made except (1) for any period (a) during which the
New York Stock Exchange (the "NYSE") is closed other than customary weekend and
holiday closings or (b) during which trading on the NYSE is restricted; (2) for
any period during which an emergency exists as a result of which (a) disposal by
such Fund of securities owned by it is not reasonably practicable or (b) it is
not reasonably practicable for such Fund fairly to determine the value of its
net assets; or (3) for such other periods as the Commission may by order permit
for the protection of security holders of such Fund. The Commission may
determine the conditions under which (i) trading shall be deemed to be
restricted and (ii) an emergency shall be deemed to exist within the meaning of
clause (2) above.
Merrill Lynch has offered the CMA program since September 1977. While no
significant problems have occurred to date, no predictions can be made as to the
rate of purchases and redemptions of shares which will result from the automatic
features of the CMA program. The portfolio securities of the Funds are highly
liquid and each Fund has the right to borrow up to 20% of its total assets on a
temporary basis to meet unexpected redemptions. Nevertheless, an erratic
redemption pattern could force the Manager to invest in securities or maintain
an average portfolio maturity which might lessen the yield that would otherwise
be available to the Funds.
PORTFOLIO TRANSACTIONS
The Funds have no obligation to deal with any dealer or group of dealers in
the execution of transactions in portfolio securities. Subject to policies
established by the Trustees and officers of the Trust, the Manager is primarily
responsible for each Fund's portfolio decisions and the placing of each Fund's
portfolio transactions. In placing orders, it is the policy of the Trust to
obtain the best net results taking into account such factors as
11
<PAGE> 50
the price of the securities and the firm's risk in positioning the securities
involved. While the Manager generally seeks reasonably competitive spreads or
commissions, the Funds will not necessarily be paying the lowest spread or
commission available. The Trust's policy of investing in securities with short
maturities will result in high portfolio turnover.
The securities in which the Funds invest are traded in the over-the-counter
("OTC") market. Where possible, the Funds will deal directly with the dealers
who make a market in the securities involved except in those circumstances where
better prices and execution are available elsewhere. Such dealers usually are
acting as principals for their own accounts. On occasion, securities may be
purchased directly from the issuer. The Municipal Securities in which the Funds
invest generally are traded on a net basis and normally do not involve either
brokerage commissions or transfer taxes. The cost of executing portfolio
securities transactions of the Funds primarily will consist of dealer spreads
and underwriting commissions. Under the Investment Company Act, persons
affiliated with the Trust are prohibited from dealing with the Trust or any Fund
as a principal in the purchase and sale of securities unless an exemptive order
allowing such transactions is obtained from the Commission. Since OTC
transactions are usually principal transactions, affiliated persons of the Trust
may not serve as the Funds' dealer in connection with such transactions, except
pursuant to the exemptive order described below. Without the relief provided by
the exemptive order described below, the Funds could purchase municipal
securities from underwriting syndicates of which Merrill Lynch was a member
under certain conditions in accordance with the provisions of a rule adopted
under the Investment Company Act. In 1987, the Commission issued an exemptive
order to one of the CMA Funds which permits the Funds to engage in certain
principal transactions with Merrill Lynch in tax-exempt securities subject to
certain conditions. An affiliated person of the Trust may serve as its broker in
OTC transactions conducted on an agency basis.
Set forth below are the number of principal transactions each Fund engaged
in with Merrill Lynch and the aggregate amount of those transactions during the
years ended March 31, 1997, 1996 and 1995.
<TABLE>
<CAPTION>
FOR THE YEAR ENDED MARCH 31,
------------------------------------------------------------------------------
1997 1996 1995
------------------------ ------------------------ ------------------------
NUMBER OF AGGREGATE NUMBER OF AGGREGATE NUMBER OF AGGREGATE
TRANSACTIONS AMOUNT* TRANSACTIONS AMOUNT* TRANSACTIONS AMOUNT*
------------ --------- ------------ --------- ------------ ---------
<S> <C> <C> <C> <C> <C> <C>
Arizona Fund......... 5 $ 5.8 3 $ 10.0 3 $ 7.0
California Fund...... 29 $ 364.4 27 $ 137.9 191 $ 823.1
Connecticut Fund..... 42 $ 99.3 16 $ 46.8 -- $ --
Massachusetts Fund... 39 $ 75.1 12 $ 27.4 42 $ 54.8
Michigan Fund........ 7 $ 20.0 7 $ 52.0 6 $ 14.9
New Jersey Fund...... 31 $ 88.4 10 $ 39.1 6 $ 14.8
New York Fund........ 7 $ 71.4 2 $ 12.2 8 $ 153.5
North Carolina
Fund............... -- $ -- 6 $ 13.6 14 $ 14.2
Ohio Fund............ 17 $ 52.1 1 $ 2.2 2 $ 2.4
Pennsylvania Fund.... 3 $ 17.3 4 $ 17.7 -- $ --
</TABLE>
- ---------------
* in millions
The Trustees of the Trust have considered the possibility of recapturing
for the benefit of the Funds expenses of possible portfolio transactions, such
as dealers' spreads and underwriting commissions, by conducting such portfolio
transactions through affiliated entities, including Merrill Lynch. After
considering all factors deemed relevant, the Trustees made a determination not
to seek such recapture. The Trustees will reconsider this matter from time to
time. The Manager has arranged for the Trust's custodian to receive any tender
offer solicitation fees on behalf of each Fund payable with respect to portfolio
securities of such Fund.
The Funds do not expect to use one particular dealer, but, subject to
obtaining the best execution, dealers who provide supplemental investment
research 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 the Management Agreement and the
expenses of the Manager will not necessarily be reduced as a result of the
receipt of such supplemental information.
12
<PAGE> 51
DETERMINATION OF NET ASSET VALUE
The net asset value of each Fund for the purpose of pricing orders for the
purchase and redemption of shares is determined by the Manager at 12 noon, New
York time, on each business day during which the NYSE or New York banks are open
for business, immediately after the daily declaration of dividends. As a result
of this procedure, net asset value is determined each business day except for
days on which both the NYSE and New York banks are closed. Both the NYSE and New
York banks are closed on New Year's Day, Martin Luther King, Jr. Day,
Presidents' Day, Memorial Day, Independence Day, Labor Day, Thanksgiving Day and
Christmas Day. The net asset value of a Fund is determined by adding the value
of all securities and other assets in the portfolio, deducting its liabilities
and dividing by the number of shares outstanding. It is anticipated that the net
asset value per share of each Fund will remain constant at $1.00 per share, but
no assurance can be offered in this regard.
Each Fund values its portfolio securities based on their amortized cost in
accordance with the terms of a rule adopted by the Commission. This involves
valuing an instrument at its cost and thereafter assuming a constant
amortization to maturity of any discount or premium, regardless of the impact of
fluctuating interest rates on the market value of the instrument. While this
method provides certainty in valuation, it may result in periods during which
value, as determined by amortized cost, is higher or lower than the price a Fund
would receive if it sold the instrument.
In accordance with the Commission regulations applicable to the valuation
of its portfolio securities, each Fund will maintain a dollar-weighted average
portfolio maturity of 90 days or less, purchase only instruments having
remaining maturities of 397 days (13 months) or less, and invest only in
securities determined by the Trustees to be of high quality with minimal credit
risks. In addition, the Trustees have established procedures designed to
stabilize, to the extent reasonably possible, each Fund's price per share as
computed for the purpose of sales and redemptions at $1.00. The Trustees will
review periodically each Fund's portfolio holdings to determine whether a
deviation exists between the net asset value calculated using market quotations
and that calculated on an amortized cost basis. In the event the Trustees
determine that a deviation exists with respect to any Fund that may result in
material dilution or other unfair results to investors or existing shareholders,
such Fund will take such corrective action which it regards as necessary and
appropriate, including the reduction of the number of outstanding shares of the
Fund by having each shareholder proportionately contribute shares to the Fund's
capital; the sale of portfolio instruments prior to maturity to realize capital
gains or losses or to shorten average portfolio maturity; withholding dividends;
or establishing a net asset value per share by using available market
quotations. If the number of outstanding shares is reduced in order to maintain
a constant net asset value of $1.00 per share, the shareholders will contribute
proportionately to such Fund's capital. Each shareholder will be deemed to have
agreed to such contribution by such shareholder's investment in the Fund.
Since the net income of each Fund is determined and declared as a dividend
immediately prior to each time the net asset value of such Fund is determined,
the net asset value per share of each Fund normally remains at $1.00 per share
immediately after each such dividend declaration. Any increase in the value of a
shareholder's investment in a Fund, representing the reinvestment of dividend
income, is reflected by an increase in the number of shares of such Fund in the
account, and any decrease in the value of a shareholder's investment may be
reflected by a decrease in the number of shares in the account. See "Taxes"
below.
YIELD INFORMATION
Each Fund normally computes its annualized yield by determining the net
income for a seven-day base period for a hypothetical pre-existing account
having a balance of one share at the beginning of the base period, dividing the
net income by the net asset value of the account at the beginning of the base
period to obtain the base period return, multiplying the result by 365 and then
dividing by seven. Under this calculation, the yields on Fund shares reflect
realized gains and losses on portfolio securities. In accordance with
regulations adopted by the Commission, each Fund is required to disclose its
annualized yield for certain seven-day base periods in a standardized manner
which does not take into consideration any realized or
13
<PAGE> 52
unrealized gains or losses on portfolio securities. The Commission also permits
the calculation of a standardized effective or compounded yield. This is
computed by compounding the unannualized base period return which is done by
adding one to the base period return, raising the sum to a power equal to 365,
dividing by seven and subtracting one from the result. This compounded yield
calculation also excludes realized and unrealized gains or losses on portfolio
securities.
The yield on Fund shares normally will fluctuate on a daily basis.
Therefore, the yield for any given past period is not an indication or
representation by a Fund of future yields or rates of return on its shares. The
yield is affected by such factors as changes in interest rates on short-term
Municipal Securities, average portfolio maturity, the types and quality of
portfolio securities held and operating expenses.
TAXES
FEDERAL
The Trust intends to continue to qualify each Fund for the special tax
treatment afforded RICs under the Code. As long as 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 the Funds to distribute substantially all of
such income.
As discussed in the Prospectus for the Funds, the Trust has a number of
Series, each referred to herein as a "Fund". Each Fund is treated as a separate
corporation for federal income tax purposes, and 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 will be 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), the Fund shall be qualified
to pay exempt-interest dividends to its 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 such Fund's shareholders
within 60 days after the close of the Fund's taxable year. 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. 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 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.
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To the extent that any Fund's distributions are derived from interest on
its taxable investments or from an excess of net short-term capital gains over
net long-term capital losses ("ordinary income dividends"), such distributions
are considered ordinary income for federal income tax purposes. Distributions,
if any, from an excess of net long-term capital gains over net short-term
capital losses derived from the sale of securities ("capital gain dividends")
are taxable as long-term capital gains for federal income tax purposes,
regardless of the length of time a shareholder has owned a Fund's 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. 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). Any loss upon
the sale or exchange of Fund shares held for six months or less will be
disallowed to the extent of any exempt-interest dividends received by the
shareholder. In addition, any such loss that is not disallowed under the rule
stated above will be treated as long-term capital loss to the extent of any
capital gain dividends received by the shareholder. If 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. The Funds 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 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
such Fund.
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 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.
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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 any of the Funds) 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 advisers regarding specific
questions as to federal or foreign taxes.
STATE
Arizona. Exempt-interest dividends are not 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 Securities. 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. Distributions, if any, of net long-term capital
gains from the sale of securities are taxable as ordinary income for Arizona
purposes.
California. Exempt-interest dividends will not be subject to California
personal income tax for California resident individuals to the extent
attributable to interest from California State Municipal Securities, 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 on California State Municipal Securities. Exempt-interest dividends
paid to a corporate shareholder subject to California state corporate franchise
tax will be taxable as ordinary income. Distributions of capital gain dividends
will be treated as long-term capital gains which are taxed at ordinary income
tax rates for California state income tax purposes.
Connecticut. Dividends paid by the Connecticut Fund are not subject to the
Connecticut personal income tax, on individuals, trusts and estates, to the
extent that they qualify as exempt-interest dividends for federal income tax
purposes that are derived from obligations issued by or on behalf of the State
of Connecticut or its political subdivisions, instrumentalities, authorities,
districts, or similar public entities created under Connecticut law
("Connecticut Obligations") or obligations the interest on which states are
prohibited from taxing by federal law. Other Connecticut Fund dividends and
distributions, whether received in cash or additional shares, are subject to
this tax, except that capital gain dividends derived from Connecticut
Obligations are not subject to the tax. Dividends and distributions paid by the
Connecticut Fund that constitute items of tax preference for purposes of the
federal alternative minimum tax, other than exempt-interest dividends not
subject to the Connecticut personal income tax, could cause liability for the
net Connecticut minimum tax, applicable to investors subject to the Connecticut
personal income tax who are required to pay the federal alternative minimum tax.
Interest on indebtedness incurred to purchase or carry Fund shares will not
reduce taxable income under the Connecticut personal income tax except to the
extent it may reduce the taxpayer's federal adjusted gross income.
Dividends paid by the Fund, including those that qualify as exempt-interest
dividends for federal income tax purposes, are taxable for purposes of the
Connecticut Corporation Business Tax. However, 70% (100% if the investor owns at
least 20% of the total voting power and value of the Fund's shares) of amounts
that are treated as dividends and not as exempt-interest dividends or capital
gain dividends for federal income tax purposes are deductible for purposes of
this tax, but no deduction is allowed for expenses related thereto.
Massachusetts. Under existing Massachusetts law, as long as the
Massachusetts Fund qualifies as a separate RIC under the Code, (i) the
Massachusetts Fund will not be liable for any personal income or 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
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Massachusetts taxable income that portion of dividends paid by the Massachusetts
Fund that is identified in a year-end statement as (a) exempt-interest dividends
directly attributable to interest that is received by the Massachusetts Fund on
obligations issued by the Commonwealth of Massachusetts, a political subdivision
thereof, or any instrumentality of either of the foregoing, and that is exempt
from Massachusetts taxation, or (b) dividends attributable to interest received
by the Massachusetts Fund on obligations of the United States that are exempt
from state taxation (collectively, "Massachusetts-exempt dividends").
Any capital gains distributed by the Massachusetts Fund (except for capital
gains on certain Massachusetts State Municipal Securities which are specifically
exempt by statute), or gains realized by 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, which relates or is allocable to
Massachusetts-exempt dividends received by the shareholder, will not be
deductible for Massachusetts personal income tax purposes.
In the case of any corporate shareholder 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. 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 to the extent such dividends are
attributable to interest on Michigan State Municipal Securities. To the extent
the distributions from the Michigan Fund are attributable to sources other than
interest on Michigan State Municipal Securities, such distributions, including,
but not limited to, long-term or short-term capital gains, but excluding any
such capital gains from obligations of the United States or of its possessions,
will not be exempt from Michigan income tax or the single business tax.
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 such a
company's investment portfolio consists of items such as the Michigan State
Municipal Securities. In addition, 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, 1998.
New Jersey. To the extent distributions are derived from interest or gains
on New Jersey State Municipal Securities, 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 Securities 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 and 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.
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On February 21, 1997, the Tax Court of New Jersey ruled against the
Director of the Division of Taxation holding against the New Jersey requirement
that fund investors pay state taxes on interest their funds earned from U.S.
government securities if the 80% Test was not met. As a result of the court
decision, the State of New Jersey could be forced to pay substantial amounts in
tax refunds to state residents who are mutual fund investors. At this time, the
effect of this litigation cannot be evaluated.
New York. The portion of exempt-interest dividends equal to the proportion
which the New York Fund's interest on New York State Municipal Securities 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 or from gain from the sale of investments or are
attributable to the portion of the New York Fund's tax-exempt interest that is
not derived from New York State Municipal Securities, they will constitute
taxable income for New York State and New York City personal income tax
purposes. Capital gain dividends paid by the New York Fund are treated as
capital gains which are taxed at ordinary income tax rates. Distributions paid
to a corporate shareholder from investment income and capital gains of the New
York Fund, including exempt-interest dividends, will be subject to New York
State corporate franchise and New York City corporation income tax.
North Carolina. Distributions of exempt-interest dividends, to the extent
attributable to interest on North Carolina State Municipal Securities and to
interest on direct obligations of the United States (including territories
thereof), are not subject to North Carolina individual or corporate income tax.
Distributions of gains attributable to the disposition of certain obligations of
the State of North Carolina and its political subdivisions issued prior to July
1, 1995 are not subject to North Carolina individual or corporate income tax;
however, for such obligations issued after June 30, 1995, distributions of gains
attributable to disposition will be subject to North Carolina individual or
corporate income tax. Any loss upon the sale or exchange of shares of the North
Carolina Fund held for six months or less will be disallowed for North Carolina
income tax purposes to the extent of any exempt-interest dividends received by
the shareholder, even though some portion of such dividends actually may have
been subject to North Carolina income tax. Except for income exempted from North
Carolina income tax as described herein, the North Carolina Fund's distributions
will generally constitute taxable income for taxpayers subject to North Carolina
income tax.
An investment in the North Carolina Fund by a corporate shareholder
generally would be included in the capital stock, surplus and undivided profits
base in computing the North Carolina franchise tax.
Ohio. Exempt-interest dividends will not be subject to Ohio personal
income tax and will be excludable from the net income base used in calculating
the Ohio corporate franchise tax to the extent attributable to interest from
Ohio State Municipal Securities. To the extent that the Ohio Fund's
distributions are derived from interest on its taxable investments or, subject
to certain exceptions, from an excess of net short-term capital gains over net
long-term capital losses, such distributions are considered ordinary income
subject to the Ohio personal income tax and the Ohio corporate franchise tax.
Subject to certain exceptions, distributions, if any, of net long-term capital
gains are also subject to the Ohio personal income tax and the Ohio corporate
franchise tax.
Distributions treated as investment income or as capital gains for federal
income tax purposes, including exempt-interest dividends, may be subject to
local taxes imposed by certain cities within Ohio. Additionally, the value of
shares of the Fund will be included in (i) the net worth measure of the issued
and outstanding shares of corporations and financial institutions for purposes
of computing the Ohio corporate franchise tax, (ii) the value of the property
included in the gross estate for purposes of the Ohio estate tax, (iii) the
value of capital and surplus for purposes of the Ohio domestic insurance company
franchise tax and (iv) the value of shares of and capital employed by dealers in
intangibles for purpose of the Ohio tax on dealers in intangibles.
Pennsylvania. To the extent distributions from the Pennsylvania Fund are
derived from interest on Pennsylvania State Municipal Securities, 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 investments other than Pennsylvania State
Municipal Securities will be taxable for
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Pennsylvania personal income tax purposes. In the case of residents of the City
of Philadelphia, distributions which are derived from interest on Pennsylvania
State Municipal Securities 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 the personal property
taxes imposed by various Pennsylvania municipalities to the extent the
Pennsylvania Fund's portfolio securities consist of Pennsylvania State Municipal
Securities on the annual assessment date.
At present, it is unclear whether an investment in the Pennsylvania Fund by
a corporate shareholder will be included in the Pennsylvania capital
stock/foreign franchise tax base by the Pennsylvania Department of Revenue. 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.
Under prior Pennsylvania law, in order for the Pennsylvania Fund to qualify
to pass through to investors income exempt from Pennsylvania personal income
tax, the Pennsylvania Fund was required to adhere to certain investment
restrictions. In order to comply with this and other Pennsylvania law
requirements previously in effect, the Pennsylvania Fund adopted, as a
fundamental policy, a requirement that it invest in securities for income
earnings rather than trading for profit and that, in accordance with such
policy, it not vary its portfolio investments except to: (i) eliminate unsafe
investments or investments not consistent with the preservation of capital or
the tax status of the investments of the Pennsylvania Fund; (ii) honor
redemption orders, meet anticipated redemption requirements and negate gains
from discount purchases; (iii) reinvest the earnings from portfolio securities
in like securities; (iv) defray normal administrative expenses; or (v) maintain
a constant net asset value pursuant to, and in compliance with, an order or rule
of the United States Securities & Exchange Commission. Pennsylvania has enacted
legislation which eliminates the necessity for the foregoing investment
policies. Since such policies are fundamental policies of the Pennsylvania Fund,
which can only be changed by the affirmative vote of a majority (as defined
under the Investment Company Act) of the outstanding shares, the Pennsylvania
Fund continues to be governed by such investment policies.
------------------------
The foregoing is a general and abbreviated summary of the tax laws for the
designated states as presently in effect. For the complete provisions, reference
should be made to the applicable state tax laws. The state tax laws described
above are subject to change by legislative, judicial, or administrative action
either prospectively or retroactively. Shareholders of each Fund should consult
their tax advisers about other state and local tax consequences of their
investment in such Fund.
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GENERAL INFORMATION
DESCRIPTION OF SERIES AND SHARES
The Declaration of Trust provides that the Trust shall comprise separate
Series each of which will consist of a separate portfolio that will issue a
separate class of shares. Presently, the Arizona, California, Connecticut,
Massachusetts, Michigan, New Jersey, New York, North Carolina, Ohio and
Pennsylvania Funds are the only Series of the Trust offering their shares to the
public. The Trustees are authorized to create an unlimited number of full and
fractional shares of beneficial interest, par value $0.10 per share, of a single
class 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 of the Trust. All shares have equal voting rights, except that
only shares of the respective Series are entitled to vote on the matters
concerning only that Series. Each issued and outstanding share is entitled to
one vote and 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. There
normally will be no meetings 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' meeting for the election of
Trustees. Shareholders may, in accordance with the terms of the Declaration of
Trust, cause a meeting of shareholders to be held for the purpose of voting on
the removal of Trustees.
The obligations and liabilities of a particular Series are restricted to
the assets of that Series and do not extend to the assets of the Trust
generally. The shares of each Series, when issued, will be fully paid and
nonassessable, have no preference, preemptive, conversion, exchange or similar
rights and will be freely transferable. Holders of shares of any Series are
entitled to redeem their shares as set forth elsewhere herein and in the
Prospectus. Shares do not have cumulative voting rights and the holders of more
than 50% of the shares of the Trust voting for the election of Trustees can
elect all of the Trustees if they choose to do so and in such event the holders
of the remaining shares would not be able to elect any Trustees. No amendment
may be made to the Declaration of Trust without the affirmative vote of a
majority of the outstanding shares of the Trust.
The Manager provided the initial capital for each Fund by purchasing
100,000 shares of each Fund. Such shares were acquired for investment and can
only be disposed of by redemption. Excepting the Arizona Fund, the
organizational expenses of each Fund were paid by the respective Fund and were
amortized over a period not exceeding five years from such Fund's commencement
of operations. The organizational expenses of the Arizona Fund ($35,700) were
paid by the Arizona Fund and are being amortized over a period not exceeding
five years. The proceeds realized by the Manager on the redemption of any of the
shares initially purchased by it will be reduced by the proportionate amount of
unamortized organizational expenses which the number of shares redeemed bears to
the number of shares initially purchased.
CUSTODIAN AND TRANSFER AGENT
State Street Bank and Trust Company, P.O. Box 351, Boston, Massachusetts
02101 (the "Custodian"), acts as custodian of the Funds' assets. The Custodian
is responsible for safeguarding and controlling each Fund's cash and securities,
handling the receipt and delivery of securities and collecting interest on each
Fund's investments.
Merrill Lynch Financial Data Services, Inc. (the "Transfer Agent"), a
subsidiary of ML & Co., P.O. Box 45290, Jacksonville, Florida 32232-5290, acts
as the Trust's transfer agent. The Transfer Agent is responsible for the
issuance, transfer and redemption of shares and the opening, maintenance and
servicing of shareholder accounts.
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 the
Funds.
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LEGAL COUNSEL
Brown & Wood LLP, One World Trade Center, New York, New York 10048-0557, is
counsel for the Trust.
REPORTS TO SHAREHOLDERS
The fiscal year of each Fund ends on March 31 of each year. The Trust sends
to each Fund's shareholders at least semi-annually reports showing the
respective 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 and the
designated state's (and, if applicable, city's) income tax information regarding
ordinary income dividends and capital gain dividends.
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 45290
Jacksonville, FL 32232-5290
The written notification should include the shareholder's name, address,
tax identification number and Merrill Lynch 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)
221-7210.
ADDITIONAL INFORMATION
The Prospectus and this Statement of Additional Information do not contain
all of the information set forth in the Registration Statement and the exhibits
relating thereto, which each Fund has filed with the Commission under the
Securities Act of 1933, as amended, and the Investment Company Act, to which
reference is hereby made.
The Declaration of Trust establishing the Trust refers to the Trustees
under the Declaration of Trust collectively as Trustees, but not as individuals
or personally; and except for his or her own bad faith, willful misfeasance,
gross negligence or reckless disregard of his or her other duties, no Trustee,
shareholder, officer, employee or agent of the Trust shall be held to any
personal liability, nor shall resort be had to their private property for the
satisfaction of any obligation or claim of the Trust but the "Trust Property"
(as defined in the Declaration of Trust) only shall be liable. A copy of the
Declaration of Trust, together with all amendments thereto, is on file in the
office of the Commonwealth of Massachusetts.
To the knowledge of the Funds, no person owned beneficially 5% or more of
any Fund's shares on July 9, 1997, except that Mr. W. Dunlop White, Jr., 920
Wellington Rd., Winston Salem, NC 27106 owned 5.14% of the shares of the North
Carolina Fund.
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APPENDIX A
ECONOMIC AND FINANCIAL CONDITIONS IN ARIZONA
The following information is a brief summary of factors affecting the
economy of the State of Arizona 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 of the most recent publicly available offering
statements relating to debt offerings of Arizona issuers, however, it has not
been updated nor will it be updated during the year. The Fund has not
independently verified the information.
Over the past several decades, the State of Arizona's (sometimes referred
to herein as the "State") 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 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, government 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 1990 and
1995, the State ranked second 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 experienced consistent growth, including an increase of 126,000,
or 2.9%, in 1996 alone. Population growth is expected to continue at
approximately the 1996 level 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 6.7% employment rate
increase, the State achieved employment rate increases of 6.1% in 1995 and 5.6%
in 1996. The service sector of the economy, which now represents approximately
30% of all jobs in the State, continues to show 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, albeit more modest, job growth in 1997. The 1996
unemployment rate was 5.5%.
The State's economic growth in recent years 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 5.3%
during 1996 to approximately $84.5 billion. The gains in per capita personal
income during this period led to continued strong growth in retail sales. While
the retail sales growth rates of 8.8% in 1995 and 5.9% in 1996 were lower than
the 12.0% growth rate in 1994, 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 significant budget surpluses each year
since 1993, including a projected $400 million surplus for the fiscal year ended
June 30, 1997. Although an amendment to the State's Constitution requiring a
2/3 majority vote in both houses of the Legislature to enact any tax or fee
increase limits the State's ability to raise additional revenue when needed, the
State has placed some of its surplus revenues in a rainy-day fund to mitigate
this risk.
In July 1994, a sharply divided Arizona Supreme Court ruled that the
State's system for financing public education itself created substantial
disparities in facilities among school districts and therefore violated the
provisions of Article XI, sec. 1 of the Arizona Constitution, which require the
Legislature to establish and
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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."
Although no comprehensive revision of the State's public school financing
system has been enacted, the Arizona Legislature, in 1996 and 1997, appropriated
$30 and $100 million, respectively to address the capital needs of less affluent
or faster growing districts. In the interim, a Superior Court judge ordered that
State funding of public schools be terminated as of June 30, 1998 if the
financing system is not satisfactorily revamped by that time. It is unclear
whether, or to what extent, the courts will treat the 1996 or 1997
appropriations as the required corrective action or whether, or to what extent,
additional legislative action or appropriations will be required to satisfy the
courts. However, since debt service on school district bonds is levied and
collected directly by the counties on behalf of the school districts, any
termination of State funding of public schools would not directly affect the
payment of debt service on any school district's bonds but would have a
significant, albeit unquantifiable, effect on its operations and maintenance
budget and, ultimately, its operational viability and continued existence.
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 overall employment
growth rates of 6.3% in 1995 and 4.6% in 1996. 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. As a result, metropolitan
Phoenix ranked first nationally among 39 major job markets (of 750,000 or more)
in job growth for 1994, 1995 and 1996. Already home to a variety of professional
sports teams, including the Phoenix Suns (basketball), the Arizona Cardinals
(football) and the Phoenix Coyotes (hockey), the County has also been awarded
one of two new major league baseball franchises; the Arizona Diamondbacks are
expected to begin play in 1998 upon completion of a new domed 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 Missile Systems division of Hughes Aircraft and several large
mining companies, including BHP 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 has
experienced a significant drop in the rate of job growth from 7.0% in 1994 to
2.3% in 1995 and 1.8% in 1996; however, positive job growth is projected to
continue at approximately the 1995-96 rates.
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
revenues in amounts and at times sufficient to service their bonded
indebtedness. The financial problems that led to the districts' default arose
from a combination of the unexpectedly high cost of constructing the CAP and
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delivering the water to the districts, plummeting land values in the late 1980s
and early 1990s, resulting in a need to increase property taxes in order to pay
the districts' bonds, and the refusal by many landowners in the districts to
accept the increased tax burden. In June 1995, a bankruptcy plan was confirmed
for one district which paid bondholders 57% of their claims and placed an
additional 42% in new 7-year bonds at 8% interest per annum. Proceedings with
respect to the second district ultimately resulted in confirmation of a plan of
reorganization but the plan is currently on appeal and certain elements of the
plan are subject to continuing litigation, the outcome of which may or may not
affect the viability of the confirmed plan. A third district encountered similar
difficulties but was able to restructure its bonded indebtedness outside the
bankruptcy court on terms substantially similar to the plan confirmed in the
second district.
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APPENDIX B
ECONOMIC AND OTHER CONDITIONS IN CALIFORNIA
The following information is a brief summary of factors affecting the
economy of the State of California 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 of the most recent publicly available offering
statements relating to debt offerings of California issuers, however, it has not
been updated nor will it be updated during the year. The Fund has not
independently verified the information.
GENERAL 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 is expected to exceed $1 trillion in 1997. On a
stand alone basis, California's economy is larger than all but six nations in
the world.
California's July 1, 1996 population of over 32 million represented over
12% of the total United States population. The official 1990 Census population
was 29,760,021 which represented an increase of over 6 million persons, or 26%,
during the decade of the 1980's. 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
1990 Census, 96% 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,
1995, the 5-county Los Angeles area accounted for 49%, with 15.6 million
residents. The 10-county San Francisco Bay Area represented 21%, 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. More than 300,000 nonfarm jobs
were added in the State in 1996, while personal income grew by more than $55
billion. California's economic expansion is being fueled by strong growth in
high-technology industries, including computer software, electronics
manufacturing, and motion picture production, all of which have offset the
recession-related losses, which were heaviest in aerospace and defense-related
industries (accounting for two-thirds of the job losses), finance and insurance.
THE STATE
1995-96 Fiscal Year. The 1995-96 Budget Act was signed by the Governor on
August 3, 1995, 34 days after the start of the fiscal year. The Budget Act
projected general fund revenues and transfers of $44.1 billion, a 3.5% increase
from the prior year. Expenditures were budgeted at $43.4 billion, a 4% increase.
The Budget Act also projected Special Fund revenues of $12.7 billion and
appropriated Special Fund expenditures of $13.0 billion.
Final data for the 1995-96 Fiscal Year showed revenues and transfers of
$46.1 billion, some $2 billion over the original fiscal year estimate, which was
attributed to the strong economic recovery. Expenditures also increased, to an
estimated $45.4 billion, as a result of the requirement to expend revenues for
schools under Proposition 98, and among other things, failure of the federal
government to enact welfare reform during the fiscal year and to budget new aid
for illegal immigrant costs, both of which had been counted on to allow
reductions in State costs. SFEU had a small negative balance of about $87
million at June 30, 1996, all but eliminating the accumulated budget deficit
from the early 1990's. Available internal borrowable resources (available cash,
after payment of all obligations due) on June 30, 1996 was about $3.8 billion,
representing a significant improvement in the State's cash position, and ending
the need for deficit borrowing over the end of the fiscal year. The State's
improved cash position allowed it to repay the $4.0 billion Revenue Anticipation
Warrant issue on April 25, 1996, and to issue only $2.0 billion of revenue
anticipation notes during the fiscal year, which matured on June 28, 1996.
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The 1995-96 Budget Act included substantial additional funding under
Proposition 98 for schools and community colleges (about $1.0 billion general
fund and $1.2 billion total above 1994-95 levels). Because of higher than
projected revenues in 1994-95, an additional $561 million ($92 per K-12 ADA) was
appropriated to the 1994-95 Proposition 98 entitlement. A large part of this was
a block grant of about $50 per pupil for any one-time purpose. For the first
time in several years, a full 2.7 percent cost of living allowance was funded.
The budget was based on the settlement of the CTA v. Gould litigation. Cuts in
health and welfare costs totaled about $220 million, almost $700 million less
than had been anticipated, because of the failure by the federal government to
approve certain of these actions in a timely manner. The federal government also
failed to appropriate all but $31 million of an anticipated $500 million in new
federal aid for incarceration and health care costs of illegal immigrants.
Funding from the general fund for the University of California was increased by
$106 million and for the California State University system by $97 million, with
no increases in student fees.
1996-97 Fiscal Year. The 1996-97 Budget Act was signed by the Governor on
July 15, 1996, along with various implementing bills. The Governor vetoed about
$82 million of appropriations (both general fund and Special Fund). With the
signing of the Budget Act, the State implemented its regular cash flow borrowing
program with the issuance of $3.0 billion of Revenue Anticipation Notes to
mature on June 30, 1997. The Budget Act appropriated a modest budget reserve in
the SFEU of $305 million, as of June 30, 1997. The Department of Finance
projected that, on June 30, 1997, the State's available internal borrowing
(cash) resources will be $2.9 billion, after payment of all obligations due by
that date, so that no cross-fiscal year borrowing will be needed.
Revenues. The Legislature rejected the Governor's proposed 15% cut in
personal income taxes (to be phased in over three years), but did approve a 5%
cut in bank and corporation taxes, to be effective for income years starting in
January 1, 1997. As a result, revenues for the Fiscal Year were estimated to
total $47.643 billion, a 3.3% increase over the final estimated 1995-96
revenues. Special Fund revenues were estimated to be $13.3 billion.
Expenditures. The Budget Act contained general fund appropriations
totaling $47.251 billion, a 4.0% increase over the final estimated 1995-96
expenditures. Special Fund expenditures were budgeted at $12.6 billion.
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%) 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 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
Fiscal Year 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 Fiscal
Year and the 1994-95 Fiscal Year 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.
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3. The Budget Act includes a 4.9% 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 State Department of Finance expects
$540 million of this amount to be received during the 1996-97 Fiscal Year.)
5. General fund support for the State Department of Corrections was
increased by about 7% 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.
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 (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
October 1, 1997 and provides California approximately $3.7 billion in block
grant funds for the 1996-97 Fiscal Year 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 was
approved November 27, 1996 to allow grant reductions to be implemented effective
January 1, 1997 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, it is now projected that savings will total approximately $320 million.
A preliminary analysis of the Laws by the State 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.
Other Subsequent Developments. With the continued strong economic recovery
in the State, the Department of Finance has estimated, in connection with the
release of the Governor's 1997-98 Budget Proposal, that revenues for the 1996-97
Fiscal Year will exceed initial projections by about $760 million. This increase
will be offset by higher expenditures for K-14 school aid (pursuant to
Proposition 98) and for health and welfare costs, because federal law changes
and other federal actions did not provide as much assistance to the State as was
initially planned in the Budget Act. The Department's updated projections show a
balance in the SFEU of $197 million, slightly lower than projected in July,
1996. The Department also projects the State's cash position will be stronger
than originally estimated, with unused internal borrowable resources at June 30,
1997 of about $4.3 billion.
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1997-98 Fiscal Year Proposed Budget. On January 9, 1997, the Governor
released his proposed budget for the 1997-98 Fiscal Year (the "Governor's
Budget"). The Governor's Budget projects general fund revenues and transfers in
1997-98 of $50.7 billion, a 4.6% increase from revised 1996-97 figures. The
Governor proposes expenditures of $50.3 billion, a 3.9% increase from 1996-97.
The Governor's Budget projects a balance in the SFEU of $553 million on June 30,
1998. The Governor's Budget also anticipates about $3 billion of external
borrowing for cash flow purposes during the year, with no requirement for
cross-fiscal year borrowing.
Among the major initiatives and features of the Governor's Budget are the
following:
1. The Governor's Budget includes a proposed 10% cut in the Bank and
Corporation Tax rate, to be phased in over two years.
2. Proposition 98 funding for K-14 schools will be increased again, as
a result of stronger revenues. Per-pupil funding for K-12 schools will
reach $5,010, compared to $4,220 as recently as the 1993-94 Fiscal Year.
Part of the new funding is proposed to be dedicated to the completion of
the current program to reduce class size to 20 pupils in lower elementary
grades, and to expand the program by one grade, so that it will cover K-3rd
grade.
3. Funding for higher education will be increased consistent with a
four-year "compact" established in 1995-96. There is not projected to be
any increase in student fees at any of the three levels of the State higher
education system.
4. The 1997-98 proposed Governor's Budget assumes approximately $500
million in savings contingent upon federal action. The Budget assumes that
federal law will be enacted to remove the maintenance-of-effort requirement
for Supplemental Security Income (SSI) payments, thereby enabling the state
to reduce grant levels pursuant to previously enacted state law ($279
million). The Budget also assumes the federal government will fund $216
million in costs of health care for illegal immigrants.
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.
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.
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 on the ability
of local government agencies to impose or raise various taxes, fees, charges and
assessments without voter approval. Certain "general taxes" imposed after
January 1, 1995 must be approved by voters in order to remain in effect. In
addition, Article XIIIC clarifies the right of local voters to reduce taxes,
fees, assessments to changes through local initiatives.
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Proposition 218 does not affect the State or its ability to levy or collect
taxes. 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 Legislature
Analyst estimated that enactment of Proposition 218 would reduce local
government revenues statewide by over $100 million a year. and that over time
revenues to local government would be reduced by several hundred million dollars
a year under this proposition.
As discussed above, the Law makes substantial modifications to the welfare
system. Among other changes, the Law will allow the State to deny access to some
federally funded welfare assistance programs to legal immigrants (but not to
refugees), which could result in a significant impact on County budgets. In the
aggregate, the bill's restrictions would reduce federal expenditures in
low-income programs by more than $55 billion over the next six years. Nearly all
of the $55 billion in savings come from reductions in the federal food stamp
program, Supplemental Security Income (SSI) program, and assistance to legal
immigrants. California would potentially lose over $10.0 billion in federal
funds during the same period of time. Absent revisions to current state law, the
California State Association of Counties has estimated that counties in the
State could see annual costs increase by $1.7 billion, while the State may
realize savings of roughly $1.4 billion annually. This analysis results from the
expectation that expenditures required to be made by counties for General
Assistance could increase significantly. For example, the annual increase in
cost for county-funded General Assistance due to the reduction of federal
assistance to legal immigrants in the County receiving SSI (one of the
assistance programs impacted by amending California Welfare and Institutions
Code Section 17000, which mandates that counties provide support and relief to
those residents who are not supported by other means) could be between $1.8
million and $2.5 million under current state law and General Assistance program
parameters. This range of potential additional annual cost represents a worst
case scenario. A more precise estimate of the impacts of the Law to local
governments will not be possible until the State of California adopts
implementing legislation. The Governor's budget proposal for 1997-98 would
eliminate State mandates for General Assistance.
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% 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% 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 Fiscal Year 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%) 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.
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
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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 the 1986-87 Fiscal Year or (ii) the amount required
to insure 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'
entitlements. By implementing these actions, per-pupil funding from Proposition
98 sources stayed almost constant at approximately $4,220 from the 1991-92
Fiscal Year to the 1993-94 Fiscal Year.
In 1992, a lawsuit was filed, called California Teachers' Association v.
Gould, which challenged the validity of these off-budget loans. The settlement
of this case, finalized in July, 1996, 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 reflected as an appropriation
above the current Proposition 98 base calculation. The schools' share of the
repayment will count either as appropriations that count toward satisfying the
Proposition 98 guarantee, or as appropriations from "below" the current base.
Repayments are spread over the eight-year period of the 1994-95 Fiscal Year
through the 2001-02 Fiscal Year to mitigate any adverse fiscal impact.
Substantially increased general fund revenues, above initial budget
projections, in the 1994-95, 1995-96 and 1996-97 fiscal years have resulted or
will result in retroactive increases in Proposition 98 appropriations from
subsequent fiscal years' budgets.
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.
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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
District Court judge struck down the central provisions of Proposition 187 by
ruling that parts of Propositions 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 can 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.
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.
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 involved in a lawsuit, Thomas Hayes v. Commission on State
Mandates, related to the state-mandated costs. The action involves an appeal by
the Director of Finance from a 1984 decision by the State Board of Control (now
succeeded by the Commission on State Mandates). The Board of Control decided in
favor of local school districts' claims for reimbursement for special education
programs for handicapped students. The case was then brought to the trial court
by the State and later remanded to the Commission on State Mandates for
redetermination. The Commission on State Mandates has since expanded the claim
to include supplemental claims filed by seven other educational institutions;
the issuance of a final consolidated decision is anticipated sometime in early
1997. To date, the Legislature has not appropriated funds. The liability to the
State, if all potentially eligible school districts pursue timely claims, has
been estimated by the Department of Finance at more than $1 billion.
The State is involved in a lawsuit related to contamination at the
Stringfellow toxic waste site. In United States, People of the State of
California v. J. B. Stringfellow, Jr., et. al., the State is seeking recovery
for post costs of cleanup of the site, a declaration that the defendants are
jointly and severally liable for future costs, and an injunction ordering
completion of the cleanup. However, the defendants have filed a counterclaim
against the State for alleged negligent acts. Because the State is the present
owner of the site, the State may be found liable. Present estimates of the
cleanup range from $200 million to $800 million.
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. An appeal has been filed.
In Professional Engineers in California Government v. Wilson, the
petitioners are challenging several appropriations in the 1993, 1994, and 1995
Budget Acts. The appropriations mandate the transfer of approximately $262
million from the State Highway Account and $113 million from the Motor Vehicle
Account to the general fund and appropriate approximately $6 million from the
State Highway Account to fund a highway-grade crossing program administered by
the Public Utilities Commission. Petitioners contend
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that the transfer violates several constitutional provisions and request that
the moneys be returned to the State Highway Account and Motor Vehicle Account.
The State is a defendant in Just Say No To Tobacco Dough Campaign v. State
of California, where the petitioners challenge the appropriation of
approximately $166 million of Proposition 99 funds in the Cigarette and Tobacco
Products Surtax Fund for years ended June 30, 1990, through June 30, 1995 for
programs which were allegedly not health education or tobacco-related disease
research. If the State loses, the general fund and funds from other sources
would be used to reimburse the Cigarette and Tobacco Products Surtax Fund for
approximately $166 million.
The State is a defendant in the case of Kurt Hathaway, et al. v. Wilson, et
al., where the plaintiffs are challenging the legality of various budget action
transfers and appropriations from particular special funds for years ended June
30, 1995, and June 30, 1996. The plaintiffs allege that the transfers and
appropriations are contrary to the substantive law establishing the funds and
providing for interest accruals to the funds, violate the single subject
requirement of the State Constitution, and is an invalid "special law."
Plaintiffs seek to have monies totaling approximately $335 million returned to
the special funds.
The State is a defendant in two related cases, Beno vs. Sullivan (Beno) and
Welch v. Anderson (Welch), concerning reductions in Aid to Families with
Dependent Children ("AFDC") grant payments. In the Beno case, plaintiffs seek to
invalidate AFDC grant reductions and in the Welch case, plaintiffs contend that
AFDC grant reductions are not authorized by state law. The Beno case concerns
the total grant reductions while the Welch case concerns the period of time the
State did not have a waiver for those reductions. The State's potential
liability for retroactive AFDC grant reductions is estimated at $831 million if
the plaintiffs are awarded the full amount in both cases.
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 the 1992-93 Fiscal Year. 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 Fiscal Year and 1994-95 Fiscal Year contributions that are unpaid to
date. On February 19, 1997, the State Court of Appeals affirmed the decision of
the Superior Court. The 1993-94 Fiscal Year and 1994-95 Fiscal Year transfers to
PERS were made pursuant to the legislation deferring payment. The transfers to
PERS which have not yet been made, but which would be required under the
judgment total approximately $900 million, representing the transfers for the
1995-96 Fiscal Year and for a portion of the 1996-97 Fiscal Year. This amount
does not include any interest that may be awarded. The State defendants intend
to seek review of the decision by the State Supreme Court.
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APPENDIX C
ECONOMIC AND FINANCIAL CONDITIONS IN CONNECTICUT
The following information is a brief summary of factors affecting the
economy of the State of Connecticut and does not purport to be a complete
description of such factors. Other factors will effect issuers. The summary is
based primarily upon one or more of the most recent publicly available offering
statements relating to debt offerings of Connecticut issuers; however, it has
not been updated nor will it be updated during the year. The Fund has not
independently verified the information.
Manufacturing has historically been of prime economic importance to
Connecticut (sometimes referred to herein as the "State"). The manufacturing
industry is diversified, with transportation equipment (primarily aircraft
engines, helicopters and submarines) the dominant industry, followed by
non-electrical machinery, fabricated metal products, and electrical machinery.
As a result of a rise in employment in service-related industries and a decline
in manufacturing employment, manufacturing accounted for only 17.95% of total
non-agricultural employment in Connecticut in 1995. Defense-related business
represents a relatively high proportion of the manufacturing sector. On a per
capita basis, defense awards to Connecticut have traditionally been among the
highest in the nation, and reductions in defense spending have had a substantial
adverse impact on Connecticut's economy. Moreover, the State's largest defense
contractors have announced substantial planned labor force reductions scheduled
to occur over the next few years.
The annual average employment rate (seasonally adjusted) in Connecticut was
5.7% in 1996. However, pockets of significant unemployment and poverty exist in
some of Connecticut's cities and towns. Moreover, Connecticut is now in a
recession, the depth and duration of which are uncertain.
In 1991, to address a growing deficit in the State's General Fund,
legislation was enacted by which the State imposed an income tax on individuals,
trust and estates for taxable years generally commencing in 1992. For each
fiscal year starting with the 1991-92 fiscal year, the General Fund has operated
at a surplus, with over 60% of the State's tax revenues being generated by the
income tax and the sales and use tax, each of which is sensitive to changes in
the level of economic activity in Connecticut. The State's budgeted expenditures
have more than doubled from approximately $4.3 billion for the 1986-87 fiscal
year to approximately $9.2 billion for the 1996-97 fiscal year.
At the end of the 1990-91 fiscal year, the General Fund had an accumulated
unappropriated deficit of $965,712,000. For the five fiscal years ended June 30,
1996, the General Fund ran operating surpluses of approximately $110.2 million,
$113.5 million, $19.7 million, $80.5 million and $250 million, respectively.
General Fund budgets for the biennium ending June 30, 1997, were adopted in 1995
and amended in 1996. General Fund expenditures and revenues are budgeted to be
approximately $9.2 billion for the 1996-97 fiscal year.
During 1991 the State issued a total of $965,710,000 Economic Recovery
Notes, of which $196,555,000 were outstanding as of May 1, 1997. The notes were
payable no later than June 30, 1996, but as part of the budget adopted for the
biennium ending June 30, 1997, payment of the notes scheduled to be paid during
the 1995-96 fiscal year was rescheduled to be made over the four fiscal years
ending June 30, 1999.
The primary method for financing capital projects by the State is through
the sale of the general obligation bonds of the State. These bonds are backed by
the full faith and credit of the State. As of May 1, 1997, there was a total
legislatively authorized bond indebtedness of $10,813,448,000, of which
$9,673,240,000 had been approved for issuance by the State Bond Commission,
$8,797,072,000 had been issued, and $6,384,716,267 were outstanding.
To meet the need for reconstructing, repairing, rehabilitating and
improving the State transportation system (except Bradley International
Airport), the State adopted legislation which provides for, among other things,
the issuance of special tax obligation ("STO") bonds the proceeds of which will
be used to pay for improvements to the State's transportation system. The STO
bonds are special tax obligations of the State payable solely from specified
motor fuel taxes, motor vehicle receipts, and license, permit and fee revenues
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pledged therefor and deposited in the special transportation fund. The cost of
the infrastructure program through June 30, 2000, to be met from federal, state
and local funds, was recently estimated at $11.2 billion. To finance a portion
of the State's $4.7 billion share of such cost, the State expects to issue $4.2
billion of STO bonds.
As of October 15, 1996, the General Assembly has authorized STO bonds for
the program in the aggregate amount of $4,157,900,000, of which $3,594,700,000
of new money borrowings had been issued. It is anticipated that additional STO
bonds will be authorized by the General Assembly annually in an amount necessary
to finance and to complete the infrastructure program. Such additional bonds may
have equal rank with the outstanding bonds provided certain pledged revenue
coverage requirements of the STO indenture controlling the issuance of such
bonds are met. The State expects to continue to offer bonds for this program.
In 1995, the State established the University of Connecticut as a separate
corporate entity to issue bonds and construct certain infrastructure
improvements. The improvements are to be financed by $18.0 million of general
obligation bonds of the State and $962.0 million bonds of the University. The
University's bonds will be secured by a State debt service commitment, the
aggregate amount of which is limited to $382.0 million for the four fiscal years
ending June 30, 1999, and $580.0 million for the six fiscal years ending June
30, 2005.
The State's general obligation bonds are rated AA- by Standard & Poor's and
Aa3 by Moody's. On March 17, 1995, Fitch reduced its ratings of the State's
general obligation bonds from AA+ to AA.
The State, its officers and its employees are defendants in numerous
lawsuits. Although it is not possible to determine the outcome of these
lawsuits, the Attorney General has opined that an adverse decision in any of the
following cases might have a significant impact on the State's financial
position: (i) litigation involving claims by Indian tribes to a portion of the
State's land area; (ii) an action on behalf of all persons with traumatic brain
injury, claiming that their constitutional rights are violated by placement in
State hospitals alleged not to provide adequate treatment and training, and
seeking placement in community residential settings with appropriate support
services; and (iii) a class action by the Connecticut Criminal Defense Lawyers
Association claiming a campaign of illegal surveillance activity and seeking
damages and injunctive relief.
As a result of litigation on behalf of black and Hispanic school children
in the City of Hartford seeking "integrated education" within the Greater
Hartford metropolitan area, on July 9, 1996, the State Supreme Court directed
the legislature to develop appropriate measures to remedy the racial and ethnic
segregation in the Hartford public schools. The fiscal impact of this decision
might be significant but is not determinable at this time.
General obligation bonds issued by municipalities are usually payable from
ad valorem taxes on property located in the municipality. Certain Connecticut
municipalities have experienced severe fiscal difficulties and have reported
operating and accumulated deficits in recent years. The most notable of these is
the City of Bridgeport, which filed a bankruptcy petition on June 7, 1991. The
State opposed the petition. The United States Bankruptcy Court for the District
of Connecticut has held that Bridgeport has authority to file such a petition
but that its petition should be dismissed on the grounds that Bridgeport was not
insolvent when the petition was filed.
In addition to general obligation bonds backed by the full faith and credit
of the municipality, certain municipal authorities may issue bonds that are not
considered to be debts of the municipality. Such bonds may only be repaid from
the revenues of projects financed by the municipal authority, which revenues may
be insufficient to service the authority's debt obligations.
Regional economic difficulties, reductions in revenues and increased
expenses could lead to further fiscal problems for the State and its political
subdivisions, authorities and agencies. This could result in declines in the
value of their outstanding obligations, increases in their future borrowing
costs and impairment of their ability to pay debt service on their obligations.
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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 Commonwealth of Massachusetts 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 of the most recent publicly
available offering statements relating to debt offerings of Massachusetts
issuers; however, it has not been updated nor will it be updated during the
year. The Fund has not independently verified the information.
While economic growth in the Commonwealth of Massachusetts (sometimes
referred to herein as the "Commonwealth") slowed considerably during the
recession of 1990-1991, indicators such as retail sales, housing permits,
construction, and employment levels suggest a strong and continued economic
recovery. As of May 1997, the Commonwealth's unadjusted unemployment rate was
3.8% as compared to a national average of 4.7%. Per capita personal income in
the Commonwealth is currently higher than the national average.
In fiscal 1995, the total revenues of the budgeted operating funds of the
Commonwealth 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.
In fiscal 1996, the total revenues of the budgeted operating funds of the
Commonwealth increased by approximately 5.7% over the prior fiscal year to
$17.328 billion. Expenditures increased by 3.9% over the prior fiscal year to
$16.881 billion. As a result, the Commonwealth ended fiscal year 1996 with a
positive closing fund balance of $1.172 billion.
Budgeted revenues and other sources in fiscal 1997, which ended June 30,
1997, were estimated as of June 24, 1997 by the Executive Office for
Administration and Finance to be approximately $17.585 billion, including tax
revenues of $12.507 billion. It is estimated that fiscal 1997 budgeted
expenditures will be $17.702 billion and that fiscal 1997 will end with fund
balances of $979.6 million.
On July 10, 1997, Governor William Weld signed a new $18.4 billion budget
into law. The Commonwealth's eight consecutive balanced budget represents an
overall spending increase of 3.8% over fiscal year 1997, including increases of
$259 million for education reform, $288 million more in aid to cities and towns
and about $50 million more for higher education.
Standard & Poor's and Moody's have rated the Commonwealth's general
obligation bonds as A+ and A1, respectively. Fitch has recently rated the
Commonwealth's bonds as A+. From time to time, agencies may change their
ratings.
Growth of tax revenues in the Commonwealth is limited by law. Tax revenues
in fiscal years 1992 through 1996 were lower than the limits set by law, and the
Executive Office for Administration and Finance estimates that state tax
revenues in fiscal 1997 will not reach 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 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.
Certain of the Commonwealth's cities, counties 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.
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On December 13, 1996 Middlesex County, the Commonwealth's most populous
county, defaulted on $4.5 million in unrated county hospital revenue
anticipation notes. Following the default, the noteholders, together with
certain other creditors of the County, initiated legal action to attach County
assets valued at $20 million in satisfaction of various obligations of the
County. On July 11, 1997 Governor Weld signed legislation that immediately
abolished the Middlesex County government. The legislation also eliminates
Worcester and Hampden County governments within one year and sets the stage for
the abolition of the entire county system by 1999. In general, all liabilities,
debts, leases and contracts of an abolished county which are in force
immediately before the transfer date would become obligations of the
Commonwealth.
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 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.
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 $2.976
billion in fiscal 1995. Fiscal 1996 expenditures for direct local aid were
$3.246 billion, which is an increase of approximately 9.1% above the 1995 level.
It is estimated that fiscal 1997 expenditures for direct local aid will be
$3.538 billion, which is an increase of approximately 9.0% above the fiscal 1996
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 $6.720 billion
as of January 1, 1996 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 1997, 1998, 1999 and 2000 are estimated to
be $965.9 million, $1.005 billion, $1.043 billion and $1.092 billion,
respectively. The 1998 budget signed by Governor Weld includes an accelerated
pension funding schedule that would eliminate the Commonwealth's unfunded
liability by 2018 rather than 2028.
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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 of Michigan 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 of the most recent publicly available offering
statements relating to debt offerings of Michigan issuers; however, it has not
been updated nor will it be updated during the year. The Fund 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 herein 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 17.1% in 1995, 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 1996, the
average monthly unemployment rate in the State was estimated at 4.7% compared to
a national average of 5.4%.
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
refunded 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 55% from the payment of State taxes and
45% 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 60% of total General Fund
expenditures are for State support of public education and for social services
programs.
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Other significant expenditures from the General Fund provide funds for law
enforcement, general State government, debt service 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 each of the
last five fiscal years the State ended the fiscal year with its General Fund in
balance after transfers from the General Fund to the Budget Stabilization Fund.
Those and certain other transfers into and out of the Fund raised the balance in
the Budget Stabilization Fund to $1.15 billion as of September 30, 1996. In all
but one of the last five fiscal years the State has borrowed between $500
million and $900 million for cash flow purposes. It borrowed $900 million in
each of the 1996 and 1997 fiscal years.
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, while total State revenue sharing payments have increased
in each of the last five years, the State has reduced revenue sharing payments
to municipalities below the level otherwise provided under formulas in each of
those years.
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 for school operating purposes 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.
In addition, the State legislature recently adopted a package of State tax
cuts, including a phase-out of the intangibles tax, an increase in exemption
amounts for personal income tax, and reductions in the single business tax.
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, AA
by Standard & Poor's and Aa by Fitch.
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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 the State 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 of the most recent publicly available offering
statements relating to debt offerings of New Jersey issuers, however, it has not
been updated nor will it be updated during the year. The Fund 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 for certain taxable income levels. 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 1998" refers to the State's fiscal year beginning July
1, 1997 and ending June 30, 1998.
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 the
fiscal year 1993, $926 million for the fiscal year 1994, $569 million for fiscal
year 1995, $442 million for fiscal year 1996, and $276 million (estimated) for
fiscal year 1997. For the fiscal year 1998, the balance in the undesignated
General Fund is estimated to be $242 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 of 1990-1991, 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
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previously growing sectors as wholesale trade, retail trade, finance, utilities,
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 1989 to a low of
3,457,900 in 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. More than two-thirds of this number, nearly 138,000 jobs, were
recovered in the 31 month period from January 1994 to August 1996.
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 appeared 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.
Nonresidential construction activity, as measured by contract awards, grew
by 9.7% in 1993, 19.6% in 1994 and 3.0% in 1995. Additionally, nonresidential
building construction contracts fell by 20.5% in the first eight months of 1996.
This decline is largely attributable to an abundance of large, one-time contract
awards during 1995, including a $202.9 million contract for the construction of
a state prison.
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. 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.
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Through July 1996, total new vehicle registrations (new passenger cars and
light trucks and vans) rose by 3.5% compared to the same time period in 1995.
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.
Business investment expenditures and consumer spending have increased
substantially 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 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.
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, the State Police
Retirement System and the Judicial Retirement System. 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 and Fiscal Year 1998 budgets. The State has 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. sec.1983 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; and (5) directing payment of
plaintiffs' attorneys' fees, disbursements and costs pursuant to 42 U.S.C.
sec.1988.
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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 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. The matter is currently
stayed pending the adoption of the Appropriations Act for Fiscal Year 1998. The
State intends to vigorously defend this action.
Beth Israel Hospital et al. v. Essential Health Services Commission. This
case represents a challenge by 11 New Jersey hospitals to the 0.53% hospital
assessment authorized by the Health Care Reform Act of 1992, specifically
N.J.S.A. 26:2H-18.062. 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, and the case has now
been briefed. 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
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damages or other relief which, if granted, would require the expenditure of
funds. The State is unable to estimate its exposure for these claims.
Abbott v. Burke. On January 6, 1997 the Education Law Center filed a
motion in aid of litigants' rights with the Supreme Court of New Jersey in
Abbott v. Burke. In 1994 the Supreme Court ruled in Abbott v. Burke that the
State had to enact a funding formula that would close the spending gap between
poor urban school districts and wealthy suburban districts by fiscal year 1998.
On December 20, 1996 the Comprehensive Education Improvement and Financing Act
("CEIFA") was enacted. CEIFA is a departure from the mechanisms of previous
funding formulas. The CEIFA is centered upon the Core Curriculum Content
Standards -- a comprehensive description of what all students should know and be
able to accomplish upon completion of a thirteen year public education. The
State projects that special needs districts will be spending between 91% and 96%
of the wealthy suburban districts in the 1997-1998 school year under CEIFA.
Plaintiffs concede that, under CEIFA, special needs districts are projected to
be spending at 91% of the wealthy suburban districts in the 1997-1998 fiscal
year. In its motion, the Education Law Center requests, in part, relief in the
form of 100% spending parity or State aid in the amount of approximately $200
million dollars to be redistributed to the special needs districts.
On May 14, 1997, the Supreme Court rendered a decision in Abbott v. Burke
and held that the CEIFA was unconstitutional as applied to the 28 Abbott
districts. The Court ordered the State to appropriate additional funds,
beginning in the 1997-98 school year, so that each Abbott district would be able
to spend at the average of the wealthy suburban districts. The Department of
Education has recommended that the appropriation for School Aid for Fiscal Year
1998 be increased by $246 million to comply with the decision by the New Jersey
Supreme Court in Abbott v. Burke. In addition, the Court remanded the matter to
the Superior Court to oversee a directive to the Commissioner of Education to
study and report on the special educational needs of students in the Abbott
districts and the facilities needs in those districts. The Superior Court is
required to issue a final determination on those issues by December 31, 1997.
The Supreme Court retained jurisdiction of the matter.
Cleary v. Waldman. This case involves the spousal impoverishment
provisions of the Medicare Catastrophic Coverage Act ("MCCA"). Under this
provision, the spouse of an institutionalized husband or wife, is allowed to
have sufficient funds to live in the community, called the monthly needs
allowance.
The State in determining a spouse's monthly needs allowance, uses a system
called the "income first" rule. If a community spouse does not have sufficient
funds to meet the monthly needs allowance, an institutionalized spouse is
allowed to shift his or her income to the community spouse to make up the
difference. If the institutionalized spouse's income is insufficient to meet the
monthly needs allowance, then the institutionalized spouse is allowed to shift
resources to the community spouse to generate income to make up the difference.
A class action was brought in federal court in which plaintiffs' argue that
the income first rule is disallowed under the MCCA. Rather plaintiffs claim that
the MCCA mandates the use of what is called the "resource-first" rule. Under
this scheme, before income is shifted from the institutionalized spouse to the
community spouse to meet the monthly needs allowance, resources must be shifted
first and income generated from these resources used to meet the monthly needs
allowance.
Estimates of exposure if a court were to find that the MCCA only allows the
"resource-first" rule has been estimated in the area of $50 million per year
from both State and Federal sources combined.
Plaintiffs filed for a preliminary injunction arguing that, under federal
law, only the resource first rule was allowed under the MCCA. The State opposed
the motion and the New Jersey Association of Health Care Facilities and the New
Jersey Association for Non-Profit Homes for the Aging moved for intervenor
status, opposing the plaintiffs' motion. The court granted the motion of
intervention and denied the motion for preliminary injunction, finding that
plaintiffs were unlikely to prevail on the merits since New Jersey's methodology
was at least a permissible application of the federal law.
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Subsequently, plaintiffs filed for class certification which was granted on
March 25, 1996. On March 26, 1997, Plaintiffs have filed a Notice of Appeal to
the Court of Appeals for the Third Circuit. The State intends to vigorously
defend this action.
United Hospitals et al. v. State of New Jersey and William Waldman. This
case represents a challenge by 18 New Jersey hospitals to Medicaid hospital
reimbursement since February, 1995. The matter was filed in the Appellate
Division of the Superior Court of New Jersey in January, 1997. The hospitals
challenge all of the following: (i) whether the State complied with certain
federal requirements for Medicaid reimbursement; (ii) whether the State's
reimbursement regulations, N.J.A.C. 10:52-1 et. seq., are arbitrary, capricious
and unreasonable; (iii) whether the Department of Human Services (DHS)
incorrectly calculated the rates; (iv) whether DHS denied hospitals of a
meaningful appeal process; (v) whether the 1996-7 State Appropriations Act
(L.1996, c.42) violates the New Jersey Constitution with respect to the
provision for Medicaid reimbursement to hospitals; and (vi) whether DHS violated
the Medicaid State Plan, filed with the U.S. Department of Health and Human
Services, in implementing hospital rates in 1995 and 1996. The State intends to
vigorously defend this action.
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 CONDITIONS IN NEW YORK
The following information is a brief summary of factors affecting the
economy of New York City (the "City") or New York State (the "State" or "New
York") 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 of
the most recent 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 Fund has not independently verified this
information.
In recent years, the 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 the New York Municipal Bonds in which the
Fund invests.
NEW YORK CITY
General. More than any other municipality, the fiscal health of 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 thereafter improved commencing
in calendar year 1996, reflecting improved securities industry earnings and
employment in other sectors. The City's current four-year financial plan assumes
that moderate economic growth will exist through calendar year 2001.
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 has been 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 the 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.
The most recent quarterly modification to the City's financial plan for the
1997 fiscal year (July 1, 1996 through June 30, 1997) projects a balanced budget
in accordance with GAAP for the 1997 fiscal year after taking into account an
increase in projected tax revenues of $1.2 billion during the 1997 fiscal year
and a discretionary prepayment in the 1997 fiscal year of $1.3 billion of debt
service due in the 1998 and 1999 fiscal years. Although several sectors of the
City's economy have expanded recently, including tourism and business and
professional services, City tax revenues remain heavily dependent on the
continued profitability of the securities industry.
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 1998 through 2001 fiscal years (the "1998-2001 Financial Plan" or "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 1998 through 2001 contemplates the
issuance of $4.3 billion of general obligation bonds and $7.1 billion of bonds
to be issued by the New York City Transitional Finance Authority (the
"Transitional Finance Authority") to finance City capital projects. In 1997, the
State enacted the New York City Transitional Finance Authority Act (the "Finance
Authority Act"), which created the Transitional Finance Authority, to assist the
City to avoid certain state constitutional debt limitations. The Transitional
Finance Authority is authorized to issue up
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to $7.5 billion in long-term debt. On June 2, 1997 an action was brought in the
State Supreme Court, Albany County seeking a declaratory judgment declaring the
Finance Authority Act to be unconstitutional. If the Finance Authority Act were
voided, and depending on whether the State took other action which would provide
relief to the City under the general debt limit, the City might be required to
curtail its currently defined capital program early in the 1998 fiscal year. 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, New York City Municipal Water Finance Authority (the
"Water Authority") bonds and Transitional Finance Authority bonds 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 Water Authority or the Transitional Finance Authority
were unable to sell its bonds, the City would be prevented from meeting its
planned operating and capital expenditures.
1998-2001 Financial Plan. On June 10, 1997 the City submitted to the New
York State Financial Control Board (the "Control Board") the Financial Plan for
the 1998 through 2001 fiscal years which reflects the City's expense and capital
budgets for the 1998 fiscal year which were adopted on June 6, 1997. The City
Financial Plan projects revenues and expenditures for the 1998 fiscal year (July
1, 1997 through June 30, 1998) balanced in accordance with GAAP. The City
Financial Plan sets forth gap-closing actions to eliminate a previously
projected gap for the 1998 fiscal year, after taking into account the prepayment
in the 1997 fiscal year of $1.3 billion of debt service due in the 1998 and 1999
fiscal years. The gap-closing actions for the 1998 fiscal year include (i)
additional agency actions; (ii) the proposed sale of various assets; (iii)
additional State aid; and (iv) entitlement savings in Medicaid. The City
Financial Plan also sets forth projections for the 1999 through 2001 fiscal
years and projects budget gaps of $1.8 billion, $2.8 billion, and $2.6 billion
for the 1999 through 2001 fiscal years, respectively. The City has outlined a
gap-closing program for these years that assumes additional agency actions,
savings from restructuring City government and privatization and procurement
initiatives, additional revenue initiatives and asset sales, additional State
aid, additional entitlement cost containment initiatives and the availability of
funds from the General Reserve.
The City Financial Plan includes a proposed tax reduction program totaling
$272 million, $435 million, $465 million and $481 million in the 1998 through
2001 fiscal years, respectively. The City Financial Plan assumes that portions
of these reductions will be offset by increased State aid totaling $47 million,
$254 million, $472 million and $722 million in the 1998 through 2001 fiscal
years, respectively.
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. 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, the ability to implement proposed
reductions in City personnel and other cost reduction initiatives, continuation
of interest earning assumptions for pension funds assets, the ability of the
City's hospital and educational entities to take actions to offset potential
budget shortfalls, the ability to complete revenue generating transactions,
provision of State and Federal aid and mandate relief, the impact on City
revenues and expenditures of Federal and State welfare reform and any future
legislation affecting Medicare or other entitlements, approval by the Governor
and the State Legislature of the extension of certain personal income tax
surcharges, which are scheduled to expire in 1997 and 1998, and adoption of the
City's budgets by the City Council in substantially the forms submitted by the
Mayor.
The City Financial Plan is also subject to the ability of the City to
implement the expenditure reductions and to obtain the 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 identified
savings are subject to negotiation with the City's municipal unions. Various
other actions proposed for the 1998 through 2001 fiscal years are subject to
approval by the Governor and the State Legislature and the proposed reductions
in spending for entitlement programs may be subject to legal challenge.
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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 its
1997-1998 fiscal year or subsequent fiscal years, such developments could result
in reductions in anticipated State aid to the City. As of July 17, 1997, the
State had not adopted the budget for the State's 1997-1998 fiscal year which
began on April 1, 1997. However, legislation making interim appropriations has
been enacted which maintains State spending through July 18, 1997. A delay in
the adoption of the State's budget beyond July 18, 1997 without further interim
appropriations could delay the projected receipt by the City of State aid. In
addition, there can be no assurance that State budgets in future fiscal years
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 criticism. On May 29, 1997, the City Comptroller issued a report on
the executive budget published on May 8, 1997 (the "Executive Budget"). The
report identified a total net budget gap of up to $796 million for the 1998
fiscal year. With respect to the 1999 and subsequent fiscal years, the report
noted that the financial plan published on May 8, 1997 (the "May Financial
Plan") fails to address the City's long-term financial weaknesses, resulting in
large out-year budget gaps. On June 5, 1997, the staff of the Control Board
issued a report commenting on the City's 1997 fiscal year. The report noted that
the City projects that it will end the 1997 fiscal year with a substantial
surplus which will be used to reduce the 1998 and 1999 fiscal year budget gaps.
On July 2, 1997, the staff of the Office of the State Deputy Comptroller of New
York (the "OSDC") issued a report on the City Financial Plan. For the 1998
fiscal year the report projected a potential surplus of $190 million. The report
also identified risks of $518 million, $1.1 billion, $1.3 billion and $1.4
billion for the 1998 through 2001 fiscal years, respectively. On October 31,
1996, the City's Independent Budget Office (the "IBO") released a report
assessing the costs that could be incurred by the City in response to the
Personal Responsibility and Work Opportunity Reconciliation Act of 1996 (the
"1996 Welfare Act"). The IBO report noted that if the requirement that all
recipients work after two years of receiving benefits is enforced, these
additional costs could be substantial starting in 1999, reflecting 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 public assistance cases, potential costs to the City could
substantially increase. The report noted that the new welfare law's most
significant fiscal impact is likely to occur in the years 2002 and beyond,
reflecting the full impact of the lifetime limit on welfare participation which
only begins to be felt in 2002. In addition, the report noted that, given the
State constitutional requirement to care for the needy, the 1996 Welfare Act
might well prompt a migration of benefit-seekers into the City. The report
concluded that the impact of the 1996 Welfare Act on the City will ultimately
depend on decisions of State and City officials, including the allocation of
block grant funds between the State and New York local governments and the
division between the State and local governments of welfare costs not funded by
the Federal Government, the performance of the local economy and the behavior of
thousands of individuals in response to the new system.
Ratings. As of June 3, 1997, Moody's rated the City's outstanding general
obligation bonds Baa1, Standard & Poor's rated such bonds BBB+ and Fitch rated
such bonds A-. On July 10, 1995, Standard & Poor's revised downwards its ratings
on outstanding general obligation bonds of the City from A- to BBB+. 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. 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 March 31, 1997, the City and the Municipal
Assistance Corporation for the City of New York had approximately $26.0 billion
and $3.8 billion of outstanding net long-term debt respectively. As of May 1,
1997, the Water Authority had approximately $6.8 billion of aggregate principal
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amount of outstanding bonds and $600 million aggregate principal amount of
outstanding commercial paper notes.
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 has taken the position that increased regulatory, enforcement and other
efforts to protect its water supply, will prevent the need for filtration. On
May 6, 1997 the U.S. Environmental Protection Agency granted the City a
filtration avoidance waiver through April 15, 2002 in response to the City's
adoption of certain watershed regulations, which became effective May 1, 1997.
The estimated incremental cost to the City of implementing this Watershed
Memorandum of Agreement, beyond investments in the watershed which are planned
independently, is approximately $400 million. Preliminary estimates of the costs
of such filtration, if it were required, are from $4 billion to $8 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.
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
since early 1992. 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.
On March 10, 1997 the State Legislature and the Governor conducted a
consensus economic and revenue forecasting process as required under law. As
part of the process, the State Division of the Budget updated the economic
forecast upon which the State's receipts estimates are based. The forecast for
income growth in 1997 was increased modestly to the 5.2 to 5.6% range,
consistent with an economic outlook of modest growth in the State's economy and
moderate inflation.
The 1997-1998 Fiscal Year. On January 14, 1997, the Governor released the
Executive Budget for the State's 1997-1998 fiscal year (as amended, the
"Executive Budget") which the State Legislature must enact and the Governor must
sign in order to become law. As of July 17, 1997 the State had not adopted its
budget for its 1997-1998 fiscal year which commenced on April 1, 1997. The
State, however, has enacted legislation making interim appropriations which
maintain State spending through July 18, 1997. It is expected that if the State
budget is not enacted by that date, additional interim appropriations will be
submitted by the Governor and enacted by the Legislature. Debt service
appropriations for existing State-supported obligations have been enacted for
the entire 1997-1998 fiscal year.
The State Division of the Budget has report that approximately $1.56
billion in unbudgeted resources has been identified for use in the 1997-1998
Financial Plan. These additional resources have arisen primarily from revenues
produced by stronger-then-expected growth in the State's economy and higher
final personal income tax payments for the 1996 tax year; additional
nonrecurring 1996-1997 cash resources and nonrecurring federal aid.
The draft 1997-1998 Financial Plan, based on the Executive Budget, projects
General Fund receipts of $32.94 billion. General Fund disbursements are
projected at $32.90 billion, a decrease of $56 million from
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projected spending levels for the 1996-1997 fiscal year. The Executive Budget
projects balance on a cash basis but identifies a potential budget gap of
approximately $2.3 billion due primarily to previously enacted tax reduction
programs, the loss of non-recurring revenues available in the 1996-1997 fiscal
year, growth in Medicaid, collective bargaining agreements, and higher fixed
costs such as pensions and debt service. Proposed gap-closing actions in the
Executive Budget include cost containment in State Medicaid, spending
reductions, the use of a portion of the 1996-1997 fiscal year budget surplus,
and other actions. The Executive Budget also anticipates a significant increase
in federal aid to the State related to the Medicaid program and the new federal
welfare block grant. There can be no assurance that the Executive Budget will be
enacted as proposed, the cost containment and spending reduction programs can be
implemented as proposed or the anticipated increase in Federal aid will
materialize as expected.
The draft 1997-1998 Financial Plan projects budget imbalances of $1.08
billion for the 1998-1999 fiscal year and $1.35 billion for the 1999-2000 fiscal
year which are expected to be closed primarily through spending reductions. The
Executive Budget contains several new tax initiatives which are projected to
reduce total receipts by $170 million in the 1997-1998 fiscal year. In addition,
there has been discussion of additional tax reductions, beyond those reflected
in the State's current projections for the 1997-1998 fiscal year that, if
enacted, could make it more difficult to achieve budget balance over this
period. The Executive Budget identifies various risks, including a financial
market or broader economic correction, and potential changes to federal tax law
which could alter the federal definitions of income on which many State taxes
rely.
The draft 1997-1998 Financial Plan and the Executive Budget are 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 1997-1998 and subsequent fiscal years, with
corresponding material and adverse effects on the State's projections of
receipts and disbursements.
Owing to these and other factors, the State may 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 Governor is required to submit a balanced budget to the State
Legislature and has indicated that he will close any potential imbalances in the
State's 1997-1998 Financial Plan primarily through General Fund expenditure
reductions and without increases in taxes or deferrals of scheduled tax
reductions. The draft 1997-1998 Financial Plan reflects, and the 1998-1999
Financial Plan, when enacted, is expected to reflect, a continuing strategy of
substantially reduced State spending. 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, 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 meet
work activity participation targets for their TANF caseload. These requirements
are phased in over time. 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.
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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 federal block grant funding. On December 13, 1996,
the State's plan was approved by the federal government. The Governor has
introduced legislation necessary to conform with federal law for consideration
by the Legislature in the 1997 legislative session. 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.
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.
Uncertainties with regard to both the economy and potential decisions at
the federal level add further pressure on future budget balance in New York
State. Specific budget proposals being discussed at the federal level but not
included in the State's current economic forecast would (if enacted) have a
disproportionate negative impact on the longer-term outlook for the State's
economy as compared to other states.
The 1996-1997 Fiscal Year. The State ended its 1996-1997 fiscal year on
March 31, 1997 in balance on a cash basis, with a 1996-1997 General Fund cash
surplus as reported by the State Division of the Budget of approximately $1.4
billion. Of the cash surplus amount, $1.05 billion was previously budgeted by
the Governor in his Executive Budget to finance the draft 1997-1998 Financial
Plan, and the additional $373 million is available for use in financing the
1997-1998 Financial Plan when enacted by the State Legislature. The surplus
results primarily from higher-than-expected revenues and lower-than-expected
spending for social service programs. The General Fund closing balance was $433
million. General Fund receipts and transfers from other funds for the 1996-1997
fiscal year totaled $33.04 billion, which was $129 million lower than originally
projected in the 1996-1997 State Financial Plan as enacted. General Fund
disbursements and transfers to other funds totaled $32.90 billion for the
1996-1997 fiscal year. This was $226 million lower than the levels projected in
the 1996-1997 Financial Plan forecast made in July 1996 when the State's
1996-1997 fiscal year budget was enacted.
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.
Local Government Assistance Corporation. In 1990, as part of a State
fiscal reform program, legislation was enacted creating the Local Government
Assistant Corporation (the "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 Banker's
Acceptance Notes ("BAN"). 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.
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Public Authorities. The fiscal stability of the State is related, in part,
to the fiscal stability of its public authorities. 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. 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 in their respective obligations.
Ratings. Currently, Moody's, Standard & Poor's and Fitch rate New York
State's outstanding general obligation bonds "A2", "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, or either of them, may have an effect on
the market price of the New York Municipal Bonds in which the 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. There can be no assurance that an adverse decision in one or more legal
proceedings would not exceed the amount the State reserves for the payment of
judgments or materially impair the State's financial operations. In its audited
financial statements for the fiscal year ended March 31, 1996, the State
reported its estimated liability for awarded and anticipated unfavorable
judgments at $474 million.
Other Localities. Certain localities in addition to the City could have
financial problems leading to requests for additional State assistance during
the State's 1997-1998 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 1997-1998 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 allocation of State resources in
amounts that cannot yet be determined.
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APPENDIX H
ECONOMIC AND FINANCIAL CONDITIONS IN NORTH CAROLINA
The following information is a brief summary of factors affecting the
economy of the State of North Carolina and does not purport to be a complete
description of such factors. These factors will affect issuers. The summary is
based primarily upon one or more of the most recent publicly available offering
statements relating to debt offerings of North Carolina issuers; however, it has
not been updated nor will it be updated during the year. The Fund has not
independently verified the information.
The State of North Carolina (the "State") has three major operating funds:
the General Fund, the Highway Fund and the Highway Trust Fund. The State derives
most of its revenue from taxes, including individual income tax, corporation
income tax, sales and use taxes, corporation franchise tax, alcoholic beverage
tax, insurance tax, inheritance tax, tobacco products tax and soft drink tax
(currently being phased out). The State receives other non-tax revenues which
are also deposited in the General Fund. The most important are Federal funds
collected by State agencies, university fees and tuitions, interest earned by
the State Treasurer on investments of General Fund moneys and revenues from the
judicial branch. The proceeds from the motor fuel tax, highway use tax and motor
vehicle license tax are deposited in the Highway Fund and the Highway Trust
Fund.
Fiscal year 1996 ended with a positive General Fund balance of
approximately $573.4 million. An additional $153.1 million was available from a
reserved fund balance. Of this aggregate amount, $77.3 million was reserved in a
Savings Reserve (bringing the total reserve to $500.9 million) and $130.0
million was reserved in a Reserve for Repair and Renovation of State Facilities
(bringing the total reserve to $151.3 million after prior withdrawals). An
additional $47.1 million was transferred to a newly-created Clean Water
Management Trust Fund, $39.5 million was reserved in a Capital Improvement
Reserve and $26.2 million was transferred to newly-created Federal Retiree
Refund and Administration Accounts, leaving an unrestricted General Fund balance
at June 30, 1996 of approximately $406.1 million.
The foregoing results are presented on a budgetary basis. Accounting
principles applied to develop data on a budgetary basis differ significantly
from those principles used to present financial statements in conformity with
generally accepted accounting principles ("GAAP"). Based on a modified accrual
basis, the General Fund balance at June 30, 1996 was $1,422.1 million.
Under the State's constitutional and statutory scheme, the Governor is
required to prepare and propose a biennial budget to the General Assembly. The
General Assembly is responsible for considering the budget proposed by the
Governor and enacting the final budget. In enacting the final budget, the
General Assembly may modify the budget proposed by the Governor as it deems
necessary. The Governor is responsible for administering the budget enacted by
the General Assembly.
The 1995-97 biennium budget adopted by the General Assembly authorized
continuation funding from the General Fund of $9,512 million for fiscal 1996 and
$9,763 million for fiscal 1997. Expansion funds of $280 million for fiscal 1996
were approved, along with capital improvements of $114 million for such fiscal
year. For fiscal 1997, $267 million of expansion funds were approved, along with
$157 million of capital improvements. Tax reductions of approximately $363
million for fiscal 1996 and $400 million for fiscal 1997 were authorized,
principally through the repeal of the State's intangible personal property tax
and reductions in the State's unemployment and personal income taxes. The
General Assembly also took several measures that benefited the State's
Department of Corrections, including a reservation of $33 million to build new
prison beds. State workers generally received a 2% pay increase. The General
Assembly also passed a package of tort reform bills that included a cap on
punitive damage awards.
In the 1996 Special Session, the General Assembly reviewed and adjusted the
fiscal 1997 budget to take into account a General Fund surplus of over $700
million for the 1996 fiscal year. The General Assembly agreed to spend
approximately $415.4 million on new or expanded programs, apply approximately
$143 million to tax cuts and refunds and reserve approximately $100 million in
various savings and other reserve accounts. Funding for education and salaries
for teachers and other state employees was increased. The tax
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cuts included a reduction in the State's corporate income tax, sales tax on food
and inheritance tax, among other tax cuts. Legislators also significantly
expanded the State's industrial development policies, including the adoption of
four new tax credits designed to make the State more competitive in industrial
recruitment. Overall, changes were made, or new credits added, in the following
areas: investment tax credit, business tax credit, worker training tax credit,
jobs creation tax credit and research and development tax credit. The tax cuts
will reduce State revenues by approximately $68.4 million for fiscal 1997 and by
approximately $337 million when all cuts are phased in by 2001. The General
Assembly also created a Clean Water Management Trust Fund, which will be used to
finance projects to clean up or prevent surface water pollution. The Fund will
receive 6.5% of the General Fund's unspent credit balance each year. The initial
allocation to this Fund from the fiscal 1996 credit balance was $47.1 million.
The State budget is based upon a number of existing and assumed State and
non-State factors, including State and national economic conditions,
international activity, Federal government policies and legislation and the
activities of the State's General Assembly. Such factors are subject to change
which may be material and affect the budget. The Congress of the United States
is considering a number of matters affecting the Federal government's
relationship with state governments that, if enacted into law, could affect
fiscal and economic policies of the states, including the State.
During recent years, the State has moved from an agricultural to a service
and goods-producing economy. According to the North Carolina Employment Security
Commission (the "Employment Security Commission"), in December 1996, the State
ranked eleventh among the states in non-agricultural employment and eighth in
manufacturing employment. The Employment Security Commission estimated the
State's seasonally adjusted unemployment rate in April 1997 to be 3.6% of the
labor force, as compared with an unemployment rate of 4.9% nationwide.
The following are certain cases pending in which the State faces the risk
of either a loss of revenue or an unanticipated expenditure which, in the
opinion of the Department of State Treasurer, would not materially adversely
affect the State's ability to meet its financial obligations.
1. Swanson v. State of North Carolina and Patton v. State of North
Carolina--State Tax Refunds--Federal Retirees. In Davis v. Michigan (1989), the
U.S. Supreme Court ruled that a Michigan income tax statute which taxed federal
retirement benefits while exempting those paid by state and local governments
violated the constitutional doctrine of intergovernmental tax immunity. At the
time of the Davis decision, North Carolina law contained similar exemptions in
favor of state and local retirees. Those exemptions were repealed prospectively,
beginning with the 1989 tax year. All public pension and retirement benefits are
now entitled to a $4,000 annual exclusion.
Following Davis, Federal retirees filed a class action suit in federal
court in 1989 seeking damages equal to the North Carolina income tax paid on
federal retirement income by the class member (Swanson). A companion suit was
filed in state court in 1990. The complaints alleged that the amount in
controversy exceeded $140 million. The North Carolina Department of Revenue
estimate of refunds and interest liability is $280.89 million as of June 30,
1994. In 1991, the North Carolina Supreme Court ruled in favor of the State in
the state court action, concluding that Davis could only be applied
prospectively and that the taxes collected from the Federal retirees were thus
not improperly collected. In 1993, the U.S. Supreme Court vacated that decision
and remanded the case back to the North Carolina Supreme Court. The North
Carolina Supreme Court then ruled in favor of the State on the grounds that the
Federal retirees had failed to comply with state procedures for challenging
unconstitutional taxes. Plaintiffs petitioned the U.S. Supreme Court for review
of that decision, and the Supreme Court denied that petition. The U.S. District
Court ruled in favor of the defendants in the companion federal case, and a
petition for reconsideration was denied. Plaintiffs appealed to the United
States Court of Appeals, which concurred with the lower court's ruling. The U.S.
Supreme Court rejected an appeal, ruling that the lawsuit was a state matter,
leaving the North Carolina Supreme Court's ruling in force. Despite these
victories in court, the General Assembly in its 1996 Special Session adopted
legislation allowing for a refund of taxes for federal retirees. Effective for
tax years beginning on or after January 1, 1996, federal retirees are entitled
to a North Carolina income tax credit for taxes paid on their
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pension benefits during tax years 1985 through 1988. In the alternative, a
partial refund may be claimed in lieu of a credit for eligible taxpayers.
An additional lawsuit was filed in 1995 in State Court by federal
pensioners to recover State income taxes paid on Federal retirement benefits
(Patton). This case grew out of a claim by federal pensioners in the original
federal court case in Swanson. In the new lawsuit, the plaintiffs allege that
when the State granted an increase in retirement benefits to State retirees in
the same legislation that equalized tax treatment between state and federal
retirees, the increased benefits to State retirees constituted an indirect
violation of Davis. The lawsuit seeks a refund of taxes paid by federal retirees
on federal retirement benefits received in the years 1989 through 1993 and
refunds or monetary relief sufficient to equalize the alleged on-going
discriminatory treatment for those years. Potential refunds exceed $300 million.
This case has been suspended pending final judgment in Bailey (discussed below),
and no court date has been set. Should plaintiffs prevail in Bailey, such a
result, these Federal retirees allege, would re-establish the disparity of
treatment between state and federal pension income which was held
unconstitutional in Davis. The North Carolina Attorney General believes that
sound legal authority and arguments support the denial of this claim.
2. Bailey v. State of North Carolina--State Tax Refunds--State
Retirees. State and local governmental retirees filed a class action suit in
1990 as a result of the appeal of the income tax exemptions for state and local
government retirement benefits. The original suit was dismissed after the North
Carolina Supreme Court ruled in 1991 that the plaintiffs had failed to comply
with state law requirements for challenging unconstitutional taxes and the U.S.
Supreme Court denied review. In 1992, many of the same plaintiffs filed a new
lawsuit alleging essentially the same claims, including breach of contract,
unconstitutional impairment of contract rights by the State in taxing benefits
that were allegedly promised to be tax-exempt and violation of several state
constitutional provisions.
On May 31, 1995, the Superior Court issued an order ruling in favor of the
plaintiffs. Under the terms of the order, the Superior Court found that the act
of the General Assembly that repealed the tax exemption on State and local
government retirement benefits is null, void and unenforceable and that
retirement benefits which were vested before August 1989 are exempt from
taxation. An appeal from this order is pending in the North Carolina Supreme
Court.
The North Carolina Attorney General's Office estimates that the amount in
controversy is approximately $40-$45 million annually for the tax years 1989
through 1992. In addition, it is anticipated that the decision reached in this
case will govern the resolution of tax refund claims made by retired state and
local government employees for taxes paid on retirement benefit income for tax
years after 1991. Furthermore, if the order of the Superior Court is upheld, its
provisions would apply prospectively to prevent future taxation of State and
local government retirement benefits that were vested before August 1989. The
North Carolina Attorney General's Office believes that sound legal arguments
support the State's position on the merits.
3. Fulton Corp. v. Justus. The State's intangible personal property tax
levied on certain shares of stock was challenged by the plaintiff on grounds
that it violated the Commerce Clause in the U.S. Constitution by discriminating
against stock issued by corporations that do all or part of their business
outside of the State. The plaintiff in the action was a North Carolina
corporation that did all or part of its business outside of the State. The
plaintiff sought to invalidate the tax in its entirety and to recover tax paid
on the value of its shares in other corporations. The North Carolina Court of
Appeals invalidated the taxable percentage deduction and excised it from the
statute beginning with the 1994 tax year. The effect of this ruling was to
increase collections by rendering all stock taxable on 100% of its value. The
North Carolina Supreme Court reversed the Court of Appeals and held that the tax
was valid and constitutional. The U.S. Supreme Court reversed, ruled in the
plaintiff's favor that the tax was discriminatory and ordered the case back to
the State Court for a ruling on the appropriate remedy. On February 10, 1997,
the North Carolina Supreme Court determined that the unconstitutional portion of
the statute was severable and referred the matter to the North Carolina General
Assembly for legislative action. Legislative options available to the General
Assembly include paying refunds to taxpayers who paid the tax, but took
appropriate steps to claim a refund. The estimated cost of paying such refunds
is approximately $150 million. In April 1995, the North Carolina General
Assembly
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repealed, effective for taxable years beginning on or after January 1, 1995, the
State's intangible personal property tax.
In its 1996 Short Session, the North Carolina General Assembly approved
State general obligation bonds in the amount of $950 million for highways and
$1.8 billion for schools. These bonds were approved by the voters of the State
in November 1996. In March, 1997, the State issued $450 million of the
authorized school bonds (Public School Building Bonds). An additional offering
of $100 million of the authorized highway bonds is anticipated to occur in the
Fall, 1997. The offering of the remaining $2.2 billion of these authorized bonds
is anticipated to occur over the next 2-5 years.
Currently, Moody's, Standard & Poor's and Fitch rate North Carolina general
obligation bonds Aaa, AAA, and AAA, respectively.
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APPENDIX I
ECONOMIC AND FINANCIAL CONDITIONS IN OHIO
The following information is a brief summary of factors affecting the
economy of the State of Ohio 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 of the most recent publicly available offering
statements relating to debt offerings of Ohio issuers, however, it has not been
updated nor will it be updated during the year. The Fund has not independently
verified the information.
The State of Ohio (the "State") operates on a fiscal biennium for its
appropriations and expenditures. The State finances the majority of its
operations through the State's General Revenue Fund (the "GRF"). sThe GRF is
funded mainly by the State's personal income tax, sales and use tax, various
other taxes and grants from the Federal government. The State is precluded by
law from ending a fiscal year or a biennium in a deficit position. In 1981, the
State created the Budget Stabilization Fund (the "BSF") for purposes of cash
management.
The GRF ending fund and cash balances for the State's 1984-85 through
1994-95 bienniums were as follows:
<TABLE>
<CAPTION>
ENDING FUND ENDING CASH
BEGINNING ENDING BALANCE BALANCE
BIENNIUM JULY 1 JUNE 30 (IN THOUSANDS) (IN THOUSANDS)
---------------------------- --------- ------- -------------- --------------
<S> <C> <C> <C> <C>
1984-85..................... 1983 1985 $297,600 $ 849,900
1986-87..................... 1985 1987 226,300 632,700
1988-89..................... 1987 1989 475,100 784,268
1990-91..................... 1989 1991 135,365 326,576
1992-93..................... 1991 1993 111,013 393,634
1994-95..................... 1993 1995 928,000 1,312,200
1996-97 (estimate).......... 1995 1997 472,190 597,694
</TABLE>
State and national fiscal uncertainties during the 1992-93 biennium
required several actions to achieve GRF positive ending balances. To allow time
to complete the resolution of differences, an interim appropriations act was
enacted effective July 1, 1991; the general appropriations act for the entire
biennium was then passed on July 11 and signed by the Governor of the State on
July 26 and included a $200 million transfer from the BSF to the GRF. In Fiscal
Year 1992, when the State's Office of Budget and Management ("OBM") projected an
imbalance in GRF resources and expenditures, the Governor ordered most State
agencies to reduce GRF appropriations spending in the final six months of Fiscal
Year 1992 by a total of approximately $184 million. (Debt service and lease
rental obligations were not affected by the order.) Then, with General Assembly
authorization, in June 1992 the entire $100.4 million BSF balance and additional
amounts from certain other funds were transferred to the GRF. Other revenue and
spending actions resolved the remaining GRF imbalance for Fiscal Year 1992.
As a first step toward addressing a projected Fiscal Year 1993 GRF
shortfall, then estimated by OBM at approximately $520 million, the Governor
ordered, effective July 1, 1992, selected reductions in Fiscal Year 1993 GRF
appropriations spending totaling $300 million. Appropriations for debt service
(including lease rental appropriations) were expressly excluded from the
Governor's cutback orders. Subsequent executive and legislative
actions--including tax revisions that produced an additional $194.5 million and
additional appropriations spending reductions totalling approximately $50
million--provided for positive biennium-ending GRF balances. As a first step
toward BSF replenishment, $21 million was deposited in the BSF.
The GRF budget for the 1994-95 biennium provided for total GRF expenditures
of approximately $30.7 billion, with Fiscal Year 1994 expenditures 9.2% higher
than in Fiscal Year 1993, and Fiscal Year 1995 expenditures 6.6% higher than in
Fiscal Year 1994.
As noted above, the GRF ended the 1994-95 biennium with a fund balance of
$928 million and cash balance of $1,312.2 million. As an additional step toward
BSF replenishment, OBM transferred $260.3 million to the BSF at the end of
Fiscal Year 1994 and $535.2 million in July 1995.
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The General Appropriations Act for the 1996-97 biennium provided for total
GRF biennial expenditures of approximately $33.5 billion, an increase over those
for the 1994-95 fiscal biennium. Authorized expenditures in Fiscal Year 1996
were higher than in Fiscal Year 1995 and for Fiscal Year 1997 were higher than
in Fiscal Year 1996. Necessary GRF debt service appropriations for the entire
biennium were requested in the budget document and incorporated in the related
appropriations bill as introduced and in the versions as passed by the House and
the Senate and in the act as passed and signed. In addition to the transfer to
the BSF described above, the Act transferred $322.8 million from the GRF to a
variety of funds (including school assistance funds and, in anticipation of
possible Federal program changes, a human service stabilization fund), leaving
an unreserved and undesignated balance in the GRF of $70 million.
In accordance with General Assembly directions, $100 million was
transferred at the end of Fiscal Year 1996 from the GRF to the fund providing
for the elementary and secondary school computer network and $30 million to a
new fund for State transportation infrastructure. Approximately $400.8 million
is serving as a basis for a temporary 1996 personal income tax reduction
equalling that amount.
As of the end of May 1997, the GRF had a cash balance of over $778 million,
and the BSF had a fund balance of $828.3 million.
The General Appropriations Act for the 1998-99 biennium, passed by the
General Assembly and, with selected vetoes, approved by the Governor in June
1997, provides for total GRF biennial expenditures of approximately $36.1
billion, an increase of 7.8% over the previous appropriations act. The Act
increases spending for primary and secondary education, higher education, and
rehabilitation and corrections, and provides for a 4.5% personal income tax
reduction in 1998.
Litigation pending in federal district court and in the Ohio Court of
Claims contests the Ohio Department of Human Services' ("ODHS") former Medicaid
financial eligibility rules for married couples where one spouse is living in a
nursing facility and the other spouse resides in the community. ODHS promulgated
new eligibility rules effective January 1, 1996. It is appealing an order of the
Federal court directing it to provide notice to persons potentially affected by
the former rules from 1990 through 1995. It is not possible at this time to
state whether this appeal will be successful or, should plaintiffs prevail, the
period, beyond the current fiscal year, during which necessary additional
Medicaid expenditures would have to be made. Plaintiffs have estimated total
additional Medicaid expenditures at $600 million for the retroactive period and,
based on current law, it is estimated that the State's share of those additional
expenditures is approximately $240 million. The Court of Claims case may come to
trial later this year.
Because the schedule of GRF cash receipts and disbursements do not
precisely coincide, temporary GRF cash flow deficiencies may occur in some
months of a Fiscal Year. Statutory provisions provide for effective management
of these temporary GRF cash deficiencies by permitting the adjustment of payment
schedules and the use of a "Total Operating Fund" (the "TOF"). The State has not
and does not do external revenue anticipation borrowing.
The TOF includes the total consolidated cash balances, revenues,
disbursements and transfers of the GRF and several other specified funds
(including the BSF). The TOF cash balance at May 31, 1997 was $5.2155 billion.
Those cash balances are consolidated only for the purpose of meeting cash flow
requirements, and, except for the GRF, a positive cash balance must be
maintained for each discrete fund included in the TOF. The GRF is permitted to
incur a temporary cash deficiency by drawing upon the available consolidated
cash balance in the TOF. The amount of that permitted GRF cash deficiency at any
time is limited to 10% of GRF revenues for the then preceding Fiscal Year
(raised from 7% by December 1992 legislation in order to better avoid the need
for even short delays in payments).
The State has encountered (and planned for) some monthly GRF cash flow
deficiencies in all recent Fiscal Years. For example, GRF cash flow deficiencies
have ranged from occurring in 10 months of Fiscal Year 1992 (with $743,140,000
being the highest) to four months in Fiscal Year 1995 (the highest being
$337,964,000). OBM reports the GRF had cash flow deficiencies in seven months of
Fiscal Year 1996 and in four months of Fiscal Year 1997.
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All cash flow deficiencies have been within the TOF limitations discussed
above. Often, the GRF balancing steps described above ameliorated deficiencies
in later months of a Fiscal Year, significantly assisting in producing the
projected positive year-end GRF balances.
The State's Constitution directs or restricts the use of certain revenues.
Highway fees and excise taxes, including gasoline taxes, are limited in use to
highway-related purposes including the payment of interest on certain securities
issued for purposes related to the State's highways. Not less than 50% of the
receipts from State income and estate and inheritance taxes must be returned to
the political subdivisions and school districts where such receipts originated.
Since 1987 all net State lottery profits are allocated to elementary, secondary,
vocational and special education program purposes.
Under the current financial structure, Ohio's public school districts
receive a major portion (state-wide aggregate approximately 44% in recent years)
of their operating moneys from State subsidy programs (the primary portion of
which is known as the "Foundation Program") distributed in accordance with
statutory formulas that take into account both local needs and local taxing
capacity. The Foundation Program amounts have steadily increased in recent
years, including small aggregate increases even in those Fiscal Years in which
appropriations cutbacks were imposed. The State's appropriations for school
funding in the current 1996-97 biennium total $10.1 billion and represent a
13.6% increase over the preceding biennium. School districts also rely heavily
upon receipts from locally voted taxes. In part because of provisions of some
State laws, some school districts have experienced varying degrees of difficulty
in meeting mandated and discretionary increased costs.
Litigation, similar to that in other states, has been pending questioning
the constitutionality of Ohio's system of school funding. The Ohio Supreme Court
concluded in a decision released March 24, 1997 that major aspects of the system
(including the Foundation Program and certain borrowing programs) are
unconstitutional. The Court also ordered the State to provide for and fund
sufficiently a system complying with the Ohio Constitution, but staying its
order for one year to allow time for responsive corrective actions by the
General Assembly. In response to a State motion for reconsideration and
clarification, the Court on April 25, 1997 indicated that property taxes may
still play a role in, but "can no longer be the primary means" of, school
funding. The Court also confirmed that contractual repayment provisions of
certain debt obligations issued for school funding will remain valid after the
stay terminates.
The General Assembly is in the process of revising the State's school
funding programs to comply with the Court's decision; however, the impact of
such compliance on the State's budget and tax structure cannot be predicted at
this time.
Federal courts have ruled that the State shared joint liability with the
local school districts for segregation in public schools in Cincinnati,
Cleveland, Columbus, Dayton and Lorain. Subsequent trial court orders directed
that remedial costs be shared equally by the State and the respective local
districts. For that purpose $75,752,659 was expended in the 1992-93 biennium,
$119,382,294 was expended in the 1994-95 biennium, and $144,759,340 was
appropriated for the 1996-97 biennium.
The State's Constitution expressly provides that the State General Assembly
has no power to pass laws impairing the obligations of contracts.
At the present time, the State does not levy any ad valorem taxes on real
or tangible personal property. Local taxing districts and political subdivisions
currently levy such taxes. The State's Constitution limits the amount of the
aggregate levy of ad valorem property taxes, without a vote of the electors or
municipal charter provision, to 1% of true value in money. Statutes also limit
the amount of the aggregate levy, without a vote or charter provision.
Economic activity in the State, as in many other industrially developed
states, tends to be more cyclical than in some other states and in the nation as
a whole. Although manufacturing (including auto-related manufacturing) remains
an important part of the State's economy, the greatest growth in Ohio employment
in recent years, consistent with national trends, has been in the
nonmanufacturing area. Ohio ranked fourth in the nation in 1991 gross state
product derived from manufacturing. That income was 26.3% of total Ohio gross
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state product, compared to 17.1% of that total being from "services". In
addition, agriculture and "agribusiness" continue as important elements of the
Ohio economy. Ohio continues as a major "headquarters" state. Of the top 500
corporations (industrial and service) as reported in 1997 by Fortune magazine,
29 had headquarters in Ohio, placing Ohio sixth as "headquarters" state for
corporations. Payroll employment in Ohio, in the diversifying employment base,
showed a steady upward trend until 1979, then decreased until 1982. It reached
an all-time high in the summer of 1993 after a slight decrease early in 1992 and
then decreased slightly, and reached a new high in 1996. Growth in recent years
has been concentrated among nonmanufacturing industries, with manufacturing
employment tapering off since its 1969 peak. Nonmanufacturing industries now
employ approximately 79.0% of all payroll workers (non-agricultural) in Ohio.
Historically, the average monthly unemployment rate in Ohio has been higher than
the average figures for the U.S., although in recent years, the average
unemployment rate in Ohio has been lower than the national rate. Ohio has been
below the national rate through April 1997, as well.
Ohio's 1990 decennial census population of over 10,840,000 indicated a 0.5%
population growth since 1980 and Ohio as ranking seventh among the states in
population. In 1980 it ranked sixth. The State's 1995 population was estimated
at 11,157,000, still seventh in the U.S.
Currently, the State's general obligation bonds are rated Aa1, AA+ and AA+
by Moody's, Standard & Poor's and Fitch, respectively.
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APPENDIX J
ECONOMIC AND FINANCIAL CONDITIONS IN PENNSYLVANIA
The following information is a brief summary of factors affecting the
economy of the Commonwealth of Pennsylvania 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 of the most recent publicly
available offering statements relating to debt offerings of Pennsylvania
issuers; however, it has not been updated nor will it be updated during the
year. The Fund has not independently verified the information.
Many factors affect the financial condition of the Commonwealth of
Pennsylvania (also referred to herein 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, sometimes referred to herein as the "City") 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.
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 from fiscal 1992 through fiscal 1996, revenues and
other sources (determined on a "GAAP" basis) increased by an average annual rate
of 4.6%. Intergovernmental revenues increased by an average annual rate of 13.2%
due, in part, to an accounting change. Tax revenues during this period increased
an average of 2.5% as modest economic growth, low inflation rates and several
tax rate reductions and other tax reduction measures constrained growth of tax
revenues. The tax reduction measure followed a $2.7 billion tax increase adopted
for the 1992 fiscal year.
Expenditures and other uses during the fiscal 1992 through fiscal 1996
period rose at an average annual rate of 6.0%, led by increases of 14.2% for
protection of persons and property. A prison expansion program and other
correctional program expenses are responsible for the large percentage increase
in this area. Efforts to control costs for various social welfare programs and
the presence of favorable economic conditions have led to a modest 5.6% increase
for public health and welfare costs for the five year period.
The fund balance at June 30, 1996 totaled $635.2 million, a $547.7 million
increase from the balance of $87.5 million at June 30, 1992.
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) totaled $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 0.7%). 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.
For GAAP purposes, the fiscal 1996 fund balance was drawn down $53.1
million to $635.2 million. A planned drawdown of the budgetary unappropriated
surplus during the fiscal year contributed to expenditures and other uses
exceeding revenues and other sources by $28.0 million. As a result, the
unreserved fund balance declined by $61.1 million, reducing the balance to
$381.8 million at the end of fiscal 1996. Total revenues and other sources
increased by 8.7% for the fiscal year, led by a 24.2% increase in
intergovernmental revenues (due
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mainly to an accounting change in the way in which food stamp coupon revenue
received from the federal government is counted as income to the Commonwealth).
Expenditures and other uses increased by 8.6% for fiscal 1996.
The fiscal 1997 budget provides for expenditures from Commonwealth revenues
of $16,375.8 million, an increase of 0.6% 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 those 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 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. Actual Commonwealth revenues for the
fiscal year through January 1997 are $189.2 million above estimated levels and
it is anticipated that the budget surplus at year-end may be significantly
higher. The higher than estimated revenues are attributed to economic conditions
in the nation and the Commonwealth exceeding the projections used to project
revenues.
On May 6, 1997 and May 7, 1997, the Governor signed the fiscal 1998 budget
and related legislation. The total budget for fiscal 1998 is $17.157
billion--$613 million or 3.7% more than the fiscal 1997 amount. The fiscal 1998
budget assumes revenues (net of reserves for refunds) of $16.815 billion. It
includes spending programs to attract jobs and strengthen communities, increased
spending for education (including a $90.4 million increase in basic education
funding) as well as programs for health and human services, older
Pennsylvanians, transportation and public safety. Also included are various tax
reduction measures including expansion of the tax exemption for working
families, repeal of the sales tax on computer services, enactment of a research
and development tax credit, various provisions to conform state law taxation of
small businesses to federal provisions as well as several other provisions. The
estimated cost of these tax changes is $170.6 million.
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
those needs. Legislation was enacted that authorized $110 million in general
obligation debt to provide for the Commonwealth'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
Commonwealth's 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.
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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 0.36% rate for the
Middle Atlantic region and a 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 January 1997 stood at
a seasonably adjusted rate of 4.7%. The seasonably adjusted national
unemployment rate for January 1997 was 5.4%.
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
(the "PHFA"), an agency of the Commonwealth 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.
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 Commonwealth-created agencies have statutory authorization to incur
debt for which Commonwealth 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 their fiscal years ended
in 1996 the State Employees' Retirement System had no accrued unfunded liability
(or surplus) and the Public School Employees' Retirement System had a total
unfunded actuarial accrued liability of $1,459 million.
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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 the Pennsylvania Intergovernmental
Cooperation Authority (the "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, 1996 shows a
surplus of approximately $118.5 million, up from approximately $80.5 million as
of June 30, 1995.
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 expired on December 31, 1996. Its ability to refund existing
outstanding debt is unrestricted. PICA had $1,146.2 million in special revenue
bonds outstanding as of December 31, 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 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. It
recently granted an extension of time within which the special master must file
his report and announced the establishment of a committee comprised of members
of the Executive Department, the Legislative Department and the special master,
to develop an implementation plan. Following the issuance of the writ, the
President Pro Tempore of the Senate
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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 petitions
challenging the validity of the 1989 tax increase. The issues in these cases
include those which were adjudicated by Fidelity, although not brought to
resolution by the Pennsylvania Supreme Court.
Pennsylvania Association of Rural and Small Schools 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 U.S. District Court for the Middle District of Pennsylvania. The
federal court case has been indefinitely stayed pending resolution of the state
court case. The Commonwealth Court trial was held in January 1997. The record
remained open to permit respondents to cross-examine a surprise witness
presented by petitioner, and to permit respondents to present their own experts.
Austin v. Department of Corrections, et al.
In November 1990, the American Civil Liberties Union filed a class action
lawsuit in the U.S. 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, 1995, the Court approved a Settlement Agreement between the parties,
pursuant to which the Commonwealth paid $1.3 million in attorney's 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 attorney's
fees for the 3-year monitoring period will not exceed $60,000 in any one year.
Envirotest Systems 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. Pursuant to a Consent to Assignment entered into in November 1996,
Envirotest has assigned its right, title and interest in the base settlement.
J-5
<PAGE> 104
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 30 days detailing
the means by which the Commonwealth will effectuate the transfer of additional
funds payable to the 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. On
J-6
<PAGE> 105
January 28, 1997, the Supreme Court issued an Order directing the parties to
brief certain specific issues relative to the lower court proceedings.
Ridge v. State Employees' Retirement Board
On December 29, 1993, Joseph H. Ridge, a former judge of the Allegheny
Court of Common Pleas, filed in the Commonwealth Court a Petition for Review in
the Nature of Complaint in Mandamus and for a Declaratory Judgment against the
State Employees' Retirement Board alleging that the use of gender distinct
actuarial factors for benefits based upon his pre-August 1, 1983 service
violates the equal protection and equal rights clauses of the Pennsylvania
Constitution. The lawsuit requests that the petitioner's benefits be "topped up"
to equal those that a similarly situated female would be receiving. A decision
adverse to the Retirement Board could be applicable to other members of the
State Employees' Retirement System and Public School Employees' Retirement
System. The Commonwealth Court granted the Retirement Board's preliminary
objection to Judge Ridge's claims for punitive damages, attorney's fees and
compensatory damages (other than a recalculation of his pension benefits should
he prevail). On November 20, 1996, the Commonwealth Court heard oral arguments
en banc on Judge Ridge's motion for judgment of the pleadings. On February 17,
1997, the Commonwealth Court denied Judge Ridge's motion for judgment on the
pleadings.
Yesenia Marrerro, et al. v. Commonwealth, et al.
On February 24, 1997, five residents of the City of Philadelphia, on their
own behalf, and on behalf of their school-aged children, joined by the City of
Philadelphia, the School District of Philadelphia, and two non-profit
organizations, filed in the Commonwealth Court a civil action for declaratory
judgment against the Commonwealth of Pennsylvania, the General Assembly of
Pennsylvania, the presiding officers of the General Assembly, the Governor of
Pennsylvania, the State Board of Education, the Department of Education, and the
Secretary of Education, claiming that the statutory education financing system
is unconstitutional as applied to the School District of Philadelphia and that
the system of funding public education violates the constitutional mandate to
provide a thorough and efficient system of education in the City of
Philadelphia. The lawsuit also alleges that a scheme for financing public
education precludes the Commonwealth from providing the constitutionally
required "thorough and efficient system of public education" in the
circumstances faced by the School District of Philadelphia, and that the
defendants have failed to provide the School District of Philadelphia with
resources and other assistance necessary to provide all of its students with the
quality of education to which they are constitutionally entitled. Among other
things, the petitioners seek a declaration that the legislature must amend the
present or enact new education legislation so as to assure that education
funding for the School District of Philadelphia accounts and makes adequate
provision for the greater and special educational challenges and needs of
students in the School District in order to address their disadvantage.
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.
J-7
<PAGE> 106
APPENDIX K
INFORMATION CONCERNING MUNICIPAL SECURITIES
A. DESCRIPTION OF MUNICIPAL SECURITIES
Municipal Securities 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 of 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 facilities
operated for private profit. Such obligations are included within the term
Municipal Securities if the interest paid thereon is exempt from Federal income
tax.
The two principal classifications of Municipal Securities are "general
obligation" bonds and "revenue" or "special obligation" 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. 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 repayment of the principal of and the
payment of 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. The Fund's portfolio may 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 debt
service obligations from current revenues, it may draw on a reserve fund, the
restoration of which is a moral commitment but not a legal obligation of a state
or municipality.
Yields on Municipal Securities 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 the Fund to achieve its investment
objective is also dependent on the continuing ability of the issuers of the
Municipal Securities in which the Fund invests to meet their obligations for the
payment of interest and the repayment of principal when due. There are
variations in the risks involved in holding Municipal Securities, both within a
particular classification and between classifications, depending on numerous
factors. Furthermore, the rights of holders of Municipal Securities and the
obligations of the issuers of such Municipal Securities may be subject to
applicable bankruptcy, insolvency and similar laws and court decisions affecting
the rights of creditors generally, and such laws, if any, which may be enacted
by Congress or state legislatures affecting specifically the rights of holders
of Municipal Securities.
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 Securities. Similar proposals may be introduced in the
future. If such a proposal were enacted, the ability of the Fund to pay
"exempt-interest dividends" would be affected adversely and the Fund would
re-evaluate its investment objective and policies and consider changes in its
structure. See "Taxes".
B. RATINGS OF MUNICIPAL SECURITIES
MUNICIPAL NOTES AND SHORT-TERM TAX-EXEMPT COMMERCIAL PAPER
Commercial paper with the greatest capacity for timely payment is rated A
by Standard & Poor's. Issues within this category are further redefined with
designations 1, 2 and 3 to indicate the relative degree of safety; A-1, the
highest of the three, indicates the degree of safety regarding timely payment is
strong; issues that possess extremely strong safety characteristics will be
denoted with a plus (+) sign; A-2 indicates that capacity for timely repayment
is satisfactory; and A-3 indicates that the capacity for timely repayment is
adequate, but adverse economic conditions or changing circumstances are more
likely to lead to a weakened
K-1
<PAGE> 107
capacity of the obligor to meet its financial commitment on the obligation. A
Standard & Poor's rating with respect to certain municipal note issues with a
maturity of less than three years reflects the liquidity concerns and market
access risks unique to notes. SP-1, the highest note rating, indicates a very
strong, or strong, capacity to repay principal and pay interest. Issues that
possess overwhelming safety characteristics will be given an SP-1 designation.
SP-2, the second highest note rating, indicates a satisfactory capacity to repay
principal and pay interest.
Moody's employs the designations of Prime-1, Prime-2 and Prime-3 with
respect to commercial paper to indicate the relative capacity of the rated
issuers (or related supporting institutions) to repay punctually. Prime-1 issues
have a superior capacity for repayment. Prime-2 issues have a strong capacity
for repayment, but to a lesser degree than Prime-1. Prime-3 issuers have an
acceptable capacity for repayment. The two highest ratings of Moody's for
short-term notes and VRDOs are MIG1/VMIG1 and MIG2/VMIG2; MIG1/VMIG1 denotes
"best quality", enjoying "strong protection by established cash flows" and
MIG2/VMIG2 denotes "high quality" with margins of protection that are ample
although not so large as MIG1/VMIG1.
Fitch employs the rating F-1+ to indicate short-term debt issues regarded
as having the strongest degree of assurance for timely payment. The rating F-1
reflects an assurance of timely payment only slightly less in degree than issues
rated F-1+. The rating F-2 indicates a satisfactory degree of assurance for
timely payment, although the margin of safety is not as great as indicated by
the F-1+ and F-1 categories.
MUNICIPAL BONDS
Bonds 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. Bonds rated AA have a very strong capacity to pay interest and repay
principal and differ from the highest rated issues only in a small degree.
Standard & Poor's applies a "+" designation to indicate that Standard & Poor's
believes the issue possesses the strongest investment attributes in its rating
category. 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.
Bonds rated Aaa by Moody's are judged to be of the best quality. Interest
payments are protected by a large or by an exceptionally stable margin and
principal is secure. Bonds rated Aa are judged to be of high quality by all
standards. They are rated lower than the best bonds because the margins of
protection may not be as large 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. Moody's applies
the numerical modifier 1 to the classifications Aa through B to indicate that
Moody's believes the issue possesses the strongest investment attributes in its
rating category. 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 operating experience, (c) rentals which begin when
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.
Bonds rated AAA by Fitch are 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. Bonds rated AA are 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. Fitch
applies a "+" designation to indicate that Fitch believes the issue possesses
the strongest investment attributes in its rating category. The ratings take
into consideration special features of the issue, its relationship to other
obligations of the issuer, the current and prospective financial condition and
operative 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. 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.
K-2
<PAGE> 108
- --------------------------------------------------------------------------------
CMA ARIZONA MUNICIPAL MONEY FUND
INDEPENDENT AUDITORS' REPORT
- --------------------------------------------------------------------------------
THE BOARD OF TRUSTEES AND SHAREHOLDERS,
CMA ARIZONA MUNICIPAL MONEY FUND OF
CMA MULTI-STATE MUNICIPAL SERIES TRUST:
We have audited the accompanying statement of assets and liabilities, including
the schedule of investments, of CMA Arizona Municipal Money Fund of CMA
Multi-State Municipal Series Trust as of March 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 four-year period then ended and for the period February 8,
1993 (commencement of operations) to March 31, 1993. 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 March 31, 1997 by correspondence with the custodian. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, such financial statements and financial highlights present
fairly, in all material respects, the financial position of CMA Arizona
Municipal Money Fund of CMA Multi-State Municipal Series Trust as of March 31,
1997, the results of its operations, the changes in its net assets, and the
financial highlights for the respective stated periods in conformity with
generally accepted accounting principles.
Deloitte & Touche LLP
Princeton, New Jersey
May 2, 1997
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<PAGE> 109
CMA ARIZONA MUNICIPAL MONEY FUND
SCHEDULE OF INVESTMENTS AS OF MARCH 31, 1997 (IN THOUSANDS)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
FACE VALUE
STATE AMOUNT ISSUE (NOTE 1a)
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Arizona -- $ 5,400 Arizona Educational Loan Marketing Corp., Educational Loan Revenue Bonds,
91.1% VRDN, AMT, Series A, 3.55% due 3/01/2015 (a)(c) ................................. $ 5,400
2,400 Arizona Health Facilities Authority, Hospital Systems Revenue Bonds (Northern
Arizona Healthcare), VRDN, AMT, Series B, 3.45% due 10/01/2026 (a)(c) ........... 2,400
290 Arizona Health Facilities Authority Revenue Bonds (Arizona Voluntary Hospital
Federation), VRDN, Series B, 3.45% due 10/01/2015 (a)(d) ........................ 290
2,285 Arizona State Transportation Board, Excise Tax Revenue Refunding Bonds
(Maricopa County Regional Area), Series A, 4% due 7/01/1997 (b) ................. 2,287
1,100 Arizona State Transportation Board, Highway Revenue Bonds, 7.80% due
7/01/1997 ....................................................................... 1,110
3,900 Cochise County, Arizona, Pollution Control Corp., Solid Waste Disposal Revenue
Bonds (Arizona Electric Power Cooperative, Inc. Project), AMT, 3.50% due
9/02/1997 ....................................................................... 3,900
Coconino County, Arizona, Pollution Control Corp., Arizona Public Service
Revenue Bonds, VRDN, AMT, Series A (a):
6,710 3.80% due 10/01/2031 .......................................................... 6,710
11,000 (Navajo Project), 3.80% due 10/01/2029 ........................................ 11,000
1,400 Coconino County, Arizona, Unified School District No. 001 (Flagstaff), TAN,
Series A, 4.40% due 7/31/1997 ................................................... 1,402
Maricopa County, Arizona, IDA, M/F Housing Revenue Bonds, VRDN, AMT (a):
6,200 (Privado Park Apartments Project), Series A, 3.55% due 12/15/2033 ............. 6,200
5,200 (Vista Ventana Apartments Project), Series D, 3.55% due 12/15/2033 ............ 5,200
Maricopa County, Arizona, Pollution Control Corp., PCR, CP (Southern California
Edison - Palo Verde Project):
3,300 Series C, 3.50% due 4/01/1997 ................................................. 3,300
1,500 Series G, 3.25% due 4/03/1997 ................................................. 1,500
Maricopa County, Arizona, Pollution Control Corp., PCR, Refunding (Arizona
Public Service Co.), VRDN (a):
1,000 Series B, 3.65% due 5/01/2029 ................................................. 1,000
200 Series C, 3.85% due 5/01/2029 ................................................. 200
12,000 Maricopa County, Arizona, Pollution Control Corp., PCR, Refunding (El Paso
Electric), VRDN, Series A, 3.60% due 8/01/2015 (a) .............................. 12,000
Maricopa County, Arizona, School District:
1,000 No. 005 (Issac Elementary), TAN, Series A, 4.25% due 7/31/1997 ................ 1,001
4,300 No. 006 (Washington Elementary), UT, Series A, 7% due 7/01/1997 (b) ........... 4,332
Maricopa County, Arizona, Unified School District, TAN:
2,000 No. 11 (Peoria), UT, Series C, 4.35% due 7/30/1997 ............................ 2,005
4,300 No. 41 (Gilbert), Series A, 4.45% due 7/31/1997 ............................... 4,306
5,500 No. 97 (Deer Valley), Series A, 4.45% due 7/31/1997 ........................... 5,507
</TABLE>
- --------------------------------------------------------------------------------
Portfolio Abbreviations for CMA Arizona Municipal Money Fund
AMT Alternative Minimum Tax (subject to)
COP Certificates of Participation
CP Commercial Paper
IDA Industrial Development Authority
IDR Industrial Development Revenue Bonds
M/F Multi-Family
PCR Pollution Control Revenue Bonds
TAN Tax Anticipation Notes
UT Unlimited Tax
VRDN Variable Rate Demand Notes
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<PAGE> 110
CMA ARIZONA MUNICIPAL MONEY FUND
SCHEDULE OF INVESTMENTS AS OF MARCH 31, 1997(CONCLUDED) (IN THOUSANDS)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
FACE VALUE
STATE AMOUNT ISSUE (NOTE 1a)
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Arizona $ 2,000 Mesa, Arizona, Municipal Development Corp., Special Tax, CP, 3.50%
(concluded) due 6/10/1997 ................................................................ $ 2,000
Mohave County, Arizona, IDA, IDR (Citizens Utilities), CP, AMT:
5,400 3.50% due 4/17/1997 ........................................................ 5,400
1,000 3.60% due 5/09/1997 ........................................................ 1,000
4,500 3.40% due 5/15/1997 ........................................................ 4,500
5,000 Phoenix, Arizona, IDA, IDR (Laich Industries Corp. Project), VRDN, AMT,
3.65% due 9/01/2016 (a) ...................................................... 5,000
6,000 Phoenix, Arizona, IDA, M/F Housing Revenue Bonds (Mariners Pointe
Apartments Project), VRDN, AMT, Series A, 3.65% due 10/01/2023 (a) ........... 6,000
Phoenix, Arizona, IDA, M/F Housing Revenue Bonds, VRDN (a):
4,000 Refunding (Paradise Lakes Apartments Project), 3.60% due 7/01/2025 ......... 4,000
6,070 (Sunset Ranch), 3.50% due 12/01/2027 ....................................... 6,070
1,400 Phoenix, Arizona, UT, VRDN, Series 95-2, 3.70% due 6/01/2020 (a) ............. 1,400
1,650 Pima County, Arizona, IDA, Industrial Revenue Refunding Bonds (Tucson
Retirement Center), VRDN, 3.30% due 1/01/2009 (a) ............................ 1,650
Pima County, Arizona, IDA, M/F Housing Revenue Bonds, VRDN (a):
1,000 (Quail Ridge Apartments), AMT, Series B, 3.55% due 12/15/2033 .............. 1,000
5,000 Refunding (La Cholla Apartments Project), 3.45% due 12/01/2025 ............. 5,000
6,500 Pima County, Arizona, IDA, Revenue Refunding Bonds (Guaranteed Mortgage
Obligation), VRDN, AMT, Series A, 3.75% due 6/30/2021 (a) .................... 6,500
7,300 Pinal County, Arizona, IDA, Hospital Revenue Bonds (Casa Grande Regional
Medical Center), VRDN, 3.60% due 12/01/2022 (a) .............................. 7,300
1,800 Pinal County, Arizona, IDA, PCR (Magma Copper/Newmont Mining Corporation),
VRDN, 3.65% due 12/01/2009 (a) ............................................... 1,800
1,400 Salt River Project, Arizona, Agricultural Improvement and Power Distribution,
Electric System Revenue Bonds (Promissory Notes), CP, 3.10% due 4/01/1997 .... 1,400
Special Fund of Industrial Community, Arizona, Tax-Exempt COP, Refunding,
CP (d):
1,200 3.25% due 4/03/1997 ........................................................ 1,200
2,700 3.50% due 6/12/1997 ........................................................ 2,700
1,000 Tempe, Arizona, IDA, M/F Revenue Bonds (Elliots Crossing), VRDN, 3.45%
due 10/01/2008 (a) ........................................................... 1,000
1,000 Tempe, Arizona, Unified High School District No. 213, Refunding, 4.20%
due 7/01/1997 (d) ............................................................ 1,001
3,100 Yavapai County, Arizona, IDA, IDR (Citizen Utilities), CP, AMT, 3.50% due
4/17/1997 .................................................................... 3,100
500 Yuma, Arizona, IDA, IDR (Ardco Inc. Project), VRDN, 3.65% due 7/01/2003 (a)... 500
3,840 Yuma, Arizona, IDA, M/F Housing Revenue Bonds (El Encanto Apartments),
VRDN, Series A, 3.35% due 11/01/2008 (a) ..................................... 3,840
- ------------------------------------------------------------------------------------------------------------------------
Puerto Rico -- 12,500 Puerto Rico Commonwealth, Government Development Bank, CP, 3.15% due
8.4% 4/08/1997 .................................................................... 12,500
1,750 Puerto Rico Industrial, Medical and Environmental Pollution Control Facility
Revenue Bonds (Key Pharmaceuticals), Series A, 3.75% due 12/01/1997 .......... 1,752
- ------------------------------------------------------------------------------------------------------------------------
Total Investments (Cost -- $168,663*) -- 99.5% ............................... 168,663
Other Assets Less Liabilities -- 0.5% ........................................ 888
--------
Net Assets -- 100.0% ......................................................... $169,551
========
- ------------------------------------------------------------------------------------------------------------------------
</TABLE>
(a) The interest rate is subject to change periodically based on certain
indexes. The interest rate shown is the interest rate in effect at March
31, 1997.
(b) AMBAC Insured.
(c) MBIA Insured.
(d) FGIC Insured.
* Cost for Federal income tax purposes.
See Notes to Financial Statements.
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<PAGE> 111
CMA ARIZONA MUNICIPAL MONEY FUND
STATEMENT OF ASSETS AND LIABILITIES AS OF MARCH 31, 1997
- --------------------------------------------------------------------------------
<TABLE>
<S> <C> <C>
Assets:
Investments, at value (identified cost -- $168,662,570) (Note 1a) ... $168,662,570
Cash ................................................................ 15,673
Interest receivable ................................................. 1,033,177
Deferred organization expenses (Note 1d) ............................ 6,503
Prepaid registration fees and other assets (Note 1d) ................ 10,430
------------
Total assets ........................................................ 169,728,353
------------
Liabilities:
Payables:
Investment adviser (Note 2) ....................................... $73,342
Distributor (Note 2) .............................................. 47,640 120,982
-------
Accrued expenses and other liabilities .............................. 56,434
------------
Total liabilities ................................................... 177,416
------------
Net Assets .......................................................... $169,550,937
============
Net Assets Consist of:
Shares of beneficial interest, $0.10 par value, unlimited number of
shares authorized ................................................. $ 16,958,726
Paid-in capital in excess of par .................................... 152,628,464
Accumulated realized capital losses -- net (Note 4) ................. (36,253)
------------
Net Assets -- Equivalent to $1.00 per share based on 169,587,255
shares of beneficial interest outstanding ......................... $169,550,937
============
</TABLE>
See Notes to Financial Statements.
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<PAGE> 112
CMA ARIZONA MUNICIPAL MONEY FUND
STATEMENT OF OPERATIONS FOR THE YEAR ENDED MARCH 31, 1997
- --------------------------------------------------------------------------------
<TABLE>
<S> <C> <C>
Investment Income (Note 1c):
Interest and amortization of premium earned ............... $5,366,356
Expenses:
Investment advisory fees (Note 2) ......................... $752,072
Distribution fees (Note 2) ................................ 185,231
Accounting services (Note 2) .............................. 50,699
Registration fees (Note 1d) ............................... 48,804
Professional fees ......................................... 46,117
Transfer agent fees (Note 2) .............................. 22,921
Custodian fees ............................................ 15,895
Printing and shareholder reports .......................... 14,493
Amortization of organization expenses (Note 1d) ........... 7,583
Pricing fees .............................................. 3,044
Trustees' fees and expenses ............................... 1,352
Other ..................................................... 2,524
-------
Total expenses ............................................ 1,150,735
----------
Investment income -- net .................................. 4,215,621
Realized Loss on Investments -- Net (Note 1c) ............. (29,558)
----------
Net Increase in Net Assets Resulting from Operations ..... $4,186,063
==========
</TABLE>
See Notes to Financial Statements.
FS-5
<PAGE> 113
CMA ARIZONA MUNICIPAL MONEY FUND
STATEMENTS OF CHANGES IN NET ASSETS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
For the Year Ended
March 31,
----------------------------------
Increase (Decrease) in Net Assets: 1997 1996
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Operations:
Investment income -- net .................................................... $ 4,215,621 $ 4,017,445
Realized loss on investments -- net ......................................... (29,558) (6,694)
------------- -------------
Net increase in net assets resulting from operations ........................ 4,186,063 4,010,751
------------- -------------
Dividends & Distributions to Shareholders (Note 1e):
Investment income -- net .................................................... (4,215,621) (4,017,445)
Realized gain on investments -- net ......................................... -- (2,500)
------------- -------------
Net decrease in net assets resulting from dividends and distributions
to shareholders ............................................................. (4,215,621) (4,019,945)
------------- -------------
Beneficial Interest Transactions (Note 3):
Net proceeds from sale of shares ............................................ 811,252,304 527,733,700
Net asset value of shares issued to shareholders in reinvestment of dividends
and distributions (Note 1e) ................................................. 4,215,615 4,019,977
------------- -------------
815,467,919 531,753,677
Cost of shares redeemed ..................................................... (783,407,673) (497,941,093)
------------- -------------
Net increase in net assets derived from beneficial interest transactions .... 32,060,246 33,812,584
------------- -------------
Net Assets:
Total increase in net assets ................................................ 32,030,688 33,803,390
Beginning of year ........................................................... 137,520,249 103,716,859
------------- -------------
End of year ................................................................. $ 169,550,937 $ 137,520,249
============= =============
</TABLE>
See Notes to Financial Statements.
FS-6
<PAGE> 114
CMA ARIZONA MUNICIPAL MONEY FUND
FINANCIAL HIGHLIGHTS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
For the
The following per share data and ratios have been derived Period
from information provided in the financial statements. Feb. 8,
For the Year Ended March 31, 1993+ to
------------------------------------------------------- March 31,
Increase (Decrease) in Net Asset Value: 1997 1996 1995 1994 1993
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Per Share Operating Performance:
Net asset value, beginning of period ....... $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
-------- -------- -------- ------- -------
Investment income -- net ................... .03 .03 .03 .02 .002
-------- -------- -------- ------- -------
Total from investment operations ........... .03 .03 .03 .02 .002
-------- -------- -------- ------- -------
Less dividends from investment income --
net....................................... (.03) (.03) (.03) (.02) (.002)
-------- -------- -------- ------- -------
Net asset value, end of period ............. $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
======== ======== ======== ======= =======
Total Investment Return .................... 2.84% 3.36% 2.83% 1.90% 1.78%*
======== ======== ======== ======= =======
Ratios to Average Net Assets:
Expenses, net of reimbursement ............. .76% .58% .54% .59% .46%*
======== ======== ======== ======= =======
Expenses ................................... .76% .77% .85% .98% 1.15%*
======== ======== ======== ======= =======
Investment income -- net ................... 2.80% 3.27% 2.84% 1.89% 1.86%*
======== ======== ======== ======= =======
Supplemental Data:
Net assets, end of period (in thousands) ... $169,551 $137,520 $103,717 $73,414 $41,437
======== ======== ======== ======= =======
</TABLE>
* Annualized.
+ Commencement of Operations.
See Notes to Financial Statements.
FS-7
<PAGE> 115
CMA ARIZONA MUNICIPAL MONEY FUND
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
1. Significant Accounting Policies:
CMA Arizona Municipal Money Fund (the "Fund") is part of CMA Multi-State
Municipal Series Trust (the "Trust"). The Fund is registered under the
Investment Company Act of 1940 as a non-diversified, open-end management
investment company. The following is a summary of significant accounting
policies followed by the Fund.
(a) Valuation of investments -- Investments are valued at amortized cost, which
approximates market value. For the purpose of valuation, the maturity of a
variable rate demand instrument is deemed to be the next coupon date on which
the interest rate is to be adjusted. In the case of a floating rate instrument,
the remaining maturity is the demand notice payment period.
(b) 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.
(c) Security transactions and investment income -- Security transactions are
recorded on the dates the transactions are entered into (the trade dates).
Interest income (including amortization of premium and discount) is recognized
on the accrual basis. Realized gains and losses on security transactions are
determined on the identified cost basis.
(d) Deferred organization expenses and prepaid registration fees -- Deferred
organization expenses are charged to expense on a straight-line basis over a
five-year period. Prepaid registration fees are charged to expense as the
related shares are issued.
(e) Dividends and distributions to shareholders -- The Fund declares dividends
daily and reinvests daily such dividends (net of non-resident alien tax and
back-up withholding tax withheld) in additional fund shares at net asset value.
Dividends are declared from the total of net investment income, excluding
discounts earned other than original issue discounts. Net realized capital
gains, if any, are normally distributed annually after deducting prior years'
loss carryforward. The Fund may distribute capital gains more frequently than
annually in order to maintain the Fund's net asset value at $1.00 per share.
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.
FAM is responsible for the management of the Fund's portfolio and provides the
necessary personnel, facilities, equipment and certain other services necessary
to the operations of the Fund. For such services, the Fund pays a monthly fee
based upon the average daily value of the Fund's net assets, at the following
annual rates: 0.50% of the first $500 million of average daily net assets;
0.425% of average daily net assets in excess of $500 million but not exceeding
$1 billion; and 0.375% of average daily net assets in excess of $1 billion.
Pursuant to the Distribution and Shareholder Servicing Plan in compliance with
Rule 12b-1 under the Investment Company Act of 1940,
FS-8
<PAGE> 116
CMA ARIZONA MUNICIPAL MONEY FUND
NOTES TO FINANCIAL STATEMENTS(CONCLUDED)
- --------------------------------------------------------------------------------
Merrill Lynch, Pierce, Fenner & Smith Inc. ("MLPF&S") receives a distribution
fee from the Fund at the end of each month at the annual rate of 0.125% of
average daily net assets of the Fund. The distribution fee is to compensate
MLPF&S financial consultants and other directly involved branch office personnel
for selling shares of the Fund and for providing direct personal services to
shareholders. The distribution fee is not compensation for the administrative
and operational services rendered to the Fund by MLPF&S in processing share
orders and administering shareholder accounts.
Merrill Lynch Financial Data Services, Inc. ("MLFDS"), a wholly-owned subsidiary
of ML & Co., is the Fund's transfer agent.
Accounting services are provided to the Fund by FAM at cost.
Certain officers and/or trustees of the Fund are officers and/or directors of
FAM, PSI, MLFDS, and/or ML & Co.
3. Shares of Beneficial Interest:
The number of shares purchased and redeemed during the period corresponds to the
amounts included in the Statements of Changes in Net Assets for net proceeds
from sale of shares and cost of shares redeemed, respectively, since shares are
recorded at $1.00 per share.
4. Capital Loss Carryforward:
At March 31, 1997, the Fund had a net capital loss carryforward of approximately
$36,000, of which $6,000 expires in 2004 and $30,000 expires in 2005. This
amount will be available to offset like amounts of any future taxable gains.
FS-9
<PAGE> 117
- --------------------------------------------------------------------------------
CMA CALIFORNIA MUNICIPAL MONEY FUND
INDEPENDENT AUDITORS' REPORT
- --------------------------------------------------------------------------------
THE BOARD OF TRUSTEES AND SHAREHOLDERS,
CMA CALIFORNIA MUNICIPAL MONEY FUND OF
CMA MULTI-STATE MUNICIPAL SERIES TRUST:
We have audited the accompanying statement of assets and liabilities, including
the schedule of investments, of CMA California Municipal Money Fund of CMA
Multi-State Municipal Series Trust as of March 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 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 March
31, 1997 by correspondence with the custodian and broker. 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 CMA California
Municipal Money Fund of CMA Multi-State Municipal Series Trust as of March 31,
1997, the results of its operations, the changes in its net assets, and the
financial highlights for the respective stated periods in conformity with
generally accepted accounting principles.
Deloitte & Touche LLP
Princeton, New Jersey
May 2, 1997
FS-10
<PAGE> 118
<TABLE>
<CAPTION>
CMA CALIFORNIA MUNICIPAL MONEY FUND
SCHEDULE OF INVESTMENTS AS OF MARCH 31, 1997 (IN THOUSANDS)
- ----------------------------------------------------------------------------------------------------------------------------------
FACE VALUE
STATE AMOUNT ISSUE (NOTE 1a)
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
California -- $13,000 Abag Finance Authority for Nonprofit Corporations, California
89.6% (University of California Project), VRDN, 3.30% due 12/01/2001 (a) ............ $13,000
California Health Facilities Financing Authority Revenue Bonds, VRDN (a):
2,500 (Pooled Loan Program), Series A, 3.30% due 6/01/2007 ........................ 2,500
7,100 (Scripps Memorial Hospital), Series A, 3.30% due 12/01/2005 (b) ............. 7,100
8,530 (Scripps Memorial Hospital), Series B, 3.30% due 12/01/2015 (b) ............. 8,530
California Pollution Control Financing Authority, PCR, Refunding
(Pacific Gas and Electric):
19,000 CP, Series A, 3.40% due 5/06/1997 ........................................... 19,000
4,500 CP, Series D, 3.40% due 5/07/1997 ........................................... 4,500
30,000 VRDN, AMT, Series B, 3.35% due 12/01/2016 (a) ............................... 30,000
California Pollution Control Financing Authority, PCR (Southern California
Edison):
14,700 CP, Series D, 3.20% due 5/07/1997 ........................................... 14,700
1,000 CP, Series D, 3.40% due 5/07/1997 ........................................... 1,000
11,100 Series D, 3.45% due 2/28/2008 ............................................... 11,100
California Pollution Control Financing Authority, Resource Recovery
Revenue Bonds, VRDN, AMT (a):
21,200 (Atlantic Richfield Company Project), Series A, 3.60% due 12/01/2024 ........ 21,200
17,900 (Delano Project), 3.70% due 8/01/2019 ....................................... 17,900
22,800 (Delano Project), Series 1991, 3.70% due 8/01/2019 .......................... 22,800
10,300 (Honey Lake Power Project), 3.70% due 9/01/2018 ............................. 10,300
15,400 Refunding (Ultra Power Malaga Project), Series A, 3.70% due 4/01/2017 ....... 15,400
5,300 Refunding (Ultra Power Malaga Project), Series B, 3.70% due 4/01/2017 ....... 5,300
10,400 Refunding (Ultra Power Rocklin Project), Series A, 3.70% due 6/01/2017 ...... 10,400
7,700 Refunding (Ultra Power Rocklin Project), Series B, 3.70% due 6/01/2017 ...... 7,700
California Pollution Control Financing Authority, Solid Waste Disposal
Revenue Bonds (Shell Oil Co.-- Martinez Project), VRDN, AMT (a):
24,000 Series A, 3.55% due 10/01/2024 .............................................. 24,000
8,300 Series B, 3.55% due 12/01/2024 .............................................. 8,300
25,000 California Public Capital Improvements Financing Authority Revenue Bonds
(Pooled Loan Project), Series D, 3.55% due 6/15/1997 .......................... 25,000
6,200 California State, CP, GO, 3.20% due 5/07/1997 ................................. 6,200
5,000 California State Economic Development Financing Authority, IDR (Kuhnash
Properties/Arkay Project), VRDN, AMT, 3.75% due 4/01/2017 (a) ................. 5,000
15,000 California State Floating Rate Receipts, GO, VRDN, Series SG-86, 3.50% due
8/01/2015 (a)(c) .............................................................. 15,000
45,520 California State, RAN, Series A, 4.50% due 6/30/1997 .......................... 45,586
California Statewide Community Development Authority, M/F Revenue Bonds
VRDN, AMT (a)(f):
10,000 (Canyon Creek Apartments), Series C, 3.30% due 6/15/2025 .................... 10,000
4,200 (Kimberly Woods), Series B, AMT, 3.30% due 6/15/2025 ........................ 4,200
</TABLE>
- --------------------------------------------------------------------------------
Portfolio Abbreviations for CMA California Municipal Money Fund
ACES(SM) Adjustable Convertible Extendable Securities
AMT Alternative Minimum Tax (subject to)
COP Certificates of Participation
CP Commercial Paper
GO General Obligation Bonds
IDR Industrial Development Revenue Bonds
M/F Multi-Family
PCR Pollution Control Revenue Bonds
RAN Revenue Anticipation Notes
TRAN Tax Revenue Anticipation Notes
UT Unlimited Tax
VRDN Variable Rate Demand Notes
FS-11
<PAGE> 119
CMA CALIFORNIA MUNICIPAL MONEY FUND
SCHEDULE OF INVESTMENTS AS OF MARCH 31, 1997 (CONTINUED) (IN THOUSANDS)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
FACE VALUE
STATE AMOUNT ISSUE (NOTE 1a)
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
California $ 9,400 California Statewide Community Development Authority, Solid Waste
(continued) Facility Revenue Bonds (Chevron United States Inc. Project), VRDN, AMT,
3.55% due 12/15/2024 (a) ....................................................... $ 9,400
Chula Vista, California, IDR (San Diego Gas & Electric Co.), CP, AMT,
Series D:
20,000 3.45% due 5/01/1997 .......................................................... 20,000
20,000 3.30% due 5/07/1997 .......................................................... 20,000
10,000 3.45% due 5/09/1997 .......................................................... 10,000
10,000 3.45% due 5/12/1997 .......................................................... 10,000
2,200 Contra Costa County, California, Housing Authority, M/F Mortgage Revenue
Bonds (Lakeshore Apartments), VRDN, Series A, 3.20% due 11/15/2012 (a)(f) ...... 2,200
3,200 Contra Costa County, California, TRAN, 4.50% due 7/03/1997 ..................... 3,204
Eagle Tax-Exempt Trust, VRDN (a):
9,500 3.51% due 2/01/2006 .......................................................... 9,500
9,300 3.51% due 11/01/2020 ......................................................... 9,300
17,100 Series 1994 C-6, 3.51% due 8/01/2017 ......................................... 17,100
14,800 Series 1994 C-7, 3.51% due 8/01/2023 ......................................... 14,800
East Bay, California, Municipal Utility District Wastewater Treatment System
Revenue Bonds, CP:
18,600 3.15% due 4/11/1997 .......................................................... 18,600
13,000 3.50% due 5/09/1997 .......................................................... 13,000
20,000 Floating Rate Trust Certificates, VRDN, Series 1992 H, 3.80% due
10/02/1998 (a)(d) .............................................................. 20,000
7,050 Fontana, California, M/F Housing Revenue Bonds (Springtime Apartments
Project), VRDN, Series A, 3.35% due 12/01/2016 (a) ............................. 7,050
Golden Empire Schools Financing Authority, California, Revenue Refunding
Bonds, VRDN (a):
8,900 (Golden Empire Project), Series B, 3.35% due 12/01/2024 ...................... 8,900
11,300 (Kern High School District), Series A, 3.35% due 12/01/2024 .................. 11,300
10,000 Kern County, California, Superintendent of Schools COP, VRDN, Series A,
3.50% due 12/01/2021 (a) ....................................................... 10,000
18,985 Loma Linda, California, M/F Housing Revenue Bonds (Loma Linda Springs
Apartments), VRDN, 3.30% due 7/01/2019 (a) ..................................... 18,985
Long Beach, California, Harbor Revenue Bonds, CP, AMT, Series A:
17,000 3.45% due 5/01/1997 .......................................................... 17,000
19,550 3.45% due 5/07/1997 .......................................................... 19,550
16,500 3.45% due 5/08/1997 .......................................................... 16,500
3,000 Los Angeles, California, Department of Airports, Airport Revenue Bonds,
VRDN, AMT, Series SG-61, 3.50% due 5/15/2020 (a)(c) ............................ 3,000
10,000 Los Angeles, California, Department of Water and Power Revenue Bonds, CP,
3.35% due 5/09/1997 ............................................................ 10,000
5,000 Los Angeles, California, Harbor Department Revenue Bonds, VRDN, AMT, 3.50%
due 8/01/2026 (a)(b) ........................................................... 5,000
39,200 Los Angeles, California, M/F Housing Revenue Bonds (Casden Project),
VRDN, Series K, 3.10% due 7/01/2010 (a) ........................................ 39,200
Los Angeles, California, M/F Housing Revenue Refunding Bonds, VRDN (a):
12,660 (Canyon Creek Project), Series C, 3.35% due 12/01/2010 ....................... 12,660
8,340 (Mountainback Project), Series B, 3.35% due 12/01/2010 ....................... 8,340
14,500 Los Angeles, California, Metropolitan Transportation Authority Revenue
Bonds, CP, 3.40% due 5/06/1997 ................................................. 14,500
3,500 Los Angeles, California, TRAN, UT, 4.50% due 6/19/1997 ......................... 3,504
11,000 Los Angeles, California, Unified School District, TRAN, UT, Series A, 4.50%
due 6/30/1997 .................................................................. 11,018
25,000 Los Angeles County, California, Local Educational Agency, COP, TRAN,
Series A, 4.75% due 6/30/1997 (e) .............................................. 25,051
11,300 Los Angeles County, California, Metropolitan Transportation Authority Revenue
Bonds, Adjusted General Municipal Trust Receipts, VRDN, Series SGB-2, 3.40%
due 7/01/2021 (a) .............................................................. 11,300
</TABLE>
FS-12
<PAGE> 120
CMA CALIFORNIA MUNICIPAL MONEY FUND
SCHEDULE OF INVESTMENTS AS OF MARCH 31, 1997 (CONTINUED) (IN THOUSANDS)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
FACE VALUE
STATE AMOUNT ISSUE (NOTE 1a)
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
California Los Angeles County, California, Metropolitan Transportation Authority,
(continued) Sales Tax Revenue Bonds, VRDN (a):
$ 1,000 Refunding (Proposition C-Second Senior), Series A, 3.20% due 7/01/2020 (b) .... $ 1,000
12,530 Series SG-46, 3.45% due 7/01/2017 (d) ......................................... 12,530
23,820 Series SG-55, 3.45% due 7/01/2018 (d) ......................................... 23,820
39,330 Los Angeles County, California, TRAN, Series A, 4.50% due 6/30/1997 ............. 39,396
45,000 Marin County, California, TRAN, 4.75% due 7/01/1997 ............................. 45,107
Metropolitan Water District (Southern California), CP:
4,400 3.20% due 5/06/1997 ........................................................... 4,400
1,300 Series B, 3.15% due 4/10/1997 ................................................. 1,300
7,200 Series B, 3.15% due 4/11/1997 ................................................. 7,200
9,100 Series B, 3.35% due 5/08/1997 ................................................. 9,100
20,300 Series B, 3.40% due 5/08/1997 ................................................. 20,300
14,800 Northern California Power Agency, Public Power Revenue Refunding Bonds
(Geothermal Project No. 3), VRDN, Series A, 3.20% due 7/01/2005 (a)(d) .......... 14,800
Palm Springs, California, Community Redevelopment Agency, COP, VRDN (a):
2,200 Headquarters Hotel 2, 3.10% due 12/01/2014 .................................... 2,200
2,500 Headquarters Hotel 3, 3.10% due 12/01/2014 .................................... 2,500
1,500 Headquarters Hotel 4, 3.10% due 12/01/2014 .................................... 1,500
1,600 Headquarters Hotel 5, 3.10% due 12/01/2014 .................................... 1,600
1,600 Headquarters Hotel 7, 3.10% due 12/01/2014 .................................... 1,600
3,600 Headquarters Hotel 8, 3.10% due 12/01/2014 .................................... 3,600
2,700 Headquarters Hotel 9, 3.10% due 12/01/2014 .................................... 2,700
1,400 Headquarters Hotel 10, 3.10% due 12/01/2014 ................................... 1,400
11,470 Pittsburg, California, Mortgage Obligation Bonds, VRDN, Series A, 3.45%
due 12/30/2022 (a) .............................................................. 11,470
7,790 Redlands, California, COP, Refunding (Sewer Facilities Project),
VRDN, 3.30% due 9/01/2017 (a)(c) ................................................ 7,790
Redlands, California, M/F Housing Revenue Bonds, VRDN, Series A (a):
2,900 (Orange Village Apartments Project), AMT, 3.35% due 8/01/2018 ................. 2,900
12,500 Refunding (Parkview Terrace Project), 3.25% due 2/01/2016 ..................... 12,500
Regents of the University of California, Series B, CP:
11,500 3.05% due 4/10/1997 ........................................................... 11,500
8,000 3.45% due 4/11/1997 ........................................................... 8,000
10,000 3.40% due 5/07/1997 ........................................................... 10,000
23,000 3.35% due 5/09/1997 ........................................................... 23,000
20,000 3.50% due 7/18/1997 ........................................................... 20,000
33,240 Riverside County, California, COP (Riverside County Public Facilities),
ACES, Series A, 3.50% due 12/01/2015 (a) ........................................ 33,240
Riverside County, California, Housing Authority, M/F Mortgage Revenue
Bonds, VRDN (a):
3,650 (Emeritus Park), Series B, 3.20% due 8/01/2018 ................................ 3,650
5,900 (Woodcreek Village), Series D, 3.20% due 8/01/2018 ............................ 5,900
13,800 Roseville, California, Finance Authority, Hospital Lease Revenue Bonds
(Roseville Hospital), VRDN, Series A, 3.25% due 10/01/2014 (a) .................. 13,800
Sacramento, California, Municipal Utility District, Electric Revenue Bonds:
5,000 CP, 3.40% due 4/02/1997 ....................................................... 5,000
5,760 VRDN, Series SGB-4, 3.40% due 8/15/2021 (a) ................................... 5,760
3,700 San Bernardino, California, M/F Housing Revenue Refunding Bonds
(Village Crossing), Series A, VRDN, 3.30% due 2/01/2027 (a) ..................... 3,700
6,000 San Bernardino County, California, Residential Mortgage Revenue Refunding
Bonds (Ramona Garden), VRDN, Series A, 3.30% due 2/01/2017 (a) .................. 6,000
15,000 San Bernardino County, California, TRAN, 4.50% due 6/30/1997 .................... 15,022
4,050 San Diego, California, IDR, Refunding (San Diego Gas & Electric), CP,
Series A, 3.40% due 5/09/1997 ................................................... 4,050
</TABLE>
FS-13
<PAGE> 121
CMA CALIFORNIA MUNICIPAL MONEY FUND
SCHEDULE OF INVESTMENTS AS OF MARCH 31, 1997 (CONCLUDED) (IN THOUSANDS)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
FACE VALUE
STATE AMOUNT ISSUE (NOTE 1a)
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
California San Diego, California, M/F Housing Authority Revenue Bonds, VRDN (a):
(concluded) $ 2,330 (Country Hills), Series A, 3.20% due 8/15/2013 .............................. $ 2,330
7,740 (La Cima Apartments), Series K, 3.25% due 12/01/2008 ........................ 7,740
17,250 (Nobel Court Apartments), 3.25% due 12/01/2008 .............................. 17,250
4,000 San Diego, California, Sewer Revenue Bonds, VRDN, Series SG-14, 3.45%
due 5/15/2020 (a)(b) .......................................................... 4,000
4,000 San Diego, California, Unified School District, TRAN, 4.75% due 10/01/1997 .... 4,020
17,500 San Diego County, California, TRAN, 4.375% due 9/30/1997 ...................... 17,559
3,645 San Francisco, California, City and County Airports Commission (San Francisco
International Airport), VRDN, Series SG-88, 3.45% due 5/01/2021 (a)(c) ........ 3,645
San Jose, California, M/F Housing Revenue Bonds, VRDN, Series A (a):
13,000 (Siena at Renaissance), AMT, 3.35% due 12/01/2029 ........................... 13,000
6,360 (Timberwood), 3.25% due 2/01/2020 ........................................... 6,360
2,000 San Jose--Santa Clara, California, Water Financing Authority, Sewer Revenue
Bonds, VRDN, Series SG-49, 3.45% due 11/15/2020 (a)(c) ........................ 2,000
10,000 San Leandro, California, M/F Revenue Bonds (Parkside Commons), VRDN,
Series A, 3.20% due 7/15/2018 (a)(f) .......................................... 10,000
9,400 Santa Clara County, California, M/F Housing Authority, Revenue
Refunding Bonds (Benton Park Central Apartments), VRDN, Series A,
3.25% due 12/15/2025 (a) ...................................................... 9,400
27,000 Santa Clara County, California, TRAN, 4.50% due 8/01/1997 ..................... 27,076
5,325 Santa Rosa, California, M/F Housing Revenue Bonds (Oak Creek Apartments
Project), VRDN, AMT, Series A, 3.35% due 6/01/2018 (a) ........................ 5,325
3,675 Simi Valley, California, Community Redevelopment Agency, M/F Housing Revenue
Bonds (Ashlee Manor Project), VRDN, AMT, Series A, 3.35% due 10/01/2017 (a) ... 3,675
Southern California Public Power Authority, Revenue Refunding Bonds,
VRDN (a)(d):
7,700 Power Project (Palo Verde Project), Series B, 3.20% due 7/01/2009 ........... 7,700
20,500 Power Project (Palo Verde Project), Series C, 3.20% due 7/01/2017 ........... 20,500
13,500 Transmission Project (Southern Transmission Project), 3.20% due 7/01/2019 ... 13,500
State of California, CP:
7,000 3.45% due 4/01/1997 ......................................................... 7,000
6,000 3.40% due 4/30/1997 ......................................................... 6,000
5,000 3.45% due 5/09/1997 ......................................................... 5,000
14,000 Ventura County, California, TRAN, UT, 4.75% due 7/02/1997 ..................... 14,035
- -----------------------------------------------------------------------------------------------------------------------------------
Puerto Rico-- Puerto Rico Commonwealth, Government Development Bank
9.7% Revenue Bonds, CP:
1,000 3.60% due 4/01/1997 ......................................................... 1,000
6,530 3.50% due 4/11/1997 ......................................................... 6,530
4,000 3.40% due 4/24/1997 ......................................................... 4,000
20,000 3.40% due 5/01/1997 ......................................................... 20,000
14,200 3.40% due 5/07/1997 ......................................................... 14,200
11,400 3.45% due 5/08/1997 ......................................................... 11,400
9,750 3.55% due 5/09/1997 ......................................................... 9,750
36,200 3.45% due 5/12/1997 ......................................................... 36,200
49,400 Puerto Rico Commonwealth, TRAN, Series 1997-A, 4% due 7/30/1997 ............... 49,484
- -----------------------------------------------------------------------------------------------------------------------------------
Total Investments (Cost--$1,554,692)--99.3% ................................... 1,554,692
Other Assets Less Liabilities--0.7% ........................................... 11,110
----------
Net Assets--100.0% ............................................................ $1,565,802
==========
- -----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(a) The interest rate is subject to change periodically based on certain
indexes. The interest rate shown is the interest rate in effect at March
31, 1997.
(b) MBIA Insured.
(c) FGIC Insured.
(d) AMBAC Insured.
(e) FSA Insured.
(f) FNMA Collateralized.
See Notes to Financial Statements.
FS-14
<PAGE> 122
CMA CALIFORNIA MUNICIPAL MONEY FUND
STATEMENT OF ASSETS AND LIABILITIES AS OF MARCH 31, 1997
- --------------------------------------------------------------------------------
<TABLE>
<S> <C> <C>
Assets:
Investments, at value (identified cost--$1,554,691,971*) (Note 1a) ............ $1,554,691,971
Cash .......................................................................... 89,127
Interest receivable ........................................................... 13,287,828
Prepaid registration fees and other assets (Note 1d) .......................... 31,195
--------------
Total assets .................................................................. 1,568,100,121
--------------
Liabilities:
Payables:
Securities purchased ......................................................... $1,007,770
Investment adviser (Note 2) .................................................. 578,966
Distributor (Note 2) ......................................................... 462,707
Beneficial interest redeemed ................................................. 44 2,049,487
----------
Accrued expenses and other liabilities ........................................ 248,365
--------------
Total liabilities ............................................................. 2,297,852
--------------
Net Assets .................................................................... $1,565,802,269
==============
Net Assets Consist of:
Shares of beneficial interest, $0.10 par value, unlimited number
of shares authorized .......................................................... $ 156,671,908
Paid-in capital in excess of par .............................................. 1,410,045,515
Accumulated realized capital losses--net (Note 4) ............................. (915,154)
--------------
Net Assets--Equivalent to $1.00 per share based on 1,566,719,083 shares of
beneficial interest outstanding ............................................... $1,565,802,269
==============
</TABLE>
*Cost for Federal income tax purposes was $1,554,697,830. As of
March 31, 1997, net unrealized depreciation for Federal income tax
purposes amounted to $5,859, all of which related to depreciated
securities.
See Notes to Financial Statements.
CMA CALIFORNIA MUNICIPAL MONEY FUND
STATEMENT OF OPERATIONS FOR THE YEAR ENDED MARCH 31, 1997
- --------------------------------------------------------------------------------
<TABLE>
<S> <C> <C>
Investment Income (Note 1c):
Interest and amortization of premium and discount earned ...................... $51,053,792
Expenses:
Investment advisory fees (Note 2) ............................................. $6,413,612
Distribution fees (Note 2) .................................................... 1,819,326
Transfer agent fees (Note 2) .................................................. 196,356
Registration fees (Note 1d) ................................................... 138,185
Accounting services (Note 2) .................................................. 127,776
Custodian fees ................................................................ 80,801
Professional fees ............................................................. 57,223
Printing and shareholder reports .............................................. 56,401
Trustees' fees and expenses ................................................... 13,262
Pricing fees .................................................................. 11,874
Other ......................................................................... 18,388
----------
Total expenses ................................................................ 8,933,204
-----------
Investment income--net ........................................................ 42,120,588
Realized Gain on Investments--Net (Note 1c) ................................... 26,624
-----------
Net Increase in Net Assets Resulting from Operations .......................... $42,147,212
===========
</TABLE>
See Notes to Financial Statements.
FS-15
<PAGE> 123
<TABLE>
<CAPTION>
CMA CALIFORNIA MUNICIPAL MONEY FUND
STATEMENTS OF CHANGES IN NET ASSETS
- --------------------------------------------------------------------------------
For the Year
Ended March 31,
--------------------------------------
1997 1996
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Increase (Decrease) In Net Assets:
Operations:
Investment income--net ............................................ $ 42,120,588 $ 38,986,274
Realized gain on investments--net ................................. 26,624 14,898
--------------- ---------------
Net increase in net assets resulting from operations .............. 42,147,212 39,001,172
--------------- ---------------
Dividends to Shareholders (Note 1e):
Investment income--net ............................................ (42,120,540) (38,963,124)
--------------- ---------------
Net decrease in net assets resulting from dividends to
shareholders....................................................... (42,120,540) (38,963,124)
--------------- ---------------
Beneficial Interest Transactions (Note 3):
Net proceeds from sale of shares .................................. 6,159,698,384 4,504,776,418
Net asset value of shares issued to shareholders in reinvestment
of dividends (Note 1e) ............................................ 42,121,016 38,962,811
--------------- ---------------
6,201,819,400 4,543,739,229
Cost of shares redeemed ........................................... (6,057,183,986) (4,290,871,513)
--------------- ---------------
Net increase in net assets derived from beneficial
interest transactions ............................................. 144,635,414 252,867,716
--------------- ---------------
Net Assets:
Total increase in net assets ...................................... 144,662,086 252,905,764
Beginning of year ................................................. 1,421,140,183 1,168,234,419
--------------- ---------------
End of year ....................................................... $ 1,565,802,269 $ 1,421,140,183
=============== ===============
</TABLE>
See Notes to Financial Statements.
<TABLE>
<CAPTION>
CMA CALIFORNIA MUNICIPAL MONEY FUND
FINANCIAL HIGHLIGHTS
- --------------------------------------------------------------------------------
The following per share data and ratios have been derived
from information provided in the financial statements.
For the Year Ended March 31,
-------------------------------------------------------------------------
Increase (Decrease) In Net Asset Value: 1997 1996 1995 1994 1993
- --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Per Share Operating Performance:
Net asset value, beginning of year ....... $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
---------- ---------- ---------- ---------- ----------
Investment income--net ................... .03 .03 .03 .02 .02
---------- ---------- ---------- ---------- ----------
Total from investment operations ......... .03 .03 .03 .02 .02
---------- ---------- ---------- ---------- ----------
Less dividends from investment
income--net............................... (.03) (.03) (.03) (.02) (.02)
---------- ---------- ---------- ---------- ----------
Net asset value, end of year ............. $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
========== ========== ========== ========== ==========
Total Investment Return .................. 2.88% 3.16% 2.66% 1.93% 2.25%
========== ========== ========== ========== ==========
Ratios to Average Net Assets:
Expenses ................................. .60% .64% .63% .62% .63%
========== ========== ========== ========== ==========
Investment income--net ................... 2.85% 3.11% 2.62% 1.91% 2.22%
========== ========== ========== ========== ==========
Supplemental Data:
Net assets, end of year (in thousands) ... $1,565,802 $1,421,140 $1,168,234 $1,225,160 $1,014,800
========== ========== ========== ========== ==========
</TABLE>
See Notes to Financial Statements.
FS-16
<PAGE> 124
CMA CALIFORNIA MUNICIPAL MONEY FUND
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
1. Significant Accounting Policies:
CMA California Municipal Money Fund (the "Fund") is part of CMA Multi-State
Municipal Series Trust (the "Trust"). The Fund is registered under the
Investment Company Act of 1940 as a non-diversified, open-end management
investment company. The following is a summary of significant accounting
policies followed by the Fund.
(a) Valuation of investments--Investments are valued at amortized cost, which
approximates market value. For the purpose of valuation, the maturity of a
variable rate demand instrument is deemed to be the next coupon date on which
the interest rate is to be adjusted. In the case of a floating rate instrument,
the remaining maturity is the demand notice payment period.
(b) 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.
(c) Security transactions and investment income--Security transactions are
recorded on the dates the transactions are entered into (the trade dates).
Interest income (including amortization of premium and discount) is recognized
on the accrual basis. Realized gains and losses on security transactions are
determined on the identified cost basis.
(d) Prepaid registration fees--Prepaid registration fees are charged to expense
as the related shares are issued.
(e) Dividends and distributions to shareholders--The Fund declares dividends
daily and reinvests daily such dividends (net of non-resident alien tax and
back-up withholding tax withheld) in additional fund shares at net asset value.
Dividends are declared from the total of net investment income, excluding
discounts earned other than original issue discounts. Net realized capital
gains, if any, are normally distributed annually after deducting prior years'
loss carryforward. The Fund may distribute capital gains more frequently than
annually in order to maintain the Fund's net asset value at $1.00 per share.
(f) Reclassification--Generally accepted accounting principles require that
certain components of net assets be adjusted to reflect permanent differences
between financial and tax reporting. Accordingly, current year's permanent
book/tax differences of $48 have been reclassified between accumulated net
realized capital losses and undistributed net investment income. These
reclassifications have no effect on net assets or net asset value per share.
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.
FAM is responsible for the management of the Fund's portfolio and provides the
necessary personnel, facilities, equipment and certain other services necessary
to the operations of the Fund. For such services, the Fund pays a monthly fee
based upon the average daily value of the Fund's net assets, at the following
annual rates: 0.50% of the first $500 million of average daily net assets;
0.425% of average daily net assets in excess of $500 million but not exceeding
$1 billion, and 0.375% of average daily net assets in excess of $1 billion.
Pursuant to the Distribution and Shareholder Servicing Plan in compliance with
Rule 12b-1 under the Investment Company Act of 1940, Merrill Lynch, Pierce,
Fenner & Smith Inc. ("MLPF&S") receives a distribution fee from the Fund at the
end of each month at the annual rate of 0.125% of average daily net assets of
the Fund. The distribution fee is to compensate MLPF&S financial consultants and
other directly involved branch office personnel for selling shares of the Fund
and for providing
FS-17
<PAGE> 125
CMA CALIFORNIA MUNICIPAL MONEY FUND
NOTES TO FINANCIAL STATEMENTS (CONCLUDED)
- --------------------------------------------------------------------------------
direct personal services to shareholders. The distribution fee is not
compensation for the administrative and operational services rendered to the
Fund by MLPF&S in processing share orders and administering shareholder
accounts.
Merrill Lynch Financial Data Services, Inc. ("MLFDS"), a wholly-owned
subsidiary of ML & Co., is the Fund's transfer agent.
Accounting services are provided to the Fund by FAM at cost.
Certain officers and/or trustees of the Fund are officers and/or directors of
FAM, PSI, MLFDS, and/or ML & Co.
3. Shares of Beneficial Interest:
The number of shares purchased and redeemed during the period corresponds to the
amounts included in the Statements of Changes in Net Assets for net proceeds
from sale of shares and cost of shares redeemed, respectively, since shares are
recorded at $1.00 per share.
4. Capital Loss Carryforward:
At March 31, 1997, the Fund had a net capital loss carryforward of approximately
$909,000, of which $433,000 expires in 2002 and $476,000 expires in 2003. This
amount will be available to offset a like amount of any future taxable gains.
FS-18
<PAGE> 126
- --------------------------------------------------------------------------------
CMA CONNECTICUT MUNICIPAL MONEY FUND
INDEPENDENT AUDITORS' REPORT
- --------------------------------------------------------------------------------
THE BOARD OF TRUSTEES AND SHAREHOLDERS,
CMA CONNECTICUT MUNICIPAL MONEY FUND OF
CMA MULTI-STATE MUNICIPAL SERIES TRUST:
We have audited the accompanying statement of assets and liabilities, including
the schedule of investments, of CMA Connecticut Municipal Money Fund of CMA
Multi-State Municipal Series Trust as of March 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 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 March
31, 1997 by correspondence with the custodian. An audit also includes assessing
the accounting principles used and significant estimates made by management, as
well as evaluating the overall financial statement presentation. We believe that
our audits provide a reasonable basis for our opinion.
In our opinion, such financial statements and financial highlights present
fairly, in all material respects, the financial position of CMA Connecticut
Municipal Money Fund of CMA Multi-State Municipal Series Trust as of March 31,
1997, the results of its operations, the changes in its net assets, and the
financial highlights for the respective stated periods in conformity with
generally accepted accounting principles.
Deloitte & Touche LLP
Princeton, New Jersey
May 1, 1997
FS-19
<PAGE> 127
CMA CONNECTICUT MUNICIPAL MONEY FUND
SCHEDULE OF INVESTMENTS AS OF MARCH 31, 1997 (IN THOUSANDS)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
FACE VALUE
STATE AMOUNT ISSUE (NOTE 1a)
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Connecticut -- $ 6,675 Berlin, Connecticut, BAN, UT, 3.75% due 6/16/1997 ................................... $ 6,676
78.5% 2,000 Brookfield, Connecticut, BAN, 3.73% due 6/12/1997 ................................... 2,000
16,400 Connecticut State Development Authority, Health Care Revenue Bonds
(Corporate Independent Living Project), VRDN, 3.20% due 7/01/2015 (a) ............... 16,400
5,420 Connecticut State Development Authority, IDA (Sealectro Corporation
Project), 3.90% due 12/01/1997 ...................................................... 5,420
Connecticut State Development Authority, PCR, Refunding, VRDN (a):
16,400 (Connecticut Light & Power Co. Project), Series A, 3.50% due 9/01/2028 ............ 16,400
1,000 (United Illuminating Co. Project), 3.50% due 6/01/2026 ............................ 1,000
16,400 (Western Massachusetts Electric Co.), Series A, 3.15% due 9/01/2028 ............... 16,400
1,000 Connecticut State Development Authority Revenue Bonds (Solid Waste Project),
VRDN, AMT, 3.25% due 8/01/2023 (a) .................................................. 1,000
6,750 Connecticut State, GO, Series D, 3.75% due 12/01/1997 ............................... 6,760
5,000 Connecticut State, HFA (Housing Mortgage), AMT, Series A, Sub-Series A-4,
3.65% due 4/10/1997 ................................................................. 5,000
Connecticut State, HFA (Housing Mortgage Finance Program), AMT, CP, Series D:
8,950 3.55% due 4/01/1997 ............................................................... 8,950
4,505 3.40% due 4/09/1997 ............................................................... 4,505
4,500 3.45% due 5/09/1997 ............................................................... 4,500
Connecticut State Health and Educational Facilities Authority Revenue Bonds:
3,200 (Yale -- New Haven Hospital), Series E, 3.60% due 6/01/1997 (b) ................... 3,200
5,075 (Yale University), CP, Series L, 3.35% due 4/01/1997 .............................. 5,075
4,300 (Yale University), CP, Series M, 3.05% due 4/03/1997 .............................. 4,300
4,000 (Yale University), CP, Series N, 3.05% due 4/03/1997 .............................. 4,000
2,550 (Yale University), CP, Series O, 3.05% due 4/03/1997 .............................. 2,550
1,000 (Yale University), CP, Series P, 3.35% due 4/01/1997 .............................. 1,000
Connecticut State Municipal Electric Energy Cooperative, Power Supply
System Revenue Bonds, CP, Series A:
1,500 3.35% due 4/04/1997 ............................................................... 1,500
1,500 3.35% due 4/08/1997 ............................................................... 1,500
1,500 3.30% due 4/14/1997 ............................................................... 1,500
1,500 3.10% due 5/01/1997 ............................................................... 1,500
1,000 Connecticut State Refunding (Economic Recovery Notes), UT, 5% due
12/15/97 ............................................................................ 1,010
Connecticut State Special Assessment Unemployment Compensation, Advanced
Fund Revenue Bonds (c):
6,500 Series A, 4.10% due 5/15/1997 ..................................................... 6,503
5,000 Series A, 4.10% due 11/15/1997 .................................................... 5,014
</TABLE>
- --------------------------------------------------------------------------------
Portfolio Abbreviations for CMA Connecticut Municipal Money Fund
AMT Alternative Minimum Tax (subject to)
BAN Bond Anticipation Notes
CP Commercial Paper
GO General Obligation Bonds
HFA Housing Finance Agency
IDA Industrial Development Authority
PCR Pollution Control Revenue Bonds
TRAN Tax Revenue Anticipation Notes
UT Unlimited Tax
VRDN Variable Rate Demand Notes
FS-20
<PAGE> 128
CMA CONNECTICUT MUNICIPAL MONEY FUND
SCHEDULE OF INVESTMENTS AS OF MARCH 31, 1997 (CONCLUDED) (IN THOUSANDS)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
FACE VALUE
STATE AMOUNT ISSUE (NOTE 1a)
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Connecticut $19,900 Connecticut State Special Assessment Unemployment Compensation, Advanced
(concluded) Fund Revenue Bonds (Connecticut Unemployment), Series C, 3.90% due
7/01/1997 (b) ...................................................................... $ 19,900
45,545 Connecticut State Special Tax Obligation Revenue Bonds (Transportation
Infrastructure), VRDN, Second Lien, Series 1, 3.40% due 12/01/2010 (a) ............. 45,545
9,900 Eagle Tax-Exempt Trust, VRDN, 3.10% due 10/01/2011 (a) ............................. 9,900
8,000 Eagle Tax-Exempt Trust, VRDN, 3.56% due 8/15/2012 (a) .............................. 8,000
5,000 East Haven, Connecticut, UT, 4% due 9/03/1997 ...................................... 5,003
4,000 Manchester, Connecticut, Temporary Notes, Lot B, 3.60% due 5/28/1997 ............... 4,000
1,085 Meriden, Connecticut, UT, 4.25% due 8/01/1997 (b) .................................. 1,086
9,000 New Canaan, Connecticut, BAN, UT, 3.75% due 3/10/1998 .............................. 9,026
1,440 New Fairfield, Connecticut, BAN, UT, 3.75% due 5/15/1997 ........................... 1,440
13,000 New Haven, Connecticut, UT, 3.94% due 5/22/1997 .................................... 13,005
810 New Milford, Connecticut, BAN, UT, 4% due 5/13/1997 ................................ 811
6,875 North Haven, Connecticut, BAN, 4% due 9/04/1997 .................................... 6,884
8,400 Stamford, Connecticut, Housing Authority Revenue Bonds (Morgan Street
Project), VRDN, AMT, 3.45% due 8/01/2024 (a) ....................................... 8,400
- -----------------------------------------------------------------------------------------------------------------------------------
Puerto Rico -- Puerto Rico Commonwealth, Government Development Bank Revenue Bonds:
20.8% 1,000 CP, 3.10% due 4/04/1997 .......................................................... 1,000
1,000 CP, 3.10% due 4/07/1997 .......................................................... 1,000
1,000 CP, 3.15% due 4/08/1997 .......................................................... 1,000
4,600 CP, 3.30% due 4/09/1997 .......................................................... 4,600
3,800 CP, 3.20% due 5/01/1997 .......................................................... 3,800
4,000 CP, 3.40% due 5/01/1997 .......................................................... 4,000
5,200 Refunding, VRDN, 3.10% due 12/01/2015 (a) ........................................ 5,200
7,300 Puerto Rico Commonwealth, Highway and Transportation Authority, Highway
Revenue Bonds, VRDN, Series X, 3.10% due 7/01/1999 (a) ............................. 7,300
24,700 Puerto Rico Commonwealth, TRAN, Series 1997-A, 4% due 7/30/1997 .................... 24,745
2,000 Puerto Rico Electric Power Authority, Power Revenue Refunding Bonds
(Puerto Rico Commonwealth Water Resources Authority), Series L, 8.40%
due 7/01/1997 (d) .................................................................. 2,064
Puerto Rico Industrial, Medical and Environmental Pollution Control Facilities
Financing Authority Revenue Bonds:
7,100 CP, 3.35% due 4/17/1997 .......................................................... 7,100
2,750 Series A, 3.75% due 12/01/1997 ................................................... 2,753
Puerto Rico Industrial, Tourist, Educational, Medical and Environmental Control
Facilities Financing Authority, Higher Education Revenue Bonds, CP, Series A:
3,100 3.50% due 4/09/1997 .............................................................. 3,100
3,100 3.55% due 5/09/1997 ............................................................... 3,100
- -----------------------------------------------------------------------------------------------------------------------------------
Total Investments (Cost -- $337,425) -- 99.3% ....................................... 337,425
Other Assets Less Liabilities -- 0.7% ............................................... 2,506
---------
Net Assets -- 100.0% ................................................................ $339,931
=========
- -----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(a) The interest rate is subject to change periodically based on certain
indexes. The interest rate shown is the rate in effect at March, 31 1997.
(b) FGIC Insured.
(c) AMBAC Insured.
(d) Prerefunded.
See Notes to Financial Statements.
FS-21
<PAGE> 129
CMA CONNECTICUT MUNICIPAL MONEY FUND
STATEMENT OF ASSETS AND LIABILITIES AS OF MARCH 31, 1997
- --------------------------------------------------------------------------------
<TABLE>
<S> <C> <C>
Assets:
Investments, at value (identified cost -- $337,424,808*) (Note 1a) ............... $337,424,808
Cash ............................................................................. 6,891
Interest receivable .............................................................. 2,812,776
Prepaid registration fees and other assets (Note 1d) ............................. 15,418
------------
Total assets ..................................................................... 340,259,893
------------
Liabilities:
Payables:
Investment adviser (Note 2) .................................................... $143,017
Distributor (Note 2) ........................................................... 97,723
Dividends to shareholders (Note 1e) ............................................ 282
Beneficial interest redeemed ................................................... 31 241,053
--------
Accrued expenses and other liabilities ........................................... 88,091
------------
Total liabilities ................................................................ 329,144
------------
Net Assets ....................................................................... $339,930,749
============
Net Assets Consist of:
Shares of beneficial interest, $0.10 par value, unlimited number of shares
authorized ....................................................................... $ 34,007,223
Paid-in capital in excess of par ................................................. 306,065,009
Accumulated realized capital losses -- net (Note 4) .............................. (141,483)
------------
Net Assets -- Equivalent to $1.00 per share based on 340,072,232 shares of
beneficial interest outstanding .................................................. $339,930,749
============
</TABLE>
* Cost for Federal income tax purposes was $337,426,745. As of March 31,
1997, net unrealized depreciation for Federal income tax purposes amounted
to $1,937, all of which related to depreciated securities.
See Notes to Financial Statements.
FS-22
<PAGE> 130
<TABLE>
<CAPTION>
CMA CONNECTICUT MUNICIPAL MONEY FUND
STATEMENT OF OPERATIONS FOR THE YEAR ENDED MARCH 31, 1997
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Investment Income (Note 1c):
Interest and amortization of premium and discount earned ....................... $10,776,804
Expenses:
Investment advisory fees (Note 2) .............................................. $1,550,354
Distribution fees (Note 2) ..................................................... 383,286
Accounting services (Note 2) ................................................... 60,088
Professional fees .............................................................. 50,439
Registration fees (Note 1d) .................................................... 49,769
Transfer agent fees (Note 2) ................................................... 46,705
Custodian fees ................................................................. 25,124
Printing and shareholder reports ............................................... 20,231
Pricing fees ................................................................... 2,911
Trustees' fees and expenses .................................................... 2,787
Amortization of organization expenses (Note 1d) ................................ 523
Other .......................................................................... 3,988
----------
Total expenses ................................................................. 2,196,205
-----------
Investment income -- net ....................................................... 8,580,599
Realized Loss on Investments -- Net (Note 1c) .................................. (7,261)
-----------
Net Increase in Net Assets Resulting from Operations ........................... $ 8,573,338
===========
</TABLE>
See Notes to Financial Statements.
FS-23
<PAGE> 131
CMA CONNECTICUT MUNICIPAL MONEY FUND
STATEMENTS OF CHANGES IN NET ASSETS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
For the Year Ended
March 31,
--------------------------------------
1997 1996
Increase (Decrease) in Net Assets:
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Operations:
Investment income -- net ............................................... $ 8,580,599 $ 8,278,292
Realized loss on investments -- net .................................... (7,261) (320)
--------------- ---------------
Net increase in net assets resulting from operations ................... 8,573,338 8,277,972
--------------- ---------------
Dividends to Shareholders (Note 1e):
Investment income -- net ............................................... (8,579,669) (8,275,678)
--------------- ---------------
Net decrease in net assets resulting from dividends to shareholders .... (8,579,669) (8,275,678)
--------------- ---------------
Beneficial Interest Transactions (Note 3):
Net proceeds from sale of shares ....................................... 1,090,795,423 1,135,984,616
Net asset value of shares issued to shareholders in reinvestment
of dividends (Note 1e) ................................................. 8,579,691 8,277,928
--------------- ---------------
1,099,375,114 1,144,262,544
Cost of shares redeemed ................................................ (1,072,800,492) (1,091,300,656)
--------------- ---------------
Net increase in net assets derived from beneficial interest transactions 26,574,622 52,961,888
--------------- ---------------
Net Assets:
Total increase in net assets ........................................... 26,568,291 52,964,182
Beginning of year ...................................................... 313,362,458 260,398,276
--------------- ---------------
End of year* ........................................................... $ 339,930,749 $ 313,362,458
=============== ===============
- ---------------------------------------------------------------------------------------------------------------------
*Undistributed investment income -- net (Note 1f) ...................... $ -- $ 1,002
=============== ===============
- ---------------------------------------------------------------------------------------------------------------------
</TABLE>
See Notes to Financial Statements.
FS-24
<PAGE> 132
<TABLE>
<CAPTION>
CMA CONNECTICUT MUNICIPAL MONEY FUND
FINANCIAL HIGHLIGHTS
- --------------------------------------------------------------------------------
The following per share data and ratios have been derived
from information provided in the financial statements.
For the Year Ended March 31,
----------------------------------------------------------------------------
Increase (Decrease) in Net Asset Value: 1997 1996 1995 1994 1993
- -------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Per Share Operating Performance:
Net asset value, beginning of year ......... $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
-------- -------- -------- -------- --------
Investment income -- net ................... .03 .03 .03 .02 .02
-------- -------- -------- -------- --------
Total from investment operations ........... .03 .03 .03 .02 .02
-------- -------- -------- -------- --------
Less dividends from investment income -- net (.03) (.03) (.03) (.02) (.02)
-------- -------- -------- -------- --------
Net asset value, end of year ............... $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
======== ======== ======== ======== ========
Total Investment Return .................... 2.79% 3.02% 2.54% 1.77% 2.20%
======== ======== ======== ======== ========
Ratios to Average Net Assets:
Expenses, net of reimbursement ............. .71% .72% .71% .70% .63%
======== ======== ======== ======== ========
Expenses ................................... .71% .72% .71% .70% .73%
======== ======== ======== ======== ========
Investment income -- net ................... 2.76% 2.97% 2.53% 1.76% 2.17%
======== ======== ======== ======== ========
Supplemental Data:
Net assets, end of year (in thousands) ..... $339,931 $313,362 $260,398 $250,038 $231,431
======== ======== ======== ======== ========
</TABLE>
See Notes to Financial Statements.
FS-25
<PAGE> 133
CMA CONNECTICUT MUNICIPAL MONEY FUND
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
1. Significant Accounting Policies:
CMA Connecticut Municipal Money Fund (the "Fund") is part of CMA Multi-State
Municipal Series Trust (the "Trust"). The Fund is registered under the
Investment Company Act of 1940 as a non-diversified, open-end management
investment company. The following is a summary of significant accounting
policies followed by the Fund.
(a) Valuation of investments -- Investments are valued at amortized cost, which
approximates market value. For the purpose of valuation, the maturity of a
variable rate demand instrument is deemed to be the next coupon date on which
the interest rate is to be adjusted. In the case of a floating rate instrument,
the remaining maturity is the demand notice payment period.
(b) 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.
(c) Security transactions and investment income -- Security transactions are
recorded on the dates the transactions are entered into (the trade dates).
Interest income (including amortization of premium and discount) is recognized
on the accrual basis. Realized gains and losses on security transactions are
determined on the identified cost basis.
(d) Deferred organization expenses and prepaid registration fees -- Deferred
organization expenses are charged to expense on a straight-line basis over a
five-year period. Prepaid registration fees are charged to expense as the
related shares are issued.
(e) Dividends and distributions to shareholders -- The Fund declares dividends
daily and reinvests daily such dividends (net of non-resident alien tax and
back-up withholding tax withheld) in additional fund shares at net asset value.
Dividends are declared from the total of net investment income, excluding
discounts earned other than original issue discounts. Net realized capital
gains, if any, are normally distributed annually after deducting prior years'
loss carryforward. The Fund may distribute capital gains more frequently than
annually in order to maintain the Fund's net asset value at $1.00 per share.
(f) Reclassification -- Generally accepted accounting principles require that
certain components of net assets be adjusted to reflect permanent differences
between financial and tax reporting. Accordingly, current year's permanent
book/tax differences of $1,932 have been reclassified between accumulated net
realized capital losses and undistributed net investment income. These
reclassifications have no effect on net assets or net asset value per share.
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.
FAM is responsible for the management of the Fund's portfolio and provides the
necessary personnel, facilities, equipment and certain other services necessary
to the operations of the Fund. For such services,
FS-26
<PAGE> 134
CMA CONNECTICUT MUNICIPAL MONEY FUND
NOTES TO FINANCIAL STATEMENTS (CONCLUDED)
- --------------------------------------------------------------------------------
the Fund pays a monthly fee based upon the average daily value of the Fund's net
assets, at the following annual rates: 0.50% of the first $500 million of
average daily net assets; 0.425% of average daily net assets in excess of $500
million but not exceeding $1 billion; and 0.375% of average daily net assets in
excess of $1 billion.
Pursuant to the Distribution and Shareholder Servicing Plan in compliance with
Rule 12b-1 under the Investment Company Act of 1940, Merrill Lynch, Pierce,
Fenner & Smith Inc. ("MLPF&S") receives a distribution fee from the Fund at the
end of each month at the annual rate of 0.125% of average daily net assets of
the Fund. The distribution fee is to compensate MLPF&S financial consultants and
other directly involved branch office personnel for selling shares of the Fund
and for providing direct personal services to shareholders. The distribution fee
is not compensation for the administrative and operational services rendered to
the Fund by MLPF&S in processing share orders and administering shareholder
accounts.
Merrill Lynch Financial Data Services, Inc. ("MLFDS"), a wholly-owned subsidiary
of ML & Co., is the Fund's transfer agent.
Accounting services are provided to the Fund by FAM at cost.
Certain officers and/or trustees of the Fund are officers and/or directors of
FAM, PSI, MLFDS, and/or ML & Co.
3. Shares of Beneficial Interest:
The number of shares purchased and redeemed during the period corresponds to the
amounts included in the Statements of Changes in Net Assets for net proceeds
from sale of shares and cost of shares redeemed, respectively, since shares are
recorded at $1.00 per share.
4. Capital Loss Carryforward:
At March 31, 1997, the Fund had a net capital loss carryforward of approximately
$138,000, of which $69,000 expires in 2000, $30,000 expires in 2001, $10,000
expires in 2002, $27,000 expires in 2003, and $2,000 expires in 2005. This
amount will be available to offset like amounts of any future taxable gains.
FS-27
<PAGE> 135
- --------------------------------------------------------------------------------
CMA MASSACHUSETTS MUNICIPAL MONEY FUND
INDEPENDENT AUDITORS' REPORT
- --------------------------------------------------------------------------------
THE BOARD OF TRUSTEES AND SHAREHOLDERS,
CMA MASSACHUSETTS MUNICIPAL MONEY FUND
OF CMA MULTI-STATE MUNICIPAL SERIES TRUST:
We have audited the accompanying statement of assets and liabilities, including
the schedule of investments, of CMA Massachusetts Municipal Money Fund of CMA
Multi-State Municipal Series Trust as of March 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 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, evi-
dence supporting the amounts and disclosures in the financial statements. Our
procedures included confirmation of securities owned at March 31, 1997 by
correspondence with the custodian. An audit also includes assessing the
accounting principles used and significant estimates made by management, as well
as evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
In our opinion, such financial statements and financial highlights present
fairly, in all material respects, the financial position of CMA Massachusetts
Municipal Money Fund of CMA Multi-State Municipal Series Trust as of March 31,
1997, the results of its operations, the changes in its net assets, and the
financial highlights for the respective stated periods in conformity with
generally accepted accounting principles.
Deloitte & Touche LLP
Princeton, New Jersey
May 2, 1997
FS-28
<PAGE> 136
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------
CMA MASSACHUSETTS MUNICIPAL MONEY FUND
SCHEDULE OF INVESTMENTS AS OF MARCH 31, 1997 (IN THOUSANDS)
- ------------------------------------------------------------------------------------------------------------------------
FACE VALUE
STATE AMOUNT ISSUE (NOTE 1a)
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <S> <C>
Massachusetts-- $ 4,500 Barnstable, Massachusetts, BAN, UT, 3.60% due 6/18/1997 ...................... $ 4,501
99.3% 2,950 Boston, Massachusetts, IDR (Boston Seafood Distribution Center Inc. Project),
VRDN, AMT, 3.20% due 1/01/2022 (a) ........................................... 2,950
2,800 Boston, Massachusetts, Industrial Development Financing Authority, Industrial
Revenue Bonds (Acme Bookbinding Co., Inc.), VRDN, AMT, 3.40% due
9/01/2006 (a) ................................................................ 2,800
5,000 Boston, Massachusetts, Water and Sewer Commission Revenue Bonds, VRDN,
Series SG-75, 3.50% due 11/01/2019 (a)(b) .................................... 5,000
4,000 Chatham, Massachusetts, BAN, 3.85% due 7/02/1997 ............................. 4,003
2,000 Clipper Tax-Exempt Trust 1994-2, VRDN, Class A, 3.15% due 10/17/2002 (a) ..... 2,000
Eagle Tax-Exempt Trust, Custodial Receipts, VRDN (a):
1,900 3.49% due 2/01/2006 ........................................................ 1,900
9,200 3.49% due 2/01/2011 ........................................................ 9,200
Fitchburg, Massachusetts:
600 BAN, 3.85% due 6/06/1997 ................................................... 600
3,800 RAN, 4.50% due 6/30/1997 ................................................... 3,804
1,086 SAAN, 4.10% due 6/06/1997 .................................................. 1,087
1,025 Greater Attleboro--Taunton Regional Transportation Authority, Massachusetts,
RAN, 4.50% due 8/15/1997 ..................................................... 1,027
Haverhill, Massachusetts, BAN:
3,285 4.11% due 4/25/1997 ........................................................ 3,285
6,000 UT, 4.50% due 4/25/1997 .................................................... 6,002
3,245 Lynn, Massachusetts, Water and Sewer Commission, BAN, UT, Series A, 4.25%
due 10/08/1997 ............................................................... 3,248
5,000 Malden, Massachusetts, BAN, 4% due 6/03/1997 ................................. 5,002
5,000 Massachusetts State, GO, VRDN, Series SG-38, 3.50% due 8/01/2014 (a)(b) ...... 5,000
3,000 Massachusetts State, HFA, Housing Revenue Bonds, Series 50, 3.70%
due 6/02/1997 ................................................................ 3,000
3,900 Massachusetts State, HFA, M/F Housing Project, Refunding, VRDN, Series A, 3.30%
due 1/15/2010 (a)(c) ......................................................... 3,900
Massachusetts State Health and Educational Facilities Authority Revenue Bonds:
8,500 (Boston University), CP, Series H, 3.50% due 5/14/1997 ..................... 8,500
2,000 (Endicott College), VRDN, Series A, 3.30% due 10/01/2011 (a) ............... 2,000
1,300 Massachusetts State Industrial Finance Agency, Cultural, Health and Educational
Revenue Bonds (Berkshire Project), VRDN, 3.20% due 9/01/2020 (a) ............. 1,300
5,500 Massachusetts State Industrial Finance Agency, Health Care Facility Revenue
Bonds (Beverly Enterprises, Inc.), VRDN, 3.75% due 4/01/2009 (a) ............. 5,500
- ------------------------------------------------------------------------------------------------------------------------
Portfolio Abbreviations for CMA Massachusetts Municipal Money Fund
AMT Alternative Minimum Tax (subject to)
BAN Bond Anticipation Notes
CP Commercial Paper
GO General Obligation Bonds
HFA Housing Finance Agency
IDR Industrial Development Revenue Bonds
M/F Multi-Family
PCR Pollution Control Revenue Bonds
RAN Revenue Anticipation Notes
SAAN Student Aid Anticipation Notes
UPDATES Unit Priced Demand Adjustable Tax-Exempt Securities
UT Unlimited Tax
VRDN Variable Rate Demand Notes
FS-29
</TABLE>
<PAGE> 137
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------
CMA MASSACHUSETTS MUNICIPAL MONEY FUND
SCHEDULE OF INVESTMENTS AS OF MARCH 31, 1997 (CONCLUDED) (IN THOUSANDS)
- ------------------------------------------------------------------------------------------------------------------------
FACE VALUE
STATE AMOUNT ISSUE (NOTE 1a)
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <S> <C>
Massachusetts Massachusetts State Industrial Finance Agency, Industrial Revenue Bonds,
(concluded) VRDN (a):
$ 3,570 (AFC Cable Systems Inc.), AMT, 3.40% due 7/01/2016 ......................... $ 3,570
2,000 (BBB Esq. LLC), AMT, Series B, 3.95% due 12/01/2016 ........................ 2,000
4,100 (Foilmark Manufacturing), AMT, Series A, 3.40% due 6/01/2010 ............... 4,100
4,200 (Gem Group Inc.), AMT, 3.40% due 7/01/2016 ................................. 4,200
2,500 (KMS Companies), AMT, 3.40% due 5/01/2016 .................................. 2,500
1,000 (Mercer Paper Tube Corp.), AMT, 3.75% due 11/01/2011 ....................... 1,000
1,100 (Nutramax Products Inc. Project), AMT, Series A, 3.40% due 5/01/2016 ....... 1,100
1,000 (Nutramax Products Inc. Project), AMT, Series B, 3.40% due 5/01/2016 ....... 1,000
7,500 (Performance Corrugated Inc. Project), AMT, 3.70% due 3/01/2009 ............ 7,500
1,535 Refunding (Easy Day Realty Trust Project), Series A, 3.35% due 7/01/2006 ... 1,535
3,350 (Telcom USA Inc.), AMT, 3.40% due 8/01/2016 ................................ 3,350
3,155 (William F. Rogers), AMT, 3.40% due 11/01/2006 ............................. 3,155
5,205 (ZBR Limited Partnership), AMT, Series A, 3.40% due 4/15/2015 .............. 5,205
1,500 (ZBR Limited Partnership), AMT, Series B, 3.35% due 4/15/2017 .............. 1,500
Massachusetts State Industrial Finance Agency, PCR:
4,000 (Holyoke Water & Power Company Project), VRDN, AMT, 3.25% due
12/01/2020 (a) ............................................................. 4,000
4,800 Refunding (New England Power Company Project), CP, 3.60% due 4/10/1997 ..... 4,800
Massachusetts State Industrial Finance Agency Revenue Bonds, VRDN (a):
5,000 (Edgewood Retirement Community Project), Series C, 3.45% due 11/15/2025 .... 5,000
3,000 (Governor Dummer Academy), 3.25% due 7/01/2026 ............................. 3,000
1,825 (Heritage at Dartmouth), AMT, 3.45% due 12/01/2028 ......................... 1,825
1,000 (Newbury College Issue), 3.30% due 6/01/2021 ............................... 1,000
4,500 (Williston Northampton Project), Series B, 3.30% due 4/01/2024 ............. 4,500
2,940 Massachusetts State Industrial Finance Agency, Solid Waste Disposal Revenue
Bonds (E.L. Harvey and Sons), VRDN, AMT, 3.40% due 1/01/2011 (a) ............. 2,940
16,255 Massachusetts State Port Authority, Revenue Refunding Bonds, VRDN,
AMT, Series B, 3.65% due 7/01/2018 (a) ....................................... 16,255
2,000 Massachusetts State, UPDATES, Series B, 3.60% due 12/01/1997 (a) ............. 2,000
2,555 Massachusetts State Water Resources Authority, Municipal Trust, VRDN,
Series SG-63, 3.50% due 8/01/2024 (a)(b) ..................................... 2,555
5,000 Mendon Upton, Massachusetts, Regional School District, BAN, UT, 3.90% due
7/10/1997 .................................................................... 5,005
5,600 New Bedford, Massachusetts, RAN, 4.50% due 6/30/1997 ......................... 5,607
1,775 Northampton, Massachusetts, BAN, 4% due 5/30/1997 ............................ 1,776
1,550 Southbridge, Massachusetts, BAN, 3.85% due 5/15/1997 ......................... 1,550
4,000 Southeastern Regional Transportation Authority, Massachusetts, RAN, 4.50%
due 9/19/1997 ................................................................ 4,008
5,950 Springfield, Massachusetts, BAN, 4.10% due 6/27/1997 ......................... 5,958
- ------------------------------------------------------------------------------------------------------------------------
Total Investments (Cost--$199,103*)--99.3% ................................... 199,103
Other Assets Less Liabilities--0.7% .......................................... 1,495
--------
Net Assets--100.0% ........................................................... $200,598
========
- ------------------------------------------------------------------------------------------------------------------------
</TABLE>
(a) The interest rate is subject to change periodically based on certain
indexes. The interest rate shown is the rate in effect at March 31, 1997.
(b) MBIA Insured.
(c) FNMA Collateralized.
* Cost for Federal income tax purposes.
See Notes to Financial Statements.
FS-30
<PAGE> 138
<TABLE>
- ------------------------------------------------------------------------------------------------------------------------
CMA MASSACHUSETTS MUNICIPAL MONEY FUND
STATEMENT OF ASSETS AND LIABILITIES AS OF MARCH 31, 1997
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Assets:
Investments, at value (identified cost--$199,102,934) (Note 1a) ......................... $ 199,102,934
Cash ..................................................................................... 47,873
Interest receivable ...................................................................... 1,659,010
Prepaid registration fees and other assets (Note 1d) ..................................... 8,558
-------------
Total assets ............................................................................. 200,818,375
-------------
Liabilities:
Payables:
Investment adviser (Note 2) .............................................................$ 84,778
Distributor (Note 2) .................................................................... 59,257
Beneficial interest redeemed ............................................................ 34 144,069
-------------
Accrued expenses and other liabilities ................................................... 75,908
-------------
Total liabilities ........................................................................ 219,977
-------------
Net Assets ............................................................................... $ 200,598,398
=============
Net Assets Consist of:
Shares of beneficial interest, $0.10 par value, unlimited number of shares authorized .... $ 20,061,387
Paid-in capital in excess of par ......................................................... 180,552,389
Accumulated realized capital losses--net (Note 4) ........................................ (15,378)
-------------
Net Assets--Equivalent to $1.00 per share based on 200,613,875 shares of beneficial
interest outstanding ..................................................................... $ 200,598,398
=============
See Notes to Financial Statements.
</TABLE>
<TABLE>
- ------------------------------------------------------------------------------------------------------------------------
CMA MASSACHUSETTS MUNICIPAL MONEY FUND
STATEMENT OF OPERATIONS FOR THE YEAR ENDED MARCH 31, 1997
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Investment Income (Note 1c):
Interest and amortization of premium earned ............................................. $ 6,654,385
Expenses:
Investment advisory fees (Note 2) ....................................................... $ 938,904
Distribution fees (Note 2) .............................................................. 228,987
Accounting services (Note 2) ............................................................ 56,006
Professional fees ....................................................................... 49,700
Transfer agent fees (Note 2) ............................................................ 48,924
Registration fees (Note 1d) ............................................................. 45,653
Printing and shareholder reports ........................................................ 26,005
Custodian fees .......................................................................... 18,415
Pricing fees ............................................................................ 3,475
Trustees' fees and expenses ............................................................. 1,774
Other ................................................................................... 3,157
-------------
Total expenses .......................................................................... 1,421,000
-------------
Investment income--net .................................................................. 5,233,385
Realized Gain on Investments--Net (Note 1c) ............................................. 2,973
-------------
Net Increase in Net Assets Resulting from Operations .................................... $ 5,236,358
=============
See Notes to Financial Statements.
</TABLE>
FS-31
<PAGE> 139
<TABLE>
<CAPTION>
CMA MASSACHUSETTS MUNICIPAL MONEY FUND
STATEMENTS OF CHANGES IN NET ASSETS
- ------------------------------------------------------------------------------------------------------------------------
For the Year Ended March 31,
------------------------------
Increase (Decrease) in Net Assets: 1997 1996
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Operations:
Investment income--net .............................................................. $ 5,233,385 $ 5,180,721
Realized gain (loss) on investments--net ............................................ 2,973 (6,750)
------------- -------------
Net increase in net assets resulting from operations ................................ 5,236,358 5,173,971
------------- -------------
Dividends to Shareholders (Note 1e):
Investment income--net .............................................................. (5,233,385) (5,180,721)
------------- -------------
Net decrease in net assets resulting from dividends to shareholders ................. (5,233,385) (5,180,721)
------------- -------------
Beneficial Interest Transactions (Note 3):
Net proceeds from sale of shares .................................................... 725,445,153 659,752,882
Net asset value of shares issued to shareholders in reinvestment of dividends
(Note 1e) ........................................................................... 5,233,764 5,180,565
------------- -------------
730,678,917 664,933,447
Cost of shares redeemed ............................................................. (719,565,744) (636,520,287)
------------- -------------
Net increase in net assets derived from beneficial interest transactions ............ 11,113,173 28,413,160
------------- -------------
Net Assets:
Total increase in net assets ........................................................ 11,116,146 28,406,410
Beginning of year ................................................................... 189,482,252 161,075,842
------------- -------------
End of year ......................................................................... $ 200,598,398 $ 189,482,252
============= =============
See Notes to Financial Statements.
</TABLE>
<TABLE>
<CAPTION>
CMA MASSACHUSETTS MUNICIPAL MONEY FUND
FINANCIAL HIGHLIGHTS
- ------------------------------------------------------------------------------------------------------------------------
The following per share data and ratios have been derived For the Year Ended March 31,
from information provided in the financial statements. --------------------------------------------------
Increase (Decrease) in Net Asset Value: 1997 1996 1995 1994 1993
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Per Share Operating Performance:
Net asset value, beginning of year .............................. $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
-------- -------- -------- -------- --------
Investment income--net .......................................... .03 .03 .02 .02 .02
-------- -------- -------- -------- --------
Total from investment operations ................................ .03 .03 .02 .02 .02
-------- -------- -------- -------- --------
Less dividends from investment income--net ...................... (.03) (.03) (.02) (.02) (.02)
-------- -------- -------- -------- --------
Net asset value, end of year .................................... $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
======== ======== ======== ======== ========
Total Investment Return ......................................... 2.81% 3.05% 2.46% 1.74% 2.20%
======== ======== ======== ======== ========
Ratios to Average Net Assets:
Expenses ........................................................ .76% .76% .76% .78% .78%
======== ======== ======== ======== ========
Investment income--net .......................................... 2.78% 3.00% 2.43% 1.72% 2.15%
======== ======== ======== ======== ========
Supplemental Data:
Net assets, end of year (in thousands) .......................... $200,598 $189,482 $161,076 $150,804 $132,302
======== ======== ======== ======== ========
See Notes to Financial Statements.
</TABLE>
FS-32
<PAGE> 140
CMA MASSACHUSETTS MUNICIPAL MONEY FUND
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
1. Significant Accounting Policies:
CMA Massachusetts Municipal Money Fund (the "Fund") is part of CMA Multi-State
Municipal Series Trust (the "Trust"). The Fund is registered under the
Investment Company Act of 1940 as a non-diversified, open-end management
investment company. The following is a summary of significant accounting
policies followed by the Fund.
(a) Valuation of investments--Investments are valued at amortized cost, which
approximates market value. For the purpose of valuation, the maturity of a
variable rate demand instrument is deemed to be the next coupon date on which
the interest rate is to be adjusted. In the case of a floating rate instrument,
the remaining maturity is the demand notice payment period.
(b) 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.
(c) Security transactions and investment income--Security transactions are
recorded on the dates the transactions are entered into (the trade dates).
Interest income (including amortization of premium and discount) is recognized
on the accrual basis. Realized gains and losses on security transactions are
determined on the identified cost basis.
(d) Prepaid registration fees--Prepaid registration fees are charged to expense
as the related shares are issued.
(e) Dividends and distributions to shareholders--The Fund declares dividends
daily and reinvests daily such dividends (net of non-resident alien tax and
back-up withholding tax withheld) in additional fund shares at net asset value.
Dividends are declared from the total of net investment income, excluding
discounts earned other than original issue discounts. Net realized capital
gains, if any, are normally distributed annually after deducting prior years'
loss carryforward. The Fund may distribute capital gains more frequently than
annually in order to maintain the Fund's net asset value at $1.00 per share.
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.
FAM is responsible for the management of the Fund's portfolio and provides the
necessary personnel, facilities, equipment and certain other services
necessary to the operations of the Fund. For such services, the Fund pays a
monthly fee based upon the average daily value of the Fund's net assets, at the
following annual rates: 0.50% of the first $500 million of average daily net
assets; 0.425% of average daily net assets in excess of $500 million but not
exceeding $1 billion; and 0.375% of average daily net assets in excess of $1
billion.
Pursuant to the Distribution and Shareholder Servicing Plan in compliance with
Rule 12b-1 under the Investment Company Act of 1940, Merrill Lynch, Pierce,
Fenner & Smith Inc. ("MLPF&S") receives a distribution fee from the Fund at the
end of each month at the annual rate of 0.125% of
FS-33
<PAGE> 141
- --------------------------------------------------------------------------------
average daily net assets of the Fund. The distribution fee is to compensate
MLPF&S financial consultants and other directly involved branch office personnel
for selling shares of the Fund and for providing direct personal services to
shareholders. The distribution fee is not compensation for the administrative
and operational services rendered to the Fund by MLPF&S in processing share
orders and administering shareholder accounts.
Merrill Lynch Financial Data Services, Inc. ("MLFDS"), a wholly-owned
subsidiary of ML & Co., is the Fund's transfer agent.
Accounting services are provided to the Fund by FAM at cost.
Certain officers and/or trustees of the Fund are officers and/or directors of
FAM, PSI, MLFDS, and/or ML & Co.
3. Shares of Beneficial Interest:
The number of shares purchased and redeemed during the period corresponds to the
amounts included in the Statements of Changes in Net Assets for net proceeds
from sale of shares and cost of shares redeemed, respectively, since shares are
recorded at $1.00 per share.
4. Capital Loss Carryforward:
At March 31, 1997, the Fund had a net capital loss carryforward of approximately
$15,000, of which $1,000 expires in 2001, $7,000 expires in 2002, and $7,000
expires in 2004. This amount will be available to offset like amounts of any
future taxable gains.
FS-34
<PAGE> 142
- --------------------------------------------------------------------------------
CMA MICHIGAN MUNICIPAL MONEY FUND
INDEPENDENT AUDITORS' REPORT
- --------------------------------------------------------------------------------
THE BOARD OF TRUSTEES AND SHAREHOLDERS,
CMA MICHIGAN MUNICIPAL MONEY FUND
OF CMA MULTI-STATE MUNICIPAL SERIES TRUST:
We have audited the accompanying statement of assets and liabilities, including
the schedule of investments, of CMA Michigan Municipal Money Fund of CMA
Multi-State Municipal Series Trust as of March 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 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 March
31, 1997 by correspondence with the custodian. An audit also includes assessing
the accounting principles used and significant estimates made by management, as
well as evaluating the overall financial statement presentation. We believe that
our audits provide a reasonable basis for our opinion.
In our opinion, such financial statements and financial highlights present
fairly, in all material respects, the financial position of CMA Michigan
Municipal Money Fund of CMA Multi-State Municipal Series Trust as of March 31,
1997, the results of its operations, the changes in its net assets, and the
financial highlights for the respective stated periods in conformity with
generally accepted accounting principles.
Deloitte & Touche LLP
Princeton, New Jersey
May 2, 1997
FS-35
<PAGE> 143
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------------
CMA MICHIGAN MUNICIPAL MONEY FUND
SCHEDULE OF INVESTMENTS AS OF MARCH 31, 1997 (IN THOUSANDS)
- -----------------------------------------------------------------------------------------------------------------------------
FACE VALUE
STATE AMOUNT ISSUE (NOTE 1a)
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Michigan -- $ 1,375 Battle Creek, Michigan, Housing Corporation Revenue Bonds, VRDN, Series
90.0% 1997-A, 3.50% due 2/01/2027 (a) ...................................................... $ 1,375
945 Bedford Township, Michigan, Economic Development Corporation Revenue
Bonds (Form-Tech Steel Inc. Project), VRDN, 3.70% due 3/01/2010 (a) .................. 945
4,500 Berrien County, Michigan, Economic Development Corporation, Economic
Development Revenue Bonds (Arlington Corp. Project), VRDN, AMT, 3.69%
due 9/01/2016 (a) .................................................................... 4,500
4,000 Chelsea, Michigan, Economic Development Corporation, Limited Obligation
Revenue Bonds (Silver Maples of Chelsea), VRDN, 3.50% due 5/15/2028 (a) .............. 4,000
105 Delta Township, Michigan, Economic Development Corporation, IDR, Refunding
(Schottenstein Stores), VRDN, 3.50% due 12/01/1997 (a) ............................... 105
15,000 Detroit, Michigan, City School District, State School Aid Notes, 4.50% due
5/01/1997 ............................................................................ 15,007
Detroit, Michigan, Water Supply System Revenue Bonds, Municipal Trust Receipts,
VRDN (a)(c):
2,000 Series SGB-6, 3.50% due 7/01/2025 ............................................... 2,000
3,500 Series SG-64, 3.50% due 7/01/2025 ............................................... 3,500
4,700 Eagle Tax-Exempt Trust Custodial Receipts, VRDN, 3.60% due 6/01/1997 (a) ............. 4,700
1,000 Eaton, Michigan, Inter-School District, TAN, 4.20% due 4/01/1997 ..................... 1,000
1,255 Farmington Hills, Michigan, Economic Development Corporation, Limited
Obligation Revenue Refunding Bonds (Brookfield Building Association), VRDN,
3.30% due 11/01/2010 (a) ............................................................. 1,255
2,800 Flint, Michigan, Economic Development Corporation, Economic Development
Revenue Bonds (Plastics Research Corp.), VRDN, AMT, 3.70% due 9/01/2004 (a) .......... 2,800
9,000 Garden City, Michigan, Hospital Finance Authority, Hospital Revenue Bonds
(Garden City Hospital Obligation), VRDN, Series A, 3.50% due 9/01/2026 (a) ........... 9,000
3,000 Garden City, Michigan, School District, State Aid Notes, 4.30% due 4/15/1997 ......... 3,000
3,400 Genesee County, Michigan, Economic Development Corporation, Limited
Obligation, Economic Development Revenue Bonds (MM & E Inc. Project), VRDN,
3.70% due 7/01/2005 (a) .............................................................. 3,400
2,300 Georgetown Charter Township, Michigan, IDR, Limited Obligation (J & F Steel
Corp.), VRDN, AMT, 3.55% due 2/01/2009 (a) ........................................... 2,300
575 Grand Rapids, Michigan, Economic Development Corporation, Limited Obligation
Revenue Refunding Bonds (Calder), VRDN, Series A, 3.45% due 10/01/2011 (a) ........... 575
1,000 Grand Rapids, Michigan, Economic Development Corporation Revenue Bonds
(Amway/Grand Plaza Hotel, Facility #1), VRDN, 3.45% due 12/01/2006 (a) ............... 1,000
2,690 Grand Rapids, Michigan, IDR, Refunding (Etheridge Company Project), VRDN,
AMT, 3.55% due 7/01/2009 (a) ......................................................... 2,690
8,000 Grand Rapids, Michigan, Water Supply System, Revenue Refunding Bonds, VRDN,
3.30% due 1/01/2020 (a)(b) ........................................................... 8,000
440 Kalamazoo, Michigan, City School District, Refunding, UT, 3.70% due 5/01/1997 (b) .... 440
980 Kalamazoo, Michigan, Public Library, 4% due 4/01/1997 ................................ 980
3,700 Kent Hospital Finance Authority, Michigan, Hospital Facilities Revenue Bonds
(Butterworth Hospital), ACES, VRDN, Series A, 3.35% due 1/15/2020 (a) ................ 3,700
1,015 Lenawee County, Michigan, Economic Development Corporation, Limited
Obligation Revenue Bonds (The Wyatt Project), VRDN, 3.70% due 5/01/2002 (a) .......... 1,015
- -----------------------------------------------------------------------------------------------------------------------------
</TABLE>
Portfolio Abbreviations for CMA Michigan Municipal Money Fund
ACES(SM) Adjustable Convertible Extendable Securities
AMT Alternative Minimum Tax (subject to)
CP Commercial Paper
FLOATS Floating Rate Securities
HDA Housing Development Authority
IDR Industrial Development Revenue Bonds
M/F Multi-Family
PCR Pollution Control Revenue Bonds
TAN Tax Anticipation Notes
TEAMS Tax-Exempt Adjustable Municipal Securities
UT Unlimited Tax
VRDN Variable Rate Demand Notes
FS-36
<PAGE> 144
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------------
CMA MICHIGAN MUNICIPAL MONEY FUND
SCHEDULE OF INVESTMENTS AS OF MARCH 31, 1997(CONTINUED) (IN THOUSANDS)
- -----------------------------------------------------------------------------------------------------------------------------
FACE VALUE
STATE AMOUNT ISSUE (NOTE 1a)
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Michigan $ 1,000 Livingston, Michigan, Educational Service Agency, TAN, 4.10% due 4/01/1997 ........... $ 1,000
(continued) 900 Melvindale, Michigan, Economic Development Corporation, Limited Obligation
Revenue Refunding Bonds (North American Steel Project), VRDN, 3.45% due
6/01/1998 (a) ........................................................................ 900
1,000 Michigan Higher Education Facilities Authority, Limited Obligation Revenue
Bonds (Davenport Collateral Business Project), VRDN, 3.50% due 3/01/2027 (a) ......... 1,000
Michigan Municipal Bond Authority Revenue Notes:
13,500 Series A, 4.50% due 7/03/1997 ..................................................... 13,525
2,000 Series B, 4.50% due 7/25/1997 ..................................................... 2,004
3,500 Series D, 4.50% due 9/19/1997 ..................................................... 3,508
1,000 Michigan State Building Authority Revenue Bonds, Series II, 5.60% due
10/01/1997 ........................................................................... 1,010
Michigan State Building Authority Revenue Notes, CP, Series 1:
15,000 3.50% due 5/01/1997 ............................................................... 15,000
11,920 3.65% due 5/01/1997 ............................................................... 11,920
Michigan State, HDA, Limited Obligation Revenue Bonds:
4,000 (Bloomfield), TEAMS, 3.50% due 6/27/1997 .......................................... 4,000
1,200 (Laurel Valley), VRDN, TEAMS, 3.50% due 12/01/2007 (a) ............................ 1,200
4,000 (Sand Creek Apartments Phase 1 Project), VRDN, AMT, 3.60% due
1/01/2029 (a) ..................................................................... 4,000
2,000 (Woodland Meadows Apartments Project), VRDN, AMT, 3.55% due
3/01/2013 (a) ..................................................................... 2,000
Michigan State, HDA, M/F Housing Revenue Bonds, CP, AMT, Series A:
2,500 3.55% due 6/09/1997 ............................................................... 2,500
4,000 3.50% due 6/10/1997 ............................................................... 4,000
Michigan State Strategic Fund, Limited Obligation Revenue Bonds, VRDN (a):
1,000 (Adaptive Manufacturing L.L.C. Project), AMT, 3.70% due 8/01/2016 ................. 1,000
945 (Akemi Inc. Project), AMT, 3.70% due 3/01/2021 .................................... 945
475 (BBPV Project), AMT, Series A-2, 4% due 1/01/2014 ................................. 475
1,500 (BCM & N Project), AMT, 3.55% due 6/01/2020 ....................................... 1,500
2,900 (Baron Drawn Steel), IDR, AMT, 3.70% due 12/01/2006 ............................... 2,900
2,500 (Cincinnati Milacron Inc. Project), AMT, 3.75% due 4/15/2005 ...................... 2,500
4,200 (Dott Industries Inc. Project), AMT, 3.70% due 6/01/2001 .......................... 4,200
1,500 (Hercules Drawn Steel Project), AMT, 3.70% due 8/01/2006 .......................... 1,500
1,500 (Inalfa-Hollandia Inc. Project), AMT, 3.70% due 5/01/2016 ......................... 1,500
2,000 (Ingersoll CM System Inc. Project), AMT, 3.70% due 12/01/2011 ..................... 2,000
230 (Kay Screen Printing Inc.), AMT, Series A, 3.50% due 1/01/1999 .................... 230
3,305 (Monarch Hydraulics Inc. Project), AMT, 3.60% due 7/01/2016 ....................... 3,305
2,000 (Norbert Industries Inc. Project), AMT, UT, 3.80% due 4/01/2006 ................... 2,000
1,000 (Nuvar Properties L.L.C. Project), AMT, 3.60% due 7/01/2026 ....................... 1,000
2,300 (Park Realty L.L.C.), AMT, Series A, 3.60% due 9/01/2026 .......................... 2,300
1,355 (Perfection Steel Inc. Project), AMT, 3.60% due 3/01/2002 ......................... 1,355
6,600 Refunding (Detroit Edison Co.), Series CC, 3.65% due 9/01/2030 .................... 6,600
4,850 Refunding (Lake Shore Inc.), AMT, 3.65% due 11/01/2019 ............................ 4,850
500 Refunding (Park Village Pines Project), 3.45% due 5/01/2006 ....................... 500
6,500 (Riverwalk Properties L.L.C. Project), AMT, 3.70% due 8/01/2021 ................... 6,500
450 Series C-4, 4% due 1/01/2014 ...................................................... 450
1,250 (TEI Investments L.L.C.), AMT, 3.70% due 2/01/2022 ................................ 1,250
4,500 (Temperance Enterprises Co.), AMT, 3.70% due 8/01/2011 ............................ 4,500
1,605 (Tom Miller Inc. Project), AMT, 3.55% due 12/01/2009 .............................. 1,605
3,000 (Universal Tube, Inc. Project), AMT, 3.70% due 8/01/2011 .......................... 3,000
450 (Whitehall Industries), AMT, Series A-6, 4% due 1/01/2009 ......................... 450
</TABLE>
FS-37
<PAGE> 145
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------------
CMA MICHIGAN MUNICIPAL MONEY FUND
SCHEDULE OF INVESTMENTS AS OF MARCH 31, 1997(CONCLUDED) (IN THOUSANDS)
- -----------------------------------------------------------------------------------------------------------------------------
FACE VALUE
STATE AMOUNT ISSUE (NOTE 1a)
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Michigan Michigan State Strategic Fund, PCR, Refunding, VRDN, Series A (a):
(concluded) $4,100 (Consumer's Power Project), 3.65% due 4/15/2018 ................................. $ 4,100
6,700 (General Motors Corp. Project), 3.55% due 4/01/2008 ............................. 6,700
7,500 Michigan State Trunk Line, FLOATS, VRDN, Series SG-44, 3.50% due
11/15/2024 (a)(b) .................................................................... 7,500
1,500 Monroe County, Michigan, Economic Development Corporation, Limited
Obligation Revenue Refunding Bonds (Detroit Edison Co.), VRDN, Series CC, 4%
due 10/01/2024 (a) ................................................................... 1,500
700 Royal Oak, Michigan, Hospital Finance Authority, Hospital Revenue Bonds
(William Beaumont Hospital), VRDN, Series J, 3.60% due 1/01/2003 (a) ................. 700
185 Sterling Heights, Michigan, Economic Development Corporation, Limited
Obligation Revenue Refunding Bonds (Sterling Shopping Center), VRDN, 3.25%
due 12/01/2010 (a) ................................................................... 185
University of Michigan, University Revenue Bonds, VRDN, Series A (a):
9,800 3.75% due 12/01/2019 ............................................................ 9,800
3,500 (Medical Service Plan), 3.75% due 12/01/2027 .................................... 3,500
500 Walled Lake, Michigan, Consolidated School District Refunding Bonds, UT,
3.65% due 5/01/1997 (c) .............................................................. 500
7,100 Wayne Charter County, Michigan, Airport Revenue Refunding Bonds (Detroit
Metropolitan County), VRDN, AMT, Series A, 3.50% due 12/01/2016 (a) .................. 7,100
900 Wyoming, Michigan, Economic Development Corporation, Revenue Refunding
Bonds (Family One Inc. Project), VRDN, AMT, 3.60% due 11/01/2019 (a) ................. 900
- -----------------------------------------------------------------------------------------------------------------------------
Puerto Rico -- Puerto Rico Commonwealth, Government Development Bank, CP:
9.2% 5,000 3.15% due 4/03/1997 ............................................................. 5,000
7,500 3.50% due 4/09/1997 ............................................................. 7,500
5,000 3.35% due 4/17/1997 ............................................................. 5,000
7,500 3.40% due 5/07/1997 ............................................................. 7,500
- -----------------------------------------------------------------------------------------------------------------------------
Total Investments (Cost -- $270,754*) -- 99.2% ....................................... 270,754
Other Assets Less Liabilities -- 0.8% ................................................ 2,215
---------
Net Assets -- 100.0% ................................................................. $272,969
=========
- -----------------------------------------------------------------------------------------------------------------------------
</TABLE>
(a) The interest rate is subject to change periodically based on certain
indexes. The interest rate shown is the rate in effect at March 31, 1997.
(b) FGIC Insured.
(c) MBIA Insured
* Cost for Federal income tax purposes.
See Notes to Financial Statements.
FS-38
<PAGE> 146
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------
CMA MICHIGAN MUNICIPAL MONEY FUND
STATEMENT OF ASSETS AND LIABILITIES AS OF MARCH 31, 1997
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Assets:
Investments, at value (identified cost -- $270,754,458) (Note 1a) $270,754,458
Cash ............................................................. 13,412
Receivables:
Interest .................................................... $2,343,672
Securities sold ............................................. 115,000 2,458,672
------------
Prepaid registration fees and other assets (Note 1d) ............. 9,049
---------------
Total assets ..................................................... 273,235,591
---------------
Liabilities:
Payables:
Investment adviser (Note 2) ................................. 114,906
Distributor (Note 2) ........................................ 80,205
Dividends to shareholders (Note 1e) ......................... 90
Beneficial interest redeemed ................................ 13 195,214
------------
Accrued expenses and other liabilities ........................... 71,042
---------------
Total liabilities ................................................ 266,256
---------------
Net Assets ....................................................... $272,969,335
===============
Net Assets Consist of:
Shares of beneficial interest, $0.10 par value, unlimited
number of shares authorized ...................................... $ 27,311,968
Paid-in capital in excess of par ................................. 245,807,707
Accumulated realized capital losses -- net (Note 4) .............. (150,340)
---------------
Net Assets -- Equivalent to $1.00 per share based on
273,119,675 shares of beneficial interest outstanding ............ $272,969,335
===============
</TABLE>
See Notes to Financial Statements.
FS-39
<PAGE> 147
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------
CMA MICHIGAN MUNICIPAL MONEY FUND
STATEMENT OF OPERATIONS FOR THE YEAR ENDED MARCH 31, 1997
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Investment Income (Note 1c):
Interest and amortization of premium and discount earned ................. $8,964,633
Expenses:
Investment advisory fees (Note 2) ........................................ $1,255,849
Distribution fees (Note 2) ............................................... 308,843
Accounting services (Note 2) ............................................. 53,569
Transfer agent fees (Note 2) ............................................. 52,563
Professional fees ........................................................ 47,651
Registration fees (Note 1d) .............................................. 26,666
Custodian fees ........................................................... 25,099
Printing and shareholder reports ......................................... 20,028
Pricing fees ............................................................. 6,372
Trustees' fees and expenses .............................................. 2,429
Amortization of organization expenses (Note 1d) .......................... 527
Other .................................................................... 5,658
------------
Total expenses ........................................................... 1,805,254
-------------
Investment income -- net ................................................. 7,159,379
Realized Loss on Investments -- Net (Note 1c) ............................ (18,304)
-------------
Net Increase in Net Assets Resulting from Operations ..................... $7,141,075
=============
</TABLE>
See Notes to Financial Statements.
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------------
CMA MICHIGAN MUNICIPAL MONEY FUND
STATEMENTS OF CHANGES IN NET ASSETS
- -------------------------------------------------------------------------------------------------------------------------
For the Year Ended
March 31,
------------------------------------
Increase (Decrease) in Net Assets: 1997 1996
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Operations:
Investment income -- net ........................................................ $ 7,159,379 $ 7,385,953
Realized loss on investments -- net ............................................. (18,304) (13,976)
--------------- ---------------
Net increase in net assets resulting from operations ............................ 7,141,075 7,371,977
--------------- ---------------
Dividends to Shareholders (Note 1e):
Investment income -- net ........................................................ (7,159,379) (7,385,953)
--------------- ---------------
Net decrease in net assets resulting from dividends to shareholders ............. (7,159,379) (7,385,953)
--------------- ---------------
Beneficial Interest Transactions (Note 3):
Net proceeds from sale of shares ................................................ 1,149,598,981 1,072,495,850
Net asset value of shares issued to shareholders in reinvestment
of dividends (Note 1e) .......................................................... 7,159,224 7,386,278
--------------- ---------------
1,156,758,205 1,079,882,128
Cost of shares redeemed ......................................................... (1,131,314,536) (1,052,494,852)
--------------- ---------------
Net increase in net assets derived from beneficial interest transactions ........ 25,443,669 27,387,276
--------------- ---------------
Net Assets:
Total increase in net assets .................................................... 25,425,365 27,373,300
Beginning of year ............................................................... 247,543,970 220,170,670
--------------- ---------------
End of year ..................................................................... $ 272,969,335 $ 247,543,970
=============== ===============
</TABLE>
See Notes to Financial Statements.
FS-40
<PAGE> 148
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------
CMA MICHIGAN MUNICIPAL MONEY FUND
FINANCIAL HIGHLIGHTS
- ----------------------------------------------------------------------------------------------------------------
The following per share data and ratios have been derived
from information provided in the financial statements. For the Year Ended March 31,
-----------------------------------------------------
Increase (Decrease) in Net Asset Value: 1997 1996 1995 1994 1993
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Per Share Operating Performance:
Net asset value, beginning of year ..................... $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
-------- -------- -------- -------- --------
Investment income -- net ............................... .03 .03 .03 .02 .02
-------- -------- -------- -------- --------
Total from investment operations ....................... .03 .03 .03 .02 .02
-------- -------- -------- -------- --------
Less dividends from investment income -- net ........... (.03) (.03) (.03) (.02) (.02)
-------- -------- -------- -------- --------
Net asset value, end of year ........................... $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
======== ======== ======== ======== ========
Total Investment Return ................................ 2.89% 3.13% 2.57% 1.81% 2.24%
======== ======== ======== ======== ========
Ratios to Average Net Assets:
Expenses, net of reimbursement ......................... .72% .73% .73% .72% .65%
======== ======== ======== ======== ========
Expenses ............................................... .72% .73% .73% .72% 74%
======== ======== ======== ======== ========
Investment income -- net ............................... 2.84% 3.05% 2.54% 1.79% 2.22%
======== ======== ======== ======== ========
Supplemental Data:
Net assets, end of year (in thousands) ................. $272,969 $247,544 $220,171 $236,435 $200,200
======== ======== ======== ======== ========
</TABLE>
See Notes to Financial Statements.
FS-41
<PAGE> 149
- --------------------------------------------------------------------------------
CMA MICHIGAN MUNICIPAL MONEY FUND
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
1. Significant Accounting Policies:
CMA Michigan Municipal Money Fund (the "Fund") is part of CMA Multi-State
Municipal Series Trust (the "Trust"). The Fund is registered under the
Investment Company Act of 1940 as a non-diversified, open-end management
investment company. The following is a summary of significant accounting
policies followed by the Fund.
(a) Valuation of investments -- Investments are valued at amortized cost, which
approximates market value. For the purpose of valuation, the maturity of a
variable rate demand instrument is deemed to be the next coupon date on which
the interest rate is to be adjusted. In the case of a floating rate instrument,
the remaining maturity is the demand notice payment period.
(b) 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.
(c) Security transactions and investment income -- Security transactions are
recorded on the dates the transactions are entered into (the trade dates).
Interest income (including amortization of premium and discount) is recognized
on the accrual basis. Realized gains and losses on security transactions are
determined on the identified cost basis.
(d) Deferred organization expenses and prepaid registration fees -- Deferred
organization expenses are charged to expense on a straight-line basis over a
five-year period. Prepaid registration fees are charged to expense as the
related shares are issued.
(e) Dividends and distributions to shareholders -- The Fund declares dividends
daily and reinvests daily such dividends (net of non-resident alien tax and
back-up withholding tax withheld) in additional fund shares at net asset value.
Dividends are declared from the total of net investment income, excluding
discounts earned other than original issue discounts. Net realized capital
gains, if any, are normally distributed annually after deducting prior years'
loss carryforward. The Fund may distribute capital gains more frequently than
annually in order to maintain the Fund's net asset value at $1.00 per share.
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.
FAM is responsible for the management of the Fund's portfolio and provides the
necessary personnel, facilities, equipment and certain other services necessary
to the operations of the Fund. For such services, the Fund pays a monthly fee
based upon the average daily value of the Fund's net assets, at the following
annual rates: 0.50% of the first $500 million of average daily net assets;
0.425% of average daily net assets in excess of $500 million but not exceeding
$1 billion; and 0.375% of average daily net assets in excess of $1 billion.
Pursuant to the Distribution and Shareholder Servicing Plan in compliance with
Rule 12b-1 under the Investment Company Act of 1940, Merrill Lynch, Pierce,
Fenner &
FS-42
<PAGE> 150
- --------------------------------------------------------------------------------
CMA MICHIGAN MUNICIPAL MONEY FUND
NOTES TO FINANCIAL STATEMENTS (CONCLUDED)
- --------------------------------------------------------------------------------
Smith Inc. ("MLPF&S") receives a distribution fee from the Fund at the end of
each month at the annual rate of 0.125% of average daily net assets of the Fund.
The distribution fee is to compensate MLPF&S financial consultants and other
directly involved branch office personnel for selling shares of the Fund and for
providing direct personal services to shareholders. The distribution fee is not
compensation for the administrative and operational services rendered to the
Fund by MLPF&S in processing share orders and administering shareholder
accounts.
Merrill Lynch Financial Data Services, Inc. ("MLFDS"), a wholly-owned subsidiary
of ML & Co., is the Fund's transfer agent.
Accounting services are provided to the Fund by FAM at cost.
Certain officers and/or trustees of the Fund are officers and/or directors of
FAM, PSI, MLFDS, and/or ML & Co.
3. Shares of Beneficial Interest:
The number of shares purchased and redeemed during the period corresponds to the
amounts included in the Statements of Changes in Net Assets for net proceeds
from sale of shares and cost of shares redeemed, respectively, since shares are
recorded at $1.00 per share.
4. Capital Loss Carryforward:
At March 31, 1997, the Fund had a net capital loss carryforward of approximately
$149,000, of which $62,000 expires in 2001, $4,000 expires in 2002, $50,000
expires in 2003 and $33,000 expires in 2005. This amount will be available to
offset like amounts of any future taxable gains.
FS-43
<PAGE> 151
- --------------------------------------------------------------------------------
CMA NEW JERSEY MUNICIPAL MONEY FUND
INDEPENDENT AUDITORS' REPORT
- --------------------------------------------------------------------------------
THE BOARD OF TRUSTEES AND SHAREHOLDERS,
CMA NEW JERSEY MUNICIPAL MONEY FUND OF
CMA MULTI-STATE MUNICIPAL SERIES TRUST:
We have audited the accompanying statement of assets and liabilities, including
the schedule of investments, of CMA New Jersey Municipal Money Fund of CMA
Multi-State Municipal Series Trust as of March 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 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 March
31, 1997 by correspondence with the custodian and broker. 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 CMA New Jersey
Municipal Money Fund of CMA Multi-State Municipal Series Trust as of March 31,
1997, the results of its operations, the changes in its net assets, and the
financial highlights for the respective stated periods in conformity with
generally accepted accounting principles.
Deloitte & Touche LLP
Princeton, New Jersey
May 2, 1997
FS-44
<PAGE> 152
<TABLE>
<CAPTION>
CMA NEW JERSEY MUNICIPAL MONEY FUND
SCHEDULE OF INVESTMENTS AS OF MARCH 31, 1997 (IN THOUSANDS)
- --------------------------------------------------------------------------------------------------------------------------
FACE VALUE
STATE AMOUNT ISSUE (NOTE 1a)
- --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
NEW JERSEY-- $ 3,800 Atlantic County, New Jersey, Improvement Authority Revenue Bonds
92.3% (Pooled Governmental Loan Program), ACES, 3.20% due 7/01/2026 (a) ............. $ 3,800
Bayonne, New Jersey, UT:
1,000 BAN, 3.85% due 4/11/1997 .................................................... 1,000
1,445 BAN, 3.90% due 9/12/1997 .................................................... 1,447
4,800 BAN, 4.25% due 9/12/1997 .................................................... 4,805
1,560 Temporary Notes, 3.87% due 7/10/1997 ........................................ 1,561
9,115 Temporary Notes, 4.25% due 7/10/1997 ........................................ 9,122
9,000 Bernards Township, New Jersey, Sewage Authority, Sewer Revenue Refunding
Bonds, 3.70% due 12/15/1997 ................................................... 9,000
Camden County, New Jersey, Improvement Authority Revenue Bonds, VRDN (a):
3,225 (Jewish Community Center Project), 3.30% due 12/01/2010 ..................... 3,225
13,900 (Parkview Redevelopment Housing Project), AMT, 3.40% due 7/01/2026 .......... 13,900
20,000 Casino Reinvestment Development Authority, New Jersey, BAN (New Jersey
Corridor Projects), Series A, 4.50% due 6/03/1997 ............................. 20,013
17,300 Eagle Tax Exempt Trust, VRDN, Series 94C-3001, 3.56% due 10/01/2015 (a) ....... 17,300
Elizabeth, New Jersey, BAN, UT:
5,671 4.36% due 7/16/1997 ......................................................... 5,671
5,000 4.42% due 7/16/1997 ......................................................... 5,001
5,000 4.49% due 7/16/1997 ......................................................... 5,002
10,000 4.55% due 7/16/1997 ......................................................... 10,005
6,450 Essex County, New Jersey, Improvement Authority Revenue Bonds (Pooled
Governmental Loan Program), ACES, 3.10% due 7/01/2026 (a) ..................... 6,450
13,260 Floating Rate Trust Certificates, VRDN, Series 1994-E, 3.50% due
7/02/1999 (a) ................................................................. 13,260
8,000 Hudson County, New Jersey, Improvement Authority Floating Bonds (Essential
Purpose Pooled Government), VRDN, 3.35% due 7/15/2026 (a) ..................... 8,000
8,575 Jersey City, New Jersey, GO, School Promissary Notes, UT, 4.125% due
3/06/1998 ..................................................................... 8,606
6,720 Little Egg Harbor, New Jersey, Board of Education, BAN, UT, 4% due
4/30/1997 ..................................................................... 6,721
2,107 Manalapan Township, New Jersey, BAN, UT, 4.25% due 10/15/1997 ................. 2,112
4,000 Mercer County, New Jersey, TAN, 4.25% due 4/30/1997 ........................... 4,002
19,600 Monmouth County, New Jersey, Improvement Authority Revenue Bonds
(Pooled Government Loan Program), ACES, 3.20% due 8/01/2016 (a) ............... 19,600
</TABLE>
PORTFOLIO ABBREVIATIONS FOR CMA NEW JERSEY MUNICIPAL MONEY FUND
ACES(SM) Adjustable Convertible Extendable Securities
AMT Alternative Minimum Tax (subject to)
BAN Bond Anticipation Notes
CP Commercial Paper
EDA Economic Development Authority
FLOATS Floating Rate Securities
GO General Obligation Bonds
IDR Industrial Development Revenue Bonds
PCR Pollution Control Revenue Bonds
TAN Tax Anticipation Notes
TRAN Tax and Revenue Anticipation Notes
UT Unlimited Tax
VRDN Variable Rate Demand Notes
FS-45
<PAGE> 153
<TABLE>
<CAPTION>
CMA NEW JERSEY MUNICIPAL MONEY FUND
SCHEDULE OF INVESTMENTS AS OF MARCH 31, 1997 (CONTINUED) (IN THOUSANDS)
- --------------------------------------------------------------------------------------------------------------------------
FACE VALUE
STATE AMOUNT ISSUE (NOTE 1a)
- --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
NEW JERSEY $ 4,765 New Brunswick, New Jersey, BAN, 4% due 12/09/1997 ............................. $ 4,776
(CONTINUED) New Jersey EDA, Dock Facility Revenue Refunding Bonds (Bayonne/IMTT
Project), VRDN, Series A (a):
500 3.40% due 12/01/2027 ........................................................ 500
10,650 3.45% due 12/01/2027 ........................................................ 10,650
New Jersey EDA, Economic Development Revenue Bonds, VRDN (a):
2,000 (400 International Drive Partners), 3.20% due 9/01/2005 ..................... 2,000
625 (Astor Chocolate Corporation Project), AMT, 3.50% due 4/01/2002 ............. 625
3,600 (Atlanta--Danic Urban Renewal), 3.10% due 11/01/2007 ........................ 3,600
9,325 (Benedictine Abbey of Newark), 3.50% due 12/01/2019 ......................... 9,325
1,625 (Brach/Jersey Avenue Project), 3.25% due 5/01/2011 .......................... 1,625
1,250 (Catholic Community Services), 3.35% due 6/01/2025 .......................... 1,250
2,550 (Delta Plastics Corporation Project), 3.69% due 10/01/2006 .................. 2,550
2,535 (Filtra Corporation Project), 3.50% due 8/01/2015 ........................... 2,535
2,000 (International Vitamin Corp. Project), AMT, 3.50% due 5/01/2003 ............. 2,000
1,150 (Manhattan Bagel Co. Inc. Project), AMT, 3.50% due 10/01/2005 ............... 1,150
1,700 (Office Court Associates Project), AMT, 3.30% due 4/01/2011 ................. 1,700
1,740 (Park Lane Associates Project), AMT, 3.50% due 4/01/2010 .................... 1,740
6,100 Refunding (Lawrenceville School Project), Series B, 3.20% due 7/01/2026 ..... 6,100
2,500 Refunding (Multi-Modal--Church & Dwight), 3.10% due 12/01/2008 .............. 2,500
2,320 Refunding (RJB Associates Project), 3.55% due 8/01/2008 ..................... 2,320
1,345 (Saint Peter's Preparatory School), 3.40% due 1/01/2010 ..................... 1,345
New Jersey EDA, Exempt Facilities, CP, AMT:
4,500 (Chambers Cogeneration), 3.30% due 4/14/1997 ................................ 4,500
4,500 (Chambers Cogeneration), 3.40% due 7/16/1997 ................................ 4,500
1,500 (Chambers Cogeneration), 3.45% due 8/08/1997 ................................ 1,500
2,100 (Keystone Project), 3.25% due 4/14/1997 ..................................... 2,100
5,000 (Keystone Project), 3.45% due 5/14/1997 ..................................... 5,000
2,100 (Keystone Project), 3.30% due 5/22/1997 ..................................... 2,100
2,800 (Keystone Project), 3.35% due 6/02/1997 ..................................... 2,800
2,700 (Keystone Project), 3.35% due 6/06/1997 ..................................... 2,700
1,735 New Jersey EDA, IDR (Plastic Suppliers Inc. Project), VRDN, AMT, 3.60% due
6/01/2006 (a) ................................................................. 1,735
800 New Jersey EDA, Industrial and Economic Development Revenue Bonds
(Elizabeth Realty Urban Renewal Associates--1986 Project), VRDN, AMT,
3.65% due 6/01/2000 (a) ....................................................... 800
14,900 New Jersey EDA, Natural Gas Facilities Revenue Bonds (NUI Corporation
Project), VRDN, AMT, Series A, 3.65% due 6/01/2026 (a)(c) ..................... 14,900
New Jersey EDA, PCR, VRDN (a):
4,835 (General Motors Corp. Project), 3.30% due 10/01/2000 ........................ 4,835
7,450 (Merck & Co.), Series A, 3.65% due 10/01/2004 ............................... 7,450
3,000 Refunding (Public Service Electric & Gas Co.), Series A, 3.10% due
9/01/2012 (b) ............................................................... 3,000
5,000 New Jersey EDA, Port Facility Revenue Bonds (Trailer Marine Crowle), VRDN,
3.30% due 2/01/2002 (a) ....................................................... 5,000
</TABLE>
FS-46
<PAGE> 154
<TABLE>
<CAPTION>
CMA NEW JERSEY MUNICIPAL MONEY FUND
SCHEDULE OF INVESTMENTS AS OF MARCH 31, 1997 (CONTINUED) (IN THOUSANDS)
- -------------------------------------------------------------------------------------------------------------------------
FACE VALUE
STATE AMOUNT ISSUE (NOTE 1a)
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
NEW JERSEY New Jersey EDA, Revenue Bonds, VRDN (a):
(CONTINUED) $ 1,130 (E.P. Henry Corp. Project), 3.50% due 3/01/2005 ............................. $ 1,130
1,075 (Economic Growth--Greater Mercer County), AMT, Series A-1, 3.35%
due 11/01/2016 .............................................................. 1,075
4,140 (Economic Growth--Greater Mercer County), AMT, Series E, 3.35%
due 11/01/2006 .............................................................. 4,140
3,570 (Economic Growth--Greater Mercer County), AMT, Series H, 3.35%
due 11/01/2016 .............................................................. 3,570
1,300 (Economic Growth--Greater Mercer County), Series F, 3.25%
due 11/01/2016 .............................................................. 1,300
1,500 (Economic Growth--Greater Mercer County), Series G, 3.25%
due 11/01/2016 .............................................................. 1,500
2,900 (Economic Growth--Paterson), AMT, Series A, 3.35% due 1/01/2016 ............. 2,900
2,000 (Economic Growth--Paterson), AMT, Series B, 3.30% due 1/01/2005 ............. 2,000
12,000 (Hoffman--La Roche, Inc. Project), AMT, 3.40% due 11/01/2011 ................ 12,000
1,000 (The Peddie School Project), 3.40% due 2/01/2026 ............................ 1,000
2,000 (The Peddie School Project), Series B, 3.40% due 2/01/2019 .................. 2,000
3,500 New Jersey EDA, Thermal Energy Facilities Revenue Bonds (Thermal Energy
Limited Partnership), AMT, 3.50% due 4/10/1997 ................................ 3,500
New Jersey EDA, Water Facilities Revenue Refunding Bonds (United Water of
New Jersey, Inc. Project), VRDN (a)(c):
14,300 AMT, Series A, 3.40% due 11/01/2026 ......................................... 14,300
2,600 Series B, 3.30% due 11/01/2025 .............................................. 2,600
22,130 New Jersey Sports and Exposition Authority, State Contract, VRDN, Series C,
3.25% due 9/01/2024 (a)(b) .................................................... 22,130
7,585 New Jersey State Educational Facilities Authority Revenue Bonds, FLOATS
(Series SG-48), 3.40% due 7/01/2026 (a)(b) .................................... 7,585
5,000 New Jersey State, GO, Refunding, UT, Series E, 4.50% due 7/15/1997 ............ 5,011
5,655 New Jersey State Housing and Mortgage Finance Agency Revenue Bonds
(Home Buyer), Series 034, 3.80% due 4/01/1997 ................................. 5,655
New Jersey State, TAN, CP, Series 96:
2,500 3.25% due 4/03/1997 ......................................................... 2,500
7,500 3.50% due 4/04/1997 ......................................................... 7,500
2,500 3.25% due 4/08/1997 ......................................................... 2,500
3,500 3.20% due 4/09/1997 ......................................................... 3,500
3,500 3.25% due 4/28/1997 ......................................................... 3,500
2,500 3.25% due 5/01/1997 ......................................................... 2,500
2,500 3.30% due 5/01/1997 ......................................................... 2,500
2,500 3.30% due 5/13/1997 ......................................................... 2,500
2,500 3.25% due 5/14/1997 ......................................................... 2,500
5,000 3.50% due 6/12/1997 ......................................................... 5,000
49,800 New Jersey State Turnpike Authority, Turnpike Revenue Refunding Bonds,
VRDN, Series D, 3.20% due 1/01/2018 (a)(d) .................................... 49,800
1,250 Passaic County, New Jersey, Utilities Authority, Solid Waste System Revenue
Bonds (Project Notes), Series B, 3.95% due 9/03/1997 (b) ...................... 1,250
Port Authority of New York and New Jersey (Line of Credit), CP, AMT:
1,100 3.50% due 5/01/1997 ......................................................... 1,100
1,175 3.60% due 5/28/1997 ......................................................... 1,175
4,800 3.50% due 8/12/1997 ......................................................... 4,800
</TABLE>
FS-47
<PAGE> 155
<TABLE>
<CAPTION>
CMA NEW JERSEY MUNICIPAL MONEY FUND
SCHEDULE OF INVESTMENTS AS OF MARCH 31, 1997 (CONCLUDED) (IN THOUSANDS)
- -------------------------------------------------------------------------------------------------------------------------
FACE VALUE
STATE AMOUNT ISSUE (NOTE 1a)
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
NEW JERSEY Port Authority of New York and New Jersey, Special Obligation Revenue Bonds
(CONCLUDED) (Versatile Structure Obligation), VRDN (a):
$56,100 AMT, Series 1, 3.70% due 8/01/2028 .......................................... $ 56,100
6,300 Series 2, 3.70% due 5/01/2019................................................ 6,300
43,600 AMT, Series 4, 3.70% due 4/01/2024 .......................................... 43,600
2,600 Series 5, 3.65% due 8/01/2024 ............................................... 2,600
Salem County, New Jersey, Industrial Pollution Control Financing Authority
Revenue Bonds, Series A:
7,300 (du Pont (E.I.) de Nemours & Co.), VRDN, 3.55% due 3/01/2012 (a) ............ 7,300
4,200 (Philadelphia Electric), CP, 3% due 4/10/1997 (d) ........................... 4,200
8,900 South Plainfield, New Jersey, BAN, UT, 4.375% due 7/24/1997 ................... 8,912
Union County, New Jersey, Industrial Pollution Control Financing Authority,
PCR, Refunding, VRDN (a):
2,200 (Allied Signal Project), 3.60% due 12/01/2020 ............................... 2,200
5,100 (Exxon Project), 3.20% due 7/01/2033 ........................................ 5,100
8,000 Woodbridge Township, New Jersey, BAN, UT, 3.91% due 7/02/1997 ................. 8,001
- ------------------------------------------------------------------------------------------------------------------------
PUERTO RICO-- Puerto Rico Commonwealth, Government Development Bank, CP:
6.9% 2,000 3.20% due 4/03/1997 ......................................................... 2,000
2,200 3.10% due 4/04/1997 ......................................................... 2,200
9,600 3.40% due 4/04/1997 ......................................................... 9,600
2,300 3.10% due 4/07/1997 ......................................................... 2,300
3,900 3.15% due 4/08/1997 ......................................................... 3,900
4,500 3.30% due 4/09/1997 ......................................................... 4,500
1,400 3.40% due 5/01/1997 ......................................................... 1,400
2,750 3.55% due 5/09/1997 ......................................................... 2,750
3,500 3.45% due 5/20/1997 ......................................................... 3,500
3,500 3.45% due 6/09/1997 ......................................................... 3,500
7,300 Puerto Rico Commonwealth, Government Development Bank, Refunding,
VRDN, 3.10% due 12/01/2015 (a) ................................................ 7,300
3,950 Puerto Rico Commonwealth, TRAN, Series 1997-A, 4% due 7/30/1997 ............... 3,957
- ------------------------------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS (COST--$678,055*)--99.2% .................................... 678,055
OTHER ASSETS LESS LIABILITIES--0.8% ........................................... 5,306
--------
NET ASSETS--100.0% ............................................................ $683,361
========
- ------------------------------------------------------------------------------------------------------------------------
</TABLE>
(a)The interest rate is subject to change periodically based on
certain indexes. The interest rate shown is the rate in effect at
March 31, 1997.
(b)MBIA Insured.
(c)AMBAC Insured.
(d)FGIC Insured.
*Cost for Federal income tax purposes.
See Notes to Financial Statements.
FS-48
<PAGE> 156
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------------
CMA NEW JERSEY MUNICIPAL MONEY FUND
STATEMENT OF ASSETS AND LIABILITIES AS OF MARCH 31, 1997
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS:
Investments, at value (identified cost--$678,055,103) (Note 1a) ............... $ 678,055,103
Cash .......................................................................... 3,872,442
Receivables:
Interest ..................................................................... $ 5,302,612
Securities sold .............................................................. 211,709 5,514,321
---------------
Prepaid registration fees and other assets (Note 1d) .......................... 23,040
---------------
Total assets .................................................................. 687,464,906
---------------
LIABILITIES:
Payables:
Securities purchased ......................................................... 3,500,000
Investment adviser (Note 2) .................................................. 281,863
Distributor (Note 2) ......................................................... 198,743
Beneficial interest redeemed ................................................. 196 3,980,802
---------------
Accrued expenses and other liabilities ........................................ 122,896
---------------
Total liabilities ............................................................. 4,103,698
---------------
NET ASSETS .................................................................... $ 683,361,208
===============
NET ASSETS CONSIST OF:
Shares of beneficial interest, $0.10 par value, unlimited number of shares
authorized .................................................................... $ 68,347,049
Paid-in capital in excess of par .............................................. 615,123,117
Accumulated realized capital losses--net (Note 4) ............................. (108,958)
---------------
NET ASSETS--Equivalent to $1.00 per share based on 683,470,493 shares of
beneficial interest outstanding ............................................... $ 683,361,208
===============
</TABLE>
See Notes to Financial Statements.
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------------
CMA NEW JERSEY MUNICIPAL MONEY FUND
STATEMENT OF OPERATIONS FOR THE YEAR ENDED MARCH 31, 1997
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
INVESTMENT INCOME (NOTE 1c):
Interest and amortization of premium and discount earned .................... $ 21,300,705
EXPENSES:
Investment advisory fees (Note 2) ........................................... $ 2,990,679
Distribution fees (Note 2) .................................................. 759,664
Transfer agent fees (Note 2) ................................................ 121,906
Accounting services (Note 2) ................................................ 82,879
Registration fees (Note 1d) ................................................. 63,074
Professional fees ........................................................... 50,457
Custodian fees .............................................................. 47,932
Printing and shareholder reports ............................................ 36,647
Pricing fees ................................................................ 8,586
Trustees' fees and expenses ................................................. 5,849
Other ....................................................................... 7,628
---------------
Total expenses .............................................................. 4,175,301
---------------
Investment income--net ...................................................... 17,125,404
REALIZED LOSS ON INVESTMENTS--NET (NOTE 1c) ................................. (47,138)
---------------
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS ........................ $ 17,078,266
===============
</TABLE>
See Notes to Financial Statements.
FS-49
<PAGE> 157
<TABLE>
<CAPTION>
CMA NEW JERSEY MUNICIPAL MONEY FUND
STATEMENTS OF CHANGES IN NET ASSETS
- ------------------------------------------------------------------------------------------------------------------------
For the Year Ended March 31,
----------------------------
Increase (Decrease) in Net Assets: 1997 1996
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
OPERATIONS:
Investment income--net ....................................................... $ 17,125,404 $ 16,961,902
Realized loss on investments--net ............................................ (47,138) (4,492)
--------------- ---------------
Net increase in net assets resulting from operations ......................... 17,078,266 16,957,410
--------------- ---------------
DIVIDENDS TO SHAREHOLDERS (NOTE 1e):
Investment income--net ....................................................... (17,117,196) (16,955,885)
--------------- ---------------
Net decrease in net assets resulting from dividends to shareholders .......... (17,117,196) (16,955,885)
--------------- ---------------
BENEFICIAL INTEREST TRANSACTIONS (NOTE 3):
Net proceeds from sale of shares ............................................. 2,177,998,397 1,937,805,407
Net asset value of shares issued to shareholders in reinvestment of
dividends (Note 1e) .......................................................... 17,116,053 16,956,937
--------------- ---------------
2,195,114,450 1,954,762,344
Cost of shares redeemed ...................................................... (2,121,998,967) (1,870,226,420)
--------------- ---------------
Net increase in net assets derived from beneficial interest transactions ..... 73,115,483 84,535,924
--------------- ---------------
NET ASSETS:
Total increase in net assets ................................................. 73,076,553 84,537,449
Beginning of year ............................................................ 610,284,655 525,747,206
--------------- ---------------
End of year* ................................................................. $ 683,361,208 $ 610,284,655
=============== ===============
*Undistributed investment income--net (Note 1f) .............................. -- $ 5,378
=============== ===============
</TABLE>
See Notes to Financial Statements.
<TABLE>
<CAPTION>
CMA NEW JERSEY MUNICIPAL MONEY FUND
FINANCIAL HIGHLIGHTS
- --------------------------------------------------------------------------------------------------------------------------------
The following per share data and ratios have been derived
from information provided in the financial statements.
For the Year Ended March 31,
---------------------------------------------------------------
Increase (Decrease) in Net Asset Value: 1997 1996 1995 1994 1993
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of year ......................... $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
---------- ---------- ---------- ---------- ----------
Investment income--net ..................................... .03 .03 .02 .02 .02
---------- ---------- ---------- ---------- ----------
Total from investment operations ........................... .03 .03 .02 .02 .02
---------- ---------- ---------- ---------- ----------
Less dividends from investment income--net ................. (.03) (.03) (.02) (.02) (.02)
---------- ---------- ---------- ---------- ----------
Net asset value, end of year ............................... $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
========== ========== ========== ========== ==========
TOTAL INVESTMENT RETURN .................................... 2.81% 3.07% 2.52% 1.82% 2.21%
========== ========== ========== ========== ==========
RATIOS TO AVERAGE NET ASSETS:
Expenses ................................................... .68% .68% .71% .70% .70%
========== ========== ========== ========== ==========
Investment income--net ..................................... 2.78% 3.02% 2.51% 1.80% 2.16%
========== ========== ========== ========== ==========
SUPPLEMENTAL DATA:
Net assets, end of year (in thousands) ..................... $ 683,361 $ 610,285 $ 525,747 $ 441,846 $ 388,903
========== ========== ========== ========== ==========
</TABLE>
See Notes to Financial Statements.
FS-50
<PAGE> 158
CMA NEW JERSEY MUNICIPAL MONEY FUND
NOTES TO FINANCIAL STATEMENTS
1. SIGNIFICANT ACCOUNTING POLICIES:
CMA New Jersey Municipal Money Fund (the "Fund") is part of CMA Multi-State
Municipal Series Trust (the "Trust"). The Fund is registered under the
Investment Company Act of 1940 as a non-diversified, open-end management
investment company. The following is a summary of significant accounting
policies followed by the Fund.
(a) Valuation of investments--Investments are valued at amortized cost, which
approximates market value. For the purpose of valuation, the maturity of a
variable rate demand instrument is deemed to be the next coupon date on which
the interest rate is to be adjusted. In the case of a floating rate instrument,
the remaining maturity is the demand notice payment period.
(b) 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.
(c) Security transactions and investment income--Security transactions are
recorded on the dates the transactions are entered into (the trade dates).
Interest income (including amortization of premium and discount) is recognized
on the accrual basis. Realized gains and losses on security transactions are
determined on the identified cost basis.
(d) Prepaid registration fees--Prepaid registration fees are charged to expense
as the related shares are issued.
(e) Dividends and distributions to shareholders--The Fund declares dividends
daily and reinvests daily such dividends (net of non-resident alien tax and
back-up withholding tax withheld) in additional fund shares at net asset value.
Dividends are declared from the total of net investment income, excluding
discounts earned other than original issue discounts. Net realized capital
gains, if any, are normally distributed annually after deducting prior years'
loss carryforward. The Fund may distribute capital gains more frequently than
annually in order to maintain the Fund's net asset value at $1.00 per share.
(f) Reclassification--Generally accepted accounting principles require that
certain components of net assets be adjusted to reflect permanent differences
between financial and tax reporting. Accordingly, current year's permanent
book/tax differences of $13,586 have been reclassified between accumulated net
realized capital losses and undistributed net investment income. These
reclassifications have no effect on net assets or net asset value per share.
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.
FAM is responsible for the management of the Fund's portfolio and provides the
necessary personnel, facilities, equipment and certain other services necessary
to the operations of the Fund. For such services, the Fund pays a monthly fee
based upon the average daily value of the Fund's net assets at the following
annual rates: 0.50% of the first $500 million of average daily net assets;
0.425% of average daily net assets in excess of $500 million but not exceeding
$1 billion; and 0.375% of average daily net assets in excess of $1 billion.
FS-51
<PAGE> 159
CMA NEW JERSEY MUNICIPAL MONEY FUND
NOTES TO FINANCIAL STATEMENTS (CONCLUDED)
Pursuant to the Distribution and Shareholder Servicing Plan in compliance with
Rule 12b-1 under the Investment Company Act of 1940, Merrill Lynch, Pierce,
Fenner & Smith Inc. ("MLPF&S") receives a distribution fee from the Fund at the
end of each month at the annual rate of 0.125% of average daily net assets of
the Fund. The distribution fee is to compensate MLPF&S financial consultants and
other directly involved branch office personnel for selling shares of the Fund
and for providing direct personal services to shareholders. The distribution fee
is not compensation for the administrative and operational services rendered to
the Fund by MLPF&S in processing share orders and administering shareholder
accounts.
Merrill Lynch Financial Data Services, Inc. ("MLFDS"), a wholly-owned
subsidiary of ML & Co., is the Fund's transfer agent.
Accounting services are provided to the Fund by FAM at cost.
Certain officers and/or trustees of the Fund are officers and/or directors of
FAM, PSI, MLFDS, and/or ML & Co.
3. SHARES OF BENEFICIAL INTEREST:
The number of shares purchased and redeemed during the period corresponds to the
amounts included in the Statements of Changes in Net Assets for net proceeds
from sale of shares and cost of shares redeemed, respectively, since shares are
recorded at $1.00 per share.
4. CAPITAL LOSS CARRYFORWARD:
At March 31, 1997, the Fund had a net capital loss carryforward of approximately
$109,000, of which $72,000 expires in 2003, $4,000 expires in 2004 and $33,000
expires in 2005. This amount will be available to offset like amounts of any
future taxable gains.
FS-52
<PAGE> 160
- --------------------------------------------------------------------------------
CMA NEW YORK MUNICIPAL MONEY FUND
INDEPENDENT AUDITORS' REPORT
- --------------------------------------------------------------------------------
THE BOARD OF TRUSTEES AND SHAREHOLDERS,
CMA NEW YORK MUNICIPAL MONEY FUND OF
CMA MULTI-STATE MUNICIPAL SERIES TRUST:
We have audited the accompanying statement of assets and liabilities, including
the schedule of investments, of CMA New York Municipal Money Fund of CMA
Multi-State Municipal Series Trust as of March 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 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 March
31, 1997 by correspondence with the custodian. An audit also includes assessing
the accounting principles used and significant estimates made by management, as
well as evaluating the overall financial statement presentation. We believe that
our audits provide a reasonable basis for our opinion.
In our opinion, such financial statements and financial highlights present
fairly, in all material respects, the financial position of CMA New York
Municipal Money Fund of CMA Multi-State Municipal Series Trust as of March 31,
1997, the results of its operations, the changes in its net assets, and the
financial highlights for the respective stated periods in conformity with
generally accepted accounting principles.
Deloitte & Touche LLP
Princeton, New Jersey
May 2, 1997
FS-53
<PAGE> 161
<TABLE>
<CAPTION>
CMA NEW YORK MUNICIPAL MONEY FUND
SCHEDULE OF INVESTMENTS AS OF MARCH 31, 1997 (IN THOUSANDS)
- -------------------------------------------------------------------------------------------------------------------------
FACE VALUE
STATE AMOUNT ISSUE (NOTE 1a)
- ----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
NEW YORK-- $ 1,079 Albany, New York, Housing Authority, Private Act Revenue Bonds (Historic
94.3% Bleeker Terrace), VRDN, AMT, 3.50% due 3/01/2015 (a) ............................ $ 1,079
2,500 Albany, New York, IDA, IDR, Refunding (Albany Ventures Inc. Project),
VRDN, 3.55% due 12/29/2010 (a) .................................................. 2,500
7,000 Amityville, New York (Union Free School District), TAN, UT, 4.50% due
6/26/1997 ....................................................................... 7,006
4,284 Binghamton, New York, BAN, 4.25% due 5/29/1997 .................................. 4,288
4,000 Buffalo, New York, RAN, Series A, 4.25% due 7/15/1997 ........................... 4,007
Eagle Tax Exempt Trust, VRDN (a):
27,000 Series 1994-3201, 3.61% due 4/01/2034 ......................................... 27,000
7,200 Series 1994-C4, 3.56% due 8/01/2003 ........................................... 7,200
20,000 Series 1995-3201, 3.56% due 8/15/2024 ......................................... 20,000
19,000 Eastern Suffolk, New York, Board Cooperative Educational Services
District, RAN, 4.50% due 6/26/1997 .............................................. 19,022
11,000 Erie County, New York, RAN, UT, Series A, 4.25% due 4/17/1997 ................... 11,003
7,000 Farmingdale, New York (Union Free School District), TAN, UT, 4.50% due
6/26/1997 ....................................................................... 7,009
Harrison, New York (Central School District), BAN, UT:
7,000 4.50% due 7/18/1997 ........................................................... 7,012
2,950 (School Building Improvement), 4.25% due 3/19/1998 ............................ 2,963
6,000 Hicksville, New York (Union Free School District), TAN, UT, 4.25% due 6/26/1997 . 6,004
12,000 Longwood, New York (Central School District at Middle Island), TAN, UT,
4.50% due 6/26/1997 ............................................................. 12,015
6,161 Middletown, New York, BAN, UT, Series B, 4.50% due 10/03/1997 ................... 6,179
3,000 Monroe County, New York, IDA (Coopervision Project), VRDN, 3.70% due
1/01/2012 (a) ................................................................... 3,000
2,000 Municipal Assistance Corporation, City of New York, New York, Refunding,
Series E, 4% due 7/01/1997 ...................................................... 2,001
Nassau County, New York, UT:
10,000 BAN, Series A, 4% due 8/15/1997 ............................................... 10,015
7,871 BAN, Series A, 4.25% due 8/15/1997 ............................................ 7,890
30,000 RAN, Series B, 4.25% due 4/15/1997 ............................................ 30,006
New York City, New York, CP:
32,400 3.45% due 4/07/1997 ........................................................... 32,400
1,500 3.50% due 4/07/1997 ........................................................... 1,500
11,300 3.35% due 4/09/1997 ........................................................... 11,300
15,000 3.40% due 4/09/1997 ........................................................... 15,000
26,900 3.50% due 4/11/1997 ........................................................... 26,900
14,400 3.40% due 5/09/1997 ........................................................... 14,400
18,000 3.50% due 6/10/1997 ........................................................... 18,000
2,000 3.50% due 7/11/1997 ........................................................... 2,000
9,000 3.50% due 7/18/1997 ........................................................... 9,000
10,000 3.55% due 7/18/1997 ........................................................... 10,000
11,000 3.45% due 8/07/1997 ........................................................... 11,000
7,000 3.55% due 8/08/1997 ........................................................... 7,000
1,500 3.55% due 8/21/1997 ........................................................... 1,500
</TABLE>
PORTFOLIO ABBREVIATIONS FOR CMA NEW YORK MUNICIPAL MONEY FUND
AMT Alternative Minimum Tax (subject to)
BAN Bond Anticipation Notes
CP Commercial Paper
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
RAN Revenue Anticipation Notes
TAN Tax Anticipation Notes
UT Unlimited Tax
VRDN Variable Rate Demand Notes
FS-54
<PAGE> 162
<TABLE>
<CAPTION>
CMA NEW YORK MUNICIPAL MONEY FUND
SCHEDULE OF INVESTMENTS AS OF MARCH 31, 1997 (CONTINUED) (IN THOUSANDS)
- ------------------------------------------------------------------------------------------------------------------------
FACE VALUE
STATE AMOUNT ISSUE (NOTE 1a)
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
NEW YORK New York City, New York, GO, VRDN (a):
(CONTINUED) $ 1,000 Series C, Subseries C-4, 3.70% due 8/01/1997 .............................. $ 1,000
3,500 UT, Series B, Sub-Series B-2, 3.65% due 8/15/2003 (d) ..................... 3,500
3,100 UT, Series B, Sub-Series B-3, 3.65% due 8/15/2004 (d) ..................... 3,100
1,200 UT, Series E, 3.70% due 5/15/1997 ......................................... 1,200
7,400 UT, Sub-Series A-4, 3.70% due 8/01/2022 ................................... 7,400
6,800 UT, Sub-Series A-4, 3.70% due 8/01/2023 ................................... 6,800
1,200 UT, Sub-Series E-5, 3.70% due 8/01/2016 ................................... 1,200
1,100 UT, Sub-Series E-5, 3.70% due 8/01/2017 ................................... 1,100
1,100 UT, Sub-Series E-5, 3.70% due 8/01/2019 ................................... 1,100
New York City, New York, Housing Development Corporation, M/F Mortgage
Revenue Bonds, VRDN, AMT, Series A (a):
10,000 (West 43rd Street Development), 3.40% due 12/01/2029 ...................... 10,000
32,400 (West 89th Street), 3.45% due 12/01/2029 .................................. 32,400
1,700 New York City, New York, IDA, IDR, VRDN, AMT (Bowe Industrial Inc.
Project), Series K, 3.45% due 11/01/2010 (a) ................................ 1,700
New York City, New York, Municipal Water Financing Authority, Water and
Sewer System Revenue Bonds:
14,000 CP, 3.60% due 4/07/1997 ................................................... 14,000
12,000 CP, 3.40% due 4/21/1997 ................................................... 12,000
10,000 CP, 3.45% due 5/16/1997 ................................................... 10,000
9,000 CP, 3.60% due 6/12/1997 ................................................... 9,000
5,000 CP, 3.60% due 8/06/1997 ................................................... 5,000
5,000 Series A, 7% due 6/15/1997 (b) ............................................ 5,106
2,360 Series A, 8.75% due 6/15/1997 (b) (f) ..................................... 2,431
20,850 VRDN, Series C, 3.65% due 6/15/2023 (a) (c) ............................... 20,850
12,500 VRDN, Series G, 3.75% due 6/15/2024 (a) (c) ............................... 12,500
New York City, New York, RAN, UT:
33,000 Series A, 4.50% due 4/15/1997 ............................................. 33,011
51,700 Series B, 4.50% due 6/30/1997 ............................................. 51,813
3,100 New York City, New York, Trust Cultural Resource Revenue Bonds (Solomon
R. Guggenheim), VRDN, Series B, 3.50% due 12/01/2015 (a) .................... 3,100
New York State, CP:
4,900 Series N, 3.40% due 5/05/1997 ............................................. 4,900
7,500 Series S, 3.15% due 4/04/1997 ............................................. 7,500
10,000 Series S, 3.40% due 5/13/1997 ............................................. 10,000
New York State Dormitory Authority Revenue Bonds:
1,900 (City University Systems Consolidated), Series A, 8.125% due 7/01/1997 (b) 1,959
5,160 (Memorial Sloan Kettering), CP, Series A, 3.55% due 4/08/1997 ............. 5,160
3,200 (Memorial Sloan Kettering), CP, Series A, 3.50% due 7/14/1997 ............. 3,200
1,000 (Memorial Sloan Kettering), CP, Series B, 3.40% due 4/08/1997 ............. 1,000
8,550 (Memorial Sloan Kettering), CP, Series B, 3.45% due 7/16/1997 ............. 8,550
9,300 (Memorial Sloan Kettering), CP, Series C, 3.35% due 4/07/1997 ............. 9,300
18,000 (Memorial Sloan Kettering), CP, Series C, 3.40% due 4/08/1997 ............. 18,000
4,500 (Memorial Sloan Kettering), CP, Series C, 3.55% due 4/08/1997 ............. 4,500
6,000 Refunding (City University Systems--3rd Generation Resources), Series 2,
4.75% due 7/01/1997 ....................................................... 6,008
New York State Energy Research and Development Authority, Electric
Facilities Revenue Bonds (Long Island Lighting Co.), VRDN, AMT (a):
5,000 Series A, 3.55% due 8/01/2025 ............................................. 5,000
18,300 Series B, 3.55% due 11/01/2023 ............................................ 18,300
</TABLE>
FS-55
<PAGE> 163
<TABLE>
<CAPTION>
CMA NEW YORK MUNICIPAL MONEY FUND
SCHEDULE OF INVESTMENTS AS OF MARCH 31, 1997 (CONTINUED) (IN THOUSANDS)
- ------------------------------------------------------------------------------------------------------------------------
FACE VALUE
STATE AMOUNT ISSUE (NOTE 1a)
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
NEW YORK $14,780 New York State Energy Research and Development Authority, PCR (Long Island
(CONTINUED) Lighting Co. Project), Series B, 3.60% due 3/01/1998 ........................ $ 14,780
3,000 New York State Environmental Facilities Corporation, PCR, State Water
Revolving Fund (Pooled Loan), Series C, 3.73% due 7/15/1997 ................. 3,000
26,400 New York State Environmental Facilities Corporation, Resource Recovery
Revenue Bonds (OFS Equity Huntington Project), VRDN, AMT, 3.70% due
11/01/2014 (a) .............................................................. 26,400
3,150 New York State Environmental Facilities Corporation, Solid Waste
Disposal Revenue Bonds (General Electric Co. Project), CP, AMT, Series A,
3.50% due 7/14/1997 ......................................................... 3,150
5,960 New York State, GO, 5% due 3/01/1998 ........................................ 6,026
New York State, HFA, Revenue Bonds, VRDN (a):
20,000 (East 84th Street), AMT, Series A, 3.40% due 11/01/2028 ................... 20,000
400 (Normandie Court-I Project), 3.40% due 5/15/2015 .......................... 400
20,000 New York State, Local Government Assistance Corporation Revenue Bonds, CP,
3.70% due 4/07/1997 ......................................................... 20,000
New York State Medical Care Facilities, Finance Agency Revenue Bonds,
VRDN, Series A (a):
5,300 (Children's Hospital of Buffalo), 3.15% due 11/01/2005 .................... 5,300
3,700 (Pooled Loan Equipment Program II), 3.30% due 11/01/2003 .................. 3,700
1,100 Refunding (Huntington Hospital Project), Series A, 8.125% due
11/01/1997 (b) ............................................................ 1,149
805 New York State Mortgage Agency, Revenue Refunding Bonds (Homeowner
Mortgage), AMT, Series 54, 3.80% due 4/01/1997 .............................. 805
New York State Power Authority, Revenue and General Purpose Bonds, CP:
21,500 3.20% due 4/01/1997 ....................................................... 21,500
22,800 3.30% due 4/04/1997 ....................................................... 22,800
25,000 3.65% due 4/07/1997 ....................................................... 25,000
20,000 3.45% due 4/09/1997 ....................................................... 20,000
39,770 New York State Power Authority, Revenue and General Purpose Bonds
(Junior Lien), 3.50% due 9/01/1997 .......................................... 39,770
7,000 New York State Thruway Authority, General Revenue Bonds, VRDN, 3.50%
due 1/01/2025 (a) ........................................................... 7,000
4,000 New York State Urban Development Corporation Revenue Bonds
(Correctional Facilities), Series C, 7.625% due 1/01/1998 (b) (e) ........... 4,197
5,860 Oneida, New York, City School District, UT, 4.25% due 6/15/1997 ............. 5,865
5,850 Oswego, New York, BAN, UT, 4.50% due 10/08/1997 ............................. 5,867
10,000 Patchogue-Medford, New York (Unified Free School District), TAN, UT,
4.50% due 6/26/1997 ......................................................... 10,015
Port Authority of New York and New Jersey, Special Obligation Revenue
Bonds (Versatile Structure Obligations), VRDN (a):
15,700 AMT, Series 1, 3.70% due 8/01/2028 ........................................ 15,700
4,600 Series 3, 3.65% due 6/01/2020 ............................................. 4,600
7,300 Series 5, 3.65% due 8/01/2024 ............................................. 7,300
9,765 Port Authority of New York and New Jersey, VRDN, AMT, Series SG-52,
3.50% due 3/01/2016 (a) (d) ................................................. 9,765
3,318 Rensselaer County, New York, BAN, UT, Series A, 4.25% due 6/27/1997 ......... 3,320
7,000 Rochester, New York, RAN, UT, Series III, 4.50% due 6/30/1997 ............... 7,017
</TABLE>
FS-56
<PAGE> 164
<TABLE>
<CAPTION>
CMA NEW YORK MUNICIPAL MONEY FUND
SCHEDULE OF INVESTMENTS AS OF MARCH 31, 1997 (CONCLUDED) (IN THOUSANDS)
- -------------------------------------------------------------------------------------------------------------------------
FACE VALUE
STATE AMOUNT ISSUE (NOTE 1a)
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
NEW YORK $ 1,880 Saint Lawrence County, New York, IDA, Civic Facility Revenue Bonds
(CONCLUDED) (Clarkson University Project), VRDN, 3.60% due 10/01/2005 (a) ............... $ 1,880
7,000 Saratoga Springs, New York, City School District, RAN, UT, 3.75% due
6/27/1997 ................................................................... 7,003
4,000 Schenectady County, New York, IDA, IDR (Super Steel Inc. Project),
VRDN, AMT, Series A, 3.50% due 5/01/2006 (a) ................................ 4,000
3,236 Smithtown, New York, BAN, UT, Series B, 4% due 5/02/1997 .................... 3,237
28,600 Suffolk County, New York, IDA, IDR (Nissequogue Cogeneration Partners),
VRDN, 3.45% due 12/15/2023 (a) .............................................. 28,600
38,580 Suffolk County, New York, TAN, UT, Series I, 4% due 8/14/1997 ............... 38,648
Suffolk County, New York, Water Authority, BAN, VRDN, UT (a):
2,600 3.35% due 12/21/1999 ...................................................... 2,600
15,000 3.35% due 2/08/2001 ....................................................... 15,000
Syracuse, New York, BAN, UT:
5,000 AMT, Series B, 4.15% due 12/19/1997 ....................................... 5,007
15,000 Series A, 3.90% due 12/19/1997 ............................................ 15,016
11,535 Syracuse, New York, IDA, Civic Facility Revenue Bonds (Community
Development Properties--Larned Project), VRDN, 3.60% due 4/01/2018 (a) ...... 11,535
2,360 Triborough Bridge and Tunnel Authority, New York, General Purpose
Revenue Bonds, Series B, 5% due 1/01/1998 ................................... 2,382
7,000 Valley Stream, New York, Central High School District, TAN, UT, 4.25%
due 6/26/1997 ............................................................... 7,006
- ------------------------------------------------------------------------------------------------------------------------
PUERTO RICO-- Puerto Rico Commonwealth, Government Development Bank, CP:
4.6% 46,600 3.40% due 5/08/1997 ....................................................... 46,600
7,000 3.55% due 5/09/1997 ....................................................... 7,000
3,500 3.45% due 5/12/1997 ....................................................... 3,500
- ------------------------------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS (COST--$1,223,327*)--98.9% ................................ 1,223,327
OTHER ASSETS LESS LIABILITIES--1.1% ......................................... 12,995
----------
NET ASSETS--100.0% .......................................................... $1,236,322
==========
</TABLE>
(a)The interest rate is subject to change periodically based on
certain indexes. The interest rate shown is the rate in effect at
March 31, 1997.
(b)Prerefunded.
(c)FGIC Insured.
(d)MBIA Insured.
(e)AMBAC Insured.
(f)BIG Insured.
*Cost for Federal income tax purposes.
See Notes to Financial Statements.
FS-57
<PAGE> 165
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------
CMA NEW YORK MUNICIPAL MONEY FUND
STATEMENT OF ASSETS AND LIABILITIES AS OF MARCH 31, 1997
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS:
Investments, at value (identified cost--$1,223,326,716) (Note 1a) ................. $ 1,223,326,716
Cash .............................................................................. 521,495
Receivables:
Interest ......................................................................... $ 11,113,368
Securities sold .................................................................. 2,369,733 13,483,101
---------------
Prepaid registration fees and other assets (Note 1d) .............................. 27,202
---------------
Total assets ...................................................................... 1,237,358,514
---------------
LIABILITIES:
Payables:
Investment adviser (Note 2) ...................................................... 471,864
Distributor (Note 2) ............................................................. 362,101
Beneficial interest redeemed ..................................................... 32 833,997
---------------
Accrued expenses and other liabilities ............................................ 202,195
---------------
Total liabilities ................................................................. 1,036,192
---------------
NET ASSETS ........................................................................ $ 1,236,322,322
===============
NET ASSETS CONSIST OF:
Shares of beneficial interest, $0.10 par value, unlimited number of shares
authorized ........................................................................ $ 123,720,521
Paid-in capital in excess of par .................................................. 1,113,484,685
Accumulated realized capital losses--net (Note 4) ................................. (882,884)
---------------
NET ASSETS--Equivalent to $1.00 per share based on 1,237,205,206 shares of
beneficial interest outstanding ................................................... $ 1,236,322,322
===============
See Notes to Financial Statements.
</TABLE>
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------
CMA NEW YORK MUNICIPAL MONEY FUND
STATEMENT OF OPERATIONS FOR THE YEAR ENDED MARCH 31, 1997
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
INVESTMENT INCOME (NOTE 1c):
Interest and amortization of premium and discount earned ......................... $ 40,146,064
EXPENSES:
Investment advisory fees (Note 2) ................................................. $ 5,150,683
Distribution fees (Note 2) ........................................................ 1,405,157
Transfer agent fees (Note 2) ...................................................... 205,845
Registration fees (Note 1d) ....................................................... 134,464
Accounting services (Note 2) ...................................................... 106,293
Custodian fees .................................................................... 69,745
Professional fees ................................................................. 55,784
Printing and shareholder reports .................................................. 54,167
Pricing fees ...................................................................... 12,179
Trustees' fees and expenses ....................................................... 10,706
Other ............................................................................. 12,704
---------------
Total expenses .................................................................... 7,217,727
---------------
Investment income--net ............................................................ 32,928,337
REALIZED LOSS ON INVESTMENTS--NET (NOTE 1c) ....................................... (802)
---------------
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS .............................. $ 32,927,535
===============
</TABLE>
See Notes to Financial Statements.
FS-58
<PAGE> 166
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------------
CMA NEW YORK MUNICIPAL MONEY FUND
STATEMENTS OF CHANGES IN NET ASSETS
- ---------------------------------------------------------------------------------------------------------------------------
For the Year Ended March 31,
-------------------------------
Increase (Decrease) in Net Assets: 1997 1996
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
OPERATIONS:
Investment income--net ............................................................ $ 32,928,337 $ 31,054,963
Realized gain (loss) on investments--net .......................................... (802) 2,835
---------------- ---------------
Net increase in net assets resulting from operations .............................. 32,927,535 31,057,798
---------------- ---------------
DIVIDENDS TO SHAREHOLDERS (NOTE 1e):
Investment income--net ............................................................ (32,920,755) (31,054,963)
---------------- ---------------
Net decrease in net assets resulting from dividends to shareholders ............... (32,920,755) (31,054,963)
---------------- ---------------
BENEFICIAL INTEREST TRANSACTIONS (NOTE 3):
Net proceeds from sale of shares .................................................. 4,110,518,531 3,670,775,973
Net asset value of shares issued to shareholders in reinvestment of
dividends (Note 1e) ............................................................... 32,921,515 31,055,127
---------------- ---------------
4,143,440,046 3,701,831,100
Cost of shares redeemed ........................................................... (4,039,388,472) (3,489,422,207)
---------------- ---------------
Net increase in net assets derived from beneficial interest transactions .......... 104,051,574 212,408,893
---------------- ---------------
NET ASSETS:
Total increase in net assets ...................................................... 104,058,354 212,411,728
Beginning of year ................................................................. 1,132,263,968 919,852,240
---------------- ---------------
End of year ....................................................................... $ 1,236,322,322 $ 1,132,263,968
=============== ===============
</TABLE>
See Notes to Financial Statements.
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------
CMA NEW YORK MUNICIPAL MONEY FUND
FINANCIAL HIGHLIGHTS
- ------------------------------------------------------------------------------------------------------------------------
The following per share data and ratios have been derived
from information provided in the financial statements.
For the Year Ended March 31,
-------------------------------------------------------------------
Increase (Decrease) in Net Asset Value: 1997 1996 1995 1994 1993
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of year ................... $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
---------- ---------- ---------- ---------- ----------
Investment income--net ............................... .03 .03 .03 .02 .02
---------- ---------- ---------- ---------- ----------
Total from investment operations ..................... .03 .03 .03 .02 .02
---------- ---------- ---------- ---------- ----------
Less dividends from investment income--net ........... (.03) (.03) (.03) (.02) (.02)
---------- ---------- ---------- ---------- ----------
Net asset value, end of year ......................... $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
========== ========== ========== ========== ==========
TOTAL INVESTMENT RETURN .............................. 2.92% 3.17% 2.59% 1.79% 2.19%
========== ========== ========== ========== ==========
RATIOS TO AVERAGE NET ASSETS:
Expenses ............................................. .63% .64% .67% .67% .67%
========== ========== ========== ========== ==========
Investment income--net ............................... 2.88% 3.12% 2.59% 1.78% 2.16%
========== ========== ========== ========== ==========
SUPPLEMENTAL DATA:
Net assets, end of year (in thousands) ............... $1,236,322 $1,132,264 $ 919,852 $ 772,760 $ 665,970
========== ========== ========== ========== ==========
</TABLE>
See Notes to Financial Statements.
FS-59
<PAGE> 167
CMA NEW YORK MUNICIPAL MONEY FUND
NOTES TO FINANCIAL STATEMENTS
1. SIGNIFICANT ACCOUNTING POLICIES:
CMA New York Municipal Money Fund (the "Fund") is part of CMA Multi-State
Municipal Series Trust (the "Trust"). The Fund is registered under the
Investment Company Act of 1940 as a non-diversified, open-end management
investment company. The following is a summary of significant accounting
policies followed by the Fund.
(a) Valuation of investments--Investments are valued at amortized cost, which
approximates market value. For the purpose of valuation, the maturity of a
variable rate demand instrument is deemed to be the next coupon date on which
the interest rate is to be adjusted. In the case of a floating rate instrument,
the remaining maturity is the demand notice payment period.
(b) 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.
(c) Security transactions and investment income--Security transactions are
recorded on the dates the transactions are entered into (the trade dates).
Interest income (including amortization of premium and discount) is recognized
on the accrual basis. Realized gains and losses on security transactions are
determined on the identified cost basis.
(d) Prepaid registration fees--Prepaid registration fees are charged to expense
as the related shares are issued.
(e) Dividends and distributions to shareholders--The Fund declares dividends
daily and reinvests daily such dividends (net of non-resident alien tax and
back-up withholding tax withheld) in additional fund shares at net asset value.
Dividends are declared from the total of net investment income, excluding
discounts earned other than original issue discounts. Net realized capital
gains, if any, are normally distributed annually after deducting prior years'
loss carryforward. The Fund may distribute capital gains more frequently than
annually in order to maintain the Fund's net asset value at $1.00 per share.
(f) Reclassification--Generally accepted accounting principles require that
certain components of net assets be adjusted to reflect permanent differences
between financial and tax reporting. Accordingly, current year's permanent
book/tax differences of $7,582 have been reclassified between accumulated net
realized capital losses and undistributed net investment income. These
reclassifications have no effect on net assets or net asset value per share.
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.
FAM is responsible for the management of the Fund's portfolio and provides the
necessary personnel, facilities, equipment and certain other services necessary
to the operations of the Fund. For such services, the Fund pays a monthly fee
based upon the average daily value of the Fund's net assets, at the following
annual rates: 0.50% of the first $500 million of average daily net assets;
0.425% of average daily net assets in excess of $500 million but not exceeding
$1 billion; and 0.375% of average daily net assets in excess of $1 billion.
FS-60
<PAGE> 168
CMA NEW YORK MUNICIPAL MONEY FUND
NOTES TO FINANCIAL STATEMENTS (CONCLUDED)
Pursuant to the Distribution and Shareholder Servicing Plan in compliance with
Rule 12b-1 under the Investment Company Act of 1940, Merrill Lynch, Pierce,
Fenner & Smith Inc. ("MLPF&S") receives a distribution fee from the Fund at the
end of each month at the annual rate of 0.125% of average daily net assets of
the Fund. The distribution fee is to compensate MLPF&S financial consultants and
other directly involved branch office personnel for selling shares of the Fund
and for providing direct personal services to shareholders. The distribution fee
is not compensation for the administrative and operational services rendered to
the Fund by MLPF&S in processing share orders and administering shareholder
accounts.
Merrill Lynch Financial Data Services, Inc. ("MLFDS"), a wholly-owned
subsidiary of ML & Co., is the Fund's transfer agent.
Accounting services are provided to the Fund by FAM at cost.
Certain officers and/or trustees of the Fund are officers and/or directors of
FAM, PSI, MLFDS, and/or ML & Co.
3. SHARES OF BENEFICIAL INTEREST:
The number of shares purchased and redeemed during the period corresponds to the
amounts included in the Statements of Changes in Net Assets for net proceeds
from sale of shares and cost of shares redeemed, respectively, since shares are
recorded at $1.00 per share.
4. CAPITAL LOSS CARRYFORWARD:
At March 31, 1997, the Fund had a net capital loss carryforward of approximately
$883,000, of which $81,000 expires in 1998, $203,000 expires in 2001, $293,000
expires in 2002, $304,000 expires in 2003 and $2,000 expires in 2004. This
amount will be available to offset like amounts of any future taxable gains.
FS-61
<PAGE> 169
- --------------------------------------------------------------------------------
CMA NORTH CAROLINA MUNICIPAL MONEY FUND
INDEPENDENT AUDITORS' REPORT
- --------------------------------------------------------------------------------
THE BOARD OF TRUSTEES AND SHAREHOLDERS,
CMA NORTH CAROLINA MUNICIPAL MONEY FUND
OF CMA MULTI-STATE MUNICIPAL SERIES TRUST:
We have audited the accompanying statement of assets and liabilities, including
the schedule of investments, of CMA North Carolina Municipal Money Fund of CMA
Multi-State Municipal Series Trust as of March 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 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 March 31, 1997 by correspondence with the custodian and
broker. 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 CMA North Carolina
Municipal Money Fund of CMA Multi-State Municipal Series Trust as of March 31,
1997, the results of its operations, the changes in its net assets, and the
financial highlights for the respective stated periods in conformity with
generally accepted accounting principles.
Deloitte & Touche LLP
Princeton, New Jersey
May 2, 1997
FS-62
<PAGE> 170
CMA NORTH CAROLINA MUNICIPAL MONEY FUND
SCHEDULE OF INVESTMENTS AS OF MARCH 31, 1997 (IN THOUSANDS)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
FACE VALUE
STATE AMOUNT ISSUE (NOTE 1a)
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
NORTH CAROLINA -- $1,000 Beaufort County, North Carolina, Industrial Facilities and Pollution Control
87.8% Financing Authority Revenue Bonds (Texasgulf, Inc. Project), VRDN, 3.50%
due 12/01/2000 (a) ................................................................... $1,000
3,300 Buncombe County, North Carolina, Industrial Facilities and Pollution Control
Financing Authority, Revenue Refunding Bonds (Cooper Industries), VRDN,
3.65% due 1/01/2006 (a) .............................................................. 3,300
6,600 Cabarrus County, North Carolina, Industrial Facilities and Pollution Control
Financing Authority, Industrial Revenue Bonds (S & D Coffee Inc. Project), VRDN,
AMT, 3.50% due 9/01/2011 (a) ......................................................... 6,600
3,000 Carteret County, North Carolina, Industrial Facilities and Pollution Control
Financing Authority, PCR (Texasgulf, Inc. Project), VRDN, 3.40% due
10/01/2005 (a) ....................................................................... 3,000
800 Catawba County, North Carolina, Industrial Facilities and Pollution Control
Financing Authority Revenue Bonds (Lukens Steel Co. Project), VRDN, AMT,
3.75% due 12/01/2009 (a) ............................................................. 800
Charlotte-Mecklenberg Hospital Authority, North Carolina, Health Care System
Revenue Bonds, VRDN, Series C (a):
4,000 3.25% due 1/15/2026 ................................................................ 4,000
8,500 3.50% due 1/15/2026 ................................................................ 8,500
5,000 Charlotte, North Carolina, Airport Revenue Refunding Bonds, VRDN, Series A,
3.35% due 7/01/2016 (a)(b) .......................................................... 5,000
1,000 Charlotte, North Carolina, Refunding Bonds, GO, UT, 4.50% due 6/01/1997 ............. 1,002
1,000 Charlotte, North Carolina, Water and Sewer, UT, 7.30% due 6/01/1997 (c) ............. 1,027
Craven County, North Carolina, Industrial Facilities and Pollution Control
Financing Authority, Resource Bonds (Cravenwood Energy Project), VRDN,
AMT (a):
4,400 Series B, 3.80% due 5/01/2011 ..................................................... 4,400
3,200 Series C, 3.80% due 5/01/2011 ..................................................... 3,200
Cumberland County, North Carolina, Industrial Facilities and Pollution Control
Financing Authority, Revenue Refunding Bonds (Monsanto Co. Project), VRDN (a):
1,715 3.40% due 6/01/2012 ............................................................... 1,715
600 3.40% due 10/01/2014 .............................................................. 600
Durham County, North Carolina, Public Improvement Bonds, VRDN, UT (a):
1,000 3.40% due 5/01/2009 ............................................................... 1,000
1,000 3.40% due 5/01/2010 ............................................................... 1,000
1,000 3.40% due 5/01/2011 ............................................................... 1,000
2,688 Enfield, North Carolina, BAN, 3.585% due 8/20/1997 .................................. 2,688
772 Freemont, North Carolina, BAN, UT, 3.70% due 1/21/1998 .............................. 773
Gaston County, North Carolina, Industrial Facilities and Pollution Control
Financing Authority Revenue Bonds, VRDN (a):
2,000 (Gold Medal Homes), 3.55% due 12/01/2009 .......................................... 2,000
800 (Mount Holly Enterprises/Queens G.P. Inc.), AMT, 3.65% due 5/01/2004 .............. 800
2,000 (Mount Holly Enterprises/Queens G.P. Inc.), AMT, 3.55% due 12/01/2009 ............. 2,000
Granville County, North Carolina, Industrial Facilities and Pollution Control
Financing Authority Revenue Bonds, VRDN, AMT (a):
4,000 Mayville Metal Production Project), 3.65% due 5/23/2020 ........................... 4,000
1,840 (Tuscarora Plastics, Inc. Project), 3.65% due 12/01/2001 .......................... 1,840
500 Greene County, North Carolina, Industrial Facilities and Pollution Control
Financing Authority, IDA, Revenue Bonds (Federal Paper Board Company, Inc.
Project), VRDN, AMT, 3.50% due 11/01/2009 (a) ....................................... 500
Guilford County, North Carolina, Industrial Facilities and Pollution Control
Financing Authority Revenue Bonds, VRDN, AMT (a):
900 (Pharmagraphics Inc. Project), 3.75% due 9/01/2010 ................................ 900
7,500 (US Woven Label Project), 3.50% due 1/01/2013 ..................................... 7,500
</TABLE>
FS-63
<PAGE> 171
CMA NORTH CAROLINA MUNICIPAL MONEY FUND
SCHEDULE OF INVESTMENTS AS OF MARCH 31, 1997(CONTINUED) (IN THOUSANDS)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
FACE VALUE
STATE AMOUNT ISSUE (NOTE 1a)
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
NORTH CAROLINA $26,015 Halifax County, North Carolina, Industrial Facilities and Pollution Control
(CONTINUED) Financing Authority Revenue Bonds (Exempt Facilities -- Westmoreland Project),
VRDN, AMT, 3.85% due 12/01/2019 (a) .................................................. $26,015
Iredell County, North Carolina, Industrial Facilities and Pollution Control
Financing Authority Revenue Bonds:
4,000 (Purina Mills Inc. Project), VRDN, AMT, 3.60% due 7/01/2020 (a) .................... 4,000
8,300 (Rubbermaid Specialty Products, Inc.), 3.85% due 6/01/1997 ......................... 8,300
1,585 Lee County, North Carolina, BAN, 3.96% due 4/02/1997 ................................. 1,585
3,700 Lenoir County, North Carolina, Industrial Facilities and Pollution Control
Financing Authority Revenue Bonds (West Co. Nebraska, Inc. Project),
VRDN, 3.55% due 10/01/2005 (a) ....................................................... 3,700
8,900 Lincoln County, North Carolina, Industrial Facilities and Pollution Control
Financing Authority Revenue Bonds (Hof Textiles Inc. Project), VRDN, AMT,
3.50% due 10/01/2011 (a) ............................................................. 8,900
8,500 Mecklenberg County, North Carolina, Industrial Facilities and Pollution Control
Financing Authority, IDR (Rexroth Corporation Project), VRDN, AMT, 3.50% due
9/01/2016 (a) ........................................................................ 8,500
Mecklenberg County, North Carolina, Industrial Facilities and Pollution Control
Financing Authority Revenue Bonds, VRDN (a):
2,000 (Edgecomb Metals Company Project), 3.40% due 12/01/2009 ............................ 2,000
900 (Flawa Corporation Project), AMT, 3.35% due 12/01/2008 ............................. 900
1,500 (Griffith Micro Science Project), AMT, 3.60% due 11/01/2007 ........................ 1,500
1,000 Mecklenburg County, North Carolina, UT, Series A and B, 6.60% due 4/01/1997 .......... 1,000
905 New Hanover County, North Carolina, Industrial Facilities and Pollution Control
Financing Authority Revenue Bonds (Interroll Corp. Project), VRDN, 3.65%
due 11/01/2003 (a) ................................................................... 905
3,200 North Carolina Eastern Municipal Power Agency, Power System Revenue Bonds,
CP, Series B, 3.15% due 4/01/1997 .................................................... 3,200
North Carolina Educational Facilities Finance Agency Revenue Bonds, VRDN (a):
1,500 (Bowman Grey School of Medicine Project), 3.50% due 9/01/2020 ...................... 1,500
1,500 (Duke University Project), Series A, 3.35% due 6/01/2027 ........................... 1,500
3,300 North Carolina Medical Care Commission, Health Care Facilities Revenue Bonds
(Cabarrus Memorial Hospital Project), VRDN, 3.45% due 3/01/2012 (a) .................. 3,300
North Carolina Medical Care Commission, Hospital Revenue Bonds (a):
3,300 (Duke University Hospital), VRDN, Series B, 3.35% due 6/01/2015 .................... 3,300
3,500 (Duke University Hospital), VRDN, Series C, 3.35% due 6/01/2015 .................... 3,500
2,130 (Duke University Hospital), VRDN, Series D, 3.35% due 6/01/2015 .................... 2,130
3,700 (Pooled Financing Project), ACES, 3.40% due 4/01/2012 .............................. 3,700
200 Refunding (Moses H. Cone Memorial Hospital Project), VRDN, 3.45%
due 10/01/2023 ..................................................................... 200
North Carolina Municipal Power Agency, Electric Revenue Bonds
(No. 1 Catawba), CP:
3,817 3.35% due 4/10/1997 ................................................................ 3,817
4,000 3.40% due 6/25/1997 ................................................................ 4,000
7,000 3.45% due 7/16/1997 ................................................................ 7,000
16,000 3.50% due 7/16/1997 ................................................................ 16,000
2,600 3.55% due 7/25/1997 ................................................................ 2,600
10,000 3.55% due 8/21/1997 ................................................................ 10,000
3,000 3.60% due 8/22/1997 ................................................................ 3,000
1,900 North Carolina State Port Authority, Docks and Wharves Facility Revenue Bonds
(Morehead City Terminals), VRDN, AMT, 3.65% due 1/01/2016 (a) ........................ 1,900
</TABLE>
FS-64
<PAGE> 172
CMA NORTH CAROLINA MUNICIPAL MONEY FUND
SCHEDULE OF INVESTMENTS AS OF MARCH 31, 1997(CONCLUDED) (IN THOUSANDS)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
FACE VALUE
STATE AMOUNT ISSUE (NOTE 1a)
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
NORTH CAROLINA $1,405 Piedmont Triad Airport Authority, North Carolina, Special Facility Revenue
(CONCLUDED) Bonds (Purpose - Cessna Aircraft Company Project), VRDN, AMT, 3.65% due
10/01/2012 (a) ....................................................................... $ 1,405
1,700 Raleigh-Durham, North Carolina, Airport Authority, Special Facility Revenue
Refunding Bonds (American Airlines), VRDN, Series A, 3.70% due 11/01/2015 (a) ........ 1,700
5,770 Robeson County, North Carolina, BAN, UT, 3.485% due 10/15/1997 ....................... 5,771
700 Rowan County, North Carolina, Industrial Facilities and Pollution Control
Financing Authority Revenue Bonds (Reynolds Metals Company Project),
3.55% due 6/01/1997 .................................................................. 700
3,100 Rutherford County, North Carolina, Industrial Facilities and Pollution Control
Financing Authority Revenue Bonds (All American Homes of North Carolina Inc.),
VRDN, AMT, 3.75% due 11/01/2011 (a) .................................................. 3,100
1,000 South Central Water and Sewer District, North Carolina, Harnett County, BAN, UT,
3.52% due 6/11/1997 .................................................................. 1,000
2,225 Tabor City, North Carolina, BAN, UT, 3.64% due 6/05/1997 ............................. 2,225
5,100 University of North Carolina, Chapel Hill School of Medicine and Ambulatory
Care Clinic Revenue Bonds, VRDN, 3.35% due 7/01/2012 (a) ............................. 5,100
4,500 Wake County, North Carolina, Industrial Facilities and Pollution Control
Financing Authority Revenue Bonds (Carolina Power and Light Company
Project), VRDN, Series C, 3.65% due 10/01/2015 (a) ................................... 4,500
2,000 Wayne County, North Carolina, Industrial Facilities and Pollution Control
Financing Authority, Revenue Refunding Bonds (General Signal), VRDN,
3.65% due 12/01/2000 (a) ............................................................. 2,000
600 Wilson County, North Carolina, Industrial Facilities and Pollution Control
Financing Authority, IDR (North Carolina Chip Co. Project), VRDN, 3.65% due
1/01/2000 (a) ........................................................................ 600
1,100 Winston-Salem, North Carolina, Urban Redevelopment, Mortgage Revenue
Refunding Bonds (Summit Square Garden Apartments), CP, 3.40% due 4/17/1997 ........... 1,100
3,500 Winston-Salem, North Carolina, Water and Sewer System Revenue Bonds, CP,
3.40% due 4/17/1997 .................................................................. 3,500
- -----------------------------------------------------------------------------------------------------------------------------------
PUERTO RICO -- Puerto Rico Commonwealth, Government Development Bank, CP:
10.8% 5,500 3.15% due 4/01/1997 ................................................................ 5,500
8,900 3.05% due 4/03/1997 ................................................................ 8,900
7,500 3.25% due 4/03/1997 ................................................................ 7,500
3,000 3.50% due 4/11/1997 ................................................................ 3,000
Puerto Rico Industrial, Medical and Environmental Pollution Control Facilities
Financing Authority Revenue Bonds:
1,750 (Abbott Labs Project), 3.75% due 3/01/1998 ......................................... 1,750
2,940 (Dickinson & Co.), 3.76% due 3/01/1998 ............................................. 2,940
- -----------------------------------------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS (COST -- $270,388*) -- 98.6% ....................................... 270,388
OTHER ASSETS LESS LIABILITIES -- 1.4% ................................................ 3,792
--------
NET ASSETS -- 100.0% ................................................................. $274,180
========
- -----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(a) The interest rate is subject to change periodically based on certain
indexes. The interest rate shown is the rate in effect at March 31, 1997.
(b) MBIA Insured.
(c) Prerefunded.
* Cost for Federal income tax purposes.
See Notes to Financial Statements.
FS-65
<PAGE> 173
CMA NORTH CAROLINA MUNICIPAL MONEY FUND
STATEMENT OF ASSETS AND LIABILITIES AS OF MARCH 31, 1997
- --------------------------------------------------------------------------------
<TABLE>
<S> <C> <C>
ASSETS:
Investments, at value (identified cost -- $270,387,549) (Note 1a) ............. $270,387,549
Cash .......................................................................... 300,760
Receivables:
Securities sold ............................................................. $3,001,870
Interest .................................................................... 1,061,411 4,063,281
----------
Prepaid registration fees and other assets (Note 1d) .......................... 10,761
------------
Total assets .................................................................. 274,762,351
------------
LIABILITIES:
Payables:
Securities purchased ........................................................ 300,665
Investment adviser (Note 2) ................................................. 116,227
Distributor (Note 2) ........................................................ 84,050
Dividends to shareholders (Note 1e) ......................................... 66 501,008
---------
Accrued expenses and other liabilities ........................................ 81,277
------------
Total liabilities .............................................................. 582,285
------------
NET ASSETS ..................................................................... $274,180,066
============
NET ASSETS CONSIST OF:
Shares of beneficial interest, $0.10 par value, unlimited number of shares
authorized ..................................................................... $27,421,988
Paid-in capital in excess of par ............................................... 246,797,889
Accumulated realized capital losses -- net (Note 4) ............................ (39,811)
------------
NET ASSETS -- Equivalent to $1.00 per share based on 274,219,877 shares of
beneficial interest outstanding ................................................ $274,180,066
============
</TABLE>
See Notes to Financial Statements.
FS-66
<PAGE> 174
CMA NORTH CAROLINA MUNICIPAL MONEY FUND
STATEMENT OF OPERATIONS FOR THE YEAR ENDED MARCH 31, 1997
- --------------------------------------------------------------------------------
<TABLE>
<S> <C> <C>
INVESTMENT INCOME (NOTE 1c):
Interest and amortization of premium and discount earned ...................... $9,351,932
EXPENSES:
Investment advisory fees (Note 2) ............................................. $1,331,895
Distribution fees (Note 2) .................................................... 326,935
Transfer agent fees (Note 2) .................................................. 60,651
Accounting services (Note 2) .................................................. 50,439
Professional fees ............................................................. 48,098
Registration fees (Note 1d) ................................................... 30,259
Custodian fees ................................................................ 26,304
Printing and shareholder reports .............................................. 22,476
Pricing fees .................................................................. 6,495
Trustees' fees and expenses ................................................... 2,436
Amortization of organization expenses (Note 1d) ............................... 1,242
Other ......................................................................... 4,035
----------
Total expenses ................................................................ 1,911,265
----------
Investment income -- net ...................................................... 7,440,667
REALIZED LOSS ON INVESTMENTS -- NET (NOTE 1c) ................................. (3,442)
----------
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS .......................... $7,437,225
==========
</TABLE>
See Notes to Financial Statements.
CMA NORTH CAROLINA MUNICIPAL MONEY FUND
STATEMENTS OF CHANGES IN NET ASSETS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
For the Year Ended
March 31,
--------------------------------
Increase (Decrease) in Net Assets: 1997 1996
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
OPERATIONS:
Investment income -- net ...................................................... ...... $ 7,440,667 $ 8,169,520
Realized loss on investments -- net .................................................. (3,442) (7,855)
------------ ------------
Net increase in net assets resulting from operations ................................. 7,437,225 8,161,665
------------ ------------
DIVIDENDS TO SHAREHOLDERS (NOTE 1e):
Investment income -- net ............................................................. (7,440,667) (8,169,520)
------------ ------------
Net decrease in net assets resulting from dividends to shareholders .................. (7,440,667) (8,169,520)
------------ ------------
BENEFICIAL INTEREST TRANSACTIONS (NOTE 3):
Net proceeds from sale of shares ..................................................... 757,440,492 854,050,473
Net asset value of shares issued to shareholders in reinvestment
of dividends (Note 1e) ............................................................... 7,440,785 8,167,035
------------ ------------
764,881,277 862,217,508
Cost of shares redeemed .............................................................. (764,608,188) (867,003,212)
------------ ------------
Net increase (decrease) in net assets derived from beneficial interest transactions .. 273,089 (4,785,704)
------------ ------------
NET ASSETS:
Total increase (decrease) in net assets .............................................. 269,647 (4,793,559)
Beginning of year .................................................................... 273,910,419 278,703,978
------------ ------------
End of year .......................................................................... $274,180,066 $273,910,419
============ ============
</TABLE>
See Notes to Financial Statements.
FS-67
<PAGE> 175
CMA NORTH CAROLINA MUNICIPAL MONEY FUND
FINANCIAL HIGHLIGHTS
The following per share data and ratios have been derived
from information provided in the financial statements.
<TABLE>
<CAPTION>
For the Year Ended March 31,
---------------------------------------------------------------------------
Increase (Decrease) in Net Asset Value: 1997 1996 1995 1994 1993
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of year ............ $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
-------- -------- -------- -------- --------
Investment income -- net ...................... .03 .03 .03 .02 .02
-------- -------- -------- -------- --------
Total from investment operations .............. .03 .03 .03 .02 .02
-------- -------- -------- -------- --------
Less dividends from investment income -- net... (.03) (.03) (.03) (.02) (.02)
-------- -------- -------- -------- --------
Net asset value, end of year .................. $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
======== ======== ======== ======== ========
TOTAL INVESTMENT RETURN ....................... 2.82% 3.13% 2.61% 1.85% 2.25%
======== ======== ======== ======== ========
RATIOS TO AVERAGE NET ASSETS:
Expenses, net of reimbursement ................ .72% .69% .62% .61% .57%
======== ======== ======== ======== ========
Expenses ...................................... .72% .74% .72% .71% .73%
======== ======== ======== ======== ========
Investment income -- net ...................... 2.79% 3.08% 2.58% 1.84% 2.20%
======== ======== ======== ======== ========
SUPPLEMENTAL DATA:
Net assets, end of year (in thousands) ........ $274,180 $273,910 $278,704 $293,452 $235,384
======== ======== +======= ======== ========
</TABLE>
See Notes to Financial Statements.
FS-68
<PAGE> 176
CMA NORTH CAROLINA MUNICIPAL MONEY FUND
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
1. SIGNIFICANT ACCOUNTING POLICIES:
CMA North Carolina Municipal Money Fund (the "Fund") is part of CMA Multi-State
Municipal Series Trust (the "Trust"). The Fund is registered under the
Investment Company Act of 1940 as a non-diversified, open-end management
investment company. The following is a summary of significant accounting
policies followed by the Fund.
(a) Valuation of investments -- Investments are valued at amortized cost, which
approximates market value. For the purpose of valuation, the maturity of a
variable rate demand instrument is deemed to be the next coupon date on which
the interest rate is to be adjusted. In the case of a floating rate instrument,
the remaining maturity is the demand notice payment period.
(b) 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.
(c) Security transactions and investment income -- Security transactions are
recorded on the dates the transactions are entered into (the trade dates).
Interest income (including amortization of premium and discount) is recognized
on the accrual basis. Realized gains and losses on security transactions are
determined on the identified cost basis.
(d) Deferred organization expenses and prepaid registration fees -- Deferred
organization expenses are charged to expense on a straight-line basis over a
five-year period. Prepaid registration fees are charged to expense as the
related shares are issued.
(e) Dividends and distributions to shareholders -- The Fund declares dividends
daily and reinvests daily such dividends (net of non-resident alien tax and
back-up withholding tax withheld) in additional fund shares at net asset value.
Dividends are declared from the total of net investment income, excluding
discounts earned other than original issue discounts. Net realized capital
gains, if any, are normally distributed annually after deducting prior years'
loss carryforward. The Fund may distribute capital gains more frequently than
annually in order to maintain the Fund's net asset value at $1.00 per share.
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.
FAM is responsible for the management of the Fund's portfolio and provides the
necessary personnel, facilities, equipment and certain other services necessary
to the operations of the Fund. For such services, the Fund pays a monthly fee
based upon the average daily value of the Fund's net assets, at the following
annual rates: 0.50% of the first $500 million of average daily net assets;
0.425% of average daily net assets in excess of $500 million but not exceeding
$1 billion; and 0.375% of average daily net assets in excess of $1 billion.
Pursuant to the Distribution and Shareholder Servicing Plan in compliance with
Rule 12b-1 under the Investment Company
FS-69
<PAGE> 177
CMA NORTH CAROLINA MUNICIPAL MONEY FUND
NOTES TO FINANCIAL STATEMENTS (CONCLUDED)
- --------------------------------------------------------------------------------
Act of 1940, Merrill Lynch, Pierce, Fenner & Smith Inc. ("MLPF&S") receives a
distribution fee from the Fund at the end of each month at the annual rate of
0.125% of average daily net assets of the Fund. The distribution fee is to
compensate MLPF&S financial consultants and other directly involved branch
office personnel for selling shares of the Fund and for providing direct
personal services to shareholders. The distribution fee is not compensation for
the administrative and operational services rendered to the Fund by MLPF&S in
processing share orders and administering shareholder accounts.
Merrill Lynch Financial Data Services, Inc. ("MLFDS"), a wholly-owned subsidiary
of ML & Co., is the Fund's transfer agent.
Accounting services are provided to the Fund by FAM at cost.
Certain officers and/or trustees of the Fund are officers and/or directors of
FAM, PSI, MLFDS, and/or ML & Co.
3. SHARES OF BENEFICIAL INTEREST:
The number of shares purchased and redeemed during the period corresponds to the
amounts included in the Statements of Changes in Net Assets for net proceeds
from sale of shares and cost of shares redeemed, respectively, since shares are
recorded at $1.00 per share.
4. CAPITAL LOSS CARRYFORWARD:
At March 31, 1997, the Fund had a net capital loss carryforward of approximately
$39,000, of which $5,000 expires in 2001, $10,000 expires in 2002, $13,000
expires in 2003 and $11,000 expires in 2005. This amount will be available to
offset like amounts of any future taxable gains.
FS-70
<PAGE> 178
- --------------------------------------------------------------------------------
CMA OHIO MUNICIPAL MONEY FUND
INDEPENDENT AUDITORS' REPORT
- --------------------------------------------------------------------------------
THE BOARD OF TRUSTEES AND SHAREHOLDERS,
CMA OHIO MUNICIPAL MONEY FUND OF
CMA MULTI-STATE MUNICIPAL SERIES TRUST:
We have audited the accompanying statement of assets and liabilities, including
the schedule of investments, of CMA Ohio Municipal Money Fund of CMA Multi-State
Municipal Series Trust as of March 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 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 March
31, 1997 by correspondence with the custodian. An audit also includes assessing
the accounting principles used and significant estimates made by management, as
well as evaluating the overall financial statement presentation. We believe that
our audits provide a reasonable basis for our opinion.
In our opinion, such financial statements and financial highlights present
fairly, in all material respects, the financial position of CMA Ohio Municipal
Money Fund of CMA Multi-State Municipal Series Trust as of March 31, 1997, the
results of its operations, the changes in its net assets, and the financial
highlights for the respective stated periods in conformity with generally
accepted accounting principles.
Deloitte & Touche LLP
Princeton, New Jersey
May 7, 1997
FS-71
<PAGE> 179
CMA OHIO MUNICIPAL MONEY FUND
SCHEDULE OF INVESTMENTS AS OF MARCH 31, 1997 (IN THOUSANDS)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
FACE VALUE
STATE AMOUNT ISSUE (NOTE 1a)
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Ohio -- 99.3% $1,090 Allen County, Ohio, IDR (Nickles Bakery Project), VRDN, 4.125% due 1/02/2003 (a).... $1,090
650 Arlington, Ohio, BAN, 4.25% due 7/09/1997 .......................................... 651
3,900 Ashtabula County, Ohio, Hospital Facilities Revenue Bonds (Ashtabula County
Medical Center Project), VRDN, 3.55% due 12/01/2007 (a) ............................ 3,900
2,385 Ashtabula County, Ohio, IDR (Neff-Perkins Co. Project), VRDN, AMT, 3.65%
due 6/01/2005 (a) .................................................................. 2,385
1,670 Bluffton, Ohio, Exempted Village School District, BAN, 4.22% due 6/19/1997 ........ 1,672
395 Brooklyn Heights, Ohio, IDR (ATC Nymold Inc.), VRDN, AMT, 3.65% due 2/01/2002 (a)... 395
1,035 Canfield, Ohio, Local School District, BAN, UT, 4.50% due 10/02/1997 ............... 1,037
1,095 Canton, Ohio, IDR (Accu Plate Project), VRDN, AMT, 3.55% due 3/01/2017 (a) ......... 1,095
3,355 Cincinnati and Hamilton Counties, Ohio, Port Authority, Economic Development
Revenue Bonds (Berthesda One Ltd.), 4.10% due 8/01/1997 ............................ 3,355
100 Cincinnati and Hamilton Counties, Ohio, Port Authority, IDR, Refunding
(Schottenstein Stores), VRDN, 3.50% due 9/01/1997 (a) .............................. 100
Cincinnati, Ohio, City School District:
7,000 BAN, 4.37% due 9/18/1997 ....................................................... 7,012
2,280 TAN, Series C, 5.41% due 7/10/1997 ............................................. 2,291
5,200 Clermont County, Ohio, Hospital Facilities Revenue Refunding Bonds (Mercy
Health Systems), VRDN, Series A, 3.45% due 12/01/2021 (a) .......................... 5,200
2,000 Clermont County, Ohio, IDR (Southern Ohio Fabricator), VRDN, AMT, Series A,
3.75% due 9/01/2005 (a) ............................................................ 2,000
1,050 Crawford County, Ohio, BAN, UT, 4.35% due 5/16/1997 ................................ 1,050
900 Cuyahoga County, Ohio, Health Care Facilities Revenue Bonds (Benjamin Rose
Institute Project), VRDN, Series B, 3.50% due 12/01/2000 (a) ....................... 900
2,000 Cuyahoga County, Ohio, Hospital Revenue Improvement Bonds (Cleveland
University Hospital), VRDN, 3.80% due 1/01/2016 (a) ................................ 2,000
Cuyahoga County, Ohio, IDR, VRDN (a):
940 (Athens Pastries Inc. Project), AMT, 3.70% due 6/03/2009 ....................... 940
5,275 (Cleveland E Excel Ltd.), AMT, 3.65% due 3/01/2019 ............................. 5,275
650 (Erieview Metal Treating Project), AMT, 3.70% due 5/05/2010 .................... 650
3,230 Refunding (Parma Care Center, Inc.), 3.70% due 12/01/2011 ...................... 3,230
945 Refunding (Pleasant Lake Association Project), 3.55% due 5/01/2011 ............. 945
3,700 (Suburban Pavilion Inc. Project), AMT, 4.125% due 10/02/2006 ................... 3,700
Eagle Tax Exempt Trust, Custodial Receipts, VRDN (a):
5,000 3.56% due 7/01/2015 ............................................................ 5,000
5,000 3.56% due 7/01/2015 ............................................................ 5,000
1,970 East Muskingum, Ohio, Water Authority Revenue Bonds, BAN, 4.50% due 6/27/1997 ...... 1,972
Erie County, Ohio, IDR, VRDN (a):
500 (Brighton Manor Company Project), AMT, 3.65% due 11/01/2016 .................... 500
1,705 Refunding (Huron Health Care Center Project), 3.55% due 8/01/2007 .............. 1,705
1,910 Euclid County, Ohio, BAN, 4.15% due 7/11/1997 ...................................... 1,911
Finneytown, Ohio, Local School District, BAN, UT:
1,370 4.22% due 7/17/1997 ............................................................ 1,373
1,000 4.38% due 7/17/1997 ............................................................ 1,002
</TABLE>
- --------------------------------------------------------------------------------
Portfolio Abbreviations for CMA Ohio Municipal Money Fund
AMT Alternative Minimum Tax (subject to)
BAN Bond Anticipation Notes
CP Commercial Paper
GO General Obligation Bonds
HFA Housing Finance Agency
IDR Industrial Development Revenue Bonds
M/F Multi-Family
PCR Pollution Control Revenue Bonds
TAN Tax Anticipation Notes
UT Unlimited Tax
VRDN Variable Rate Demand Notes
FS-72
<PAGE> 180
CMA OHIO MUNICIPAL MONEY FUND
SCHEDULE OF INVESTMENTS AS OF MARCH 31, 1997 (CONTINUED) (IN THOUSANDS)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
FACE VALUE
STATE AMOUNT ISSUE (NOTE 1a)
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Ohio $9,750 Forest Hills, Ohio, Local School District, BAN, UT, 4.21% due 6/17/1997 .......... $9,764
(continued) 3,500 Franklin County, Ohio, Health Systems Revenue Bonds (Franciscan Sisters - Saint
Anthony Medical Facility), VRDN, Series B, 3.65% due 7/01/2015 (a) ............... 3,500
Franklin County, Ohio, Hospital Revenue Bonds, VRDN (a):
5,000 (Children's Hospital Project), Series B, 3.65% due 12/01/2014 ................ 5,000
1,000 (Lutheran Senior City Inc. Project), 3.45% due 5/01/2015 ..................... 1,000
Franklin County, Ohio, IDR :
1,395 (GSW Building Association Ltd.), 3.70% due 5/01/1997 ......................... 1,395
2,500 Refunding (Heekin Can Inc. Project), VRDN, AMT, 3.75% due 5/01/2007 (a) ...... 2,500
3,000 Franklin County, Ohio, M/F Housing Revenue Bonds (Colonial Courts Project),
VRDN, AMT, 3.70% due 12/01/2024 (a) .............................................. 3,000
821 Franklin, Ohio, BAN, 4.45% due 8/26/1997 ......................................... 822
3,100 Fulton County, Ohio, IDR (Gilders Business Holdings Project), VRDN, AMT,
3.70% due 4/01/2007 (a) .......................................................... 3,100
2,200 Geauga County, Ohio, IDR (Neff-Perkins Co. Project), VRDN, AMT, 3.65%
due 6/01/2005 (a) ................................................................ 2,200
3,125 Greene County, Ohio, GO, 4.50% due 9/11/1997 ..................................... 3,131
1,000 Greene County, Ohio, IDR (FC Ltd. AFC Stamping), VRDN, AMT, 3.70% due
9/01/2016 (a) .................................................................... 1,000
2,500 Greenville, Ohio, BAN, 4.50% due 7/09/1997 ....................................... 2,502
880 Hamilton County, Ohio, Economic Development Revenue Bonds (Cincinnati
Performing Arts), VRDN, 3.50% due 6/15/2005 (a) .................................. 880
1,725 Hancock County, Ohio, GO, Series A, 4.50% due 9/19/1997 .......................... 1,729
1,180 Huber Heights, Ohio, IDR (Lasermike Inc. Project), VRDN, AMT, 3.70% due
12/01/2014 (a) ................................................................... 1,180
2,000 Indian Lake, Ohio, Local School District, BAN, 4.14% due 4/09/1997 ............... 2,000
5,287 Kent, Ohio, City School District, BAN, UT, 4% due 7/15/1997 ...................... 5,292
2,400 Knox County, Ohio, BAN, Series A, 4.10% due 8/27/1997 ............................ 2,405
1,800 Lisbon, Ohio, Exempted Village School District, BAN, UT, 4.50% due 9/04/1997 ..... 1,803
5,500 Lorain County, Ohio, BAN, 4.40% due 9/19/1997 .................................... 5,510
3,200 Lorain County, Ohio, IDR (DGR Investment Ltd./Trimline Die Corp.), VRDN, AMT,
3.80% due 12/01/2012 (a) ......................................................... 3,200
5,000 Lorain County, Ohio, Independent Living Facilities Revenue Bonds (Elyria
United Methodist Project), VRDN, Series A, 3.50% due 6/01/2022 (a) ............... 5,000
3,000 Lucas County, Ohio, Economic Development Revenue Bonds (Hammill
Manufacturing Co. Project), VRDN, AMT, 3.60% due 5/01/2010 (a) ................... 3,000
225 Lucas County, Ohio, Hospital Revenue Bonds (Sunshine Children's Home
Project), VRDN, 3.60% due 12/01/2007 (a) ......................................... 225
4,995 Lucas County, Ohio, IDR (Reichert Stamping Co. Project), VRDN, 3.70%
due 7/15/2006 (a) ................................................................ 4,995
1,100 Madeira, Ohio, Local School District, BAN, UT, 4.22% due 7/17/1997 ............... 1,102
955 Marion County, Ohio, Hospital Improvement Revenue Bonds (Pooled Lease
Program), VRDN, 3.55% due 5/01/2019 (a) .......................................... 955
1,935 Marion County, Ohio, IDR (Mid-Ohio Packaging Company Project), VRDN,
AMT, 3.70% due 11/01/2015 (a) .................................................... 1,935
2,970 Mentor, Ohio, IDR (Metcor Partnership/Tridelt), VRDN, AMT, 3.65% due
12/01/2008 (a) ................................................................... 2,970
2,470 Montgomery County, Ohio, IDR (Citywide Development Corp. Project), VRDN,
AMT, 3.65% due 12/01/2013 (a) .................................................... 2,470
605 Montgomery County, Ohio, IDR (Town Centers Ltd. Partnership Project), AMT,
3.80% due 5/15/1997 .............................................................. 605
1,980 Moraine, Ohio, IDR, Refunding (Gray America Corporation Project), VRDN, AMT,
3.65% due 12/01/2001 (a) ......................................................... 1,980
400 Mount Gilead, Ohio, BAN, 4% due 11/06/1997 ....................................... 400
2,000 Obetz, Ohio, IDR (HFI Inc. Project), VRDN, AMT, 3.65% due 10/01/2003 (a) ......... 2,000
</TABLE>
FS-73
<PAGE> 181
CMA OHIO MUNICIPAL MONEY FUND
SCHEDULE OF INVESTMENTS AS OF MARCH 31, 1997 (CONTINUED) (IN THOUSANDS)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
FACE VALUE
STATE AMOUNT ISSUE (NOTE 1a)
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Ohio Ohio, HFA, Mortgage Revenue Bonds, AMT (c):
(continued) $10,000 Series A-1, 3.55% due 9/01/1997 .............................................. $10,000
10,000 Series B-3, 4% due 8/13/1997 ................................................. 10,000
Ohio State Air Quality Development Authority, Revenue Refunding Bonds:
2,400 (Cincinnati Gas & Electric), VRDN, Series A, 3.80% due 9/01/2030 (a) ......... 2,400
1,400 (Cincinnati Gas & Electric), VRDN, Series B, 3.65% due 9/01/2030 (a) ......... 1,400
5,930 (Environmental Improvement - USX Project), 3.45% due 9/01/1997 ............... 5,930
Ohio State Higher Educational Facilities, Commission Revenue Bonds,
VRDN (a):
2,790 (Mount Vernon), 3.60% due 9/01/2009 .......................................... 2,790
4,800 (Facilities Pooled Financing), 3.30% due 12/01/2016 .......................... 4,800
3,325 Ohio State, IDR, Refunding (General Motors Corp. Project), VRDN, 3.70% due
9/01/2001 (a) .................................................................... 3,325
2,600 Ohio State, PCR, Refunding (Sohio Air Project - BP Petroleum), VRDN, 3.60%
due 5/01/2022 (a) ................................................................ 2,600
2,110 Ohio State, PCR, Refunding (Sohio Water Project - BP Petroleum), VRDN, 3.60%
due 5/01/2022 (a) ................................................................ 2,110
9,000 Ohio State Water Development Authority, Environmental Improvement Revenue
Bonds (Mead Corp. Project), CP, AMT, 3.45% due 5/01/1997 ......................... 9,000
Ohio State Water Development Authority, Pollution Control Facilities Revenue
Bonds (Duquesne Light Co. Project), CP, AMT:
3,000 3.40% due 4/01/1997 .......................................................... 3,000
5,000 3.50% due 5/09/1997 .......................................................... 5,000
5,735 Ohio State Water Development Authority, Pollution Control Facilities Revenue
Refunding Bonds (Cleveland Electric Illuminating Co.), CP, Series A, 3.45% due
4/15/1997 (b) .................................................................... 5,735
6,745 Ohio State Water Development Authority Revenue Bonds, VRDN, Series A,
3.55% due 9/01/1998 (a) .......................................................... 6,745
3,000 Ohio State Water Development Authority, Solid Waste Disposal Revenue
Bonds (American Steel & Wire Corp.), VRDN, 3.70% due 9/01/2025 (a) ............... 3,000
400 Paulding County, Ohio, IDR, Refunding (Countrymark Cooperative Inc. Project),
VRDN, 3.50% due 3/01/1999 (a) .................................................... 400
4,600 Paulding County, Ohio, Solid Waste Disposal Revenue Bonds (Lafarge Corp.
Project), VRDN, AMT, 3.70% due 8/01/2026 (a) ..................................... 4,600
Portage County, Ohio, IDR, VRDN, AMT (a):
1,445 (John E. Susong Project), Series B, 3.70% due 5/02/2016 ...................... 1,445
1,825 (NCSP L.P. Project), 3.65% due 7/01/2014 ..................................... 1,825
2,695 (PM Property One, Ltd.), 3.65% due 11/01/2012 ................................ 2,695
2,180 Refunding (John E. Susong Project), Series A, 3.70% due 5/02/2011 ............ 2,180
1,350 Powell Village, Ohio, BAN, 4.10% due 7/09/1997 ................................... 1,351
2,380 Richland County, Ohio, BAN, 4.375% due 6/05/1997 ................................. 2,382
1,100 Rickenbacker, Ohio, Port Authority, IDR, Refunding (Rickenbacker Holdings,
Inc.), VRDN, 3.55% due 12/01/2010 (a) ............................................ 1,100
1,250 Ross County, Ohio, Hospital Revenue Bonds (Medical Center Hospital Project),
VRDN, 3.45% due 12/01/2020 (a) ................................................... 1,250
4,500 Sandusky County, Ohio, IDR (Magnesium Refining Technologies, Inc.), VRDN,
AMT, Series A, 3.70% due 9/01/2007 (a) ........................................... 4,500
Sandusky County, Ohio, IDR, VRDN, AMT (a):
1,300 (Brighton Manor Co. Project), 3.65% due 12/01/2016 ........................... 1,300
2,200 (Crown Battery Manufacturing Co.), 3.55% due 8/06/2003 ....................... 2,200
305 Solon, Ohio, IDR (Tameran Project), VRDN, AMT, 3.70% due 11/01/2004 (a) .......... 305
Stark County, Ohio, IDR, VRDN, AMT (a):
2,695 (Superior Dairy Inc. Project), 3.65% due 5/01/2003 ........................... 2,695
1,350 (Wilkof-Morris Project), 3.70% due 1/01/2010 ................................. 1,350
</TABLE>
FS-74
<PAGE> 182
CMA OHIO MUNICIPAL MONEY FUND
SCHEDULE OF INVESTMENTS AS OF MARCH 31, 1997 (CONCLUDED) (IN THOUSANDS)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
FACE VALUE
STATE AMOUNT ISSUE (NOTE 1a)
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Ohio $2,160 Strongsville, Ohio, IDR (E&E Properties/Dupli System Project), VRDN, 3.70%
(concluded) due 2/01/2010 (a) ................................................................ $ 2,160
600 Summit County, Ohio, Hospital Facilities Revenue Bonds (Cuyahoga Falls
General Hospital), VRDN, Series B, 3.50% due 7/01/1999 (a) ....................... 600
Summit County, Ohio, IDR:
1,760 (Austin Printing Co. Inc. Project), VRDN, AMT, 3.70% due 8/01/2006 (a) ....... 1,760
2,480 (Delco Corp. Project), VRDN, AMT, 3.70% due 6/01/2016 (a) .................... 2,480
400 (Forest Manufacturing Project), VRDN, 3.65% due 11/01/2001 (a) ............... 400
840 (Hardcoating Project), VRDN, 3.70% due 7/01/2002 (a) ......................... 840
670 (Lucerne Production Project), VRDN, AMT, 3.65% due 6/01/2002 (a) ............. 670
905 (Ohio Camshaft Project), 3.80% due 4/01/1997 ................................. 905
1,260 (Sigma Properties Project), VRDN, 3.70% due 6/01/2008 (a) .................... 1,260
1,100 (Steffen Bookbinders Project), VRDN, 3.70% due 11/01/2004 (a) ................ 1,100
550 (Struktol Project), VRDN, AMT, Series A, 3.65% due 6/01/2002 (a) ............. 550
1,040 (Texler Inc. Project), AMT, 3.80% due 5/01/1997 .............................. 1,040
4,000 Toledo, Ohio, City Services Special Assessment Notes (Special Obligation),
4.50% due 6/02/1997 .............................................................. 4,003
1,590 Troy, Ohio, Economic Development Revenue Bonds (L&CP Corp. Project), AMT,
3.70% due 6/01/1997 .............................................................. 1,590
1,985 Trumbull County, Ohio, IDR (ATD Corp. Project), VRDN, AMT, 3.70% due
8/01/2010 (a) .................................................................... 1,985
2,500 Union County, Ohio, IDR (Union Aggregates Co. Project), VRDN, AMT, 3.75%
due 11/01/2006 (a) ............................................................... 2,500
1,250 Valley View, Ohio, IDR (Porter Development Project), VRDN, AMT, 3.45% due
5/01/2016 (a) .................................................................... 1,250
1,575 Valley View, Ohio, IDR, Refunding and Improvement (Sweet Valley Dillion Project),
VRDN, AMT, 3.25% due 4/01/2011 (a) ............................................... 1,575
821 Wapakoneta, Ohio, Special Assessment, 4.70% due 9/16/1997 ........................ 823
Warren County, Ohio, IDR, VRDN, AMT (a):
3,700 (Johnson & Hardin Enterprises), Series A, 3.75% due 2/01/2010 ................ 3,700
2,080 (Kardol Quality Products Project), 3.75% due 12/01/2014 ...................... 2,080
1,185 Warren County, Ohio, Special Assessment, BAN, 4.38% due 6/03/1997 ................ 1,186
8,500 Westlake, Ohio, City School District, BAN, UT, 4.20% due 7/28/1997 ............... 8,516
2,465 Willoughby, Ohio, IDR (Malish Brush & Specialty), VRDN, AMT, 3.65% due
6/01/2009 (a) .................................................................... 2,465
3,000 Wood County, Ohio, Economic Development Revenue Bonds (Great Lakes
Window Project), AMT, 4.50% due 6/01/1997 ........................................ 3,000
Wood County, Ohio, IDR, VRDN, AMT (a):
1,205 (B&B Box Co. Project), 3.70% due 3/01/2011 ................................... 1,205
1,120 (Centaur Tool & Die Inc. Project), 3.70% due 8/01/2010 ....................... 1,120
1,410 Woodster, Ohio, IDR (Litco International Inc. Project), VRDN, AMT, 3.70% due
5/01/2010 (a) .................................................................... 1,410
3,525 Zanesville - Muskingum County, Ohio, Port Authority, IDR (B.E. Products Inc.
Project), VRDN, AMT, 3.65% due 9/01/2004 (a) ..................................... 3,525
- ---------------------------------------------------------------------------------------------------------------------
Total Investments (Cost -- $324,997*) -- 99.3% ................................... 324,997
Other Assets Less Liabilities -- 0.7% ............................................ 2,176
--------
Net Assets -- 100.0% ............................................................. $327,173
========
</TABLE>
- --------------------------------------------------------------------------------
(a) The interest rate is subject to change periodically based on certain
indexes. The interest rate shown is the rate in effect at March 31, 1997.
(b) FGIC Insured.
(c) GNMA Collateralized.
* Cost for Federal income tax purposes.
See Notes to Financial Statements.
FS-75
<PAGE> 183
CMA OHIO MUNICIPAL MONEY FUND
STATEMENT OF ASSETS AND LIABILITIES AS OF MARCH 31, 1997
- --------------------------------------------------------------------------------
<TABLE>
<S> <C> <C>
Assets:
Investments, at value (identified cost -- $324,997,003) (Note 1a)............... $324,997,003
Cash............................................................................ 250,090
Interest receivable............................................................. 2,222,349
Prepaid registration fees and other assets (Note 1d)............................ 12,000
------------
Total assets.................................................................... 327,481,442
------------
Liabilities:
Payables:
Investment adviser (Note 2)................................................... $ 140,225
Distributor (Note 2).......................................................... 95,429
Beneficial interest redeemed.................................................. 33
Dividends to shareholders (Note 1e)........................................... 6 235,693
--------
Accrued expenses and other liabilities.......................................... 72,708
------------
Total liabilities............................................................... 308,401
------------
Net Assets...................................................................... $327,173,041
============
Net Assets Consist of:
Shares of beneficial interest, $0.10 par value, unlimited number of shares
authorized...................................................................... $32,720,460
Paid-in capital in excess of par................................................ 294,484,136
Accumulated realized capital losses -- net (Note 4)............................. (31,555)
------------
Net Assets -- Equivalent to $1.00 per share based on 327,204,596 shares of
beneficial interest outstanding................................................. $327,173,041
============
</TABLE>
See Notes to Financial Statements.
CMA OHIO MUNICIPAL MONEY FUND
STATEMENT OF OPERATIONS FOR THE YEAR ENDED MARCH 31, 1997
- --------------------------------------------------------------------------------
<TABLE>
<S> <C> <C>
Investment Income (Note 1c):
Interest and amortization of premium and discount earned........................ $11,053,201
Expenses:
Investment advisory fees (Note 2)............................................... $1,508,892
Distribution fees (Note 2)...................................................... 372,783
Transfer agent fees (Note 2).................................................... 56,924
Professional fees............................................................... 56,297
Accounting services (Note 2).................................................... 52,081
Registration fees (Note 1d)..................................................... 42,778
Custodian fees.................................................................. 28,467
Printing and shareholder reports................................................ 18,556
Pricing fees.................................................................... 12,522
Trustees' fees and expenses..................................................... 2,719
Amortization of organization expenses (Note 1d)................................. 598
Other........................................................................... 4,058
----------
Total expenses.................................................................. 2,156,675
-----------
Investment income -- net........................................................ 8,896,526
-----------
Net Increase in Net Assets Resulting from Operations............................ $ 8,896,526
===========
</TABLE>
See Notes to Financial Statements.
FS-76
<PAGE> 184
CMA OHIO MUNICIPAL MONEY FUND
STATEMENT OF CHANGES IN NET ASSETS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
For the Year Ended
March 31,
--------------------------------------
1997 1996
Increase (Decrease) in Net Assets:
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Operations:
Investment income -- net ................................................. $ 8,896,526 $ 8,285,646
--------------- ---------------
Net increase in net assets resulting from operations ..................... 8,896,526 8,285,646
--------------- ---------------
Dividends to Shareholders (Note 1e):
Investment income -- net ................................................. (8,896,526) (8,285,646)
--------------- ---------------
Net decrease in net assets resulting from dividends to shareholders ...... (8,896,526) (8,285,646)
--------------- ---------------
Beneficial Interest Transactions (Note 3):
Net proceeds from sale of shares ......................................... 1,162,499,097 1,007,207,668
Net asset value of shares issued to shareholders in reinvestment
of dividends (Note 1e) ................................................... 8,896,416 8,285,698
--------------- ---------------
1,171,395,513 1,015,493,366
Cost of shares redeemed .................................................. (1,126,409,501) (970,961,402)
--------------- ---------------
Net increase in net assets derived from beneficial interest transactions.. 44,986,012 44,531,964
--------------- ---------------
Net Assets:
Total increase in net assets ............................................. 44,986,012 44,531,964
Beginning of year ........................................................ 282,187,029 237,655,065
--------------- ---------------
End of year .............................................................. $ 327,173,041 $ 282,187,029
=============== ===============
</TABLE>
See Notes to Financial Statements.
CMA OHIO MUNICIPAL MONEY FUND
FINANCIAL HIGHLIGHTS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
The following per share data and ratios have been derived
from information provided in the financial statements. For the Year Ended March 31,
----------------------------------------------------------------------------------
Increase (Decrease) in Net Asset Value: 1997 1996 1995 1994 1993
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Per Share Operating Performance:
Net asset value, beginning of year ........... $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
----------- ----------- ----------- ----------- -----------
Investment income -- net ..................... .03 .03 .03 .02 .02
----------- ----------- ----------- ----------- -----------
Total from investment operations ............. .03 .03 .03 .02 .02
----------- ----------- ----------- ----------- -----------
Less dividends from investment income -- net.. (.03) (.03) (.03) (.02) (.02)
----------- ----------- ----------- ----------- -----------
Net asset value, end of year ................. $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
=========== =========== =========== =========== ===========
Total Investment Return ...................... 2.99% 3.27% 2.65% 1.88% 2.27%
=========== =========== =========== =========== ===========
Ratios to Average Net Assets:
Expenses ..................................... .71% .73% .74% .72% .74%
=========== =========== =========== =========== ===========
Investment income -- net ................... 2.94% 3.21% 2.64% 1.86% 2.24%
=========== =========== =========== =========== ===========
Supplemental Data:
Net assets, end of year (in thousands) ..... $ 327,173 $ 282,187 $ 237,655 $ 213,655 $ 187,344
=========== =========== =========== =========== ===========
</TABLE>
See Notes to Financial Statements.
FS-77
<PAGE> 185
CMA OHIO MUNICIPAL MONEY FUND
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
1. Significant Accounting Policies:
CMA Ohio Municipal Money Fund (the "Fund") is part of CMA Multi-State Municipal
Series Trust (the "Trust"). The Fund is registered under the Investment Company
Act of 1940 as a non-diversified, open-end management investment company. The
following is a summary of significant accounting policies followed by the Fund.
(a) Valuation of investments -- Investments are valued at amortized cost, which
approximates market value. For the purpose of valuation, the maturity of a
variable rate demand instrument is deemed to be the next coupon date on which
the interest rate is to be adjusted. In the case of a floating rate instrument,
the remaining maturity is the demand notice payment period.
(b) 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.
(c) Security transactions and investment income -- Security transactions are
recorded on the dates the transactions are entered into (the trade dates).
Interest income (including amortization of premium and discount) is recognized
on the accrual basis. Realized gains and losses on security transactions are
determined on the identified cost basis.
(d) Deferred organization expenses and prepaid registration fees -- Deferred
organization expenses are charged to expense on a straight-line basis over a
five-year period. Prepaid registration fees are charged to expense as the
related shares are issued.
(e) Dividends and distributions to shareholders -- The Fund declares dividends
daily and reinvests daily such dividends (net of non-resident alien tax and
back-up withholding tax withheld) in additional fund shares at net asset value.
Dividends are declared from the total of net investment income, excluding
discounts earned other than original issue discounts. Net realized capital
gains, if any, are normally distributed annually after deducting prior years'
loss carryforward. The Fund may distribute capital gains more frequently than
annually in order to maintain the Fund's net asset value at $1.00 per share.
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.
FAM is responsible for the management of the Fund's portfolio and provides the
necessary personnel, facilities, equipment and certain other services necessary
to the operations of the Fund. For such services, the Fund pays a monthly fee
based upon the average daily value of the Fund's net assets, at the following
annual rates: 0.50% of the first $500 million of average daily net assets;
0.425% of average daily net assets in excess of $500 million but not exceeding
$1 billion; and 0.375% of average daily net assets in excess of $1 billion.
Pursuant to the Distribution and Shareholder Servicing Plan in compliance with
Rule 12b-1 under the Investment Company
FS-78
<PAGE> 186
CMA OHIO MUNICIPAL MONEY FUND
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
Act of 1940, Merrill Lynch, Pierce, Fenner & Smith Inc. ("MLPF&S") receives a
distribution fee from the Fund at the end of each month at the annual rate of
0.125% of average daily net assets of the Fund. The distribution fee is to
compensate MLPF&S financial consultants and other directly involved branch
office personnel for selling shares of the Fund and for providing direct
personal services to shareholders. The distribution fee is not compensation for
the administrative and operational services rendered to the Fund by MLPF&S in
processing share orders and administering shareholder accounts.
Merrill Lynch Financial Data Services, Inc. ("MLFDS"), a wholly-owned subsidiary
of ML & Co., is the Fund's transfer agent.
Accounting services are provided to the Fund by FAM at cost.
Certain officers and/or trustees of the Fund are officers and/or
directors of FAM, PSI, MLFDS, and/or ML & Co.
3. Shares of Beneficial Interest:
The number of shares purchased and redeemed during the period corresponds to the
amounts included in the Statements of Changes in Net Assets for net proceeds
from sale of shares and cost of shares redeemed, respectively, since shares are
recorded at $1.00 per share.
4. Capital Loss Carryforward:
At March 31, 1997, the Fund had a net capital loss carryforward of approximately
$32,000, of which $23,000 expires in 2000, $5,000 expires in 2001 and $4,000
expires in 2002. This amount will be available to offset like amounts of any
future taxable gains.
FS-79
<PAGE> 187
- --------------------------------------------------------------------------------
CMA PENNSYLVANIA MUNICIPAL MONEY FUND
INDEPENDENT AUDITORS' REPORT
- --------------------------------------------------------------------------------
THE BOARD OF TRUSTEES AND SHAREHOLDERS,
CMA PENNSYLVANIA MUNICIPAL MONEY FUND
OF CMA MULTI-STATE MUNICIPAL SERIES TRUST:
We have audited the accompanying statement of assets and liabilities, including
the schedule of investments, of CMA Pennsylvania Municipal Money Fund of CMA
Multi-State Municipal Series Trust as of March 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 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 March
31, 1997 by correspondence with the custodian and broker. 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 CMA Pennsylvania
Municipal Money Fund of CMA Multi-State Municipal Series Trust as of March 31,
1997, the results of its operations, the changes in its net assets, and the
financial highlights for the respective stated periods in conformity with
generally accepted accounting principles.
Deloitte & Touche LLP
Princeton, New Jersey
May 2, 1997
FS-80
<PAGE> 188
CMA PENNSYLVANIA MUNICIPAL MONEY FUND
SCHEDULE OF INVESTMENTS AS OF MARCH 31, 1997 (IN THOUSANDS)
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------------
FACE VALUE
STATE AMOUNT ISSUE (NOTE 1a)
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
PENNSYLVANIA-- Allegheny County, Pennsylvania, Hospital Development Authority
96.1% Revenue Bonds, VRDN (a):
$ 1,000 (Allegheny General Hospital), Series B, 3.45% due 9/01/2010 ................. $ 1,000
400 (Presbyterian University Hospital), Series B2, 3.50% due 3/01/2018 .......... 400
6,500 Allegheny County, Pennsylvania, IDA, Pollution Revenue Bonds (Duquesne
Light Project), CP, Series A, 3.70% due 2/05/1998 ............................. 6,500
9,900 Allegheny County, Pennsylvania, IDA, Revenue Bonds (United Jewish
Federation Project), VRDN, Series A, 3.60% due 10/01/2026 (a) ................. 9,900
6,000 Allegheny County, Pennsylvania, IDA, Revenue Refunding Bonds
(Commercial Development Parkway Center Mall Project), VRDN, Series A,
3.60% due 5/01/2009 (a) ....................................................... 6,000
Beaver County, Pennsylvania, IDA, PCR:
4,200 (Duquesne Light Project), CP, 3.60% due 7/09/1997 ........................... 4,200
5,100 (Duquesne Light Project), CP, AMT, Series A, 3.50% due 7/15/1997 ............ 5,100
1,000 (Duquesne Light Project), CP, Series 94, 2.60% due 4/01/1997 ................ 1,000
4,000 Refunding (Atlantic Richfield Project), VRDN, 3.45% due 12/01/2020 (a) ...... 4,000
10,000 Refunding (Toledo Edison Project), CP, Series E, 3.70% due 12/04/1997 ....... 10,000
Berks County, Pennsylvania IDA, IDR:
4,100 (Citizens Utilities Co. Projects), CP, AMT, Series A, 3.45% due 6/13/1997 ... 4,100
2,425 (Valley Forge Company, Inc. Project), VRDN, AMT, Series A,
3.85% due 9/01/2006 (a) ..................................................... 2,425
4,830 Bucks County, Pennsylvania, IDA, Environmental Improvement Revenue
Refunding Bonds (USX Corporate Project), 3.45% due 8/05/1997 .................. 4,830
Carbon County, Pennsylvania, IDA, Resource Recovery Revenue Bonds
(Panther Creek Partners), CP, AMT:
4,050 Series A, 3.55% due 5/14/1997 ............................................... 4,050
4,445 Series A, 3.50% due 7/15/1997 ............................................... 4,445
6,200 Series A, 3.50% due 7/25/1997 ............................................... 6,200
2,550 Series B, 3.40% due 4/10/1997 ............................................... 2,550
14,540 Series B, 3.60% due 7/09/1997 ............................................... 14,540
2,000 Delaware County, Pennsylvania, Authority Revenue Bonds (Widener
University Inc.), VRDN, 3.60% due 7/01/2014 (a) ............................... 2,000
500 Delaware County, Pennsylvania, IDA, PCR (BP Oil Inc. Project), UPDATES,
3.70% due 12/01/2009 (a) ...................................................... 500
Eagle Tax Exempt Trust, VRDN (a):
4,300 Series 94, 3.61% due 5/01/2008 .............................................. 4,300
5,700 Series 96C, 3.56% due 5/01/2014 ............................................. 5,700
5,900 Series A, 3.46% due 7/01/2025 ............................................... 5,900
</TABLE>
- -------------------------------------------------------------------------------
PORTFOLIO ABBREVIATIONS FOR CMA PENNSYLVANIA MUNICIPAL MONEY FUND
<TABLE>
<CAPTION>
<S> <C>
ACES(SM) Adjustable Convertible Extendable Securities
AMT Alternative Minimum Tax (subject to)
CP Commercial Paper
GO General Obligation Bonds
IDA Industrial Development Authority
IDR Industrial Development Revenue Bonds
M/F Multi-Family
PCR Pollution Control Revenue Bonds
S/F Single-Family
TAN Tax Anticipation Notes
TRAN Tax Revenue Anticipation Notes
UPDATES Unit Price Daily Adjustable Tax-Exempt Securities
UT Unlimited Tax
VRDN Variable Rate Demand Notes
</TABLE>
FS-81
<PAGE> 189
<TABLE>
<CAPTION>
CMA PENNSYLVANIA MUNICIPAL MONEY FUND
SCHEDULE OF INVESTMENTS AS OF MARCH 31, 1997 (CONTINUED) (IN THOUSANDS)
- -------------------------------------------------------------------------------------------------------------------------
FACE VALUE
STATE AMOUNT ISSUE (NOTE 1a)
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <S> <C>
PENNSYLVANIA Emmaus, Pennsylvania, General Authority Revenue Bonds, VRDN (a):
(CONTINUED) $ 3,300 Sub-Series B-12, 3.55% due 3/01/2024 ........................................ $ 3,300
3,300 Sub-Series C-8, 3.55% due 3/01/2024 ......................................... 3,300
5,400 Sub-Series E-7, 3.55% due 3/01/2024 ......................................... 5,400
3,500 Sub-Series F-7, 3.55% due 3/01/2024 ......................................... 3,500
5,000 Sub-Series F-8, 3.55% due 3/01/2024 ......................................... 5,000
6,800 Sub-Series G-7, 3.55% due 3/01/2024 ......................................... 6,800
2,700 Erie County, Pennsylvania, IDA, Revenue Bonds (McInnes Steel Co.),
VRDN, AMT, 3.80% due 11/01/2001 (a) ........................................... 2,700
8,900 Geisinger, Pennsylvania, Health System Revenue Bonds, VRDN, Series B,
3.70% due 7/01/2022 (a) ....................................................... 8,900
10,000 Harrisburg, Pennsylvania, Revenue Bonds (Pool Financing Authority
Fund), VRDN, 3.60% due 7/01/2021 (a) .......................................... 10,000
2,000 Jeannette, Pennsylvania, Health Service Authority, Hospital Revenue
Bonds (Jeannette District Memorial Hospital), VRDN, Series B, 3.60%
due 11/01/2018 (a) ............................................................ 2,000
5,940 Lancaster County, Pennsylvania, Hospital Authority, Health Center
Revenue Bonds (Masonic Homes Project), VRDN, 3.65% due 7/01/2027 (a) .......... 5,940
2,000 Montgomery County, Pennsylvania, GO, VRDN, UT, 3.55% due 11/15/2001 (a) ....... 2,000
18,000 Montgomery County, Pennsylvania, Higher Education and Health Authority
Revenue Bonds (Pennsylvania Higher Education & Health Loan), VRDN,
Series A, 3.70% due 8/01/2021 (a) ............................................. 18,000
Montgomery County, Pennsylvania, IDA, Revenue Bonds
(Merck & Co. Project), Series A:
10,000 CP, 3.40% due 4/16/1997 ..................................................... 10,000
1,700 VRDN, 3.90% due 10/01/2017 (a) .............................................. 1,700
4,250 Montgomery County, Pennsylvania, IDA, Revenue Refunding Bonds (Commercial
Development--Valley Forge Plaza), VRDN, 3.40% due 12/01/2013 (a) .............. 4,250
3,850 Montour County, Pennsylvania, IDA, PCR (Merck & Co. Project), VRDN,
Series A, 3.65% due 10/01/2003 (a) ............................................ 3,850
3,500 Moon, Pennsylvania, IDA, Commercial Development Revenue Bonds (One
Thorn Run Center Project), VRDN, Series A, 3.60% due 11/01/2015 (a) ........... 3,500
5,000 Northeastern Pennsylvania, Hospital and Education Authority Revenue
Bonds (Allhealth Pooled Financing Program), VRDN, 3.70% due 7/01/2026 (a) ..... 5,000
Pennsylvania Economic Development Financing Authority, Economic
Development Revenue Bonds, VRDN (a):
1,200 (Erie Forge & Steel Project), AMT, Series B-4, 3.75% due 12/01/1999 ......... 1,200
1,600 (Erie Plating Company Project), AMT, Series B-5, 3.75% due 12/01/2004 ....... 1,600
5,300 (Gutchess Hardwoods Project), Series B, 3.60% due 4/01/2005 ................. 5,300
5,000 AMT, Series D-7, 3.75% due 8/01/2022 ........................................ 5,000
2,000 AMT, Series F-5, 3.75% due 12/01/2006 ....................................... 2,000
2,000 AMT, Series I-3, 3.75% due 12/01/2011 ....................................... 2,000
1,170 (Wendt Dunnington Co. Project), VRDN, AMT, 3.55% due 9/01/2010 (a) .......... 1,170
Pennsylvania Energy Development Authority, Energy Development Revenue
Bonds, VRDN, AMT (a):
5,650 (BIW Ebensburg Project), 3.45% due 12/01/2011 ............................... 5,650
14,000 (Piney Creek Project), Series A, 3.50% due 12/01/2011 ....................... 14,000
900 (Piney Creek Project), Series C, 3.50% due 12/01/2011 ....................... 900
4,000 Pennsylvania Intergovernmental Cooperative Authority, Special Tax
Revenue Refunding Bonds (Philadelphia Funding Project), 5% due
6/15/1997 (c) ................................................................. 4,010
Pennsylvania State Higher Education Assistance Agency, Student Loan
Revenue Bonds, VRDN (a):
3,100 AMT, Series A, 3.50% due 1/01/2018 .......................................... 3,100
15,000 AMT, Series A, 3.30% due 3/01/2027 .......................................... 15,000
1,800 Series C, 3.50% due 7/01/2018 ............................................... 1,800
</TABLE>
FS-82
<PAGE> 190
<TABLE>
CMA PENNSYLVANIA MUNICIPAL MONEY FUND
SCHEDULE OF INVESTMENTS AS OF MARCH 31, 1997 (CONCLUDED) (IN THOUSANDS)
- -------------------------------------------------------------------------------------------------------------------------
<CAPTION>
FACE VALUE
STATE AMOUNT ISSUE (NOTE 1a)
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <S> <C>
PENNSYLVANIA $ 3,400 Pennsylvania State Higher Educational Facilities Authority, College
(CONCLUDED) and University Revenue Refunding Bonds (Pennsylvania College of
Optometry), VRDN, 3.40% due 3/01/2026 (a) ..................................... $ 3,400
Pennsylvania State Higher Educational Facilities Authority, Revenue
Refunding Bonds, Series C (a):
7,300 (Carnegie Mellon University), VRDN, 3.70% due 11/01/2029 .................... 7,300
10,000 (Thomas Jefferson University), ACES, 3.50% due 5/30/1997 .................... 10,000
10,000 Pennsylvania State, TAN, First Series, 4.50% due 6/30/1997 .................... 10,018
2,560 Philadelphia, Pennsylvania, Authority for Industrial Development
Revenue Bonds (David Michael & Co. Inc.), VRDN, AMT, 3.85% due
10/01/2006 (a) ................................................................ 2,560
Philadelphia, Pennsylvania, Hospitals and Higher Educational
Facilities Authority, Hospital Revenue Bonds, VRDN (a):
4,600 (Children's Hospital of Philadelphia Project), 3.70% due 3/01/2027 .......... 4,600
2,280 Refunding (Pennsylvania Hospital), Series B, 3.40% due 7/01/2023 (c) ........ 2,280
4,425 Philadelphia, Pennsylvania, Redevelopment Authority, M/F Housing Revenue
Refunding Bonds (Courts Project), VRDN, Series A, 3.40% due 6/01/2025 (a) ..... 4,425
14,545 Philadelphia, Pennsylvania, School District, TRAN, 4.50% due 6/30/1997 ........ 14,567
22,200 Philadelphia, Pennsylvania, TRAN, Series A, 4.50% due 6/30/1997 ............... 22,235
1,450 Pittsburgh, Pennsylvania, Urban Redevelopment Authority, S/F Mortgage
Revenue Bonds, AMT, Series C, 3.65% due 6/01/1997 (b) ......................... 1,450
2,200 Red Lion, Pennsylvania, Area School District, TRAN, 4.25% due 6/30/1997 ....... 2,202
3,400 Scranton-Lackawanna, Pennsylvania, Health and Welfare Authority,
Hospital Facilities Revenue Refunding Bonds (Mercy Health Systems),
VRDN, Series A, 3.45% due 12/01/2021 (a) ...................................... 3,400
15,000 Temple University of the Commonwealth System of Higher Education,
Pennsylvania, University Funding Obligations, 4.625% due 5/20/1997 ............ 15,018
Venango, Pennsylvania, IDA, Resource Recovery Revenue Bonds (Scrubgrass
Project), CP, AMT:
2,000 3.40% due 4/10/1997 ......................................................... 2,000
9,100 Refunding, Series A, 3.50% due 7/11/1997 .................................... 9,100
4,300 Refunding, Series B, 3.40% due 4/10/1997 .................................... 4,300
3,000 Westmoreland County, Pennsylvania, IDA, Revenue Bonds (National
Waste and Energy Corp.--Valley Landfill Expansion Project), AMT,
4.375% due 5/01/1997 .......................................................... 3,000
13,000 York, Pennsylvania, General Pooled Financing Authority Revenue Bonds,
VRDN, 3.50% due 9/01/2026 (a) ................................................. 13,000
- -------------------------------------------------------------------------------------------------------------------------
PUERTO RICO-- Puerto Rico Commonwealth, Government Development
4.0% Bank Revenue Bonds, CP:
5,000 3.25% due 4/03/1997 ......................................................... 5,000
3,000 3.10% due 4/08/1997 ......................................................... 3,000
9,000 3.50% due 4/09/1997 ......................................................... 9,000
- -------------------------------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS (COST--$429,365*)--100.1% ................................... 429,365
LIABILITIES IN EXCESS OF OTHER ASSETS--(0.1%) ................................. (469)
----------
NET ASSETS--100.0% ............................................................ $ 428,896
==========
- -------------------------------------------------------------------------------------------------------------------------
</TABLE>
(a)The interest rate is subject to change periodically based on certain indexes.
The interest rate shown is the rate in effect at March 31, 1997.
(b)GNMA Collateralized.
(c)FGIC Insured.
*Cost for Federal income tax purposes.
See Notes to Financial Statements.
FS-83
<PAGE> 191
CMA PENNSYLVANIA MUNICIPAL MONEY FUND
STATEMENT OF ASSETS AND LIABILITIES AS OF MARCH 31, 1997
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS:
Investments, at value (identified cost--$429,364,743) (Note 1a) .................... $ 429,364,743
Cash ............................................................................... 83,162
Interest receivable ................................................................ 3,346,944
Prepaid registration fees and other assets (Note 1d) ............................... 22,163
---------------
Total assets ....................................................................... 432,817,012
---------------
LIABILITIES:
Payables:
Securities purchased .............................................................. $ 3,500,000
Investment adviser (Note 2) ....................................................... 181,321
Distributor (Note 2) .............................................................. 127,692
Dividends to shareholders (Note 1e) ............................................... 196
Beneficial interest redeemed ...................................................... 30 3,809,239
---------------
Accrued expenses and other liabilities ............................................. 111,704
---------------
Total liabilities .................................................................. 3,920,943
---------------
NET ASSETS ......................................................................... $ 428,896,069
===============
NET ASSETS CONSIST OF:
Shares of beneficial interest, $0.10 par value, unlimited number of shares
authorized ......................................................................... $ 42,892,078
Paid-in capital in excess of par ................................................... 386,028,378
Accumulated realized capital losses--net (Note 4) .................................. (24,387)
---------------
NET ASSETS--Equivalent to $1.00 per share based on 428,920,781 shares of
beneficial interest outstanding .................................................... $ 428,896,069
===============
</TABLE>
See Notes to Financial Statements.
FS-84
<PAGE> 192
CMA PENNSYLVANIA MUNICIPAL MONEY FUND
STATEMENT OF OPERATIONS FOR THE YEAR ENDED MARCH 31, 1997
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
INVESTMENT INCOME (NOTE 1c):
Interest and amortization of premium and discount earned ........................... $ 14,404,354
EXPENSES:
Investment advisory fees (Note 2) .................................................. $ 2,013,273
Distribution fees (Note 2) ......................................................... 496,888
Transfer agent fees (Note 2) ....................................................... 102,555
Registration fees (Note 1d) ........................................................ 64,766
Accounting services (Note 2) ....................................................... 59,661
Professional fees .................................................................. 53,522
Printing and shareholder reports ................................................... 34,490
Custodian fees ..................................................................... 33,645
Pricing fees ....................................................................... 7,255
Trustees' fees and expenses ........................................................ 3,930
Other .............................................................................. 5,563
................................................................................... ---------------
Total expenses ..................................................................... 2,875,548
---------------
Investment income--net ............................................................. 11,528,806
REALIZED LOSS ON INVESTMENTS--NET (NOTE 1c) ........................................ (1,453)
---------------
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS ............................... $ 11,527,353
===============
</TABLE>
See Notes to Financial Statements.
CMA PENNSYLVANIA MUNICIPAL MONEY FUND
STATEMENTS OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------------
For the Year Ended
March 31,
------------------------------------
1997 1996
Increase (Decrease) in Net Assets:
- ----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
OPERATIONS:
Investment income--net ............................................................. $ 11,528,806 $ 12,163,742
Realized loss on investments--net .................................................. (1,453) --
--------------- ---------------
Net increase in net assets resulting from operations ............................... 11,527,353 12,163,742
--------------- ---------------
DIVIDENDS TO SHAREHOLDERS (NOTE 1e):
Investment income--net ............................................................. (11,525,719) (12,163,742)
--------------- ---------------
Net decrease in net assets resulting from dividends to shareholders ................ (11,525,719) (12,163,742)
--------------- ---------------
BENEFICIAL INTEREST TRANSACTIONS (NOTE 3):
Net proceeds from sale of shares ................................................... 1,355,806,175 1,486,225,661
Net asset value of shares issued to shareholders in reinvestment of
dividends (Note 1e) ................................................................ 11,525,515 12,166,441
--------------- ---------------
1,367,331,690 1,498,392,102
Cost of shares redeemed ............................................................ (1,355,166,461) (1,435,297,725)
--------------- ---------------
Net increase in net assets derived from beneficial interest
transactions ....................................................................... 12,165,229 63,094,377
--------------- ---------------
NET ASSETS:
Total increase in net assets ....................................................... 12,166,863 63,094,377
Beginning of year .................................................................. 416,729,206 353,634,829
--------------- ---------------
End of year ........................................................................ $ 428,896,069 $ 416,729,206
=============== ===============
</TABLE>
See Notes to Financial Statements.
FS-85
<PAGE> 193
CMA PENNSYLVANIA MUNICIPAL MONEY FUND
FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------
The following per share data and ratios have been derived from information
provided in the financial statements.
For the Year Ended March 31,
-----------------------------------------------------------------------
Increase (Decrease) in Net Asset Value: 1997 1996 1995 1994 1993
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of year $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
---------- ---------- ---------- ---------- ----------
Investment income--net .03 .03 .03 .02 .02
---------- ---------- ---------- ---------- ----------
Total from investment operations .03 .03 .03 .02 .02
---------- ---------- ---------- ---------- ----------
Less dividends from investment income--net (.03) (.03) (.03) (.02) (.02)
---------- ---------- ---------- ---------- ----------
Net asset value, end of year $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
========== ========== ========== ========== ==========
TOTAL INVESTMENT RETURN 2.89% 3.20% 2.65% 1.87% 2.29%
========== ========== ========== ========== ==========
RATIOS TO AVERAGE NET ASSETS:
Expenses .71% .72% .71% .72% .72%
========== ========== ========== ========== ==========
Investment income--net 2.86% 3.13% 2.64% 1.85% 2.22%
========== ========== ========== ========== ==========
SUPPLEMENTAL DATA:
Net assets, end of year (in thousands) $ 428,896 $ 416,729 $ 353,635 $ 336,853 $ 318,954
========== ========== ========== ========== ==========
</TABLE>
See Notes to Financial Statements.
FS-86
<PAGE> 194
CMA PENNSYLVANIA MUNICIPAL MONEY FUND
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
1. SIGNIFICANT ACCOUNTING POLICIES:
CMA Pennsylvania Municipal Money Fund (the "Fund") is part of CMA Multi-State
Municipal Series Trust (the "Trust"). The Fund is registered under the
Investment Company Act of 1940 as a non-diversified, open-end management
investment company. The following is a summary of significant accounting
policies followed by the Fund.
(a) Valuation of investments--Investments are valued at amortized cost, which
approximates market value. For the purpose of valuation, the maturity of a
variable rate demand instrument is deemed to be the next coupon date on which
the interest rate is to be adjusted. In the case of a floating rate instrument,
the remaining maturity is the demand notice payment period.
(b) 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.
(c) Security transactions and investment income--Security transactions are
recorded on the dates the transactions are entered into (the trade dates).
Interest income (including amortization of premium and discount) is recognized
on the accrual basis. Realized gains and losses on security transactions are
determined on the identified cost basis.
(d) Prepaid registration fees--Prepaid registration fees are charged to expense
as the related shares are issued.
(e) Dividends and distributions to shareholders--The Fund declares dividends
daily and reinvests daily such dividends (net of non-resident alien tax and
back-up withholding tax withheld) in additional fund shares at net asset value.
Dividends are declared from the total of net investment income, excluding
discounts earned other than original issue discounts. Net realized capital
gains, if any, are normally distributed annually after deducting prior years'
loss carryforward. The Fund may distribute capital gains more frequently than
annually in order to maintain the Fund's net asset value at $1.00 per share.
(f) Reclassification--Generally accepted accounting principles require that
certain components of net assets be adjusted to reflect permanent differences
between financial and tax reporting. Accordingly, current year's permanent
book/tax differences of $3,087 have been reclassified between accumulated net
realized capital losses and undistributed net investment income. These
reclassifications have no effect on net asset value per share.
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.
FAM is responsible for the management of the Fund's portfolio and provides the
necessary personnel, facilities, equipment and certain other services necessary
to the operations of the Fund. For such services, the Fund pays a monthly fee
based upon the average daily value of the Fund's net assets, at the following
annual rates: 0.50% of the first $500 million of average daily net assets;
0.425% of average daily net assets in excess of $500 million but not exceeding
$1 billion; and 0.375% of average daily net assets in excess of $1 billion.
FS-87
<PAGE> 195
CMA PENNSYLVANIA MUNICIPAL MONEY FUND
NOTES TO FINANCIAL STATEMENTS (CONCLUDED)
- --------------------------------------------------------------------------------
Pursuant to the Distribution and Shareholder Servicing Plan in compliance with
Rule 12b-1 under the Investment Company Act of 1940, Merrill Lynch, Pierce,
Fenner & Smith Inc. ("MLPF&S") receives a distribution fee from the Fund at the
end of each month at the annual rate of 0.125% of average daily net assets of
the Fund. The distribution fee is to compensate MLPF&S financial consultants and
other directly involved branch office personnel for selling shares of the Fund
and for providing direct personal services to shareholders. The distribution fee
is not compensation for the administrative and operational services rendered to
the Fund by MLPF&S in processing share orders and administering shareholder
accounts.
Merrill Lynch Financial Data Services, Inc. ("MLFDS"), a wholly-owned subsidiary
of ML & Co., is the Fund's transfer agent.
Accounting services are provided to the Fund by FAM at cost.
Certain officers and/or trustees of the Fund are officers and/or directors of
FAM, PSI, MLFDS, and/or ML & Co.
3. SHARES OF BENEFICIAL INTEREST:
The number of shares purchased and redeemed during the period corresponds to the
amounts included in the Statements of Changes in Net Assets for net proceeds
from sale of shares and cost of shares redeemed, respectively, since shares are
recorded at $1.00 per share.
4. CAPITAL LOSS CARRYFORWARD:
At March 31, 1997, the Fund had a net capital loss carryforward of approximately
$24,000, of which $13,000 expires in 2002 and $11,000 expires in 2003. This
amount will be available to offset like amounts of any future taxable gains.
FS-88
<PAGE> 196
[This page intentionally left blank]
<PAGE> 197
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
-----
<S> <C>
Investment Objectives and Policies.... 2
Management of the Trust............... 5
Trustees and Officers............... 5
Compensation of Trustees............ 6
Management and Advisory
Arrangements..................... 9
Purchase and Redemption of Shares..... 10
Portfolio Transactions................ 11
Determination of Net Asset Value...... 13
Yield Information..................... 13
Taxes................................. 14
Federal............................. 14
State............................... 16
General Information................... 20
Description of Series and Shares.... 20
Custodian and Transfer Agent........ 20
Independent Auditors................ 20
Legal Counsel....................... 21
Reports to Shareholders............. 21
Additional Information.............. 21
Appendices............................ A-1
Financial Statements.................. FS-1
</TABLE>
Code #16818-0797
CMA MULTI-STATE
MUNICIPAL SERIES TRUST
- - ARIZONA
- - CALIFORNIA
- - CONNECTICUT
- - MASSACHUSETTS
- - MICHIGAN
- - NEW JERSEY
- - NEW YORK
- - NORTH CAROLINA
- - OHIO
- - PENNSYLVANIA
- ------------------------------------------------------
STATEMENT OF
ADDITIONAL INFORMATION
- ------------------------------------------------------
July 22, 1997
- ------------------------------------------------------
(LOGO)
<PAGE> 4
PART C. OTHER INFORMATION
ITEM 24. FINANCIAL STATEMENTS AND EXHIBITS.
(A) FINANCIAL STATEMENTS:
Financial Statements contained in Part A:
Financial Highlights for the period July 5, 1988 (commencement of
operations) to March 31, 1989 and for each of the years in the
eight-year period ended March 31, 1997.
Financial Statements contained in Part B:
Schedule of Investments as of March 31, 1997.
Statement of Assets and Liabilities as of March 31, 1997.
Statement of Operations for the year ended March 31, 1997.
Statements of Changes in Net Assets for each of the years in the
two-year period ended March 31, 1997.
Financial Highlights for each of the years in the five-year period
ended March 31, 1997.
(B) EXHIBITS:
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
-------- ---------------------------------------------------------------------------
<C> <S> <C>
1. (a) --Declaration of Trust of the Registrant dated February 6, 1987.(a)
(b) --Amendment to the Declaration of Trust.(a)
(c) --Instrument establishing CMA California Tax-Exempt Fund as a series of the
Registrant.(a)
(d) --Change of series designation to CMA California Municipal Money Fund (the
"Fund"), filed May 9, 1993.(a)
2. --By-Laws of the Registrant.(a)
3. --None.
4. --Portion of the Declaration of Trust, Establishment and Designation and
By-Laws of the Registrant defining the rights of holders of shares of the
Fund as a series of the Registrant.(b)
5. (a) --Form of Management Agreement between the Registrant and Fund Asset
Management, L.P.(a)
(b) --Supplement to the Management Agreement with Fund Asset Management,
L.P.(c)
6. --Form of Distribution Agreement between the Registrant and Merrill Lynch,
Pierce, Fenner & Smith Incorporated.(a)
7. --None.
8. --Form of Custody Agreement between the Registrant and State Street Bank
and Trust Company.(a)
9. (a) --Amended Transfer Agency, Shareholder Servicing Agency and Proxy Agency
Agreement between the Registrant and Merrill Lynch Financial Data
Services, Inc.(a)
(b) --Form of Cash Management Account Agreement.(a)
10. --None.
11. --Consent of Deloitte & Touche LLP, independent auditors for the
Registrant.
12. --None.
13. --Certificate of Fund Asset Management, L.P.(a)
14. --None.
15. --Form of Distribution and Shareholder Servicing Plan between the
Registrant and Merrill Lynch, Pierce, Fenner & Smith Incorporated.(a)
16. (a) --Schedule for computation of each performance quotation provided in the
Registration Statement in response to Item 22.(a)
(b) --Schedule for computation of each performance quotation provided in the
Registration Statement in response to Item 22.(d)
17. --Financial Data Schedule.
</TABLE>
- ---------------
(a) Previously filed pursuant to the Electronic Data Gathering, Analysis and
Retrieval ("EDGAR") phase-in requirements as an exhibit to Post-Effective
Amendment No. 8 to Registrant's Registration Statement (the "Registration
Statement") on Form N-1A filed on July 31, 1995.
C-1
<PAGE> 5
(b) Reference is made to Article II, Section 2.3 and Articles III, V, VI, VIII,
IX, X and XI of the Registrant's Declaration of Trust, filed as Exhibit 1(a)
to Post-Effective Amendment No. 8 to the Registration Statement; to the
Certificate of Establishment and Designation establishing the Fund as a
series of the Registrant, filed as Exhibit 1(c) to Post-Effective Amendment
No. 8 to the Registration Statement; and to Articles I, V and VI of the
Registrant's By-Laws, filed as Exhibit 2 to Post-Effective Amendment No. 8
to the Registration Statement.
(c) Filed on July 29, 1994 as an exhibit to Post-Effective Amendment No. 7 to
the Registration Statement.
(d) Filed on July 31, 1995 as an exhibit to Post-Effective Amendment No. 8 to
the Registration Statement.
Reference is made to the Registration Statements under the Securities Act
of 1933 on Form N-1A in connection with exhibits relating to CMA Arizona
Municipal Money Fund (File No. 33-54492), CMA Connecticut Municipal Money Fund
(File No. 33-38833), CMA Massachusetts Municipal Money Fund (File No. 33-34610),
CMA Michigan Municipal Money Fund (File No. 33-38834), CMA New Jersey Municipal
Money Fund (File No. 33-34609), CMA New York Municipal Money Fund (File No.
33-20463), CMA North Carolina Municipal Money Fund (File No. 33-38780), CMA Ohio
Municipal Money Fund (File No. 33-38835) and CMA Pennsylvania Municipal Money
Fund (File No. 33-34608).
ITEM 25. PERSONS CONTROLLED BY OR UNDER COMMON CONTROL WITH REGISTRANT.
None.
ITEM 26. NUMBER OF HOLDERS OF SECURITIES.
<TABLE>
<CAPTION>
NUMBER OF
HOLDERS
TITLE OF CLASS AT MAY 31, 1997
---------------------------------------------------------------- ----------------
<S> <C>
Shares of beneficial interest, par value $0.10 per share........ 17,791
</TABLE>
---------------------
Note: The number of holders shown above includes holders of record plus
beneficial owners, whose shares are held of record by Merrill Lynch,
Pierce, Fenner & Smith Incorporated.
ITEM 27. INDEMNIFICATION.
Section 5.3 of the Registrant's Declaration of Trust provides as follows:
"The Trust shall indemnify each of its Trustees, officers, employees,
and agents (including persons who serve at its request as directors,
officers or trustees of another organization in which it has any interest
as a shareholder, creditor or otherwise) against all liabilities and
expenses (including amounts paid in satisfaction of judgments, in
compromise, as fines and penalties, and as counsel fees) reasonably
incurred by him in connection with the defense or disposition of any
action, suit or other proceeding, whether civil or criminal, in which he
may be involved or with which he may be threatened, while in office or
thereafter, by reason of his being or having been such a trustee, officer,
employee or agent, except with respect to any matter as to which he shall
have been adjudicated to have acted in bad faith, willful misfeasance,
gross negligence or reckless disregard of his duties; provided, however,
that as to any matter disposed of by a compromise payment by such person,
pursuant to a consent decree or otherwise, no indemnification either for
said payment or for any other expenses shall be provided unless the Trust
shall have received a written opinion from independent legal counsel
approved by the Trustees to the effect that if either the matter of willful
misfeasance, gross negligence or reckless disregard of duty, or the matter
of good faith and reasonable belief as to the best interests of the Trust,
had been adjudicated, it would have been adjudicated in favor of such
person. The rights accruing to any person under these provisions shall not
exclude any other right to which he may be lawfully entitled; provided that
no person may satisfy any right of indemnity or reimbursement granted
herein or in Section 5.1 or to which he may be otherwise entitled except
out of the property of the Trust, and no Shareholder shall be personally
liable to any person with respect to any claim for indemnity or
reimbursement or otherwise. The Trustees may make advance payments in
connection with indemnification under this Section 5.3, provided that the
indemnified person shall have given a written undertaking to reimburse the
Trust in the event it is subsequently determined that he is not entitled to
such indemnification."
C-2
<PAGE> 6
The Registrant's By-Laws provide that insofar as the conditional advancing
of indemnification moneys pursuant to Section 5.3 of the Declaration of Trust
for actions based upon the Investment Company Act of 1940 may be concerned, such
payments will be made only on the following conditions: (i) the advances must be
limited to amounts used, or to be used, for the preparation or presentation of a
defense to the action, including costs connected with the preparation of a
settlement; (ii) advances may be made only upon receipt of a written promise by,
or on behalf of, the recipient to repay that amount of the advance which exceeds
the amount to which it is ultimately determined he is entitled to receive from
the Registrant by reason of indemnification; and (iii) (a) such promise must be
secured by a surety bond, other suitable insurance or an equivalent form of
security which assures that any repayments may be obtained by the Registrant
without delay or litigation, which bond, insurance or other form of security
must be provided by the recipient of the advance, or (b) a majority of a quorum
of the Registrant's disinterested, non-party Trustees, or an independent legal
counsel in a written opinion, shall determine, based upon a review of readily
available facts, that the recipient of the advance ultimately will be found
entitled to indemnification.
In Section 8 of the Distribution Agreement relating to the securities being
offered hereby, the Registrant agrees to indemnify the Distributor and each
person, if any, who controls the Distributor within the meaning of the
Securities Act of 1933 (the "Act"), against certain types of civil liabilities
arising in connection with the Registration Statement or Prospectus.
Insofar as indemnification for liabilities arising under the Act may be
permitted to Trustees, officers and controlling persons of the Registrant and
the principal underwriter pursuant to the foregoing provisions or otherwise, the
Registrant has been advised that in the opinion of the Securities and Exchange
Commission such indemnification is against public policy as expressed in the Act
and is, therefore, unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment by the Registrant of expenses
incurred or paid by a Trustee, officer, or controlling person of the Registrant
and the principal underwriter in connection with the successful defense of any
action, suit or proceeding) is asserted by such Trustee, officer or controlling
person or the principal underwriter in connection with the shares being
registered, the Registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Act and will be governed by the final adjudication of
such issue.
ITEM 28. BUSINESS AND OTHER CONNECTIONS OF THE INVESTMENT ADVISER.
Fund Asset Management, L.P. (the "Manager" or "FAM") acts as the investment
adviser for the following open-end investment companies: CBA Money Fund, CMA
Government Securities Fund, CMA Money Fund, CMA Multi-State Municipal Series
Trust, CMA Tax-Exempt Fund, CMA Treasury Fund, The Corporate Fund Accumulation
Program, Inc., Financial Institutions Series Trust, Merrill Lynch Basic Value
Fund, Inc., Merrill Lynch California Municipal Series Trust, Merrill Lynch
Corporate Bond Fund, Inc., Merrill Lynch Emerging Tigers Fund, Inc., Merrill
Lynch Federal Securities Trust, Merrill Lynch Funds for Institutions Series,
Merrill Lynch Multi-State Limited Maturity Municipal Series Trust, Merrill Lynch
Multi-State Municipal Series Trust, Merrill Lynch Municipal Bond Fund, Inc.,
Merrill Lynch Phoenix Fund, Inc., Merrill Lynch Special Value Fund, Inc.,
Merrill Lynch World Income Fund, Inc. and The Municipal Fund Accumulation
Program, Inc.; and for the following closed-end investment companies: Apex
Municipal Fund, Inc., Corporate High Yield Fund, Inc., Corporate High Yield Fund
II, Inc., Debt Strategies Fund, Inc., Income Opportunities Fund 1999, Inc.,
Income Opportunities Fund 2000, Inc., Merrill Lynch Municipal Strategy Fund,
MuniAssets Fund, Inc., MuniEnhanced Fund, Inc., MuniInsured Fund, Inc., MuniVest
Florida Fund, MuniVest Fund, Inc., MuniVest Fund II, Inc., MuniHoldings Fund,
Inc., MuniVest Michigan Insured Fund, Inc., MuniVest New Jersey Fund, Inc.,
MuniVest Pennsylvania Insured Fund, MuniYield Arizona Fund, Inc., MuniYield
California Fund, Inc., MuniYield California Insured Fund, Inc., MuniYield
California Insured Fund II, Inc., MuniYield Florida Fund, MuniYield Florida
Insured Fund, MuniYield Fund, Inc., MuniYield Insured Fund, Inc., MuniYield
Michigan Fund, Inc., MuniYield Michigan Insured Fund, Inc., MuniYield New Jersey
Fund, Inc., MuniYield New Jersey Insured Fund, Inc., MuniYield New York Insured
Fund, Inc., MuniYield New York Insured Fund II, Inc., MuniYield Pennsylvania
Fund,
C-3
<PAGE> 7
MuniYield Quality Fund, Inc., MuniYield Quality Fund II, Inc., Senior High
Income Portfolio, Inc., Taurus MuniCalifornia Holdings, Inc., Taurus MuniNewYork
Holdings, Inc. and Worldwide DollarVest Fund, Inc.
Merrill Lynch Asset Management, L.P. ("MLAM"), an affiliate of FAM, acts as
investment adviser for the following open-end investment companies: Merrill
Lynch Adjustable Rate Securities Fund, Inc., Merrill Lynch Americas Income Fund,
Inc., Merrill Lynch Asset Builder Program, Inc., Merrill Lynch Asset Growth
Fund, Inc., Merrill Lynch Asset Income Fund, Inc., Merrill Lynch Capital Fund,
Inc., Merrill Lynch Developing Capital Markets Fund, Inc., Merrill Lynch Dragon
Fund, Inc., Merrill Lynch EuroFund, Merrill Lynch Fundamental Growth Fund, Inc.,
Merrill Lynch Fund for Tomorrow, Inc., Merrill Lynch Global Allocation Fund,
Inc., Merrill Lynch Global Bond Fund for Investment and Retirement, Merrill
Lynch Global Convertible Fund, Inc., Merrill Lynch Global Holdings, Inc.,
Merrill Lynch Global Resources Trust, Merrill Lynch Global SmallCap Fund, Inc.,
Merrill Lynch Global Utility Fund, Inc., Merrill Lynch Global Value Fund, Inc.,
Merrill Lynch Intermediate Government Bond Fund, Merrill Lynch Growth Fund,
Merrill Lynch Healthcare Fund, Inc., Merrill Lynch International Equity Fund,
Merrill Lynch Latin America Fund, Inc., Merrill Lynch Middle East/Africa Fund,
Inc., Merrill Lynch Municipal Series Trust, Merrill Lynch Pacific Fund, Inc.,
Merrill Lynch Ready Assets Trusts, Merrill Lynch Retirement Series Trust,
Merrill Lynch Series Fund, Inc., Merrill Lynch Short-Term Global Income Fund,
Inc., Merrill Lynch Strategic Dividend Fund, Merrill Lynch Technology Fund,
Inc., Merrill Lynch U.S.A. Government Reserves, Merrill Lynch U.S. Treasury
Money Fund, Merrill Lynch Utility Income Fund, Inc., Merrill Lynch Variable
Series Fund, Inc. and Hotchkis and Wiley Funds (advised by Hotchkis and Wiley, a
division of MLAM); and for the following closed-end investment companies:
Convertible Holdings, Inc., Merrill Lynch High Income Municipal Bond Fund, Inc.
and Merrill Lynch Senior Floating Rate Fund, Inc.
The address of each of these investment companies is P.O. Box 9011,
Princeton, New Jersey 08543-9011, except that the address of Merrill Lynch Funds
for Institutions Series is One Financial Center, 15th Floor, Boston,
Massachusetts 02111-2646. The address of the Manager, MLAM, Princeton Services,
Inc. ("Princeton Services") and Princeton Administrators, L.P. is also P.O. Box
9011, Princeton, New Jersey 08543-9011. The address of Merrill Lynch, Pierce,
Fenner & Smith Incorporated ("Merrill Lynch") and Merrill Lynch & Co., Inc. ("ML
& Co.") is World Financial Center, North Tower, 250 Vesey Street, New York, New
York 10281. The address of Merrill Lynch Financial Data Services, Inc. ("MLFDS")
is 4800 Deer Lake Drive East, Jacksonville, Florida 32246-6484.
Set forth below is a list of each executive officer and partner of the
Manager indicating each business, profession, vocation or employment of a
substantial nature in which each such person or entity has been engaged since
April 1, 1995 for his, her or its own account or in the capacity of director,
officer, employee, partner or trustee. In addition, Mr. Zeikel is President, Mr.
Glenn is Executive Vice President and Mr. Richard is Treasurer of all or
substantially all of the investment companies described in the preceding
paragraph. Messrs. Zeikel, Glenn and Richard also hold the same position with
all or substantially all of the investment companies advised by MLAM as they do
with those advised by the Manager and Messrs. Giordano, Harvey, Kirstein and
Monagle are directors or officers of one or more of such companies.
<TABLE>
<CAPTION>
POSITION(S) WITH OTHER SUBSTANTIAL BUSINESS,
NAME MANAGER PROFESSION, VOCATION OR EMPLOYMENT
- ------------------------------ ----------------------- ----------------------------------------------
<S> <C> <C>
ML & Co....................... Limited Partner Financial Services Holding Company; Limited
Partner of MLAM
Princeton Services............ General Partner General Partner of MLAM
</TABLE>
C-4
<PAGE> 8
<TABLE>
<CAPTION>
POSITION(S) WITH OTHER SUBSTANTIAL BUSINESS,
NAME MANAGER PROFESSION, VOCATION OR EMPLOYMENT
- ------------------------------ ----------------------- ----------------------------------------------
<S> <C> <C>
Arthur Zeikel................. President President of MLAM; President and Director of
Princeton Services; Director of Merrill
Lynch Funds Distributor, Inc. ("MLFD");
Executive Vice President of ML & Co.
Terry K. Glenn................ Executive Vice Executive Vice President of MLAM; Executive
President Vice President and Director of Princeton
Services; President and Director of MLFD;
Director of MLFDS; President of Princeton
Administrators, L.P.
Vincent R. Giordano........... Senior Vice President Senior Vice President of MLAM; Senior Vice
President of Princeton Services
Elizabeth Griffin............. Senior Vice President Senior Vice President of MLAM; Senior Vice
President of Princeton Services
Norman R. Harvey.............. Senior Vice President Senior Vice President of MLAM; Senior Vice
President of Princeton Services
Michael J. Hennewinkel........ Senior Vice President Senior Vice President of MLAM; Senior Vice
President of Princeton Services
Philip L. Kirstein............ Senior Vice President, Senior Vice President, General Counsel and
General Counsel and Secretary of MLAM; Senior Vice President,
Secretary General Counsel, Director and Secretary of
Princeton Services; Director of MLFD
Ronald M. Kloss............... Senior Vice President Senior Vice President and Controller of MLAM;
and Controller Senior Vice President and Controller of
Princeton Services
Stephen M.M. Miller........... Senior Vice President Executive Vice President of Princeton
Administrators, L.P.; Senior Vice President
of Princeton Services
Joseph T. Monagle, Jr. ....... Senior Vice President Senior Vice President of MLAM; Senior Vice
President of Princeton Services
Michael L. Quinn.............. Senior Vice President Senior Vice President of MLAM; Senior Vice
President of Princeton Services; Managing
Director and First Vice President of Merrill
Lynch from 1989 to 1995
Richard L. Reller............. Senior Vice President Senior Vice President of MLAM; Senior Vice
President of Princeton Services
Gerald M. Richard............. Senior Vice President Senior Vice President and Treasurer of MLAM;
and Treasurer Senior Vice President and Treasurer of
Princeton Services; Vice President and
Treasurer of MLFD
Ronald L. Welburn............. Senior Vice President Senior Vice President of MLAM; Senior Vice
President of Princeton Services
</TABLE>
C-5
<PAGE> 9
ITEM 29. PRINCIPAL UNDERWRITERS.
(a) Merrill Lynch acts as the principal underwriter for the Registrant.
Merrill Lynch also acts as the principal underwriter for each of the following
open-end investment companies referred to in the first paragraph of Item 28: CBA
Money Fund, nine other series of CMA Multi-State Municipal Series Trust, CMA
Money Fund, CMA Tax-Exempt Fund, CMA Treasury Fund, CMA Government Securities
Fund, The Corporate Fund Accumulation Program, Inc. and The Municipal Fund
Accumulation Program, Inc. and also acts as the principal underwriter for each
of the closed-end investment companies referred to in the first paragraph of
Item 28, and as the depositor of the following unit investment trusts: The
Corporate Income Fund, Municipal Investment Trust Fund, The ML Trust for
Government Guaranteed Securities and The Government Securities Income Fund.
(b) Set forth below is information concerning each director and executive
officer of Merrill Lynch. The principal business address of each such person is
World Financial Center, North Tower, 250 Vesey Street, New York, New York 10281.
<TABLE>
<CAPTION>
POSITION(S) AND OFFICE(S) POSITION(S) AND OFFICE(S)
NAME WITH MERRILL LYNCH WITH REGISTRANT
- ---------------------------------- ---------------------------------- -------------------------
<S> <C> <C>
Stephen L. Hammerman.............. Chairman None
President and Chief Executive
Herbert M. Allison, Jr. .......... Officer None
Executive Vice President and
John L. Steffens.................. Director None
David H. Komansky................. Director None
Barry S. Friedberg................ Executive Vice President None
Edward L. Goldberg................ Executive Vice President None
Jerome P. Kenney.................. Executive Vice President None
Thomas H. Patrick................. Executive Vice President None
Winthrop H. Smith, Jr. ........... Executive Vice President None
Roger M. Vasey.................... Executive Vice President None
George A. Schierren............... General Counsel None
Theresa Lang...................... Treasurer None
Gregory T. Russo.................. Secretary None
</TABLE>
(c) Not applicable.
ITEM 30. LOCATION OF ACCOUNTS AND RECORDS.
All accounts, books and other documents required to be maintained by
Section 31(a) of the Investment Company Act of 1940, as amended, and the rules
thereunder will be maintained at the offices of the Registrant, 800 Scudders
Mill Road, Plainsboro, New Jersey 08536 and MLFDS, 4800 Deer Lake Drive East,
Jacksonville, Florida 32246-6484.
ITEM 31. MANAGEMENT SERVICES.
Other than as set forth under the caption "Management of the
Trust--Management and Advisory Arrangements" in the Prospectus constituting Part
A of the Registration Statement and under the caption "Management of the
Trust--Management and Advisory Arrangements" in the Statement of Additional
Information constituting Part B of the Registration Statement, and in response
to Item 31 in Part C of the Registration Statements of CMA Arizona Municipal
Money Fund, CMA Connecticut Municipal Money Fund, CMA Massachusetts Municipal
Money Fund, CMA Michigan Municipal Money Fund, CMA New Jersey Municipal Money
Fund, CMA New York Municipal Money Fund, CMA North Carolina Municipal Money
Fund, CMA Ohio Municipal Money Fund, and CMA Pennsylvania Municipal Money Fund,
the Registrant is not a party to any management-related services contract.
C-6
<PAGE> 10
ITEM 32. UNDERTAKINGS.
(a) Not applicable.
(b) Not applicable.
(c) Registrant undertakes to furnish each person to whom a prospectus is
delivered with a copy of the Registrant's latest annual report to shareholders
upon request and without charge.
C-7
<PAGE> 11
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933 AND THE
INVESTMENT COMPANY ACT OF 1940, THE REGISTRANT CERTIFIES THAT IT MEETS ALL OF
THE REQUIREMENTS FOR EFFECTIVENESS OF THIS POST-EFFECTIVE AMENDMENT TO THE
REGISTRATION STATEMENT PURSUANT TO RULE 485(B) UNDER THE SECURITIES ACT OF 1933
AND HAS DULY CAUSED THIS POST-EFFECTIVE AMENDMENT TO THE REGISTRATION STATEMENT
TO BE SIGNED ON ITS BEHALF BY THE UNDERSIGNED, THEREUNTO DULY AUTHORIZED, IN THE
TOWNSHIP OF PLAINSBORO AND STATE OF NEW JERSEY, ON THE 21TH DAY OF JULY, 1997.
CMA MULTI-STATE MUNICIPAL SERIES TRUST
(Registrant)
By /s/ TERRY K. GLENN
------------------------------------
(Terry K. Glenn, Executive Vice
President)
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THIS AMENDMENT
TO THE REGISTRATION STATEMENT HAS BEEN SIGNED BELOW BY THE FOLLOWING PERSON IN
THE CAPACITY AND ON THE DATE INDICATED.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
- ------------------------------------------ ------------------------------------ --------------
<C> <S> <C>
ARTHUR ZEIKEL* President (Principal
- ------------------------------------------ Executive Officer) and
(Arthur Zeikel) Trustee
GERALD M. RICHARD* Treasurer (Principal
- ------------------------------------------ Financial and Accounting
(Gerald M. Richard) Officer)
RONALD W. FORBES* Trustee
- ------------------------------------------
(Ronald W. Forbes)
CYNTHIA A. MONTGOMERY* Trustee
- ------------------------------------------
(Cynthia A. Montgomery)
CHARLES C. REILLY* Trustee
- ------------------------------------------
(Charles C. Reilly)
KEVIN A. RYAN* Trustee
- ------------------------------------------
(Kevin A. Ryan)
RICHARD R. WEST* Trustee
- ------------------------------------------
(Richard R. West)
*By /s/ TERRY K. GLENN July 21, 1997
- ------------------------------------------
(Terry K. Glenn,
Attorney-in-Fact)
</TABLE>
C-8
<PAGE> 12
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
-------- ---------------------------------------------------------------------------
<C> <S> <C>
11. --Consent of Deloitte & Touche LLP, independent auditors for the
Registrant.
17. --Financial Data Schedule.
</TABLE>
<PAGE> 1
INDEPENDENT AUDITORS' CONSENT
CMA California Municipal Money Fund of
CMA Multi-State Municipal Series Trust:
We consent to the use in Post-Effective Amendment No. 10 to Registration
Statement No. 33-20580 of our report dated May 2, 1997 appearing in the
Statement of Additional Information, which is a part of such Registration
Statement, and to the reference to us under the caption "Financial Highlights"
appearing in the Prospectus, which also is a part of such Registration
Statement.
/s/ DELOITTE & TOUCHE LLP
Princeton, New Jersey
July 17, 1997
<TABLE> <S> <C>
<ARTICLE> 6
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> MAR-31-1997
<PERIOD-START> APR-01-1996
<PERIOD-END> MAR-31-1997
<INVESTMENTS-AT-COST> 1554691971
<INVESTMENTS-AT-VALUE> 1554691971
<RECEIVABLES> 13287828
<ASSETS-OTHER> 120322
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 1568100121
<PAYABLE-FOR-SECURITIES> 1007770
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 1290082
<TOTAL-LIABILITIES> 2297852
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 1566717423
<SHARES-COMMON-STOCK> 1566719083
<SHARES-COMMON-PRIOR> 1422083668
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> (915154)
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 0
<NET-ASSETS> 1565802269
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 51053792
<OTHER-INCOME> 0
<EXPENSES-NET> (8933204)
<NET-INVESTMENT-INCOME> 42120588
<REALIZED-GAINS-CURRENT> 26624
<APPREC-INCREASE-CURRENT> 0
<NET-CHANGE-FROM-OPS> 42147212
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> (42120540)
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 6159698385
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