<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 taxation.
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 26, 1996
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 income taxes,
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 income 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 OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
------------------------
This Prospectus is a concise statement of information about the 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 26,
1996 (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, 1996:
Management
Fees(a)....... 0.50% 0.44% 0.50% 0.50% 0.50% 0.49% 0.46% 0.50% 0.50% 0.50%
Rule 12b-1
Fees(b)....... 0.13 0.13 0.13 0.13 0.13 0.13 0.13 0.13 0.13 0.13
Other Expenses:
Dividend and
Transfer
Agency
Fees(c)..... 0.02 0.02 0.02 0.03 0.02 0.02 0.02 0.03 0.02 0.03
Other Fees.... 0.12 0.05 0.07 0.10 0.08 0.04 0.03 0.08 0.08 0.06
---- ---- ---- ---- ---- ---- ---- ---- ---- ----
Total Other
Expenses.... 0.14 0.07 0.09 0.13 0.10 0.06 0.05 0.11 0.10 0.09
---- ---- ---- ---- ---- ---- ---- ---- ---- ----
Total Fund
Operating
Expenses...... 0.77% 0.64% 0.72% 0.76% 0.73% 0.68% 0.64% 0.74% 0.73% 0.72%
==== ==== ==== ==== ==== ==== ==== ==== ==== ====
</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 $ 7 $ 7 $ 8 $ 7 $ 7 $ 7 $ 8 $ 7 $ 7
3 years........... $25 $ 20 $23 $24 $ 23 $ 22 $ 20 $ 24 $23 $ 23
5 years........... $43 $ 36 $40 $42 $ 41 $ 38 $ 36 $ 41 $41 $ 40
10 years........... $95 $ 80 $89 $94 $ 91 $ 85 $ 80 $ 92 $91 $ 89
</TABLE>
As of March 31, 1996, Fund Asset Management, L.P. (the "Manager") was
voluntarily waiving a portion of its management fee. The Fee Table has been
restated to assume the absence of any waiver because the Manager may discontinue
or reduce such waiver at any time without notice. During the fiscal year ended
March 31, 1996, the Manager waived management fees totaling .19% and .05% for
the Arizona and North Carolina Funds, respectively, after which each Fund's
total expense ratio was .58% and .69%, respectively.
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, 1996 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, ------------------------------------
1996 1995 1994 1993 1996 1995 1994
-------- -------- ------- ----------- ---------- ---------- ----------
<S> <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
-------- ------- ------- ---------- ---------- ---------- ----------
Investment income--net................ .03 .03 .02 .002 .03 .03 .02
-------- ------- ------- ---------- ---------- ---------- ----------
Total from investment operations...... .03 .03 .02 .002 .03 .03 .02
-------- ------- ------- ---------- ---------- ---------- ----------
Less dividends:
Investment income--net............... (.03) (.03) (.02) (.002) (.03) (.03) (.02)
-------- ------- ------- ---------- ---------- ---------- ----------
Net asset value, end of period........ $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
======== ======= ======= ========== ========== ========== ==========
TOTAL INVESTMENT RETURN............... 3.36% 2.83% 1.90% 1.78%* 3.16% 2.66% 1.93%
======== ======= ======= ========== ========== ========== ==========
RATIOS TO AVERAGE NET ASSETS:
Expenses, net of reimbursement........ .58% .54% .59% .46%* .64% .63% .62%
======== ======= ======= ========== ========== ========== ==========
Expenses.............................. .77% .85% .98% 1.15%* .64% .63% .62%
======== ======= ======= ========== ========== ========== ==========
Investment income--net................ 3.27% 2.84% 1.89% 1.86%* 3.11% 2.62% 1.91%
======== ======= ======= ========== ========== ========== ==========
SUPPLEMENTAL DATA:
Net assets, end of period
(in thousands)....................... $137,520 $103,717 $73,414 $41,437 $1,421,140 $1,168,234 $1,225,160
======== ======= ======= ========== ========== ========== ==========
<CAPTION>
FOR THE
PERIOD
JULY 5,
1988+
TO
MARCH 31,
1993 1992 1991 1990 1989
---------- ---------- ---------- ---------- ---------
<S> <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
---------- ---------- ---------- ---------- --------
Investment income--net................ .02 .03 .05 .05 .04
---------- ---------- ---------- ---------- --------
Total from investment operations...... .02 .03 .05 .05 .04
---------- ---------- ---------- ---------- --------
Less dividends:
Investment income--net............... (.02) (.03) (.05) (.05) (.04)
---------- ---------- ---------- ---------- --------
Net asset value, end of period........ $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
========== ========== ========== ========== ========
TOTAL INVESTMENT RETURN............... 2.25% 3.48% 4.96% 5.59% 5.41%*
========== ========== ========== ========== ========
RATIOS TO AVERAGE NET ASSETS:
Expenses, net of reimbursement........ .63% .63% .62% .65% .64%*
========== ========== ========== ========== ========
Expenses.............................. .63% .63% .62% .65% .72%*
========== ========== ========== ========== ========
Investment income--net................ 2.22% 3.42% 4.83% 5.44% 5.43%*
========== ========== ========== ========== ========
SUPPLEMENTAL DATA:
Net assets, end of period
(in thousands)....................... $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
---------------------------------------------------------
FOR THE
FOR THE PERIOD
YEAR APRIL 29,
ENDED 1991+
MARCH 31, TO
-------------------------------------------- MARCH 31,
1996 1995 1994 1993 1992
-------- -------- -------- -------- --------
<S> <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
-------- -------- -------- -------- --------
Investment income -- net . . . . . .03 .03 .02 .02 .03
-------- -------- -------- -------- --------
Total from investment operations .03 .03 .02 .02 .03
-------- -------- -------- -------- --------
Less dividends:
Investment income -- net . . . . (.03) (.03) (.02) (.02) (.03)
-------- -------- -------- -------- --------
Net asset value, end of period . . $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
======== ======== ======== ======== ========
TOTAL INVESTMENT RETURN . . . . . . 3.02% 2.54% 1.77% 2.20% 3.56%*
======== ======== ======== ======== ========
RATIOS TO AVERAGE NET ASSETS:
Expenses, net of reimbursement . . .72% .71% .70% .63% .41%*
======== ======== ======== ======== ========
Expenses . . . . . . . . . . . . . .72% .71% .70% .73% .81%*
======== ======== ======== ======== ========
Investment income -- net . . . . . 2.97% 2.53% 1.76% 2.17% 3.46%*
======== ======== ======== ======== ========
SUPPLEMENTAL DATA:
Net assets, end of period
(in thousands) . . . . . . . . . $313,362 $260,398 $250,038 $231,431 $197,895
======== ======== ======== ======== ========
</TABLE>
<TABLE>
<CAPTION>
MASSACHUSETTS FUND
-----------------------------------------------------------------------
FOR THE
PERIOD
JULY 30,
FOR THE YEAR ENDED 1990+
MARCH 31, TO
--------------------------------------------------------- MARCH 31,
1996 1995 1994 1993 1992 1991
-------- -------- -------- -------- -------- --------
<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 .02 .02 .02 .04 .03
-------- -------- -------- -------- -------- --------
Total from investment operations . .03 .02 .02 .02 .04 .03
-------- -------- -------- -------- -------- --------
Less dividends:
Investment income -- net . . . . (.03) (.02) (.02) (.02) (.04) (.03)
-------- -------- -------- -------- -------- --------
Net asset value, end of period . . $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
======== ======== ======== ======== ======== ========
TOTAL INVESTMENT RETURN . . . . . . . 3.05% 2.46% 1.74% 2.20% 3.66% 5.04%*
======== ======== ======== ======== ======== ========
RATIOS TO AVERAGE NET ASSETS:
Expenses, net of reimbursement . . .76% .76% .78% .78% .85% .72%*
======== ======== ======== ======== ======== ========
Expenses . . . . . . . . . . . . . .76% .76% .78% .78% .87% .97%*
======== ======== ======== ======== ======== ========
Investment income -- net . . . . . 3.00% 2.43% 1.72% 2.15% 3.56% 4.92%*
======== ======== ======== ======== ======== ========
SUPPLEMENTAL DATA:
Net assets, end of period
(in thousands) . . . . . . . . . $189,482 $161,076 $150,804 $132,302 $116,340 $ 84,613
======== ======== ======== ======== ======== ========
</TABLE>
- ---------------------------------------
* Annualized.
+ Commencement of Operations.
4
<PAGE> 6
<TABLE>
<CAPTION>
FINANCIAL HIGHLIGHTS (CONTINUED)
MICHIGAN FUND
-----------------------------------------------------
FOR THE
PERIOD
APRIL 29,
FOR THE YEAR ENDED 1991+
MARCH 31, TO
----------------------------------------- MARCH 31,
1996 1995 1994 1993 1992
-------- -------- -------- -------- ---------
<S> <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
-------- -------- -------- -------- --------
Investment income--net................. .03 .03 .02 .02 .03
-------- -------- -------- -------- --------
Total from investment operations....... .03 .03 .02 .02 .03
-------- -------- -------- -------- --------
Less dividends:
Investment income--net............... (.03) (.03) (.02) (.02) (.03)
-------- -------- -------- -------- --------
Net asset value, end of period......... $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
======== ======== ======== ======== ========
TOTAL INVESTMENT RETURN................ 3.13% 2.57% 1.81% 2.24% 3.62%*
======== ======== ======== ======== ========
RATIOS TO AVERAGE NET ASSETS:
Expenses, net of reimbursement......... .73% .73% .72% .65% .54%*
======== ======== ======== ======== ========
Expenses............................... .73% .73% .72% .74% .80%*
======== ======== ======== ======== ========
Investment income--net................. 3.05% 2.54% 1.79% 2.22% 3.53%*
======== ======== ======== ======== ========
SUPPLEMENTAL DATA:
Net assets, end of period (in
thousands)........................... $247,544 $220,171 $236,435 $200,200 $194,433
======== ======== ======== ======== ========
<CAPTION>
NEW JERSEY FUND
------------------------------------------------------------------
FOR THE
PERIOD
JULY 30,
FOR THE YEAR ENDED 1990+
MARCH 31, TO
---------------------------------------------------- MARCH 31,
1996 1995 1994 1993 1992 1991
-------- -------- -------- -------- -------- ---------
<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 .02 .02 .02 .03 .03
-------- -------- -------- -------- -------- --------
Total from investment operations....... .03 .02 .02 .02 .03 .03
-------- -------- -------- -------- -------- --------
Less dividends:
Investment income--net............... (.03) (.02) (.02) (.02) (.03) (.03)
-------- -------- -------- -------- -------- --------
Net asset value, end of period......... $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
======== ======== ======== ======== ======== ========
TOTAL INVESTMENT RETURN................ 3.07% 2.52% 1.82% 2.21% 3.49% 4.95%*
======== ======== ======== ======== ======== ========
RATIOS TO AVERAGE NET ASSETS:
Expenses, net of reimbursement......... .68% .71% .70% .70% .74% .64%*
======== ======== ======== ======== ======== ========
Expenses............................... .68% .71% .70% .70% .74% .76%*
======== ======== ======== ======== ======== ========
Investment income--net................. 3.02% 2.51% 1.80% 2.16% 3.42% 4.74%*
======== ======== ======== ======== ======== ========
SUPPLEMENTAL DATA:
Net assets, end of period (in
thousands)........................... $610,285 $525,747 $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,
1996 1995 1994 1993 1992 1991 1990 1989
---------- -------- -------- -------- -------- -------- -------- ---------
<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 .02 .02 .03 .05 .05 .04
-------- -------- -------- -------- -------- -------- -------- --------
Total from investment
operations.............. .03 .03 .02 .02 .03 .05 .05 .04
-------- -------- -------- -------- -------- -------- -------- --------
Less dividends:
Investment
income--net........... (.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
======== ======== ======== ======== ======== ======== ======== ========
TOTAL INVESTMENT
RETURN.................. 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........... .64% .67% .67% .67% .68% .69% .71% .70%*
======== ======== ======== ======== ======== ======== ======== ========
Expenses................. .64% .67% .67% .67% .68% .69% .72% .79%*
======== ======== ======== ======== ======== ======== ======== ========
Investment income--net... 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).......... $1,132,264 $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,
1996 1995 1994 1993 1992
------- -------- -------- -------- ---------
<S> <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
-------- -------- -------- -------- --------
Investment income--net... .03 .03 .02 .02 .03
-------- -------- -------- -------- --------
Total from investment
operations.............. .03 .03 .02 .02 .03
-------- -------- -------- -------- --------
Less dividends:
Investment
income--net........... (.03) (.03) (.02) (.02) (.03)
-------- -------- -------- -------- --------
Net asset value, end of
period.................. $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
======== ======== ======== ======== ========
TOTAL INVESTMENT
RETURN.................. 3.13% 2.61% 1.85% 2.25% 3.49%*
======== ======== ======= ======== ========
RATIOS TO AVERAGE NET
ASSETS:
Expenses, net of
reimbursement........... .68% .62% .61% .57% .45%*
======== ======== ======= ======== ========
Expenses................. .74% .72% .71% .73% .83%*
======== ======== ======= ======== ========
Investment income--net... 3.08% 2.58% 1.84% 2.20% 3.25%*
======== ======== ======= ======== ========
SUPPLEMENTAL DATA:
Net assets, end of period
(in thousands).......... $273,910 $278,704 $293,452 $235,384 $221,060
======== ======== ======= ======== ========
</TABLE>
- ---------------
* Annualized.
+ Commencement of Operations.
6
<PAGE> 8
<TABLE>
<CAPTION>
FINANCIAL HIGHLIGHTS (CONCLUDED)
OHIO FUND
-----------------------------------------------------
FOR THE
PERIOD
APRIL 29,
FOR THE YEAR ENDED 1991+
MARCH 31, TO
----------------------------------------- MARCH 31,
1996 1995 1994 1993 1992
-------- -------- -------- -------- ---------
<S> <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
-------- -------- -------- -------- --------
Investment income--net............. .03 .03 .02 .02 .03
-------- -------- -------- -------- --------
Total from investment operations... .03 .03 .02 .02 .03
-------- -------- -------- -------- --------
Less dividends:
Investment income--net........... (.03) (.03) (.02) (.02) (.03)
-------- -------- -------- -------- --------
Net asset value, end of period..... $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
======== ======== ======== ======== ========
TOTAL INVESTMENT RETURN............ 3.27% 2.65% 1.88% 2.27% 3.65%*
======== ======== ======== ======== ========
RATIOS TO AVERAGE NET ASSETS:
Expenses, net of reimbursement..... .73% .74% .72% .74% .57%*
======== ======== ======== ======== ========
Expenses........................... .73% .74% .72% .74% .82%*
======== ======== ======== ======== ========
Investment income--net............. 3.21% 2.64% 1.86% 2.24% 3.52%*
======== ======== ======== ======== ========
SUPPLEMENTAL DATA:
Net assets, end of period
(in thousands)................... $282,187 $237,655 $213,655 $187,344 $192,173
======== ======== ======== ======== ========
<CAPTION>
PENNSYLVANIA FUND
----------------------------------------------------------------
FOR THE
PERIOD
AUGUST
27,
FOR THE YEAR ENDED 1990+
MARCH 31, TO
---------------------------------------------------- MARCH 31,
1996 1995 1994 1993 1992 1991
-------- -------- -------- -------- -------- ---------
<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 .02 .02 .03 .03
-------- -------- -------- -------- -------- --------
Total from investment operations... .03 .03 .02 .02 .03 .03
-------- -------- -------- -------- -------- --------
Less dividends:
Investment income--net........... (.03) (.03) (.02) (.02) (.03) (.03)
-------- -------- -------- -------- -------- --------
Net asset value, end of period..... $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
======== ======== ======== ======== ======== ========
TOTAL INVESTMENT RETURN............ 3.20% 2.65% 1.87% 2.29% 3.58% 4.95%*
======== ======== ======== ======== ======== ========
RATIOS TO AVERAGE NET ASSETS:
Expenses, net of reimbursement..... .72% .71% .72% .72% .77% .75%*
======== ======== ======== ======== ======== ========
Expenses........................... .72% .71% .72% .72% .77% .80%*
======== ======== ======== ======== ======== ========
Investment income--net............. 3.13% 2.64% 1.85% 2.22% 3.47% 4.75%*
======== ======== ======== ======== ======== ========
SUPPLEMENTAL DATA:
Net assets, end of period
(in thousands)................... $416,729 $353,635 $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 seven-day 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, 1996
Annualized Yield.... 2.73% 2.72% 2.67% 2.66% 2.72% 2.64% 2.81% 2.69% 2.85% 2.72%
Compounded
Annualized Yield.. 2.77% 2.76% 2.71% 2.70% 2.76% 2.68% 2.85% 2.73% 2.89% 2.76%
Average Maturity
of Portfolio at
End of Period..... 51 days 30 days 38 days 62 days 41 days 44 days 59 days 42 days 41 days 33 days
Seven-Day Period
Ended June 30, 1996
Annualized Yield.... 2.82% 2.85% 2.72% 2.76% 2.84% 2.81% 2.83% 2.82% 2.88% 2.85%
Compounded
Annualized Yield.. 2.86% 2.89% 2.76% 2.80% 2.88% 2.85% 2.87% 2.86% 2.92% 2.89%
Average Maturity
of Portfolio at
End of Period..... 20 days 38 days 67 days 66 days 30 days 62 days 66 days 36 days 52 days 65 days
Thirty-Day Period
Ended June 30, 1996
Taxable Equivalent
Yield*........... 3.92% 3.96% 3.78% 3.83% 3.94% 3.90% 3.93% 3.92% 4.00% 3.96%
</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 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
8
<PAGE> 10
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, preservation of
capital and liquidity available from investing in a portfolio of short-term,
high quality tax-exempt securities. In addition to the investment objectives
stated above, the New York Fund also seeks income exempt from New York City
income taxes. 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 taxation, the designated state's income taxation and, in the case
of the New York Fund, from New York City income taxation. 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, in the case of the New York Fund, New York City income 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 taxation but not state or city taxation.
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 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 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.
9
<PAGE> 11
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" 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 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, in the case of the New York Fund, New York City income taxation.
Each Fund seeks to provide as high a double (or, in the case of the New York
Fund, triple) tax-exempt yield potential as is available from 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.
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
10
<PAGE> 12
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. 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
11
<PAGE> 13
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. These securities represent a relatively new type of financing
that has not yet developed the depth of marketability associated with more
conventional securities. Certain investments in lease obligations may be
illiquid. A Fund may not invest in illiquid lease obligations if such
investments, together with 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 Group ("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
12
<PAGE> 14
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 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
13
<PAGE> 15
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. In 1994, all three of the rating agencies rating
California's long-term debt lowered their ratings of California's general
obligation bonds. Standard & Poor's lowered its rating from A+ to A, Moody's
lowered its rating from Aa to A1 and Fitch lowered its rating from AA to A. In
1996, Fitch raised its rating to 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.
The Connecticut Fund. Fiscal stress is reflected in Connecticut's economic
and revenue forecasts, a rising debt burden that reflects a significant increase
in bond activity since fiscal 1987-88, a cumulative general fund deficit for
fiscal 1990-91 of over $965 million, and uncertainty concerning the solutions
for these imbalances. Accumulated surpluses in a budget stabilization fund
created in 1983 to protect against future deficit problems were exhausted in
1990. The lack of a contingency fund balance, combined with reduced
revenue-raising flexibility in the near term, places additional constraints on
managing these financial problems and any others that may arise. As a result of
recurring budgetary problems, Connecticut's general obligation bonds were
downgraded by Standard & Poor's from AA+ to AA in April 1990 and, in September
1991, to AA-; by Moody's from Aa1 to Aa in April 1990; and by Fitch from AA+ to
AA in March 1995. 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.
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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 and fiscal 1995 with positive closing fund balances of $589.3
million and $726.0 million, respectively. As of the date of this Prospectus and
according to the Executive Office for Administration and Finance, fiscal 1996 is
expected to end with positive budgetary fund balances totaling approximately
$613.0 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, 1995 after a transfer of $67.4 million to the Michigan Budget
Stabilization Fund, which after such transfer had an accrued balance of $987.9
million. Michigan has improved financially after two consecutive years of
deficits in the 1989-90 and 1990-91 fiscal years and draws on the Michigan
Budget Stabilization Fund to balance the 1991-92 and succeeding fiscal year
budgets. 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 near 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. Just as New Jersey was hurt by the national
recession, the State is now in its fourth year of recovery. The economy is in a
period of steady, moderate growth, having slowed enough during the second
quarter of 1995 to avoid inflation, but not enough to slip into a recession. If
the nation's economic growth rate slows, business expansion could become
somewhat subdued in New Jersey. In addition, both the nation and New Jersey will
continue to be impacted by downsizing and other cost-cutting measures, which at
least in the short run will dampen growth. New Jersey is reliant on Federal
assistance and ranks high among the states in the amount of Federal aid
received. 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 A, 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. The Manager does not
believe that the current economic conditions in New York will have a significant
adverse effect on the
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<PAGE> 17
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. Growth of North Carolina tax revenues slowed
considerably during fiscal 1990-92, requiring tax increases and budget
adjustments, including hiring freezes and restrictions, spending constraints,
changes in timing of certain collections and payments, and other short-term
budget adjustments, that were needed to comply with North Carolina's
constitutional mandate for a balanced budget. Fiscal years 1993, 1994 and 1995,
however, ended with a positive General Fund balance each year. By law, 25% 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 positive fund balance was reserved in the General Fund as part
of a "Reserve for Repair and Renovation of State Facilities", leaving the
remaining unrestricted fund balance at the end of each such 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 positive fund and
cash balances at the end of the 1995 Fiscal Year of $928.0 million and $1,312.2
million, respectively, and as of the end of May 1996, that Fund had a cash
balance of $542.9 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, Aa 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. For fiscal 1995, the Pennsylvania
General Fund recorded a $49.8 million deficit (determined on a "GAAP" basis).
Some of the deficit was attributable to changes in the methodology used to
compute certain liabilities. At June 30, 1995, the Fund balance was $688.3
million. 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.
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
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<PAGE> 18
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.
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 Internal Revenue 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.
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
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<PAGE> 19
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, (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.
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<PAGE> 20
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 fee for the CMA service which presently is $100 per
year for individuals (an additional fee, presently $25, is charged for
participation in the CMA Visa Gold Program). 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.
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
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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 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 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.
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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."), has introduced 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 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
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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.
------------------------
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, 1996, each Fund's net assets
as of June 30, 1996 and the approximate annual distribution fee payable by each
Fund as of June 30, 1996.
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<TABLE>
<CAPTION>
DISTRIBUTION FEES
------------------------------------------------------------
AS OF JUNE 30, 1996
FEE PAID FOR THE -----------------------------------------
YEAR ENDED APPROXIMATE ANNUAL FEE
MARCH 31, 1996 NET ASSETS BASED ON NET ASSETS
---------------- ---------------- ----------------------
<S> <C> <C> <C>
Arizona Fund.................................. $ 152,808 $ 133,817,063 $ 167,271
California Fund............................... $1,565,337 $ 1,334,302,549 $1,667,878
Connecticut Fund.............................. $ 347,816 $ 282,757,061 $ 353,446
Massachusetts Fund............................ $ 215,451 $ 184,509,255 $ 230,637
Michigan Fund................................. $ 299,263 $ 232,483,515 $ 290,604
New Jersey Fund............................... $ 701,300 $ 568,226,646 $ 710,283
New York Fund................................. $1,244,612 $ 1,016,309,155 $1,270,386
North Carolina Fund........................... $ 330,722 $ 259,447,861 $ 324,310
Ohio Fund..................................... $ 322,038 $ 271,485,905 $ 339,357
Pennsylvania Fund............................. $ 483,744 $ 369,512,469 $ 461,891
</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
New York Stock Exchange 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.
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
23
<PAGE> 25
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 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. 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
24
<PAGE> 26
is defined in Rule 17Ad-15 under the Securities Exchange Act of 1934, the
existence and validity of which may be verified by the Transfer Agent through
the use of industry publications. Notarized signatures are not sufficient. 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.
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.; and Director of Merrill Lynch Funds Distributor, Inc. (the
"Distributor").
RONALD W. FORBES--Professor of Finance, School of Business, State
University of New York at Albany.
CYNTHIA A. MONTGOMERY--Professor of Finance, Harvard Business School.
CHARLES C. REILLY--Self-employed financial consultant; former
President and Chief Investment Officer of Verus Capital, Inc.; and former
Senior Vice President of Arnhold and S. Bleichroeder, Inc.
KEVIN A. RYAN--Professor of Education, Boston University; Founder and
current Director of the Boston University Center for the Advancement of
Ethics and Character.
RICHARD R. WEST--Professor of Finance and Dean Emeritus, New York
University Leonard N. Stern School of Business Administration.
- ---------------
*Interested person, as defined in the Investment Company Act, of the Trust.
25
<PAGE> 27
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 130 registered investment companies and provides investment advisory
services to individual and institutional accounts. As of June 30, 1996, MLAM and
the Manager had a total of approximately $206.5 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.
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.
26
<PAGE> 28
Set forth in the chart below is certain management fee and expense
information for each Fund for the year ended March 31, 1996 and at June 30,
1996.
<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,
1996... $613,484 $5,570,525 $1,393,151 $864,244 $1,202,870 $2,760,878 $4,591,599 $1,326,840 $1,290,786 $1,939,951
Management
Fee
Waived
for
the
Year
Ended
March
31,
1996... $229,188 $ -- $ -- $ -- $ -- $ -- $ -- $ 137,989 $ -- $ --
Effective
Fee Rate
as of
March
31,
1996... .50% .44% .50% .50% .50% .49% .45% .50% .50% .50%
Net
Assets
at
June
30,
1996
(in
millions).$ 133.8 $ 1,334.3 $ 282.8 $ 184.5 $ 232.5 $ 568.2 $ 1,016.3 $ 259.4 $ 271.5 $ 369.5
Approximate
Annual
Management
Fee as of
June
30,
1996... $669,085 $5,878,635 $1,413,785 $922,546 $1,162,418 $2,789,963 $4,686,159 $1,297,239 $1,357,430 $1,847,562
Approximate
Effective
Fee
Rate
as of
June
30,
1996.. .50% .44% .50% .50% .50% .49% .46% .50% .50% .50%
Reimbursement
for
Accounting
Services
for
the
Year
Ended
March
31,
1996... $ 37,954 $ 119,888 $ 49,754 $ 36,998 $ 50,931 $ 56,678 $ 95,052 $ 62,279 $ 35,331 $ 61,755
Ratio
of
Operating
Expenses
to
Average
Net
Assets
(Net
of
Reimbursement)
for the
Year
Ended
March
31,
1996... .58% .64% .72% .76% .73% .68% .64% .69% .73% .72%
</TABLE>
TRANSFER AGENCY SERVICES
Merrill Lynch Financial Data Services, Inc., a wholly-owned 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, each Fund pays the Transfer Agent a fee of $10.00 per shareholder
account and the Transfer Agent is entitled to reimbursement from each Fund for
out-of-pocket expenses incurred by the Transfer Agent under the Transfer Agency
Agreement.
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, 1996. Also set forth below is a computation of the
annual Transfer Agent fee, excluding out-of-pocket expenses, based upon the
number of shareholder accounts in each Fund at June 30, 1996.
<TABLE>
<CAPTION>
TRANSFER AGENT FEES
--------------------------------------------
AS OF JUNE 30, 1996
-----------------------
FOR THE YEAR ENDED NUMBER OF APPROXIMATE
MARCH 31, 1996 ACCOUNTS FEE
------------------ --------- -----------
<S> <C> <C> <C>
Arizona Fund............................................ $ 24,702 1,985 $ 19,850
California Fund......................................... $220,014 17,078 $ 170,780
Connecticut Fund........................................ $ 48,419 3,892 $ 38,920
Massachusetts Fund...................................... $ 51,674 4,225 $ 42,250
Michigan Fund........................................... $ 58,902 4,713 $ 47,130
New Jersey Fund......................................... $126,778 10,262 $ 102,620
New York Fund........................................... $210,200 17,669 $ 176,690
North Carolina Fund..................................... $ 79,231 5,346 $ 53,460
Ohio Fund............................................... $ 58,301 4,770 $ 47,700
Pennsylvania Fund....................................... $110,609 8,562 $ 85,620
</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,
1996.
<TABLE>
<CAPTION>
NUMBER OF AGGREGATE
TRANSACTIONS AMOUNT
------------ ------------
<S> <C> <C>
Arizona Fund........................................................ 3 $ 10,000,000
California Fund..................................................... 27 $137,932,549
Connecticut Fund.................................................... 16 $ 46,800,000
Massachusetts Fund.................................................. 12 $ 27,400,000
Michigan Fund....................................................... 7 $ 52,045,000
New Jersey Fund..................................................... 10 $ 39,074,024
New York Fund....................................................... 2 $ 12,228,720
North Carolina Fund................................................. 6 $ 13,600,000
Ohio Fund........................................................... 1 $ 2,150,000
Pennsylvania Fund................................................... 4 $ 17,700,000
</TABLE>
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 New York Stock Exchange 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 New York Stock Exchange 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.
TAXES
FEDERAL
The Trust intends to continue to qualify each Fund for the special tax
treatment afforded regulated investment companies ("RICs") under the Code. If a
Fund so qualifies, the Fund (but not its shareholders) will not be subject to
Federal income tax to the extent that it distributes its net investment income
and net realized capital gains. The Trust intends to cause the Funds to
distribute substantially all of such income.
29
<PAGE> 31
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 used for industrial development
or housing purposes). Income received on such bonds is classified as an item of
"tax preference", which could subject investors in such bonds, including
shareholders of the 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.
30
<PAGE> 32
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 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 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. In the case of the New
York Fund, "State Municipal Securities" includes obligations as described in the
previous sentence, the interest from which is exempt, in the opinion of counsel
to the issuer, from Federal, New York State and New York City income taxation.
Exempt-interest dividends attributable to interest income from State
Municipal Securities of a designated state generally will be exempt from income
taxation to shareholders otherwise subject to personal income taxation by such
designated state. Shareholders subject to income taxation by states other than
the Fund's designated state will realize a lower after-tax rate of return than
shareholders in that state since the dividends distributed by a Fund generally
will not be exempt, to any significant degree, from income taxation by any state
other than that Fund's designated state. The Trust will inform shareholders
annually as to the portion of a Fund's distributions which constitutes
exempt-interest dividends and the portion which is not subject to state and, if
applicable, city income or franchise taxes. Interest on indebtedness incurred or
continued to purchase or carry Fund shares generally will not be deductible for
state income tax purposes to
31
<PAGE> 33
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 and as to the availability of any exemptions from other state or local
taxes. Additional considerations relating to income 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
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.
32
<PAGE> 34
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> 36
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<PAGE> 37
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<PAGE> 38
Manager
Fund Asset Management
Administrative Offices:
800 Scudders Mill Road
Plainsboro, New Jersey
Mailing Address:
P.O. Box 9011
Princeton, New Jersey 08543-9011
Distributor
Merrill Lynch, 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> 39
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............... 25
Portfolio Transactions................ 28
Dividends............................. 29
Determination of Net Asset Value...... 29
Taxes................................. 29
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 #16817-0796
[EPS]
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 26, 1996
(LOGO)
<PAGE> 40
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 income taxes,
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
26, 1996 (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 26, 1996.
<PAGE> 41
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 the case of the New York Fund, from New
York City income 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"
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.
The Funds have 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 it does not invest more than a limited amount (not more
than 20% each) 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 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
2
<PAGE> 42
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., Moody's Investors Service, Inc. and Standard & Poor's
Ratings Group. 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 also may 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 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
3
<PAGE> 43
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
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
4
<PAGE> 44
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
"regulated investment company", 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
The Trustees and executive officers of the Trust, their ages and their
principal occupations for at least the last five years are set forth below.
Unless otherwise noted, the address of each Trustee and executive officer is
P.O. Box 9011, Princeton, New Jersey 08543-9011.
ARTHUR ZEIKEL (64)--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 (55)--Trustee(2)--1400 Washington Avenue, Albany, New York
12222. Professor of Finance, School of Business, State University of New York at
Albany since 1989 and Associate Professor prior thereto; Member, Task Force on
Municipal Securities Markets, Twentieth Century Fund.
CYNTHIA A. MONTGOMERY (44)--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 (65)--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, 1990; Adjunct
Professor, Wharton School, The University of Pennsylvania, 1990; Partner, Small
Cities CableVision.
KEVIN A. RYAN (63)--Trustee(2)--127 Commonwealth Avenue, Chestnut Hill,
Massachusetts 02167. Founder, current Director and Professor of The Boston
University Center for the Advancement of Ethics and Character; Professor of
Education at Boston University since 1982; formerly taught on the faculties of
The University of Chicago, Stanford University and Ohio State University.
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<PAGE> 45
RICHARD R. WEST (58)--Trustee(2)--Box 604, Genoa, Nevada 89411. Professor
of Finance and Dean from 1984 to 1993, and currently Dean Emeritus of New York
University Leonard N. Stern School of Business Administration; Professor of
Finance from 1976 to 1984, and Dean from 1976 to 1983, Amos Tuck School of
Business Administration, Dartmouth College; Director of Vornado, Inc. (real
estate investment trust), Bowne & Co., Inc. (financial printer), Smith-Corona
Corporation (manufacturer of typewriters and word processors) and Alexander's
Inc. (real estate company).
TERRY K. GLENN (55)--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 (51)--Senior Vice President and Portfolio
Manager(1)(2)--Senior Vice President of the Manager and MLAM since 1984 and Vice
President from 1980 to 1984.
EDWARD J. ANDREWS (36)--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 (36)--Vice President(1)(2)--Vice President and Director of
Taxation of MLAM since 1990; employee of Deloitte & Touche LLP from 1982 to
1990.
PETER J. HAYES (37)--Vice President and Portfolio Manager(1)(2)--Vice
President of MLAM since 1989 and Assistant Vice President from 1987 to 1989;
Assistant Vice President of Shawmut Bank, N.A. from 1985 to 1987.
KENNETH A. JACOB (45)--Vice President and Portfolio Manager(1)(2)--Vice
President of MLAM since 1984.
KEVIN A. SCHIATTA (41)--Vice President and Portfolio Manager(1)(2)--Vice
President of MLAM since 1985.
HELEN MARIE SHEEHAN (36)--Vice President(1)(2)--Vice President of MLAM
since 1991; Assistant Vice President of MLAM from 1989 to 1991; employee of MLAM
since 1985.
STEVEN LEWIS (33)--Vice President and Portfolio Manager(1)(2)--Assistant
Vice President of MLAM since 1995.
DARRIN SANFILLIPPO (31)--Vice President and Portfolio
Manager(1)(2)--Assistant Vice President of MLAM since 1994.
GERALD M. RICHARD (47)--Treasurer(1)(2)--Senior Vice President and
Treasurer of the Manager and MLAM since 1984; Senior Vice President and
Treasurer of Princeton Services since 1993; Vice President of MLFD since 1981
and Treasurer since 1984.
ROBERT HARRIS (44)--Secretary(1)(2)--Vice President of MLAM since 1984;
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 June 30, 1996, 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
unaffiliated Trustee a fee
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<PAGE> 46
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-affiliated 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 unaffiliated Trustees for the year ended March 31, 1996.
<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>
$1,227 $ 13,244 $ 3,042 $ 1,802 $2,554 $6,125 $10,289 $3,299 $2,649 $3,966
</TABLE>
The following table sets forth for the fiscal year ended March 31, 1996
compensation paid by the Funds to the non-interested Trustees and for the
calendar year ended December 31, 1995 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)...................... $ 225.14 None $147,100
Cynthia A. Montgomery(1)................. $ 225.14 None $147,100
Charles C. Reilly(1)..................... $ 225.14 None $269,600
Kevin A. Ryan(1)......................... $ 225.14 None $147,100
Richard R. West(1)....................... $ 248.19 None $294,600
California Fund
- ----------------
Ronald W. Forbes(1)...................... $ 2,577.36 None $147,100
Cynthia A. Montgomery(1)................. $ 2,577.36 None $147,100
Charles C. Reilly(1)..................... $ 2,577.36 None $269,600
Kevin A. Ryan(1)......................... $ 2,577.36 None $147,100
Richard R. West(1)....................... $ 2,860.91 None $294,600
Connecticut Fund
- -------------------
Ronald W. Forbes(1)...................... $ 572.77 None $147,100
Cynthia A. Montgomery(1)................. $ 572.77 None $147,100
Charles C. Reilly(1)..................... $ 572.77 None $269,600
Kevin A. Ryan(1)......................... $ 572.77 None $147,100
Richard R. West(1)....................... $ 635.02 None $294,600
Massachusetts Fund
- ---------------------
Ronald W. Forbes(1)...................... $ 339.63 None $147,100
Cynthia A. Montgomery(1)................. $ 339.63 None $147,100
Charles C. Reilly(1)..................... $ 339.63 None $269,600
Kevin A. Ryan(1)......................... $ 339.63 None $147,100
Richard R. West(1)....................... $ 375.88 None $294,600
</TABLE>
7
<PAGE> 47
<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)...................... $ 486.30 None $147,100
Cynthia A. Montgomery(1)................. $ 486.30 None $147,100
Charles C. Reilly(1)..................... $ 486.30 None $269,600
Kevin A. Ryan(1)......................... $ 486.30 None $147,100
Richard R. West(1)....................... $ 539.03 None $294,600
New Jersey Fund
- ------------------
Ronald W. Forbes(1)...................... $ 1,128.28 None $147,100
Cynthia A. Montgomery(1)................. $ 1,128.28 None $147,100
Charles C. Reilly(1)..................... $ 1,128.28 None $269,600
Kevin A. Ryan(1)......................... $ 1,128.28 None $147,100
Richard R. West(1)....................... $ 1,249.87 None $294,600
New York Fund
- -----------------
Ronald W. Forbes(1)...................... $ 1,999.28 None $147,100
Cynthia A. Montgomery(1)................. $ 1,999.28 None $147,100
Charles C. Reilly(1)..................... $ 1,999.28 None $269,600
Kevin A. Ryan(1)......................... $ 1,999.28 None $147,100
Richard R. West(1)....................... $ 2,214.72 None $294,600
North Carolina Fund
- ----------------------
Ronald W. Forbes(1)...................... $ 594.12 None $147,100
Cynthia A. Montgomery(1)................. $ 594.12 None $147,100
Charles C. Reilly(1)..................... $ 594.12 None $269,600
Kevin A. Ryan(1)......................... $ 594.12 None $147,100
Richard R. West(1)....................... $ 661.79 None $294,600
Ohio Fund
- -----------
Ronald W. Forbes(1)...................... $ 509.38 None $147,100
Cynthia A. Montgomery(1)................. $ 509.38 None $147,100
Charles C. Reilly(1)..................... $ 509.38 None $269,600
Kevin A. Ryan(1)......................... $ 509.38 None $147,100
Richard R. West(1)....................... $ 564.08 None $294,600
Pennsylvania Fund
- -------------------
Ronald W. Forbes(1)...................... $ 767.74 None $147,100
Cynthia A. Montgomery(1)................. $ 767.74 None $147,100
Charles C. Reilly(1)..................... $ 767.74 None $269,600
Kevin A. Ryan(1)......................... $ 767.74 None $147,100
Richard R. West(1)....................... $ 850.51 None $294,600
</TABLE>
- ---------------
(1) The Trustees serve on the boards of MLAM/FAM Advised Funds as follows: Mr.
Forbes (23 registered investment companies consisting of 36 portfolios); Ms.
Montgomery (23 registered investment companies consisting of 36 portfolios);
Mr. Reilly (41 registered investment companies consisting of 54 portfolios);
Mr. Ryan (23 registered investment companies consisting of 36 portfolios);
and Mr. West (41 registered investment companies consisting of 54
portfolios).
8
<PAGE> 48
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, 1996, 1995 and 1994:
<TABLE>
<CAPTION>
FOR THE YEAR ENDED MARCH 31,
------------------------------------------------------------------------------------------
1996 1995 1994
---------------------------- ---------------------------- ----------------------------
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................. $ 613,484 $ 229,188 $ 430,110 $ 267,373 $ 269,875 $ 209,036
California Fund.............. $5,570,525 $ -- $5,371,374 $ -- $4,979,676 $ --
Connecticut Fund............. $1,393,151 $ -- $1,290,608 $ -- $1,176,254 $ --
Massachusetts Fund........... $ 864,244 $ -- $ 756,123 $ -- $ 721,970 $ --
Michigan Fund................ $1,202,870 $ -- $1,117,988 $ -- $1,067,163 $ --
New Jersey Fund.............. $2,760,878 $ -- $2,299,467 $ -- $2,007,881 $ --
New York Fund................ $4,591,599 $ -- $3,831,293 $ -- $3,347,951 $ --
North Carolina Fund.......... $1,326,840 $ 137,989 $1,474,176 $ 294,835 $1,193,861 $ 238,772
Ohio Fund.................... $1,290,786 $ -- $1,078,893 $ -- $ 955,932 $ --
Pennsylvania Fund............ $1,939,951 $ -- $1,689,896 $ -- $1,587,756 $ --
</TABLE>
The State of California imposes limitations on the expenses of the Funds.
These expense limitations require that the Manager reimburse each Fund in any
amount necessary to prevent the ordinary operating expenses of each Fund
(excluding interest, taxes, distribution fees, brokerage fees and commissions
and extraordinary charges such as litigation costs) from exceeding in any fiscal
year 2.5% of such Fund's first $30 million of average daily net assets, 2.0% of
the next $70 million of average daily net assets and 1.5% of the remaining
average daily net assets. No fee payment will be made to the Manager during the
year which will
9
<PAGE> 49
cause such expenses to exceed the pro rata expense limitation at the time of
such payment. For the years ended March 31, 1996, 1995 and 1994, no
reimbursement was made to any of the Funds on account of the above-described
expense limitation.
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 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 unaffiliated 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
10
<PAGE> 50
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.
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, 1996, 1995 and 1994. All of the amounts expended were allocated to Merrill
Lynch personnel and to related administrative costs.
<TABLE>
<CAPTION>
FOR THE YEAR ENDED MARCH 31,
----------------------------------------
1996 1995 1994
---------- ---------- ----------
<S> <C> <C> <C>
Arizona Fund......................................... $ 152,808 $ 106,900 $ 67,140
California Fund...................................... $1,565,337 $1,492,270 $1,364,634
Connecticut Fund..................................... $ 347,816 $ 320,966 $ 292,733
Massachusetts Fund................................... $ 215,451 $ 187,724 $ 179,349
Michigan Fund........................................ $ 299,263 $ 277,622 $ 265,504
New Jersey Fund...................................... $ 701,300 $ 573,696 $ 500,084
New York Fund........................................ $1,244,612 $1,013,471 $ 872,640
North Carolina Fund.................................. $ 330,722 $ 366,625 $ 297,463
Ohio Fund............................................ $ 322,038 $ 268,476 $ 237,695
Pennsylvania Fund.................................... $ 483,744 $ 420,594 $ 395,631
</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 is closed other than customary weekend and holiday
closings or (b) during which trading on the New York Stock Exchange 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
11
<PAGE> 51
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 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
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
over-the-counter 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 over-the-counter 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, 1996, 1995 and 1994.
<TABLE>
<CAPTION>
FOR THE YEAR ENDED MARCH 31,
------------------------------------------------------------------------------
1996 1995 1994
------------------------ ------------------------ ------------------------
NUMBER OF AGGREGATE NUMBER OF AGGREGATE NUMBER OF AGGREGATE
TRANSACTIONS AMOUNT* TRANSACTIONS AMOUNT* TRANSACTIONS AMOUNT*
------------ --------- ------------ --------- ------------ ---------
<S> <C> <C> <C> <C> <C> <C>
Arizona Fund......... 3 $ 10.0 3 $ 7.0 -- $ --
California Fund...... 27 $ 137.9 191 $ 823.1 174 $ 875.8
Connecticut Fund..... 16 $ 46.8 -- $ -- 3 $ 7.0
Massachusetts Fund... 12 $ 27.4 42 $ 54.8 52 $ 95.3
Michigan Fund........ 7 $ 52.0 6 $ 14.9 10 $ 54.9
New Jersey Fund...... 10 $ 39.1 6 $ 14.8 7 $ 34.9
New York Fund........ 2 $ 12.2 8 $ 153.5 31 $ 155.2
North Carolina
Fund............... 6 $ 13.6 14 $ 14.2 15 $ 23.6
Ohio Fund............ 1 $ 2.2 2 $ 2.4 13 $ 26.4
Pennsylvania Fund.... 4 $ 17.7 -- $ -- 2 $ 12.3
</TABLE>
- ---------------
* in millions
12
<PAGE> 52
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.
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 day the New York Stock Exchange 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 day except for days on
which both the New York Stock Exchange and New York banks are closed. Both the
New York Stock Exchange and New York banks are closed on New Year's 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's rule 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 in a Fund's portfolio which 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
13
<PAGE> 53
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 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 regulated investment companies ("RICs") under the Code. If a
Fund so qualifies, the Fund (but not its shareholders) will not be subject to
Federal income tax to the extent that it distributes its net investment income
and net realized capital gains. The Trust intends to cause 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-
14
<PAGE> 54
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.
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 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
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beginning 30 days before and ending 30 days after the date that the shares are
disposed of. In such a case, the basis of the shares acquired will be adjusted
to reflect the disallowed loss.
Ordinary income dividends paid to shareholders who are nonresident aliens
or foreign entities will be subject to a 30% United States withholding tax under
existing provisions of the Code applicable to foreign individuals and entities
unless a reduced rate of withholding or a withholding exemption is provided
under applicable treaty law. Nonresident shareholders are urged to consult their
own tax advisers concerning the applicability of the United States withholding
tax.
Under certain Code provisions, some shareholders may be subject to a 31%
withholding tax on certain ordinary income dividends and on capital gain
dividends and redemption payments ("backup withholding"). Generally,
shareholders subject to backup withholding will be those for whom no certified
taxpayer identification number is on file with the Trust or who, to the Trust's
knowledge, have furnished an incorrect number. When establishing an account, an
investor must certify under penalty of perjury that such number is correct and
that such investor is not otherwise subject to backup withholding.
The Code provides that every person required to file a tax return must
include for information purposes on such return the amount of exempt-interest
dividends received from all sources (including any of the Funds) during the
taxable year.
ENVIRONMENTAL TAX
The Code imposes a deductible tax (the "Environmental Tax") on a
corporation's modified alternative minimum taxable income (computed without
regard to the alternative tax net operating loss deduction and the deduction for
the Environmental Tax) at a rate of $12 per $10,000 (0.12%) of alternative
minimum taxable income in excess of $2,000,000. The Environmental Tax is imposed
for taxable years beginning after December 31, 1986 and before January 1, 1996,
unless extended. The Environmental Tax is imposed even if the corporation is not
required to pay an alternative minimum tax because the corporation's regular
income tax liability exceeds its minimum tax liability. The Code provides,
however, that RICs, such as the Funds, are not subject to the Environmental Tax.
However, exempt-interest dividends paid by the Funds that create alternative
minimum taxable income for corporate shareholders (as described above) may
subject corporate shareholders of the Funds to the Environmental Tax.
------------------------
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 will not be subject to Arizona income
tax for shareholders who are Arizona residents to the extent that the dividends
are attributable to interest earned on Arizona State Municipal 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.
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<PAGE> 56
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 is reflected in 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 "regulated investment company" 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 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 received by the Massachusetts Fund on Massachusetts
State Municipal Securities 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 they are attributable to
interest on Michigan State Municipal Securities. To the extent the distributions
from the Michigan Fund are attributable to sources other than exempt-interest
dividends, such distributions, including, but not limited to, long- or
short-term capital gains, will not be exempt from Michigan income tax or the
single business tax.
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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.
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. Distributions from investment income and capital gains of the New York
Fund, including exempt-interest dividends paid to a corporate shareholder, will
be subject to New York State corporate franchise and New York City corporation
income tax.
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.
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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 also 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 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.
------------------------
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 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 1, 1996.
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The following appendices contain certain information regarding the economic
and financial conditions in each designated state as of the date of this
Statement of Additional Information. This information is provided to investors
in each Fund in view of each Fund's concentration of investments in securities
of issuers in a specific State.
APPENDIX A
ECONOMIC AND FINANCIAL CONDITIONS IN ARIZONA
The following information is a brief summary of factors affecting the
economy of the State and does not purport to be a complete description of such
factors. Other factors will affect issuers. The summary is based primarily upon
one or more publicly available offering statements relating to debt offerings of
state issuers; however, it has not been updated nor will it be updated during
the year. The Trust has not independently verified the information.
Over the past several decades, the economy of Arizona (sometimes referred
to as the "State") 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 and the service industry. Other
important industries that contributed to the State's growth in past years, such
as construction and real estate, have rebounded from substantial declines during
the late 1980s and early 1990s, and, like the rest of the State, are
experiencing positive growth.
Arizona's strong economy, warm climate and reasonable cost of living have
encouraged many people to move to the State in recent years. Between 1985 and
1990, the State ranked fifth in the country in population growth, and Maricopa
County, the State's most populous county, had the single largest population
inflow (in absolute terms) of any county in the country during that period.
Since 1991, as a result of both the State's relatively good economy and the
troubles experienced in surrounding areas, like California, the State's
population has grown by approximately 392,000, or 10.4%, including an increase
of 105,000, or 2.6%, in 1995 alone. Population growth is expected to continue at
or above 1995 levels for the foreseeable future.
Part of the State's popularity in recent years can be attributed to the
favorable job climate. Following 1994's near record employment rate increase of
6.7%, the State achieved an employment rate increase of 5.4% in 1995, recording
more than 91,000 new jobs. Once again, the service sector of the economy, which
represents more than 29% of all jobs in the State, showed significant growth. A
relatively sound United States economy, a stronger economy in California (which
historically has been a prime market for Arizona goods and services) and
continued growth in high technology, manufacturing and services should enable
the State to realize positive, though more modest, gains in job growth in 1996.
The 1995 unemployment rate was 5.1%.
The State's economic growth in recent times has enabled Arizonans to
realize substantial gains in personal income. While the State's per capita
personal income generally varies between 5% and 15% below the national average
due to such factors as the chronic poverty on the State's Indian reservations,
the State's relatively high numbers of retirees and children and the State's
below-average wage scale, the State's aggregate personal income grew nearly 8.6%
during 1995 to approximately $84.8 billion, which translated into a gain in real
personal income of 6.1%, or $4.5 billion, over 1994. The gains in per capita
personal income during this period led to continued strong growth in retail
sales. While the 8.9% retail sales growth rate in 1995 was lower than 1994's
12.0% increase, the State's strong employment and personal income figures should
provide for continued growth in future years.
The State government's fiscal situation has improved substantially in
recent years. After experiencing several years of budget shortfalls requiring
mid-year adjustments, the State has had significant budget surpluses each year
since 1993. Although an amendment to the State's Constitution requiring a 2/3
majority
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<PAGE> 63
vote in both houses of the Legislature to pass a tax or fee increase constrains
the State's ability to raise additional revenue when needed, the State has
placed some of its surplus in a rainy-day fund.
In July 1994, a sharply divided Arizona Supreme Court ruled that the
State's current system for financing public education itself created substantial
disparities in facilities among school districts and therefore violated the
provisions of Article XI, sec.1 of the Arizona Constitution, which requires the
Legislature to establish and maintain "a general and uniform public school
system". The Court remanded the case to the Superior Court "to determine
whether, within a reasonable time, legislative action has been taken [to correct
this situation]". In response to a subsequent motion for clarification, the
Supreme Court ordered that, pending such legislative action or further order of
the Supreme Court, "which would have prospective application only", the public
school system "continue under existing statutes, and the validity and
enforceability of past and future acts, bonded indebtedness and obligations
incurred under applicable statutes, as long as they are in force and effect, are
assured." In May 1995, a court dismissed a taxpayer's challenge to a school
district bond issue that was authorized at an election subsequent to the Supreme
Court decision on the ground that the Supreme Court decision contemplated and
approved such bond issues pending legislative action or further court order. A
new system of public school financing has not yet been implemented and it is
unclear if or when the Superior Court or the Supreme Court will take further
action and, if so, what its effect will be on Arizona school district bonds.
Maricopa County is the State's most populous and prosperous county,
accounting for nearly 60% of the State's population, and a substantial majority
of its wage and salary employment and aggregate personal income. Within its
borders lie the City of Phoenix, the State's largest city and the seventh
largest city in the United States, and the Cities of Scottsdale, Tempe, Mesa,
Glendale, Chandler and Peoria, as well as the Towns of Paradise Valley and
Gilbert. Good transportation facilities, a substantial pool of available labor,
a variety of support industries and a warm climate have helped make Maricopa
County a major business center in the southwestern United States. Once dependent
primarily on agriculture, Maricopa County has substantially diversified its
economic base. Led by the service sector, which includes transportation,
communications, public utilities, hospitality and entertainment, trade, finance,
insurance, real estate and government, the County achieved an overall employment
growth rate of 6.3% in 1995. In addition, several large, publicly-traded
companies, such as The Dial Corp., Phelps Dodge and MicroAge, have their
headquarters in Maricopa County, while others, such as Motorola, Intel and
Honeywell, conduct major operations there. Already home to a variety of
professional sports teams, including the Phoenix Suns and Arizona Cardinals, the
County was also awarded one of two new major league baseball franchises; the
Arizona Diamondbacks are expected to begin play in 1998 upon completion of a
stadium currently under construction in downtown Phoenix.
Pima County is the State's second most populous county and includes the
City of Tucson. Traditionally, Pima County's economy has been based primarily
upon manufacturing, mining, government, agriculture, tourism, education and
finance. Hughes Aircraft, which transferred its Hughes Missile Systems division
to Tucson from Canoga Park, California, several years ago, and several large
mining companies, including 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 did
experience a significant drop in the rate of job growth from 7.0% in 1994 to
2.3% in 1995, although positive job growth is expected to continue.
In 1994, two special purpose irrigation districts, formed for the purpose
of issuing bonds to finance the purchase of Colorado River water from the
Central Arizona Project ("CAP"), filed for bankruptcy under Chapter 9 of the
United States Bankruptcy Code due to the districts' inability to collect tax
revenue in amounts and at times sufficient to service their bonded debt. The
financial problems that led to the districts' default arose from a combination
of the unexpectedly high cost of constructing the CAP and delivering the water
to the districts, plummeting land values resulting in a need to increase
property taxes in order to pay the districts' bonds, and the refusal by many
land owners in the districts to shoulder the increased tax burden. In June 1995,
a bankruptcy plan was confirmed for one district which gave back to bondholders
57 cents on the dollar of their principal and placed an additional 42 cents on
the dollar in new 8 percent bonds maturing in seven years. The proceedings with
respect to the second district are continuing.
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APPENDIX B
ECONOMIC AND FINANCIAL CONDITIONS IN CALIFORNIA
The following information is a brief summary of factors affecting the
economy of the State and does not purport to be a complete description of such
factors. Other factors will affect issuers. The summary is based primarily upon
one or more publicly available offering statements relating to debt offerings of
state issuers; however, it has not been updated nor will it be updated during
the year. The Trust has not independently verified the information.
ECONOMIC CONDITIONS
The economy of the State of California (sometimes referred to herein as the
"State") is the largest among the 50 states and one of the largest in the world.
This diversified economy has major components in agriculture, manufacturing,
high technology, trade, entertainment, tourism, construction and services. Total
State gross domestic product of about $835 billion in 1994 was larger than all
but six nations in the world.
California's July 1, 1994 population of over 32 million represented over 12
percent of the total United States population. The official 1990 Census
population was 29,760,021 as of April 1, 1990, which represented an increase of
over 6 million persons, or 26 percent, during the decade of the 1980s. As of the
April 1, 1990 Census, the median age of California's population was 31.5 years,
younger than the 1990 U.S. median of 32.9 years.
California's population is concentrated in metropolitan areas. As of the
April 1, 1990 Census, 96 percent resided in the 23 Metropolitan Statistical
Areas in the State. Overall, California's population per square mile was 191 in
1990. As of July 1, 1994, 69 percent of the population of the State was located
in the two consolidated Metropolitan Statistical Areas in California. The
5-county Los Angeles area accounted for 48 percent, with 15.6 million residents.
The 10-county San Francisco Bay Area represented 21 percent, with a population
of 6.7 million.
After suffering through a severe recession, California's economy has been
on a steady recovery since the start of 1994. Employment grew by over 500,000 in
1994 and 1995, and the pre-recession level of total employment is expected to be
matched in 1996. The strongest growth has been in export-related industries,
business services, electronics, entertainment and tourism, all of which have
offset the recession-related losses which were heaviest in aerospace and
defense-related industries (which accounted for two-thirds of the job losses),
finance and insurance. Residential housing construction, with new permits for
under 100,000 annual new units issued in 1994 and 1995, is weaker than in
previous recoveries, but has been growing slowly since 1993.
The State. In the years following enactment of the Federal Tax Reform Act
of 1986, and conforming changes to the State's tax laws, taxpayer behavior
became much more difficult to predict, and the State experienced a series of
fiscal years in which revenue came in significantly higher or lower than
original estimates. The 1989-90 Fiscal Year ended with revenues below estimates,
so that the State's budget reserve (the Special Fund for Economic Uncertainties
or "SFEU") was fully depleted by June 30, 1990. This date essentially coincided
with the start of the current recession, which severely affected State General
Fund revenues and increased expenditures above initial budget appropriations due
to greater health and welfare costs. The State's budget problems in recent years
have also been caused by a structural imbalance which has been identified by the
current and previous Administrations. The largest General Fund Program--K-14
education, health, welfare and corrections--was increasing faster than the
revenue base, driven by the State's rapid population growth. These pressures
will continue as population trends maintain strong demand for health and welfare
services, as the school-age population continues to grow and as the State's
corrections program responds to a "Three Strikes" law enacted in 1994, which
requires mandatory life prison terms for certain third-time felony offenders.
Prior Years. As a result of these factors and others, from the late 1980s
until 1992-93, the State had a period of budget imbalance. During this period,
expenditures exceeded revenues in four out of six years, and
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the State accumulated and sustained a budget deficit in the SFEU approaching
$2.8 billion at its peak at June 30, 1993. Starting in the 1990-91 Fiscal Year
and for each fiscal year thereafter, each budget required multi-billion dollar
actions to bring projected revenues and expenditures into balance and to close
large "budget gaps" which were identified. Despite budget actions by the
Legislature, the effects of the recession led to large, unanticipated deficits
in the budget reserve, the SFEU, as compared to projected positive balances. By
the 1993-94 Fiscal Year, the accumulated deficit was so large that it was
impractical to budget to retire it in one year, so a two-year program was
implemented, using the issuance of revenue anticipation warrants to carry a
portion of the deficit over the end of the fiscal year. When the economy failed
to recover sufficiently in 1993-94, a second two-year plan was implemented in
1994-95.
Another consequence of the accumulated budget deficits, together with other
factors such as disbursement of funds to local school districts "borrowed" from
future fiscal years and hence not shown in the annual budget, was to
significantly reduce the State's cash resources available to pay its ongoing
obligations. The State's cash condition became so serious in late Spring of 1992
that the State Controller was required to issue revenue anticipation warrants
maturing in the following fiscal year in order to pay the State's continuing
obligations. The State was forced to rely increasingly on external debt markets
to meet its cash needs, as a succession of notes and warrants were issued in the
period from June 1992 to July 1994, often needed to pay previously maturing
notes or warrants. These borrowings were used also in part to spread out the
repayment of the accumulated budget deficit over the end of the fiscal year.
The 1994-95 Fiscal Year represented the fourth consecutive year that the
Governor and the Legislature were faced with a very difficult budget environment
to produce a balanced budget. Many program cuts and budgetary adjustments had
already been made in the last three years. The Governor's budget proposal, as
updated in May and June, 1994, recognized that the accumulated deficit could not
be repaid in one year and proposed a two-year solution.
Pursuant to the Budget Adjustment Law (the "Law"), the State Controller was
required to make a report by November 15, 1994 on whether the projected cash
resources for the General Fund as of June 30, 1995 would decrease more than $430
million from the amount projected by the State in its Official Statement in July
1994 for the sale of $4,000,000,000 of revenue anticipation warrants. On
November 15, 1994, the State Controller issued the report on the State's cash
position required by the Law. The report indicated that the cash position of the
General Fund on June 30, 1995 would be $581 million better than was estimated in
the July 1994 cash flow projections and therefore, no budget adjustment
procedures would be invoked for the 1994-95 Fiscal Year.
On October 15, 1995, when the State Controller, in conjunction with the
Legislative Analyst's Office, reviewed the estimated cash condition of the
General Fund for the 1995-96 Fiscal Year, the State Controller estimated that
the General Fund would not have negative internal cash resources on June 30,
1996 (i.e., external borrowing would be needed to pay all obligations due). If a
cash shortfall had been identified by the State Controller, the State
Legislature would have been required to enact legislation providing for
sufficient General Fund expenditure reductions, revenue increases, or both.
1995-96. On January 10, 1995, the Governor presented his 1995-96 Fiscal
Year budget proposal (the "Proposed Budget"). Two of the principal features of
the Proposed Budget were a phased 15% cut in personal income and corporate taxes
and a further expansion of the "realignment" process to transfer more
responsibility and funding sources for certain health and welfare programs to
local governments. Neither of these proposals was approved by the Legislature.
As a result of the improving economy, with resulting improved revenue and
caseload estimates, the State entered the 1995-96 budget negotiations with the
smallest nominal "budget gap" to be enclosed in many years.
The 1995-96 Budget Act was signed by the Governor on August 3, 1995. The
Budget Act projects General Fund revenues and transfers of $44.1 billion, a 3.5
percent increase from the prior year. Expenditures are budgeted at $43.4
billion, a 4 percent increase. The Department of Finance projects that, after
repaying the last of the carryover budget deficit, there will be a positive
balance of $28 million in the budget reserve, the
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SFEU, at June 30, 1996. The Budget Act also projects Special Fund revenues of
$12.7 billion and appropriates Special Fund expenditures of $13.4 billion.
1996-1997. On January 10, 1996, the Governor released his proposed budget
for the next fiscal year (the "Governor's Budget"). The Governor requested total
General Fund appropriations of about $45.2 billion, based on projected revenues
and transfers of about $45.6 billion, which would leave a budget reserve in the
SFEU at June 30, 1997 of about $400 million. The Governor renewed a proposal,
which had been rejected by the Legislature in 1995, for a 15 percent phased cut
in individual and corporate tax rates over three years (the budget proposal
assumes this will be enacted, reducing revenues in 1996-97 by about $600
million). There was also a proposal to restructure trial court funding in a way
which would result in a $300 million decrease in General Fund revenues. The
Governor requested legislation to make permanent a moratorium on cost of living
increases for welfare payments and suspension of a renters' tax credit, which
otherwise would go back into effect in the 1996-97 Fiscal Year. He further
proposed additional cuts in certain health and welfare programs. The Governor
assumed that cuts previously approved by the legislature will receive Federal
approval, and Federal welfare reform would allow the State to reduce welfare
costs. As of mid-April, 1996, approximately $1.6 billion in anticipated health
and welfare cuts for 1996-97 had not yet been approved by the Federal
government. There is no assurance as to when Federal welfare reform may be
enacted. The Governor's budget proposes increases in funding for K-12 schools
under Proposition 98, for State higher education systems (with a second year of
no student fee increases) and for corrections. The Governor's budget projects
external cash flow borrowing of up to $3.2 billion, to mature by June 30, 1997.
On July 15, 1996, the Governor approved the 1996-97 Budget Act with General
Fund appropriations of approximately $47.3 billion, based on projected revenues
and transfers of $47.6 billion which would leave a budget reserve in the SFEU of
approximately $305 million at June 30, 1997.
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 other
taxes. Counties, in particular, have had fewer options to raise revenues than
other local government entities and have been required to maintain many
services.
In the aftermath of Proposition 13, the State provided aid from the General
Fund to make up some of the loss of property tax moneys, including taking over
the principal responsibility for funding local K-12 schools and community
colleges. Under the pressure of the recent recession, the Legislature has
eliminated remnants of this post-Proposition 13 aid to entities other than K-14
education districts, although it has also provided additional funding sources
(such as sales taxes) and reduced mandates for local services. Many counties
continue to be under severe fiscal stress. While such stress has in recent years
most often been experienced by smaller, rural counties, larger urban counties,
such as Los Angeles, have also been affected.
ORANGE COUNTY BANKRUPTCY
In December 1994, Orange County, California ("Orange County"), together
with its pooled investment funds (the "Pools") filed for protection under
Chapter 9 of the Federal Bankruptcy Code, after reports that the Pools had
suffered significant market losses in their investments, causing a liquidity
crisis for the Pools and Orange County. More than 200 other public entities,
most, but not all, of which are located in Orange County, were also depositors
in the Pools. Orange County has reported the Pools' loss at about $1.69 billion,
or about 23 percent of their initial deposits of approximately $7.5 billion.
Many of the entities which deposited moneys in the Pools, including Orange
County, faced interim and/or extended cash flow difficulties because of the
bankruptcy filing and may be required to reduce programs or capital projects.
Orange County has embarked
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on a fiscal recovery plan based on sharp reductions in services and personnel
and rescheduling of outstanding short-term debt using certain new revenues
transferred to Orange County from other local governments pursuant to special
legislation enacted in October 1995. The termination of the bankruptcy was
approved in June 1996.
CONSTITUTIONAL AND STATUTORY LIMITATIONS; RECENT INITIATIVES, PENDING LITIGATION
Constitutional and Statutory Limitations. Article XIIIA of the California
Constitution (which resulted from the voter-approved Proposition 13 in 1978)
limits the taxing powers of California public agencies. Article XIIIA provides
that the maximum ad valorem tax on real property cannot exceed 1 percent of the
"full cash value" of the property and effectively prohibits the levying of any
other ad valorem tax on real property for general purposes. However, on May 3,
1986, Proposition 46, an amendment to Article XIIIA, was approved by the voters
of the State of California, creating a new exemption under Article XIIIA
permitting an increase in ad valorem taxes on real property in excess of 1
percent for bonded indebtedness approved by two-thirds of the voters voting on
the proposed indebtedness. "Full cash value" is defined as "the County
Assessor's valuation of real property as shown on the 1975-76 tax bill under
"full cash value" or, thereafter, the appraised value of real property when
purchased, newly constructed, or a change in ownership has occurred after the
1975 assessment". The "full cash value" is subject to annual adjustment to
reflect increases (not to exceed 2 percent) or decreases in the consumer price
index or comparable local data, or to reflect reductions in property value
caused by damage, destruction or other factors.
Article XIIIB of the California Constitution limits the amount of
appropriations of the State and of the local governments to the amount of
appropriations of the entity for the prior year, adjusted for changes in the
cost of living, population and the services that local government has financial
responsibility for providing. To the extent that the revenues of the State
and/or local government exceed its appropriations, the excess revenues must be
rebated to the public either directly or through a tax decrease. Expenditures
for voter-approved debt services are not included in the appropriations limit.
In 1986, California voters approved an initiative statute known as
Proposition 62. This initiative (i) required that any tax for general
governmental purposes imposed by a local governmental entity be approved by a
majority of the electorate of the governmental entity, (ii) required that any
special tax (defined as taxes levied for other than general government purposes)
imposed by a local governmental entity be approved by a two-thirds vote of the
voters within that jurisdiction, (iii) restricted the use of revenues from a
special tax to the purposes or for the service for which the special tax is
imposed, (iv) prohibited the imposition of ad valorem taxes on real property by
local governmental entities except as permitted by Article XIIIA, (v) prohibited
the imposition of transaction taxes and sales taxes on the sale of real property
by local governments, (vi) required that any tax imposed by a local government
on or after August 1, 1985 be ratified by a majority vote of the electorate
within two years of the adoption of the initiative or be terminated by November
15, 1988, (vii) required that, in the event a local government fails to comply
with the provisions of this measure, a reduction in the amount of property tax
revenues allocated to such local government occurs in an amount equal to the
revenues received by such entity attributable to the tax levied in violation of
the initiative, and (viii) permitted those provisions to be amended exclusively
by the voters of the State of California.
On September 28, 1995 the California Supreme Court upheld the
constitutionality of the provision requiring a two-thirds vote in order for a
local government to impose a "special tax". Although the Supreme Court has yet
to rule on the provision requiring a majority vote for a "general tax", it
appears that the Supreme Court is favorably disposed to uphold that portion of
Proposition 62 as well. In that event, a number of taxes currently being
collected (especially by counties and general law cities) would be invalidated.
Prior collection of such taxes may also be subject to claims for refund unless
the Supreme Court chooses to apply its ruling prospectively. The California
Supreme Court has yet to consider the validity of Proposition 62 with regard to
charter cities.
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Recent Initiatives. At the November 9, 1988 general election, California
voters approved an initiative known as Proposition 98. This initiative amends
Article XIIIB to require that (i) the California Legislature establish a prudent
state reserve fund in an amount it shall deem reasonable and necessary and (ii)
revenues in excess of amounts permitted to be spent and which would otherwise be
returned pursuant to Article XIIIB by revision of tax rates or fee schedules be
transferred and allocated (up to a maximum of 40%) to the State School Fund and
be expended solely for purposes of instructional improvement and accountability.
Proposition 98 also amends Article XVI to require that the State of California
provide a minimum level of funding for public schools and community colleges.
Commencing with the 1988-89 Fiscal Year, money to be applied by the State for
the support of school districts and community college districts shall not be
less than the greater of: (i) the amount which, as a percentage of the State
General Fund revenues which may be appropriated pursuant to Article XIIIB,
equals the percentage of such State General Fund revenues appropriated for
school districts and community college districts, respectively, in Fiscal Year
1986-87 or (ii) the amount required to ensure that the total allocations to
school districts and community college districts from the State General Fund
proceeds of taxes appropriated pursuant to Article XIIIB and allocated local
proceeds of taxes shall not be less than the total amount from these sources in
the prior year, adjusted for increases in enrollment and adjusted for changes in
the costs of living pursuant to the provisions of Article XIIIB. The initiative
permits the enactment of legislation, by a two-thirds vote, to suspend the
minimum funding requirements for one year. As a result of Proposition 98, funds
that the State might otherwise make available to its political subdivisions may
be allocated instead to satisfy such minimum funding level.
During the recent recession, General Fund revenues for several years were
less than originally projected, so that the original Proposition 98
appropriations turned out to be higher than the minimum percentage provided in
the law. The Legislature responded to these developments by designating the
"extra" Proposition 98 payments in one year as a "loan" from future years'
Proposition 98 entitlements and also intended that the "extra" payments would
not be included in the Proposition 98 "base" for calculating future years'
entitlement. By implementing these actions, per-pupil funding from Proposition
98 sources stayed almost constant at approximately $4,220 from Fiscal Year
1991-92 to Fiscal Year 1993-94.
In 1992, a lawsuit was filed, called California Teachers' Association v.
Gould, which challenged the validity of these off-budget loans. As part of the
negotiations leading to the 1995-96 Budget Act, an oral agreement was reached to
settle this case. The parties reached a conditional final settlement of the case
in April 1996. The settlement requires adoption of legislation satisfactory to
the parties to implement its terms and final approval by the court.
The settlement provides, among other things, that both the State and K-14
schools share in the repayment of prior years' emergency loans to schools. Of
the total $1.76 billion in loans, the State will repay $935 million by
forgiveness of the amount owed, while schools will repay $825 million. The State
share of the repayment will be reflected as expenditures above the current
Proposition 98 base calculation. The schools' share of the repayment will count
as appropriations that count toward satisfying the Proposition 98 guarantee, or
from "below" the current base. Repayments are spread over the eight-year period
of 1994-95 through 2001-02 to mitigate any adverse fiscal impact. Once the
Director of Finance certifies that a settlement has occurred, approximately $377
million in appropriations from the 1995-96 Fiscal Year to schools will be
disbursed in August 1996.
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
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not verify as either a United States citizen or a person legally admitted to the
United States. The State Legislative Analyst estimates that verification costs
could be in the tens of millions of dollars on a statewide level (including
verification costs incurred by other local governments), with first-year costs
potentially in excess of $100 million.
The reporting requirements may violate the Family Educational Rights and
Privacy Act ("FERPA"), which generally prohibits schools that receive Federal
funds from disclosing information in student records without parental consent.
Compliance with FERPA is a condition of receiving Federal education funds, which
total $2.3 billion annually to California school districts. The Secretary of the
United States Department of Education has indicated that the reporting
requirement in Proposition 187 could jeopardize the ability of school districts
to receive these funds.
Opponents of Proposition 187 have filed at least eight lawsuits challenging
the constitutionality and validity of the measure. On November 2, 1995, a United
States District Court judge struck down the central provisions of Proposition
187 by ruling that parts of Proposition 187 conflict with Federal power over
immigration. The ruling concluded that states may not enact their own schemes to
"regulate immigration or devise immigration regulations which run parallel or
purport to supplement Federal immigration law". As a consequence of the ruling,
students may not be denied public education and may not be asked about their
immigration status when enrolling in public schools. Further, the ruling struck
down the requirements of Proposition 187 that teachers and district employees
report information on the immigrant status of students, parents and guardians.
An appeal has been filed.
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 a defendant in 12 lawsuits involving the exclusion of small
business stock gains from preference tax and in some cases, also from taxation.
The lead cases are Mervin Morris v. Franchise Tax Board and James Lennane v.
Franchise Tax Board. The majority of the remaining cases had been deferred
pending the outcome of the Morris and Lennane cases. The Supreme Court has ruled
against the State in Lennane but has not yet ruled in Morris. The State has lost
at least $80 million as a result of the Lennane decision.
In Parr v. State of California, a complaint was filed in Federal court
claiming that payment of wages in registered warrants violated the Fair Labor
Standards Act ("FLSA"). The Federal court held that the issuance of registered
warrants does violate the FLSA but subsequently withdrew its order. The parties
have agreed to a settlement which has to be approved by the trial court. If the
State had lost, the maximum amount of damages could have been approximately $500
million.
The State is involved in a lawsuit seeking reimbursement for alleged
state-mandated costs. In Thomas Hayes v. Commission on State Mandates, the State
Director of Finance is appealing a 1984 decision by the State Board of Control.
The Board of Control decided in favor of local school districts' claims for
reimbursement for special education programs for handicapped students; however,
funds have not been appropriated. The amount of potential liability to the
State, if all potentially eligible school districts pursue timely claims, has
been estimated by the Department of Finance at over $1 billion.
In another case, the State is a defendant in Long Beach Unified School
Districts v. State of California. In this case, the school district seeks
reimbursement for voluntary desegregation costs incurred in the implementation
of California Department of Education guidelines. The years of reimbursement are
from Fiscal Year 1977-78 and each fiscal year thereafter to the present. The
district prevailed in a superior court, and the case has been decided by a State
appellate court against the State. A petition for review was denied and the
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superior court judgment has become final, but the court retains jurisdiction to
oversee payment. The State anticipates that the unfavorable outcome will affect
pending claims by other school districts, and the total loss could be in excess
of $300 million.
A Federal Court of Appeals in the case of Deanna Beno et al. v. Donna
Shalala et al., reversing a trial court ruling in favor of the State, recently
determined that the Secretary of the United States Department of Health and
Human Services violated the Federal Administrative Procedure Act when she
approved California's Assistance Payment Demonstration Project, which in part,
granted California a waiver from complying with requirements for state
participation in the Federal program for medical assistance ("Medicaid"). The
waiver has allowed California to reduce payments under the Aid to Families with
Dependent Children program ("AFDC"), below 1988 payment levels without violating
Medicaid requirements relating to maintenance of AFDC payment levels. California
had relied, in part, on the waiver to reduce state AFDC payments in 1992, 1993
and 1994. The Court of Appeals remanded the case to the trial court with
instructions to remand the Demonstration Project to the Secretary for additional
consideration of objections raised by the plaintiffs. The effect of the court's
decision on California is uncertain at this time.
One of the features of the 1994-95 Budget Act is a 2.3 percent reduction in
AFDC payments. In Welch v. Anderson, on August 19, 1994, the San Francisco
Superior Court issued a preliminary injunction against the California Director
of Social Services to prevent the 2.3 percent AFDC cuts from becoming effective
September 1, 1994. While September cuts were already in process and could not be
halted, the court ordered the cuts to be restored. The preliminary injunction
has been upheld and the case on the merits remains pending.
The State is involved in two lawsuits related to contamination at the
Stringfellow toxic waste site. In one suit, the State is one of approximately
130 defendants in Penny Newman v. J.B. Stringfellow, et al. in which 3,800
plaintiffs are claiming damages of $850 million arising from contamination at
the Stringfellow toxic waste site. The State is a defendant because it chose the
site and approved the deposit of toxic wastes. Seventeen of the 3,800 plaintiffs
have litigated their claims; in half of these cases plaintiffs' verdicts in the
total amount of $159,000 were received and in the remaining cases verdicts were
entered for the State. The other cases have been settled for $13.5 million. In
the separate suit described in United States, People of the State of California
v. J.B. Stringfellow Jr. et al., the State has been found liable by the District
Court on the counterclaim. The amount of liability is still being litigated
although allocation of liability has been determined by the trial court,
including an allocation of liability to the State.
The State is a defendant in a coordinated action involving 3,000 plaintiffs
seeking recovery for damages caused by the Yuba River flood of February 1986.
The appellate court affirmed the trial court finding of liability in inverse
condemnation and awarded damages of $500,000 to 12 sample plaintiffs. Potential
liability to the remaining 300 plaintiffs, from claims filed, ranges from $800
million to $1.5 billion.
The State is involved in a case concerning the default by Triad Healthcare
on a $167 million loan guaranteed by the Cal-Mortgage Loan Insurance Division of
the Office of Statewide Health Planning and Development ("Cal-Mortgage"). Monies
for the loan were raised through the sale of Certificates of Participation and
Cal-Mortgage insured the debt service payments. Since July 1993, Triad has
failed to make its monthly debt service payments; therefore, the reserve account
of the bonds has been used to make the payments. Once the reserve account is
exhausted, additional debt service payments would be made from the Health
Facility Construction Loan Insurance Fund as they become due. However, if there
is any shortfall in this fund, the State's General Fund would be used to make up
the difference.
In Jernigan & Burleson v. State, filed in Federal district court, the
prison inmate plaintiffs claim they are entitled to minimum wages while working
for the Prison Industry Authority. The inmates claim that the State has violated
the FLSA. Plaintiffs are seeking back pay for the period from August 1990
onward, and liquidated damages for a total of approximately $350 million. In
June 1995, the district court ruled that the inmates are not employees under the
FLSA. The decision has been appealed to the Ninth Circuit Court of Appeals.
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Additional lawsuits challenge the transfer of moneys from special fund
accounts within the State Treasury to the State's General Fund pursuant to the
Budget Acts of 1991, 1992, 1993 and 1994. Plaintiffs in the two cases titled
Abramovitz et al. v. Wilson et al., filed in State and Federal courts, seek to
have the transfers reversed and the moneys allegedly totalling approximately
$400 million returned to the special funds. Plaintiffs in the case of Kurt
Hathaway, et al. v. Wilson, filed in State court, seek to reverse transfers of
money from special fund accounts to the State's General Fund authorized in the
1994 and 1995 Budget Acts, allegedly totalling approximately $370 million. The
State disputes both liability and the amount claimed. In the case of
Professional Engineers in California Government v. Wilson, several State
employees' unions have challenged transfers made from special funds to the
General Fund pursuant to the Budget Acts of 1993, 1994 and 1995 and seek
reimbursement of over $400 million to these special funds.
In the case of Board of Administration, California Public Employees'
Retirement System, et al. v. Pete Wilson, Governor, et al., plaintiffs
challenged the constitutionality of legislation which deferred payment of the
State's employer contribution to the Public Employees' Retirement System
("PERS") beginning in Fiscal Year 1992-1993. On January 11, 1995, the Sacramento
County Superior Court entered a judgment finding that the legislation
unconstitutionally impaired the vested contract rights of PERS members. The
judgment provides for issuance of a writ of mandate directing State defendants
to disregard the provisions of the legislation, to implement the statute
governing employer contributions that existed before the changes in the
legislation were found to be unconstitutional and to transfer to PERS the
1993-94 and 1994-95 contributions that are unpaid to date. The State defendants
have appealed.
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APPENDIX C
ECONOMIC AND FINANCIAL CONDITIONS IN CONNECTICUT
The following information is a brief summary of factors affecting the
economy of the State and does not purport to be a complete description of such
factors. Other factors will affect issuers. The summary is based primarily upon
one or more publicly available offering statements relating to debt offerings of
state issuers; however, it has not been updated nor will it be updated during
the year. The Trust has not independently verified the information.
Manufacturing has historically been of prime economic importance to
Connecticut (sometimes referred to 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. From 1970 to
1994, however, there was a rise in employment in service-related industries.
During this period, manufacturing employment declined 35.4%, while the number of
persons employed in other non-agricultural establishments (including government)
increased 66.3%, particularly in the service, trade and finance categories. In
1994, manufacturing accounted for only 18.5% of total non-agricultural
employment in Connecticut. 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 four years.
The annual average unemployment rate (seasonally adjusted) in Connecticut
decreased from 6.9% in 1982 to a low of 3.0% in 1988 but, after a number of
important changes in the method of calculation, increased to 5.6% in 1994.
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,
trusts 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 $4,300,000,000 for the 1986-87 fiscal
year to approximately $9,000,000,000 for the 1995-96 fiscal year.
For the four fiscal years ended June 30, 1991, the General Fund ran
operating deficits of approximately $115,600,000, $28,000,000, $259,000,000 and
$808,500,000, respectively. At the end of the 1990-1991 fiscal year, the General
Fund had an accumulated unappropriated deficit of $965,712,000. For the four
fiscal years ended June 30, 1995, the General Fund ran operating surpluses of
approximately $110,200,000, $113,500,000, $19,700,000 and $80,500,000,
respectively. General Fund budgets for the biennium ending June 30, 1997, were
adopted in 1995. General Fund expenditures and revenues are budgeted to be
approximately $9,000,000,000 and $9,200,000,000, for the 1995-1996 and 1996-1997
fiscal years, respectively.
The 1991 legislation also authorized the State Treasurer to issue Economic
Recovery Notes to fund the General Fund's accumulated deficit of $965,712,000 as
of June 30, 1991, and during 1991, the State issued a total of $965,710,000
Economic Recovery Notes, of which $311,055,000 were outstanding as of April 4,
1996. The notes were to be payable no later than June 30, 1996, but as part of
the budget adopted for the biennium ending June 30, 1997, payment of the
remaining notes scheduled to be paid during the 1995-96 fiscal year was
rescheduled to be paid 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 April 4, 1996, there was a total
legislatively authorized bond indebtedness of $10,534,394,000, of which
$9,381,215,000 had been approved for issuance by the State Bond Commission and
$8,237,794,000 had been issued. As of September 15, 1995, $6,186,518,000 were
outstanding.
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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
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 September 15, 1995, the General Assembly has authorized STO bonds for
the program in the aggregate amount of $4,157,900,000, of which $3,269,700,000
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 million of general
obligation bonds of the State and $962 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 million for the four fiscal years
ending June 30, 1999, and $580 million for the six fiscal years ending June 30,
2005.
The State's budget problems led to the ratings of its general obligation
bonds being reduced by Standard and Poor's ("Standard & Poor's") from AA+ to AA
on March 29, 1990, and by Moody's Investors Service, Inc. from Aa1 to Aa on
April 9, 1990. Because of concerns over Connecticut's lack of a plan to deal
during the current fiscal year with the accumulated projected deficits in its
General Fund, on September 13, 1991, Standard & Poor's further reduced its
ratings of the State's general obligation bonds and certain other obligations
that depend in part on the creditworthiness of the State to AA-. On March 17,
1995, Fitch Investors Service, Inc. reduced its ratings of the State's general
obligation bonds from AA+ to AA.
The State, its officers and employees are defendants in numerous lawsuits.
According to the Attorney General's Office, an adverse decision in any of the
cases which are summarized herein could materially affect the State's financial
position: (i) an action by inmates of the Department of Correction seeking
damages and injunctive relief with respect to alleged violations of statutory
and constitutional rights as a result of the monitoring and recording of their
telephone calls from the State's correctional institutions; (ii) litigation on
behalf of black and Hispanic school children in the City of Hartford seeking
"integrated education" within the greater Hartford metropolitan area; (iii)
litigation involving claims by Indian tribes to less than 1/10 of 1% of the
State's land area; (iv) litigation challenging the State's method of financing
elementary and secondary public schools on the ground that it denies equal
access to education; (v) an action on behalf of all persons with retardation or
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 (vi) a class action by the Connecticut
Criminal Defense Lawyers Association claiming a campaign of illegal surveillance
activity and seeking damages and injunctive relief. In addition, a number of
corporate taxpayers have filed requests for refunds of corporation business tax,
asserting that interest on federal obligations may not be included in the
measure of that tax, on the grounds that to do so allegedly violates federal law
because interest on certain obligations of the State is not included in the
measure of the tax. The State has attempted to eliminate the basis for these
refund requests by enacting legislation that takes by eminent domain the rights
of corporate holders to exclude the interest on such obligations. The State will
compensate such corporate holders. Certain of the corporate taxpayers have filed
cases claiming that the eminent domain legislation is unconstitutional and does
not eliminate the basis for their refund requests.
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General obligation bonds issued by municipalities are usually payable from
ad valorem taxes on property subject to taxation by 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 State and does not purport to be a complete description of such
factors. Other factors will affect issuers. The summary is based primarily upon
one or more publicly available offering statements relating to debt offerings of
state issuers; however, it has not been updated nor will it be updated during
the year. The Trust has not independently verified the information.
Economic growth in the Commonwealth of Massachusetts (sometimes referred to
as the "Commonwealth") has slowed since 1988, particularly in the construction,
real estate, financial and manufacturing sectors, including certain high
technology areas. Economic conditions have improved somewhat, since 1993. The
unemployment rate in Massachusetts averaged 6.9% during 1993, after rising
steadily during the previous three years, from 3.4% at the beginning of 1989. As
of April 1996, however, the Commonwealth's unadjusted unemployment rate was 4.8%
as compared to a national average of 5.4%. Per capita personal income in the
Commonwealth is currently higher than the national average.
Ending fund balances in the budgeted operating funds for fiscal 1991 were
$237.1 million. Fiscal 1992 ended with positive fund balances of $549.4 million,
after carrying forward the fund balances from fiscal 1991. Fiscal 1993 ended
with positive fund balances of $562.5 million.
In fiscal 1994, the total revenues of the budgeted operating funds of the
Commonwealth during such fiscal year increased by approximately 5.7% over the
prior fiscal year, to $15.550 billion. Expenditures increased by 5.6% over the
prior year, to $15.523 billion. As a result, the Commonwealth ended fiscal 1994
with a positive closing fund balance of $589.3 million. In fiscal 1995, which
ended June 30, 1995, the total revenues of the budgeted operating funds of the
Commonwealth during such fiscal year increased by approximately 5.4% over the
prior fiscal year, to $16.387 billion. Expenditures increased by 4.7% over the
prior fiscal year, to $16.251 billion. As a result, the Commonwealth ended
fiscal 1995 with a positive closing fund balance of $726.0 million. Budgeted
revenues and other sources in fiscal 1996, which ended June 30, 1996, were
estimated as of June 6, 1996 by the Executive Office for Administration and
Finance to be approximately $16.850 billion, including tax revenues of $11.684
billion. It is estimated that fiscal 1996 budgeted expenditures will be $16.963
billion.
Standard & Poor's and Moody's have rated the Commonwealth's general
obligation bonds as A+ and A-1, 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 1988 through 1995 were lower than the limits set by law, and the
Executive Office for Administration and Finance estimates that state tax
revenues in fiscal 1996 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 percent of such appropriation. Bonds in the aggregate principal
amount of $1.416 billion issued in October and December 1990, under Chapter 151
of the Acts of 1990 to meet the fiscal 1990 deficit, are excluded from the
computation of these limitations, and principal of and interest on such bonds
are to be paid from up to 15% of the Commonwealth's income tax receipts in each
year that such principal or interest is payable.
Furthermore, certain of the Commonwealth's cities and towns have at times
experienced serious financial difficulties which have adversely affected their
credit standing. The recurrence of such financial difficulties, or financial
difficulties of the Commonwealth, could adversely affect the market values and
marketability of outstanding obligations issued by the Commonwealth or its
public authorities or municipalities. In addition, the Massachusetts statutes
which limit the taxing authority of the Commonwealth or certain Massachusetts
governmental entities may impair the ability of issuers of some Massachusetts
obligations to pay debt service on their obligations.
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In Massachusetts, the tax on personal property and real estate is virtually
the only source of tax revenues available to cities and towns to meet local
costs. "Proposition 2 1/2", an initiative petition adopted by the voters of the
Commonwealth of Massachusetts on November 4, 1980, limits the power of
Massachusetts cities and towns and certain tax-supported districts and public
agencies to raise revenue from property taxes to support their operations,
including the payment of certain debt service. Proposition 2 1/2 required many
cities and towns to reduce their property tax levels to a stated percentage of
the full and fair cash value of their taxable real estate and personal property
and limited the amount by which the total property taxes assessed by a city or
town might increase from year to year. Although the limitations of Proposition
2 1/2 on tax increases may be overridden and amounts for debt service and
capital expenditures excluded from such limitation by the voters of the relevant
municipality, Proposition 2 1/2 will continue to restrain significantly the
ability of cities and towns to pay for local services, especially in light of
cost increases due to an inflation rate generally exceeding 2.5%.
To offset shortfalls experienced by local governments as a result of the
implementation of Proposition 2 1/2, the government of the Commonwealth
increased direct local aid from the 1981 level of $1.632 billion to the fiscal
1991 level of $2.608 billion. Direct local aid decreased from fiscal 1991 to
$2.359 billion in fiscal 1992, increased to $2.547 billion in fiscal 1993 and
increased to $2.727 billion in fiscal 1994. Fiscal 1995 expenditures for direct
local aid were $2.976 billion, which is an increase of approximately 9.1% above
the 1994 level. It is estimated that fiscal 1996 expenditures for direct local
aid will be $3.242 billion, which is an increase of approximately 8.9% above the
fiscal 1995 level.
The aggregate unfunded actuarial liabilities of the pension systems of the
Commonwealth and the unfunded liability of the Commonwealth related to local
retirement systems are significant--estimated to be approximately $9.651 billion
as of January 1, 1993 (the last date that such liability was calculated) on the
basis of certain actuarial assumptions regarding, among other things, future
investment earnings, annual inflation rates, wage increases and cost of living
increases. No assurance can be given that these assumptions will be realized.
The legislature adopted a comprehensive pension bill addressing the issue in
January 1988, which requires the Commonwealth, beginning in fiscal year 1989, to
fund future pension liabilities currently and amortize the Commonwealth's
unfunded liabilities over 40 years in accordance with funding schedules prepared
by the Secretary for Administration and Finance and approved by the legislature.
The amounts required for funding of current pension liabilities in fiscal years
1995, 1996, 1997 and 1998 are estimated to be $959.9 million, $1.007 billion,
$1.061 billion and $1.128 billion, respectively.
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APPENDIX E
ECONOMIC AND FINANCIAL CONDITIONS IN MICHIGAN
The following information is a brief summary of factors affecting the
economy of the State and does not purport to be a complete description of such
factors. Other factors will affect issuers. The summary is based primarily upon
one or more publicly available offering statements relating to debt offerings of
state issuers; however, it has not been updated nor will it be updated during
the year. The Trust has not independently verified the information.
Due primarily to the fact that the leading sector of the economy of the
State of Michigan (sometimes referred to as the "State") is the manufacturing of
durable goods, economic activity in the State has tended to be more cyclical
than in the nation as a whole. While the State's efforts to diversify its
economy have proven successful, as reflected by the fact that the share of
employment in the State in the durable goods sector has fallen from 33.1% in
1960 to 15.8% in 1994, durable goods manufacturing still represents a sizable
portion of the State's economy. As a result, any substantial national economic
downturn is likely to have an adverse effect on the economy of the State and on
the revenues of the State and some of its local governmental units. Historically
the average monthly unemployment rate in the State has been higher than the
average figures for the United States. More recently, the unemployment rate in
the State has been at or below the national average. During 1995, the average
monthly unemployment rate in the State was 5.3% compared to a national average
of 5.6%.
The State's economy could continue to be affected by changes in the auto
industry, notably consolidation and plant closings resulting from competitive
pressures and overcapacity. Such actions could adversely affect State revenues
and the financial impact on the local units of government in the areas in which
plants are closed could be more severe. The impact on the financial condition of
the municipalities in which the plants are located may be more severe than the
impact on the State itself.
The Michigan Constitution limits the amount of total revenues of the State
raised from taxes and certain other sources to a level for each fiscal year
equal to a percentage of the State's personal income for the prior calendar
year. In the event the State's total revenues exceed the limit by 1% or more,
the Constitution requires that the excess be refunded to taxpayers. To avoid
exceeding the revenue limit in the State's 1994-95 fiscal year the State is
refunding approximately $113 million through income tax credits for the 1995
calendar year. The State Constitution does not prohibit the increasing of taxes
so long as revenues are expected to amount to less than the revenue limit and
authorizes exceeding the limit for emergencies. The State Constitution further
provides that the proportion of State spending paid to all local units' total
spending may not be reduced below the proportion in effect for the 1978-79
fiscal year. The Constitution requires that if spending does not meet the
required level in a given year, an additional appropriation for local units is
required for the following fiscal year. The State Constitution also requires the
State to finance any new or expanded activity of local units mandated by State
law. Any expenditures required by this provision would be counted as State
spending for local units for purposes of determining compliance with the
provisions stated above.
The State Constitution limits the purposes for which State general
obligation debt may be issued. Such debt is limited to short-term debt for State
operating purposes, short- and long-term debt for the purposes of making loans
to school districts and long-term debt for voter approved purposes. In addition
to the foregoing, the State authorizes special purpose agencies and authorities
to issue revenue bonds payable from designated revenues and fees. Revenue bonds
are not obligations of the State and in the event of shortfalls in self-
supporting revenues, the State has no legal obligation to appropriate money to
these debt service payments. The State's Constitution also directs or restricts
the use of certain revenues.
The State finances its operations through the State's General Fund and
Special Revenue Funds. The General Fund receives revenues of the State that are
not specifically required to be included in the Special Revenue Fund. General
Fund revenues are obtained approximately 58% from the payment of State taxes and
42% from federal and non-tax revenue sources. The majority of the revenues from
State taxes are from the State's personal income tax, single business tax, use
tax, sales tax and various other taxes. Approximately 59%
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of total General Fund expenditures are for State support of public education and
for social services programs. Other significant expenditures from the General
Fund provide funds for law enforcement, general State government, debt service
and capital outlay. The State Constitution requires that any prior year's
surplus or deficit in any fund must be included in the next succeeding year's
budget for that fund.
In recent years, the State of Michigan has reported its financial results
in accordance with generally accepted accounting principles. For the fiscal
years ended September 30, 1990 and 1991, the State reported negative year-end
General Fund balances of $310.3 million and $169.4 million, respectively, but
ended the 1992, 1993, 1994 and 1995 fiscal years with its General Fund in
balance after transfers in 1993, 1994 and 1995 from the General Fund to the
Budget Stabilization Fund of $283 million, $464 million and $67.4 million,
respectively. Those and certain other transfers into and out of the Fund, raised
the balance in the Budget Stabilization Fund to $987.9 million as of September
30, 1995. A positive cash balance in the combined General Fund/School Aid Fund
was recorded at September 30, 1990. In each of the three prior fiscal years, the
State undertook mid-year actions to address projected year-end budget deficits
including expenditure costs and deferrals and one time expenditures or revenue
recognition adjustments. From 1991 through 1993, the State experienced
deteriorating cash balances which necessitated short-term borrowings and the
deferral of certain scheduled cash payments of local units of government. The
State borrowed between $500 million and $900 million for cash flow purposes in
the 1992 to 1993 fiscal years, $500 million in the 1995 fiscal year and $900
million in the 1996 fiscal year. The State did not have to borrow for short-term
cash flow purposes in the 1993-94 fiscal year due to improved cash balances.
Amendments to the Michigan Constitution which placed limitations on
increases in State taxes and local ad valorem taxes (including taxes used to
meet debt service commitments on obligations of taxing units) were approved by
the voters of the State of Michigan in November 1978 and became effective on
December 23, 1978. To the extent that obligations in the Fund are tax supported
and are for local units and have not been voted by the taxing unit's electors,
the ability of the local units to levy debt service taxes might be affected.
State law provides for distributions of certain State collected taxes or
portions thereof to local units based in part on population as shown by census
figures and authorizes levy of certain local taxes by local units having a
certain level of population as determined by census figures. Reductions in
population in local units resulting from periodic census could result in a
reduction in the amount of State collected taxes returned to those local units
and in reductions in levels of local tax collections for such local units unless
the impact of the census is changed by State law. No assurance can be given that
any such State law will be enacted. In the 1991 fiscal year, the State deferred
certain scheduled payments to municipalities, school districts, universities and
community colleges. While such deferrals were made up at later dates, similar
future deferrals could have an adverse impact on the cash position of some local
units. Additionally, the State has reduced revenue sharing payments to
municipalities below the level provided under formulas by increasing amounts in
each of the last five fiscal years and has budgeted a reduction of $81.26
million in the fiscal year which ends September 30, 1996.
On March 15, 1994, the electors of the State voted to amend the State's
Constitution to increase the State sales tax rate from 4% to 6% and to place an
annual cap on property assessment increases for all property taxes. Companion
legislation also cut the State's income tax rate from 4.6% to 4.4%, reduced some
property taxes 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.
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
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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 and does not purport to be a complete description of such
factors. Other factors will affect issuers. The summary is based primarily upon
one or more publicly available offering statements relating to debt offerings of
state issuers; however, it has not been updated nor will it be updated during
the year. The Trust has not independently verified the information.
Effective January 1, 1994, personal income tax rates in the State of New
Jersey (the "State") were cut by 5% for all taxpayers. Effective January 1,
1995, the 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 on a taxpayer's level of income and filing status, 30%, 15% or 9%
lower than 1993 rates. At this time the effect of the tax reduction cannot be
evaluated.
The State operates on a fiscal year beginning July 1 and ending June 30.
For example, "fiscal year 1997" refers to the State's fiscal year beginning July
1, 1996 and ending June 30, 1997.
The General Fund is the fund into which all State revenues not otherwise
restricted by statute are deposited and from which appropriations are made. The
largest part of the total financial operations of the State is accounted for in
the General Fund. Revenues received from taxes and unrestricted by statute, most
federal revenue and certain miscellaneous revenue items are recorded in the
General Fund.
The State's undesignated General Fund balance was $937 million for the
fiscal year 1993, $926 million for the fiscal year 1994, $569 million for fiscal
year 1995 and $607 million (estimated) for fiscal year 1996. For the fiscal year
1997, the balance in the undesignated General Fund is estimated to be $276
million.
The State finances capital projects primarily through the sale of 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 repayments and interest payments 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 previously growing sectors as wholesale trade, retail trade, finance,
utilities and trucking and warehousing. The net effect was a decline in the
State's total non-farm wage and salary employment from a peak of 3,689,800 in
1989 to a low of 3,445,000 in 1992. This loss was followed by an employment gain
of 176,400 from May 1992
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to October 1995, a recovery of 67% of the jobs lost during the recession. Almost
two-thirds of this number, nearly 117,000 jobs, were recovered in the 21 month
period from January 1994 to October 1995.
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 8.4%
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% during the first ten
months of 1995. Despite an increase reported in December 1995, the average
annualized unemployment rate remained at 6.4% for the fourth quarter of 1995.
For the recovery period as a whole, May 1992 to October 1995,
service-producing employment in New Jersey has expanded by 188,300 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 14,400 and 5,800,
respectively, in the 12-month period ending October 1995.
The manufacturing sector showed evidence of improvement through 1994.
Factory employment losses slowed between 1992 and 1994, as the plant closings
and layoffs of the recessionary period tapered off and were increasingly
counterbalanced by the expansionary impact of rising industrial demand. After
totaling about 134,000 over the four-year period through the end of 1992 (an
average of 33,500 per year), New Jersey's factory job losses tapered off to
11,100 during 1993 and 5,400 during 1994. During 1995, however, manufacturing
job losses appeared to have accelerated, reflecting a slowdown in national
manufacturing production activity, with an employment loss of 16,600 for the
12-month period ending October 1995. After having enjoyed actual growth in the
number of production workers in 1994, the number of blue-collar workers resumed
their decline in 1995 at the same time that managerial and office staff were
also reduced as part of nationwide downsizing.
Conditions have slowly improved in the construction industry, where
employment has risen by 21,200 since its low in May 1992. When it began during
the late spring of 1992, this sector's hiring rebound was driven primarily by
increased homebuilding and public work projects. Nonresidential construction
activity has begun to increase in the last two years. Contract awards in this
sector posted a 9.7% gain in 1993 and 19.8% in 1994. More recently,
nonresidential building construction contracts increased by 9.0% in the first
three quarters of 1995 compared with the same period in 1994.
Residential construction contracts through September 1995, despite monthly
fluctuations, stayed almost even with 1994 ($1,671 million in the first three
quarters of 1995 versus $1,677 million in the same period of 1994). Despite a
7.2% decline in nonbuilding or infrastructure construction, largely due to a
slowing in public construction projects, total construction contracts rose by
1.6% when comparing the first nine months of 1994 with those of 1995.
Another indicator of economic improvement is increased consumer spending as
evidenced by rising retail sales. While overall retail sales in New Jersey grew
by only 1.5% during 1993, they performed much better in 1994 and continued to
increase, despite some fall off in the winter of 1995. Sales advanced briskly
with retail receipts up 8.1% during 1994 compared with 1993, which was somewhat
higher than the 7.8% growth registered nationwide. Consumer spending was
sluggish during the winter months of 1995 both nationally and in the State.
Statewide sales of retail stores regained momentum in May 1995 and were on a
moderately upward trend through August 1995, resulting in sales growth of 3.1%
when comparing the first eight months of 1994 with those of 1995. The rising
trend in retail sales has translated into steady increases in retail trade jobs
(both full- and part-time) and, in September and October 1995, retail employment
rose by a total of 5,600 jobs.
Total new vehicle registrations (new passenger cars and light trucks and
vans) rose robustly in 1993 by more than 18% and in 1994 by 5.5%. Through August
1995 however, total new vehicle registrations were down by 2.3% compared to the
same time period in 1994.
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Unemployment in the State through October 1995 has been receding. According
to the U.S. Bureau of Labor Statistics, the jobless rate dropped from 7.4% in
1993 to 6.8% in 1994. Subsequently, it has dropped to 6.4% for the three-month
period ending in December 1995. It should be noted that the monthly household
survey upon which these unemployment estimates are based was modified
significantly beginning January 1994, causing a break in the historical series
that makes it difficult to accurately assess current changes in overall labor
market conditions with those that occurred prior to 1994. Before the survey
redesign, however, conditions had already been steadily improving for a year and
one-half, with the State's jobless rate dropping from a high of 9.3% in the
summer of 1992 to 6.5% during the fourth quarter of 1993.
The insured unemployment rate, i.e., the number of individuals claiming
benefits as a percentage of the number of workers covered by unemployment
insurance, peaked at 4.2% in October 1991 and remained stable at about 4.0%
through June 1992. It then began a gradual decline, reaching 3.0% in December
1994, and has since stabilized in the range of 3.0% to 3.2%.
Just as New Jersey was hurt by the national recession, the State is now in
its fourth year of recovery which appears to be sustainable. The economy is in a
period of steady, moderate growth, having slowed enough during the second
quarter of 1995 to avoid inflation but not enough to slip into a recession.
Reasons for cautious optimism in New Jersey are increasing employment levels, a
declining jobless rate and a higher than national level of per capita personal
income.
If the nation's economic growth rate slows from the relatively robust 4.2%
in the third quarter of 1995 as expected by most forecasters, business expansion
could become somewhat subdued in New Jersey. In addition, both the nation and
the State will continue to be impacted by downsizing and other cost-cutting
measures, which at least in the short run will dampen growth. However, the
State's economy should have enough momentum to keep its trend line pointing
upwards. Although it may fall a bit short of its pace of the past year, economic
recovery should continue.
New Jersey Education Association et. al v. State of New Jersey et. al.
represents a challenge to amendments to the pension laws enacted on June 30,
1994 (P.L. 1994, Chapter 62), which concerned the funding of the Teachers
Pension and Annuity Fund (TPAF), the Public Employee's Retirement System (PERS),
the Police and Fireman's Retirement System (PFRS), the State Police Retirement
System (SPRS) and the Judicial Retirement System (JRS). The complaint was filed
in the United States District Court of New Jersey on October 17, 1994. The
statute, as enacted, made several changes affecting these retirement systems
including changing the actuarial funding method to projected unit credit;
continuing the prefunding of post-retirement medical benefits but at a reduced
level for TPAF and PERS; revising the employee member contribution rate to a
flat 5% for TPAF and PERS; extending the phase in period for the revised TPAF
actuarial assumptions; changing the phase-in period for funding of
cost-of-living adjustments and reducing the inflation assumption for the Cost of
Living Adjustment for all retirement systems; and decreasing the average salary
increase assumption for all retirement systems. Plaintiffs allege that the
changes resulted in lower employer contributions in order to reduce a general
budget deficit. The complaint further alleges that certain provisions of Chapter
62 violate the contract, due process and taking clauses of the United States and
New Jersey Constitutions, and further constitute a breach of the State's
fiduciary duty to participants in TPAF and PERS. Plaintiffs seek to permanently
enjoin the State from administering, enforcing or otherwise implementing Chapter
62. An adverse determination against the State would have a significant impact
upon the fiscal year 1996 budget and the proposed fiscal year 1997 budget. The
State has filed a motion to dismiss and a motion for summary judgment. In
October 1995, the State was dismissed 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
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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. Discovery is
proceeding in this matter. 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. 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 claims 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. In addition, at
any given time, there are various numbers of contract and other claims against
the University of Medicine and Dentistry, seeking recovery of monetary damages
or other relief which, if granted, would require the expenditure of funds. The
State is unable to estimate its exposure for these claims.
Currently, the State's general obligation bonds are rated AA+ by Standard &
Poor's, Aa1 by Moody's, and AA+ by Fitch.
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APPENDIX G
ECONOMIC AND FINANCIAL CONDITIONS IN NEW YORK
The following information is a brief summary of factors affecting the
economy of the State and does not purport to be a complete description of such
factors. Other factors will affect specific issuers. The summary is based
primarily upon one or more publicly available offering statements relating to
debt offerings of state issuers; however, it has not been updated nor will it be
updated during the year. The Trust has not independently verified the
information.
In recent years, New York State (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 New York State Municipal
Securities in which the New York Fund invests.
NEW YORK CITY
General. More than any other municipality, the fiscal health of New York
City (sometimes referred to as the "City") has a significant effect on the
fiscal health of the State. The national economic downturn which began in July
1990 adversely affected the local economy, which had been declining since late
1989. As a result, the City experienced job losses in 1990 and 1991 and real
Gross City Product ("GCP") fell in those two years. Beginning in calendar year
1992, the improvement in the national economy helped stabilize conditions in the
City. Employment losses moderated toward year-end and real GCP increased,
boosted by strong wage gains. However, after noticeable improvements in the
City's economy during the calendar year 1994, economic growth slowed in calendar
year 1995, and the City's current four-year financial plan assumes that moderate
economic growth will continue through calendar year 2000.
For each of the 1981 through 1995 fiscal years, the City achieved balanced
operating results as reported in accordance with generally accepted accounting
principles ("GAAP"). The City was required to close substantial budget gaps in
recent fiscal years in order to maintain balanced operating results. For the
City's 1995 fiscal year, the City adopted a budget which halted the trend in
recent years of substantial increases in City spending from one year to the
next. There can be no assurance that the City will continue to maintain a
balanced budget as required by State law without additional reductions in City
services or entitlement programs or without tax or other revenue increases which
could adversely affect the City's economic base.
Pursuant to the laws of the State, the Mayor is responsible for preparing
the City's four-year financial plan, including the City's current financial plan
for the 1997 through 2000 fiscal years (the "1997-2000 Financial Plan" or the
"City Financial Plan"). The City's projections set forth in the City Financial
Plan are based on various assumptions and contingencies which are uncertain and
which may not materialize. Changes in major assumptions could significantly
affect the City's ability to balance its budget as required by State law and to
meet its annual cash flow and financing requirements.
Implementation of the City Financial Plan is also dependent upon the City's
ability to market its securities successfully in the public credit markets. The
City's financing program for fiscal years 1997 through 2000 contemplates the
issuance of $5.6 billion of general obligation bonds and $4.1 billion of bonds
to be issued by the proposed New York City Infrastructure Finance Authority,
primarily to reconstruct and rehabilitate the City's infrastructure and physical
assets and to make capital investments. The creation of the Infrastructure
Finance Authority, which is subject to the enactment of legislation by the
State, is being proposed by the City as part of the City's effort to avoid
certain State constitutional limitations on the amount of debt the City is
authorized to issue. 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 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, it would be prevented from meeting its planned operating and capital
expenditures.
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1997-2000 Financial Plan. The City Financial Plan projects revenues and
expenditures for the City's 1997 fiscal year (July 1, 1996-June 30, 1997)
balanced in accordance with GAAP and reflects proposed actions to close a
previously projected budget gap of approximately $2.6 billion. Such gap closing
actions include, among others, spending reductions for Medicaid and welfare
programs, City agency spending reductions, additional State aid, pension and
debt service savings and the sale of certain City assets. The City Financial
Plan also sets forth projections for the 1998 through 2000 fiscal years and
outlines a proposed gap-closing program to close projected budget gaps of $1.7
billion, $2.7 billion and $3.4 billion for the 1998 through 2000 fiscal years,
respectively, after successful implementation of the gap-closing program for the
1997 fiscal year.
The City's projections set forth in the City Financial Plan are based on
various assumptions and contingencies which are uncertain and which may not
materialize. Changes in major assumptions could significantly affect the City's
ability to balance its budget as required by State law and to meet its annual
cash flow and financing requirements. Such assumptions and contingencies include
the condition of the regional and local economies, the impact of real estate tax
revenues on the real estate market, employment growth, wage increases for City
employees consistent with those assumed in the City Financial Plan, continuation
of interest earnings assumptions for pension fund assets, the ability of the
City's hospital and education entities to maintain balanced budgets, provision
of State and Federal aid, the impact of proposed Federal and State welfare
reforms on City revenues and adoption of the budget by the City Council in
substantially the form submitted by the Mayor. The City Financial Plan also
assumes the timely extension by the State Legislature of the current rate
structures for personal income, corporation and sales taxes imposed by the City.
In addition, the continuing failure of the Federal government to adopt a budget
for its 1996 fiscal year could result in a delay or reduction in the receipt of
Federal grants in the City's 1997 fiscal year.
The City Financial Plan is also subject to the ability of the City to
implement the expenditure reductions, sell the assets and to obtain the debt
service savings outlined in the City Financial Plan. In addition, the City may
incur expenditures which exceed those projected in the City Financial Plan.
There can be no assurance that additional gap-closing measures will not be
required to enable the City to achieve a balanced budget in a particular fiscal
year. Certain of the proposed actions for the 1998 through 2000 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.
The City depends on the State for State aid both to enable the City to
balance its budget and to meet its cash requirements. If the State experiences
revenue shortfalls or spending increases beyond its projections during the
current or subsequent fiscal years, such developments could result in reductions
in anticipated State aid to the City. In addition, there can be no assurance
that the State budget in any given State fiscal year will be adopted by the
April 1 statutory deadline and that there will not be adverse effects on the
City's cash flow and additional City expenditures as a result of such reductions
or delays.
The City's financial plans have been the subject of extensive public
comment and criticism. On July 16, 1996, the City Comptroller issued a report on
the City Financial Plan which identified budget risks of up to $941 million,
$2.58 billion, $3.53 billion and $4.31 billion for the City's 1997, 1998, 1999
and 2000 fiscal years, respectively. On July 18, 1996, the New York State
Financial Control Board issued a report on the City Plan Financial Plan which
identified budget risks of $594 million, $1.08 billion, $851 million and $813
million for the City's 1997, 1998, 1999 and 2000 fiscal years, respectively. On
July 18, 1996 the Office of the State Deputy Comptroller of New York issued a
report on the City Financial Plan which identified budget risks of up to $848
million, $1.39 billion, $1.09 billion and $1.12 billion for the City's 1997,
1998, 1999 and 2000 fiscal years, respectively. Each of the reports noted that
the City Financial Plan achieves budget balance for 1997 fiscal year only with
the inclusion of approximately $1.5 billion in non-recurring resources. It is
reasonable to expect that such reports will continue to be issued and to
engender public comment.
Ratings. As of July 11, 1996, Moody's Investors Service, Inc. ("Moody's")
rated the City's outstanding general obligation bonds "Baa1", Standard & Poor's
Ratings Services ("Standard & Poor's") rated such bonds "BBB+" and Fitch
Investors Service, L.P. ("Fitch") rated such bonds "A-". On February 28, 1996,
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Fitch placed the City's general obligation bonds on FitchAlert with negative
implications. On July 10, 1995, Standard & Poor's revised downward its ratings
on outstanding general obligation bonds of the City from "A-" to "BBB+". Such
ratings reflect only the views 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, 1996, the City had approximately
$24.84 billion of long-term debt and the New York City Municipal Water Finance
Authority (the "Water Authority") had approximately $6.05 billion of net
long-term debt.
Debt service on Water Authority obligations is secured by fees and charges
collected from the users of the City's water and sewer system. State and Federal
regulations require the City's water supply to meet certain standards to avoid
filtration. The City's water supply now meets all technical standards and the
City's current efforts are directed toward protection of the watershed area. The
City has taken the position that increased regulatory enforcement and other
efforts to protect its water supply, relating to such matters as land use and
sewage treatment, will preserve the high quality of water in the upstate water
supply system and prevent the need for filtration. The U.S. Environmental
Protection Agency has granted the City a waiver of filtration regulations
through 1999. If filtration of the City's water supply is ultimately required,
the capital expenditure required could be between $4 billion and $5 billion.
Such an expenditure could cause significant increases in City water and sewer
charges.
Litigation. The City is a defendant in a significant number of lawsuits.
Such litigation includes, but is not limited to, routine litigation incidental
to the performance of its governmental and other functions, actions commenced
and claims asserted against the City arising out of alleged constitutional
violations, alleged torts, alleged breaches of contracts and other alleged
violations of law and condemnation proceedings and other tax and miscellaneous
actions. While the ultimate outcome and fiscal impact, if any, of the
proceedings and claims are not currently predictable, adverse determinations 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, 1995, the City estimated its
potential future liability on account of all outstanding claims to be
approximately $2.5 billion.
NEW YORK STATE
Current Economic Outlook. The national economy began to expand in 1991 and
has added over 7 million jobs since early 1992. Although the State has added
approximately 185,000 jobs since November 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.
The State expects modest economic growth in New York's economy for the 1996
calendar year. Overall employment growth is estimated to be 0.7 percent in 1995
and projected at 0.5 percent in 1996 while personal income growth is expected to
be 5.7 percent in 1995 and 4.4 percent in 1996.
1996-1997 Fiscal Year. On July 13, 1996, the State adopted its budget for
the 1996-97 fiscal year, which began on April 1, 1996. Prior to the adoption of
the 1996-1997 fiscal year budget, legislation making interim appropriations for
State personal service costs, various grants to local governments, debt service
obligations of the State and certain other items was enacted by the Legislature.
The State's 1996-1997 fiscal year budget with respect to the General Fund totals
$33.1 billion, virtually unchanged from the 1995-1996 budget.
The State's 1996-1997 fiscal year budget is based upon forecasts of
national and State economic activity. Economic forecasts have frequently failed
to predict accurately the timing and magnitude of changes in the national and
State economies. Many uncertainties exist in forecasts of both the national and
State economies, including consumer attitudes toward spending, Federal financial
and monetary policies, the availability of credit and the condition of the world
economy, which could have an adverse effect on the State. There can be no
assurance that the State economy will not experience worse-than-predicted
results in the 1996-1997 and
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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 State's use 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. 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.
The 1996-1997 fiscal year budget contains actions that provide $1.3 billion
in non-recurring resources or savings as well as actions that impose baseline
losses of receipts. In addition to these nonrecurring actions, the adoption of a
three-year 20% reduction in the State's personal income tax in 1995 in
combination with business tax reductions enacted in 1994 will reduce State tax
receipts by as much as $5.6 billion by the 1997-1998 fiscal year.
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
disproportionately negative impact on the long-term outlook for the State's
economy as compared to other states.
1995-1996 Fiscal Year. 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.
1994-1995 Fiscal Year. In July, 1995, the State Comptroller issued its
audit of the State's 1994-1995 fiscal year prepared in accordance with generally
accepted auditing standards. The State completed its 1994-1995 fiscal year with
a General Fund operating deficit of $1.426 billion, as compared with an
operating surplus of $914 million for the previous fiscal year. The 1994-1995
fiscal year deficit was caused by several factors, including the use of $1.026
billion of the 1993-1994 fiscal year surplus in the 1994-1995 fiscal year and
the adoption of changes in accounting methodologies by the State Comptroller.
Local Government Assistance Corporation. In 1990, as part of a state
fiscal reform program, legislation was enacted creating the Local Government
Assistance Corporation ("LGAC"), a public benefit corporation empowered to issue
long-term obligations to fund certain payments to local governments
traditionally funded through the State's annual seasonal borrowing. As of June
1995, LGAC had 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, 1995, the total amount of outstanding general obligation
debt was approximately $5.181 billion, including $149 million in Bond
Anticipation Notes; the total amount of moral obligation debt was approximately
$7.01 billion; and $17.98 billion of bonds issued primarily in connection with
lease-purchase and contractual-obligation financing of State capital programs
were outstanding.
Public Authorities. The fiscal stability of the State is related, in part,
to the fiscal stability of its public authorities. The State anticipates that
its capital programs will be financed, in part, by State and public authorities
borrowings in the 1996-1997 fiscal year. Public authorities are not subject to
the constitutional
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restrictions on the incurrence of debt which apply to the State itself, and may
issue bonds and notes within the amounts of, and as otherwise restricted by,
their legislative authorization. As of September 30, 1994, the latest data
available, there were 18 public authorities that had outstanding debt of $100
million or more and the aggregate outstanding debt, including refunding bonds,
of these 18 public authorities was $70.3 billion. The State's access to the
public credit markets could be impaired and the market price of its outstanding
debt may be adversely affected if any of its public authorities were to default
in their respective obligations.
Ratings. Currently, Moody's, Standard & Poor's and Fitch rate New York
State's outstanding general obligation bonds "A", "A-" and "A+", respectively.
Ratings reflect only the respective views of such organizations, and an
explanation of the significance of such ratings must be obtained from the rating
agency furnishing the same. There is no assurance that a particular rating will
continue for any given period of time or that any such rating will not be
revised downward or withdrawn entirely if, in the judgment of the agency
originally establishing the rating, circumstances so warrant. A downward
revision or withdrawal of such ratings may have an effect on the market price of
the New York Municipal Bonds in which each Fund invests.
Litigation. The State is a defendant in numerous legal proceedings
including, but not limited to, claims asserted against the State arising from
alleged torts, alleged breaches of contracts, condemnation proceedings and other
alleged violations of State and Federal laws. State programs are frequently
challenged on State and Federal constitutional grounds. Adverse developments in
legal proceedings or the initiation of new proceedings could affect the ability
of the State to maintain a balanced budget in any given fiscal year. The State
believes that the State Financial Plan for the 1996-1997 fiscal year, which is
based on the adopted 1996-1997 budget, includes sufficient reserves for the
payment of judgments that may be required during the 1996-1997 fiscal year.
There can be no assurance, however, that an adverse decision in one or more
legal proceedings would not exceed the amount of such reserves for the payment
of judgments or materially impair the State's financial operations.
Other Localities. Certain localities in addition to the City could have
financial problems leading to requests for additional State assistance during
the State's 1996-1997 fiscal year and thereafter. The potential impact on the
State of such actions by localities is not included in the projections of the
State receipts and disbursements in the State's 1996-1997 fiscal year.
Fiscal difficulties experienced by the City of Yonkers ("Yonkers") resulted
in the creation of the Financial Control Board for Yonkers (the "Yonkers Board")
by the State in 1984. The Yonkers Board is charged with oversight of the fiscal
affairs of Yonkers. Future actions taken by the Governor or the State
Legislature to assist Yonkers could result in 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 and does not purport to be a complete description of such
factors. Other factors will affect issuers. The summary is based primarily upon
one or more publicly available offering statements relating to debt offerings of
state issuers; however, it has not been updated nor will it be updated during
the year. The Trust has not independently verified the information.
The State of North Carolina (the "State") has two major operating funds:
the General Fund and the Highway Fund. In addition, the 1989 General Assembly
created the Highway Trust Fund to provide funding for a major highway
construction program. 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. 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.
During the 1989-92 budget years, growth of North Carolina tax revenues
slowed considerably, requiring tax increases and budget adjustments, including
hiring freezes and restrictions, spending constraints, changes in timing of
certain collections and payments and other short-term budget adjustments
necessary to comply with the State's constitutional mandate for a balanced
budget. Many areas of State government were affected. Reductions in capital
spending, local government aid and the use of the budget stabilization reserve,
combined with other budget adjustments, brought the budget into balance. Tax
increases in the fiscal 1992 budget included a $.01 increase in the State sales
tax and increases in the personal and corporate income tax rates, as well as
increases in the tax on cigarettes and alcohol, among other items.
Fiscal year 1992 ended with a positive fund balance of approximately $164.8
million. By law, $41.2 million of such positive fund balance was required to be
reserved in the General Fund of North Carolina as part of a "Savings Reserve",
leaving an unrestricted General Fund balance at June 30, 1992 of $123.6 million.
Fiscal year 1993 ended with a positive General Fund balance of approximately
$537.3 million. Of this amount, $134.3 million was reserved in the Savings
Reserve and $57 million was reserved in a Reserve for Repair and Renovation of
State Facilities, leaving an unrestricted General Fund balance at June 30, 1993
of $346 million. Fiscal year 1994 ended with a positive General Fund balance of
approximately $444.7 million. An additional $178 million was available from a
reserved fund balance. Of this aggregate amount, $155.7 million was reserved in
the Savings Reserve (bringing the total reserve to $210.6 million after prior
withdrawals) and $60 million was reserved in a Reserve for Repair and Renovation
of State Facilities (bringing the total reserve to $60 million after prior
withdrawals), leaving an unrestricted General Fund balance at June 30, 1994 of
$407 million. Fiscal year 1995 ended with a positive General Fund balance of
approximately $343.4 million on an unaudited basis and $3.1 million on an
audited basis, after an accounting charge of $340.3 million to the beginning
fund balance to reflect the impact of the implementation for fiscal 1995 of GASB
Statement No. 22, Accounting for Taxpayer-Assessed Tax Revenues in Governmental
Funds. For fiscal year 1995, $146.3 million was reserved in the Savings Reserve
(bringing the total reserve to $423.6 million after prior contributions) and
$146.3 million was reserved in the Reserve for Repair and Renovation of State
Facilities (bringing the total reserve to $146.3 million after prior
withdrawals), leaving an unrestricted General Fund balance at June 30, 1995 of
$292.6 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, 1993, 1994 and 1995 was $681.5
million, $900.6 million and $1,024.6 mil-
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lion, respectively. The foregoing amounts for fiscal years 1994 and 1995 reflect
adjustments for GASB Statement No. 22 adopted by the State during fiscal 1995.
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 benefitted 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.
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 "Commission"), in November 1994, the State ranked ninth among
the states in non-agricultural employment and eighth in manufacturing
employment. The Commission estimated the State's seasonally adjusted
unemployment rate in March 1996 to be 4.4% of the labor force, as compared with
an unemployment rate of 5.6% 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--State Tax Refunds--Federal
Retirees. In Davis v. Michigan (1989), the United States 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 members. 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 United States 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 United States Supreme Court for review of that
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decision, and the Supreme Court denied that petition. The United States 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
United States Supreme Court rejected an appeal, ruling that the lawsuit was a
state matter, leaving the North Carolina Supreme Court's ruling in force.
An additional lawsuit was filed in 1995 in State Court by Federal
pensioners to recover State income taxes paid on Federal retirement benefits.
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. 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 repeal 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
United States 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. The North Carolina Attorney General has appealed this order.
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 1991. 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.
3. Fulton Corp. v. Justus. The State's intangible personal property tax
levied on certain shares of stock has been challenged by the plaintiff on
grounds that it violates the United States Constitution Commerce Clause by
discriminating against stock issued by corporations that do all or part of their
business outside of the State. The plaintiff in the action is a North Carolina
corporation that does all or part of its business outside of the State. The
plaintiff seeks 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
is valid and constitutional. The United States 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. It is anticipated
that the State Court will order the State to pay refunds aggregating between
$130 million and $140 million, including interest, although alternative remedies
are possible. In April 1995, the North Carolina General Assembly repealed,
effective for taxable years beginning on or after January 1, 1995, the State's
intangible personal property tax.
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In October 1993, the State issued a total of $194.7 million in general
obligation bonds (consisting of $87.5 million in Prison and Youth Services
Facilities Bonds, $61 million in Public Improvement Refunding Bonds, $30.2
million in Highway Refunding Bonds and $16 million in Clean Water Refunding
Bonds). An additional $67.5 million in general obligation bonds (Prison and
Youth Services Facilities Bonds) were issued in November 1993. On November 2,
1993, a total of $740 million in general obligation bonds (consisting of $310
million in University Improvement Bonds, $250 million in Community College
Bonds, $145 million in Clean Water Bonds and $35 million in State Parks Bonds)
were approved by the voters of the State. Pursuant to this authorization, the
State issued $400 million in general obligation bonds (Capital Improvement
Bonds) in January 1994. The proceeds of these Capital Improvement Bonds may be
used for any purpose for which the proceeds of the University Improvement Bonds,
Community College Bonds, and State Parks Bonds may be used (none of such
proceeds may be used for Clean Water purposes). An additional $60 million in
general obligation bonds (Clean Water Bonds) were issued in September and
October 1994. The remaining $85 million in general obligation bonds (Clean Water
Bonds) were issued in June and July 1995. The offering of the remaining $195
million of these authorized bonds is anticipated to occur over the next two
years.
In its 1996 Short Session, the North Carolina General Assembly approved
additional State general obligation bonds in the amount of $950 million for
highways and $1.8 billion for schools. These bonds will be submitted to the
voters of the State for approval in November 1996. The General Assembly
adjourned the Short Session without making traditional adjustments to the budget
for fiscal 1997, leaving a surplus of approximately $700 million for future
appropriations.
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 and does not purport to be a complete description of such
factors. Other factors will affect issuers. The summary is based primarily upon
one or more publicly available offering statements relating to debt offerings of
state issuers; however, it has not been updated nor will it be updated during
the year. The Trust has not independently verified the information.
The State 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"). The 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 ("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
</TABLE>
Based on year-to-date financial results and a then current economic
forecast for the State, both in light of the continuing uncertain nationwide
economic situation, the State's Office of the Budget and Management ("OBM")
projected a Fiscal Year 1992 imbalance in GRF resources and expenditures which
was subsequently timely addressed. As an initial action, the Governor of the
State ordered most State agencies to reduce GRF appropriations spending in the
final six months of Fiscal Year 1992 by a total of approximately $184,000,000.
(Debt service and lease rental obligations were not affected by the order.)
Then, with General Assembly authorization, in June 1992 the entire $100,400,000
BSF balance and additional amounts from certain other funds were transferred to
the GRF. Other administration 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 $520,000,000, the Governor
ordered, effective July 1, 1992, selected reductions in Fiscal Year 1993 GRF
appropriations spending totaling $300,000,000. Those selected GRF reductions
included appropriations for higher education but expressly excluded
appropriations for debt service (including lease rental appropriations) and for
primary and secondary education. Subsequent executive and legislative actions --
including tax revisions that produced an additional $194,500,000 and additional
appropriations spending reductions totalling approximately
$50,000,000 -- provided for positive biennium-ending GRF balances and a better
basis for appropriations for the next biennium. As a first step toward BSF
replenishment, $21,000,000 was deposited in the BSF as contemplated by
applicable law, being the amount of the GRF ending balance in excess of
$90,000,000.
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.
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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, for a balance in the BSF of
$828.3 million.
The General Appropriations Act for the 1996-97 biennium provides 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 are
higher than in Fiscal Year 1995 and for Fiscal Year 1997 are 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 programs changes, a human services stabilization fund), leaving
an unreserved and undesignated balance in the GRF of $70 million.
As of the end of May 1996, the GRF had a cash balance of $542.9 million and
the BSF cash balance was $828.3 million. OBM estimates a GRF ending cash balance
for Fiscal Year 1996 of $494.9 million.
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" ("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 30, 1996 was $4.7076 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 the 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).
Cash flow deficiencies occurred in ten months of Fiscal Year 1992, with the
highest month requiring a drawdown of $743.14 million from the TOF, in ten
months of Fiscal Year 1993, with the highest month requiring a drawdown of
$768.64 million from the TOF, in six months of Fiscal Year 1994, with the
highest month requiring a drawdown of $500.64 million from the TOF, and in four
months of Fiscal Year 1995, with the highest month requiring a drawdown of
$337.96 million from the TOF. OBM currently reports and projects GRF cash flow
deficiencies in seven months of Fiscal Year 1996.
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.
Litigation contesting the State's system of school funding is pending on
appeal in the Ohio Supreme Court, with defendants being the State and several
State agencies and officials. Among other relief sought, the complaints
essentially request a declaratory judgment that the State's statutory system of
funding public elementary and secondary education (including the State's basic
aid funding system known as the "Foundation Program") violates various
provisions of the Ohio Constitution, with a remedy requested being decrees as
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may be required to compel the State and the General Assembly to devise and enact
a constitutionally acceptable system of school funding. The trial court in July
1994 concluded that certain provisions of current law (including those relating
to the Foundation Program and certain school district borrowing authorizations)
violated provisions of the Ohio Constitution and directed the State "forthwith
to provide for and fund a system of funding public elementary and secondary
education in compliance with the Ohio Constitution". The State appealed, and the
trial court granted a stay of its findings and conclusions and a stay of its
orders except for requirements that officials prepare and present to the General
Assembly proposals for a school funding system complying with the
court-specified criteria and except for periodic reports to the court on steps
taken to eliminate wealth-based disparities among districts. In August 1995, a
court of appeals reversed the trial court's findings for plaintiff districts.
In prior litigation, the Ohio Supreme Court in 1979 upheld what was
essentially the then existing Foundation Program against similar claims that the
school funding system violated provisions of the Ohio Constitution. Applying
that 1979 decision to the present case, the court of appeals found no
constitutional violation and reversed the trial court's negative rulings and
vacated its remedial orders.
It is not possible at this time to state whether the suit will ultimately
be successful on appeal or, should plaintiffs prevail, the effect on the State's
present school funding system, including the amount of and criteria for State
basic aid allocations to school districts. It cannot be predicted if the 1979
Supreme Court decision will be considered by the Supreme Court, as it was by the
court of appeals, to be determinative of any or all of the issues raised in this
current litigation.
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 appropriated for the 1994-95 biennium and $144,759,340 has been
expended for the current 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 electorate 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
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 (based on 1994 sales) as reported in 1995 by Fortune magazine, 48
had headquarters in Ohio, placing Ohio fifth as a "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, but is now at or near a new high. Growth in recent
years has been concentrated among nonmanufacturing industries, with
manufacturing employment tapering off since its 1969 peak. Nonmanufacturing
industries now employ approximately 78.9% 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 United States, although
for 1994 the average monthly unemployment rate in Ohio was 5.5% as compared to a
national average of 6.1% in the United States and in 1995, the Ohio rate was
4.8% compared to 5.6% for the United States. Ohio has been below the national
rate for 1996, as well.
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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 11,150,000, still seventh among the United States.
Currently, the State's general obligation bonds are rated Aa, 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 State and does not purport to be a complete description of such
factors. Other factors will affect issuers. The summary is based primarily upon
one or more publicly available offering statements relating to debt offerings of
state issuers; however, it has not been updated nor will it be updated during
the year. The Trust has not independently verified the information.
Many factors affect the financial condition of the Commonwealth of
Pennsylvania (the "Commonwealth") and its political subdivisions, such as
social, environmental and economic conditions, many of which are not within the
control of such entities. Pennsylvania and certain of its counties, cities and
school districts and public bodies (most notably the City of Philadelphia) have
from time to time in the past encountered financial difficulties which have
adversely affected their respective credit standings. Such difficulties could
affect outstanding obligations of such entities, including obligations held by
the Fund. Further, the Washington based Center on Budget and Policy Priorities
issued a report in the spring of 1996 stating that recent and proposed State tax
cuts, combined with structural problems in the State's revenue system, will lead
to a $600 million annual deficit within five years. Governor Ridge's
administration has challenged that report.
The General Fund, the Commonwealth's largest fund, receives all tax
revenues, non-tax revenues and Federal grants and entitlements that are not
specified by law to be deposited elsewhere. The majority of the Commonwealth's
operating and administrative expenses are payable from the General Fund. Debt
service on all bonded indebtedness of the Commonwealth, except that issued for
highway purposes or for the benefit of other special revenue funds, is payable
from the General Fund.
Financial conditions during the fiscal years 1991 through 1995 were
distinguished by slow economic growth and a rapid expansion of certain
governmental programs that together produced a significant stress on the
Commonwealth's budget. These problems were particularly evident during fiscal
years 1990 and 1991 when revenues were significantly below projections, and
expenditures, largely driven by demand for public welfare services, rose above
budgeted amounts. During this period, total revenues and other sources rose at a
9.1% average annual rate while expenditures and other uses grew by 7.4%
annually. Over two-thirds of the increase in total revenues and other sources
during this period occurred during fiscal 1992 when a $2.7 billion tax increase
was enacted to address a fiscal 1991 budget deficit and to fund increased
expenditures for fiscal 1992.
Fiscal 1995 was the fourth consecutive fiscal year the Commonwealth
reported an increase in the fiscal year-end unappropriated balance. The fiscal
1995 unappropriated surplus (prior to reserves for transfer to the Tax
Stabilization Fund) was $540 million, an increase of $204.2 million over the
fiscal 1994 unappropriated surplus (prior to transfers). Commonwealth revenues
were $459.4 million (2.9%) above the estimate of revenues used at the time the
budget was enacted. The higher than estimated revenues from tax sources were due
to faster economic growth in the national and state economy than had been
projected when the budget was adopted. Expenditures from Commonwealth revenues
(excluding pooled financing expenditures), including $65.5 million of
supplemental appropriations enacted at the close of the 1995 fiscal year,
totaled $15,674 million, representing an increase of 5% over spending during
fiscal 1994.
For GAAP purposes, the General Fund recorded a $49.8 million deficit for
fiscal 1995, leading to a decline in the fund balance to $688.3 million at June
30, 1995. The two items which predominately contributed to the decline in the
fund balance were (i) the use of a more comprehensive procedure to compute the
liabilities for certain public welfare programs, leading to an increase for the
year-end accruals; and (ii) a change to the methodology to calculate the
year-end accrual for corporate tax payables which increased the tax refund
liability by $72 million for the 1995 fiscal year when compared to the previous
fiscal year.
The enacted fiscal 1996 budget provides for expenditures from Commonwealth
revenues of $16,161.7 million, a 2.7% increase over total appropriations from
Commonwealth revenues in fiscal 1995. The fiscal 1996 budget is based on
anticipated Commonwealth revenues, net of enacted tax changes, of $16.27
billion, an
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increase over actual fiscal 1995 Commonwealth revenues of .3%. Excluding the
estimated effects of tax changes enacted in 1994 and 1995, Commonwealth revenues
for fiscal 1996 are estimated to increase by approximately 2.9%. Tax changes
(reductions) enacted with the fiscal 1996 budget totaled $282.9 million,
representing an approximate 1.7% of base revenues. The largest dollar value
changes were in the corporate net income tax where the scheduled 1997 reduction
of the tax rate to 9.99% was accelerated to the 1995 tax year; a double weighing
was provided for the sales factor of the corporate net income tax apportionment
calculation; and the maximum allowance for the net operating loss deduction was
increased from $500,000 to $1 million. The fiscal 1996 cost of these corporate
net income tax changes is estimated to be $210.8 million. Other major components
of the tax reduction include a $12.1 million decrease for the capital stock and
franchise tax from an increase in the exemption amount; $24.7 million from the
repeal of the tax on annuities; and $27.9 million from an acceleration of the
scheduled phase-out of the inheritance tax on transfers of certain property to a
surviving spouse. A 90 day amnesty program was also authorized in the tax bill
and was available to taxpayers from mid-October 1995 through mid-January 1996.
Revised estimates for the fiscal 1996 budget were included in the
Governor's February 1996 submission of his fiscal 1997 budget proposal.
Supplemental appropriation funding needs were recommended totaling $54.2
million, representing .3% of the approved appropriations for fiscal 1996.
Commonwealth revenues for fiscal 1996 are anticipated to be $2.5 million (less
than .1%) over the official estimate of revenues for the fiscal year. The fiscal
year ending unappropriated surplus (prior to any transfer to the tax
stabilization reserve fund) is estimated to be $118.3 million, an increase of
$105.6 million over the enacted budget estimate. For the current fiscal year
through April 1996, Commonwealth revenue receipts have totaled $11.9 million
(less than .1%) above the estimate for the period.
On June 29, 1996, the Governor signed the state's $16.38 billion fiscal
1997 general fund budget package, which included much of the spending goals
proposed by the Governor. These include freezing aid to basic education and
expanding economic development programs. In addition, a job creation tax credit
was included as a part of the budget package. The state has indicated that it
plans to issue $517 million in bonds in fiscal 1997.
Pennsylvania has historically been identified as a heavy industry state
although that reputation has changed over the last thirty years as the
industrial composition of the Commonwealth diversified when the coal, steel and
railroad industries began to decline. A more diversified economy was necessary
as the traditionally strong industries in the Commonwealth declined due to a
long-term shift in jobs, investment and workers away from the northeast part of
the nation. The major sources of growth in Pennsylvania are in the service
sector, including trade, medical and health services, education and financial
institutions.
Non-agricultural employment in Pennsylvania over the last ten years
increased at an annual rate of 1.02%. During the period 1990 through 1992,
non-agricultural employment declined by 94,000 jobs. By 1994 employment exceeded
the pre-recession level.
For the last 3 years, employment in the Commonwealth has increased 3.4%.
The unemployment rate in Pennsylvania in March, 1996 stood at a seasonally
adjusted rate of 5.6%. The seasonally adjusted national unemployment rate for
March, 1996 was also 5.6%.
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, 1995, the
Commonwealth had $5,045.4 million of general obligation debt outstanding.
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Other state-related obligations include "moral obligations". Moral
obligation indebtedness may be issued by the Pennsylvania Housing Finance Agency
("PHFA"), a state-created agency which provides financing for housing for lower
and moderate income families, and The Hospitals and Higher Education Facilities
Authority of Philadelphia, a municipal authority organized by the City of
Philadelphia to, among other things, acquire and prepare various sites for use
as intermediate care facilities for the mentally retarded. PHFA's bonds, but not
its notes, are partially secured by a capital reserve fund required to be
maintained by PHFA in an amount equal to the maximum annual debt service on its
outstanding bonds in any succeeding calendar year. PHFA is not permitted to
borrow additional funds as long as any deficiency exists in the capital reserve
fund.
Certain state-created agencies have statutory authorization to incur debt
for which state appropriations to pay debt service thereon is not required. The
debt of these agencies is funded by assets of, or revenues derived from, the
various projects financed and is not a statutory or moral obligation of the
Commonwealth. Some of these organizations, however, are indirectly dependent on
Pennsylvania operating appropriations. In addition, the Commonwealth maintains
pension plans covering state employees, public school employees and employees of
certain state-related organizations. For their fiscal years ended in 1994, the
State Employees' Retirement System had a $249 million surplus and the Public
School Employees' Retirement System had a total unfunded actuarial accrued
liability of $3,797 million.
The City of Philadelphia is the largest city in the Commonwealth with an
estimated population of 1,585,577 according to the 1990 Census. Legislation
providing for the establishment of Pennsylvania Intergovernmental Cooperation
Authority ("PICA") to assist Philadelphia in remedying fiscal emergencies was
enacted by the Pennsylvania General Assembly and approved by the Governor in
June 1991. PICA is designed to provide assistance through the issuance of
funding debt and to make factual findings and recommendations to Philadelphia
concerning its budgetary and fiscal affairs. At this time, Philadelphia is
operating under a five year fiscal plan approved by PICA on April 17, 1995.
Technical modifications were made to that plan as of July 12, 1995 and the
revised plan, incorporating such technical modifications, was approved by PICA
on July 18, 1995.
PICA has issued $1,418,680 of its Special Tax Revenue Bonds. This financial
assistance has included the refunding of certain general obligation bonds,
funding of capital projects and the liquidation of the cumulative General Fund
balance deficit as of June 30, 1992 of $224.9 million. The audited General Fund
balance of Philadelphia as of June 30, 1995, showed a surplus of approximately
$80.5 million, up from approximately $1.54 million as of June 30, 1994.
No further bonds are to be issued by PICA for the purpose of financing a
capital project or deficit as the authority for such bond sales expired December
31, 1994. PICA's authority to issue debt for the purpose of financing a cash
flow deficit expires on December 31, 1996. Its ability to refund existing
outstanding debt is unrestricted. PICA had $1,237.5 million in special revenue
bonds outstanding as of December 31, 1995.
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
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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 and a request was made by the counties to
continue the action until Spring 1995. The Court has not apparently acted on the
new action and the General Assembly has yet to consider legislation implementing
the Supreme Court's decision.
Fidelity Bank v. Commonwealth of Pennsylvania
On November 30, 1989, Fidelity Bank, N.A. ("Fidelity") filed an action
challenging the constitutional validity of a 1989 amendment increasing the bank
shares tax and related legislation. The Commonwealth Court ruled in favor of the
Commonwealth finding no constitutional deficiencies in the tax increase, but
invalidating one element of the legislation which provided a credit to new banks
(the "new bank tax credit"). Fidelity, the Commonwealth and certain intervener
banks appealed to the Pennsylvania Supreme Court. However, pursuant to a
Settlement Agreement dated as of April 21, 1995, the Commonwealth agreed to
enter a credit in favor of Fidelity in the amount of $4,100,000 in settlement of
the constitutional and non-constitutional issues. The credit represents
approximately 5% of the potential claim of Fidelity, had the constitutional
issues been resolved in its favor.
Pursuant to a separate Settlement Agreement dated as of April 21, 1995, the
Commonwealth also settled with the intervening banks with respect to issues
concerning the new bank tax credit.
Notwithstanding the foregoing settlements, other banks have filed
protective petitions which are currently pending at the various administrative
agencies challenging the validity of the 1989 tax increase. Depending on the
outcomes of these administrative appeals, one or more of these banks may seek to
raise a new constitutional challenge in Commonwealth Court. However, as set
forth above, the Commonwealth Court has previously examined and confirmed the
Act's constitutionality.
Pennsylvania Association of Rural and Small Schools (PARSS) v. Casey
In January 1991, the Association of Rural and Small Schools and several
other parties filed a lawsuit against then Governor Robert P. Casey and former
Secretary of Education, Donald M. Carroll, challenging the constitutionality of
the Commonwealth system for funding local school districts. The litigation
consists of two parallel cases, one in the Commonwealth Court of Pennsylvania
and one in the United States District Court for the Middle District of
Pennsylvania. The federal court case has been indefinitely stayed pending
resolution of the state court case. The state court case is currently in the
pre-trial discovery stage. Judge Pellegrini issued an Order, dated May 30, 1996,
to consider, among other things, the report of the Governor's Commission on
Public School Finance and the course of future proceedings, including trial.
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Austin v. Department of Corrections, et al.
In November 1990, the American Civil Liberties Union filed a class action
lawsuit in the United States District Court for the Eastern District of
Pennsylvania on behalf of inmate populations in various Pennsylvania
correctional institutions, challenging the conditions of confinement and seeking
injunctive relief. On January 17, 1995, the Court approved a Settlement
Agreement between the parties. On February 3, 1995, the Commonwealth paid $1.3
million in attorneys' fees to the plaintiffs' attorneys, in accordance with the
Agreement, 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, which will expire on January 6, 1998. The attorneys' fees for the
3-year monitoring period will not exceed $60,000 in any one year.
Envirotest/Synterra Partners
Envirotest Systems Corporation, Envirotest Partners ("Envirotest") and the
Commonwealth of Pennsylvania have entered into a Settlement Agreement dated
December 15, 1995 pursuant to which the parties settled all claims which
Envirotest might have had against the Commonwealth arising from the suspension
of an emissions testing program. Under the Agreement, Envirotest is to receive
$145 million, with interest at 6% per annum, payable $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 (i.e., property Envirotest had acquired in connection with the
emissions testing program).
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". The Commonwealth and the City sought to appeal their joinders to the
Supreme Court of Pennsylvania, but the Court denied the petitions without
comment.
On February 28, 1996, the School District of Philadelphia filed a
third-party complaint against the Commonwealth of Pennsylvania asking the
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 intervenors on March
4, 1996 filed a third-party complaint against the Commonwealth of Pennsylvania
and the City of Philadelphia requesting the 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 July 11, 1996, the Commonwealth Court heard closing arguments from all
parties involved in the litigation.
Currently, Pennsylvania general obligation bonds are rated AA- by Standard
& Poor's and Fitch, and A1 by Moody's. There can be no assurance that the
economic conditions on which these ratings are based will continue or that
particular bond issues will not be adversely affected by changes in economic or
political conditions.
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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. 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
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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. 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. 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 classification 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. 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.
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- --------------------------------------------------------------------------------
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, 1996, the related statements
of operations for the year then ended and changes in net assets for each of the
years in the two-year period then ended, and the financial highlights for each
of the years in the three-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, 1996 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,
1996, 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
April 29, 1996
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<TABLE>
CMA ARIZONA MUNICIPAL MONEY FUND
SCHEDULE OF INVESTMENTS AS OF MARCH 31, 1996 (IN THOUSANDS)
<CAPTION>
Face Value
State Amount Issue (Note 1a)
<S> <C> <C> <C>
Arizona-- $ 5,400 Arizona Educational Loan Marketing Corp., Educational Loan Revenue
97.9% Bonds, VRDN, AMT, Series A, 3.60% due 3/01/2015 (a)(c) $ 5,400
Arizona Health Facilities Authority Revenue Bonds (Arizona
Voluntary Hospital Federation), VRDN (a)(d):
1,460 Series A, 3.40% due 10/01/2015 1,460
1,245 Series B, 3.40% due 10/01/2015 1,245
2,500 Arizona State Transportation Board Revenue Bonds (Maricopa County),
7.30% due 7/01/1996 (b) 2,572
Arizona State University Revenue Bonds (b):
1,310 7.10% due 7/01/1996 1,347
1,930 7.20% due 7/01/1996 1,985
5,000 Chandler, Arizona, IDA, IDR, Refunding (SMP II Limited Partnership),
VRDN, 3.45% due 12/01/2015 (a) 5,000
6,000 Cochise County, Arizona, Pollution Control Corp., Solid Waste
Disposal Revenue Bonds (Arizona Electric Power Cooperative, Inc.
Project), AMT, 3.30% due 9/01/1996 6,000
6,600 Coconino County, Arizona, Pollution Control Corp., Arizona Public
Service Revenue Bonds (Navajo Project), VRDN, AMT, Series A, 3.60% due
10/01/2029 (a) 6,600
200 Maricopa County, Arizona, IDA, Hospital Facility Revenue Bonds
(Samaritan Health Service Hospital), VRDN, Series B-2, 3.50% due
12/01/2008 (a)(c) 200
Maricopa County, Arizona, IDA, M/F Housing Revenue Bonds, VRDN, AMT (a):
3,700 (Privado Park Apartments Project), Series A, 3.60% due 6/01/2034 3,700
4,000 (Vista Ventana Apartments Project), Series D, 3.60% due 6/01/2034 4,000
Maricopa County, Arizona, Pollution Control Corp., PCR, CP (Southern
California Edison-Palo Verde Project):
1,400 Series C, 3.35% due 7/10/1996 1,400
500 Series D, 3.40% due 8/22/1996. 500
1,100 Series E, 3.40% due 8/22/1996 1,100
1,500 Series G, 3.35% due 7/10/1996. 1,500
Maricopa County, Arizona, Pollution Control Corp., PCR, Refunding,
VRDN (a):
1,000 (Arizona Public Service Co.), Series B, 3.45% due 5/01/2029 1,000
1,700 (Arizona Public Service Co.), Series F, 3.50% due 5/01/2029 1,700
12,000 (El Paso), Series A, 3.75% due 8/01/2015 12,000
</TABLE>
Portfolio Abbreviations for CMA Arizona Municipal Money Fund
AMT Alternative Minimum Tax (subject to)
COP Certificates of Participation
CP Commercial Paper
DATES Daily Adjustable Tax-Exempt Securities
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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<TABLE>
CMA ARIZONA MUNICIPAL MONEY FUND
SCHEDULE OF INVESTMENTS AS OF MARCH 31, 1996 (CONTINUED) (IN THOUSANDS)
<CAPTION>
Face Value
State Amount Issue (Note 1a)
<S> <C> <C> <C>
Arizona Maricopa County, Arizona, School District, TAN:
(continued) $ 1,000 No. 38 (Madison Elementary), Series A, 4.45% due 7/31/1996 $ 1,004
2,000 No. 83 (Cartwright Elementary), Series C, 4.30% due 7/31/1996 2,005
1,000 Maricopa County, Arizona, Unified School District No. 4 (Mesa),
UT, Series C, 6.60% due 7/01/1996 (e) 1,007
Maricopa County, Arizona, Unified School District, TAN:
1,050 No. 93 (Cave Creek), Series C, 4.30% due 7/31/1996 1,053
6,000 No. 97 (Deer Valley), Series B, 4.60% due 7/31/1996 6,013
3,000 No. 210 (Phoenix), Series A, 4.45% due 7/31/1996 3,005
5,300 Mesa, Arizona, Municipal Development Corp., Special Tax, CP, 3.10%
due 4/23/1996 5,300
1,155 Mesa, Arizona, Utility System Revenue Refunding Bonds, 6.10% due
7/01/1996 (d) 1,162
Mohave County, Arizona, IDA, IDR (Citizens Utilities), CP, AMT:
5,400 3.40% due 4/15/1996 5,400
2,700 3.35% due 5/17/1996 2,700
2,700 3.45% due 5/17/1996 2,700
4,000 Phoenix, Arizona, IDA, M/F Housing Revenue Refunding Bonds (Paradise
Lakes Apartments Project), VRDN, 3.75% due 7/01/2025 (a) 4,000
1,650 Pima County, Arizona, IDA, IDR, Refunding (Tucson Retirement Center),
VRDN, 3.30% due 1/01/2009 (a) 1,650
Pima County, Arizona, IDA, M/F Housing Revenue Bonds, VRDN, AMT (a):
1,000 (Quail Ridge Apartments), Series B, 3.60% due 6/01/2034 1,000
1,900 (Saguaro Crest Apartments), Series A, 3.60% due 6/01/2034 1,900
1,000 Pima County, Arizona, Unified School District No. 10, Refunding
(Amphitheater), 6.40% due 7/01/1996 (d) 1,007
2,000 Pinal County, Arizona, IDA, Hospital Revenue Bonds (Casa Grande
Regional Medical Center), VRDN, 3.35% due 12/01/2022 (a) 2,000
Pinal County, Arizona, IDA, PCR (Magma Copper/Newmont Mining Corp.),
VRDN (a):
10,100 3.35% due 12/01/2009 10,100
2,000 DATES, 3.35% due 12/01/2009 2,000
1,000 Pinal County, Arizona, Unified High School District No. 82 (Casa
Grande), UT, Series A, 3.80% due 7/01/1996 (e) 1,000
</TABLE>
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<TABLE>
CMA ARIZONA MUNICIPAL MONEY FUND
SCHEDULE OF INVESTMENTS AS OF MARCH 31, 1996 (CONCLUDED) (IN THOUSANDS)
<CAPTION>
Face Value
State Amount Issue (Note 1a)
<S> <C> <C> <C>
Arizona Salt River Project, Arizona, Agricultural Improvement and Power
(concluded) Distribution, Electric System Revenue Bonds:
$ 1,300 CP, 3.15% due 8/09/1996 $ 1,300
5,430 Series A, 7.50% due 1/01/1997 (b) 5,714
1,200 Special Fund of Industrial Community, Arizona, Tax-Exempt COP,
Refunding, Bonds CP, 3.35% due 7/10/1996 (d) 1,200
1,000 Tempe, Arizona, IDA, M/F Housing Revenue Bonds (Elliots Crossing),
VRDN, 3.40% due 10/01/2008 (a) 1,000
1,765 Tucson, Arizona, IDA, IDR, Refunding (Santa Rita Hotel), VRDN, AMT,
Series B, 3.50% due 12/01/2016 (a) 1,765
Yavapai County, Arizona, IDA, IDR (Citizens Utilities), CP, AMT:
1,200 3.35% due 5/17/1996 1,200
1,900 3.45% due 5/17/1996 1,900
1,500 3.40% due 6/14/1996 1,500
500 Yuma, Arizona, IDA, IDR (Ardco Inc. Project), VRDN, 3.55% due
7/01/2003 (a) 500
3,840 Yuma, Arizona, IDA, M/F Housing Revenue Bonds (El Encanto Apartments),
VRDN, Series A, 3.40% due 11/01/2008 (a) 3,840
Puerto Rico-- 2,000 Puerto Rico Commonwealth, Government Development Bank, CP, 3.45%
1.5% due 4/03/1996 2,000
Total Investments (Cost--$136,634*)--99.4% 136,634
Other Assets Less Liabilities--0.6% 886
--------
Net Assets--100.0% $137,520
========
</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, 1996.
(b)Prerefunded.
(c)MBIA Insured.
(d)FGIC Insured.
(e)AMBAC Insured.
*Cost for Federal income tax purposes.
See Notes to Financial Statements.
FS-4
<PAGE> 108
CMA ARIZONA MUNICIPAL MONEY FUND
STATEMENT OF ASSETS AND LIABILITIES AS OF MARCH 31, 1996
<TABLE>
<S> <C> <C>
Assets:
Investments, at value (identified cost--$136,634,162) (Note 1a) $ 136,634,162
Cash 105,604
Interest receivable 893,518
Deferred organization expenses (Note 1d) 14,087
Prepaid registration fees and other assets (Note 1d) 31,145
-------------
Total assets 137,678,516
-------------
Liabilities:
Payables:
Investment adviser (Note 2) $ 54,481
Distributor (Note 2) 41,122 95,603
-------------
Accrued expenses and other liabilities 62,664
-------------
Total liabilities 158,267
-------------
Net Assets $ 137,520,249
=============
Net Assets Consist of:
Shares of beneficial interest, $0.10 par value, unlimited number of shares authorized $ 13,752,701
Paid-in capital in excess of par 123,774,242
Accumulated realized capital losses--net (Note 4) (6,694)
-------------
Net Assets--Equivalent to $1.00 per share based on 137,527,008 shares of beneficial
interest outstanding $ 137,520,249
=============
</TABLE>
CMA ARIZONA MUNICIPAL MONEY FUND
STATEMENT OF OPERATIONS FOR THE YEAR ENDED MARCH 31, 1996
<TABLE>
<S> <C> <C>
Investment Income (Note 1c):
Interest and amortization of premium and discount earned $ 4,734,021
Expenses:
Investment advisory fees (Note 2) $ 613,484
Distribution fees (Note 2) 152,808
Accounting services (Note 2) 37,954
Professional fees 35,083
Registration fees (Note 1d) 33,557
Transfer agent fees (Note 2) 24,702
Printing and shareholder reports 17,131
Custodian fees 13,722
Amortization of organization expenses (Note 1d) 7,604
Pricing fees 6,214
Trustees' fees and expenses 1,227
Other 2,278
-------------
Total expenses before reimbursement 945,764
Reimbursement of expenses (Note 2) (229,188)
-------------
Total expenses after reimbursement 716,576
-------------
Investment income--net 4,017,445
Realized Loss on Investments--Net (Note 1c) (6,694)
-------------
Net Increase in Net Assets Resulting from Operations $ 4,010,751
=============
</TABLE>
See Notes to Financial Statements.
FS-5
<PAGE> 109
CMA ARIZONA MUNICIPAL MONEY FUND
STATEMENTS OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
For the Year Ended
March 31,
Increase (Decrease) in Net Assets: 1996 1995
<S> <C> <C>
Operations:
Investment income--net $ 4,017,445 $ 2,445,657
Realized gain (loss) on investments--net (6,694) 2,450
------------- -------------
Net increase in net assets resulting from operations 4,010,751 2,448,107
------------- -------------
Dividends & Distributions to Shareholders (Note 1e):
Investment income--net (4,017,445) (2,445,657)
Realized gain on investments--net (2,500) --
------------- -------------
Net decrease in net assets resulting from dividends
and distributions to shareholders (4,019,945) (2,445,657)
------------- -------------
Beneficial Interest Transactions (Note 3):
Net proceeds from sale of shares 527,733,700 389,748,845
Net asset value of shares issued to shareholders in reinvestment of
dividends and distributions (Note 1e) 4,019,977 2,445,654
------------- -------------
531,753,677 392,194,499
Cost of shares redeemed (497,941,093) (361,894,068)
------------- -------------
Net increase in net assets derived from beneficial interest transactions 33,812,584 30,300,431
------------- -------------
Net Assets:
Total increase in net assets 33,803,390 30,302,881
Beginning of year 103,716,859 73,413,978
------------- -------------
End of year $ 137,520,249 $ 103,716,859
============= =============
</TABLE>
See Notes to Financial Statements.
FS-6
<PAGE> 110
CMA ARIZONA MUNICIPAL MONEY FUND
FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
For the
Period
The following per share data and ratios have been derived Feb. 8,
from information provided in the financial statements. 1993++ to
For the Year Ended March 31, March 31,
Increase (Decrease) in Net Asset Value: 1996 1995 1994 1993
<S> <C> <C> <C> <C>
Per Share Operating Performance:
Net asset value, beginning of period $ 1.00 $ 1.00 $ 1.00 $ 1.00
-------- -------- -------- --------
Investment income--net .03 .03 .02 .002
-------- -------- -------- --------
Total from investment operations .03 .03 .02 .002
-------- -------- -------- --------
Less dividends from investment income--net (.03) (.03) (.02) (.002)
-------- -------- -------- --------
Net asset value, end of period $ 1.00 $ 1.00 $ 1.00 $ 1.00
======== ======== ======== ========
Total Investment Return 3.36% 2.83% 1.90% 1.78%*
======== ======== ======== ========
Ratios to Average Net Assets:
Expenses, net of reimbursement .58% .54% .59% .46%*
======== ======== ======== ========
Expenses .77% .85% .98% 1.15%*
======== ======== ======== ========
Investment income--net 3.27% 2.84% 1.89% 1.86%*
======== ======== ======== ========
Supplemental Data:
Net assets, end of period (in thousands) $137,520 $103,717 $ 73,414 $ 41,437
======== ======== ======== ========
</TABLE>
*Annualized.
++Commencement of Operations.
See Notes to Financial Statements.
FS-7
<PAGE> 111
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 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 reclassified to
reflect permanent differences between financial reporting and tax
purposes. Accordingly, current year's permanent book/tax differences
of $65 have been reclassified from paid-in capital in excess of par
to accumulated net realized capital losses. 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" or "Adviser"). 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-8
<PAGE> 112
CMA ARIZONA 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.
The most restrictive annual expense limitation requires that the
Adviser reimburse the Fund to the extent the Fund's expenses
(excluding interest, taxes, distribution fees, brokerage fees and
commissions, and extraordinary items) exceed in any fiscal year 2.5%
of the Fund's first $30 million of average daily net assets, 2.0% of
the Fund's next $70 million of average daily net assets, and 1.5% of
the average daily net assets in excess thereof. No fee payment will
be made to the Adviser during the year which will cause such
expenses to exceed the pro rata expense limitation at the time of
such payment. For the year ended March 31, 1996, FAM earned fees of
$613,484, of which $229,188 was voluntarily waived.
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, MLPF&S, 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, 1996, the Fund had a net capital loss carryforward of
approximately $6,000, all of which expires in 2004. This amount will
be available to offset like amounts of any future taxable gains.
FS-9
<PAGE> 113
- --------------------------------------------------------------------------------
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, 1996, the related statements
of operations for the year then ended and changes in net assets for each of the
years in the two-year period then ended, and the financial highlights for each
of the years in the 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, 1996 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 California
Municipal Money Fund of CMA Multi-State Municipal Series Trust as of March 31,
1996, 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
April 30, 1996
FS-10
<PAGE> 114
<TABLE>
CMA CALIFORNIA MUNICIPAL MONEY FUND
SCHEDULE OF INVESTMENTS AS OF MARCH 31, 1996 (IN THOUSANDS)
<CAPTION>
Face Value
State Amount Issue (Note 1a)
<S> <C> <C> <C>
California-- $ 3,000 Alameda County, California, IDA, IDR, Refunding (Hoover University
92.0% Inc.Project), VRDN, 3.15% due 6/01/2004 (a) $ 3,000
California Health Facilities Financing Authority Revenue Bonds,
VRDN (a):
14,000 (Floating Pool Program), 3.10% due 9/01/2020 14,000
6,645 (Huntington Memorial Hospital), 2.85% due 11/01/2010 6,645
1,500 (Pooled Loan Program), Series 85-B, 3.10% due 10/01/2010 (c) 1,500
2,700 (Pooled Loan Program), Series A, 3.10% due 6/01/2007 2,700
5,000 Refunding (Catholic West), Series B, 3.05% due 7/01/2005 (b) 5,000
7,200 Refunding (Catholic West), Series D, 3.05% due 7/01/2018 (b) 7,200
7,600 (Scripps Memorial Hospital), Series A, 3.10% due 12/01/2005 (b) 7,600
5,830 (Scripps Memorial Hospital), Series B, 3.10% due 12/01/2015 (b) 5,830
10,000 California HFA, Multi-Unit Rental Housing Revenue Bonds, Series A,
3.20%due 5/01/1996 (b) 10,000
California Pollution Control Financing Authority, PCR:
700 Refunding (Shell Oil Company Project), VRDN, Series B, 3.20%
due 10/01/2011 (a) 700
1,500 (Southern California Edison), CP, Series C, 3.60% due 4/08/1996 1,500
California Pollution Control Financing Authority, PCR, Refunding
(Pacific Gas & Electric), CP:
5,500 AMT, Series A, 3.50% due 4/08/1996 5,500
7,770 AMT, Series A, 3.15% due 4/10/1996 7,770
15,000 AMT, Series A, 3.05% due 8/01/1996 15,000
27,600 AMT, Series B, 3.45% due 4/11/1996 27,600
12,000 AMT, Series B, 3.40% due 7/25/1996 12,000
14,100 AMT, Series B, 3.35% due 8/08/1996 14,100
22,900 AMT, Series B, 3.55% due 8/15/1996 22,900
18,900 Series D, 3.60% due 4/12/1996 18,900
15,100 Series E, 3.10% due 4/09/1996 15,100
23,400 Series E, 3.15% due 4/09/1996 23,400
20,000 Series E, 3.35% due 7/25/1996 20,000
27,300 Series F, 3.25% due 4/12/1996 27,300
20,000 Series F, 3.10% due 4/16/1996 20,000
California Pollution Control Financing Authority, Resource Recovery
Revenue Bonds, VRDN, AMT (a):
18,400 (Atlantic Richfield Company Project), Series A, 3.25% due
12/01/2024 18,400
18,200 (Delano Project), 3% due 8/01/2019 18,200
5,900 (Delano Project), 3% due 8/01/2019 5,900
19,800 (Delano Project), Series 1991, 3% due 8/01/2019 19,800
1,600 (Honey Lake Power Project), 3% due 9/01/2018 1,600
12,100 (Honey Lake Power Project), 3% due 9/01/2018 12,100
15,300 Refunding (Ultra Power Malaga Project), Series A, 3% due 4/01/2017 15,300
2,900 Refunding (Ultra Power Malaga Project), Series B, 3% due 4/01/2017 2,900
1,300 Refunding (Ultra Power Rocklin Project), Series A, 3% due 6/01/2017 1,300
6,600 Refunding (Ultra Power Rocklin Project), Series B, 3% due 6/01/2017 6,600
</TABLE>
Portfolio Abbreviations for CMA California Municipal Money Fund
AMT Alternative Minimum Tax (subject to)
BAN Bond Anticipation Notes
COP Certificates of Participation
CP Commercial Paper
GO General Obligation Bonds
HFA Housing Financing Agency
IDA Industrial Development Authority
IDR Industrial Development Revenue Bonds
M/F Multi-Family
PCR Pollution Control Revenue Bonds
RAW Revenue Anticipation Warrants
TRAN Tax Revenue Anticipation Notes
UT Unlimited Tax
VRDN Variable Rate Demand Notes
FS-11
<PAGE> 115
<TABLE>
CMA CALIFORNIA MUNICIPAL MONEY FUND
SCHEDULE OF INVESTMENTS AS OF MARCH 31, 1996 (CONTINUED) (IN THOUSANDS)
<CAPTION>
Face Value
State Amount Issue (Note 1a)
<S> <C> <C> <C>
California California Pollution Control Financing Authority, Solid Waste
(continued) Disposal Revenue Bonds, VRDN (a):
$ 5,000 (North County Recycling Center), Series B, 3.10% due 7/01/2017 $ 5,000
52,100 (Shell Oil Co.--Martinez Project), AMT, Series A, 3.20% due
10/01/2024 52,100
11,800 (Shell Oil Co.--Martinez Project), AMT, Series B, 3.20% due
12/01/2024 11,800
25,000 California Public Capital Improvements Financing Authority Revenue
Bonds(Pooled Loan Project), Series D, 3.40% due 6/15/1996 25,000
10,000 California State, GO, VRDN, 3.47% due 11/01/2020 (a) 10,000
97,965 California State, RAW, Series C, 5.75% due 4/25/1996 98,072
1,800 California Statewide Community Development Authority Revenue Bonds
(Sutter Health Obligation Group), VRDN, COP, 3.25% due 7/01/2015 (a)(d) 1,800
5,700 California Statewide Community Development Authority, Solid Waste
Facility Revenue Bonds (Chevron United States Inc. Project), VRDN,
AMT, 3.20% due 12/15/2024 (a) 5,700
Chula Vista, California, IDR (San Diego Gas & Electric Co.), CP, AMT,
Series D:
20,000 3.30% due 4/04/1996 20,000
10,000 3.25% due 4/09/1996 10,000
10,000 3.70% due 4/09/1996 10,000
20,000 3.25% due 4/10/1996 20,000
27,500 Clovis, California, Unified School District, TRAN, UT, 4.50% due
7/05/1996 27,537
2,200 Contra Costa County, California, Housing Authority, M/F Mortgage
Revenue Bonds (Lakeshore Apartments), VRDN, Series A, 3.15% due
11/15/2012 (a) 2,200
1,500 Delmar, California, Racetrack Authority, BAN, CP, Series 1993, 3.20%
due 4/08/1996 1,500
Eagle Tax Exempt Trust, VRDN (a):
9,500 3.47% due 2/01/2006 9,500
18,400 Series 1994 C-6, 3.47% due 8/01/2017 18,400
14,800 Series 1994 C-7, 3.47% due 8/01/2023 14,800
East Bay, California, Municipal Utility District, Wastewater
Treatment System Revenue Bonds, CP:
16,800 3.10% due 4/08/1996 16,800
1,800 3.20% due 4/08/1996 1,800
5,000 East Yolo, California, Community Services District, Revenue
Refunding Bonds, 7.25% due 6/01/1996 (c)(e) 5,126
10,400 Eastern Municipal Water District, California, Water and Sewer
Revenue Refunding Bonds, VRDN, COP, Series B, 3% due 7/01/2020 (a)(c) 10,400
20,000 Floating Rate Trust Certificates, VRDN, Series 1992 H, 3.65% due
10/02/1998 (a)(d) 20,000
8,050 Fontana, California, M/F Housing Revenue Bonds (Springtime Apartments
Project), VRDN, Series A, 3.35% due 12/01/2016 (a) 8,050
Golden Empire Schools Financing Authority, California, Revenue
Refunding Bonds, VRDN (a):
9,100 (Golden Empire Project), Series B, 3.15% due 12/01/2024 9,100
11,400 (Kern High School District), Series A, 3.15% due 12/01/2024 11,400
13,000 Hayward, California, M/F Housing Revenue Bonds (Shorewood Apartments),
VRDN, Series A, 3.25% due 8/01/2014 (a)(c) 13,000
2,435 Kern County, California, Housing Authority, Mortgage Obligation Bonds,
VRDN, Series A, 3.45% due 12/30/2027 (a) 2,435
18,985 Loma Linda, California, M/F Housing Revenue Bonds (Loma Linda Springs
Apartments), VRDN, 3.30% due 7/01/2019 (a) 18,985
</TABLE>
FS-12
<PAGE> 116
<TABLE>
CMA CALIFORNIA MUNICIPAL MONEY FUND
SCHEDULE OF INVESTMENTS AS OF MARCH 31, 1996 (CONTINUED) (IN THOUSANDS)
<CAPTION>
Face Value
State Amount Issue (Note 1a)
<S> <C> <C> <C>
California Long Beach, California, Harbor Revenue Bonds, CP, AMT, Series A:
(continued) $17,000 3.30% due 4/04/1996 $ 17,000
10,000 3.30% due 4/08/1996 10,000
6,500 3.25% due 4/09/1996 6,500
29,000 3.25% due 4/11/1996 29,000
40,000 Long Beach, California, TRAN, 4.50% due 9/19/1996 40,100
Los Angeles, California, Harbor Department Revenue Bonds
(Port of Los Angeles), CP, AMT, Series B:
16,000 3.10% due 4/08/1996 16,000
21,000 3.15% due 4/08/1996 21,000
13,000 3.65% due 4/08/1996 13,000
1,500 3.70% due 4/08/1996 1,500
8,700 Los Angeles, California, M/F Housing Revenue Bonds (Beverly Park
Apartments Project), VRDN, AMT, Series A, 3.15% due 8/01/2018 (a) 8,700
Los Angeles, California, M/F Housing Revenue Refunding Bonds,
VRDN (a):
12,660 (Canyon), Series C, 3.15% due 12/01/2010 12,660
8,340 (Mountainback), Series B, 3.15% due 12/01/2010 8,340
2,000 Los Angeles County, California, Metropolitan Transportation Authority,
Revenue Bonds, CP, Series A, 3.15% due 4/09/1996 2,000
4,000 Los Angeles County, California, Metropolitan Transportation Authority,
Sales Tax Revenue Bonds, VRDN, 3.50% due 7/01/2017 (a)(d) 4,000
24,300 Los Angeles County, California, Metropolitan Transportation Authority,
Sales Tax Revenue Refunding Bonds (Proposition C--Second Senior
Bonds),VRDN, Series A, 3% due 7/01/2020 (a)(b) 24,300
3,700 M-S-R Public Power Agency, California, Revenue Bonds (San Juan
Project),VRDN, Series B, 3.05% due 7/01/2022 (a)(d) 3,700
20,300 Metropolitan Water District (Southern California), CP, Series B, 3.25%
due 4/24/1996 20,300
6,000 Moor Park, California, M/F Mortgage Revenue Refunding Bonds (Le Club
Apartments Project), VRDN, Series A, 3.10% due 11/01/2015 (a) 6,000
Palm Springs, California, Community Redevelopment Agency, COP, VRDN (a):
2,200 Headquarters Hotel 2, 3.25% due 12/01/2014 2,200
1,500 Headquarters Hotel 3, 3.25% due 12/01/2014 1,500
1,500 Headquarters Hotel 4, 3.25% due 12/01/2014 1,500
1,700 Headquarters Hotel 5, 3.25% due 12/01/2014 1,700
1,600 Headquarters Hotel 7, 3.25% due 12/01/2014 1,600
3,700 Headquarters Hotel 8, 3.25% due 12/01/2014 3,700
1,900 Headquarters Hotel 9, 3.25% due 12/01/2014 1,900
1,500 Headquarters Hotel 10, 3.25% due 12/01/2014 1,500
11,470 Pittsburg, California, Mortgage Obligation Bonds, VRDN, Series A,
3.40%due 12/30/2022 (a) 11,470
2,900 Redlands, California, M/F Housing Revenue Bonds (Orange Village
Apartments), VRDN, AMT, Series A, 3.35% due 8/01/2018 (a) 2,900
Riverside County, California, Housing Authority, M/F Mortgage Revenue
Bonds, VRDN (a):
3,750 (Emeritus Park), Series B, 3.15% due 8/01/2018 3,750
6,000 (Woodcreek Village), Series D, 3.15% due 8/01/2018 6,000
</TABLE>
FS-13
<PAGE> 117
<TABLE>
CMA CALIFORNIA MUNICIPAL MONEY FUND
SCHEDULE OF INVESTMENTS AS OF MARCH 31, 1996 (CONCLUDED) (IN THOUSANDS)
<CAPTION>
Face Value
State Amount Issue (Note 1a)
<S> <C> <C> <C>
California $14,200 Roseville, California, Finance Authority, Hospital Lease Revenue
(concluded) Bonds(Roseville Hospital), VRDN, Series A, 3.10% due 10/01/2014 (a) $ 14,200
36,667 Sacramento, California, Municipal Utility District, Electric
Revenue Bonds, CP, Series I, 3.50% due 4/08/1996 36,667
6,110 San Bernardino County, California, Residential Mortgage Revenue
Refunding Bonds (Ramona Garden), VRDN, Series A, 3.15% due
2/01/2017 (a) 6,110
5,400 San Diego, California, IDR, Refunding (San Diego Gas & Electric),
CP,Series A, 3.20% due 4/11/1996 5,400
5,000 San Diego, California, Local Area Government COP, TRAN, 4.75% due
10/18/1996 5,016
San Diego, California, M/F Housing Authority Revenue Bonds, VRDN (a):
2,330 (Country Hills), Series A, 3.15% due 8/15/2013 2,330
8,035 (La Cima Apartments), Series K, 3.05% due 12/01/2008 8,035
18,000 (Nobel Court Apartments), 3.05% due 12/01/2008 18,000
3,800 San Diego County, California, Regional Transportation Commission
Sales Tax Revenue Bonds, CP, 3.35% due 4/11/1996 3,800
7,085 San Francisco City and County, California, TRAN, 4.75% due 9/19/1996 7,114
12,700 San Jose, California, Redevelopment Agency, Tax Allocation Refunding
Bonds (Merged Area Redevelopment Project), Series A, 7.80% due
8/01/1996 (e) 13,122
2,000 San Jose--Santa Clara, California, Water Financing Authority, Sewer
Revenue Bonds, VRDN, 3.50% due 11/15/2020 (a) 2,000
25,000 San Juan, California, Unified School District, TRAN, 4.50% due
9/26/1996 25,076
10,000 San Leandro, California, M/F Revenue Bonds (Parkside Commons), VRDN,
Series A, 3.15% due 7/15/2018 (a) 10,000
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
Puerto Rico-- Puerto Rico Commonwealth, Government Development Bank Revenue Bonds, CP:
7.2% 10,600 3.45% due 4/03/1996 10,600
8,600 2.90% due 4/04/1996 8,600
22,000 3.15% due 4/08/1996 22,000
24,000 3.20% due 4/08/1996 24,000
27,675 3.30% due 4/17/1996 27,675
9,300 3% due 4/22/1996 9,300
Total Investments (Cost--$1,409,715*)--99.2% 1,409,715
Other Assets Less Liabilities--0.8% 11,425
-----------
Net Assets--100.0% $ 1,421,140
===========
</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, 1996.
(b)MBIA Insured.
(c)FGIC Insured.
(d)AMBAC Insured.
(e)Prerefunded.
*Cost for Federal income tax purposes.
See Notes to Financial Statements.
FS-14
<PAGE> 118
CMA CALIFORNIA MUNICIPAL MONEY FUND
STATEMENT OF ASSETS AND LIABILITIES AS OF MARCH 31, 1996
<TABLE>
<S> <C> <C>
Assets:
Investments, at value (identified cost--$1,409,715,217) (Note 1a) $ 1,409,715,217
Cash 86,334
Receivables:
Interest $ 11,213,093
Securities sold 1,200,000 12,413,093
---------------
Prepaid registration fees and other assets (Note 1d) 53,995
---------------
Total assets 1,422,268,639
---------------
Liabilities:
Payables:
Investment adviser (Note 2) 497,182
Distributor (Note 2) 428,687
Dividends to shareholders (Note 1e) 302 926,171
---------------
Accrued expenses and other liabilities 202,285
---------------
Total liabilities 1,128,456
---------------
Net Assets $ 1,421,140,183
===============
Net Assets Consist of:
Shares of beneficial interest, $0.10 par value, unlimited number of
shares authorized $ 142,208,367
Paid-in capital in excess of par 1,279,873,642
Accumulated realized capital losses--net (Note 4) (941,826)
---------------
Net Assets--Equivalent to $1.00 per share based on 1,422,083,668 shares
of beneficial interest outstanding $ 1,421,140,183
===============
</TABLE>
CMA CALIFORNIA MUNICIPAL MONEY FUND
STATEMENT OF OPERATIONS FOR THE YEAR ENDED MARCH 31, 1996
<TABLE>
<S> <C> <C>
Investment Income (Note 1c):
Interest and amortization of premium and discount earned $ 47,014,483
Expenses:
Investment advisory fees (Note 2) $ 5,570,525
Distribution fees (Note 2) 1,565,337
Transfer agent fees (Note 2) 220,014
Accounting services (Note 2) 119,888
Registration fees (Note 1d) 89,413
Custodian fees 79,956
Printing and shareholder reports 74,364
Professional fees 60,523
Pricing fees 13,774
Trustees' fees and expenses 13,244
Other 221,171
---------------
Total expenses 8,028,209
---------------
Investment income--net 38,986,274
Realized Gain on Investments--Net (Note 1c) 14,898
---------------
Net Increase in Net Assets Resulting from Operations $ 39,001,172
===============
</TABLE>
See Notes to Financial Statements.
FS-15
<PAGE> 119
CMA CALIFORNIA MUNICIPAL MONEY FUND
STATEMENTS OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
For the Year
Ended March 31,
1996 1995
Increase (Decrease) in Net Assets:
<S> <C> <C>
Operations:
Investment income--net $ 38,986,274 $ 31,434,272
Realized gain (loss) on investments--net 14,898 (508,031)
--------------- ---------------
Net increase in net assets resulting from operations 39,001,172 30,926,241
--------------- ---------------
Dividends to Shareholders (Note 1e):
Investment income--net (38,963,124) (31,420,688)
--------------- ---------------
Net decrease in net assets resulting from dividends
to shareholders (38,963,124) (31,420,688)
--------------- ---------------
Beneficial Interest Transactions (Note 3):
Net proceeds from sale of shares 4,504,776,418 4,208,416,998
Net asset value of shares issued to shareholders in reinvestment
of dividends (Note 1e) 38,962,811 31,421,185
--------------- ---------------
4,543,739,229 4,239,838,183
Cost of shares redeemed (4,290,871,513) (4,296,269,504)
--------------- ---------------
Net increase (decrease) in net assets derived from beneficial
interest transactions 252,867,716 (56,431,321)
--------------- ---------------
Net Assets:
Total increase (decrease) in net assets 252,905,764 (56,925,768)
Beginning of year 1,168,234,419 1,225,160,187
--------------- ---------------
End of year* $ 1,421,140,183 $ 1,168,234,419
=============== ===============
*Undistributed investment income-- net (Note 1f) $ -- $ 13,584
=============== ===============
</TABLE>
CMA CALIFORNIA 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: 1996 1995 1994 1993 1992
<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 .03
---------- ---------- ---------- ---------- ----------
Total from investment operations .03 .03 .02 .02 .03
---------- ---------- ---------- ---------- ----------
Less dividends from investment income--net (.03) (.03) (.02) (.02) (.03)
---------- ---------- ---------- ---------- ----------
Net asset value, end of year $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
========== ========== ========== ========== ==========
Total Investment Return 3.16% 2.66% 1.93% 2.25% 3.48%
========== ========== ========== ========== ==========
Ratios to Average Net Assets:
Expenses .64% .63% .62% .63% .63%
========== ========== ========== ========== ==========
Investment income--net 3.11% 2.62% 1.91% 2.22% 3.42%
========== ========== ========== ========== ==========
Supplemental Data:
Net assets, end of year (in thousands) $1,421,140 $1,168,234 $1,225,160 $1,014,800 $1,033,423
========== ========== ========== ========== ==========
</TABLE>
See Notes to Financial Statements.
FS-16
<PAGE> 120
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 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 reclassified to
reflect permanent differences between financial reporting and tax
purposes. Accordingly, current year's permanent book/tax differences
of $36,734 and $1,659 have been reclassified from undistributed net
investment income and paid-in capital in excess of par,
respectively, to accumulated net realized capital losses. 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" or "Adviser"). 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-17
<PAGE> 121
CMA CALIFORNIA MUNICIPAL MONEY FUND
NOTES TO FINANCIAL STATEMENTS (CONCLUDED)
The most restrictive annual expense limitation requires that the
Adviser reimburse the Fund to the extent the Fund's expenses
(excluding interest, taxes, distribution fees, brokerage fees and
commissions, and extraordinary items) exceed in any fiscal year 2.5%
of the Fund's first $30 million of average daily net assets, 2.0% of
the Fund's next $70 million of average daily net assets, and 1.5% of
the average daily net assets in excess thereof. No fee payment will
be made to the Adviser during the year which will cause such
expenses to exceed the pro rata expense limitation at the time of
such payment.
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 less 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, MLPF&S, 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, 1996, the Fund had a net capital loss carryforward of
approximately $942,000, of which $466,000 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> 122
- --------------------------------------------------------------------------------
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, 1996, the related statements
of operations for the year then ended and changes in net assets for each of the
years in the two-year period then ended, and the financial highlights for each
of the years in the four-year period then ended and for the period April 29,
1991 (commencement of operations) to March 31, 1992. 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, 1996 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,
1996, 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
April 30, 1996
FS-19
<PAGE> 123
<TABLE>
<CAPTION>
CMA CONNECTICUT MUNICIPAL MONEY FUND
SCHEDULE OF INVESTMENTS AS OF MARCH 31, 1996 (IN THOUSANDS)
Face Value
State Amount Issue (Note 1a)
<S> <C> <S> <C>
Connecticut-- $15,500 Connecticut State Development Authority, Health Care Revenue Bonds
84.2% (Independent Living Project), VRDN, 3.30% due 7/01/2015 (a) $ 15,500
5,420 Connecticut State Development Authority, IDA (Sealectro Corporation Project),
3.80% due 12/01/1997 5,420
Connecticut State Development Authority, PCR, Refunding, VRDN (a):
4,900 (Connecticut Light & Power Co. Project), AMT, Series B, 3.45% due 9/01/2028 4,900
10,600 (Connecticut Light & Power Co. Project), Series A, 3.30% due 9/01/2028 10,600
10,800 (Western Massachusetts Electric Co.), Series A, 3.25% due 9/01/2028 10,800
6,000 Connecticut State Development Authority, Water Facility Revenue Bonds
(Bridgeport Hydraulic Co. Project), VRDN, AMT, 3.05% due 4/01/2035 (a) 6,000
Connecticut State Economic Recovery Notes:
1,000 Refunding, UT, 4.25% due 12/15/1996 1,005
3,000 Series A, 5.50% due 6/15/1996 (d) 3,013
8,100 VRDN, Series B, 3.50% due 6/01/1996 (a) 8,100
8,000 Connecticut State GO, Series B, 4.50% due 10/01/1996 8,026
Connecticut State Health and Educational Facilities Authority Revenue Bonds:
3,530 (Yale-New Haven Hospital), Series E, 4% due 6/01/1996 (b) 3,530
5,075 (Yale University), CP, Series L, 3.15% due 4/09/1996 5,075
5,300 (Yale University), CP, Series M, 3.15% due 4/09/1996 5,300
5,800 (Yale University), CP, Series N, 3.15% due 4/09/1996 5,800
1,950 (Yale University), CP, Series O, 3.15% due 4/09/1996 1,950
5,000 (Yale University), CP, Series P, 3.15% due 4/09/1996 5,000
Connecticut State HFA (Housing Mortgage Finance Project), AMT:
9,865 CP, Series D, 3.35% due 4/26/1996 9,865
8,090 CP, Series D, 3.30% due 5/01/1996 8,090
6,000 Sub-Series E-2, 3.85% due 6/10/1996 6,000
12,000 Connecticut State Municipal Electric Energy Cooperative Power Supply System
Revenue Bonds, CP, Series A, 3.05% due 5/01/1996 12,000
Connecticut State Special Assessment Unemployment Compensation, Advanced
Fund Revenue Bonds (Connecticut Unemployment):
14,800 Series C, 3.90% due 7/01/1996 (b) 14,800
47,000 VRDN, Series B, 3.60% due 11/01/2001 (a) 47,000
15,500 Connecticut State Special Tax Obligation Revenue Bonds (Transportation
Infrastructure), VRDN, Second Lien, Series 1, 2.70% due 12/01/2010 (a) 15,500
8,000 Eagle Tax Exempt Trust, VRDN, 3.47% due 8/15/2012 (a) 8,000
</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
UT Unlimited Tax
VRDN Variable Rate Demand Notes
FS-20
<PAGE> 124
<TABLE>
<CAPTION>
CMA CONNECTICUT MUNICIPAL MONEY FUND
SCHEDULE OF INVESTMENTS AS OF MARCH 31, 1996 (CONCLUDED) (IN THOUSANDS)
Face Value
State Amount Issue (Note 1a)
<S> <C> <S> <C>
Connecticut $10,000 East Haven, Connecticut, BAN, UT, 4.25% due 9/04/1996 $ 10,020
(concluded) 1,000 Enfield, Connecticut, UT, 5.25% due 5/15/1996 1,002
4,700 Meriden, Connecticut, BAN, UT, 3.25% due 8/14/1996 4,702
2,000 New Britain, Connecticut, BAN, 3.70% due 4/15/1996 2,000
1,150 Norwalk, Connecticut, Refunding, UT, Second Series, 3.625% due 1/15/1997 1,153
6,000 Stamford, Connecticut, BAN, UT, 3.25% due 10/15/1996 6,002
7,500 Stamford, Connecticut, Housing Authority Revenue Bonds (Morgan Street
Project), VRDN, AMT, 3.30% due 8/01/2024 (a) 7,500
1,550 Stonington, Connecticut, BAN, UT, 3.25% due 6/19/1996 1,551
1,735 Trumbull, Connecticut, BAN, UT, 3.25% due 6/05/1996 1,736
4,000 West Hartford, Connecticut, BAN, UT, 3.35% due 7/18/1996 4,001
3,000 Windsor Locks, Connecticut, BAN, 3.75% due 5/15/1996 (e) 3,001
Puerto Rico-- Puerto Rico Commonwealth, Government Development Bank Revenue Bonds, CP:
15.2% 6,500 3% due 4/09/1996 6,500
2,500 3.15% due 4/23/1996 2,500
6,000 3.25% due 4/25/1996 6,000
5,100 Puerto Rico Commonwealth, Highway and Transportation Authority, Highway
Revenue Bonds, VRDN, Series X, 2.80% due 7/01/1999 (a) 5,100
10,500 Puerto Rico Housing Finance Corporation, Medical Revenue Bonds, 3.40% due
10/01/2011 (c) 10,500
Puerto Rico Industrial, Medical and Environmental Pollution Control Facilities,
Financing Authority Revenue Bonds (Ana G. Mendez Educational Project), CP:
6,900 3.15% due 4/26/1996 6,900
4,000 3.20% due 5/01/1996 4,000
Puerto Rico Industrial, Tourist, Educational, Medical and Environmental Control
Facilities Financing Authority, CP, Series A:
4,700 3.30% due 4/25/1996 4,700
1,500 3% due 5/01/1996 1,500
Total Investments (Cost--$311,642*)--99.4% 311,642
Other Assets Less Liabilities--0.6% 1,720
--------
Net Assets--100.0% $313,362
========
<FN>
(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, 1996.
(b)FGIC Insured.
(c)AMBAC Insured.
(d)Escrowed to Maturity.
(e)Bank Qualified.
*Cost for Federal income tax purposes.
</TABLE>
See Notes to Financial Statements.
FS-21
<PAGE> 125
<TABLE>
<CAPTION>
CMA CONNECTICUT MUNICIPAL MONEY FUND
STATEMENT OF ASSETS AND LIABILITIES AS OF MARCH 31, 1996
<S> <C> <C>
Assets:
Investments, at value (identified cost--$311,642,146) (Note 1a) $ 311,642,146
Cash 44,737
Receivables:
Interest $ 1,635,552
Securities sold 300,216 1,935,768
------------
Deferred organization expenses (Note 1d) 523
Prepaid registration fees and other assets (Note 1d) 31,608
------------
Total assets 313,654,782
------------
Liabilities:
Payables:
Investment adviser (Note 2) 122,685
Distributor (Note 2) 94,191
Dividends to shareholders (Note 1e) 34 216,910
------------
Accrued expenses and other liabilities 75,414
------------
Total liabilities 292,324
------------
Net Assets $313,362,458
============
Net Assets Consist of:
Shares of beneficial interest, $0.10 par value, unlimited number of shares authorized $ 31,349,761
Paid-in capital in excess of par 282,147,848
Undistributed investment income--net 1,002
Accumulated realized capital losses--net (Note 4) (136,153)
------------
Net Assets--Equivalent to $1.00 per share based on 313,497,610 shares of beneficial
interest outstanding $313,362,458
============
</TABLE>
See Notes to Financial Statements.
FS-22
<PAGE> 126
<TABLE>
<CAPTION>
CMA CONNECTICUT MUNICIPAL MONEY FUND
STATEMENT OF OPERATIONS FOR THE YEAR ENDED MARCH 31, 1996
<S> <C> <C>
Investment Income (Note 1c):
Interest and amortization of premium and discount earned $ 10,288,254
Expenses:
Investment advisory fees (Note 2) $ 1,393,151
Distribution fees (Note 2) 347,816
Registration fees (Note 1d) 51,630
Professional fees 49,964
Accounting services (Note 2) 49,754
Transfer agent fees (Note 2) 48,419
Custodian fees 25,689
Printing and shareholder reports 22,757
Amortization of organization expenses (Note 1d) 7,526
Pricing fees 6,022
Trustees' fees and expenses 3,042
Other 4,192
------------
Total expenses 2,009,962
------------
Investment income--net 8,278,292
Realized Loss on Investments--Net (Note 1c) (320)
------------
Net Increase in Net Assets Resulting from Operations $ 8,277,972
============
</TABLE>
See Notes to Financial Statements.
FS-23
<PAGE> 127
<TABLE>
<CAPTION>
CMA CONNECTICUT MUNICIPAL MONEY FUND
STATEMENTS OF CHANGES IN NET ASSETS
For the Year
Ended March 31,
Increase (Decrease) in Net Assets: 1996 1995
<S> <C> <C>
Operations:
Investment income--net $ 8,278,292 $ 6,517,952
Realized loss on investments--net (320) (31,149)
------------- -------------
Net increase in net assets resulting from operations 8,277,972 6,486,803
------------- -------------
Dividends to Shareholders (Note 1e):
Investment income--net (8,275,678) (6,504,917)
------------- -------------
Net decrease in net assets resulting from dividends to shareholders (8,275,678) (6,504,917)
------------- -------------
Beneficial Interest Transactions (Note 3):
Net proceeds from sale of shares 1,135,984,616 944,440,136
Net asset value of shares issued to shareholders in reinvestment of dividends
(Note 1e) 8,277,928 6,504,738
------------- -------------
1,144,262,544 950,944,874
Cost of shares redeemed (1,091,300,656) (940,566,013)
------------- -------------
Net increase in net assets derived from beneficial interest transactions 52,961,888 10,378,861
------------- -------------
Net Assets:
Total increase in net assets 52,964,182 10,360,747
Beginning of year 260,398,276 250,037,529
------------- -------------
End of year* $ 313,362,458 $ 260,398,276
============= =============
<FN>
*Undistributed investment income--net (Note 1f) $ 1,002 $ 9,081
============= =============
</TABLE>
See Notes to Financial Statements.
FS-24
<PAGE> 128
<TABLE>
<CAPTION>
CMA CONNECTICUT MUNICIPAL MONEY FUND
FINANCIAL HIGHLIGHTS
For the
Period
The following per share data and ratios have been derived April 29,
from information provided in the financial statements. 1991++ to
For the Year Ended March 31, March 31,
Increase (Decrease) in Net Asset Value: 1996 1995 1994 1993 1992
<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 .02 .02 .03
-------- -------- -------- -------- --------
Total from investment operations .03 .03 .02 .02 .03
-------- -------- -------- -------- --------
Less dividends from investment income--net (.03) (.03) (.02) (.02) (.03)
-------- -------- -------- -------- --------
Net asset value, end of period $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
======== ======== ======== ======== ========
Total Investment Return 3.02% 2.54% 1.77% 2.20% 3.56%*
======== ======== ======== ======== ========
Ratios to Average Net Assets:
Expenses, net of reimbursement .72% .71% .70% .63% .41%*
======== ======== ======== ======== ========
Expenses .72% .71% .70% .73% .81%*
======== ======== ======== ======== ========
Investment income--net 2.97% 2.53% 1.76% 2.17% 3.46%*
======== ======== ======== ======== ========
Supplemental Data:
Net assets, end of period (in thousands) $313,362 $260,398 $250,038 $231,431 $197,895
======== ======== ======== ======== ========
<FN>
*Annualized.
++Commencement of Operations.
</TABLE>
See Notes to Financial Statements.
FS-25
<PAGE> 129
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 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 classified to
reflect permanent differences between financial reporting and tax
purposes. Accordingly, current year's permanent book/tax differences
of $10,693 have been reclassified from undistributed net investment
income to accumulated net realized capital losses. 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" or "Adviser"). 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-26
<PAGE> 130
CMA CONNECTICUT MUNICIPAL MONEY FUND
NOTES TO FINANCIAL STATEMENTS (CONCLUDED)
The most restrictive annual expense limitation requires that the
Adviser reimburse the Fund to the extent the Fund's expenses
(excluding interest, taxes, distribution fees, brokerage fees and
commissions, and extraordinary items) exceed in any fiscal year 2.5%
of the Fund's first $30 million of average daily net assets, 2.0% of
the Fund's next $70 million of average daily net assets, and 1.5% of
the average daily net assets in excess thereof. No fee payment will
be made to the Adviser during the year which will cause such
expenses to exceed the pro rata expense limitation at the time of
such payment.
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, MLPF&S, 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, 1996, the Fund had a net capital loss carryforward of
approximately $136,000, of which $69,000 expires in 2000, $30,000
expires in 2001, $10,000 expires in 2002 and $27,000 expires in
2003. This amount will be available to offset like amounts of any
future taxable gains.
FS-27
<PAGE> 131
- --------------------------------------------------------------------------------
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, 1996, the related statements
of operations for the year then ended and changes in net assets for each of the
years in the two-year period then ended, and the financial highlights for each
of the years in the 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, 1996 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,
1996, 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
April 30, 1996
FS-28
<PAGE> 132
<TABLE>
<CAPTION>
CMA MASSACHUSETTS MUNICIPAL MONEY FUND
SCHEDULE OF INVESTMENTS AS OF MARCH 31, 1996 (IN THOUSANDS)
Face Value
State Amount Issue (Note 1a)
<S> <C> <S> <C>
Massachusetts-- $ 400 Agawam, Massachusetts, BAN, 4% due 7/03/1996 (d) $ 401
97.2% 3,046 Bellingham, Massachusetts, BAN, 4% due 12/17/1996 (d) 3,052
348 Billerica, Massachusetts, SAAN, 4% due 7/23/1996 (d) 349
600 Boston, Massachusetts, Water and Sewer Commission Revenue Bonds,
VRDN,Series A, 3.10% due 11/01/2015 (a) 600
4,300 Brockton, Massachusetts, RAN, 4.10% due 6/28/1996 4,308
2,000 Clipper Tax Exempt Trust 1994-2, Massachusetts, VRDN, Class A,
3.41% due 10/17/2002 (a) 2,000
Danvers, Massachusetts, BAN (d):
1,295 4% due 7/19/1996 1,296
500 3.98% due 8/23/1996 501
Dracut, Massachusetts:
1,000 BAN, 3.75% due 6/28/1996 1,000
2,700 RAN, 3.70% due 6/28/1996 2,702
6,000 East Bridgewater, Massachusetts, BAN, UT, 3.80% due 12/20/1996 6,004
4,000 Fitchburg, Massachusetts, Industrial Development Financing Authority
Revenue Bonds (Netstal Machinery Project), VRDN, AMT, 3.45% due
12/23/2007 (a) 4,000
2,886 Hopkinton, Massachusetts, BAN, 4% due 7/05/1996 (d) 2,888
6,750 Lynn, Massachusetts, Water and Sewer Commission, BAN, Series A, 4.50%
due 10/11/1996 6,761
Massachusetts State GO, VRDN (a):
9,700 3.47% due 2/01/2011 9,700
2,000 Refunding, Series A, 3.48% due 2/01/2006 (b) 2,000
Massachusetts State Health and Educational Facilities Authority
Revenue Bonds:
9,000 (Boston University), CP, Series H, 3.20% due 5/16/1996 9,000
700 (Capital Asset Program), VRDN, Series A, 3.05% due 1/01/2001 (a) 700
15,900 (Capital Asset Program), VRDN, Series D, 3.30% due 1/01/2035 (a)
(c) 15,900
3,680 (Newbury College), VRDN, Series A, 3.15% due 11/01/2018 (a) 3,680
5,900 (Williams College), VRDN, Issue E, 3% due 8/01/2014 (a) 5,900
7,500 Massachusetts State HFA, M/F Housing Project, Refunding, VRDN,
Series A, 3.20% due 1/15/2010 (a) (e) 7,500
8,000 Massachusetts State HFA, S/F Housing Revenue Bonds, AMT, Series 34,
4.15% due 6/01/1996 8,000
1,300 Massachusetts State Industrial Finance Agency, Cultural, Health and
Educational Revenue Bonds (Berkshire Project), VRDN, 3.15% due
9/01/2020 (a) 1,300
</TABLE>
Portfolio Abbreviations for CMA Massachusetts Municipal Money Fund
<TABLE>
<S> <C>
AMT Alternative Minimum Tax (subject to)
BAN Bond Anticipation Notes
CP Commercial Paper
GO General Obligation Bonds
HFA Housing Finance Agency
M/F Multi-Family
PCR Pollution Control Revenue Bonds
RAN Revenue Anticipation Notes
SAAN Student Aid Anticipation Notes
S/F Single-Family
UT Unlimited Tax
VRDN Variable Rate Demand Notes
</TABLE>
FS-29
<PAGE> 133
<TABLE>
<CAPTION>
CMA MASSACHUSETTS MUNICIPAL MONEY FUND
SCHEDULE OF INVESTMENTS AS OF MARCH 31, 1996 (CONCLUDED) (IN THOUSANDS)
Face Value
State Amount Issue (Note 1a)
<S> <C> <S> <C>
Massachusetts $ 3,500 Massachusetts State Industrial Finance Agency, Health Care Facility
(concluded) Revenue Bonds (Beverly Enterprises, Inc.), VRDN, 3.50% due
4/01/2009 (a) $ 3,500
Massachusetts State Industrial Finance Agency, Industrial Revenue
Bonds, VRDN (a):
4,400 (Foilmark Manufacturing), AMT, Series A, 3.20% due 6/01/2010 4,400
1,700 Refunding (Easy Day Reality Project), Series A, 3.10% due 7/01/1996 1,700
1,500 (ZBR Limited Partnership), AMT, 3.45% due 4/15/2015 1,500
4,000 Massachusetts State Industrial Finance Agency, PCR (Holyoke
Water & Power Company Project), VRDN, AMT, 3.45% due 12/01/2020 (a) 4,000
Massachusetts State Industrial Finance Agency, PCR, Refunding
(New England Power Company Project), CP:
3,000 3.15% due 4/08/1996 3,000
4,800 3.20% due 5/09/1996 4,800
Massachusetts State Industrial Finance Agency Revenue Bonds, VRDN (a):
5,000 (Edgewood Retirement Community Project), Series C, 3.40%
due 11/15/2025 5,000
700 (Hockomock YMCA), Series A, 3.20% due 6/01/2011 700
7,000 (Whitehead Institute), 3.45% due 7/01/2026 7,000
4,500 (Williston Northampton Project), Series B, 3.20% due 4/01/2024 4,500
1,500 Massachusetts State Industrial Finance Agency, Solid Waste Disposal
Revenue Bonds (E.L. Harvey and Sons), VRDN, AMT, 3.45% due
1/01/2011 (a) 1,500
Massachusetts State Port Authority, Revenue Refunding Bonds,
VRDN (a):
6,900 AMT, Series B, 3.35% due 7/01/2018 6,900
1,700 Series A, 3.25% due 7/01/2015 1,700
3,000 Massachusetts State Water Resources Authority, CP, 3.60% due
5/13/1996 3,000
New Bedford, Massachusetts:
3,400 BAN, 4.10% due 7/19/1996 3,407
1,600 RAN, 4% due 6/28/1996 1,602
North Andover, Massachusetts, BAN:
2,150 4.18% due 9/11/1996 2,152
4,900 UT, 4% due 1/10/1997 4,909
7,400 Springfield, Massachusetts, BAN, 3.75% due 7/12/1996 7,412
2,700 Stoughton, Massachusetts, BAN, 4.20% due 8/30/1996 (d) 2,703
2,824 Webster, Massachusetts, SAAN, 3.80% due 5/31/1996 (d) 2,825
6,500 Worcester, Massachusetts, BAN, Lot A, 4.20% due 8/29/1996 6,504
Total Investments (Cost--$184,256*)--97.2% 184,256
Other Assets Less Liabilities--2.8% 5,226
--------
Net Assets--100.0% $189,482
========
<FN>
(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, 1996.
(b)AMBAC Insured.
(c)MBIA Insured.
(d)Bank Qualified.
(e)FNMA Collateralized.
*Cost for Federal income tax purposes.
</TABLE>
See Notes to Financial Statements.
FS-30
<PAGE> 134
<TABLE>
<CAPTION>
CMA MASSACHUSETTS MUNICIPAL MONEY FUND
STATEMENT OF ASSETS AND LIABILITIES AS OF MARCH 31, 1996
<S> <C> <C>
Assets:
Investments, at value (identified cost--$184,256,028) (Note 1a) $ 184,256,028
Cash 112,108
Receivables:
Securities sold $ 4,000,000
Interest 1,276,054 5,276,054
-------------
Prepaid registration fees and other assets (Note 1d) 30,773
-------------
Total assets 189,674,963
-------------
Liabilities:
Payables:
Investment adviser (Note 2) 75,622
Distributor (Note 2) 58,270
Dividends to shareholders (Note 1e) 78 133,970
-------------
Accrued expenses and other liabilities 58,741
-------------
Total liabilities 192,711
-------------
Net Assets $ 189,482,252
=============
Net Assets Consist of:
Shares of beneficial interest, $0.10 par value, unlimited number of shares
authorized $ 18,950,070
Paid-in capital in excess of par 170,550,533
Accumulated realized capital losses--net (Note 4) (18,351)
-------------
Net Assets--Equivalent to $1.00 per share based on 189,500,702 shares of
beneficial interest outstanding $ 189,482,252
=============
</TABLE>
See Notes to Financial Statements.
FS-31
<PAGE> 135
<TABLE>
<CAPTION>
CMA MASSACHUSETTS MUNICIPAL MONEY FUND
STATEMENT OF OPERATIONS FOR THE YEAR ENDED MARCH 31, 1996
<S> <C> <C>
Investment Income (Note 1c):
Interest and amortization of premium and discount earned $ 6,492,108
Expenses:
Investment advisory fees (Note 2) $ 864,244
Distribution fees (Note 2) 215,451
Professional fees 55,989
Transfer agent fees (Note 2) 51,674
Accounting services (Note 2) 36,998
Registration fees (Note 1d) 32,900
Printing and shareholder reports 25,766
Custodian fees 14,624
Pricing fees 5,362
Amortization of organization expenses (Note 1d) 3,282
Trustees' fees and expenses 1,802
Other 3,295
-------------
Total expenses 1,311,387
-------------
Investment income--net 5,180,721
Realized Loss on Investments--Net (Note 1c) (6,750)
-------------
Net Increase in Net Assets Resulting from Operations $ 5,173,971
=============
</TABLE>
<TABLE>
<CAPTION>
CMA MASSACHUSETTS MUNICIPAL MONEY FUND
STATEMENTS OF CHANGES IN NET ASSETS
For the Year Ended March 31,
Increase (Decrease) in Net Assets: 1996 1995
<S> <C> <C>
Operations:
Investment income--net $ 5,180,721 $ 3,680,857
Realized loss on investments--net (6,750) (622)
------------- -------------
Net increase in net assets resulting from operations 5,173,971 3,680,235
------------- -------------
Dividends to Shareholders (Note 1e):
Investment income--net (5,180,721) (3,680,587)
------------- -------------
Net decrease in net assets resulting from dividends to shareholders (5,180,721) (3,680,587)
------------- -------------
Beneficial Interest Transactions (Note 3):
Net proceeds from sale of shares 659,752,882 566,759,318
Net asset value of shares issued to shareholders in reinvestment of dividends
(Note 1e) 5,180,565 3,680,721
------------- -------------
664,933,447 570,440,039
Cost of shares redeemed (636,520,287) (560,168,139)
------------- -------------
Net increase in net assets derived from beneficial interest transactions 28,413,160 10,271,900
------------- -------------
Net Assets:
Total increase in net assets 28,406,410 10,271,548
Beginning of year 161,075,842 150,804,294
------------- -------------
End of year $ 189,482,252 $ 161,075,842
============= =============
</TABLE>
See Notes to Financial Statements.
FS-32
<PAGE> 136
<TABLE>
<CAPTION>
CMA MASSACHUSETTS 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: 1996 1995 1994 1993 1992
<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 .02 .02 .02 .04
-------- -------- -------- -------- --------
Total from investment operations .03 .02 .02 .02 .04
-------- -------- -------- -------- --------
Less dividends from investment income--net (.03) (.02) (.02) (.02) (.04)
-------- -------- -------- -------- --------
Net asset value, end of year $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
======== ======== ======== ======== ========
Total Investment Return 3.05% 2.46% 1.74% 2.20% 3.66%
======== ======== ======== ======== ========
Ratios to Average Net Assets:
Expenses, net of reimbursement .76% .76% .78% .78% .85%
======== ======== ======== ======== ========
Expenses .76% .76% .78% .78% .87%
======== ======== ======== ======== ========
Investment income--net 3.00% 2.43% 1.72% 2.15% 3.56%
======== ======== ======== ======== ========
Supplemental Data:
Net assets, end of year (in thousands) $189,482 $161,076 $150,804 $132,302 $116,340
======== ======== ======== ======== ========
</TABLE>
See Notes to Financial Statements.
FS-33
<PAGE> 137
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) 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 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 reclassified to
reflect permanent differences between financial reporting and tax
purposes. Accordingly, current year's permanent book/tax differences
of $99 have been reclassified from paid-in capital in excess of par
to accumulated net realized capital losses. 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" or "Adviser"). The general partner of
FAM is Princeton Services, Inc. ("PSI"), an indirect wholly-
FS-34
<PAGE> 138
CMA MASSACHUSETTS MUNICIPAL MONEY FUND
NOTES TO FINANCIAL STATEMENTS (CONCLUDED)
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.
The most restrictive annual expense limitation requires that the
Adviser reimburse the Fund to the extent the Fund's expenses
(excluding interest, taxes, distribution fees, brokerage fees and
commissions, and extraordinary items) exceed in any fiscal year 2.5%
of the Fund's first $30 million of average daily net assets, 2.0% of
the Fund's next $70 million of average daily net assets, and 1.5% of
the average daily net assets in excess thereof. No fee payment will
be made to the Adviser during the year which will cause such
expenses to exceed the pro rata expense limitation at the time of
such payment.
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, MLPF&S, 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, 1996, the Fund had a net capital loss carryforward of
approximately $18,000, of which $4,000 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-35
<PAGE> 139
- --------------------------------------------------------------------------------
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, 1996, the related statements
of operations for the year then ended and changes in net assets for each of the
years in the two-year period then ended, and the financial highlights for each
of the years in the four-year period then ended and for the period April 29,
1991 (commencement of operations) to March 31, 1992. 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, 1996 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 Michigan
Municipal Money Fund of CMA Multi-State Municipal Series Trust as of March 31,
1996, 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
April 30, 1996
FS-36
<PAGE> 140
<TABLE>
<CAPTION>
CMA MICHIGAN MUNICIPAL MONEY FUND
SCHEDULE OF INVESTMENTS AS OF MARCH 31, 1996 (IN THOUSANDS)
Face Value
State Amount Issue (Note 1a)
<S> <C> <C> <C>
Michigan-- $ 1,025 Bedford Township, Michigan, Economic Development Corp. Revenue Bonds
97.9% (Form-Tech Steel Inc. Project), VRDN, 3.65% due 3/01/2010 (a) $ 1,025
2,100 Cornell Township, Michigan, Economic Development Corp., IDR, CP,
Refunding (Mead-Escambia Paper Co.), 3.20% due 4/17/1996 2,100
Delta County, Michigan, Economic Development Corp., Environmental
Improvement Revenue Refunding Bonds (Mead-Escambia Paper Co.):
700 CP, Series C, 3.25% due 12/01/2023 700
2,200 VRDN, Series D, 3.40% due 12/01/2023 (a) 2,200
245 Delta Township, Michigan, Economic Development Corp., IDR, Refunding
(Schottenstein Stores), VRDN, 3.45% due 12/01/1997 (a) 245
19,000 Detroit, Michigan, City School District, State School Aid Notes,
4.50% due 5/01/1996 19,011
1,215 Farmington Hills, Michigan, Economic Development Corp., Limited
Obligation Revenue Refunding Bonds (Brookfield Building Association),
VRDN, 3.55% due 11/01/2010 (a) 1,215
2,800 Flint, Michigan, Economic Development Corporation, Economic Development
Revenue Bonds (Plastic Research Corp.), VRDN, 3.60% due 9/01/2004 (a) 2,800
3,400 Genesee County, Michigan, Economic Development Corporation, Limited
Obligation, Economic Development Revenue Bonds (MM&E Inc. Project),
VRDN, 3.60% due 7/01/2005 (a) 3,400
2,300 Georgetown Charter Township, Michigan, IDR, Limited Obligation
(J&F Steel Corp.), VRDN, AMT, 3.45% due 2/01/2009 (a) 2,300
600 Grand Rapids, Michigan, Economic Development Corp., Limited Obligation
Revenue Refunding Bonds (Calder), VRDN, Series A, 3.35% due
10/01/2011 (a) 600
1,000 Grand Rapids, Michigan, Economic Development Corp. Revenue Bonds
(Amway/Grand Plaza Hotel, Facility #1), VRDN, 3.35% due 12/01/2006 (a) 1,000
2,810 Grand Rapids, Michigan, IDR, Refunding (Etheridge Company Project),
VRDN, AMT, 3.45% due 7/01/2009 (a) 2,810
Grand Rapids, Michigan, Water Supply System, Revenue Refunding Bonds:
1,200 7.75% due 1/01/1997 (b) 1,258
800 VRDN, 3.50% due 1/01/2020 (a)(d) 800
1,032 Hesperia, Michigan, Community Schools, State Aid Notes, 4.20% due
5/30/1996 (e) 1,032
7,500 Kalamazoo, Michigan, City School District, State Aid Notes, 4.50%
due 4/01/1996 7,501
4,500 Kalamazoo, Michigan, TAN, 3.75% due 12/31/1996 4,517
1,250 Lakeview, Michigan, Public School District, Macomb County State
Aid Notes, 4.20% due 6/25/1996 (e) 1,251
</TABLE>
Portfolio Abbreviations for CMA Michigan Municipal Money Fund
AMT Alternative Minimum Tax (subject to)
CP Commercial Paper
IDR Industrial Development Revenue Bonds
M/F Multi-Family
PCR Pollution Control Revenue Bonds
S/F Single-Family
TAN Tax Anticipation Notes
UT Unlimited Tax
VRDN Variable Rate Demand Notes
FS-37
<PAGE> 141
<TABLE>
<CAPTION>
CMA MICHIGAN MUNICIPAL MONEY FUND
SCHEDULE OF INVESTMENTS AS OF MARCH 31, 1996 (CONTINUED) (IN THOUSANDS)
Face Value
State Amount Issue (Note 1a)
<S> <C> <C> <C>
Michigan $ 1,240 Lenawee County, Michigan, Economic Development Corporation, Limited
(continued) Obligation Revenue Bonds (The Wyatt Project), VRDN, 3.65%
due 5/01/2002 (a) $ 1,240
850 Manchester, Michigan, Community Schools, State Aid Notes, 4.05% due
6/28/1996 (e) 850
1,300 Marshall, Michigan, Public Schools District, State Aid Notes, 3.95%
due 6/30/1996 (e) 1,300
1,350 Melvindale, Michigan, Economic Development Corporation, Limited
Obligation Revenue Refunding Bonds (North American Steel Project),
VRDN, 3.30% due 6/01/1998 (a) 1,350
12,005 Michigan Higher Education Student Loan Authority Revenue Bonds, VRDN,
AMT, Series XII-D, 3.85% due 10/01/2015 (a)(c) 12,005
4,285 Michigan Municipal Bond Authority Revenue Notes, Series C, 4.50% due
9/06/1996 4,295
2,860 Michigan State Building Authority Revenue Bonds (Facilities Program I),
4% due 10/01/1996 2,872
250 Michigan State Building Authority, Revenue Refunding Bonds, Series I,
3.75% due 10/01/1996 250
5,000 Michigan State, CP, 3.50% due 5/07/1996 5,000
Michigan State Housing Development Authority, Limited Obligation
Revenue Bonds:
4,000 (Bloomfield), CP, 3.60% due 7/15/1996 4,000
1,100 (Laurel Valley), VRDN, 3.30% due 12/01/2007 (a) 1,100
4,000 (Sandcreek Apartments), VRDN, AMT, 3.60% due 1/01/2029 (a) 4,000
Michigan State Housing Development Authority, M/F Housing Revenue
Bonds, CP, AMT, Series A:
12,345 3.20% due 4/17/1996 12,345
12,345 3.20% due 4/19/1996 12,345
5,225 3.15% due 4/24/1996 5,225
2,135 3.35% due 5/08/1996 2,135
10,500 3.35% due 5/10/1996 10,500
7,245 Michigan State Housing Development Authority, S/F Mortgage Revenue
Bonds, AMT, Series B, 3.50% due 6/01/1996 7,245
7,000 Michigan State Notes, CP, UT, 4% due 9/30/1996 7,022
5,555 Michigan State, Refunding, UT, Series 95, 6.50% due 12/01/1996 5,676
Michigan State Strategic Fund, Limited Obligation Revenue Bonds, VRDN (a):
1,000 (Akemi Inc. Project), AMT, 3.50% due 3/01/2021 1,000
1,500 (BCM&N) Project, AMT, 3.45% due 6/01/2020 1,500
3,200 (Baron Drawn Steel), IDR, AMT, 3.65% due 12/01/2006 3,200
2,500 (Cincinnati Milacron Inc. Project), AMT, 3.60% due 4/15/2005 2,500
3,300 (Detroit Edison Co., Reserve 1), 2.70% due 9/01/2030 3,300
5,000 (Dott Industries Inc. Project), AMT, 3.60% due 6/01/2001 5,000
1,500 (Hercules Drawn Steel Project), AMT, 3.65% due 8/01/2006 1,500
2,000 (Ingersoll CM System Inc. Project), AMT, 3.60% due 12/01/2011 2,000
345 (Kay Screen Printing Inc.), AMT, Series A, 3.75% due 1/01/1999 345
4,000 (Methodist Children's Home), 3.40% due 8/01/2015 4,000
3,000 (Midbrook Products Inc., Project), AMT, 3.45% due 10/01/2014 3,000
1,635 (Perfection Steel Inc. Project), AMT, 3.50% due 3/01/2002 1,635
4,850 Refunding (Lake Shore Inc.), AMT, 3.65% due 11/01/2019 4,850
570 Refunding (Park Village Pines Project), 3.30% due 5/01/2006 570
1,860 (Tom Miller Inc. Project), AMT, 3.45% due 12/01/2009 1,860
9,000 (United Waste Systems Inc. Project), AMT, 3.50% due 4/01/2010 9,000
3,000 (Universal Tube, Inc. Project), AMT, 3.60% due 8/01/2011 3,000
</TABLE>
FS-38
<PAGE> 142
<TABLE>
<CAPTION>
CMA MICHIGAN MUNICIPAL MONEY FUND
SCHEDULE OF INVESTMENTS AS OF MARCH 31, 1996 (CONCLUDED) (IN THOUSANDS)
Face Value
State Amount Issue (Note 1a)
<S> <C> <C> <C>
Michigan $ 8,300 Michigan State Strategic Fund, PCR, Refunding (Consumers Power
(concluded) Project), VRDN, Series A, 3.45% due 4/15/2018 (a) $ 8,300
4,000 Monroe County, Michigan, Economic Development Corp., Limited
Obligation Revenue Refunding Bonds (Detroit Edison Co.), VRDN, Series
CC, 3.25% due 10/01/2024 (a) 4,000
4,200 Monroe County, Michigan, Intermediate School, Special Education,
TAN, 3.75% due 4/03/1996 (e) 4,200
2,000 Niles, Michigan, Community Schools, State Aid Notes, 3.95% due
6/28/1996 (e) 2,000
195 Sterling Heights, Michigan, Economic Development Corp., Limited
Obligation Revenue Refunding Bonds (Sterling Shopping Center), VRDN,
3.50% due 12/01/2010 (a) 195
University of Michigan, University Hospital Revenue Bonds, VRDN,
Series A (a):
5,200 3.60% due 12/01/2027 5,200
4,800 (Medical Service Plan), 3.60% due 12/01/2027 4,800
2,100 Refunding, 3.60% due 12/01/2019 2,100
950 Watervliet, Michigan, Public Schools, State Aid Anticipation Notes,
4.25% due 6/30/1996 (e) 950
4,900 Wayne County, Michigan, Regional Educational Service Agency, State
Aid Notes, 4.13% due 5/30/1996 4,901
1,000 Wyoming, Michigan, Economic Development Corp., Revenue Refunding Bonds
(Family One Inc. Project), VRDN, AMT, 3.45% due 11/01/2019 (a) 1,000
Puerto Rico-- 3,000 Puerto Rico Commonwealth, Government Development Bank, CP, 3.20% due
1.2% 4/24/1996 3,000
Total Investments (Cost--$245,426)--99.1% 245,426
Other Assets Less Liabilities--0.9% 2,118
--------
Net Assets--100.0% $247,544
========
</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, 1996.
(b)Prerefunded.
(c)AMBAC Insured.
(d)FGIC Insured.
(e)Bank Qualified.
See Notes to Financial Statements.
FS-39
<PAGE> 143
<TABLE>
<CAPTION>
CMA MICHIGAN MUNICIPAL MONEY FUND
STATEMENT OF ASSETS AND LIABILITIES AS OF MARCH 31, 1996
<S> <C> <C>
Assets:
Investments, at value (identified cost--$245,425,659*) (Note 1a) $ 245,425,659
Cash 90,881
Receivables:
Interest $ 1,929,353
Securities sold 1,320,822 3,250,175
-------------
Deferred organization expenses (Note 1d) 527
Prepaid registration fees and other assets (Note 1d) 31,160
-------------
Total assets 248,798,402
-------------
Liabilities:
Payables:
Securities purchased 1,000,000
Investment adviser (Note 2) 103,676
Distributor (Note 2) 81,240 1,184,916
-------------
Accrued expenses and other liabilities 69,516
-------------
Total liabilities 1,254,432
-------------
Net Assets $ 247,543,970
=============
Net Assets Consist of:
Shares of beneficial interest, $0.10 par value, unlimited number of shares authorized $ 24,767,601
Paid-in capital in excess of par 222,908,405
Accumulated realized capital losses--net (Note 4) (132,036)
-------------
Net Assets--Equivalent to $1.00 per share based on 247,676,006 shares of beneficial
interest outstanding $ 247,543,970
=============
</TABLE>
*The aggregate cost of investments at March 31, 1996 for Federal
income tax purposes was $245,430,396. As of March 31, 1996, net
unrealized depreciation for Federal income tax purposes aggregated
$4,737, all of which related to depreciated securities.
See Notes to Financial Statements.
FS-40
<PAGE> 144
<TABLE>
<CAPTION>
CMA MICHIGAN MUNICIPAL MONEY FUND
STATEMENT OF OPERATIONS FOR THE YEAR ENDED MARCH 31, 1996
<S> <C> <C>
Investment Income (Note 1c):
Interest and amortization of premium and discount earned $ 9,152,675
Expenses:
Investment advisory fees (Note 2) $ 1,202,870
Distribution fees (Note 2) 299,263
Transfer agent fees (Note 2) 58,902
Accounting services (Note 2) 50,931
Professional fees 48,683
Registration fees (Note 1d) 39,479
Custodian fees 22,853
Printing and shareholder reports 22,423
Amortization of organization expenses (Note 1d) 7,143
Pricing fees 6,219
Trustees' fees and expenses 2,554
Other 5,402
-------------
Total expenses 1,766,722
-------------
Investment income--net 7,385,953
Realized Loss on Investments--Net (Note 1c) (13,976)
-------------
Net Increase in Net Assets Resulting from Operations $ 7,371,977
=============
</TABLE>
<TABLE>
<CAPTION>
CMA MICHIGAN MUNICIPAL MONEY FUND
STATEMENTS OF CHANGES IN NET ASSETS
For the Year Ended March 31,
Increase (Decrease) in Net Assets: 1996 1995
<S> <C> <C>
Operations:
Investment income--net $ 7,385,953 $ 5,678,287
Realized loss on investments--net (13,976) (50,049)
------------- -------------
Net increase in net assets resulting from operations 7,371,977 5,628,238
------------- -------------
Dividends to Shareholders (Note 1e):
Investment income--net (7,385,953) (5,678,287)
------------- -------------
Net decrease in net assets resulting from dividends to shareholders (7,385,953) (5,678,287)
------------- -------------
Beneficial Interest Transactions (Note 3):
Net proceeds from sale of shares 1,072,495,850 929,669,029
Net asset value of shares issued to shareholders in reinvestment of dividends
(Note 1e) 7,386,278 5,678,120
------------- -------------
1,079,882,128 935,347,149
Cost of shares redeemed (1,052,494,852) (951,561,384)
------------- -------------
Net increase (decrease) in net assets derived from beneficial interest transactions 27,387,276 (16,214,235)
------------- -------------
Net Assets:
Total increase (decrease) in net assets 27,373,300 (16,264,284)
Beginning of year 220,170,670 236,434,954
------------- -------------
End of year $ 247,543,970 $ 220,170,670
============= =============
</TABLE>
See Notes to Financial Statements.
FS-41
<PAGE> 145
<TABLE>
<CAPTION>
CMA MICHIGAN MUNICIPAL MONEY FUND
FINANCIAL HIGHLIGHTS
For the
Period
The following per share data and ratios have been derived April 29,
from information provided in the financial statements. 1991++ to
For the Year Ended March 31, March 31,
Increase (Decrease) in Net Asset Value: 1996 1995 1994 1993 1992
<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 .02 .02 .03
-------- -------- -------- -------- --------
Total from investment operations .03 .03 .02 .02 .03
-------- -------- -------- -------- --------
Less dividends from investment income--net (.03) (.03) (.02) (.02) (.03)
-------- -------- -------- -------- --------
Net asset value, end of period $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
======== ======== ======== ======== ========
Total Investment Return 3.13% 2.57% 1.81% 2.24% 3.62%*
======== ======== ======== ======== ========
Ratios to Average Net Assets:
Expenses, net of reimbursement .73% .73% .72% .65% .54%*
======== ======== ======== ======== ========
Expenses .73% .73% .72% .74% .80%*
======== ======== ======== ======== ========
Investment income--net 3.05% 2.54% 1.79% 2.22% 3.53%*
======== ======== ======== ======== ========
Supplemental Data:
Net assets, end of period (in thousands) $247,544 $220,171 $236,435 $200,200 $194,433
======== ======== ======== ======== ========
</TABLE>
*Annualized.
++Commencement of Operations.
See Notes to Financial Statements.
FS-42
<PAGE> 146
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 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" or "Adviser"). 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-43
<PAGE> 147
CMA MICHIGAN MUNICIPAL MONEY FUND
NOTES TO FINANCIAL STATEMENTS (CONCLUDED)
The most restrictive annual expense limitation requires that the
Adviser reimburse the Fund to the extent the Fund's expenses
(excluding interest, taxes, distribution fees, brokerage fees and
commissions, and extraordinary items) exceed in any fiscal year 2.5%
of the Fund's first $30 million of average daily net assets, 2.0% of
the Fund's next $70 million of average daily net assets, and 1.5% of
the average daily net assets in excess thereof. No fee payment will
be made to the Adviser during any year which will cause such
expenses to exceed the pro rata expense limitation at the time of
such payment.
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, MLPF&S, 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, 1996, the Fund had a net capital loss carryforward of
approximately $116,000, of which $62,000 expires in 2001 and $4,000
expires in 2002, and $50,000 expires in 2003. This amount will be
available to offset like amounts of any future taxable gains.
FS-44
<PAGE> 148
- --------------------------------------------------------------------------------
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, 1996, the related statements
of operations for the year then ended and changes in net assets for each of the
years in the two-year period then ended, and the financial highlights for each
of the years in the 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, 1996 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,
1996, 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
April 30, 1996
FS-45
<PAGE> 149
<TABLE>
<CAPTION>
CMA NEW JERSEY MUNICIPAL MONEY FUND
SCHEDULE OF INVESTMENTS AS OF MARCH 31, 1996 (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
96.9% (Pooled Governmental Loan Program), ACES, 3.10% due 7/01/2026 (a) $ 3,800
Bayonne, New Jersey:
7,000 BAN, UT, 4.10% due 9/13/1996 7,006
1,700 Temporary Notes, 3.88% due 9/13/1996 1,703
7,040 UT, Temporary Notes, 4.10% due 9/13/1996 7,046
4,880 Bergenfield, New Jersey, BAN, 4% due 1/31/1997 (e) 4,903
8,325 Bernards Township, New Jersey, Sewer Authority, Revenue Refunding
Bonds, 3.85% due 12/15/1996 8,331
4,000 Camden County, New Jersey, Improvement Authority Revenue Bonds
(Jewish Community Center Project), VRDN, 3.25% due 12/01/2010 (a) 4,000
2,017 Cedar Grove Township, New Jersey, BAN, UT, 3.50% due 3/11/1997 (e) 2,015
Eagle Tax Exempt Trust, New Jersey, VRDN, Series 94C-3001 (a):
15,900 3.47% due 10/01/2015 15,900
4,100 3.52% due 10/01/2015 4,100
Elizabeth, New Jersey, BAN, UT:
4,000 4.26% due 7/17/1996 4,002
5,000 4.34% due 7/17/1996 5,003
5,000 4.44% due 7/17/1996 5,004
Essex County, New Jersey, Improvement Authority Revenue Bonds
(Pooled Governmental Loan Program), ACES (a):
7,200 2.85% due 12/01/1998 7,200
14,250 2.85% due 7/01/2026 14,250
13,260 Floating Rate Trust Certificates, New Jersey, VRDN, Series 1994-E,
3.35% due 7/02/1999 (a) 13,260
12,200 Hudson County, New Jersey, Improvement Authority Revenue Bonds
(Pooled Government Loan Program), VRDN, 3.30% due 7/15/2026 (a) 12,200
14,000 Hunterdon County, New Jersey, BAN, 3.69% due 5/03/1996 14,000
14,700 Jersey City, New Jersey, BAN, UT, 4.75% due 9/27/1996 14,750
4,500 Middlesex County, New Jersey, Refunding Bonds, UT, 3.60% due
7/15/1996 4,497
Monmouth County, New Jersey, Improvement Authority Revenue Bonds:
1,095 (Governmental Loan), 3.65% due 7/15/1996 (d) 1,095
21,600 (Pooled Government Loan Program), ACES, 3.15% due 8/01/2016 (a) 21,600
2,400 New Brunswick, New Jersey, BAN, 4.10% due 7/12/1996 (e) 2,401
New Jersey EDA, Dock Facility Revenue Refunding Bonds (Bayonne/IMTT
Project), VRDN, Series A (a):
10,400 3.15% due 12/01/2027 10,400
8,350 3.20% due 12/01/2027 8,350
</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
GO General Obligation Bonds
PCR Pollution Control Revenue Bonds
RAN Revenue Anticipation Notes
TAN Tax Anticipation Notes
TRAN Tax and Revenue Anticipation Notes
UT Unlimited Tax
VRDN Variable Rate Demand Notes
FS-46
<PAGE> 150
<TABLE>
<CAPTION>
CMA NEW JERSEY MUNICIPAL MONEY FUND
SCHEDULE OF INVESTMENTS AS OF MARCH 31, 1996 (CONTINUED) (IN THOUSANDS)
Face Value
State Amount Issue (Note 1a)
<S> <C> <C> <C>
New Jersey New Jersey EDA, Economic Development Revenue Bonds, VRDN (a):
(continued) $ 2,600 (400 International Drive Partners), 3.05% due 9/01/2005 $ 2,600
625 (Astor Chocolate Corporation Project), AMT, 3.40% due 4/01/2002 625
9,525 (Benedictine Abbey of Newark), 3.40% due 12/01/2019 9,525
1,725 (Brach/Jersey Avenue Project), 3.15% due 5/01/2011 1,725
1,250 (Catholic Community Services), 3.20% due 6/01/2025 1,250
6,000 (Center for Aging, Applewood Estates Project), 3.30% due 12/01/2019 6,000
1,700 (Filtra Corp. Project), 3.40% due 8/01/2015 1,700
2,000 (International Vitamin Corp. Project), AMT, 3.40% due 5/01/2003 2,000
1,250 (Manhattan Bagel Co. Inc. Project), AMT, 3.40% due 10/01/2005 1,250
1,750 (Office Court Associates Project), AMT, 3.25% due 4/01/2011 1,750
1,870 (Park Lane Association Project), AMT, 3.40% due 4/01/2010 1,870
1,500 Refunding (Church & Dwight), 2.85% due 12/01/2008 1,500
2,420 Refunding (RJB Associates Project), 3.40% due 8/01/2008 2,420
1,365 (Saint Peter's Preparatory School), 3.30% due 1/01/2010 1,365
New Jersey EDA, Industrial and Economic Development Revenue Bonds,
VRDN (a):
1,000 (Elizabeth Realty Urban Renewal Associates--1986 Project), AMT,
3.85% due 6/01/2000 1,000
4,100 (Seton Company Project), 3.35% due 9/01/2005 4,100
2,300 New Jersey EDA, Natural Gas Facilities Revenue Bonds (Natural Gas
Company Project), VRDN, Series B, 3.30% due 8/01/2030 (a)(f) 2,300
New Jersey EDA, PCR, VRDN, Series A (a):
7,450 (Merck & Co.), 3.55% due 10/01/2004 7,450
8,000 Refunding (Public Service Electric & Gas Co.), CP, 3.15% due
4/08/1996 (h) 8,000
5,000 New Jersey EDA, Port Facility Revenue Bonds (Trailer Marine Crowle),
VRDN, 3.35% due 2/01/2002 (a) 5,000
New Jersey EDA, Revenue Bonds:
9,000 (Chambers Cogeneration), CP, AMT, 3.20% due 4/11/1996 9,000
4,500 (Chambers Cogeneration), CP, AMT, 3.05% due 5/01/1996 4,500
1,305 (E.P. Henry Corp. Project), VRDN, 3.40% due 3/01/2005 (a) 1,305
3,000 (Economic Growth--Paterson), VRDN, AMT, Series A, 3.50% due
11/01/2015 (a) 3,000
2,000 (Economic Growth--Paterson), VRDN, AMT, Series B, 3.50% due
11/01/2004 (a) 2,000
6,000 First Mortgage (Fellowship VLG Project), VRDN, Series B, 3.35% due
1/01/2001 (a) 6,000
7,800 (Hoffman-La Roche Inc. Project), VRDN, AMT, 3.05% due 11/01/2011 (a) 7,800
9,200 (Keystone Project), CP, 3.25% due 4/30/1996 9,200
3,000 (Keystone Project), CP, 3.20% due 5/01/1996 3,000
2,000 (Peddie School Project), VRDN, Series B, 3.25% due 2/01/2019 (a) 2,000
1,000 (Peddie School Project), VRDN, 3.20% due 2/01/2026 (a) 1,000
5,865 (Public Schools Small Project Loan Program), 3.80% due 8/15/1996 5,874
3,000 New Jersey EDA, Thermal Energy Facilities Revenue Bonds (Thermal
Energy Limited Partnership), AMT, 3.70% due 4/30/1996 3,000
28,800 New Jersey Sports and Exposition Authority, State Contract Revenue
Bonds, VRDN, Series C, 3.10% due 9/01/2024 (a) 28,800
New Jersey State, CP, Series 96:
5,000 TAN, 3.25% due 4/08/1996 5,000
25,000 TAN, 3.40% due 4/11/1996 25,000
10,000 TAN, 3.55% due 4/12/1996 10,000
6,000 TAN, 3.30% due 5/21/1996 6,000
9,000 TRAN, 3.30% due 5/07/1996 9,000
9,450 New Jersey State Educational Facilities Authority Revenue Bonds
(Higher Educational Facilities Trust Fund), Series A, 5.125%
due 9/01/1996 (f) 9,510
</TABLE>
FS-47
<PAGE> 151
<TABLE>
<CAPTION>
CMA NEW JERSEY MUNICIPAL MONEY FUND
SCHEDULE OF INVESTMENTS AS OF MARCH 31, 1996 (CONCLUDED) (IN THOUSANDS)
Face Value
State Amount Issue (Note 1a)
<S> <C> <C> <C>
New Jersey New Jersey State, GO:
(concluded) $ 3,500 7.20% due 4/15/1996 (b) $ 3,506
1,000 7.30% due 11/01/1996 (c) 1,026
9,000 New Jersey State Transportation Trust Fund Authority, Series A,
5.50% due 12/15/1996 (b) 9,143
13,800 New Jersey State Turnpike Authority, Turnpike Revenue Refunding
Bonds, VRDN, Series D, 3.05% due 1/01/2018 (a)(g) 13,800
3,000 Passaic County, New Jersey, BAN, 3.67% due 11/19/1996 3,002
Port Authority of New York and New Jersey:
11,895 AMT, CP, 3.05% due 5/01/1996 11,895
1,550 CP, Series A and B, 3.15% due 4/08/1996 1,550
6,575 CP, Series A and B, 3.20% due 4/10/1996 6,575
15,000 CP, Series A and B, 3.60% due 4/12/1996 15,000
1,280 CP, Series A and B, 3.45% due 8/14/1996 1,280
2,030 (Line of Credit), AMT, CP, 3.25% due 5/01/1996 2,030
9,850 (Line of Credit), AMT, CP, 3.30% due 5/01/1996 9,850
4,980 (Line of Credit), AMT, CP, 3.25% due 8/08/1996 4,980
2,440 (Line of Credit), AMT, CP, 3.40% due 8/23/1996 2,440
2,500 One Hundred-Third Series, 3.50% due 12/15/1996 (h) 2,498
Port Authority of New York and New Jersey, Special Obligation
Revenue Bonds (Versatile Structure Obligation), VRDN (a):
47,300 AMT, Series 1, 3.20% due 8/01/2028 47,300
300 Series 3, 3.25% due 6/01/2020 300
4,212 Roxbury Township, New Jersey, BAN, UT, 3.75% due 2/14/1997 4,230
1,160 Rutgers State University, New Jersey, University Revenue Refunding
Bonds, Series N, 7.375% due 5/01/1996 (c) 1,169
Salem County, New Jersey, Industrial Pollution Control Financing
Authority Revenue Bonds, Series A:
7,300 (du Pont (E.I.) de Nemours), VRDN, 3.40% due 3/01/2012 (a) 7,300
4,200 (Philadelphia Electric), CP, 3.30% due 4/25/1996 4,200
4,050 Scotch Plains Township, New Jersey, BAN, Series A, 4.25% due
4/04/1996 (e) 4,050
3,500 South Plainfield, New Jersey, BAN, UT, 3.95% due 7/26/1996 3,500
Union County, New Jersey, Industrial Pollution Control Financing
Authority, PCR, Refunding, VRDN (a):
2,200 (Allied Signal Project), 3.50% due 12/01/2020 2,200
17,300 (Exxon Project), 3.05% due 7/01/2033 17,300
Puerto Rico-- Puerto Rico Commonwealth, Government Development Bank, CP:
2.9% 7,800 3.45% due 4/03/1996 7,800
10,000 3.25% due 4/25/1996 10,000
Total Investments (Cost--$609,159*)-- 99.8% 609,159
Other Assets Less Liabilities--0.2% 1,126
----------
Net Assets--100.0% $ 610,285
==========
</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, 1996.
(b)Escrowed to maturity.
(c)Prerefunded.
(d)FSA Insured.
(e)Bank Qualified.
(f)AMBAC Insured.
(g)FGIC Insured.
(h)MBIAInsured.
*Cost for Federal income tax purposes.
See Notes to Financial Statements.
FS-48
<PAGE> 152
CMA NEW JERSEY MUNICIPAL MONEY FUND
STATEMENT OF ASSETS AND LIABILITIES AS OF MARCH 31, 1996
<TABLE>
<S> <C> <C>
Assets:
Investments, at value (identified cost--$609,158,594) (Note 1a) $ 609,158,594
Cash 8,121
Receivables:
Interest $ 3,986,503
Securities sold 3,480,000 7,466,503
---------------
Prepaid registration fees and other assets (Note 1d) 44,927
---------------
Total assets 616,678,145
---------------
Liabilities:
Payables:
Securities purchased 5,842,359
Investment adviser (Note 2) 242,784
Distributor (Note 2) 190,574 6,275,717
---------------
Accrued expenses and other liabilities 117,773
---------------
Total liabilities 6,393,490
---------------
Net Assets $ 610,284,655
===============
Net Assets Consist of:
Shares of beneficial interest, $0.10 par value, unlimited number of
shares authorized $ 61,035,501
Paid-in capital in excess of par 549,319,182
Undistributed investment income--net 5,378
Accumulated realized capital losses--net (Note 4) (75,406)
---------------
Net Assets--Equivalent to $1.00 per share based on 610,355,010 shares
of beneficial interest outstanding $ 610,284,655
===============
</TABLE>
See Notes to Financial Statements.
FS-49
<PAGE> 153
CMA NEW JERSEY MUNICIPAL MONEY FUND
STATEMENT OF OPERATIONS FOR THE YEAR ENDING MARCH 31, 1996
<TABLE>
<S> <C> <C>
Investment Income (Note 1c):
Interest and amortization of premium and discount earned $ 20,811,368
Expenses:
Investment advisory fees (Note 2) $ 2,760,878
Distribution fees (Note 2) 701,300
Transfer agent fees (Note 2) 126,778
Accounting services (Note 2) 56,678
Professional fees 56,025
Printing and shareholder reports 47,323
Custodian fees 40,102
Registration fees (Note 1d) 31,488
Pricing fees 10,031
Trustees' fees and expenses 6,125
Amortization of organization expenses (Note 1d) 2,912
Other 9,826
---------------
Total expenses 3,849,466
---------------
Investment income--net 16,961,902
Realized Loss on Investments--Net (Note 1c) (4,492)
---------------
Net Increase in Net Assets Resulting from Operations $ 16,957,410
===============
</TABLE>
CMA NEW JERSEY MUNICIPAL MONEY FUND
STATEMENTS OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
For the Year Ended March 31,
Increase (Decrease) in Net Assets: 1996 1995
<S> <C> <C>
Operations:
Investment income--net $ 16,961,902 $ 11,557,524
Realized loss on investments--net (4,492) (30,343)
--------------- ---------------
Net increase in net assets resulting from operations 16,957,410 11,527,181
--------------- ---------------
Dividends to Shareholders (Note 1e):
Investment income--net (16,955,885) (11,550,666)
--------------- ---------------
Net decrease in net assets resulting from dividends
to shareholders (16,955,885) (11,550,666)
--------------- ---------------
Beneficial Interest Transactions (Note 3):
Net proceeds from sale of shares 1,937,805,407 1,629,827,901
Net asset value of shares issued to shareholders in reinvestment of
dividends (Note 1e) 16,956,937 11,550,723
--------------- ---------------
1,954,762,344 1,641,378,624
Cost of shares redeemed (1,870,226,420) (1,557,454,149)
--------------- ---------------
Net increase in net assets derived from beneficial interest transactions 84,535,924 83,924,475
--------------- ---------------
Net Assets:
Total increase in net assets 84,537,449 83,900,990
Beginning of year 525,747,206 441,846,216
--------------- ---------------
End of year* $ 610,284,655 $ 525,747,206
=============== ===============
*Undistributed investment income--net (Note 1f) $ 5,378 $ --
=============== ===============
</TABLE>
See Notes to Financial Statements.
FS-50
<PAGE> 154
CMA NEW JERSEY 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: 1996 1995 1994 1993 1992
<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 .02 .02 .02 .03
---------- ---------- ---------- ---------- ----------
Total from investment operations .03 .02 .02 .02 .03
---------- ---------- ---------- ---------- ----------
Less dividends from investment income--net (.03) (.02) (.02) (.02) (.03)
---------- ---------- ---------- ---------- ----------
Net asset value, end of year $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
========== ========== ========== ========== ==========
Total Investment Return 3.07% 2.52% 1.82% 2.21% 3.49%
========== ========== ========== ========== ==========
Ratios to Average Net Assets:
Expenses .68% .71% .70% .70% .74%
========== ========== ========== ========== ==========
Investment income--net 3.02% 2.51% 1.80% 2.16% 3.42%
========== ========== ========== ========== ==========
Supplemental Data:
Net assets, end of year (in thousands) $ 610,285 $ 525,747 $ 441,846 $ 388,903 $ 350,058
========== ========== ========== ========== ==========
</TABLE>
See Notes to Financial Statements.
FS-51
<PAGE> 155
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) 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 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 reclassified to
reflect permanent differences between financial reporting and tax
purposes. Accordingly, current year's permanent book/tax differences
of $327 and $639 have been reclassified from paid-in capital in
excess of par and undistributed net investment income, respectively,
to accumulated realized capital losses. 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" or "Adviser"). 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-52
<PAGE> 156
CMA NEW JERSEY MUNICIPAL MONEY FUND
NOTES TO FINANCIAL STATEMENTS (concluded)
The most restrictive annual expense limitation requires that the
Adviser reimburse the Fund to the extent the Fund's expenses
(excluding interest, taxes, distribution fees, brokerage fees and
commissions, and extraordinary items) exceed in any fiscal year 2.5%
of the Fund's first $30 million of average daily net assets, 2.0% of
the Fund's next $70 million of average daily net assets, and 1.5% of
the average daily net assets in excess thereof. No fee payment will
be made to the Adviser during any year which will cause such
expenses to exceed the pro rata expense limitation at the time of
such payment.
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, MLPF&S, 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, 1996, the Fund had a net capital loss carryforward of
approximately $75,000, of which $71,000 expires in 2003 and $4,000
expires in 2004. This amount will be available to offset like
amounts of any future taxable gains.
FS-53
<PAGE> 157
- --------------------------------------------------------------------------------
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, 1996, the related statements
of operations for the year then ended and changes in net assets for each of the
years in the two-year period then ended, and the financial highlights for each
of the years in the 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, 1996 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,
1996, 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, 1996
FS-54
<PAGE> 158
<TABLE>
<CAPTION>
CMA NEW YORK MUNICIPAL MONEY FUND
SCHEDULE OF INVESTMENTS AS OF MARCH 31, 1996 (IN THOUSANDS)
Face Value
State Amount Issue (Note 1a)
<S> <C> <C> <C>
New York-- $ 1,109 Albany, New York, Housing Authority, Private Act Revenue Bonds
95.1% (Historic Bleeker Terrace), VRDN, AMT, 3.70% due 3/01/2015 (a) $ 1,109
Board Cooperative Educational Services, New York (Sole Supervisory
District), RAN:
5,000 4% due 4/04/1996 5,000
3,300 4.25% due 6/27/1996 3,303
6,400 Buffalo, New York, RAN, Series A, 4.20% due 7/16/1996 6,415
1,071 Colonie, New York, BAN, 3.875% due 2/14/1997 1,076
Eagle Tax Exempt Trust, New York, VRDN (a):
27,000 Series 1994-3201, 3.52% due 4/01/2034 27,000
7,200 Series 1994-C4, 3.47% due 8/01/2003 7,200
20,000 Series 1995-3201, 3.47% due 8/15/2024 20,000
16,333 Elmira City, New York, BAN, UT, 4.25% due 7/19/1996 16,358
4,610 Elmira Heights, New York (Central School District), BAN, UT, 4% due
1/16/1997 4,623
5,000 Erie County, New York, RAN, 4.50% due 9/20/1996 5,015
Metropolitan Transportation Authority, New York, Transportation
Facilities Revenue Bonds (b):
1,000 Series F, 8.375% due 7/01/1996 1,030
4,650 Series H, 8.50% due 7/01/1996 4,798
4,380 Monroe County, New York, BAN, UT, Series A, 4.50% due 6/07/1996 4,385
Municipal Assistance Corporation, City of New York, New York:
1,000 Refunding, Series 56, 8.25% due 7/01/1996 (b) 1,032
1,000 Series 66, 6.90% due 7/01/1996 1,008
600 Series 68, 6.80% due 7/01/1996 604
Nassau County, New York:
5,000 BAN, Series A, 3.50% due 11/15/1996 5,009
1,210 BAN, Series H, 4.25% due 8/15/1996 1,214
23,700 BAN, UT, Series H, 4% due 8/15/1996 23,754
725 Refunding, Series D, 3.75% due 5/15/1996 (c) 725
10,000 TAN, UT, Series B, 4.50% due 4/15/1996 10,003
4,600 Nassau County, New York, IDA, Civic Facilities Revenue Bonds
(Cold Spring Harbor Laboratory Project), VRDN, 3.40% due 7/01/2019 (a) 4,600
900 Nassau County, New York, IDA, Research Facilities Revenue Bonds
(Cold Spring Harbor Laboratory Project), VRDN, 3.40% due 7/01/2023 (a) 900
New York City, New York, CP:
23,800 3.80% due 4/11/1996 23,800
20,000 3.65% due 6/11/1996 20,000
6,600 3.20% due 8/06/1996 6,600
29,400 3.40% due 8/07/1996 29,400
4,000 3.35% due 8/09/1996 4,000
8,100 3.35% due 8/09/1996 8,100
1,500 3.40% due 8/09/1996 1,500
5,200 3.45% due 8/09/1996 5,200
10,000 3.50% due 8/09/1996 10,000
</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 Tan Anticipation Notes
UT Unlimited Tax
VRDN Variable Rate Demand Notes
FS-55
<PAGE> 159
<TABLE>
<CAPTION>
CMA NEW YORK MUNICIPAL MONEY FUND
SCHEDULE OF INVESTMENTS AS OF MARCH 31, 1996 (CONTINUED) (IN THOUSANDS)
Face Value
State Amount Issue (Note 1a)
<S> <C> <C> <C>
New York New York City, New York, GO, Series D:
(continued) $ 2,000 8.50% due 8/01/1996 (b) $ 2,072
2,590 UT, 6.80% due 2/01/1997 2,660
6,700 VRDN, UT, 3.10% due 2/01/2020 (a) (c) 6,700
New York City, New York, GO, VRDN, UT (a):
400 Series B, 3.25% due 10/01/2020 (c) 400
2,100 Series B, Sub-Series B-3, 3.50% due 8/15/2004 (d) 2,100
2,000 Series B, Sub-Series B-4, 3.50% due 8/15/2023 (d) 2,000
4,300 Series B, Sub-Series B-7, 3.50% due 8/15/2018 (e) 4,300
9,900 Sub-Series A-4, 3.25% due 8/01/2021 9,900
7,200 Sub-Series A-4, 3.30% due 8/01/2022 7,200
6,700 Sub-Series A-4, 3.30% due 8/01/2023 6,700
700 Sub-Series A-5, 3.50% due 8/01/2016 700
1,000 Sub-Series B-4, 3.25% due 8/15/2023 1,000
13,100 New York City, New York, Housing Development Corporation, M/F
Mortgage Revenue Bonds (Tribecca Towers), VRDN, AMT, Series A,
3.30% due 12/15/2024 (a) 13,100
2,700 New York City, New York, Housing Development Corporation, Mortgage
Revenue Bonds (Columbus Apartments), VRDN, Series A, 3.15% due
3/15/2025 (a) 2,700
New York City, New York, IDA, Civic Facilities Revenue Bonds,
VRDN (a):
3,350 (Children's Oncology Society/Ronald McDonald House), 3.05% due
5/01/2012 3,350
3,100 (Columbia Grammer School Project), 3.20% due 6/30/2014 3,100
New York City, New York, IDA, IDR, VRDN, AMT (a):
1,800 (Bowe Industrial Inc. Project), Series K, 3.25% due 11/01/2010 1,800
1,350 (Composite XXV), Series E, 3.25% due 11/01/2010 1,350
29,800 (Japan Airlines Company Ltd. Project), 3.50% due 11/01/2015 29,800
New York City, New York, Municipal Water Financing Authority, Water
and Sewer System Revenue Bonds:
6,100 CP, 3.20% due 4/04/1996 6,100
18,500 CP, 3.40% due 4/04/1996 18,500
10,000 CP, 3% due 4/19/1996 10,000
10,900 CP, 3.30% due 4/22/1996 10,900
20,000 CP, 3.35% due 4/22/1996 20,000
7,300 CP, 3.50% due 4/22/1996 7,300
22,300 VRDN, Series A, 3.25% due 6/15/2025 (a) (c) 22,300
2,000 VRDN, Series C, 3.50% due 6/15/2022 (a) (c) 2,000
21,380 VRDN, Series C, 3.50% due 6/15/2023 (a) (c) 21,380
1,900 VRDN, Series G, 3.50% due 6/15/2024 (a) (c) 1,900
New York City, New York, RAN:
36,300 Series A, 4.50% due 4/11/1996 36,307
34,500 Series B, 4.75% due 6/28/1996 34,583
New York City, New York, Trust Cultural Resource Revenue Bonds,
VRDN (a):
9,000 Refunding (American Natural Museum), Series A, 3.15% due
4/01/2021 (d) 9,000
3,700 (Soloman R. Guggenheim), Series B, 3.30% due 12/01/2015 3,700
New York State Dormitory Authority Revenue Bonds, VRDN (a):
1,100 (Cornell University), Series B, 3.30% due 7/01/2025 1,100
500 (Saint Francis Center at The Knolls), 3.20% due 7/01/2023 500
</TABLE>
FS-56
<PAGE> 160
<TABLE>
<CAPTION>
CMA NEW YORK MUNICIPAL MONEY FUND
SCHEDULE OF INVESTMENTS AS OF MARCH 31, 1996 (CONTINUED) (IN THOUSANDS)
Face Value
State Amount Issue (Note 1a)
<S> <C> <C> <C>
New York New York State Dormitory Authority, Special Obligation Revenue Bonds:
(continued) $ 1,000 (State University), Series B, 6.50% due 5/01/1996 $ 1,003
1,400 (State University Dorm Facilities), Series A, 3.70% due 7/01/1996 1,400
New York State Energy Research and Development Authority, Electric
Facilities Revenue Bonds (Long Island Lighting Co.), VRDN, AMT (a):
5,000 Series A, 3.10% due 8/01/2025 5,000
18,300 Series B, 3.10% due 11/01/2023 18,300
13,325 New York State Energy Research and Development Authority, PCR (Long
Island Lighting Co. Project), Series A, 3.25% due 3/01/1997 13,325
720 New York State Environmental Facilities Corporation, PCR, State
Water Revolving Fund (Pooled Loan), Series A, 3.70% due 5/15/1996 720
21,100 New York State Environmental Facilities Corporation, Resource Recovery
Revenue Bonds (Equity Huntington Project), VRDN, AMT, 3.60% due
11/01/2014 (a) 21,100
2,450 New York State Environmental Facilities Corporation, Solid Waste
Disposal Revenue Refunding Bonds (General Electric Co. Project), CP,
Series A, 3.10% due 4/10/1996 2,450
20,000 New York State HFA, Revenue Bonds (East 84th Street), VRDN, AMT,
Series A,3.40% due 11/01/2028 (a) 20,000
New York State Local Government Assistance Corporation Revenue Bonds,
VRDN (a):
33,300 Series B, 3.15% due 4/01/2025 33,300
1,800 Series F, 3.15% due 4/01/2025 1,800
New York State Medical Care Facilities, Finance Agency Revenue Bonds
VRDN (a):
5,700 (Children's Hospital of Buffalo), Series A, 3.25% due 11/01/2005 5,700
15,100 (Pooled Loan Equipment Program), Series A, 3.30% due 11/01/2003 15,100
New York State Power Authority, Revenue and General Purpose Bonds, CP:
5,400 3.40% due 4/12/1996 5,400
15,000 3.60% due 4/12/1996 15,000
7,800 3.40% due 4/18/1996 7,800
25,000 3.30% due 4/22/1996 25,000
10,000 3.30% due 4/22/1996 10,000
10,000 3.30% due 4/23/1996 10,000
10,000 3.30% due 4/24/1996 10,000
New York State Power Authority, Revenue and General Purpose Bonds
(Junior Lien), VRDN (a):
13,545 3.25% due 9/01/1996 13,545
23,305 3.25% due 9/01/1996 23,305
3,735 3.25% due 9/01/1996 3,735
2,300 New York State Thruway Authority, General Revenue Bonds, VRDN,
3.40% due 1/01/2024 (a) (c) 2,300
21,135 New York State Tollway Authority, Highway and Bridge Trust Fund,
Series A,4% due 4/01/1996 21,136
North Hempstead, New York, BAN:
16,675 Series B, 4% due 2/27/1997 16,741
8,769 UT, Series A, 4% due 1/30/1997 8,803
8,785 Orange County, New York, BAN, UT, 4.25% due 11/15/1996 8,816
5,250 Oswego, New York, City School District, BAN, UT, 4.40% due
10/09/1996 5,262
</TABLE>
FS-57
<PAGE> 161
<TABLE>
<CAPTION>
CMA NEW YORK MUNICIPAL MONEY FUND
SCHEDULE OF INVESTMENTS AS OF MARCH 31, 1996 (CONCLUDED) (IN THOUSANDS)
Face Value
State Amount Issue (Note 1a)
<S> <C> <C> <C>
New York Oyster Bay, New York, UT:
(concluded) $ 2,250 4.80% due 12/01/1996 $ 2,267
1,000 BAN, 4% due 7/12/1996 1,002
800 Refunding, 3.75% due 2/15/1997 802
4,375 Port Authority of New York and New Jersey, CP, Series A and B,
3.60% due 5/14/1996 4,375
6,400 Port Authority of New York and New Jersey, Special Obligation
Revenue Bonds (Versatile Structure Obligations), VRDN, AMT,
Series 1, 3.20%due 8/01/2028 (a) 6,400
750 Putnam County, New York, BAN, 4.25% due 6/03/1996 751
2,500 Riverhead, New York, Central School District, BAN, UT, 4.375% due
12/06/1996 2,511
20,000 Rochester, New York, BAN, UT, Series I, 4.50% due 10/31/1996 20,085
1,975 Saint Lawrence County, New York, IDA, Civic Facility Revenue Bonds
(Clarkson University Project), VRDN, 3.45% due 10/01/2005 (a) 1,975
1,100 Smithtown, New York, Central School District, TAN, UT, 4.25% due
6/27/1996 1,101
29,600 Suffolk County, New York, IDA, IDR (Nissequogue Cogeneration Partners),
VRDN, 3.45% due 12/15/2023 (a) 29,600
Suffolk County, New York, TAN, UT:
14,000 Series I, 4% due 8/15/1996 14,035
8,000 Series II, 4.50% due 9/12/1996 8,023
Suffolk County, New York, Water Authority, BAN, VRDN (a):
15,000 3.30% due 2/06/2001 15,000
5,000 UT, 3.30% due 12/21/1999 5,000
11,775 Syracuse, New York, IDA, Civic Facility Revenue Bonds (Community
Development Properties--Larned Project), VRDN, 3.35% due 4/01/2018 (a) 11,775
44,000 Triborough Bridge and Tunnel Authority, New York, Special Obligation
Revenue Bonds, VRDN, 3.10% due 1/01/2024 (a) (c) 44,000
2,500 Ulster County, New York, BAN, UT, 4.25% due 11/22/1996 2,506
4,000 Westhampton Beach, New York, Unified Free School District, TAN,
4.25%due 6/26/1996 4,004
4,500 William Floyd, Unified Free School District, BAN, 4.25% due 6/28/1996 4,504
Puerto Rico-- Puerto Rico Commonwealth, Government Development Bank, CP:
4.1% 7,500 3.45% due 4/03/1996 7,500
10,000 3.30% due 4/17/1996 10,000
17,000 3% due 4/22/1996 17,000
12,000 3.30% due 4/23/1996 12,000
Total Investments (Cost--$1,123,520*)--99.2% 1,123,520
Other Assets Less Liabilities--0.8% 8,744
----------
Net Assets--100.0% $1,132,264
==========
</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 1996.
(b)Prerefunded.
(c)FGIC Insured.
(d)MBIA Insured.
(e)AMBAC Insured.
*Cost for Federal income tax purposes.
See Notes to Financial Statements.
FS-58
<PAGE> 162
<TABLE>
<CAPTION>
CMA NEW YORK MUNICIPAL MONEY FUND
STATEMENT OF ASSETS AND LIABILITIES AS OF MARCH 31, 1996
<S> <C> <C>
Assets:
Investments, at value (identified cost--$1,123,520,192) (Note 1a) $ 1,123,520,192
Cash 10,667
Receivables:
Interest $ 8,467,611
Securities sold 1,132,875 9,600,486
---------------
Prepaid registration fees and other assets (Note 1d) 55,146
---------------
Total assets 1,133,186,491
---------------
Liabilities:
Payables:
Investment adviser (Note 2) 412,413
Distributor (Note 2) 345,332
Dividends to shareholders (Note 1e) 246 757,991
---------------
Accrued expenses and other liabilities 164,532
---------------
Total liabilities 922,523
---------------
Net Assets $ 1,132,263,968
===============
Net Assets Consist of:
Shares of beneficial interest, $0.10 par value, unlimited number of shares
authorized $ 113,315,363
Paid-in capital in excess of par 1,019,838,269
Accumulated realized capital losses--net (Note 4) (889,664)
---------------
Net Assets--Equivalent to $1.00 per share based on 1,133,153,632 shares of
beneficial interest outstanding $ 1,132,263,968
===============
</TABLE>
<TABLE>
<CAPTION>
CMA NEW YORK MUNICIPAL MONEY FUND
STATEMENT OF OPERATIONS FOR THE YEAR ENDED MARCH 31, 1996
<S> <C> <C>
Investment Income (Note 1c):
Interest and amortization of premium and discount earned $ 37,412,972
Expenses:
Investment advisory fees (Note 2) $ 4,591,599
Distribution fees (Note 2) 1,244,612
Transfer agent fees (Note 2) 210,200
Accounting services (Note 2) 95,052
Custodian fees 64,866
Printing and shareholder reports 59,967
Professional fees 56,680
Pricing fees 10,640
Trustees' fees and expenses 10,289
Registration fees (Note 1d) 601
Other 13,503
---------------
Total expenses 6,358,009
---------------
Investment income--net 31,054,963
Realized Gain on Investments--Net (Note 1c) 2,835
---------------
Net Increase in Net Assets Resulting from Operations $ 31,057,798
===============
See Notes to Financial Statements.
</TABLE>
FS-59
<PAGE> 163
<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: 1996 1995
<S> <C> <C>
Operations:
Investment income--net $ 31,054,963 $ 21,060,951
Realized gain (loss) on investments--net 2,835 (251,800)
--------------- ---------------
Net increase in net assets resulting from operations 31,057,798 20,809,151
--------------- ---------------
Dividends to Shareholders (Note 1e):
Investment income--net (31,054,963) (21,059,960)
--------------- ---------------
Net decrease in net assets resulting from dividends to shareholders (31,054,963) (21,059,960)
--------------- ---------------
Beneficial Interest Transactions (Note 3):
Net proceeds from sale of shares 3,670,775,973 3,003,904,257
Net asset value of shares issued to shareholders in reinvestment of
dividends (Note 1e) 31,055,127 21,059,556
--------------- ---------------
3,701,831,100 3,024,963,813
Cost of shares redeemed (3,489,422,207) (2,877,620,567)
--------------- ---------------
Net increase in net assets derived from beneficial interest transactions 212,408,893 147,343,246
--------------- ---------------
Net Assets:
Total increase in net assets 212,411,728 147,092,437
Beginning of year 919,852,240 772,759,803
--------------- ---------------
End of year $ 1,132,263,968 $ 919,852,240
=============== ===============
</TABLE>
<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: 1996 1995 1994 1993 1992
<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 .03
---------- ---------- ---------- ---------- ----------
Total from investment operations .03 .03 .02 .02 .03
---------- ---------- ---------- ---------- ----------
Less dividends from investment income--net (.03) (.03) (.02) (.02) (.03)
---------- ---------- ---------- ---------- ----------
Net asset value, end of year $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
========== ========== ========== ========== ==========
Total Investment Return 3.17% 2.59% 1.79% 2.19% 3.37%
========== ========== ========== ========== ==========
Ratios to Average Net Assets:
Expenses .64% .67% .67% .67% .68%
========== ========== ========== ========== ==========
Investment income--net 3.12% 2.59% 1.78% 2.16% 3.31%
========== ========== ========== ========== ==========
Supplemental Data:
Net assets, end of year (in thousands) $1,132,264 $ 919,852 $ 772,760 $ 665,970 $ 625,768
========== ========== ========== ========== ==========
See Notes to Financial Statements.
</TABLE>
FS-60
<PAGE> 164
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 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" or "Adviser"). 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-61
<PAGE> 165
CMA NEW YORK MUNICIPAL MONEY FUND
NOTES TO FINANCIAL STATEMENTS (CONCLUDED)
The most restrictive annual expense limitation requires that the
Adviser reimburse the Fund to the extent the Fund's expenses
(excluding interest, taxes, distribution fees, brokerage fees and
commissions, and extraordinary items) exceed in any fiscal year 2.5%
of the Fund's first $30 million of average daily net assets, 2.0% of
the Fund's next $70 million of average daily net assets and 1.5% of
the average daily net assets in excess thereof. No fee payment will
be made to the Adviser during the year which will cause such
expenses to exceed the pro rata expense limitation at the time of
such payment.
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, MLPF&S, 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, 1996, the Fund had a net capital loss carryforward of
approximately $890,000, of which $87,000 expires in 1998, $203,000
expires in 2001, $293,000 expires in 2002, $305,000 expires in 2003
and $2,000 expires in 2004. This amount will be available to offset
like amounts of any future taxable gains.
FS-62
<PAGE> 166
- --------------------------------------------------------------------------------
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, 1996, the related statements
of operations for the year then ended and changes in net assets for each of the
years in the two-year period then ended, and the financial highlights for each
of the years in the four-year period then ended and for the period May 28, 1991
(commencement of operations) to March 31, 1992. 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, 1996 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 North Carolina
Municipal Money Fund of CMA Multi-State Municipal Series Trust as of March 31,
1996, 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, 1996
FS-63
<PAGE> 167
<TABLE>
CMA NORTH CAROLINA MUNICIPAL MONEY FUND
SCHEDULE OF INVESTMENTS AS OF MARCH 31, 1996 (IN THOUSANDS)
<CAPTION>
Face Value
State Amount Issue (Note 1a)
<S> <C> <C> <C>
North $ 1,000 Beaufort County, North Carolina, Industrial Facilities and Pollution
Carolina--94.3% Control Financing Authority Revenue Bonds (Texasgulf, Inc. Project),
VRDN, 3.40% due 12/01/2000 (a) $ 1,000
1,095 Beaufort County, North Carolina, Refunding and Improvement Bonds, UT,
4% due 2/01/1997 (b) 1,102
2,068 Bladen County, North Carolina, BAN (Water District), UT, 3.59% due
4/24/1996 (c) 2,068
3,000 Carteret County, North Carolina, Industrial Facilities and Pollution
Control Financing Authority, PCR (Texasgulf, Inc. Project), VRDN,
3.425% 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, 3.70% due 12/01/2009 (a) 800
895 Charlotte, North Carolina, COP (FY1996 Acquisition Project), Series A,
3.30% due 9/01/1996 895
950 Charlotte, North Carolina, Refunding Bonds, GO, UT, 4.20% due 2/01/1997 958
Craven County, North Carolina, Industrial Facilities and Pollution
Control Financing Authority Revenue Bonds (Cravenwood Energy Project),
VRDN, AMT (a):
1,100 Series A, 3.60% due 5/01/2011 1,100
8,500 Series B, 3.60% due 5/01/2011 8,500
3,600 Series C, 3.60% due 5/01/2011 3,600
1,430 Craven County, North Carolina, School, BAN, UT, 3.63% due 6/05/1996 (c) 1,430
Cumberland County, North Carolina, Industrial Facilities and Pollution
Control Financing Authority, Revenue Refunding Bonds (Monsanto Co.
Project), VRDN (a):
1,715 3.20% due 6/01/2012 1,715
600 3.20% due 10/01/2014 600
Durham County, North Carolina, Public Improvement Bonds, VRDN, UT (a):
1,000 3.25% due 5/01/2009 1,000
1,000 3.25% due 5/01/2010 1,000
1,000 3.30% due 2/01/2011 1,000
1,000 3.25% due 5/01/2011 1,000
900 3.30% due 2/01/2013 900
1,800 Durham County, North Carolina, Water and Sewer Utility System Revenue
Bonds, VRDN, 3.40% due 12/01/2015 (a) 1,800
1,000 Forsyth County, North Carolina, GO, UT, 4.70% due 2/01/1997 1,012
2,800 Gaston County, North Carolina, Industrial Facilities and Pollution
Control Financing Authority Revenue Bonds (Mount Holly Enterprises/
Queens G.P. Inc.), VRDN, AMT, 3.65% due 5/01/2004 (a) 2,800
950 Gaston County, North Carolina, Public Improvement, UT, 4.90% due
3/01/1997 (d) 963
Granville County, North Carolina, Industrial Facilities and Pollution
Control Financing Authority Revenue Bonds, VRDN (a):
4,000 (Mayville Metal Production Project), 3.50% due 5/23/2020 4,000
2,155 (Tuscarora Plastics, Inc. Project), 3.65% due 12/01/2001 2,155
</TABLE>
Portfolio Abbreviations for CMA North Carolina Municipal Money Fund
AMT Alternative Minimum Tax (subject to)
BAN Bond Anticipation Notes
COP Certificates of Participation
CP Commercial Paper
DATES Daily Adjustable Tax-Exempt Securities
GO General Obligation Bonds
IDA Industrial Development Authority
IDR Industrial Development Revenue Bonds
PCR Pollution Control Revenue Bonds
UT Unlimited Tax
VRDN Variable Rate Demand Notes
FS-64
<PAGE> 168
<TABLE>
CMA NORTH CAROLINA MUNICIPAL MONEY FUND
SCHEDULE OF INVESTMENTS AS OF MARCH 31, 1996 (CONTINUED) (IN THOUSANDS)
<CAPTION>
Face Value
State Amount Issue (Note 1a)
<S> <C> <C> <C>
North Carolina $ 500 Greene County, North Carolina, Industrial Facilities and Pollution
(continued) Control Financing Authority, IDA, Revenue Bonds (Federal Paper Board
Company, Inc. Project), VRDN, AMT, 3.50% due 11/01/2009 (a) $ 500
Greensboro, North Carolina, Public Improvement Bonds, VRDN, Series B (a):
1,400 3.30% due 4/01/2007 1,400
1,450 3.30% due 4/01/2008 1,450
1,000 Guilford County, North Carolina, Industrial Facilities and Pollution
Control Financing Authority Revenue Bonds (Pharmagraphics Inc.
Project), VRDN, AMT, 3.70% due 9/01/2010 (a) 1,000
24,015 Halifax County, North Carolina, Industrial Facilities and Pollution
Control Financing Authority Revenue Bonds (Exempt Facilities-
Westmoreland Project), VRDN, AMT, 3.40% due 12/01/2019 (a) 24,015
2,500 Hillsborough, North Carolina, GO, BAN, 3.17% due 10/30/1996 (c) 2,501
Iredell County, North Carolina, Industrial Facilities and Pollution
Control Financing Authority Revenue Bonds:
4,000 (Purina Mills Inc. Project), VRDN, AMT, 3.45% due 7/01/2020 (a) 4,000
8,300 (Rubbermaid Specialty Products, Inc.), 4.25% due 6/01/1996 8,300
3,700 Lenoir County, North Carolina, Industrial Facilities and Pollution Control
Financing Authority Revenue Bonds (West Co. Nebraska, Inc. Project), VRDN,
3.40% due 10/01/2005 (a) 3,700
9,100 Lincoln County, North Carolina, Industrial Facilities and Pollution Control
Financing Authority Revenue Bonds (Hof Textiles Inc. Project), VRDN, AMT,
3.30% due 10/01/2011 (a) 9,100
Mecklenberg County, North Carolina, Industrial Facilities and Pollution
Control Financing Authority Revenue Bonds, VRDN (a):
2,000 (Edgecomb Metals Company Project), 3.30% due 12/01/2009 2,000
900 (Flawa Corporation Project), AMT, 3.45% due 12/01/2008 900
1,500 (Griffith Micro Science Project), AMT, 3.50% due 11/01/2007 1,500
4,700 Mecklenberg County, North Carolina, Lease Revenue Bonds (The Young Mens
Christian), VRDN, 3.50% due 2/01/2016 (a) 4,700
1,000 Mecklenburg County, North Carolina, UT, Series A and B, 6.60% due 4/01/1997 1,030
1,055 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) 1,055
North Carolina Eastern Municipal Power Agency, Power System Revenue
Bonds, Series B, CP:
5,800 3.35% due 4/08/1996 5,800
5,800 3.35% due 4/09/1996 5,800
North Carolina Educational Facilities Finance Agency Revenue Bonds,
VRDN (a):
3,900 (Duke University Project), Series A, 3.25% due 12/01/2017 3,900
1,500 (Duke University Project), Series A, 3.25% due 6/01/2027 1,500
2,700 (Wake Forest University Project), 3.30% due 1/01/2009 2,700
North Carolina Medical Care Commission, Hospital Revenue Bonds, VRDN (a):
8,200 (Carol Woods Project), 3.55% due 4/01/2021 8,200
3,300 (Duke University Hospital), Series B, 3.25% due 6/01/2015 3,300
3,500 (Duke University Hospital), Series C, 3.25% due 6/01/2015 3,500
2,130 (Duke University Hospital), Series D, 3.25% due 6/01/2015 2,130
7,000 (Pooled Equipment Financing Project), 3.35% due 12/01/2025 (b) 7,000
200 Refunding (Moses H. Cone Memorial Hospital Project), 3.35% due
10/01/2023 200
North Carolina Municipal Power Agency, Electric Revenue Bonds (No. 1
Catawba), CP:
11,000 3.70% due 4/10/1996 11,000
10,000 3.40% due 6/21/1996 10,000
15,000 3.45% due 7/16/1996 15,000
15,000 3.40% due 8/21/1996 15,000
</TABLE>
FS-65
<PAGE> 169
<TABLE>
CMA NORTH CAROLINA MUNICIPAL MONEY FUND
SCHEDULE OF INVESTMENTS AS OF MARCH 31, 1996 (CONCLUDED) (IN THOUSANDS)
<CAPTION>
Face Value
State Amount Issue (Note 1a)
<S> <C> <C> <C>
North Carolina $ 2,000 North Carolina State Port Authority, Docks and Wharves Facility Revenue
(concluded) Bonds(Morehead City Terminals), VRDN, AMT, 3.65% due 1/01/2016 (a) $ 2,000
1,000 Orange County, North Carolina, GO, UT, 5.30% due 2/01/1997 1,015
7,200 Person County, North Carolina, Industrial Facilities and Pollution Control
Financing Authority, Solid Waste Disposal Revenue Bonds (Carolina Power
and Light Company), VRDN, AMT, DATES, 3.35% due 11/01/2016 (a) 7,200
1,405 Piedmont Triad Airport Authority, North Carolina, Special Facility Revenue
Bonds(Purpose-Cessna Aircraft Company Project), VRDN, AMT, 3.65% due
10/01/2012 (a) 1,405
1,000 Raleigh, North Carolina, Public Improvement Bonds, UT, 6.80% due
2/01/1997 1,031
Raleigh-Durham, North Carolina, Airport Authority, Special Facility
Revenue Refunding Bonds (American Airlines), VRDN (a):
3,600 Series A, 3.50% due 11/01/2005 3,600
7,500 Series B, 3.50% due 11/01/2015 7,500
700 Rowan County, North Carolina, Industrial Facilities and Pollution
Control Financing Authority Revenue Bonds (Reynolds Metals Company
Project), 3.70% due 6/01/1996 700
7,900 Union County, North Carolina, Industrial Facilities and Pollution Control
Financing Authority, IDR, Refunding (Square D Co. Project), VRDN, 3.30%
due 3/01/2003 (a) 7,900
University of North Carolina, Chapel Hill School of Medicine and
Ambulatory Care Clinic Revenue Bonds, VRDN (a):
1,600 3.40% due 10/01/2002 1,600
3,000 3.30% due 7/01/2012 3,000
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, 3.35% due 12/01/2000 (a) 2,000
800 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) 800
1,350 Winston-Salem, North Carolina, Urban Redevelopment, Mortgage Revenue
Refunding Bonds (Summit Square Garden Apartments), CP, 3.30% due
4/24/1996 1,350
6,000 Winston-Salem, North Carolina, Water and Sewer System Revenue Bonds, CP,
3.30% due 4/24/1996 6,000
Puerto Rico-- Puerto Rico Commonwealth, Government Development Bank, Revenue Bonds, CP:
4.8% 5,000 3.20% due 4/24/1996 5,000
3,500 3.20% due 5/21/1996 3,500
Puerto Rico Industrial, Medical and Environmental Pollution Control
Facilities Financing Authority Revenue Bonds:
1,750 (Abbott Labs Project), 3.41% due 3/01/1997 1,752
2,940 (Dickinson & Co.), 3.50% due 3/01/1997 2,942
Total Investments (Cost--$271,374*)--99.1% 271,374
Other Assets Less Liabilities--0.9% 2,536
--------
Net Assets--100.0% $273,910
========
</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, 1996.
(b)MBIA Insured.
(c)Bank Qualified.
(d)AMBAC Insured.
*Cost for Federal income tax purposes.
See Notes to Financial Statements.
FS-66
<PAGE> 170
CMA NORTH CAROLINA MUNICIPAL MONEY FUND
STATEMENT OF ASSETS AND LIABILITIES AS OF MARCH 31, 1996
<TABLE>
<S> <C> <C>
Assets:
Investments, at value (identified cost--$271,374,281) (Note 1a) $ 271,374,281
Cash 76,716
Receivables:
Securities sold $ 1,770,000
Interest 946,059 2,716,059
-------------
Deferred organization expenses (Note 1d) 1,243
Prepaid registration fees and other assets (Note 1d) 33,851
-------------
Total assets 274,202,150
-------------
Liabilities:
Payables:
Investment adviser (Note 2) 111,678
Distributor (Note 2) 91,389
Dividends to shareholders (Note 1e) 125 203,192
-------------
Accrued expenses and other liabilities 88,539
-------------
Total liabilities 291,731
-------------
Net Assets $ 273,910,419
=============
Net Assets Consist of:
Shares of beneficial interest, $0.10 par value, unlimited number of shares authorized $ 27,394,679
Paid-in capital in excess of par 246,552,109
Accumulated realized capital losses--net (Note 4) (36,369)
-------------
Net Assets--Equivalent to $1.00 per share based on 273,946,788 shares of beneficial
interest outstanding $ 273,910,419
=============
</TABLE>
See Notes to Financial Statements.
FS-67
<PAGE> 171
CMA NORTH CAROLINA MUNICIPAL MONEY FUND
STATEMENT OF OPERATIONS FOR THE YEAR ENDED MARCH 31, 1996
<TABLE>
<S> <C> <C>
Investment Income (Note 1c):
Interest and amortization of premium and discount earned $ 10,007,334
Expenses:
Investment advisory fees (Note 2) $ 1,326,840
Distribution fees (Note 2) 330,722
Transfer agent fees (Note 2) 79,231
Accounting services (Note 2) 62,279
Professional fees 51,952
Registration fees (Note 1d) 45,482
Printing and shareholder reports 27,425
Custodian fees 26,659
Pricing fees 8,170
Amortization of organization expenses (Note 1d) 8,119
Trustees' fees and expenses 3,299
Other 5,625
-------------
Total expenses before reimbursement 1,975,803
Reimbursement of expenses (Note 2) (137,989)
-------------
Total expenses after reimbursement 1,837,814
-------------
Investment income--net 8,169,520
Realized Loss on Investments--Net (Note 1c) (7,855)
-------------
Net Increase in Net Assets Resulting from Operations $ 8,161,665
=============
</TABLE>
CMA NORTH CAROLINA MUNICIPAL MONEY FUND
STATEMENTS OF CHANGES INNET ASSETS
<TABLE>
<CAPTION>
For the Year Ended March 31,
Increase (Decrease) in Net Assets: 1996 1995
<S> <C> <C>
Operations:
Investment income--net $ 8,169,520 $ 7,592,481
Realized loss on investments--net (7,855) (13,460)
------------- -------------
Net increase in net assets resulting from operations 8,161,665 7,579,021
------------- -------------
Dividends to Shareholders (Note 1e):
Investment income--net (8,169,520) (7,592,405)
------------- -------------
Net decrease in net assets resulting from dividends to shareholders (8,169,520) (7,592,405)
------------- -------------
Beneficial Interest Transactions (Note 3):
Net proceeds from sale of shares 854,050,473 924,263,338
Net asset value of shares issued to shareholders in reinvestment
of dividends (Note 1e) 8,167,035 7,592,507
------------- -------------
862,217,508 931,855,845
Cost of shares redeemed (867,003,212) (946,590,315)
------------- -------------
Net decrease in net assets derived from beneficial interest transactions (4,785,704) (14,734,470)
------------- -------------
Net Assets:
Total decrease in net assets (4,793,559) (14,747,854)
Beginning of year 278,703,978 293,451,832
------------- -------------
End of year $ 273,910,419 $ 278,703,978
============= =============
</TABLE>
See Notes to Financial Statements.
FS-68
<PAGE> 172
CMA NORTH CAROLINA MUNICIPAL MONEY FUND
FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
For the
Period
The following per share data and ratios have been derived May 28,
from information provided in the financial statements. 1991++ to
For the Year Ended March 31, March 31,
Increase (Decrease) in Net Asset Value: 1996 1995 1994 1993 1992
<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 .02 .02 .03
-------- -------- -------- -------- --------
Total from investment operations .03 .03 .02 .02 .03
-------- -------- -------- -------- --------
Less dividends from investment income--net (.03) (.03) (.02) (.02) (.03)
-------- -------- -------- -------- --------
Net asset value, end of period $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
======== ======== ======== ======== ========
Total Investment Return 3.13% 2.61% 1.85% 2.25% 3.49%*
======== ======== ======== ======== ========
Ratios to Average Net Assets:
Expenses, net of reimbursement .69% .62% .61% .57% .45%*
======== ======== ======== ======== ========
Expenses .74% .72% .71% .73% .83%*
======== ======== ======== ======== ========
Investment income--net 3.08% 2.58% 1.84% 2.20% 3.25%*
======== ======== ======== ======== ========
Supplemental Data:
Net assets, end of period (in thousands) $273,910 $278,704 $293,452 $235,384 $221,060
======== ======== ======== ======== ========
</TABLE>
*Annualized.
++Commencement of Operations.
See Notes to Financial Statements.
FS-69
<PAGE> 173
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 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" or "Adviser"). 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.
The most restrictive annual expense limitation requires that the
Adviser reimburse the Fund to the extent the Fund's expenses
FS-70
<PAGE> 174
CMA NORTH CAROLINA MUNICIPAL MONEY FUND
NOTES TO FINANCIAL STATEMENTS (CONCLUDED)
(excluding interest, taxes, distribution fees, brokerage fees and
commissions, and extraordinary items) exceed in any fiscal year 2.5%
of the Fund's first $30 million of average daily net assets, 2.0% of
the Fund's next $70 million of average daily net assets, and 1.5% of
the average daily net assets in excess thereof. No fee payment will
be made to the Adviser during the year which will cause such
expenses to exceed the pro rata expense limitation at the time of
such payment. For the year ended March 31, 1996, FAM earned fees of
$1,326,840, of which $137,989 was voluntarily waived.
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, MLPF&S, 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, 1996, the Fund had a net capital loss carryforward of
approximately $28,000, of which $5,000 expires in 2001, $10,000
expires in 2002, and $13,000 expires in 2003. This amount will be
available to offset like amounts of any future taxable gains.
FS-71
<PAGE> 175
- --------------------------------------------------------------------------------
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, 1996, the related statements of
operations for the year then ended and changes in net assets for each of the
years in the two-year period then ended, and the financial highlights for each
of the years in the four-year period then ended and for the period April 29,
1991 (commencement of operations) to March 31, 1992. 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, 1996 by correspondence with the custodian and brokers. An audit also
includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, such financial statements and financial highlights present
fairly, in all material respects, the financial position of CMA Ohio Municipal
Money Fund of CMA Multi-State Municipal Series Trust as of March 31, 1996, 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
April 30, 1996
FS-72
<PAGE> 176
<TABLE>
CMA OHIO MUNICIPAL MONEY FUND
SCHEDULE OF INVESTMENTS AS OF MARCH 31, 1996 (IN THOUSANDS)
<CAPTION>
Face Value
State Amount Issue (Note 1a)
<S> <C> <C> <C>
Ohio--100.3% $ 495 Akron, Ohio, Sanitation Sewer System Revenue Bonds, VRDN, 3.50% due
12/01/2014 (a) $ 495
1,330 Allen County, Ohio, IDR (Nickles Bakery Project), VRDN, 4.25% due
1/02/2003 (a) 1,330
2,520 Ashtabula County, Ohio, IDR (Neff-Perkins Co. Project), VRDN, AMT,
3.65% due 6/01/2005 (a) 2,520
Avon, Ohio, Local School District, BAN, UT:
3,000 3.94% due 7/11/1996 3,004
1,950 4.16% due 7/11/1996 1,953
6,000 Beavercreek, Ohio, Local School District, BAN, UT, 4.03% due 7/18/1996 6,010
Brooklyn Heights, Ohio, IDR, VRDN, AMT (a):
475 (ATC Nymold Inc.), 3.65% due 2/01/2002 475
3,200 (Keynote Office Center), 4.375% due 12/01/2009 3,200
2,500 Butler County, Ohio, BAN, 4.28% due 11/01/1996 2,506
255 Cincinnati and Hamilton Counties, Ohio, Port Authority, IDR, Refunding
(Schottenstein Stores), VRDN, 3.45% due 9/01/1997 (a) 255
Cincinnati, Ohio, City School District:
3,850 BAN, 4.03% due 9/20/1996 3,860
4,900 TAN, 4.31% due 6/28/1996 4,907
2,300 Clermont County, Ohio, IDR (Southern Ohio Fabricator), VRDN, AMT,
Series A, 3.60% due 9/01/2005 (a) 2,300
1,500 Crawford County, Ohio, BAN, 3.875% due 8/08/1996 (b) 1,502
1,000 Cuyahoga County, Ohio, Health Care Facilities Revenue Bonds (Benjamin
Rose Institute Project), VRDN, Series B, 3.55% due 12/01/2000 (a) 1,000
14,100 Cuyahoga County, Ohio, Hospital Revenue Improvement Bonds (Cleveland
University Hospital), VRDN, 3.35% due 1/01/2016 (a) 14,100
3,355 Cuyahoga County, Ohio, IDR (Parma Care), VRDN, 3.65% due 12/01/2011 (a) 3,355
995 Cuyahoga County, Ohio, IDR, Refunding (Pleasant Lake Association
Project), VRDN, 3.50% due 5/01/2011 (a) 995
Cuyahoga County, Ohio, IDR, VRDN (a):
1,000 (Athens Pastries Inc. Project), AMT, 3.65% due 6/03/2009 1,000
5,390 (Cleveland E Excel Ltd.), AMT, 3.65% due 3/01/2019 5,390
715 (Erieview Metal Treating Project), AMT, 3.65% due 5/05/2010 715
1,925 (Puritas Association Project), 3.50% due 12/01/2006 1,925
3,950 (Suburban Pavilion Inc. Project), AMT, 4.75% due 10/02/2006 3,950
Dayton, Ohio, BAN:
675 4.05% due 7/25/1996 675
6,000 (Airport Improvement), 4.10% due 7/25/1996 6,008
Dayton, Ohio, Special Facilities Revenue Bonds (Emery Air
Freight Project), VRDN (a):
8,700 AMT, Series D, 3.65% due 10/01/2009 8,700
5,300 Series C, 3.50% due 10/01/2009 5,300
</TABLE>
Portfolio Abbreviations for CMA Ohio Municipal Money Fund
AMT Alternative Minimum Tax (subject to)
BAN Bond Anticipation Notes
CP Commercial Paper
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-73
<PAGE> 177
<TABLE>
CMA OHIO MUNICIPAL MONEY FUND
SCHEDULE OF INVESTMENTS AS OF MARCH 31, 1996 (CONTINUED) (IN THOUSANDS)
<CAPTION>
Face Value
State Amount Issue (Note 1a)
<S> <C> <C> <C>
Ohio $10,000 Eagle Tax Exempt Trust, Ohio, VRDN, 3.47% due 7/01/2015 (a) $ 10,000
(continued) Erie County, Ohio, IDR, VRDN (a):
500 (Brighton Manor Company Project), AMT, 3.65% due 11/01/2016 500
1,815 Refunding (Huron Health Care Center Project), 3.50% due 8/01/2007 1,815
4,515 Fairfield County, Ohio, BAN, 4.55% due 10/24/1996 (b) 4,531
843 Fairfield, Ohio, City School District, BAN, 4% due 6/27/1996 (b) 844
Franklin County, Ohio, Hospital Revenue Bonds, VRDN (a):
5,200 (Children's Hospital Project), Series B, 3.60% due 12/01/2014 5,200
7,200 (Franciscan Sisters-Saint Anthony Medical Facility), Series B, 3.35%
due 7/01/2015 7,200
1,000 (Lutheran Senior City Inc. Project), 3.50% due 5/01/2015 1,000
2,500 Franklin County, Ohio, IDR, Refunding (Heekin Can Inc. Project),
VRDN, AMT, 3.60% due 5/01/2007 (a) 2,500
5,500 Franklin County, Ohio, M/F Housing Revenue Bonds (Colonial Courts
Project), VRDN, AMT, 3.60% due 12/01/2024 (a) 5,500
2,722 Franklin, Ohio, Local School District (Muskingum County Construction
Notes), UT, 3.85% due 10/30/1996 (b) 2,729
3,300 Fulton County, Ohio, IDR (Gilders Business Holdings Project), VRDN, AMT,
3.65% due 4/01/2007 (a) 3,300
2,320 Geauga County, Ohio, IDR (Neff-Perkins Co. Project), VRDN, AMT, 3.65%
due 6/01/2005 (a) 2,320
1,000 Greene County, Ohio, IDR (FC Ltd. AFC Stamping), VRDN, AMT, 3.75% due
9/01/2016 (a) 1,000
1,450 Hamilton County, Ohio, Economic Development Revenue Bonds (Cincinnati
Performing Arts), VRDN, 3.45% due 6/15/2005 (a) 1,450
1,400 Hancock County, Ohio, IDR (Quality Material Handling Equipment), VRDN,
4.375% due 12/01/1998 (a) 1,400
1,225 Huber Heights, Ohio, IDR (Lasermike Inc. Project), VRDN, AMT, 3.65% due
12/01/2014 (a) 1,225
905 Huron, Ohio, BAN, 4.49% due 5/31/1996 (b) 905
8,400 Indian Lake, Ohio, Local School District, BAN, UT, 4.20% due 4/09/1996 8,401
2,000 Lucas County, Ohio, BAN (Sewer and Water District), 4.25% due 11/28/1996 (b) 2,006
250 Lucas County, Ohio, Hospital Revenue Bonds (Sunshine Children's Home
Project), VRDN, 3.50% due 12/01/2007 (a) 250
Marion County, Ohio, Hospital Improvement Revenue Bonds (Pooled Lease
Program), VRDN (a):
3,105 3.50% due 10/01/2022 3,105
1,455 Series A, 3.50% due 5/01/2019 1,455
2,000 Marion County, Ohio, IDR (Ohio Packaging Company Project), VRDN, AMT,
3.65% due 11/01/2015 (a) 2,000
3,155 Mentor, Ohio, IDR (Metcor Partnership/Tridelt), VRDN, AMT, 3.65% due
12/01/2008 (a) 3,155
6,135 Montgomery County, Ohio, BAN, 4.25% due 4/26/1996 6,137
2,560 Montgomery County, Ohio, IDR (Citywide Development Corp. Project),
VRDN, AMT, 3.65% due 12/01/2013 (a) 2,560
2,345 Moraine, Ohio, IDR, Refunding (Gray America Corporation Project),
VRDN, AMT, 3.65% due 12/01/2001 (a) 2,345
2,200 Northeastern, Ohio, Local School District (Clark County), BAN, UT,
4.10% due 6/11/1996 (b) 2,201
2,355 Ohio HFA, M/F Housing Revenue Bonds (Kenwood Congregate Retirement
Program), VRDN, 3.40% due 12/01/2015 (a) 2,355
5,000 Ohio State Air Quality Development Authority, PCR (Duquesne Light),
CP, AMT, 3.30% due 5/10/1996 5,000
</TABLE>
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<PAGE> 178
<TABLE>
CMA OHIO MUNICIPAL MONEY FUND
SCHEDULE OF INVESTMENTS AS OF MARCH 31, 1996 (CONTINUED) (IN THOUSANDS)
<CAPTION>
Face Value
State Amount Issue (Note 1a)
<S> <C> <C> <C>
Ohio Ohio State Air Quality Development Authority, Revenue Refunding Bonds:
(continued) $ 2,000 (Cincinnati Gas & Electric), VRDN, Series B, 3.45% due 9/01/2030 (a) $ 2,000
1,730 (Environmental Improvement-Usx Project), 3.70% due 5/01/1996 1,730
2,910 Ohio State Higher Educational Facilities, Commission Revenue Bonds
(Mount Vernon), VRDN, 3.50% due 9/01/2009 (a) 2,910
3,400 Ohio State Higher Educational Facilities Revenue Bonds (Kenyon College
Project), VRDN, 3.45% due 4/01/2022 (a) 3,400
1,400 Ohio State, PCR, Refunding (Sohio Air Project), VRDN, 3.20% due
5/01/2022 (a) 1,400
3,300 Ohio State Water Development Authority, Environmental Improvement
Revenue Bonds (Honda America), VRDN, 3.50% due 1/01/1997 (a) 3,300
Ohio State Water Development Authority, Environmental Improvement
Revenue Bonds (Mead Corp. Project), AMT, CP:
5,000 3.40% due 4/01/1996 5,000
4,000 3.35% due 5/09/1996 4,000
Ohio State Water Development Authority, Pollution Control Facilities
Revenue Bonds (Duquesne Light Co. Project), AMT:
5,000 CP, 3.55% due 7/25/1996 5,000
3,000 VRDN, 3.45% due 10/01/2023 (a) 3,000
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
600 Paulding County, Ohio, IDR, Refunding (Countrymark Cooperative Inc.
Project), VRDN, 3.55% due 3/01/1999 (a) 600
Portage County, Ohio, IDR, VRDN, AMT (a):
2,025 (NCSP L.P. Project), 3.65% due 7/01/2014 2,025
2,800 (PM Property One, Ltd.), 3.65% due 11/01/2012 2,800
1,100 Rickenbacker, Ohio, Port Authority, IDR, Refunding (Rickenbacker
Holdings, Inc.), VRDN, 3.50% due 12/01/2010 (a) 1,100
1,250 Ross County, Ohio, Hospital Revenue Bonds (Medical Center Hospital
Project), VRDN, 3.50% due 12/01/2020 (a) 1,250
Sandusky County, Ohio, IDR, VRDN, AMT (a):
1,300 (Brighton Manor Co. Project), 3.65% due 12/01/2016 1,300
2,420 (Crown Battery Manufacturing Co.), 3.50% due 8/06/2003 2,420
1,270 Seven Hills, Ohio, BAN, 4.40% due 8/01/1996 (b) 1,272
380 Solon, Ohio, IDR (Tameran Project), VRDN, AMT, 3.65% due 11/01/2004 (a) 380
1,350 Stark County, Ohio, IDR (Wilkof-Morris Project), VRDN, AMT, 3.65% due
1/01/2010 (a) 1,350
1,425 Stark County, Ohio, Sewer District Improvement Notes, 3.90% due
10/01/1996 (b) 1,428
1,000 Stow, Ohio, Refunding, BAN, 4.25% due 12/20/1996 (b) 1,004
2,250 Strongsville, Ohio, IDR (E&E Properties/Dupli System Project), VRDN,
AMT, 3.65% due 2/01/2010 (a) 2,250
900 Summit County, Ohio, Hospital Facilities Revenue Bonds (Cuyahoga Falls
General Hospital), VRDN, Series B, 3.55% due 7/01/1999 (a) 900
Summit County, Ohio, IDR:
410 (Adjusted Forest Manufacturing Project), VRDN, 3.65% due 11/01/2001 (a) 410
1,920 (Austin Printing Co. Inc. Project), VRDN, AMT, 3.65% due 8/01/2006 (a) 1,920
940 (Hardcoating Project), VRDN, AMT, 3.65% due 7/01/2002 (a) 940
760 (Lucerne Production Project), VRDN, AMT, 3.65% due 6/01/2002 (a) 760
980 (Ohio Camshaft Project), 3.50% due 10/01/1996 980
1,365 (Sigma Properties Project), VRDN, AMT, 3.65% due 6/01/2008 (a) 1,365
650 (Struktol Project), VRDN, AMT, Series A, 3.65% due 6/01/2002 (a) 650
1,125 (Texler Inc. Project), AMT, 3.95% due 5/01/1996 1,125
</TABLE>
FS-75
<PAGE> 179
<TABLE>
CMA OHIO MUNICIPAL MONEY FUND
SCHEDULE OF INVESTMENTS AS OF MARCH 31, 1996 (CONCLUDED) (IN THOUSANDS)
<CAPTION>
Face Value
State Amount Issue (Note 1a)
<S> <C> <C> <C>
Ohio $ 1,250 Troy, Ohio, Economic Development Revenue Bonds (L&CP Corporation
(concluded) Project), AMT, 3.70% due 6/01/1996 $ 1,250
2,000 Trumbull County, Ohio, IDR (Multi-Mode-ATD Corp. Project), VRDN, AMT,
3.65% due 8/01/2010 (a) 2,000
5,400 University of Cincinnati, Ohio, General Receipts, BAN, UT, Series S,
4.25% due 8/28/1996 5,405
5,000 Upper Arlington, Ohio, City School District, UT, 4.20% due 4/11/1996 5,001
Warren County, Ohio, IDR, VRDN, AMT (a):
3,900 (Johnson & Hardin Enterprises), Series A, 3.60% due 2/01/2010 3,900
2,080 (Kardol Quality Products Project), 3.60% due 12/01/2014 2,080
1,000 Warren County, Ohio, Special Assignment, BAN, 4.58% due 9/05/1996 1,004
Wayne, Ohio, Local School District, Warren County, BAN, UT:
3,500 4.15% due 7/18/1996 3,507
2,000 4.34% due 7/18/1996 2,004
2,590 Willoughby, Ohio, IDR (Malish Brush & Specialty), VRDN, AMT, 3.65% due
6/01/2009 (a) 2,590
3,130 Wood County, Ohio, Economic Development Revenue Bonds (Great Lakes
Window Project), AMT, 4.75% due 6/01/1996 3,130
Wood County, Ohio, IDR, VRDN, AMT (a):
1,235 (B & B Box Co. Project), 3.50% due 3/01/2011 1,235
1,200 (Centaur Tool & Die Inc. Project), 3.65% due 8/01/2010 1,200
3,995 Zanesville-Muskingum County, Ohio, Port Authority, IDR (B.E. Products
Inc. Project), VRDN, AMT, 3.65% due 9/01/2004 (a) 3,995
Total Investments (Cost--$283,089*)--100.3% 283,089
Liabilities in Excess of Other Assets--(0.3%) (902)
--------
Net Assets--100.0% $282,187
========
</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, 1996.
(b)Bank Qualified.
*Cost for Federal income tax purposes.
See Notes to Financial Statements.
FS-76
<PAGE> 180
CMA OHIO MUNICIPAL MONEY FUND
STATEMENT OF ASSETS AND LIABILITIES AS OF MARCH 31, 1996
<TABLE>
<S> <C> <C>
Assets:
Investments, at value (identified cost--$283,088,586) (Note 1a) $ 283,088,586
Cash 61,229
Interest receivable 1,678,006
Deferred organization expenses (Note 1d) 598
Prepaid registration fees and other assets (Note 1d) 31,265
-------------
Total assets 284,859,684
-------------
Liabilities:
Payables:
Securities purchased $ 2,407,779
Investment adviser (Note 2) 112,552
Distributor (Note 2) 86,627 2,606,958
-------------
Accrued expenses and other liabilities 65,697
-------------
Total liabilities 2,672,655
-------------
Net Assets $ 282,187,029
=============
Net Assets Consist of:
Shares of beneficial interest, $0.10 par value, unlimited number of shares authorized $ 28,221,859
Paid-in capital in excess of par 253,996,725
Accumulated realized capital losses--net (Note 4) (31,555)
-------------
Net Assets--Equivalent to $1.00 per share based on 282,218,584 shares of
beneficial interest outstanding $ 282,187,029
=============
</TABLE>
CMA OHIO MUNICIPAL MONEY FUND
STATEMENT OF OPERATIONS FOR THE YEAR ENDED MARCH 31, 1996
<TABLE>
<S> <C> <C>
Investment Income (Note 1c):
Interest and amortization of premium and discount earned $ 10,165,070
Expenses:
Investment advisory fees (Note 2) $ 1,290,786
Distribution fees (Note 2) 322,038
Transfer agent fees (Note 2) 58,301
Registration fees (Note 1d) 54,214
Professional fees 47,321
Accounting services (Note 2) 35,331
Custodian fees 23,376
Printing and shareholder reports 22,195
Pricing fees 10,595
Amortization of organization expenses (Note 1d) 7,801
Trustees' fees and expenses 2,649
Other 4,817
-------------
Total expenses 1,879,424
-------------
Investment income--net 8,285,646
-------------
Net Increase in Net Assets Resulting from Operations $ 8,285,646
=============
</TABLE>
See Notes to Financial Statements.
FS-77
<PAGE> 181
CMA OHIO MUNICIPAL MONEY FUND
STATEMENTS OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
For the Year Ended March 31,
Increase (Decrease) in Net Assets: 1996 1995
<S> <C> <C>
Operations:
Investment income--net $ 8,285,646 $ 5,687,952
Realized loss on investments--net -- (285)
------------- -------------
Net increase in net assets resulting from operations 8,285,646 5,687,667
------------- -------------
Dividends to Shareholders (Note 1e):
Investment income--net (8,285,646) (5,687,952)
------------- -------------
Net decrease in net assets resulting from dividends to shareholders (8,285,646) (5,687,952)
------------- -------------
Beneficial Interest Transactions (Note 3):
Net proceeds from sale of shares 1,007,207,668 823,958,852
Net asset value of shares issued to shareholders in reinvestment of dividends
(Note 1e) 8,285,698 5,687,899
------------- -------------
1,015,493,366 829,646,751
Cost of shares redeemed (970,961,402) (805,646,384)
------------- -------------
Net increase in net assets derived from beneficial interest transactions 44,531,964 24,000,367
------------- -------------
Net Assets:
Total increase in net assets 44,531,964 24,000,082
Beginning of year 237,655,065 213,654,983
------------- -------------
End of year $ 282,187,029 $ 237,655,065
============= =============
</TABLE>
CMA OHIO MUNICIPAL MONEY FUND
FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
For the
Period
The following per share data and ratios have been derived April 29,
from information provided in the financial statements. 1991++ to
For the Year Ended March 31, March 31,
Increase (Decrease) in Net Asset Value: 1996 1995 1994 1993 1992
<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 .02 .02 .03
-------- -------- -------- -------- --------
Total from investment operations .03 .03 .02 .02 .03
-------- -------- -------- -------- --------
Less dividends from investment income--net (.03) (.03) (.02) (.02) (.03)
-------- -------- -------- -------- --------
Net asset value, end of period $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
======== ======== ======== ======== ========
Total Investment Return 3.27% 2.65% 1.88% 2.27% 3.65%*
======== ======== ======== ======== ========
Ratios to Average Net Assets:
Expenses, net of reimbursement .73% .74% .72% .74% .57%*
======== ======== ======== ======== ========
Expenses .73% .74% .72% .74% .82%*
======== ======== ======== ======== ========
Investment income--net 3.21% 2.64% 1.86% 2.24% 3.52%*
======== ======== ======== ======== ========
Supplemental Data:
Net assets, end of period (in thousands) $282,187 $237,655 $213,655 $187,344 $192,173
======== ======== ======== ======== ========
</TABLE>
*Annualized.
++Commencement of Operations.
See Notes to Financial Statements.
FS-78
<PAGE> 182
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 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" or "Adviser"). 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-79
<PAGE> 183
CMA OHIO MUNICIPAL MONEY FUND
NOTES TO FINANCIAL STATEMENTS (CONCLUDED)
The most restrictive annual expense limitation requires that the
Adviser reimburse the Fund to the extent the Fund's expenses
(excluding interest, taxes, distribution fees, brokerage fees and
commissions, and extraordinary items) exceed in any fiscal year 2.5%
of the Fund's first $30 million of average daily net assets, 2.0% of
the Fund's next $70 million of average daily net assets, and 1.5% of
the average daily net assets in excess thereof. No fee payment will
be made to the Adviser during the year which will cause such
expenses to exceed the pro rata expense limitation at the time of
such payment.
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, MLPF&S, 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, 1996, 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-80
<PAGE> 184
- --------------------------------------------------------------------------------
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, 1996, the related statements
of operations for the year then ended and changes in net assets for each of the
years in the two-year period then ended, and the financial highlights for each
of the years in the 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, 1996 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 Pennsylvania
Municipal Money Fund of CMA Multi-State Municipal Series Trust as of March 31,
1996, 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, 1996
FS-81
<PAGE> 185
<TABLE>
CMA PENNSYLVANIA MUNICIPAL MONEY FUND
SCHEDULE OF INVESTMENTS AS OF MARCH 31, 1996 (IN THOUSANDS)
<CAPTION>
Face Value
State Amount Issue (Note 1a)
<S> <C> <S> <C>
Pennsylvania-- Allegheny County, Pennsylvania, Allegheny Hospital Development
96.0% Authority Revenue Bonds, VRDN (a):
$ 2,000 (Presbyterian Health Center), Series A, 3.35% due 3/01/2020 (b) $ 2,000
3,000 Refunding (Harmarville Rehabilitation Center Project), 3.45%
due 7/01/2007 3,000
6,500 Allegheny County, Pennsylvania, IDA (Duquesne Light Project), CP,
Series A, 3.50% due 6/06/1996 6,500
6,000 Allegheny County, Pennsylvania, IDA, Refunding (Commercial Development
Parkway Center Project), VRDN, Series A, 3.60% due 5/01/2009 (a) 6,000
4,000 Allegheny County, Pennsylvania, Port Authority, Grant Anticipation
Notes, Series A, 3.875% due 6/28/1996 4,000
Beaver County, Pennsylvania, IDA, PCR, CP (Duquesne Light Project),
AMT, Series A:
5,100 3.20% due 4/01/1996 5,100
4,200 3.45% due 5/14/1996 4,200
4,000 Beaver County, Pennsylvania, IDA, PCR, Refunding (Atlantic Richfield
Project), VRDN, 3.40% due 12/01/2020 (a) 4,000
8,000 Beaver County, Pennsylvania, IDA, PCR, Refunding (Toledo Edison
Project), CP, Series E, 3.25% due 6/05/1996 8,000
2,600 Berks County, Pennsylvania, IDA, IDR (Valley Forge Company, Inc.
Project), VRDN, AMT, Series A, 3.95% due 9/01/2006 (a) 2,600
1,360 Bucks County, Pennsylvania, IDA, Environmental Improvement Revenue
Refunding Bonds (USX Corporate Project), 3.70% due 5/01/1996 1,360
6,600 Bucks County, Pennsylvania, IDA, Revenue Bonds (Thypin Steel Co.),
VRDN, AMT, 3.35% due 12/01/2015 (a) 6,600
Carbon County, Pennsylvania, IDA, Resource Recovery Revenue Bonds
(Panther Creek Partners), CP, AMT:
2,000 Series A, 3.30% due 4/10/1996 2,000
4,050 Series A, 3.50% due 4/11/1996 4,050
7,400 Series A, 3.40% due 5/09/1996 7,400
1,245 Series A, 3.55% due 5/09/1996 1,245
2,550 Series B, 3.40% due 5/09/1996 2,550
14,540 Series B, 3.45% due 8/22/1996 14,540
2,415 Chester County, Pennsylvania, Health and Education Facilities Authority,
Health System Revenue Bonds (Main Line Health System), Series A, 3.70%
due 5/15/1996 2,416
3,400 Delaware County, Pennsylvania, IDA, PCR (BP Oil Inc. Project), UPDATES,
VRDN,3.50% due 12/01/2009 (a) 3,400
7,800 Delaware County, Pennsylvania, IDA, PCR, Refunding (BP Exploration &
Oil), VRDN, 3.50% due 10/01/2019 (a) 7,800
Delaware County, Pennsylvania, IDA, PCR, Refunding (Philadelphia Electric
Company), CP (c):
4,500 Series A, 3.30% due 4/24/1996 4,500
5,000 Series C, 3.30% due 4/09/1996 5,000
4,500 Series C, 3.20% due 4/29/1996 4,500
</TABLE>
Portfolio Abbreviations for CMA Pennsylvania Municipal Money Fund
ACES SM Adjustable Convertible Extendable Securities
AMT Alternative Minimum Tax (subject to)
CP Commercial Paper
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
FS-82
<PAGE> 186
<TABLE>
CMA PENNSYLVANIA MUNICIPAL MONEY FUND
SCHEDULE OF INVESTMENTS AS OF MARCH 31, 1996 (CONTINUED) (IN THOUSANDS)
<CAPTION>
Face Value
State Amount Issue (Note 1a)
<S> <C> <S> <C>
Pennsylvania Eagle Tax Exempt Trust, Pennsylvania, VRDN (a):
(continued) $ 4,300 Series 94, 3.52% due 5/01/2008 $ 4,300
6,000 Series A, 3.47% due 7/01/2025 6,000
Emmaus, Pennsylvania, General Authority Revenue Bonds (Local
Government Pool), VRDN (a):
4,600 Series H, 3.40% due 3/01/2024 4,600
3,300 Sub-Series B-12, 3.45% due 3/01/2024 3,300
11,300 Sub-Series C-8, 3.45% due 3/01/2024 11,300
5,000 Sub-Series C-9, 3.45% due 3/01/2024 5,000
7,000 Sub-Series C-11, 3.40% due 3/01/2024 7,000
3,600 Sub-Series D-11, 3.45% due 3/01/2024 3,600
3,500 Sub-Series F-7, 3.45% due 3/01/2024 3,500
5,000 Sub-Series F-8, 3.45% due 3/01/2024 5,000
3,200 Sub-Series F-9, 3.40% due 3/01/2024 3,200
6,800 Sub-Series G-7, 3.45% due 3/01/2024 6,800
3,100 Erie County, Pennsylvania, IDA, Revenue Bonds (McInnes Steel Co.),
VRDN, AMT, 3.60% due 11/01/2001 (a) 3,100
Montgomery County, Pennsylvania, IDA, PCR, Refunding
(PECO Energy Co.), CP:
10,000 3.35% due 5/07/1996 10,000
4,640 Series B, 3.20% due 4/10/1996 4,640
1,700 Montgomery County, Pennsylvania, IDA, Revenue Bonds (Merck & Co.
Project), VRDN, Series A, 3.80% due 10/01/2017 (a) 1,700
3,850 Montour County, Pennsylvania, IDA, PCR (Merck & Co. Project), VRDN,
Series A, 3.55% due 10/01/2003 (a) 3,850
Pennsylvania Economic Development Financing Authority, Economic
Development Revenue Bonds, VRDN (a):
5,000 AMT, Series D-7, 3.60% due 8/01/2022 5,000
2,100 AMT, Series I-3, 3.60% due 12/01/2011 2,100
1,600 (Erie Forge & Steel Project), AMT, Series B-4, 3.60% due 12/01/1999 1,600
1,800 (Erie Plating Company Project), AMT, Series B-5, 3.60% due
12/01/2004 1,800
6,100 (Gutchess Hardwoods Project), Series B, 3.90% due 4/01/2005 6,100
1,250 (Wendt Dunnington Co. Project), AMT, 3.60% due 9/01/2010 1,250
5,850 Pennsylvania Energy Development Authority, Energy Development Revenue
Bonds (B&W Ebensburg Project), VRDN, AMT, 3.40% due 12/01/2011 (a) 5,850
Pennsylvania Energy Development Authority, Energy Development Revenue
Bonds (Piney Creek Project), VRDN, AMT (a):
14,000 Series A, 3.45% due 12/01/2011 14,000
900 Series C, 3.45% due 12/01/2011 900
Pennsylvania State Higher Education Assistance Agency, Student Loan
Revenue Bonds, VRDN (a):
13,600 AMT, Series A, 3.50% due 1/01/2018 13,600
5,900 AMT, Series B, 3.50% due 7/01/2018 5,900
9,900 Series C, 3.50% due 7/01/2018 9,900
13,000 Pennsylvania State Higher Education, University Funding Obligation
Bonds (Temple University), 5% due 5/22/1996 13,020
2,200 Pennsylvania State Higher Educational Facilities Authority, College
and University Revenue Bonds (Temple University), VRDN, 3.40%
due 10/01/2009 (a) 2,200
</TABLE>
FS-83
<PAGE> 187
<TABLE>
CMA PENNSYLVANIA MUNICIPAL MONEY FUND
SCHEDULE OF INVESTMENTS AS OF MARCH 31, 1996 (CONCLUDED) (IN THOUSANDS)
<CAPTION>
Face Value
State Amount Issue (Note 1a)
<S> <C> <S> <C>
Pennsylvania Pennsylvania State Higher Educational Facilities Authority, Revenue
(concluded) Refunding Bonds (Carnegie Mellon University), VRDN (a):
$ 6,900 Series B, 3.50% due 11/01/2027 $ 6,900
2,400 Series C, 3.50% due 11/01/2029 2,400
5,000 Pennsylvania State Higher Educational Facilities Authority, Revenue
Refunding Bonds (Thomas Jefferson University), ACES, Series C, 3.25%
due 8/26/1996 (a) 5,000
28,500 Pennsylvania State, TAN, 4.50% due 6/28/1996 28,552
5,000 Pennsylvania State University, Series A, 4% due 12/18/1996 5,023
6,000 Pennsylvania State, VRDN, 3.52% due 5/01/2014 (a) 6,000
Philadelphia, Pennsylvania, Hospitals and Higher Education Facilities
Authority, Hospital Revenue Bonds, VRDN (a):
2,200 (Friends Hospital), Series A, 3.45% due 3/01/2006 2,200
2,360 Refunding (Pennsylvania Hospital), Series B, 3.35% due 7/01/2023 (c) 2,360
Philadelphia, Pennsylvania, IDA, Revenue Bonds, VRDN (a):
10,200 (30th Street Station Project), AMT, 3.55% due 1/01/2011 (b) 10,200
8,000 (Institute for Cancer Research Project), Series A, 3.40% due
7/01/2013 8,000
4,425 Philadelphia, Pennsylvania, Redevelopment Authority, M/F Housing
Revenue Refunding Bonds (Courts Project), VRDN, Series A, 3.30% due
6/01/2025 (a) 4,425
5,000 Philadelphia, Pennsylvania, School District, TRAN, UT, 4.50% due
6/28/1996 5,006
5,000 Philadelphia, Pennsylvania, TRAN, Series A, 4.50% due 6/27/1996 5,006
1,805 Pittsburgh, Pennsylvania, Urban Redevelopment Authority, S/F Mortgage
Revenue Bonds, AMT, Series C, 3.40% due 6/01/1996 1,805
Venango, Pennsylvania, IDA, Resource Recovery Revenue Bonds
(Scrubgrass Project), AMT, CP:
2,915 3.35% due 4/11/1996 2,915
2,000 3.70% due 5/10/1996 2,000
9,100 Refunding, Series A, 3.20% due 4/08/1996 9,100
2,750 Refunding, Series B, 3.80% due 4/09/1996 2,750
1,550 Refunding, Series B, 3.55% due 5/09/1996 1,550
2,050 Wallenpaupack, Pennsylvania, Area School District, TRAN, 4.18%
due 6/28/1996 2,051
3,900 Washington County, Pennsylvania, Lease Authority Revenue Bonds (Higher
Education Pooled Equipment Lease), VRDN, Series 1985-A, 3.55% due
11/01/2005 (a) 3,900
Total Investments (Cost--$400,014*)-- 96.0% 400,014
Other Assets Less Liabilities--4.0% 16,715
----------
Net Assets--100.0% $ 416,729
==========
<FN>
(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, 1996.
(b)MBIA Insured.
(c)FGIC Insured.
*Cost for Federal income tax purposes.
See Notes to Financial Statements.
</TABLE>
FS-84
<PAGE> 188
<TABLE>
CMA PENNSYLVANIA MUNICIPAL MONEY FUND
STATEMENT OF ASSETS AND LIABILITIES AS OF MARCH 31, 1996
<S> <C> <C>
Assets:
Investments, at value (identified cost--$400,014,003) (Note 1a) $ 400,014,003
Cash 66,004
Receivables:
Securities sold $ 14,003,200
Interest 2,843,176
Beneficial interest sold 157,346 17,003,722
---------------
Prepaid registration fees and other assets (Note 1d) 44,079
---------------
Total assets 417,127,808
---------------
Liabilities:
Payables:
Investment adviser (Note 2) 167,698
Distributor (Note 2) 130,674 298,372
---------------
Accrued expenses and other liabilities 100,230
---------------
Total liabilities 398,602
---------------
Net Assets $ 416,729,206
===============
Net Assets Consist of:
Shares of beneficial interest, $0.10 par value, unlimited number of shares
authorized $ 41,675,555
Paid-in capital in excess of par 375,079,671
Accumulated realized capital losses--net (Note 4) (26,020)
---------------
Net Assets--Equivalent to $1.00 per share based on 416,755,552 shares of
beneficial interest outstanding $ 416,729,206
===============
See Notes to Financial Statements.
</TABLE>
FS-85
<PAGE> 189
<TABLE>
CMA PENNSYLVANIA MUNICIPAL MONEY FUND
STATEMENT OF OPERATIONS FOR THE YEAR ENDED MARCH 31, 1996
<S> <C> <C>
Investment Income (Note 1c):
Interest and amortization of premium and discount earned $ 14,946,927
Expenses:
Investment advisory fees (Note 2) $ 1,939,951
Distribution fees (Note 2) 483,744
Transfer agent fees (Note 2) 110,609
Accounting services (Note 2) 61,755
Professional fees 53,802
Registration fees (Note 1d) 41,717
Printing and shareholder reports 35,745
Custodian fees 33,242
Pricing fees 8,244
Amortization of organization expenses (Note 1d) 3,976
Trustees' fees and expenses 3,966
Other 6,434
---------------
Total expenses 2,783,185
---------------
Investment income--net 12,163,742
---------------
Net Increase in Net Assets Resulting from Operations $ 12,163,742
===============
</TABLE>
<TABLE>
CMA PENNSYLVANIA MUNICIPAL MONEY FUND
STATEMENTS OF CHANGES IN NET ASSETS
<CAPTION>
For the Year Ended March 31,
Increase (Decrease) in Net Assets: 1996 1995
<S> <C> <C>
Operations:
Investment income--net $ 12,163,742 $ 8,936,700
Realized loss on investments--net -- (12,217)
--------------- ---------------
Net increase in net assets resulting from operations 12,163,742 8,924,483
--------------- ---------------
Dividends to Shareholders (Note 1e):
Investment income--net (12,163,742) (8,935,523)
--------------- ---------------
Net decrease in net assets resulting from dividends to shareholders (12,163,742) (8,935,523)
--------------- ---------------
Beneficial Interest Transactions (Note 3):
Net proceeds from sale of shares 1,486,225,661 1,238,593,671
Net asset value of shares issued to shareholders in reinvestment of
dividends (Note 1e) 12,166,441 8,935,464
--------------- ---------------
1,498,392,102 1,247,529,135
Cost of shares redeemed (1,435,297,725) (1,230,735,908)
--------------- ---------------
Net increase in net assets derived from beneficial interest transactions 63,094,377 16,793,227
--------------- ---------------
Net Assets:
Total increase in net assets 63,094,377 16,782,187
Beginning of year 353,634,829 336,852,642
--------------- ---------------
End of year $ 416,729,206 $ 353,634,829
=============== ===============
See Notes to Financial Statements.
</TABLE>
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<PAGE> 190
<TABLE>
CMA PENNSYLVANIA MUNICIPAL MONEY FUND
FINANCIAL HIGHLIGHTS
<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: 1996 1995 1994 1993 1992
<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 .03
---------- ---------- ---------- ---------- ----------
Total from investment operations .03 .03 .02 .02 .03
---------- ---------- ---------- ---------- ----------
Less dividends from investment income--net (.03) (.03) (.02) (.02) (.03)
---------- ---------- ---------- ---------- ----------
Net asset value, end of year $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
========== ========== ========== ========== ==========
Total Investment Return 3.20% 2.65% 1.87% 2.29% 3.58%
========== ========== ========== ========== ==========
Ratios to Average Net Assets:
Expenses .72% .71% .72% .72% .77%
========== ========== ========== ========== ==========
Investment income--net 3.13% 2.64% 1.85% 2.22% 3.47%
========== ========== ========== ========== ==========
Supplemental Data:
Net assets, end of year (in thousands) $ 416,729 $ 353,635 $ 336,853 $ 318,954 $ 243,225
========== ========== ========== ========== ==========
See Notes to Financial Statements.
</TABLE>
FS-87
<PAGE> 191
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) 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 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 reclassified to
reflect permanent differences between financial reporting and tax
purposes. Accordingly, current year's permanent book/tax differences
of $325 have been reclassified from paid-in-capital in excess of par
to accumulated net realized capital losses. 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" or "Adviser"). 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.
The most restrictive annual expense limitation requires that the
Adviser reimburse the Fund to the extent the Fund's expenses
FS-88
<PAGE> 192
CMA PENNSYLVANIA MUNICIPAL MONEY FUND
NOTES TO FINANCIAL STATEMENTS (CONCLUDED)
(excluding interest, taxes, distribution fees, brokerage fees and
commissions, and extraordinary items) exceed in any fiscal year 2.5%
of the Fund's first $30 million of average daily net assets, 2.0% of
the Fund's next $70 million of average daily net assets, and 1.5% of
the average daily net assets in excess thereof. No fee payment will
be made to the Adviser during the year which will cause such
expenses to exceed the pro rata expense limitation at the time of
such payment.
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, MLPF&S, 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, 1996, the Fund had a net capital loss carryforward of
approximately $26,000, of which $15,000 expires in 2002 and $11,000
expires in 2003. This amount will be available to offset like
amounts of any future taxable gains.
FS-89
<PAGE> 193
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<PAGE> 194
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................ 12
Determination of Net Asset Value...... 13
Yield Information..................... 14
Taxes................................. 14
Federal............................. 14
Environmental Tax................... 16
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 #16818-0796
CMA MULTI-STATE
MUNICIPAL SERIES TRUST
- - ARIZONA
- - CALIFORNIA
- - CONNECTICUT
- - MASSACHUSETTS
- - MICHIGAN
- - NEW JERSEY
- - NEW YORK
- - NORTH CAROLINA
- - OHIO
- - PENNSYLVANIA
- ------------------------------------------------------
STATEMENT OF
ADDITIONAL INFORMATION
- ------------------------------------------------------
July 26, 1996
- ------------------------------------------------------
(LOGO)YZa
