<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON MAY 17, 1994
SECURITIES ACT FILE NO. 33-50417
INVESTMENT COMPANY ACT FILE NO. 811-6282
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
----------------
FORM N-1A
REGISTRATION STATEMENT UNDER
THE SECURITIES ACT OF 1933 [X]
PRE-EFFECTIVE AMENDMENT NO. [_]
POST-EFFECTIVE AMENDMENT NO. 1 [X]
AND/OR
REGISTRATION STATEMENT UNDER
THE INVESTMENT COMPANY ACT OF 1940 [X]
[X]
AMENDMENT NO. 9
(Check appropriate box or boxes)
----------------
MERRILL LYNCH MULTI-STATE LIMITED MATURITYMUNICIPAL SERIES TRUST
(EXACT NAME OF REGISTRANT AS SPECIFIED IN CHARTER)
800 SCUDDERS MILL ROAD
PLAINSBORO, NEW JERSEY 08536
(ADDRESS OF PRINCIPAL EXECUTIVE (ZIP CODE)
OFFICES)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE (609) 282-2800
ARTHUR ZEIKEL
MERRILL LYNCH MULTI-STATE LIMITED MATURITY MUNICIPAL SERIES TRUST
800 SCUDDERS MILL ROAD, PLAINSBORO, NEW JERSEY
MAILING ADDRESS: BOX 9011, PRINCETON, NEW JERSEY 08543-9011
(NAME AND ADDRESS OF AGENT FOR SERVICE)
----------------
COPIES TO:
COUNSEL FOR THE TRUST: PHILIP L. KIRSTEIN, ESQ.
BROWN & WOOD
ONE WORLD TRADE CENTER FUND ASSET MANAGEMENT INC.
BOX 9011
NEW YORK, NEW YORK 10048-0557 PRINCETON, NEW JERSEY 08543-9011
ATTENTION: THOMAS R. SMITH, JR., ESQ.
----------------
It is proposed that this filing will become effective (check appropriate box)
[X] Immediately upon filing pursuant to paragraph (b), or
[_] on (date) pursuant to paragraph (b), or
[_] 60 days after filing pursuant to paragraph (a), or
[_] on (date) pursuant to paragraph (a) of Rule 485
----------------
THE REGISTRANT HAS REGISTERED AN INDEFINITE NUMBER OF ITS CLASS A AND CLASS B
SHARES OF BENEFICIAL INTEREST UNDER THE SECURITIES ACT OF 1933 PURSUANT TO RULE
24F-2 UNDER THE INVESTMENT COMPANY ACT OF 1940. NO SHARES OF BENEFICIAL
INTEREST WERE SOLD PURSUANT TO SUCH RULE DURING REGISTRANT'S MOST RECENT FISCAL
YEAR ENDED JULY 31, 1993 (PRIOR TO COMMENCEMENT OF OPERATIONS). THEREFORE,
PURSUANT TO PARAGRAPH (B)(2) OF RULE 24F-2, THE NOTICE REQUIRED BY SUCH RULE
NEED NOT BE FILED FOR SUCH FISCAL YEAR.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
MERRILL LYNCH MULTI-STATE LIMITED MATURITY MUNICIPAL SERIES TRUST
REGISTRATION STATEMENT ON FORM N-1A
CROSS REFERENCE SHEET
<TABLE>
<CAPTION>
N-1A ITEM NO. LOCATION
------------- --------
<C> <S> <C>
PART A
Item 1. Cover Page........................ Cover Page
Item 2. Synopsis ......................... Fee Table
Item 3. Condensed Financial Information... Financial Highlights
(unaudited)
Item 4. General Description of Registrant. Cover Page; Investment
Objectives and Policies;
Additional Information
Item 5. Management of the Fund............ Fee Table; Investment
Objectives and Policies;
Management of the Trust;
Portfolio Transactions;
Inside Back Cover Page
Item 5A. Management's Discussion of Fund Not Applicable
Performance.......................
Item 6. Capital Stock and Other Cover Page; Additional
Securities........................ Information
Item 7. Purchase of Securities Being Cover Page; Fee Table;
Offered .......................... Alternative Sales
Arrangements; Purchase of
Shares; Shareholder
Services; Additional
Information; Inside Back
Cover Page
Item 8. Redemption or Repurchase.......... Fee Table; Alternative Sales
Arrangements; Purchase of
Shares; Redemption of Shares
Item 9. Pending Legal Proceedings......... Not Applicable
PART B
Item 10. Cover Page........................ Cover Page
Item 11. Table of Contents................. Back Cover Page
Item 12. General Information and History... Not Applicable
Item 13. Investment Objectives and Investment Objectives and
Policies.......................... Policies; Investment
Restrictions
Item 14. Management of the Fund............ Management of the Trust
Item 15. Control Persons and Principal Management of the Trust;
Holders of Securities............. General Information
Item 16. Investment Advisory and Other Management of the Trust;
Services.......................... Purchase of Shares; General
Information
Brokerage Allocation and Other
Item 17. Practices......................... Portfolio Transactions
Item 18. Capital Stock and Other General Information--
Securities........................ Description of Series and
Shares
Item 19. Purchase, Redemption and Pricing
of Securities Being Offered....... Purchase of Shares;
Redemption of Shares;
Determination of Net Asset
Value; Shareholder Services
Item 20. Tax Status........................ Distributions and Taxes
Item 21. Underwriters...................... Purchase of Shares
Item 22. Calculation of Performance Data... Performance Data
Item 23. Financial Statements.............. Financial Statements
(unaudited); Statements of
Assets and Liabilities
(audited)
PART C
Information required to be included in Part C is set forth under the appro-
priate Item, so numbered, in Part C to this Registration Statement.
</TABLE>
i
<PAGE>
PROSPECTUS
May 17, 1994
MERRILL LYNCH MULTI-STATE LIMITED MATURITY MUNICIPAL SERIES TRUST
MERRILL LYNCH ARIZONA LIMITED MERRILL LYNCH MICHIGAN LIMITED
MATURITY MUNICIPAL BOND FUND MATURITY MUNICIPAL BOND FUND
MERRILL LYNCH CALIFORNIA LIMITED MERRILL LYNCH NEW JERSEY LIMITED
MATURITY MUNICIPAL BOND FUND MATURITY MUNICIPAL BOND FUND
MERRILL LYNCH FLORIDA LIMITED MERRILL LYNCH NEW YORK LIMITED
MATURITY MUNICIPAL BOND FUND MATURITY MUNICIPAL BOND FUND
MERRILL LYNCH MASSACHUSETTS
LIMITED MATURITY MUNICIPAL BOND MERRILL LYNCH PENNSYLVANIA
FUND LIMITED MATURITYMUNICIPAL BOND
FUND
BOX 9011, PRINCETON, NEW JERSEY 08543-9011--PHONE NO. (609) 282-2800
--------------
Merrill Lynch Multi-State Limited Maturity Municipal Series Trust (the
"Trust") consists of eight separate series: Merrill Lynch Arizona Limited
Maturity Municipal Bond Fund (the "Arizona Fund"), Merrill Lynch California
Limited Maturity Municipal Bond Fund (the "California Fund"), Merrill Lynch
Florida Limited Maturity Municipal Bond Fund (the "Florida Fund"), Merrill
Lynch Massachusetts Limited Maturity Municipal Bond Fund (the "Massachusetts
Fund"), Merrill Lynch Michigan Limited Maturity Municipal Bond Fund (the
"Michigan Fund"), Merrill Lynch New Jersey Limited Maturity Municipal Bond Fund
(the "New Jersey Fund"), Merrill Lynch New York Limited Maturity Municipal Bond
Fund (the "New York Fund"), and Merrill Lynch Pennsylvania Limited Maturity
Municipal Bond Fund (the "Pennsylvania Fund"). Each series of the Trust is
referred to herein as a "Fund". Each Fund seeks to provide shareholders with as
high a level of income exempt from Federal income taxes and personal income
taxes imposed by the designated state (and, in certain instances, state
intangible personal property taxes and local personal income taxes) as is
consistent with prudent investment management. Under normal market conditions,
each Fund invests primarily in a portfolio of intermediate-term investment
grade obligations of the designated state or its political subdivisions,
agencies or instrumentalities, or certain other jurisdictions, that pay
interest exempt, in the opinion of bond counsel to the issuer, from Federal
income taxes and personal income taxes of the designated state and, where
applicable, local personal income taxes in the designated state. The
obligations in which the Funds invest have remaining maturities of between one
and ten years, and it is anticipated that, depending on market conditions, the
dollar weighted average maturity of each Fund's portfolio will not exceed five
years. The Funds may invest in certain tax-exempt securities classified as
"private activity bonds" that may subject certain investors in the Funds to an
alternative minimum tax. At times, a Fund may seek to hedge its portfolio
through the use of futures and options transactions. There can be no assurance
that the investment objective of any Fund will be realized.
(continued on following page)
--------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION, NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED
UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO
THE CONTRARY IS A CRIMINAL OFFENSE.
--------------
This Prospectus is a concise statement of information about the Trust and
each Fund that is relevant to making an investment in a Fund. This Prospectus
should be retained for future reference. A statement containing additional
information about the Trust and each Fund, dated May 17, 1994 (the "Statement
of Additional Information"), has been filed with the Securities and Exchange
Commission and is available, without charge, by calling or by writing the Trust
at the above telephone number or address. The Statement of Additional
Information is hereby incorporated by reference into this Prospectus.
--------------
FUND ASSET MANAGEMENT--MANAGER
MERRILL LYNCH FUNDS DISTRIBUTOR, INC.-- DISTRIBUTOR
<PAGE>
(continued from prior page)
Each Fund offers two classes of shares which may be purchased at a price
equal to the next determined net asset value per share, plus in both cases a
sales charge which, at the election of the purchaser, may be imposed (i) at the
time of purchase (the "Class A shares") or (ii) on a deferred basis (the "Class
B shares"). The deferred charges to which the Class B shares are subject shall
consist of a contingent deferred sales charge which may be imposed on
redemptions made within one year of purchase and an ongoing account maintenance
fee and distribution fee. These alternatives permit an investor to choose the
method of purchasing shares that is most beneficial given the amount of the
purchase, the length of time the investor expects to hold the shares and other
circumstances. Investors should understand that the purpose and function of the
deferred sales charge with respect to the Class B shares of a Fund are the same
as those of the initial sales charge with respect to the Class A shares of that
Fund. Investors also should understand that over time the deferred charges
related to Class B shares of a Fund may exceed the initial sales charge with
respect to Class A shares of that Fund. See "Alternative Sales Arrangements" on
page 5.
Each Class A share and Class B share of a Fund represents an identical
interest in the investment portfolio of that Fund and has the same rights,
except that (i) Class B shares bear the expenses of the account maintenance fee
and distribution fee of that Fund and certain other costs resulting from the
deferred sales charge arrangement, which will cause Class B shares to have a
higher expense ratio and to pay lower dividends than Class A shares, and (ii)
Class B shares have exclusive voting rights with respect to the account
maintenance fee and distribution fee of that Fund. The two classes also have
different exchange privileges.
Shares may be purchased directly from Merrill Lynch Funds Distributor, Inc.
(the "Distributor"), Box 9011, Princeton, New Jersey 08543-9011 [(609) 282-
2800], or from securities dealers which have entered into selected dealer
agreements with the Distributor, including Merrill Lynch, Pierce, Fenner &
Smith Incorporated ("Merrill Lynch"). The minimum initial purchase is $1,000
and the minimum subsequent purchase is $50. Merrill Lynch may charge its
customers a processing fee (presently $4.85) for confirming purchases and
repurchases. Purchases and redemptions directly through the Trust's Transfer
Agent are not subject to the processing fee. See "Purchase of Shares" and
"Redemption of Shares".
UNLESS OTHERWISE INDICATED, THE INFORMATION SET FORTH IN THIS PROSPECTUS IS
APPLICABLE TO EACH FUND. MANAGEMENT OF THE TRUST HAS CONSIDERED THE POSSIBILITY
THAT THE USE OF A COMBINED PROSPECTUS MAY SUBJECT A FUND OR FUNDS TO LIABILITY
FOR AN ALLEGED MISSTATEMENT RELATING TO ANOTHER FUND OR FUNDS. MANAGEMENT
BELIEVES THIS POSSIBILITY IS REMOTE.
EACH FUND HAS QUALIFIED ITS SHARES FOR SALE UNDER THE SECURITIES LAWS OF
CERTAIN STATES, AND SHARES OF A FUND MAY BE PURCHASED ONLY IN JURISDICTIONS IN
WHICH SUCH SHARES ARE QUALIFIED FOR PURCHASE. THIS PROSPECTUS DOES NOT
CONSTITUTE AN OFFERING OF SHARES OF ANY FUND IN ANY STATE OR JURISDICTION IN
WHICH SUCH OFFERING MAY NOT LAWFULLY BE MADE. AN INVESTOR CONSIDERING
PURCHASING SHARES OF A FUND SHOULD CONSULT HIS OR HER MERRILL LYNCH FINANCIAL
CONSULTANT TO DETERMINE WHETHER SHARES OF SUCH FUND ARE AVAILABLE FOR PURCHASE
IN HIS OR HER STATE.
2
<PAGE>
FEE TABLE
A general comparison of the sales arrangements and other nonrecurring and
recurring expenses applicable to Class A shares and Class B shares follows:
<TABLE>
<CAPTION>
ALL FUNDS
-----------------------------------------------------------------------------------------
CLASS A SHARES INITIAL SALES CHARGE ALTERNATIVE CLASS B SHARES DEFERRED SALES CHARGE
("CLASS A") ALTERNATIVE ("CLASS B")
----------------------------------------------- -----------------------------------------
<S> <C> <C>
Shareholder Transaction
Expenses:
Maximum Sales Charge
Imposed on Purchases (as
a percentage of offering
price).................. 1.00%(a) None
Sales Charge Imposed on
Dividend Reinvestments . None None
Deferred Sales Charge
(as a percentage of
original purchase price
or redemption proceeds, 1.0% during the first year, decreasing to
whichever is lower) .... None 0.0% after the first year(b)
Exchange Fee ........... None None
</TABLE>
<TABLE>
<CAPTION>
ARIZONA FUND CALIFORNIA FUND FLORIDA FUND MASSACHUSETTS FUND MICHIGAN FUND NEW JERSEY FUND
--------------- --------------- --------------- ---------------------- --------------- ---------------
CLASS A CLASS B CLASS A CLASS B CLASS A CLASS B CLASS A CLASS B CLASS A CLASS B CLASS A CLASS B
------- ------- ------- ------- ------- ------- --------- --------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Annual Fund
Operating
Expenses (as a
percentage of
average net
assets):
Management
Fees(c)......... 0.35% 0.35% 0.35% 0.35% 0.35% 0.35% 0.35% 0.35% 0.35% 0.35% 0.35% 0.35%
Rule 12b-1 Fees. None 0.35% None 0.35% None 0.35% None 0.35% None 0.35% None 0.35%
Other Expenses.. 1.51% 1.52% 0.85% 0.85% 0.46% 0.47% 0.90% 0.93% 1.88% 1.89% 0.89% 0.98%
---- ---- ---- ---- ---- ---- --------- --------- ---- ---- ---- ----
Total Fund Oper-
ating Expenses.. 1.86% 2.22% 1.20% 1.55% 0.81% 1.17% 1.25% 1.63% 2.23% 2.59% 1.24% 1.68%
==== ==== ==== ==== ==== ==== ========= ========= ==== ==== ==== ====
<CAPTION>
NEW YORK FUND PENNSYLVANIA FUND
--------------- -----------------------
CLASS A CLASS B CLASS A CLASS B
------- ------- ----------- -----------
<S> <C> <C> <C> <C>
Annual Fund
Operating
Expenses (as a
percentage of
average net
assets):
Management
Fees(c)......... 0.35% 0.35% 0.35% 0.35%
Rule 12b-1 Fees. None 0.35% None 0.35%
Other Expenses.. 0.99% 0.99% 1.06% 1.06%
------- ------- ----------- -----------
Total Fund Oper-
ating Expenses.. 1.34% 1.69% 1.41% 1.76%
======= ======= =========== ===========
</TABLE>
- ----
(a) Reduced for purchases of $100,000 and over, decreasing to 0.30% for
purchases of $500,000 and over. Certain purchasers of Class A shares
investing $1,000,000 or more, in lieu of a front-end sales load, may be
assessed a contingent deferred sales charge on redemptions within the
first year of such investment. See "Purchase of Shares--Initial Sales
Charge Alternative--Class A Shares"--page 25.
(b) See "Purchase of Shares--Deferred Sales Charge Alternative--Class B
Shares"--page 26.
(c) See "Management of the Trust--Management and Advisory Arrangements"--page
21.
3
<PAGE>
EXAMPLE:
<TABLE>
<CAPTION>
CUMULATIVE EXPENSES PAID FOR THE PERIOD INDICATED
-----------------------------------------------------------------------------------------------
ARIZONA FUND CALIFORNIA FUND FLORIDA FUND
------------------------------- ------------------------------- -------------------------------
1 YEAR 3 YEARS 5 YEARS 10 YEARS 1 YEAR 3 YEARS 5 YEARS 10 YEARS 1 YEAR 3 YEARS 5 YEARS 10 YEARS
------ ------- ------- -------- ------ ------- ------- -------- ------ ------- ------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
An investor in
each Fund would
pay the following
expenses on a
$1,000 investment
including, for
Class A shares,
the maximum $10
front-end sales
charge and
assuming (1) the
operating expense
ratios set forth
above for Class A
shares and Class
B shares of that
Fund, (2) a 5%
annual return
throughout the
period and (3)
redemption at the
end of the
period:
Class A ........ $28.70 $67.89 $109.58 $225.80 $22.11 $47.71 $75.31 $154.00 $18.19 $35.60 $54.51 $109.16
Class B ........ $32.51 $69.42 $118.98 $255.44 $25.77 $48.95 $84.47 $184.55 $21.92 $37.16 $64.37 $142.04
An investor would
pay the following
expenses on the
same $1,000
investment
assuming no
redemption at the
end of the
period:
Class A ........ $28.70 $67.89 $109.58 $225.80 $22.11 $47.71 $75.31 $154.00 $18.19 $35.60 $54.51 $109.16
Class B ........ $22.51 $69.42 $118.98 $255.44 $15.77 $48.95 $84.47 $184.55 $11.92 $37.16 $64.37 $142.04
</TABLE>
<TABLE>
<CAPTION>
CUMULATIVE EXPENSES PAID FOR THE PERIOD INDICATED
-------------------------------
MASSACHUSETTS FUND
-------------------------------
1 YEAR 3 YEARS 5 YEARS 10 YEARS
------ ------- ------- --------
<S> <C> <C> <C> <C>
An investor in
each Fund would
pay the following
expenses on a
$1,000 investment
including, for
Class A shares,
the maximum $10
front-end sales
charge and
assuming (1) the
operating expense
ratios set forth
above for Class A
shares and Class
B shares of that
Fund, (2) a 5%
annual return
throughout the
period and (3)
redemption at the
end of the
period:
Class A ........ $22.61 $49.26 $77.94 $159.62
Class B ........ $26.57 $51.42 $88.65 $193.28
An investor would
pay the following
expenses on the
same $1,000
investment
assuming no
redemption at the
end of the
period:
Class A ........ $22.61 $49.26 $77.94 $159.62
Class B ........ $16.57 $51.42 $88.65 $193.28
</TABLE>
<TABLE>
<CAPTION>
CUMULATIVE EXPENSES PAID FOR THE PERIOD INDICATED
-----------------------------------------------------------------------------------------------
MICHIGAN FUND NEW JERSEY FUND NEW YORK FUND
------------------------------- ------------------------------- -------------------------------
1 YEAR 3 YEARS 5 YEARS 10 YEARS 1 YEAR 3 YEARS 5 YEARS 10 YEARS 1 YEAR 3 YEARS 5 YEARS 10 YEARS
------ ------- ------- -------- ------ ------- ------- -------- ------ ------- ------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
An investor in
each Fund would
pay the following
expenses on a
$1,000 investment
including, for
Class A shares,
the
maximum $10
front-end sales
charge and
assuming (1) the
operating expense
ratios set forth
above for Class A
shares and
Class B shares of
that Fund, (2) a
5% annual return
throughout the
period and
(3) redemption at
the end of the
period:
Class A ........ $32.38 $79.03 $128.29 $263.89 $22.51 $48.95 $77.42 $158.50 $23.51 $52.03 $82.67 $169.65
Class B ........ $36.21 $80.55 $137.53 $292.45 $27.08 $52.96 $91.26 $198.70 $27.18 $53.26 $91.78 $199.78
An investor would
pay the following
expenses on the
same $1,000
investment
assuming
no redemption at
the end of the
period:
Class A ........ $32.38 $79.03 $128.29 $263.89 $22.51 $48.95 $77.24 $158.50 $23.51 $52.03 $82.67 $169.65
Class B ........ $26.21 $80.55 $137.53 $292.45 $17.08 $52.96 $91.26 $198.70 $17.18 $53.26 $91.78 $199.78
</TABLE>
<TABLE>
<CAPTION>
CUMULATIVE EXPENSES PAID FOR THE PERIOD INDICATED
-------------------------------
PENNSYLVANIA FUND
-------------------------------
1 YEAR 3 YEARS 5 YEARS 10 YEARS
------ ------- ------- --------
<S> <C> <C> <C> <C>
An investor in
each Fund would
pay the following
expenses on a
$1,000 investment
including, for
Class A shares,
the
maximum $10
front-end sales
charge and
assuming (1) the
operating expense
ratios set forth
above for Class A
shares and
Class B shares of
that Fund, (2) a
5% annual return
throughout the
period and
(3) redemption at
the end of the
period:
Class A ........ $24.21 $54.18 $86.34 $177.39
Class B ........ $27.89 $55.41 $95.41 $207.31
An investor would
pay the following
expenses on the
same $1,000
investment
assuming
no redemption at
the end of the
period:
Class A ........ $24.21 $54.18 $86.34 $177.39
Class B ........ $17.89 $55.41 $95.41 $207.31
</TABLE>
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 expenses set forth under "Other Expenses" are based on
estimated amounts through the end of each Fund's first fiscal year on an
annualized basis. The Example set forth above assumes reinvestment of all
dividends and distributions and utilizes a 5% annual rate of return as
mandated by Securities and Exchange Commission regulations. THE EXAMPLE SHOULD
NOT BE CONSIDERED A REPRESENTATION OF PAST OR FUTURE EXPENSES OR ANNUAL RATES
OF RETURN, AND ACTUAL EXPENSES OR ANNUAL RATES OF RETURN MAY BE MORE OR LESS
THAN THOSE ASSUMED FOR PURPOSES OF THE EXAMPLE. Class B shareholders of any
Fund who hold their shares for an extended period of time may pay more in Rule
12b-1 distribution fees than the economic equivalent of the maximum front-end
sales charges permitted under the Rules of Fair Practice of the National
Association of Securities Dealers, Inc. Merrill Lynch may charge its customers
a processing fee (presently $4.85) for confirming purchases and repurchases.
Purchases and redemptions directly through the Trust's Transfer Agent are not
subject to the processing fee. See "Purchase of Shares" and "Redemption of
Shares".
4
<PAGE>
ALTERNATIVE SALES ARRANGEMENTS
Shares of each Fund may be purchased at a price equal to the next determined
net asset value per share, plus in both cases a sales charge which, at the
election of the purchaser, may be imposed either (i) at the time of the
purchase (the "initial sales charge alternative"), or (ii) on a deferred basis
(the "deferred sales charge alternative").
Class A Shares. An investor who elects the initial sales charge alternative
acquires Class A shares. Although Class A shares incur a sales charge when they
are purchased, they enjoy the benefit of not being subject to the ongoing
account maintenance fees and distribution fees to which Class B shares are
subject or any sales charge when they are redeemed. Certain purchasers of Class
A shares qualify for reduced initial sales charges. See "Purchase of Shares".
Class B Shares. An investor who elects the deferred sales charge alternative
acquires Class B shares. Class B shares do not incur a sales charge when they
are purchased, but they are subject to ongoing account maintenance fees and
distribution fees and a sales charge if they are redeemed within one year of
purchase. Class B shares enjoy the benefit of permitting all of the investor's
dollars to work from the time the investment is made. The ongoing account
maintenance fees and distribution fees paid by Class B shares will cause such
shares to have a higher expense ratio and to pay lower dividends than those
related to Class A shares. Payment of the distribution fee is subject to
certain limits as set forth under "Purchase of Shares--Deferred Sales Charge
Alternative--Class B Shares."
As an illustration, investors who qualify for significantly reduced sales
charges might elect the initial sales charge alternative because similar sales
charge reductions are not available for purchases under the deferred sales
charge alternative. Moreover, shares acquired under the initial sales charge
alternative would not be subject to ongoing account maintenance fees and
distribution fees. However, because initial sales charges are deducted at the
time of purchase, such investors would not have all of their funds invested
initially. Investors not qualifying for reduced initial sales charges who
expect to maintain their investment for an extended period of time also might
elect the initial sales charge alternative because over time the accumulated
continuing account maintenance and distribution fees may exceed the initial
sales charge. Again, however, such investors must weigh this consideration
against the fact that not all of their funds will be invested initially.
Furthermore, the ongoing account maintenance and distribution fees will be
offset to the extent any return is realized on the additional funds initially
invested under the deferred sales charge alternative. However, there can be no
assurance as to the return, if any, which will be realized on such additional
funds. Certain other investors might determine it to be more advantageous to
have all of their funds invested initially, although remaining subject to
continued account maintenance fees and distribution fees and, for a one-year
period of time, a contingent deferred sales charge.
The distribution expenses incurred by the Distributor and dealers (primarily
Merrill Lynch) in connection with the sale of the shares will be paid, in the
case of the Class A shares, from the proceeds of the initial sales charge. In
the case of the Class B shares, such distribution expenses will be paid from
the proceeds of the ongoing distribution fee and, if applicable, the contingent
deferred sales charge incurred upon redemption within one year of purchase.
Sales personnel may receive different compensation for selling Class A shares
or Class B shares. Investors should understand that the purpose and function of
the deferred sales charges with respect to the Class B shares of a Fund are the
same as those of the initial sales charge with respect to the Class A shares of
that Fund.
5
<PAGE>
Dividends paid by the Funds with respect to Class A shares and Class B
shares, to the extent any dividends are paid, will be calculated in the same
manner at the same time on the same day and will be in the same amount, except
that account maintenance and distribution fees and any incremental transfer
agency costs relating to Class B shares will be borne exclusively by that
class. See "Additional Information--Determination of Net Asset Value". Class A
shareholders and Class B shareholders of the Funds have an exchange privilege
for Class A shares and Class B shares, respectively, of certain other mutual
funds sponsored by Merrill Lynch. Class A shareholders and Class B shareholders
of the Funds also may exchange their shares for shares of certain money market
funds sponsored by Merrill Lynch. See "Shareholder Services--Exchange
Privilege".
The Trustees of the Trust have determined that currently no conflict of
interest exists between the Class A shares and Class B shares. On an ongoing
basis, the Trustees of the Trust, pursuant to their fiduciary duties under the
Investment Company Act of 1940, as amended (the "1940 Act") and state laws,
will seek to assure that no such conflict arises.
The alternative sales arrangements permit an investor to choose the
method of purchasing shares that is most beneficial given the amount of the
purchase, the length of time the investor expects to hold the shares and
other circumstances. Investors should determine whether under their
particular circumstances it is more advantageous to incur an initial sales
charge and not be subject to ongoing charges, or to have the entire initial
purchase price invested in a Fund with the investment thereafter being
subject to ongoing account maintenance charges and distribution charges. To
assist investors in making this determination, the Fee Table on pages 3-4
sets forth the charges applicable to each class of shares and a discussion
of relevant factors in making such determination is set forth under
"Purchase of Shares--Alternative Sales Arrangements" on page 24.
6
<PAGE>
FINANCIAL HIGHLIGHTS (UNAUDITED)
The financial information in the table below has not been audited. Unaudited
financial statements for the period November 26, 1993 (commencement of
operations) to January 31, 1994, 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.
<TABLE>
<CAPTION>
FOR THE PERIOD NOVEMBER 26, 1993+ TO JANUARY 31, 1994
------------------------------------------------------------------------------------
ARIZONA CALIFORNIA FLORIDA MASSACHUSETTS
LIMITED LIMITED LIMITED LIMITED
MATURITY MATURITY MATURITY MATURITY
------------------ ------------------ ------------------ ------------------
Increase (Decrease) in CLASS A CLASS B CLASS A CLASS B CLASS A CLASS B CLASS A CLASS B
Net Asset Value: ------- ------- ------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
PER SHARE OPERATING PER-
FORMANCE:
Net asset value, begin- $10.00 $10.00 $10.00 $ 10.00 $ 10.00 $ 10.00 $10.00 $10.00
ning of period.......... ------ ------ ------ ------- ------- ------- ------ ------
Investment income--net... .06 .05 .06 .05 .05 .05 .06 .05
Realized and unrealized
gain on investments-- .08 .08 .11 .11 .07 .07 .05 .05
net..................... ------ ------ ------ ------- ------- ------- ------ ------
Total from investment op- .14 .13 .17 .16 .12 .12 .11 .10
erations................ ------ ------ ------ ------- ------- ------- ------ ------
Less dividends:
Investment income--net.. (.06) (.05) (.06) (.05) (.05) (.05) (.06) (.05)
------ ------ ------ ------- ------- ------- ------ ------
Total dividends.......... (.06) (.05) (.06) (.05) (.05) (.05) (.06) (.05)
------ ------ ------ ------- ------- ------- ------ ------
Net asset value, end of $10.08 $10.08 $10.11 $10.11 $10.07 $10.07 $10.05 $10.05
period.................. ====== ====== ====== ======= ======= ======= ====== ======
TOTAL INVESTMENT RE-
TURN:**
Based on net asset value 1.41%++ 1.35%++ 1.69%++ 1.63%++ 1.28%++ 1.22%++ 1.13%++ 1.07%++
per share............... ====== ====== ====== ======= ======= ======= ====== ======
RATIOS TO AVERAGE NET AS-
SETS:
Expenses, excluding dis-
tribution fees and net .00% .00% .00% .00% .00% .00% .00% .00%
of reimbursement........ ====== ====== ====== ======= ======= ======= ====== ======
Expenses, net of reim- .00% .35%* .00% .35%* .00% .35%* .00% .35%*
bursement ====== ====== ====== ======= ======= ======= ====== ======
Expenses................. 1.86%* 2.22%* 1.20%* 1.55%* .81%* 1.17%* 1.25%* 1.63%*
====== ====== ====== ======= ======= ======= ====== ======
Investment income--net... 3.11%* 2.77%* 3.06%* 2.71%* 3.06%* 2.65%* 3.43%* 2.96%*
====== ====== ====== ======= ======= ======= ====== ======
SUPPLEMENTAL DATA:
Net assets, end of period $1,867 $4,532 $3,914 $11,042 $20,565 $17,749 $5,504 $7,679
(in thousands).......... ====== ====== ====== ======= ======= ======= ====== ======
Portfolio turnover....... 44.78% 44.78% .00% .00% 1.98% 1.98% .00% .00%
====== ====== ====== ======= ======= ======= ====== ======
</TABLE>
- --------
* Annualized.
** Total investment returns exclude the effects of sales loads.
+ Commencement of Operations.
++ Aggregate total investment return.
7
<PAGE>
<TABLE>
<CAPTION>
FOR THE PERIOD NOVEMBER 26, 1993+ TO JANUARY 31, 1994
--------------------------------------------------------------------------------------------------
MICHIGAN NEW JERSEY NEW YORK PENNSYLVANIA
LIMITED MATURITY LIMITED MATURITY LIMITED MATURITY LIMITED MATURITY
--------------------- --------------------- --------------------- --------------------
CLASS A CLASS B CLASS A CLASS B CLASS A CLASS B CLASS A CLASS B
<S> <C> <C> <C> <C> <C> <C> <C> <C>
INCREASE (DECREASE) IN NET
ASSET VALUE:
PER SHARE OPERATING
PERFORMANCE:
Net asset value, beginning
of period................ $ 10.00 $ 10.00 $ 10.00 $ 10.00 $ 10.00 $ 10.00 $ 10.00 $ 10.00
-------- -------- -------- -------- -------- -------- ------- --------
Investment income--net.... .06 .05 .05 .05 .06 .05 .05 .05
Realized and unrealized
gain on investments--net. .08 .08 .06 .07 .10 .10 .07 .07
-------- -------- -------- -------- -------- -------- ------- --------
Total from investment
operations............... .14 .13 .11 .12 .16 .15 .12 .12
-------- -------- -------- -------- -------- -------- ------- --------
Less dividends:
Investment income--net.. (.06) (.05) (.05) (.05) (.06) (.05) (.05) (.05)
-------- -------- -------- -------- -------- -------- ------- --------
Total dividends........... (.06) (.05) (.05) (.05) (.06) (.05) (.05) (.05)
-------- -------- -------- -------- -------- -------- ------- --------
Net asset value, end of
period................... $ 10.08 $ 10.08 $ 10.06 $ 10.07 $ 10.10 $ 10.10 $ 10.07 $ 10.07
======== ======== ======== ======== ======== ======== ======= ========
TOTAL INVESTMENT RETURN:**
Based on net asset value
per share................ 1.43%++ 1.37%++ 1.17%++ 1.21%++ 1.64%++ 1.58%++ 1.26%++ 1.20%++
======== ======== ======== ======== ======== ======== ======= ========
RATIOS TO AVERAGE NET
ASSETS:
Expenses, excluding
distribution fees and net
of reimbursement......... .00% .00% .00% .00% .00% .00% .00% .00%
======== ======== ======== ======== ======== ======== ======= ========
Expenses, net of
reimbursement............ .00% .35%* .00% .35%* .00% .35%* .00% .35%*
======== ======== ======== ======== ======== ======== ======= ========
Expenses.................. 2.23%* 2.59%* 1.24%* 1.68%* 1.34%* 1.69%* 1.41%* 1.76%*
======== ======== ======== ======== ======== ======== ======= ========
Investment income--net.... 3.22%* 2.86%* 3.12%* 2.60%* 3.34%* 2.95%* 2.95%* 2.54%*
======== ======== ======== ======== ======== ======== ======= ========
SUPPLEMENTAL DATA:
Net assets, end of period
(in thousands)........... $ 3,182 $ 2,512 $ 5,028 $ 7,205 $ 4,280 $ 8,521 $ 904 $ 10,121
======== ======== ======== ======== ======== ======== ======= ========
Portfolio turnover........ 68.74% 68.74% 29.55% 29.55% 25.84% 25.84% 18.07% 18.07%
======== ======== ======== ======== ======== ======== ======= ========
</TABLE>
- --------
* Annualized.
** Total investment returns exclude the effects of sales loads.
+ Commencement of Operations.
++ Aggregate total investment return.
8
<PAGE>
INVESTMENT OBJECTIVES AND POLICIES
The investment objective of each Fund is to provide shareholders with as high
a level of income exempt from Federal income taxes, the designated state's
personal income taxes and, where applicable, local personal income taxes, as is
consistent with prudent investment management. Each Fund seeks to achieve its
objective while providing investors with the opportunity to invest in a
portfolio of securities consisting primarily of intermediate-term investment
grade obligations issued by or on behalf of the designated state or its
political subdivisions, agencies or instrumentalities, and obligations of other
qualifying issuers, such as issuers located in Puerto Rico, the Virgin Islands
and Guam. Such obligations pay interest exempt, in the opinion of bond counsel
to the issuer, from Federal income taxes, the designated state's personal
income taxes and, in certain instances, local personal income taxes.
Obligations that pay interest exempt from Federal income taxes are referred to
herein as "Municipal Bonds." Obligations that pay interest exempt from Federal
income taxes, the designated state's personal income taxes and, where
applicable, local personal income taxes, and obligations that would not subject
shareholders to intangible personal property taxes in the designated state are
referred to herein as "State Municipal Bonds". Unless otherwise indicated,
references to Municipal Bonds shall be deemed to include State Municipal Bonds.
Each Fund will maintain at all times, except during temporary defensive
periods, at least 65% of its total assets invested in its respective State
Municipal Bonds; the New Jersey Fund will maintain at least 80% of its total
assets invested in New Jersey State Municipal Bonds. The investment objective
of each Fund as set forth in this paragraph is a fundamental policy of that
Fund and may not be changed without shareholder approval. At times, a Fund may
seek to hedge its portfolio through the use of futures transactions to reduce
volatility in the net asset value of Fund shares.
Each Fund will invest only in Municipal Bonds with remaining maturities of
between one and ten years. It is anticipated that, depending on market
conditions, the dollar weighted average maturity of each Fund's portfolio will
not exceed five years. For purposes of these investment policies, a bond will
be treated as having a maturity earlier than its stated maturity date if such
bond has technical features which, in the judgment of Fund Asset Management,
L.P. (the "Manager"), will result in the bond being valued in the market as
though it has such earlier maturity. Interest rates on shorter-term Municipal
Bonds may fluctuate more widely from time to time than interest rates on
longer-term Municipal Bonds. However, because of their limited maturities, the
market value of the Municipal Bonds held by each Fund can be expected to
fluctuate less as a result of changes in interest rates.
Municipal Bonds may include several types of bonds. The risks and special
considerations involved in investments in Municipal Bonds vary with the types
of instruments being acquired. Investments in Non-Municipal Tax-Exempt
Securities, as defined herein, may present similar risks, depending on the
particular product. See "Description of Municipal Bonds". The interest on
Municipal Bonds may bear a fixed rate or be payable at a variable or floating
rate. The Funds also may invest in variable rate demand obligations and
participations therein, described below, and short-term tax-exempt municipal
obligations such as tax anticipation notes. The Municipal Bonds purchased by
the Funds primarily will be what are commonly referred to as "investment grade"
securities, which are obligations rated at the time of purchase within the four
highest quality ratings as determined by either Moody's Investors Service, Inc.
("Moody's") (currently Aaa, Aa, A and Baa), Standard & Poor's Corporation
("Standard & Poor's") (currently AAA, AA, A and BBB) or Fitch Investors
Service, Inc. ("Fitch") (currently AAA, AA, A and BBB). If Municipal Bonds are
unrated, such securities will possess creditworthiness comparable, in the
opinion of the Manager, to investment grade obligations. Municipal Bonds rated
in the fourth highest rating category, while considered investment grade, have
certain speculative characteristics and are more likely to be downgraded to
non-investment grade than obligations rated in one of the top three rating
categories. See Appendix I--"Ratings
9
<PAGE>
of Municipal Bonds"--in the Statement of Additional Information for more
information regarding ratings of debt securities. An issue of rated Municipal
Bonds may cease to be rated or its rating may be reduced below investment grade
subsequent to its purchase by a Fund. If an obligation is downgraded below
investment grade, the Manager will consider factors such as price, credit risk,
market conditions, financial condition of the issuer, interest rates and any
state or local tax limitations to determine whether to continue to hold the
obligation in a Fund's portfolio.
Each Fund may invest up to 20% of its total assets in Municipal Bonds that
are rated below Baa by Moody's or below BBB by Standard & Poor's or Fitch. Such
securities, sometimes referred to as "high yield" or "junk" bonds, are
predominantly speculative with respect to the capacity to pay interest and
repay principal in accordance with the terms of the security and generally
involve a greater volatility of price than securities in higher rating
categories. The market prices of high-yielding, lower-rated securities may
fluctuate more than higher-rated securities and may decline significantly in
periods of general economic difficulty, which may follow periods of rising
interest rates. In purchasing such securities, a Fund will rely on the
Manager's judgment, analysis and experience in evaluating the creditworthiness
of the issuer of such securities. The Manager will take into consideration,
among other things, the issuer's financial resources, its sensitivity to
economic conditions and trends, its operating history, the quality of its
management and regulatory matters. See "Investment Objectives and Policies" in
the Statement of Additional Information for a more detailed discussion of the
pertinent risk factors involved in investing in "high yield" or "junk" bonds
and Appendix I--"Ratings of Municipal Bonds"--in the Statement of Additional
Information for additional information regarding ratings of debt securities.
None of the Funds intends to purchase debt securities that are in default or
which the Manager believes will be in default.
Certain Municipal Bonds may be entitled to the benefits of letters of credit
or similar credit enhancements issued by financial institutions. In such
instances, the Trustees and the Manager will take into account in assessing the
quality of such bonds not only the creditworthiness of the issuer of such bonds
but also the creditworthiness of the financial institution. Certain instruments
in which the Funds may invest may be characterized as derivative instruments.
See "Indexed and Inverse Floating Obligations" and "Financial Futures Contracts
and Options Thereon".
Each Fund's investments also may include variable rate demand obligations
("VRDOs") and VRDOs in the form of participation interests ("Participating
VRDOs") in variable rate tax-exempt obligations held by a financial
institution. The VRDOs in which the Funds will invest are tax-exempt
obligations which contain a floating or variable interest rate adjustment
formula and an unconditional right of demand on the part of the holder thereof
to receive payment of the unpaid principal balance plus accrued interest on a
short notice period not to exceed seven days. Participating VRDOs provide the
Funds with a specified undivided interest (up to 100%) of the underlying
obligation and the right to demand payment of the unpaid principal balance plus
accrued interest on the Participating VRDOs from the financial institution on a
specified number of days' notice, not to exceed seven days. There is, however,
the possibility that because of a default or insolvency, the demand feature of
VRDOs or Participating VRDOs may not be honored. The Trust has been advised by
its counsel that the Funds should be entitled to treat the income received on
Participating VRDOs as interest from tax-exempt obligations.
VRDOs that contain an unconditional right of demand to receive payment of the
unpaid principal balance plus accrued interest on a notice period exceeding
seven days may be deemed illiquid securities. A VRDO with a demand notice
period exceeding seven days therefore will be subject to each Fund's
restriction on illiquid investments unless, in the judgement of the Trustees,
such VRDO is liquid. The Trustees may
10
<PAGE>
adopt guidelines and delegate to the Manager the daily function of determining
and monitoring liquidity of such VRDOs. The Trustees, however, will retain
sufficient oversight and be ultimately responsible for such determinations.
The Funds ordinarily do not intend to realize investment income not exempt
from Federal income taxes, state personal income taxes and, where applicable,
local personal income taxes, or to hold investments that would subject
shareholders to intangible personal property taxes in the designated state.
However, to the extent that suitable Municipal Bonds of a designated state are
not available for investment by the Fund in that state, the Fund may purchase
Municipal Bonds issued by other states or their agencies or instrumentalities,
the interest on which is exempt, in the opinion of bond counsel to the issuer,
from Federal, but not state, taxation. The Funds also may invest in securities
not issued by or on behalf of a state or territory or by an agency or
instrumentality thereof, if the Manager nevertheless believes such securities
to be exempt from Federal income taxation ("Non-Municipal Tax-Exempt
Securities"). Non-Municipal Tax-Exempt Securities may include securities issued
by other investment companies that invest in municipal bonds, to the extent
such investments are permitted by the 1940 Act. Other Non-Municipal Tax-Exempt
Securities could include trust certificates or other derivative instruments
evidencing interests in one or more intermediate-term municipal securities.
Under normal circumstances, except when acceptable securities are unavailable
as determined by the Manager, each Fund will invest at least 65% of its total
assets in State Municipal Bonds; except that under normal circumstances the New
Jersey Fund will invest at least 80% of its total assets in New Jersey State
Municipal Bonds. For temporary defensive purposes or to provide liquidity, each
Fund has the authority to invest as much as 35% (20% in the case of the New
Jersey Fund) of its total assets in tax-exempt or taxable money market
obligations with maturities of one year or less (such short-term obligations
being referred to herein as "Temporary Investments"), except that taxable
Temporary Investments shall not exceed 20% of a Fund's net assets. The
Temporary Investments, VRDOs and Participating VRDOs in which the Funds may
invest also will be in the following rating categories at the time of purchase:
MIG-1/VMIG-1 through MIG-4/VMIG-4 for notes and VRDOs and Prime-1 through
Prime-3 for commercial paper (as determined by Moody's), SP-1+ through SP-2 for
notes and A-1+ through A-3 for VRDOs and commercial paper (as determined by
Standard & Poor's), or F-1+ through F-3 for notes, VRDOs and commercial paper
(as determined by Fitch) or, if unrated, of comparable quality in the opinion
of the Manager. Each Fund at all times will have at least 80% of its net assets
invested in securities the interest on which is exempt from Federal taxation.
However, interest received on certain otherwise tax-exempt securities which are
classified as "private activity bonds" (in general, bonds that benefit non-
governmental entities), may be subject to a Federal alternative minimum tax.
The percentage of each Fund's net assets invested in "private activity bonds"
will vary during the year. See "Distributions and Taxes". In addition, each
Fund reserves the right to invest temporarily a greater portion of its assets
in Temporary Investments for defensive purposes when, in the judgment of the
Manager, market conditions warrant. The investment objective of each Fund is a
fundamental policy of that Fund which may not be changed without a vote of a
majority of the outstanding shares of the Fund. Each Fund's hedging strategies,
which are described in more detail under "Financial Futures Contracts and
Options Thereon", are not fundamental policies and may be modified by the
Trustees of the Trust without the approval of the Fund's shareholders.
POTENTIAL BENEFITS
Investment in shares of a Fund offers several benefits. Each Fund offers
investors the opportunity to receive income exempt from Federal income taxes,
the designated state's personal income taxes and, where
11
<PAGE>
applicable, local personal income taxes, by investing in a professionally
managed portfolio consisting primarily of intermediate-term State Municipal
Bonds. Shares of certain Funds also may be exempt from intangible personal
property taxes in the designated state. Each Fund also provides liquidity
because of its redemption features and relieves the investor of the burdensome
administrative details involved in managing a portfolio of tax-exempt
securities. The benefits of investing in each Fund are at least partially
offset by the expenses involved in operating an investment company. Such
expenses primarily consist of the management fee and operational costs, and in
the case of Class B shares of a Fund, the account maintenance costs and
distribution costs for that Fund.
RISK FACTORS AND SPECIAL CONSIDERATIONS
Each Fund ordinarily will invest at least 65% (80% in the case of the New
Jersey Fund) of its total assets in its respective State Municipal Bonds and,
therefore, it is more susceptible to factors adversely affecting issuers of
Municipal Bonds in such state than is a tax-exempt mutual fund that is not
concentrated in issuers of State Municipal Bonds to this degree. Because each
Fund's portfolio will be comprised primarily of intermediate-term, investment
grade securities, each Fund is expected to be less subject to market and credit
risks than a fund that invests in longer-term or lower quality State Municipal
Bonds. Set forth below are special considerations and risk factors specific to
each Fund. The Manager does not believe that the current economic conditions
described below for each state will have a significant adverse effect on the
related Fund's ability to invest in investment grade State Municipal Bonds.
The Arizona Fund. Economic activity in Arizona, as in many other industrially
developed states, tends to be more cyclical than in some other states and in
the nation as a whole. However, diversification of the State's economy has
helped enable the State to maintain a moderate rate of growth. The ultimate
effect of the Chapter 11 bankruptcies of three of the State's major employers
cannot be predicted at this time. See Appendix A, "Economic and Financial
Conditions in Arizona", in the Statement of Additional Information.
The California Fund. Since the start of the 1990-91 fiscal year, the State of
California has faced the worst economic, fiscal and budget conditions since the
1930's. In 1992, the State of California's bond rating was lowered to A+ by
Standard & Poor's and AA by Fitch. Moody's also lowered the State of
California's long-term rating to Aa and no assurance can be given that such
ratings will not be lowered in the future. Forecasts anticipate stabilization
of the economy and a modest recovery in 1995, but pre-recession job levels are
not expected to be reached until 1998. See Appendix B, "Economic and Financial
Conditions in California", in the Statement of Additional Information.
The Florida Fund. As of the date of this Prospectus, no state personal income
tax is imposed in Florida; however, the Florida Fund seeks to provide its
shareholders both with income exempt from Federal income taxes and with shares
exempt from Florida intangible personal property taxes. See "Distributions and
Taxes--Taxes--State" in the Statement of Additional Information. On August 23,
1992, Hurricane Andrew swept across southern Florida causing extensive property
damage. It is not possible to determine what long-term effect, if any, such
damage will have on Florida's growth rate, unemployment, tourism, general
revenues or other vital statistics or on the ability of state government or
affected local governments to pay the interest on, or repay the principal of
any Florida State Municipal Bonds in which the Florida Fund may invest or the
ratings of such Florida State Municipal Bonds. See Appendix C, "Economic and
Financial Conditions in Florida", in the Statement of Additional Information.
The Massachusetts Fund. The Commonwealth of Massachusetts is experiencing a
significant economic slowdown. Moreover, spending by the government of the
Commonwealth exceeded revenues in each of the
12
<PAGE>
five fiscal years commencing fiscal 1987. The operating losses in fiscal 1989
and fiscal 1990 totalled $672 million and $1.251 billion, respectively, and
were covered primarily through deficit borrowings. The Commonwealth experienced
an operating loss in fiscal 1991 of $21.2 million, but because of a positive
closing fund balance of $237.1 million after applying proceeds of borrowing
that financed the fiscal 1990 deficit, no deficit borrowing was required to
close out fiscal 1991. In fiscal 1992, revenues exceeded spending and the
Commonwealth ended fiscal 1992 with positive fund balances of $549.4 million.
The budgeted operating funds of the Commonwealth ended fiscal 1993 with a
surplus of revenues and other sources over expenditures and other uses, and
with aggregate ending fund balances of the Commonwealth of approximately $562.5
million. As of the date of this Prospectus and according to the Executive
Office for Administration and Finance of the Commonwealth, fiscal 1994 is
expected to end with an operating loss of $180.5 million but with positive
budgetary fund balances totaling approximately $382 million, to be achieved
through the use of the prior year ending fund balances. Fitch, Standard &
Poor's and Moody's have upgraded their ratings of Massachusetts' general
obligation bonds from A, BBB and Baa, respectively, to A+, A+ and A,
respectively. Ratings have been lowered on short-term debt and some state
agency obligations. From time to time, the rating agencies may further change
their ratings in response to budgetary matters or other economic indicators.
See Appendix D, "Economic and Financial Conditions in Massachusetts", in the
Statement of Additional Information.
The Michigan Fund. In recent years, the State of Michigan has reported its
financial results in accordance with generally accepted accounting principles.
For each of the five fiscal years ending with the fiscal year ended September
30, 1989, the State reported positive year-end fund balances and positive cash
balances in the combined General Fund/School Aid Fund. 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 fiscal year with its General Fund in balance. The State reported a balance
in the General Fund as of September 30, 1993 of $26.0 million after a transfer
of $283 million to the Budget Stabilization Fund described below. In each of
the last three fiscal years, the State has undertaken mid-year actions to
address projected year-end budget deficits, including expenditure cuts and
deferrals and one time expenditures or revenue recognition adjustments. In the
1991 through 1993 fiscal years, the State experienced deteriorating cash
balances which necessitated short-term borrowings and the deferral of certain
scheduled cash payments. The State borrowed $700 million for cash flow purposes
in the 1992 fiscal year and $900 million in the 1993 fiscal year. The State has
a Budget Stabilization Fund which had an accrued balance of $20.1 million as of
September 30, 1992, and, after a transfer of $283 million on an accrual basis
upon completion of the State's financial reports, an ending balance of $303
million as of September 30, 1993. In May, 1986, Moody's raised the State's
general obligation bond rating to A1. In October, 1989, Standard & Poor's
raised its rating on the State's general obligation bonds to AA. The State's
economy could continue to be affected by changes in the auto industry, notably
consolidations and plant closings resulting from competitive pressures and
overcapacity. See Appendix E, "Economic and Financial Conditions in Michigan",
in the Statement of Additional Information.
The New Jersey Fund. On November 2, 1993, Christine Todd Whitman was elected
to replace James Florio as Governor of the State. As a matter of public record,
Governor Whitman during her campaign publicized her intention to reduce taxes
in the State. Effective January 1, 1994, New Jersey's personal income tax rates
were cut by 5% for all taxpayers. At this time the effect of this tax reduction
cannot be evaluated. Although New Jersey's economy expanded during the late
1980's, its manufacturing sector experienced a downward economic trend and
continued decreasing employment. Since 1987, a decline in construction demand
and in the rate of growth in consumer spending set the stage for the current
recession. New Jersey is
13
<PAGE>
reliant on Federal assistance and ranks high among the states in the amount of
Federal aid received. On June 4, 1992, Standard & Poor's placed New Jersey's
general obligation bonds on CreditWatch with negative implications. On July 6,
1992, Standard & Poor's removed New Jersey's general obligation bonds from
CreditWatch and reaffirmed its AA+ rating of such bonds but with negative long-
term implications. On August 24, 1992, Moody's lowered its rating on New
Jersey's general obligation bonds to AA-1 from AAA. See Appendix F, "Economic
and Financial Conditions in New Jersey", in the Statement of Additional
Information.
The New York Fund. New York State, New York City and other New York public
bodies have, in recent years, encountered serious 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 City's
general obligation bonds Baal, A- and A-, respectively, and Moody's and
Standard & Poor's rate New York State's general obligation bonds A and A-,
respectively. See Appendix G, "Economic and Financial Conditions in New York",
in the Statement of Additional Information.
The Pennsylvania Fund. Many different social, environmental and economic
factors may affect the financial condition of Pennsylvania and its political
subdivisions. From time to time Pennsylvania and certain of its political
subdivisions have encountered financial difficulties which have adversely
affected their respective credit standings. For example, the financial
condition of the City of Philadelphia had impaired its ability to borrow and
resulted in its obligations generally being downgraded by the major rating
services (Moody's and Standard & Poor's), in some cases below investment grade.
Other factors which may negatively affect economic conditions in Pennsylvania
include adverse changes in employment rates, Federal revenue sharing or laws
with respect to tax-exempt financing. Currently, Pennsylvania's general
obligation bonds are rated AA- by Standard & Poor's and Fitch and A1 by
Moody's. See Appendix H, "Economic and Financial Conditions in Pennsylvania" in
the Statement of Additional Information.
DESCRIPTION OF MUNICIPAL BONDS
Municipal Bonds include debt obligations issued by or on behalf of a state or
its agencies, instrumentalities, municipalities or political subdivisions to
obtain funds for various public purposes, including construction and equipping
of a wide range of public facilities (including water, sewer, gas, electricity,
solid waste disposal, health care, transportation, education and housing
facilities), refunding of outstanding obligations and obtaining of funds for
general operating expenses and loans to other public institutions and
facilities. In addition, certain types of industrial development bonds or
private activity bonds are issued by or on behalf of public authorities to
finance or refinance various privately operated facilities, including certain
facilities for the local furnishing of electric energy or gas, sewage
facilities, solid waste disposal facilities and other specialized facilities.
For purposes of this Prospectus, such obligations are referred to as Municipal
Bonds if the interest paid thereon is exempt, in the opinion of bond counsel to
the issuer, from Federal income taxes. Such obligations are referred to herein
as State Municipal Bonds if such obligations pay interest exempt, in the
opinion of bond counsel to the issuer, from Federal income taxes, the
designated state's personal income taxes and, where applicable, local personal
income taxes, and would not subject shareholders to intangible personal
property taxes in the designated state. Such bonds may be "private activity
bonds" as discussed below.
The two principal classifications of Municipal Bonds are "general obligation"
bonds and "revenue" bonds, which latter category includes industrial
development bonds ("IDBs") and private activity bonds. General obligation bonds
are secured by the issuer's pledge of its faith, credit and taxing power for
the repayment of principal and the payment of interest. The taxing power of any
governmental entity may be limited, however, by provisions of state
constitutions or laws, and an entity's creditworthiness will depend on many
factors, including potential erosion of the tax base due to population
declines, natural disasters, declines
14
<PAGE>
in the state's industrial base or inability to attract new industries, economic
limits on the ability to tax without eroding the tax base, state legislative
proposals or voter initiatives to limit ad valorem real property taxes and the
extent to which the entity relies on Federal or state aid, access to capital
markets or other factors beyond the state or entity's control. Accordingly, the
capacity of the issuer of a general obligation bond as to the timely payment of
interest and the repayment of principal when due is affected by the issuer's
maintenance of its tax base.
Revenue bonds are payable only from the revenues derived from a particular
facility or class of facilities or, in some cases, from the proceeds of a
special excise tax or other specific revenue source such as payments from the
user of the facility being financed; accordingly, the timely payment of
interest and the repayment of principal in accordance with the terms of the
revenue or special obligation bond is a function of the economic viability of
such facility or such revenue source. A Fund will not invest more than 10% of
its total assets (taken at market value at the time of each investment) in
revenue bonds where the entity supplying the revenues from which the issuer is
paid, including predecessors, has a record of less than three years of
continuous business operations. Investments involving entities with less than
three years of continuous business operations may pose somewhat greater risks
due to the lack of a substantial operating history for such entities. The
Manager believes, however, that such investments will not adversely affect the
Funds, particularly given each Fund's limitations on such investments.
The Funds may purchase IDBs or private activity bonds. IDBs or private
activity bonds are tax-exempt securities issued by states, municipalities or
public authorities to provide funds, usually through a loan or lease
arrangement, to a private entity for the purpose of financing construction or
improvement of a facility to be used by the entity. Such bonds are secured
primarily by revenues derived from loan repayments or lease payments due from
the entity which may or may not be guaranteed by a parent company or otherwise
secured. Neither IDBs nor private activity bonds are secured by a pledge of the
taxing power of the issuer of such bonds. Therefore, an investor should be
aware that repayment of such bonds depends on the revenues of a private entity
and be aware of the risks that such an investment may entail. Continued ability
of an entity to generate sufficient revenues for the repayment of principal and
the payment of interest on such bonds will be affected by many factors
including the size of the entity, capital structure, demand for its products or
services, competition, general economic conditions, governmental regulation and
the entity's dependence on revenues for the operation of the particular
facility being financed. Each Fund also may invest in so-called "moral
obligation" bonds. If an issuer of such bonds is unable to meet its
obligations, repayment of such bonds becomes a moral commitment, but not a
legal obligation, of the issuer. Each Fund also may purchase obligations of
state and local housing authorities the proceeds of which are used to purchase
single-family mortgage loans or to finance the construction of multi-family
housing projects. Economic developments, including fluctuations in interest
rates, increasing construction and operating costs, and reductions in Federal
housing subsidy programs may adversely affect the revenues of housing
authorities. Furthermore, adverse economic conditions may result in an
increasing rate of default of mortgagors on the underlying mortgage loans.
Single-family mortgage revenue bonds also are subject to extraordinary
mandatory redemption at par at any time, in whole or in part, from the proceeds
derived from prepayments of underlying mortgage loans and from the unused
proceeds of the issue within a stated period which may be within one year of
the date of issue.
Municipal Lease Obligations. Also included within the general category of
Municipal Bonds are participation certificates issued by government authorities
or entities to finance the acquisition or construction of equipment, land
and/or facilities. The certificates represent participations in a lease, an
installment purchase contract or a conditional sales contract (hereinafter
collectively called "lease obligations") relating
15
<PAGE>
to such equipment, land or facilities. Although lease obligations do not
constitute general obligations of the issuer for which the issuer's unlimited
taxing power is pledged, a lease obligation frequently is backed by the
issuer's covenant to budget for, appropriate and make the payments due under
the lease obligation. However, certain lease obligations contain "non-
appropriation" clauses which provide that the issuer has no obligation to make
lease or installment purchase payments in future years unless money is
appropriated for such purpose on a yearly basis. Although "non-appropriation"
lease obligations are secured by the leased property, disposition of the
property in the event of foreclosure might prove difficult. These securities
represent a type of financing that has not yet developed the depth of
marketability associated with more conventional securities. Certain investments
in lease obligations may be illiquid. A Fund may not invest in illiquid lease
obligations if such investments, together with other illiquid investments,
would exceed 15% of the Fund's net assets. A Fund, however, may invest without
regard to such limitation in lease obligations which the Manager, pursuant to
guidelines which have been adopted by the Board of Trustees and subject to the
supervision of the Board, determines to be liquid. The Manager will deem lease
obligations liquid if they are publicly offered and have received an investment
grade rating of Baa or better by Moody's, or BBB or better by Standard & Poor's
or Fitch. Unrated lease obligations, or those rated below investment grade,
will be considered liquid if the obligations come to the market through an
underwritten public offering and at least two dealers are willing to give
competitive bids. In reference to the latter, the Manager, among other things,
also must review the creditworthiness of the municipality obligated to make
payment under the lease obligation and make certain specified determinations
based on such factors as the existence of a rating or credit enhancement such
as insurance, the frequency of trades or quotes for the obligation and the
willingness of dealers to make a market in the obligation.
Federal tax legislation has limited the types and volume of bonds the
interest on which qualifies for a Federal income tax exemption. As a result,
this legislation and legislation which may be enacted in the future may affect
the availability of Municipal Bonds for investment by the Funds.
WHEN-ISSUED SECURITIES AND DELAYED DELIVERY TRANSACTIONS
The Funds may purchase or sell Municipal Bonds on a delayed delivery basis or
on a when-issued basis at fixed purchase terms. These transactions arise when
securities are purchased or sold by a Fund with payment and delivery taking
place in the future. The purchase will be recorded on the date a Fund enters
into the commitment and the value of the obligation thereafter will be
reflected in the calculation of the Fund's net asset value. The value of the
obligation on the delivery date may be more or less than its purchase price. A
separate account of each Fund will be established with its respective custodian
consisting of cash, cash equivalents or high grade, liquid municipal securities
having a market value at all times at least equal to the amount of the forward
commitment.
INDEXED AND INVERSE FLOATING OBLIGATIONS
The Funds may invest in Municipal Bonds the return on which is based on a
particular index of value or interest rates. For example, a Fund may invest in
Municipal Bonds that pay interest based on an index of Municipal Bond interest
rates or based on the value of gold or some other product. The principal amount
payable upon maturity of certain Municipal Bonds also may be based on the value
of an index. To the extent a Fund invests in these types of Municipal Bonds,
the Fund's return on such Municipal Bonds will be subject to risk with respect
to the value of the particular index. Also, a Fund may invest in so-called
"inverse floating obligations" or "residual interest bonds" on which the
interest rates typically vary inversely with a short-term floating rate (which
may be reset periodically by a dutch auction, a remarketing agent, or by
reference to a
16
<PAGE>
short-term tax-exempt interest rate index). The Funds may purchase original
issue inverse floating rate bonds in both the primary and secondary markets and
also may purchase in the secondary market synthetically-created inverse
floating rate bonds evidenced by custodial or trust receipts. Generally,
interest rates on inverse floating rate bonds will decrease when short-term
rates increase, and will increase when short-term rates decrease. Such
securities have the effect of providing a degree of investment leverage, since
they may increase or decrease in value in response to changes, as an
illustration, in market interest rates at a rate which is a multiple (typically
two) of the rate at which fixed-rate, long-term, tax-exempt securities increase
or decrease in response to such changes. As a result, the market values of such
securities generally will be more volatile than the market values of fixed-
rate, tax-exempt securities. To seek to limit the volatility of these
securities, a Fund may purchase inverse floating obligations with shorter term
maturities or which contain limitations on the extent to which the interest
rate may vary. The Manager believes that indexed and inverse floating
obligations represent a flexible portfolio management instrument for a Fund
which allows the Manager to vary the degree of investment leverage relatively
efficiently under different market conditions. Certain investments in such
obligations may be illiquid. A Fund may not invest in such illiquid obligations
if such investments, together with other illiquid investments, would exceed 15%
of that Fund's net assets.
CALL RIGHTS
Each Fund may purchase, either directly from the issuer or from a third
party, a Municipal Bond issuer's contractual right to call all or a portion of
such Municipal Bond for mandatory tender for purchase (a "Call Right"). A Fund
purchasing a Call Right may or may not own the related Municipal Bond. A holder
of a Call Right may exercise such right to require a mandatory tender for the
purchase of related Municipal Bonds, subject to certain conditions. A Call
Right that is not exercised prior to the maturity of the related Municipal Bond
will expire without value. The economic effect of holding both the Call Right
and the related Municipal Bond is identical to holding a Municipal Bond as a
non-callable security. Certain investments in such obligations may be illiquid.
A Fund may not invest in such illiquid obligations if such investments,
together with other illiquid investments, would exceed 15% of that Fund's net
assets.
FINANCIAL FUTURES CONTRACTS AND OPTIONS THEREON
Each Fund is authorized to purchase and sell certain exchange-traded
financial futures contracts ("financial futures contracts") and options
thereon. The purchase or sale of an option on a financial futures contract is
analogous to the purchase or sale of an option on an individual security.
Financial futures contracts and options thereon are used solely for the
purposes of hedging a Fund's investments in Municipal Bonds against declines in
value and hedging against increases in the cost of securities it intends to
purchase. However, a Fund's transactions involving financial futures contracts
or options thereon (which options may include both puts and calls) will be in
accordance with its investment policies and limitations. A financial futures
contract obligates the seller of a contract to deliver and the purchaser of a
contract to take delivery of the type of financial instrument covered by the
contract, or in the case of index-based financial futures contracts to make and
accept a cash settlement, at a specific future time for a specified price. A
sale of financial futures contracts or options thereon may provide a hedge
against a decline in the value of portfolio securities because such
depreciation may be offset, in whole or in part, by an increase in the value of
the position in the financial futures contracts. A purchase of financial
futures contracts or options thereon may provide a hedge against an increase in
the cost of securities intended to be purchased, because such appreciation may
be offset, in whole or in part, by an increase in the value of the position in
the financial futures contracts or options thereon. Distributions, if any, of
net long-term capital gains from certain transactions in futures or options
17
<PAGE>
are taxable at long-term capital gains rates for Federal income tax purposes,
regardless of the length of time the shareholder has owned Fund shares. See
"Distributions and Taxes--Taxes".
Each Fund may deal in financial futures contracts traded on the Chicago Board
of Trade based on The Bond Buyer Municipal Bond Index, a price-weighted measure
of the market value of 40 large, recently issued tax-exempt bonds. There can be
no assurance, however, that a liquid secondary market will exist to terminate
any particular financial futures contract or option thereon at any specific
time. If it is not possible to close a financial futures position or the
related option entered into by a Fund, the Fund would continue to be required
to make daily cash payments of variation margin in the event of adverse price
movements. In such a situation, if the Fund has insufficient cash, it may have
to sell portfolio securities to meet daily variation margin requirements at a
time when it may be disadvantageous to do so. The inability to close financial
futures contracts or related option positions also could have an adverse impact
on a Fund's ability to hedge effectively. There is also the risk of loss by a
Fund of margin deposits in the event of bankruptcy of a broker with whom the
Fund has an open position in a financial futures contract or option thereon.
Each Fund may purchase and sell financial futures contracts on U.S.
Government securities and write and purchase put and call options on such
financial futures contracts as a hedge against adverse changes in interest
rates as described more fully in the Statement of Additional Information. With
respect to U.S. Government securities, currently there are financial futures
contracts based on long-term U.S. Treasury bonds, U.S. Treasury notes,
Government National Mortgage Association ("GNMA") Certificates and three-month
U.S. Treasury bills.
Subject to policies adopted by the Trustees, the Funds also may enter into
other financial futures transactions, such as financial futures contracts or
options on other municipal bond indices which may become available, if the
Manager of the Funds and the Trustees of the Trust should determine that there
is normally a sufficient correlation between the prices of such financial
futures contracts or options thereon and the Municipal Bonds in which a Fund
invests to make such hedging appropriate.
Utilization of financial futures contracts and options thereon involves the
risk of imperfect correlation in movements in the price of financial futures
contracts or options thereon and movements in the price of the security which
is the subject of the hedge. If the price of the financial futures contract or
option thereon moves more or less than the price of the security that is the
subject of the hedge, a Fund will experience a gain or loss which will not be
completely offset by movements in the price of such security. There is a risk
of imperfect correlation where the securities underlying financial futures
contracts or options thereon have different maturities, ratings or geographic
mixes than the security being hedged. In addition, the correlation may be
affected by additions to or deletions from the index which serves as a basis
for a financial futures contract or option thereon. Finally, in the case of
financial futures contracts on U.S. Government securities and options on such
financial futures contracts, the anticipated correlation of price movements
between the U.S. Government securities underlying the financial futures or
options, and Municipal Bonds may be adversely affected by economic, political,
legislative or other developments which have a disparate impact on the
respective markets for such securities.
Under regulations of the Commodity Futures Trading Commission, the futures
trading activities described herein will not result in a Fund being deemed to
be a "commodity pool," as defined under such regulations, provided that the
Fund adheres to certain restrictions. In particular, a Fund may purchase and
sell financial futures contracts and options thereon (i) for bona fide hedging
purposes, and (ii) for non-hedging purposes, if the aggregate initial margin
and premiums required to establish positions in such contracts and options does
not exceed 5% of the liquidation value of the Fund's portfolio assets after
taking into account
18
<PAGE>
unrealized profits and unrealized losses on any such contracts and options. As
stated above, each Fund intends to engage in options and futures transactions
only for hedging purposes. Margin deposits may consist of cash or securities
acceptable to the broker and the relevant contract market.
When a Fund purchases a financial futures contract, or writes a put option or
purchases a call option thereon, it will maintain an amount of cash, cash
equivalents (e.g., high grade commercial paper and daily tender adjustable
notes) or short-term, high-grade, fixed-income securities in a segregated
account with the Fund's custodian, so that the amount so segregated plus the
amount of initial and variation margin held in the account of its broker equals
the market value of the financial futures contract or option thereon, thereby
ensuring that the use of such financial futures contract or option is
unleveraged. It is not anticipated that transactions in financial futures
contracts or options thereon will have the effect of increasing portfolio
turnover.
Although certain risks are involved in options and futures transactions, the
Manager believes that, because the Funds will engage in financial futures
transactions only for hedging purposes, the futures portfolio strategies of the
Funds will not subject the Funds to certain risks frequently associated with
speculation in futures transactions. The Funds must meet certain Federal income
tax requirements under the Internal Revenue Code of 1986, as amended (the
"Code"), in order to qualify for the special tax treatment afforded regulated
investment companies, including a requirement that less than 30% of its gross
income be derived from the sale or other disposition of securities held for
less than three months. Additionally, each Fund is required to meet certain
diversification requirements under the Code.
The liquidity of a secondary market in a financial futures contract or
related option may be adversely affected by "daily price fluctuation limits"
established by commodity exchanges which limit the amount of fluctuation in a
financial futures contract price during a single trading day. Once the daily
limit has been reached in the contract, no trades may be entered into at a
price beyond the limit, thus preventing the liquidation of open futures
positions. Prices in the past have reached or exceeded the daily limit on a
number of consecutive trading days.
The successful use of financial futures contracts and options thereon also
depends on the ability of the Manager to forecast correctly the direction and
extent of interest rate movements within a given time frame. To the extent
these rates remain stable during the period in which a financial futures
contract or related option is held by a Fund or move in a direction opposite to
that anticipated, the Fund may realize a loss on the hedging transaction which
is not fully or partially offset by an increase in the value of portfolio
securities. As a result, a Fund's total return for such period may be less than
if it had not engaged in the hedging transaction. Furthermore, each Fund only
will engage in hedging transactions from time to time and may not necessarily
be engaging in hedging transactions when movements in interest rates occur.
Reference is made to the Statement of Additional Information for further
information on financial futures contracts and certain options thereon.
REPURCHASE AGREEMENTS AND PURCHASE AND SALE CONTRACTS
As Temporary Investments, the Funds may invest in securities pursuant to
repurchase agreements or purchase and sale contracts. Repurchase agreements and
purchase and sale contracts may be entered into only with a member bank of the
Federal Reserve System or a primary dealer in U.S. Government securities. Under
such agreements, the bank or the primary dealer agrees, upon entering into the
contract, to repurchase the security at a mutually agreed upon time and price,
thereby determining the yield during the term of the agreement. This results in
a fixed rate of return insulated from market fluctuations during such period.
In the
19
<PAGE>
case of repurchase agreements, the prices at which the trades are conducted do
not reflect accrued interest on the underlying obligations; whereas, in the
case of purchase and sale contracts, the prices take into account accrued
interest. Such agreements usually cover short periods, such as under one week.
Repurchase agreements may be construed to be collateralized loans by the
purchaser to the seller secured by the securities transferred to the purchaser.
In the case of a repurchase agreement, 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; a
Fund does not have the right to seek additional collateral in the case of
purchase and sale contracts. In the event of default by the seller under the
repurchase agreement construed to be a collateralized loan, the underlying
securities are not owned by a Fund but only constitute collateral for the
seller's obligation to pay the repurchase price. Therefore, a Fund may suffer
time delays and incur costs or possible losses in connection with the
disposition of the collateral. A purchase and sale contract differs from a
repurchase agreement in that the contract arrangements stipulate that the
securities are owned by a Fund. In the event of a default under such a
repurchase agreement or under a purchase and sale contract, instead of the
contractual fixed rate of return, the rate of return to a Fund shall be
dependent upon intervening fluctuations of the market value of such security
and the accrued interest on the security. In such event, a Fund would have
rights against the seller for breach of contract with respect to any losses
arising from market fluctuations following the failure of the seller to
perform. A Fund may not invest in repurchase agreements or purchase and sale
contracts maturing in more than seven days if such investments, together with
all other illiquid investments, would exceed 15% of that Fund's net assets.
Certain Funds may be subject to state and local restrictions which prohibit
certain types of investments and investment strategies, including some of the
investments and investment strategies discussed herein.
INVESTMENT RESTRICTIONS
Each Fund has adopted a number of restrictions and policies relating to the
investment of the Fund's assets and its activities, which are fundamental
policies of the Fund and may not be changed without the approval of the holders
of a majority of the Fund's outstanding voting securities, as defined in the
1940 Act. Among the more significant restrictions, a Fund may not: (i) purchase
any securities other than securities referred to under "Investment Objectives
and Policies" herein; (ii) purchase securities of other investment companies,
except in connection with certain specified transactions and with respect to
investments of up to 10% of the Fund's total assets in securities of closed-end
investment companies; (iii) 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 [No Fund will
purchase securities while borrowings are outstanding]; (iv) mortgage, pledge,
hypothecate or in any manner transfer as security for indebtedness any
securities owned or held by the Fund except in connection with certain
specified transactions; (v) invest in securities which cannot be readily resold
because of legal or contractual restrictions or which are not readily
marketable, including individually negotiated loans that constitute illiquid
investments and illiquid lease obligations, and in repurchase agreements and
purchase and sale contracts maturing in more than seven days, if, regarding all
such securities taken together, more than 15% of its net assets (taken at
market value at the time of each investment) would be invested in such
securities; (vi) invest more than 10% of its total assets (taken at market
value at the time of each investment) in revenue bonds where the entity
supplying the revenues from which the issue is to be paid, and the guarantor of
the obligation, including predecessors, each has a record of less than three
years' continuous business operation; and (vii) invest more than 25% of its
total assets (taken at market value at the time of each investment) in
securities of issuers in any particular industry (other than U.S. Government
securities or Government agency securities, Municipal Bonds and Non-Municipal
Tax-Exempt Securities).
20
<PAGE>
Each Fund is classified as non-diversified within the meaning of the 1940
Act, which means that the Fund is not limited by the 1940 Act in the
proportion of its assets that it may invest in obligations of a single issuer.
However, each Fund's investments will be limited so as to qualify as a
"regulated investment company" for purposes of the Code. See "Distributions
and Taxes--Taxes". To qualify, among other requirements, the Trust will limit
each Fund's investments so that, at the close of each quarter of the taxable
year, (i) not more than 25% of the market value of the Fund's total assets
will be invested in the securities of a single issuer, and (ii) with respect
to 50% of the market value of its total assets, not more than 5% of the market
value of its total assets will be invested in the securities of a single
issuer and the Fund will not own more than 10% of the outstanding voting
securities of a single issuer. [For purposes of this restriction, each Fund
will regard each state and each political subdivision, agency or
instrumentality of such state and each multi-state agency of which such state
is a member and each public authority which issues securities on behalf of a
private entity as a separate issuer, except that if the security is backed
only by the assets and revenues of a non-government entity then the entity
with the ultimate responsibility for the payment of interest and principal may
be regarded as the sole issuer.] These tax-related limitations may be changed
by the Trustees of the Trust to the extent necessary to comply with changes to
the Federal tax requirements. A Fund which elects to be classified as
"diversified" under the 1940 Act must satisfy the foregoing 5% and 10%
requirements with respect to 75% of its total assets. To the extent that a
Fund assumes large positions in the obligations of a small number of issuers,
that Fund's total return may fluctuate to a greater extent than that of a
diversified company as a result of changes in the financial condition or in
the market's assessment of the issuers.
Investors are referred to the Statement of Additional Information for a
complete description of each Fund's investment restrictions.
MANAGEMENT OF THE TRUST
TRUSTEES
The Trustees of the Trust consist of six individuals, five of whom are not
"interested persons" of the Trust as defined in the 1940 Act. The Trustees are
responsible for the overall supervision of the operations of the Trust and the
Funds and perform the various duties imposed on the directors or trustees of
investment companies by the 1940 Act.
The Trustees are:
Arthur Zeikel*--President and Chief Investment Officer of the Manager
and of Merrill Lynch Investment Management, L.P. (doing business as
Merrill Lynch Asset Management ("MLAM")); President and Director of
Princeton Services, Inc.; Executive Vice President of Merrill Lynch &
Co., Inc. since 1990; Executive Vice President of Merrill Lynch since
1990 and a Senior Vice President thereof from 1985 to 1990; Director
of the Distributor.
Kenneth S. Axelson--Former Executive Vice President and Director, J.C.
Penney Company, Inc.
Herbert I. London--John M. Olin Professor of Humanities, New York
University.
Robert R. Martin--Former Chairman and Chief Executive Officer, Kinnard
Investments, Inc.
Joseph L. May--Attorney in private practice.
Andre F. Perold--Professor, Harvard Business School.
- --------
*Interested person, as defined in the 1940 Act, of the Trust.
21
<PAGE>
MANAGEMENT AND ADVISORY ARRANGEMENTS
Fund Asset Management, L.P. (the "Manager"), which is an affiliate of MLAM
and is owned and controlled by Merrill Lynch & Co., Inc., acts as the manager
for the Trust and provides each Fund with management services. The Manager or
MLAM acts as the investment adviser for over 90 other registered investment
companies. MLAM also offers portfolio management and portfolio analysis
services to individuals and institutions. As of April 30, 1994, the Manager and
MLAM had a total of approximately $162.3 billion in investment company and
other portfolio assets under management, including accounts of certain
affiliates of the Manager.
Subject to the direction of the Trustees, the Manager is responsible for the
actual management of each Fund's portfolio and constantly reviews each Fund's
holdings in light of its own research analysis and that from other relevant
sources. The responsibility for making decisions to buy, sell or hold a
particular security rests with the Manager. The Manager performs certain of the
other administrative services and provides all the office space, facilities,
equipment and necessary personnel for management of the Funds.
Vincent R. Giordano, Kenneth A. Jacob and Peter J. Hayes are the Portfolio
Managers for each Fund. Vincent R. Giordano has been a Portfolio Manager of the
Manager and of MLAM since 1977 and a Senior Vice President of the Manager and
of MLAM since 1984. Kenneth A. Jacob has been a Portfolio Manager and Vice
President of the Manager and of MLAM since 1984. Peter J. Hayes has been a
Portfolio Manager and Vice President of the Manager and of MLAM since 1989.
Pursuant to separate management agreements between the Manager and the Trust
on behalf of each Fund (each a "Management Agreement"), the Manager is entitled
to receive from each Fund a monthly fee based upon the average daily net assets
of that Fund at the annual rate of 0.35% of the average daily net assets of
that Fund.
Each Management Agreement obligates the related Fund to pay certain expenses
incurred in that Fund's operations, including, among other things, the
management fee, legal and audit fees, unaffiliated Trustees' fees and expenses,
registration fees, custodian and transfer agency fees, accounting and pricing
costs, and certain of the costs of printing proxies, shareholder reports,
prospectuses and statements of additional information. Accounting services are
provided to the Trust by the Manager, and each Fund reimburses the Manager for
its proportionate costs in connection with such services. The Manager may waive
all or a portion of its management fee for any Fund and may assume voluntarily
all or a portion of each Fund's expenses.
TRANSFER AGENCY SERVICES
Financial Data Services, Inc. (the "Transfer Agent"), which is a wholly-owned
subsidiary of Merrill Lynch & Co., Inc., acts as the Trust's transfer agent
pursuant to a transfer agency, dividend disbursing agency and shareholder
servicing agency agreement (the "Transfer Agency Agreement"). Pursuant to the
Transfer Agency Agreement, the Transfer Agent is responsible for the issuance,
transfer and redemption of shares of each Fund and the opening and maintenance
of shareholder accounts. Pursuant to the Transfer Agency Agreement, each
Fund pays the Transfer Agent an annual fee of $10.00 per Class A shareholder
account and $12.00 per Class B shareholder account, and the Transfer Agent is
entitled to reimbursement from the Fund for out-of-pocket expenses incurred by
the Transfer Agent on behalf of such Fund under the Transfer Agency Agreement.
22
<PAGE>
PURCHASE OF SHARES
Merrill Lynch Funds Distributor, Inc. (the "Distributor"), an affiliate of
MLAM, the Manager and Merrill Lynch, acts as the Distributor of Class A shares
and Class B shares of each Fund. Class A shares and Class B shares of each Fund
are offered continuously for sale by the Distributor and other eligible
securities dealers (including Merrill Lynch). Shares of the Funds may be
purchased from securities dealers or by mailing a purchase order directly to
the Transfer Agent. The minimum initial purchase for both Class A shares and
Class B shares of each Fund is $1,000 and the minimum subsequent purchase is
$50.
Each Fund is offering its shares at a public offering price equal to the next
determined net asset value per share plus sales charges which, at the option of
the purchaser, may be imposed either at the time of purchase (the "initial
sales charge alternative") or on a deferred basis (the "deferred sales charge
alternative"), as described below. The applicable offering price for purchase
orders is based upon the net asset value of the respective Fund next determined
after receipt of the purchase orders by the Distributor. As to purchase orders
received by securities dealers prior to 4:15 P.M., New York time, which
includes orders received after the determination of net asset value on the
previous day, the applicable offering price will be based on the net asset
value determined as of 4:15 P.M. on the day the order is placed with the
Distributor, provided the order is received by the Distributor prior to 4:30
P.M., New York time, on that day. If the purchase orders are not received by
the Distributor prior to 4:30 P.M., New York time, such orders shall be deemed
received on the next business day. Any order may be rejected by the Distributor
or the Trust. The Trust or the Distributor may suspend the continuous offering
of a Fund's shares at any time in response to conditions in the securities
markets or otherwise and thereafter may resume such offering from time to time.
Neither the Distributor nor the dealers are permitted to withhold placing
orders to benefit themselves by a price change. Merrill Lynch may charge its
customers a processing fee (presently $4.85) to confirm a sale of shares to
such customers. Purchases directly through the Trust's Transfer Agent are not
subject to the processing fee.
On November 26, 1993, the Funds completed the subscription offerings of their
shares. The following table sets forth the number of Class A shares and Class B
shares each Fund issued and the net proceeds to each Fund for its Class A
shares and Class B shares, respectively. The table also sets forth the amount
of sales charges received by the Distributor in connection with the
subscription offerings of each Fund, all of which was paid to Merrill Lynch as
selected dealer.
<TABLE>
<CAPTION>
CLASS A CLASS B*
---------------------------------- --------------------------
NUMBER OF NET PROCEEDS SALES NUMBER OF NET PROCEEDS
SHARES ISSUED TO FUND CHARGES SHARES ISSUED TO FUND
------------- ------------ ------- ------------- ------------
<S> <C> <C> <C> <C> <C>
Arizona Fund............ 162,043 $1,620,430 $11,793 350,307 $ 3,503,070
California Fund......... 283,614 $2,836,140 $18,213 774,739 $ 7,747,390
Florida Fund............ 946,744 $9,467,440 $50,879 1,366,642 $13,666,420
Massachusetts Fund...... 238,858 $2,388,580 $13,330 611,474 $ 6,114,740
Michigan Fund........... 231,349 $2,313,490 $17,462 213,316 $ 2,133,160
New Jersey Fund......... 65,906 $ 659,060 $ 5,007 603,447 $ 6,034,470
New York Fund........... 273,822 $2,738,220 $11,506 798,422 $ 7,984,220
Pennsylvania Fund....... 44,042 $ 440,420 $ 3,708 784,259 $ 7,842,590
</TABLE>
- --------
* A sales charge is not imposed at the time of purchase on Class B shares. See
"Purchase of Shares--Deferred Sales Charge Alternative--Class B Shares"--page
26.
23
<PAGE>
Each Fund issues two classes of shares: Class A shares are sold to investors
choosing the initial sales charge alternative and Class B shares are sold to
investors choosing the deferred sales charge alternative. Each class of shares
represents an interest in the same portfolio of investments of the respective
Fund, has the same rights and is identical to the other class in all respects,
except that Class B shares of a Fund bear the expenses of the deferred sales
arrangements, any expenses (including incremental transfer agency costs)
resulting from such sales arrangements and the expenses paid by the account
maintenance fee of that Fund and have exclusive voting rights with respect to
the Rule 12b-1 distribution plan pursuant to which the account maintenance and
distribution fees of that Fund are paid. The two classes also have different
exchange privileges. See "Shareholder Services-- Exchange Privilege". The net
income attributable to Class B shares of a Fund and the dividends payable on
Class B shares of that Fund will be reduced by the amount of the account
maintenance and distribution fees and incremental transfer agency costs
relating to Class B shares of that Fund; accordingly, the net asset value of
the Class B shares of that Fund will be reduced by such amount to the extent
the Fund has undistributed net income. Sales personnel may receive different
compensation for selling Class A shares or Class B shares. Investors are
advised that only Class A shares may be available for purchase through
securities dealers, other than Merrill Lynch, that are eligible to sell shares.
ALTERNATIVE SALES ARRANGEMENTS
The alternative sales arrangements of each Fund permit investors to choose
the method of purchasing shares that is most beneficial given the amount of
their purchase, the length of time the investor expects to hold his or her
shares and other relevant circumstances. AN INVESTOR SHOULD DETERMINE WHETHER
UNDER HIS OR HER PARTICULAR CIRCUMSTANCES IT IS MORE ADVANTAGEOUS TO INCUR AN
INITIAL SALES CHARGE AND NOT BE SUBJECT TO ONGOING CHARGES, AS DISCUSSED BELOW,
OR TO HAVE THE ENTIRE INITIAL PURCHASE PRICE INVESTED IN A FUND WITH THE
INVESTMENT THEREAFTER BEING SUBJECT TO ONGOING CHARGES.
As an illustration, investors who qualify for significantly reduced sales
charges, as described below, might elect the initial sales charge alternative
because similar sales charge reductions are not available for purchases under
the deferred sales charge alternative. Moreover, shares acquired under the
initial sales charge alternative would not be subject to ongoing account
maintenance and distribution fees as described below. However, because initial
sales charges are deducted at the time of purchase, such investors would not
have all of their funds invested initially.
Investors not qualifying for reduced initial sales charges who expect to
maintain their investment for an extended period of time also might elect the
initial sales charge alternative because over time the accumulated continuing
account maintenance and distribution fees may exceed the initial sales charge.
Again, however, such investors must weigh this consideration against the fact
that not all of their funds will be invested initially. Furthermore, the
ongoing account maintenance fees and distribution fees will be offset to the
extent that any return is realized on the additional funds initially invested
under the deferred alternative. Another factor that may be applicable under
certain circumstances is that the payment of the Class B distribution fee and
contingent deferred sales charge ("CDSC") for each Fund is subject to certain
limits as set forth below under "Deferred Sales Charge Alternative--Class B
Shares".
Certain other investors might determine it to be more advantageous to have
all of their funds invested initially, although remaining subject to continued
account maintenance and distribution fees and, for a one-year period of time, a
CDSC as described below. For example, an investor subject to the 1.0% initial
sales charge will have to hold his investment at least approximately three
years for the 0.15% account maintenance fee and 0.20% distribution fee to
exceed the initial sales charge of Class A shares. This example does not
24
<PAGE>
take into account the time value of money which further reduces the impact of
the ongoing account maintenance and distribution fees on the investment,
fluctuations in the net asset value, the effect of the return on the investment
over this period of time or the effect of any limits that may be imposed upon
the payment of the distribution fee and the CDSC.
INITIAL SALES CHARGE ALTERNATIVE--CLASS A SHARES
The public offering price of Class A shares of each Fund for purchasers
choosing the initial sales charge alternative is the next determined net asset
value plus varying sales charges (i.e., sales loads), as set forth below.
<TABLE>
<CAPTION>
SALES CHARGE SALES CHARGE DISCOUNT TO
AS PERCENTAGE* AS PERCENTAGE* SELECTED DEALERS
OF OFFERING OF THE NET AS PERCENTAGE* OF THE
AMOUNT OF PURCHASE PRICE AMOUNT INVESTED OFFERING PRICE
------------------ -------------- --------------- ---------------------
<S> <C> <C> <C>
Less than $100,000........ 1.00% 1.01% .95%
$100,000 but less than
$250,000................. .75 .76 .70
$250,000 but less than
$500,000................. .50 .50 .45
$500,000 and over**....... .30 .30 .27
</TABLE>
- --------
* Rounded to the nearest one-hundredth percent.
** A purchase of $1 million or more in a single transaction by an investor
(other than an employer sponsored retirement or savings plan, such as a tax
qualified retirement plan under Section 401 of the Code, a deferred
compensation plan under Section 403(b) and Section 457 of the Code, other
deferred compensation arrangements, VEBA plans and non-qualified After Tax
Savings and Investment programs maintained on the Merrill Lynch Group
Employee Services system, herein referred to as "Employer Sponsored
Retirement or Savings Plans"), or any purchase by a TMASM Managed Trust, of
Class A shares of a Fund may not be subject to an initial sales charge.
Purchases for which the initial sales charge is waived will be subject
instead to a CDSC of 0.20% of the dollar amount of the purchase if the
shares are redeemed within one year after purchase.
Initial sales charges may be waived for shareholders purchasing $1 million or
more in a single transaction (other than an employer sponsored retirement or
savings plan, such as a tax qualified retirement plan under Section 401 of the
Code, a deferred compensation plan under Section 403(b) and Section 457 of the
Code, other deferred compensation arrangements, VEBA plans and non-qualified
After Tax Savings and Investment programs maintained on the Merrill Lynch Group
Employee Services system, herein referred to as "Employer Sponsored Retirement
or Savings Plans"), or a purchase by a TMASM Managed Trust, of Class A shares
of a Fund. In addition, purchases of Class A shares of the Funds made in
connection with a single investment of $1 million or more under the Merrill
Lynch Mutual Fund Adviser Program will not be subject to an initial sales
charge. Purchases described in this paragraph will be subject to a CDSC of
0.20% if the shares are redeemed within one year after purchase.
The Distributor may reallow discounts to selected dealers and retain the
balance over such discounts. At times the Distributor may reallow the entire
sales charge to such dealers. Since securities dealers selling Class A shares
of a Fund will receive a concession equal to most of the sales charge, they may
be deemed to be underwriters under the Securities Act of 1933, as amended.
Reduced Initial Sales Charges. Sales charges are reduced under a Right of
Accumulation and a Letter of Intention. Class A shares of each Fund are offered
at net asset value to Trustees of the Trust, to directors or trustees of
certain other Merrill Lynch-sponsored investment companies, to an investor who
has a business
25
<PAGE>
relationship with a financial consultant who joined Merrill Lynch from another
investment firm within six months prior to the date of purchase if certain
conditions set forth in the Statement of Additional Information are met, and to
directors and employees of Merrill Lynch & Co., Inc. and its subsidiaries.
Also, Class A shares may be offered at net asset value in connection with the
acquisition of assets of other investment companies. No initial sales charges
are imposed upon Class A shares issued as a result of the automatic
reinvestment of dividends or capital gains distributions. Class A shares are
offered to TMASM Managed Trusts to which Merrill Lynch Trust Company provides
discretionary trustee services at net asset value plus a reduced sales charge.
Class A shares of each Fund are offered at net asset value to certain Employer
Sponsored Retirement or Savings Plans, provided such plans meet the required
minimum number of eligible employees or required amount of assets advised by
the Fund's investment adviser or any of its affiliates. Class A shares of each
Fund also are offered at net asset value to shareholders of certain closed-end
funds advised by the Manager or MLAM who wish to reinvest the net proceeds from
a sale of their closed-end fund shares of common stock in shares of a Fund,
provided certain conditions are met. Thus, for example, Class A shares of a
Fund are offered at net asset value to shareholders of Merrill Lynch Senior
Floating Rate Fund, Inc. (formerly known as Merrill Lynch Prime Fund, Inc.)
("Senior Floating Rate Fund") who wish to reinvest the net proceeds from a sale
of certain of their shares of common stock of Senior Floating Rate Fund in
shares of that Fund. In order to exercise this investment option, Senior
Floating Rate Fund shareholders must sell their Senior Floating Rate Fund
shares to Senior Floating Rate Fund in connection with a tender offer conducted
by Senior Floating Rate Fund and reinvest the proceeds immediately in that
Fund. This investment option is available only with respect to the proceeds of
Senior Floating Rate Fund shares as to which no Early Withdrawal Charge (as
defined in the Senior Floating Rate Fund prospectus) is applicable. Purchase
orders from Senior Floating Rate Fund shareholders wishing to exercise this
investment option will be accepted only on the day that the related Senior
Floating Rate Fund tender offer terminates and will be effected at the net
asset value of that Fund at such day. Class A shares of that Fund may be
purchased at net asset value, without a sales charge, by programs associated
with professional athletic players' associations which have invested in the
aggregate more than $10 million in Merrill Lynch-sponsored investment
companies. Additional information concerning these reduced initial charges is
set forth in the Statement of Additional Information.
DEFERRED SALES CHARGE ALTERNATIVE--CLASS B SHARES
Investors choosing the deferred sales charge alternative purchase Class B
shares at net asset value per share without the imposition of a sales charge at
the time of purchase. The Class B shares are being sold without an initial
sales charge so that each Fund will receive the full amount of the investor's
purchase payment. Merrill Lynch compensates its financial consultants for
selling Class B shares at the time of purchase from its own funds. The proceeds
of the CDSCs and the ongoing distribution fee of a Fund discussed below are
used to defray Merrill Lynch's distribution expenses of that Fund, including
compensating its financial consultants. The proceeds from the ongoing account
maintenance fee of a Fund are used to compensate Merrill Lynch for providing
continuing account maintenance activities in connection with that Fund.
Proceeds from the CDSCs of a Fund are paid to the Distributor and are used in
whole or in part by the Distributor to defray the expenses of dealers
(including Merrill Lynch) related to providing distribution-related services to
that Fund in connection with the sale of its Class B shares, such as the
payment of compensation to financial consultants for selling Class B shares of
that Fund. Payments by a Fund to the Distributor of the distribution fee under
the distribution plan for that Fund described below also may be used in whole
or in part by the Distributor for this purpose. The combination of the CDSC and
the ongoing
26
<PAGE>
distribution fee facilitates the ability of a Fund to sell its Class B shares
without a sales charge being deducted at the time of purchase. Class B
shareholders of a Fund who exercise the exchange privilege described under
"Shareholder Services--Exchange Privilege" will continue to be subject to that
Fund's CDSC schedule, if such schedule is higher than the deferred sales charge
schedule relating to the Class B shares acquired as a result of the exchange.
CDSC. Class B shares of a Fund which are redeemed within one year of purchase
may be subject to a CDSC at the rates set forth below charged as a percentage
of the dollar amount subject thereto. The charge will be assessed on an amount
equal to the lesser of the current market value or the cost of the shares being
redeemed. Accordingly, no CDSC will be imposed on increases in net asset value
above the initial purchase price. In addition, no CDSC will be assessed on
shares derived from reinvestment of dividends or capital gains distributions.
The following table sets forth the rates of the CDSC for all Funds:
<TABLE>
<CAPTION>
CDSC AS
PERCENTAGE OF
YEAR SINCE DOLLAR AMOUNT
PURCHASE SUBJECT TO
PAYMENT MADE CHARGE
------------ -------------
<S> <C>
0-1........................................................ 1.0%
1 and thereafter........................................... None
</TABLE>
In determining whether a CDSC is applicable to a redemption, the calculation
will be made in the manner that results in the lowest applicable rate being
charged. Therefore, it will be assumed that the redemption is first of shares
until such time as the CDSC is no longer applicable or shares acquired pursuant
to reinvestment of dividends or distributions and then of shares held longest
during the one-year period. The charge will not be applied to dollar amounts
representing an increase in the net asset value since the time of purchase. A
transfer of shares from a shareholder's account to another account will be
assumed to be made in the same order as a redemption.
Distribution Plans. Pursuant to separate distribution plans adopted by the
Trust on behalf of each Fund under Rule 12b-1 under the 1940 Act (each a
"Distribution Plan"), each Fund pays the Distributor an ongoing account
maintenance fee and distribution fee relating to its Class B shares, which are
accrued daily and paid monthly, at the annual rates of 0.15% and 0.20%,
respectively, of the average daily net assets of the Class B shares of that
Fund. Pursuant to sub-agreements with the Distributor, Merrill Lynch also
provides account maintenance and distribution services to each Fund. The
ongoing account maintenance fee charged by each Fund compensates the
Distributor and Merrill Lynch for providing account maintenance services to
Class B shareholders of that Fund.The ongoing distribution fee charged by each
Fund compensates the Distributor and Merrill Lynch for providing distribution
services and bearing certain distribution-related expenses of that Fund,
including payments to financial consultants for selling Class B shares of that
Fund.
Each Distribution Plan is designed to permit an investor to purchase Class B
shares of a Fund through dealers without the assessment of a front-end sales
charge and at the same time permit the dealer to compensate its financial
consultants in connection with the sale of such Class B shares. In this regard,
the purpose and function of the ongoing distribution fee under a Fund's
Distribution Plan and the CDSC are the same as those of the initial sales
charge with respect to the Class A shares of the Fund in that the deferred
sales charges provide for the financing of the distribution of that Fund's
Class B shares.
27
<PAGE>
The payments under each Distribution Plan are based on a percentage of
average daily net assets of Class B shares of the related Fund regardless of
the amount of expenses incurred, and, accordingly, distribution-related
revenues may be more or less than distribution-related expenses. Information
with respect to the distribution-related revenues and expenses of each Fund is
presented to the Trustees for their consideration in connection with their
deliberations as to the continuance of each Distribution Plan. This information
is presented separately for each Fund and annually as of December 31 of each
year on a "fully allocated accrual" basis and quarterly on a "direct expense
and revenue/cash" basis. On the fully allocated accrual basis, a Fund's
revenues consist of the account maintenance fees, distribution fees, the CDSCs
and certain other related revenues of that Fund, and expenses consist of
financial consultant compensation, branch office and regional operation center
selling and transaction processing expenses, advertising, sales promotion and
market expenses, corporate overhead and interest expense of that Fund. On the
direct expense and revenue/cash basis, revenues consist of the account
maintenance fees, distribution fees and CDSCs of that Fund, and the expenses
consist of financial consultant compensation of that Fund.
The Trust has no obligation with respect to distribution-related expenses
incurred by the Distributor and Merrill Lynch, respectively, in connection with
the Class B shares of any Fund, and there is no assurance that the Trustees of
the Trust will approve the continuance of any Distribution Plan from year to
year. However, the Distributor intends to seek annual continuation of all of
the Distribution Plans. In their review of each Fund's Distribution Plan, the
Trustees will not be asked to take into consideration expenses incurred in
connection with the distribution of Class A shares of that Fund, of Class A or
Class B shares of any other Fund or of shares of other funds for which the
Distributor acts as distributor. The account maintenance fee, the distribution
fee and the CDSC in the case of Class B shares of a Fund will not be used to
subsidize the sale of Class A shares of that Fund.
Limitations on the Payment of Deferred Sales Charges. The maximum sales
charge rule in the Rules of Fair Practice of the National Association of
Securities Dealers, Inc. imposes a limitation on certain asset-based sales
charges such as each Fund's distribution fee and the CDSC, but not the account
maintenance fee. As applicable to each Fund, the maximum sales charge rule
limits the aggregate of distribution fee payments and CDSCs payable by each
Fund to (1) 6.25% of eligible gross sales of Class B shares of that Fund
(defined to exclude shares issued pursuant to dividend reinvestments and
exchanges) plus (2) interest on the unpaid balance at the prime rate plus 1%
(the unpaid balance being the maximum amount payable minus amounts received
from the payment of the distribution fee and the CDSC of that Fund). The
Distributor has voluntarily agreed to waive interest charges on the unpaid
balance in excess of 0.50% of eligible gross sales. Consequently, the maximum
amount payable to the Distributor in connection with each Fund (referred to as
the "voluntary maximum") is 6.75% of eligible gross sales of that Fund. The
Distributor retains the right to stop waiving the interest charges at any time.
To the extent a Fund's payments would exceed the voluntary maximum, such Fund
will not make further payments of the distribution fee and any CDSCs will be
paid to the Fund rather than to the Distributor; however, such Fund will
continue to make payments of the account maintenance fee. In certain
circumstances the amount payable pursuant to the voluntary maximum may exceed
the amount payable under the NASD formula. In such circumstances payments in
excess of the amount payable under the NASD formula will not be made.
The following table sets forth comparative information as of March 31, 1994,
with respect to the Class B shares of each of the Funds indicating the maximum
allowable payments that can be made under the NASD
28
<PAGE>
maximum sales charge rule and the Distributor's voluntary maximum for the
fiscal period ended March 31, 1994.
<TABLE>
<CAPTION>
DATA CALCULATED AS OF MARCH 31, 1994
---------------------------------------------------------------------------
(IN THOUSANDS)
ANNUAL
DISTRIBUTION
ALLOWABLE ALLOWABLE AMOUNTS FEE AT
ELIGIBLE AGGREGATE INTEREST MAXIMUM PREVIOUSLY AGGREGATE CURRENT
GROSS SALES ON UNPAID AMOUNT PAID TO UNPAID NET ASSET
SALES(1) CHARGES BALANCE(2) PAYABLE DISTRIBUTOR(3) BALANCE LEVEL(4)
-------- --------- ---------- ------- -------------- --------- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
Arizona Fund
Under NASD Rule as
Adopted............... $ 4,200 $ 262 $ 6 $ 268 $ 4 $ 264 $ 9
Under Distributor's
Voluntary Waiver...... $ 4,200 $ 262 $21 $ 283 $ 4 $ 279 $ 9
California Fund
Under NASD Rule as
Adopted............... $ 9,840 $ 615 $14 $ 629 $ 9 $ 620 $22
Under Distributor's
Voluntary Waiver...... $ 9,840 $ 615 $49 $ 664 $ 9 $ 655 $22
Florida Fund
Under NASD Rule as
Adopted............... $17,926 $ 1,120 $25 $1,145 $16 $1,129 $36
Under Distributor's
Voluntary Waiver...... $17,926 $ 1,120 $90 $1,120 $16 $1,194 $36
Massachusetts Fund
Under NASD Rule as
Adopted............... $ 8,085 $ 505 $11 $ 516 $ 9 $ 507 $17
Under Distributor's
Voluntary Waiver...... $ 8,085 $ 505 $40 $ 545 $ 9 $ 537 $17
Michigan Fund
Under NASD Rule as
Adopted............... $ 2,450 $ 153 $ 4 $ 157 $ 2 $ 155 $ 5
Under Distributor's
Voluntary Waiver...... $ 2,450 $ 153 $12 $ 165 $ 2 $ 164 $ 5
New Jersey Fund
Under NASD Rule as
Adopted............... $ 7,554 $ 472 $10 $ 482 $ 6 $ 476 $15
Under Distributor's
Voluntary Waiver...... $ 7,554 $ 472 $38 $ 510 $ 6 $ 504 $15
New York Fund
Under NASD Rule as
Adopted............... $ 8,791 $ 549 $13 $ 562 $11 $ 551 $18
Under Distributor's
Voluntary Waiver...... $ 8,791 $ 549 $44 $ 593 $11 $ 582 $18
Pennsylvania Fund
Under NASD Rule as
Adopted............... $ 8,754 $ 547 $13 $ 560 $ 7 $ 553 $20
Under Distributor's
Voluntary Waiver...... $ 8,754 $ 547 $44 $ 591 $ 7 $ 584 $20
</TABLE>
- --------
(1) Purchase price of all eligible Class B shares sold since November 26, 1993
(commencement of operations) other than shares acquired through dividend
reinvestment and the exchange privilege.
(2) Interest is computed on a monthly basis based upon the prime rate, as
reported in The Wall Street Journal, plus 1.0%, as permitted under the NASD
Rule.
(3) Consists of CDSC payments, distribution fee payments and accruals.
(4) Provided to illustrate the extent to which the current level of
distribution fee payments (not including any CDSC payments) is amortizing
the unpaid balance. No assurance can be given that payments of the
distribution fee will reach either the voluntary maximum or the NASD
maximum.
29
<PAGE>
REDEMPTION OF SHARES
The Trust is required to redeem for cash all full and fractional shares of
the Funds upon receipt of a written request in proper form. The redemption
price is the net asset value per share next determined after the initial
receipt of proper notice of redemption. Except for any CDSC which may be
applicable to Class B shares of a Fund, there will be no charge for redemption
if the redemption request is sent directly to the Transfer Agent. Shareholders
liquidating their holdings will receive upon redemption all dividends
reinvested through the date of redemption. The value of shares at the time of
redemption may be more or less than the shareholder's cost, depending on the
market value of the securities held by a Fund at such time.
REDEMPTION
A shareholder wishing to redeem shares of a Fund may do so by tendering the
shares directly to the Transfer Agent, Financial Data Services, Inc., Transfer
Agency Mutual Fund Operations, P.O. Box 45289, Jacksonville, Florida 32232-
5289. Redemption requests delivered other than by mail should be delivered to
Financial Data Services, Inc., Transfer Agency Mutual Fund Operations, 4800
Deer Lake Drive East, Jacksonville, Florida 32246-6484. Proper notice of
redemption in the case of shares deposited with the Transfer Agent may be
accomplished by a written letter requesting redemption. Proper notice of
redemption in the case of shares of a Fund for which certificates have been
issued may be accomplished by a written letter as noted above accompanied by
certificates for the shares to be redeemed. Redemption requests should not be
sent to the Trust or any Fund. The notice in either event requires the
signature(s) of all persons in whose name(s) the shares are registered, signed
exactly as such name(s) appear(s) on the Transfer Agent's register. The
signature(s) on the redemption request must be guaranteed by an "eligible
guarantor institution" as such term is defined in Rule 17Ad-15 under the
Securities Exchange Act of 1934, as amended, the existence and validity of
which may be verified by the Transfer Agent through the use of industry
publications. Notarized signatures are not sufficient. In certain instances,
the Transfer Agent may require additional documents such as, but not limited
to, trust instruments, death certificates, appointments as executor or
administrator, or certificates of corporate authority. For shareholders
redeeming directly with the Transfer Agent, payments will be mailed within
seven days of receipt of a proper notice of redemption.
At various times the Trust may be requested to redeem shares of a Fund for
which it has not yet received good payment (e.g., cash, Federal funds or
certified check drawn on a United States bank). The Trust may delay or cause to
be delayed the mailing of a redemption check until such time as it has assured
itself that good payment has been collected for the purchase of such Fund
shares, which may take up to 10 days.
REPURCHASE
The Trust also will repurchase shares of a Fund through a shareholder's
listed securities dealer. The Trust normally will accept orders to repurchase
Fund shares by wire or telephone from dealers for their customers at the net
asset value next computed after receipt of the order by the dealer, provided
that the request for repurchase is received by the dealer prior to the close of
business on the New York Stock Exchange on the day received and is received by
a Fund from such dealer not later than 4:30 P.M., New York time, on the same
day.
Dealers have the responsibility of submitting such repurchase requests to the
Trust not later than 4:30 P.M., New York time, in order to obtain that day's
closing price. The repurchase arrangements are for the convenience of
shareholders and do not involve a charge by the Trust (other than the
applicable CDSC in the case of Class B shares); securities firms which do not
have selected dealer agreements with the Distributor, however, may impose a
charge on the shareholder for transmitting the notice of repurchase to the
Trust. Merrill Lynch may charge its customers a processing fee (presently
$4.85) to confirm a repurchase of shares
30
<PAGE>
of such customers. Redemptions directly through a Fund's Transfer Agent are not
subject to the processing fee. The Trust reserves the right to reject any order
for repurchase, which right of rejection might adversely affect shareholders
seeking redemption through the repurchase procedure. However, a shareholder
whose order for repurchase is rejected by the Trust may redeem Fund shares as
set forth above.
REINSTATEMENT PRIVILEGE--CLASS A SHARES
Shareholders who have redeemed their Class A shares of a Fund have a one-time
privilege to reinstate their accounts by purchasing Class A shares of that Fund
at net asset value without a sales charge up to the dollar amount redeemed. The
reinstatement privilege may be exercised by sending a notice of exercise along
with a check for the amount to be reinstated to the Transfer Agent within 30
days after the date the request for redemption was accepted by the Transfer
Agent or the Distributor. The reinstatement will be made at the net asset value
per share next determined after the notice of reinstatement is received and
cannot exceed the amount of the redemption proceeds. The reinstatement is a
one-time privilege and may be exercised by the Class A shareholder only the
first time such shareholder makes a redemption.
SHAREHOLDER SERVICES
The Trust offers a number of shareholder services and investment plans
designed to facilitate investment in shares of the Funds. Full details as to
each of such services and instructions as to how to participate in the various
services or plans, or to change options with respect thereto can be obtained
from the Trust by calling the telephone number on the cover page hereof or from
the Distributor or Merrill Lynch. Included in such services are the following:
Investment Account. Each shareholder whose account (an "Investment Account")
is maintained at the Transfer Agent has an Investment Account and will receive
quarterly statements from the Transfer Agent. These quarterly statements will
serve as transaction confirmations for automatic investment purchases and the
reinvestment of income dividends, and long-term capital gain distributions. The
quarterly statements will also show any other activity in the account since the
preceding statement. Shareholders will receive separate transaction
confirmations for each purchase or sale transaction other than automatic
investment purchases and the reinvestment of income dividends, and long-term
capital gain distributions. A shareholder may make additions to his or her
Investment Account at any time by mailing a check directly to the Transfer
Agent. Shareholders also may maintain their accounts through Merrill Lynch.
Upon the transfer of shares out of a Merrill Lynch brokerage account, an
Investment Account in the transferring shareholder's name may be opened at the
Transfer Agent. Shareholders considering transferring their Class A shares of a
Fund from Merrill Lynch to another brokerage firm or financial institution
should be aware that, if the firm to which the Class A shares are to be
transferred will not take delivery of shares of the Fund, a shareholder either
must redeem the Class A shares so that the cash proceeds can be transferred to
the account at the new firm or such shareholder must continue to maintain an
Investment Account at the Transfer Agent for those Class A shares. Shareholders
interested in transferring their Class B shares of a Fund from Merrill Lynch
and who do not wish to have an Investment Account maintained for such shares at
the Transfer Agent may request their new brokerage firm to maintain such shares
in an account registered in the name of the brokerage firm for the benefit of
the shareholder. If the new brokerage firm is willing to accommodate the
shareholder in this manner, the shareholder must request that he or she be
issued certificates for his or her shares and then must turn the certificates
over to the new firm for re-registration as described in the preceding
sentence.
31
<PAGE>
Exchange Privilege. Shareholders of the Funds have an exchange privilege with
certain other mutual funds sponsored by Merrill Lynch. There is currently no
limitation on the number of times a shareholder may exercise the exchange
privilege. The exchange privilege may be modified or terminated in accordance
with the rules of the Securities and Exchange Commission (the "Commission").
Class A shareholders of a Fund may exchange their shares ("outstanding Class A
shares") for Class A shares of another fund ("new Class A shares") on the basis
of relative net asset value per Class A share, plus an amount equal to the
difference, if any, between the sales charge previously paid on the outstanding
Class A shares and the sales charge payable at the time of the exchange on the
new Class A shares. However, a Fund's exchange privilege is modified with
respect to purchases of Class A shares under the Merrill Lynch Mutual Fund
Adviser Program. First, the initial allocation of assets is made under the
program. Then, any subsequent exchange under the program of Class A shares of
another fund for Class A shares of a Fund will be made solely on the basis of
the relative net asset values of the shares being exchanged. Therefore, there
will not be a charge for any difference between the sales charge previously
paid on the shares of the other fund and the sales charge payable on the shares
of a Fund being acquired in the exchange under this program.
Class B shareholders of a Fund may exchange their shares ("outstanding Class
B shares") for Class B shares of another fund ("new Class B shares") on the
basis of relative net asset value per share, without the payment of any CDSC
that otherwise might be due upon the redemption of the outstanding Class B
shares. Class B shareholders of a Fund exercising the exchange privilege will
continue to be subject to that Fund's CDSC schedule if such schedule is higher
than the deferred sales charge schedule relating to the new Class B shares. In
addition, Class B shares of a Fund acquired through use of the exchange
privilege will be subject to that Fund's CDSC schedule if such schedule is
higher than the deferred sales charge schedule relating to the Class B shares
of the fund from which the exchange has been made. For purposes of computing
the CDSC that may be payable upon a disposition of the new Class B shares, the
holding period for the outstanding Class B shares is "tacked" to the holding
period of the new Class B shares. Class A shareholders and Class B shareholders
of the Funds also may exchange their shares for shares of certain money market
funds, but in the case of an exchange from Class B shares the period of time
that shares are held in a money market fund will not count toward satisfaction
of the holding period requirement for purposes of reducing the CDSC. Exercise
of the exchange privilege is treated as a sale for Federal income tax purposes.
The exchange privilege is available only in states where the exchange legally
may be made. For further information, see "Shareholder Services--Exchange
Privilege" in the Statement of Additional Information.
Automatic Reinvestment of Dividends and Capital Gains Distributions. All
dividends and capital gains distributions are reinvested automatically in full
and fractional shares of a Fund, without a sales charge, at the net asset value
per share of that Fund at the close of business on the monthly payment date for
such dividends and distributions. A shareholder, at any time, by written
notification or by telephone (1-800-MER-FUND) to the Transfer Agent, may elect
to have subsequent dividends or both dividends and capital gains distributions
paid in cash, rather than reinvested, in which event payment will be mailed
monthly. No deferred sales charge will be imposed upon redemption of shares
issued as a result of the automatic reinvestment of dividends or capital gains
distributions.
Systematic Withdrawal and Automatic Investment Plans. A Class A shareholder
of a Fund may elect to receive systematic withdrawal payments from his or her
Investment Account through automatic payment by check or through automatic
payment by direct deposit to his or her bank account on either a monthly or
quarterly basis. A Class A shareholder whose shares are held within a CMA(R),
CBA(R) or Retirement Account may elect to have shares redeemed on a monthly,
bimonthly, quarterly, semiannual or annual basis through the Systematic
Redemption Program, subject to certain conditions. Regular additions of both
Class A shares
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<PAGE>
and Class B shares may be made to an investor's Investment Account by
prearranged charges of $50 or more to his or her regular bank account. A
Fund's Automatic Investment Program is not available to shareholders whose
shares are held in a brokerage account with Merrill Lynch. Alternatively, an
investor who maintains a CMA(R) account may arrange to have periodic
investments made in a Fund in that CMA(R) account or in certain related
accounts in amounts of $100 or more through the CMA(R) Automatic Investment
Program.
PORTFOLIO TRANSACTIONS
Subject to the policies established by the Trustees or the Trust, the
Manager is primarily responsible for the execution of the Fund's portfolio
transactions. Municipal Bonds and other securities in which the Funds invest
are traded primarily in the over-the-counter market. Where possible, the Trust
deals directly with the dealers who make a market in the securities involved
except in those circumstances where better prices and execution are available
elsewhere. It is the policy of the Trust to obtain the best net results in
conducting portfolio transactions for the Funds, taking into account such
factors as price (including the applicable dealer spread), the size, type and
difficulty of the transactions involved, the firm's general execution and
operations facilities, and the firm's risk in positioning the securities
involved and the provision of supplemental investment research by the firm.
While reasonably competitive spreads or commissions are sought, the Funds will
not necessarily be paying the lowest spread or commission available. The sale
of shares of the Funds may be taken into consideration as a factor in the
selection of brokers or dealers to execute portfolio transactions for the
Funds. The portfolio securities of the Funds generally are traded on a
principal basis and normally do not involve either brokerage commissions or
transfer taxes. The cost of portfolio securities transactions of the Funds
primarily consists of dealer or underwriter spreads. Under the 1940 Act,
persons affiliated with the Trust, including Merrill Lynch, are prohibited
from dealing with the Trust or any Fund as principals in the purchase and sale
of securities unless such trading is permitted by an exemptive order issued by
the Commission. The Trust has obtained an exemptive order permitting it and
each Fund to engage in certain principal transactions with Merrill Lynch
involving high quality short-term municipal securities, subject to certain
conditions. In addition, the Trust may not purchase securities, including
Municipal Bonds, for the Funds during the existence of any underwriting
syndicate of which Merrill Lynch is a member except pursuant to procedures
approved by the Trustees of the Trust which comply with rules adopted by the
Commission. An affiliated person of the Trust may serve as its broker in over-
the-counter transactions conducted for the Funds on an agency basis only.
DISTRIBUTIONS AND TAXES
DISTRIBUTIONS
The net investment income of each Fund is declared as dividends following
the normal close of trading on the New York Stock Exchange (currently 4:00
P.M.) prior to the determination of the net asset value on that day. The net
investment income of each Fund for dividend purposes consists of interest
earned on portfolio securities, less expenses, in each case computed since the
most recent determination of the net asset value. Expenses of each Fund,
including the management fees and Class B account maintenance fees and
distribution fees of that Fund, are accrued daily. Dividends of net investment
income of a Fund are declared daily and reinvested monthly in the form of
additional full and fractional shares of that Fund at net asset value unless
the shareholder elects to receive such dividends in cash. Shares will accrue
dividends as long as they are issued and outstanding. Shares are issued and
outstanding from the settlement date of a purchase order to the day prior to
the settlement date of a redemption order.
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<PAGE>
All net realized long- or short-term capital gains of a Fund, if any, are
declared and distributed to that Fund's shareholders at least annually. Capital
gains distributions will be reinvested automatically in shares of a Fund unless
the shareholder elects to receive such distributions in cash.
The per share dividends and distributions on Class B shares of a Fund will be
lower than per share dividends and distributions on Class A shares of that Fund
as a result of the account maintenance, distribution and transfer agency fees
applicable with respect to the Class B shares. See "Additional Information--
Determination of Net Asset Value".
See "Shareholder Services" for information as to how to elect either dividend
reinvestment or cash payments. Portions of dividends and distributions which
are taxable to shareholders as described below are subject to income tax
whether they are reinvested in shares of a Fund or received in cash.
TAXES
Federal. The Trust intends to continue to qualify each Fund for the special
tax treatment afforded regulated investment companies ("RICs") under the
Internal Revenue Code of 1986, as amended (the "Code"). If a Fund so qualifies,
in any taxable year in which it distributes at least 90% of its taxable net
income and 90% of its tax-exempt net income, the Fund (but not its
shareholders) will not be subject to Federal income tax to the extent that it
distributes its net investment income and net realized capital gains. The Trust
intends to cause each Fund to distribute substantially all of such income.
To the extent that the dividends distributed to Fund shareholders are derived
from interest income exempt from Federal tax 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 and railroad retirement benefits subject to Federal
income taxes. 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. The Trust will inform shareholders annually as to the
portion of each Fund's distributions which constitutes exempt-interest
dividends and which is exempt from Federal income tax. Interest on indebtedness
incurred or continued to purchase or carry Fund shares is not deductible for
Federal income tax purposes to the extent attributable to exempt-interest
dividends.
To the extent that a Fund's distributions are derived from interest on its
taxable investments or from an excess of net short-term capital gains over net
long-term capital losses ("ordinary income dividends"), such distributions are
considered ordinary income for Federal income tax purposes. Such distributions
are not eligible for the dividends received deduction for corporations.
Distributions, if any, of net long-term capital gains from the sale of
securities or from certain transactions in futures or options ("capital gain
dividends") are taxable at long-term capital gains rates for Federal income tax
purposes, regardless of the length of time the shareholder has owned Fund
shares. Distributions in excess of the Fund's earnings and profits will first
reduce the adjusted tax basis of a holder's shares and, after such adjusted tax
basis is reduced to zero, will constitute capital gains to such holder
(assuming the shares are held as a capital asset). Under the Revenue
Reconciliation Act of 1993, all or a portion of each Fund's gain from the sale
or redemption of tax-exempt obligations purchased at a market discount will be
treated as ordinary income rather than capital gain. This rule may increase the
amount of ordinary income dividends received by shareholders. Any loss upon the
sale or exchange of shares held for six months or less will be treated as long-
term capital loss to the extent of any capital gain dividends received by the
shareholder. In addition, such loss will be disallowed to the extent of
34
<PAGE>
any exempt-interest 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. Each Fund will purchase
such "private activity bonds" and the Trust will report to shareholders within
60 days after each Fund's taxable year-end the portion of its dividends
declared during the year which constitutes an item of tax preference for
alternative minimum tax purposes. The Code further provides that corporations
are subject to an alternative minimum tax based, in part, on certain
differences between taxable income as adjusted for other tax preferences and
the corporation's "adjusted current earnings" which more closely reflect a
corporation's economic income. Because an exempt-interest dividend paid by a
Fund will be included in adjusted current earnings, a corporate shareholder may
be required to pay alternative minimum tax on exempt-interest dividends paid by
such Fund.
The Revenue Reconciliation Act of 1993 has added new marginal tax brackets of
36% and 39.6% for individuals and has created a graduated structure of 26% and
28% for the alternative minimum tax applicable to individual taxpayers. These
rate increases may affect an individual investor's after-tax return from an
investment in one of the Funds in this Prospectus as compared with such
investor's return from taxable investments.
Under certain Code provisions some shareholders may be subject to a 31%
withholding tax on certain ordinary income dividends and on capital gain
dividends and redemption payments ("backup withholding"). Generally,
shareholders subject to backup withholding will be those for whom no certified
taxpayer identification number is on file with the Trust or who, to the Trust's
knowledge, have furnished an incorrect number. When establishing an account, an
investor must certify under penalty of perjury that such number is correct and
that such investor is not otherwise subject to backup withholding.
The Code provides that every person required to file a tax return must
include for information purposes on such return the amount of exempt-interest
dividends received from all sources (including each Fund), during the taxable
year.
The foregoing is a general and abbreviated summary of the applicable
provisions of the Code and Treasury regulations presently in effect. For the
complete provisions, reference should be made to the pertinent Code sections
and the Treasury regulations promulgated thereunder. The Code and the Treasury
regulations are subject to change by legislative or administrative action
either prospectively or retroactively.
Shareholders are urged to consult their tax advisers regarding specific
questions as to Federal, foreign, state or local taxes.
State. The State Municipal Bonds in which each Fund will invest consist of
obligations with remaining maturities of between one and ten years which are
issued by or on behalf of the designated state or its political subdivisions,
agencies or instrumentalities, and obligations of other qualifying issuers,
such as issuers located
35
<PAGE>
in Puerto Rico, the Virgin Islands and Guam. State Municipal Bonds pay interest
which is exempt, in the opinion of bond counsel to the issuer, from Federal
income taxes, personal income taxes in the designated state and, in certain
instances, franchise and local personal income taxes. In certain states, State
Municipal Bonds are exempt from intangible personal property taxes in the
designated state.
Exempt-interest dividends paid by a Fund and attributable to interest income
from State Municipal Bonds of a designated state generally will be exempt from
income taxation to shareholders otherwise subject to personal income taxation
by such designated state. Shareholders subject to income taxation by states
other than the Fund's designated state will realize a lower after-tax rate of
return than shareholders in that state since the dividends distributed by a
Fund generally will not be exempt, to any significant degree, from income
taxation by any state other than that Fund's designated state. The Trust will
inform shareholders annually as to the portion of a Fund's distributions which
constitutes exempt-interest dividends and the portion which is not subject to
state and, if applicable, city income or franchise taxes. Interest on
indebtedness incurred or continued to purchase or carry Fund shares generally
will not be deductible for state personal income tax purposes to the extent
attributable to interest income exempt from personal income taxation by the
designated state.
The foregoing description relates generally to state personal income tax
issues; investors should consult with their tax advisers with respect to such
taxes and any state or local personal income taxes not described above as well
as to the availability of any exemptions from state or local personal income
taxes. Additional considerations relating to income taxation in the various
states is set forth under "Distributions and Taxes" in the Statement of
Additional Information.
PERFORMANCE DATA
From time to time each Fund may include its average annual total return,
yield and tax equivalent yield for various specified time periods in
advertisements or information furnished to present or prospective shareholders.
Average annual total return, yield and tax equivalent yield are computed in
accordance with formulas specified by the Commission.
Average annual total return quotations for the specified periods will be
computed by finding the average annual compounded rates of return (based on net
investment income and any realized and unrealized capital gains or losses on
portfolio investments over such periods) that would equate the initial amount
invested to the redeemable value of such investment at the end of each period.
Average annual total return is computed assuming all dividends and
distributions are reinvested and taking into account all applicable recurring
and nonrecurring expenses, including the maximum sales charge in the case of
Class A shares of a Fund and the CDSC that would be applicable to a complete
redemption of the investment at the end of the specified period in the case of
Class B shares of that Fund. Dividends paid by each Fund with respect to its
Class A shares and Class B shares, to the extent any dividends are paid, will
be calculated in the same manner at the same time on the same day and will be
in the same amount, except that account maintenance charges and distribution
charges and any incremental transfer agency costs relating to Class B shares
will be borne exclusively by that Class. Each Fund will include performance
data for both Class A shares and Class B shares of that Fund in any
advertisement or information including performance data of that Fund.
The Funds also may quote total return and aggregate total return performance
data for various specified time periods. Such data will be calculated
substantially as described above, except that (1) the rates of return
36
<PAGE>
calculated will not be average annual rates, but rather, actual annual,
annualized or aggregate rates of return and (2) the maximum applicable sales
charges will not be included with respect to annual or annualized rates of
return calculations. Aside from the impact on the performance data calculations
of including or excluding the maximum applicable sales charges, actual annual
or annualized total return data generally will be lower than average annual
total return data since the average annual rates of return reflect compounding
and aggregate total return data generally will be higher than average annual
total return data since the aggregate rates of return reflect compounding over
a longer period of time. In advertisements distributed to investors whose
purchases are subject to reduced sales charges in the case of Class A shares or
waiver of the CDSC in the case of Class B shares (such as investors in certain
retirement plans), the performance data may take into account the reduced, and
not the maximum, sales charge or may not take into account the CDSC and
therefore may reflect greater total return since, due to the reduced sales
charges or waiver of the CDSC, a lower amount of expenses is deducted. See
"Purchase of Shares". A Fund's total return may be expressed either as a
percentage or as a dollar amount in order to illustrate such total return on a
hypothetical $1,000 investment in the Fund at the beginning of each specified
period.
Yield quotations will be computed based on a 30-day period by dividing (a)
the net income based on the yield of each security earned during the period by
(b) the average daily number of shares outstanding during the period that were
entitled to receive dividends multiplied by the maximum offering price per
share on the last day of the period. Tax equivalent yield quotations will be
computed by dividing (a) the part of the Fund's yield that is tax-exempt by (b)
one minus a stated tax rate and (c) adding the result to that part, if any, of
the Fund's yield that is not tax-exempt.
The following sets forth the yield for the Class A shares and Class B shares
of each of the Funds for the 30-day period ended February 28, 1994. The table
also sets forth the tax-equivalent yield (based on a Federal income tax rate of
28%) for the Class A shares and Class B shares of each of the Funds for the
same period.
<TABLE>
<CAPTION>
CLASS A CLASS B
--------------------- ---------------------
30-DAY TAX-EQUIVALENT 30-DAY TAX-EQUIVALENT
YIELD YIELD YIELD YIELD
------ -------------- ------ --------------
<S> <C> <C> <C> <C>
Arizona Fund.................. 2.89% 4.01% 2.57% 3.57%
California Fund............... 3.14% 4.36% 3.50% 4.86%
Florida Fund.................. 3.32% 4.61% 3.01% 4.18%
Massachusetts Fund............ 3.66% 5.08% 3.35% 4.65%
Michigan Fund................. 3.30% 4.58% 2.97% 4.13%
New Jersey Fund............... 3.17% 4.40% 2.87% 3.99%
New York Fund................. 3.22% 4.47% 2.90% 4.03%
Pennsylvania Fund............. 2.94% 4.08% 2.62% 3.64%
</TABLE>
Total return, yield and tax-equivalent yield figures are based on a Fund's
historical performance and are not intended to indicate future performance. A
Fund's total return and yield will vary depending on market conditions, the
securities comprising the Fund's portfolio, the Fund's operating expenses and
the amount of realized and unrealized net capital gain or losses during the
period. The value of an investment in a Fund will fluctuate and an investor's
shares, when redeemed, may be worth more or less than their original cost.
Investors' tax-equivalent yields may differ from those listed above because of
the application of state and local income and intangibles taxes and Federal
income tax rates which are higher or lower than 28%.
37
<PAGE>
On occasion, a Fund may compare its performance to performance data published
by Lipper Analytical Services, Inc., Morningstar Publications, Inc.
("Morningstar") and CDA Investment Technology, Inc., or to data contained in
publications such as Money Magazine, U.S. News & World Report, Business Week,
Forbes Magazine and Fortune Magazine. From time to time, a Fund may include its
Morningstar risk-adjusted performance ratings in advertisements or supplemental
sales literature. As with other performance data, performance comparisons
should not be considered representative of a Fund's relative performance for
any future period.
ADDITIONAL INFORMATION
DETERMINATION OF NET ASSET VALUE
The net asset value of each Fund is determined by the Manager once daily as
of 4:15 P.M., New York time, on each day during which the New York Stock
Exchange is open for trading. The net asset value per share is computed by
dividing the sum of the value of the securities held by a Fund plus any cash or
other assets minus all liabilities by the total number of shares outstanding at
such time, rounded to the nearest cent. Expenses, including the fees payable to
the Manager and the Distributor, are accrued daily.
The net asset value per share of the Class A shares of a Fund and the net
asset value per share of the Class B shares of that Fund are expected to be
equivalent. Under certain circumstances, however, the per share net asset value
of the Class B shares of a Fund may be lower than the per share net asset value
of the Class A shares of that Fund, reflecting the daily expense accruals of
the account maintenance and distribution fees (and incremental transfer agency
costs) applicable with respect to the Class B shares. Even under those
circumstances, the per share net asset value of the two classes eventually will
tend to converge immediately after the payment of dividends, which will differ
by approximately the amount of the expense accrual differential between the
classes.
ORGANIZATION OF THE TRUST
The Trust is an unincorporated business trust organized on February 14, 1991
under the laws of Massachusetts. The Trust is an open-end management investment
company comprised of separate series ("Series"), each of which is a separate
portfolio offering shares to selected groups of purchasers. Each of the Series
is managed independently in order to provide to shareholders who are residents
of the state to which such Series relates as high a level of income exempt from
Federal and applicable state and local personal income taxes as is consistent
with prudent investment management. The Trustees are authorized to create an
unlimited number of Series and, with respect to each Series, to issue an
unlimited number of full and fractional shares of beneficial interest of $.10
par value of different classes. Shareholder approval is not required for the
authorization of additional Series or classes of a Series of the Trust. At the
date of this Prospectus, the shares of each Fund are divided into Class A
shares and Class B shares. Both Class A shares and Class B shares represent an
interest in the same assets of a Fund and have identical voting, dividend,
liquidation and other rights and the same terms and conditions except that
expenses related to the account maintenance and distribution of the Class B
shares are borne solely by such class and Class B shares have exclusive voting
rights with respect to matters relating to such expenditures. See "Purchase of
Shares". The Trust has received an order from the Commission permitting the
issuance and sale of two classes of shares, and the issuance and sale of any
additional classes by any Series will require an additional order from the
Commission. There is no assurance that such an additional order will be
granted.
Shareholders are entitled to one vote for each full share and to fractional
votes for fractional shares held in the election of Trustees (to the extent
hereinafter provided) and on other matters submitted to the vote of
38
<PAGE>
shareholders. All shares of the Trust have equal voting rights, except that
only shares of the respective Series are entitled to vote on matters concerning
only that Series and, as noted above, only Class B shares of a Series will have
exclusive voting rights with respect to matters relating to the account
maintenance and distribution expenses being borne solely by such class. There
normally will be no meeting of shareholders for the purpose of electing
Trustees unless and until such time as less than a majority of the Trustees
holding office have been elected by shareholders, at which time the Trustees
then in office will call a shareholders' meeting for the election of Trustees.
Shareholders, in accordance with the terms of the Declaration of Trust, may
cause a meeting of shareholders to be held for the purpose of voting on the
removal of Trustees. Also, the Trust will be required to call a special meeting
of shareholders of a Series in accordance with the requirements of the 1940 Act
to seek approval of new management and advisory arrangements, of a material
increase in distribution fees or of a change in the fundamental policies,
objectives or restrictions of a Series. Except as set forth above, the Trustees
shall continue to hold office and appoint successor Trustees. Each issued and
outstanding share is entitled to participate equally in dividends and
distributions declared by the respective Series and in net assets of such
Series upon liquidation or dissolution remaining after satisfaction of
outstanding liabilities except that, as noted above, expenses related to the
distribution of the Class B shares of a Series will be borne solely by such
class. The obligations and liabilities of a particular Series are restricted to
the assets of that Series and do not extend to the assets of the Trust
generally. The shares of each Series, when issued, will be fully-paid and non-
assessable by the Trust.
SHAREHOLDER REPORTS
Only one copy of each shareholder report and certain shareholder
communications will be mailed to each identified shareholder regardless of the
number of accounts such shareholder has. If a shareholder wishes to receive
separate copies of each report and communication for each of the shareholder's
related accounts, the shareholder should notify in writing:
Financial Data Services, Inc.
Attn: Document Evaluation Unit
P.O. Box 45290
Jacksonville, FL 32232-5290
The written notification should include the shareholder's name, address, tax
identification number and Merrill Lynch, Pierce, Fenner & Smith Incorporated
and/or mutual fund account numbers. Shareholders having any questions regarding
this matter should call their Merrill Lynch financial consultant or Financial
Data Services, Inc. at 800-637-3863.
SHAREHOLDER INQUIRIES
Shareholder inquiries may be addressed to the Trust at the address or
telephone number set forth on the cover page of this Prospectus.
The Declaration of Trust establishing the Trust, dated February 14, 1991, a
copy of which together with all amendments thereto (the "Declaration") is on
file in the office of the Secretary of the Commonwealth of Massachusetts,
provides that the name "Merrill Lynch Multi-State Limited Maturity Municipal
Series Trust" refers to the Trustees under the Declaration collectively as
Trustees, but not as individuals or personally; and no Trustee, shareholder,
officer, employee or agent of the Trust shall be held to any personal
liability, nor shall resort be had to such person's private property for the
satisfaction of any obligation or claim of the Trust, but the "Trust Property"
(as defined in the Declaration) only shall be liable.
39
<PAGE>
[THIS PAGE INTENTIONALLY LEFT BLANK]
40
<PAGE>
MERRILL LYNCH MULTI-STATE LIMITED MATURITY MUNICIPAL SERIES TRUST--
AUTHORIZATION FORM
- -------------------------------------------------------------------------------
1. SHARE PURCHASE APPLICATION
I, being of legal age, wish to purchase [_] Class A shares or [_] Class B
shares (choose one) of the following fund (choose one)* and establish an
Investment Account as described in the Prospectus:
[_] Merrill Lynch Arizona Limited Maturity Municipal Bond Fund
[_] Merrill Lynch Michigan Limited
Maturity Municipal Bond Fund
[_] Merrill Lynch California Limited Maturity Municipal Bond Fund
[_] Merrill Lynch New Jersey Limited
Maturity Municipal Bond Fund
[_] Merrill Lynch Florida Limited Maturity Municipal Bond Fund
[_] Merrill Lynch Massachusetts Limited Maturity Municipal Bond Fund
[_] Merrill Lynch New York Limited
Maturity Municipal Bond Fund
*THE FUND SELECTED ABOVE IS HEREIN REFERRED TO AS THE "FUND".
[_] Merrill Lynch Pennsylvania
Limited Maturity Municipal Bond Fund
Basis for establishing an Investment Account:
A. I enclose a check for $ . . . . . . . payable to Financial Data Services,
Inc., as an initial investment (minimum $1,000) (subsequent investment $50 or
more). I understand that this purchase will be executed at the applicable
offering price next to be determined after this Application is received by
you.
B. I already own shares of the following Merrill Lynch mutual funds that
would qualify for the cumulative quantity discount as outlined in the
Statement of Additional Information:
1. ....................................... 4. ...............................
2. ....................................... 5. ...............................
3. ....................................... 6. ...............................
(Please list all funds. Use a separate sheet of paper if necessary.)
Until you are notified by me in writing, the following options with
respect to dividends and distributions are elected:
Elect[_] reinvest Elect[_] reinvest capital
Distributiondividends gains
Options One[_] pay dividends in One[_] pay capital gains in
cash cash
If no election is made, dividends and capital gains will be reinvested
automatically at net asset value without a sales charge.
(Please Print)
Name .............................................
First NameInitialLast Name
Name of Co-Owner (if any) ........................ Social Security
First NameInitialLast Name No. or Taxpayer
Identification
No.
Address ..........................................
.................................................. ................. 19. .
(Zip Code) Date
Occupation .............. Name and Address..................................
of Employer.......................................
..................................................
Under penalty of perjury, I certify (1) that the number set forth above is
my correct Social Security No. or Taxpayer Identification No. and (2) that I
am not subject to backup withholding (as discussed under "Distributions and
Taxes--Taxes" in the Prospectus) either because I have not been notified that
I am subject thereto as a result of a failure to report all interest or
dividends, or the Internal Revenue Service (the "IRS") has notified me that I
am no longer subject thereto.
INSTRUCTION: YOU MUST STRIKE OUT THE LANGUAGE IN (2) ABOVE IF YOU HAVE BEEN
NOTIFIED THAT YOU ARE SUBJECT TO BACKUP WITHHOLDING DUE TO UNDER-REPORTING,
AND IF YOU HAVE NOT RECEIVED A NOTICE FROM THE IRS THAT BACKUP WITHHOLDING HAS
BEEN TERMINATED. THE UNDERSIGNED AUTHORIZES THE FURNISHING OF THIS
CERTIFICATION TO OTHER MERRILL LYNCH-SPONSORED MUTUAL FUNDS.
SIGNATURE OF OWNER .............. SIGNATURE OF CO-OWNER (IF ANY) ........
In the case of co-owners, a joint tenancy with right of survivorship will be
presumed unless otherwise specified.
- -------------------------------------------------------------------------------
2. LETTER OF INTENTION--CLASS A SHARES ONLY (SEE TERMS AND CONDITIONS IN THE
STATEMENT OF ADDITIONAL INFORMATION)
..............., 19...
Gentlemen: Date of initial
purchase
Although I am not obligated to do so, I intend to purchase shares of the
Fund selected in item 1 above or any other investment company with an initial
sales charge or deferred sales charge for which the Merrill Lynch Funds
Distributor, Inc. acts as a distributor over the next 13-month period which
will equal or exceed:
[_] $100,000 [_] $250,000 [_] $500,000
Each purchase will be made at the then reduced offering price applicable to
the amount checked above, as described in the Merrill Lynch Multi-State
Limited Maturity Municipal Series Trust prospectus.
I agree to the terms and conditions of the Letter of Intention. I hereby
irrevocably constitute and appoint Merrill Lynch Funds Distributor, Inc. my
attorney, with full power of substitution, to surrender for redemption any or
all shares of the Fund held as security.
By .................................. .....................................
Signature of Owner Signature (If registered in joint
names, both must sign)
In making purchases under this letter, the following are the related
accounts on which reduced offering prices are to apply:
(1) Name ............................ (2) Name ............................
- -------------------------------------------------------------------------------
41
<PAGE>
MERRILL LYNCH MULTI-STATE LIMITED MATURITY MUNICIPAL SERIES TRUST--
AUTHORIZATION FORM
- -------------------------------------------------------------------------------
3.SYSTEMATIC WITHDRAWAL PLAN--CLASS A SHARES ONLY (SEE TERMS AND CONDITIONS IN
THE STATEMENT OF ADDITIONAL INFORMATION)
Minimum Requirements: $10,000 for monthly disbursements, $5,000 for
quarterly, of shares in the Fund selected in item 1 above at cost or current
offering price.
Begin systematic withdrawal on . . . . . . . . . , 19. .
Withdrawals to be made either (check
one) [_] Monthly [_] Quarterly. Quarterly
withdrawals are made on the 24th day of March, June,
September and December.
[date]
Specify withdrawal amount (check one): [_] $ . . . . . . . or [_] . . . . .%
of the current value of Class A shares in the account
Specify withdrawal method: [_] check or [_] direct deposit to bank account
(CHECK ONE AND COMPLETE PART (A) OR (B) BELOW):
(A) I HEREBY AUTHORIZE PAYMENT BY (B) I HEREBY AUTHORIZE PAYMENT BY
CHECK DIRECT DEPOSIT TO BANK ACCOUNT and
(if necessary) debit entries and
adjustments for any credit entries
made in error to my account
Draw checks payable
(check one) Specify type of account (check
[_] as indicated in item 1. one): [_] checking [_] savings
[_] to the order of ............... I agree that this authorization will
remain in effect until I provide
written notification to Financial
Data Services, Inc. amending or
terminating this service.
Name on your Account .................
Mail to (check one) Bank .................................
[_] the address indicated in item Bank # ...................
1. Account # ...
[_] Name (Please Print) ........... Bank Address .........................
Signature of Depositor ... Date .....
Address .............................
Signature of Owner................... Signature of Depositor (if joint
account) .............................
NOTE: IF AUTOMATIC DIRECT DEPOSIT IS
Signature of Co-Owner (if any)....... ELECTED, YOUR BLANK, UNSIGNED CHECK
MARKED "VOID" OR A DEPOSIT SLIP FROM
YOUR SAVINGS ACCOUNT SHOULD ACCOMPANY
THIS APPLICATION.
- -------------------------------------------------------------------------------
4. APPLICATION FOR AUTOMATIC INVESTMENT PLAN
I hereby request that Financial Data Services, Inc. draw a check or an
automated clearing house ("ACH") debit on my checking account as described
below each month to purchase [_] Class A shares or [_] Class B shares of the
Fund selected in item 1 above to the terms set forth below.
FINANCIAL DATA SERVICES, INC. AUTHORIZATION TO HONOR CHECKS OR ACH
DEBITS
You are hereby authorized to draw a DRAWN BY FINANCIAL DATA SERVICES, INC.
check or an ACH debit each month on To ................................Bank
my bank account for investment in (Investor's Bank)
the Fund as indicated below: Bank Address ..........................
City ......... State .... Zip Code.....
Amount of each check or ACH
debit $ ......................
Account No. ..................
Please date and invest checks As a convenience to me, I hereby re-
or draw ACH debits on the quest and authorize you to pay and
20th of each month beginning charge to my account checks or ACH
.............................. debits drawn on my account by and pay-
able to Financial Data Services, Inc.
(Month) I agree that your rights in respect to
or as soon thereafter as each such check or debit shall be the
possible. same as if it were a check drawn on
you and signed personally by me. This
I agree that you are preparing authority is to remain in effect until
these checks or drawing these deb- revoked personally by me in writing.
its voluntarily at my request and Until you receive such notice, you
that you shall not be liable for shall be fully protected in honoring
any loss arising from any delay in any such check or debit. I further
preparing or failure to prepare any agree that if any such check or debit
such check or debit. If I change be dishonored, whether with or without
banks or desire to terminate or cause and whether intentionally or in-
suspend this program, I agree to advertently, you shall be under no li-
notify you promptly in writing. ability.
I further agree that if a check or ......... ...........................
debit is not honored upon Date Signature of Depositor
presentation, Financial Data ......... ..........................
Services, Inc. is authorized to Bank Signature of Depositor
discontinue immediately the Account (If joint account, both
Automatic Investment Plan and to Number must sign)
liquidate sufficient shares held in NOTE: IF AUTOMATIC INVESTMENT PLAN IS
my account to offset the purchase ELECTED, YOUR BLANK, UNSIGNED CHECK
made with the returned check or MARKED "VOID" SHOULD ACCOMPANY THIS
dishonored debit. APPLICATION.
........ .......................
Date Signature of Depositor
.......................
Signature of Depositor
(If joint account,
both must sign)
- -------------------------------------------------------------------------------
5. FOR DEALER ONLY
Branch Office, Address, Stamp We hereby authorize Merrill Lynch Funds
Distributor, Inc. to act as our agent in
^ ^ connection with transactions under this
authorization form and agree to notify the
Distributor of any purchases made under a
Letter of Intention or Systematic With-
drawal Plan. We guarantee the sharehold-
er's Signature.
^ ^
This form when completed should
be mailed to:
...........................................
Merrill Lynch Multi-State Dealer Name and Address
Limited Maturity Municipal By ........................................
Series Trust c/o Financial Data Authorized Signature of Dealer
Services, Inc. Transfer Agency
Mutual Fund Operations P.O. Box
45289Jacksonville, FL 32232-
5289
......................
Branch- F/C No. F/C Last Name
Code
Dealer's Customer
A/C No.
42
<PAGE>
MANAGER
Fund Asset Management, L.P.
Administrative Offices:
800 Scudders Mill Road
Plainsboro, New Jersey
Mailing Address:
Box 9011
Princeton, New Jersey 08543-9011
DISTRIBUTOR
Merrill Lynch Funds Distributor, Inc.
Administrative Offices:
800 Scudders Mill Road
Plainsboro, New Jersey
Mailing Address:
Box 9011
Princeton, New Jersey 08543-9011
CUSTODIAN
The Bank of New York
110 Washington Street
New York, New York 10286
TRANSFER AGENT
Financial Data Services, Inc.
Administrative Offices:
Transfer Agency Mutual Fund Operations
4800 Deer Lake Drive East
Jacksonville, Florida 32246-6484
Mailing Address:
P.O. Box 45289
Jacksonville, Florida 32232-5289
INDEPENDENT AUDITORS
Deloitte & Touche
117 Campus Drive
Princeton, New Jersey 08540
COUNSEL
Brown & Wood
One World Trade Center
New York, New York 10048-0557
<PAGE>
NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATIONS, OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS, IN CONNECTION
WITH THE OFFER CONTAINED IN THIS PROSPECTUS, AND, IF GIVEN OR MADE, SUCH OTHER
INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN
AUTHORIZED BY THE TRUST, THE MANAGER OR THE DISTRIBUTOR. THIS PROSPECTUS DOES
NOT CONSTITUTE AN OFFERING IN ANY STATE IN WHICH SUCH OFFERING MAY NOT
LAWFULLY BE MADE.
---------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Fee Table.................................................................. 3
Alternative Sales Arrangements............................................. 5
Financial Highlights....................................................... 7
Investment Objectives and Policies......................................... 9
Management of the Trust.................................................... 21
Purchase of Shares......................................................... 23
Redemption of Shares....................................................... 30
Shareholder Services....................................................... 31
Portfolio Transactions..................................................... 33
Distributions and Taxes.................................................... 33
Performance Data........................................................... 36
Additional Information..................................................... 38
Authorization Form......................................................... 41
</TABLE>
Distributor:
Merrill Lynch
Funds Distributor, Inc.
This Prospectus should be
retained for future reference.
Principal Office of the Trust:
800 Scudders Mill Road
Plainsboro, New Jersey 08536-9011
Code # 16925-0594
Prospectus
[ART]
- -----------------------------------
MERRILL LYNCH MULTI-STATE LIMITED
MATURITY MUNICIPAL SERIES TRUST
MERRILL LYNCH ARIZONA LIMITED MATURITY MUNICIPAL BOND FUND
MERRILL LYNCH CALIFORNIA LIMITED MATURITY MUNICIPAL BOND FUND
MERRILL LYNCH FLORIDA LIMITED MATURITY MUNICIPAL BOND FUND
MERRILL LYNCH MASSACHUSETTS LIMITED MATURITY MUNICIPAL BOND FUND
MERRILL LYNCH MICHIGAN LIMITED MATURITY MUNICIPAL BOND FUND
MERRILL LYNCH NEW JERSEY LIMITED MATURITY MUNICIPAL BOND FUND
MERRILL LYNCH NEW YORK LIMITED MATURITY MUNICIPAL BOND FUND
MERRILL LYNCH PENNSYLVANIA LIMITED MATURITY MUNICIPAL BOND FUND
May 17, 1994
<PAGE>
STATEMENT OF ADDITIONAL INFORMATION
MAY 17, 1994
MERRILL LYNCH MULTI-STATE LIMITED MATURITY MUNICIPAL SERIES TRUST
MERRILL LYNCH ARIZONA MERRILL LYNCH MICHIGAN
LIMITED MATURITY MUNICIPAL LIMITED MATURITY MUNICIPAL
BOND FUND BOND FUND
MERRILL LYNCH CALIFORNIA MERRILL LYNCH NEW JERSEY
LIMITED MATURITY MUNICIPAL LIMITED MATURITY MUNICIPAL
BOND FUND BOND FUND
MERRILL LYNCH FLORIDA MERRILL LYNCH NEW YORK
LIMITED MATURITY MUNICIPAL LIMITED MATURITY MUNICIPAL
BOND FUND BOND FUND
MERRILL LYNCH
MASSACHUSETTS LIMITED MERRILL LYNCH PENNSYLVANIA
MATURITY MUNICIPAL BOND LIMITED MATURITY MUNICIPAL
FUND BOND FUND
-----------
BOX 9011, PRINCETON, NEW JERSEY 08543-9011--PHONE NO. (609) 282-2800
-----------
Merrill Lynch Multi-State Limited Maturity Municipal Series Trust (the
"Trust"), an open-end management investment company organized as a
Massachusetts business trust, consists of eight separate series: Merrill Lynch
Arizona Limited Maturity Municipal Bond Fund (the "Arizona Fund"), Merrill
Lynch California Limited Maturity Municipal Bond Fund (the "California Fund"),
Merrill Lynch Florida Limited Maturity Municipal Bond Fund (the "Florida
Fund"), Merrill Lynch Massachusetts Limited Maturity Municipal Bond Fund (the
"Massachusetts Fund"), Merrill Lynch Michigan Limited Maturity Municipal Bond
Fund (the "Michigan Fund"), Merrill Lynch New Jersey Limited Maturity Municipal
Bond Fund (the "New Jersey Fund"), Merrill Lynch New York Limited Maturity
Municipal Bond Fund (the "New York Fund"), and Merrill Lynch Pennsylvania
Limited Maturity Municipal Bond Fund (the "Pennsylvania Fund")(together, the
"Funds"). The investment objective of each Fund is to provide shareholders with
as high a level of income exempt from Federal income taxes and personal income
taxes imposed by the designated state (and, in certain instances, local
personal income taxes) as is consistent with prudent investment management.
Under normal market conditions, each Fund invests primarily in a portfolio of
intermediate-term investment grade obligations of the designated state or its
political subdivisions, agencies or instrumentalities, or certain other
jurisdictions, that pay interest exempt, in the opinion of bond counsel to the
issuer, from Federal income taxes and personal income taxes of the designated
state and, where applicable, local personal income taxes. There can be no
assurance that the investment objective of any Fund will be realized.
Each Fund offers two classes of shares which may be purchased at a price
equal to the next determined net asset value per share, plus in both cases a
sales charge which, at the election of the purchaser, may be imposed (i) at the
time of purchase (the "Class A shares"), or (ii) on a deferred basis (the
"Class B shares"). These alternatives permit an investor to choose the method
of purchasing shares that is most beneficial given the amount of the purchase,
the length of time the investor expects to hold the shares and other
circumstances. Investors should understand that the purpose and function of the
deferred sales charge with respect to the Class B shares are the same as the
purpose and function of the initial sales charge with respect to the Class A
shares. Each Class A share and Class B share represents an identical interest
in the investment portfolio of a Fund and has the same rights, except that
Class B shares bear the expenses of the account maintenance and distribution
fees and certain other costs resulting from the deferred sales charge
arrangement of that Fund and have exclusive voting rights with respect to the
account maintenance and distribution fees. The two classes also have different
exchange privileges.
-----------
The Statement of Additional Information of the Trust and each Fund is not a
prospectus and should be read in conjunction with the prospectus of the Trust
and each Fund, dated May 17, 1994 (the "Prospectus"), which has been filed with
the Securities and Exchange Commission and can be obtained, without charge, by
calling or by writing the Trust at the above telephone number or address. This
Statement of Additional Information has been incorporated by reference into the
Prospectus. Capitalized terms used but not defined herein have the same
meanings as in the Prospectus.
-----------
FUND ASSET MANAGEMENT--MANAGER
MERRILL LYNCH FUNDS DISTRIBUTOR, INC.--DISTRIBUTOR
The date of this Statement of Additional Information is May 17, 1994
<PAGE>
INVESTMENT OBJECTIVES AND POLICIES
The investment objective of each Fund is to provide shareholders with as high
a level of income exempt from Federal income taxes, the designated state's
personal income taxes and, where applicable, local personal income taxes, as is
consistent with prudent investment management. Each Fund seeks to achieve its
objective by investing primarily in a portfolio of intermediate-term investment
grade obligations issued by or on behalf of the designated state or its
political subdivisions, agencies or instrumentalities, and obligations of other
qualifying issuers, such as issuers located in Puerto Rico, the Virgin Islands
and Guam. Such obligations pay interest exempt, in the opinion of bond counsel
to the issuer, from Federal income taxes, the designated state's personal
income taxes, and, in certain instances, local personal income taxes.
Obligations that pay interest exempt from Federal income taxes are referred to
herein as "Municipal Bonds". Obligations that pay interest exempt from Federal
income taxes, the designated state's personal income taxes and, where
applicable, local personal income taxes, and obligations that would not subject
shareholders to intangible personal property taxes in the designated state are
referred to herein as "State Municipal Bonds". Unless otherwise indicated,
references to Municipal Bonds shall be deemed to include State Municipal Bonds.
Each Fund anticipates that at all times, except during temporary defensive
periods, it will maintain at least 65% of its total assets invested in its
respective State Municipal Bonds; the New Jersey Fund will maintain at least
80% of its total assets invested in New Jersey State Municipal Bonds. At times,
a Fund may seek to hedge its portfolio through the use of futures transactions
to reduce volatility in the net asset value of Fund shares. Reference is made
to "Investment Objectives and Policies" in the Prospectus for a discussion of
the investment objective and policies of each Fund.
Each Fund will invest only in Municipal Bonds with remaining maturities of
between one and ten years. It is anticipated that, depending on market
conditions, the dollar weighted average maturity of each Fund's portfolio will
not exceed five years. For purposes of these investment policies, an obligation
will be treated as having a maturity earlier than its stated maturity date if
such obligation has technical features which, in the judgment of Fund Asset
Management, L.P. (the "Manager") will result in the obligation being valued in
the market as though it has such earlier maturity. Interest rates on shorter-
term Municipal Bonds may fluctuate more widely from time to time than interest
rates on longer-term Municipal Bonds. However, because of their limited
maturities, the market value of the Municipal Bonds held by each Fund can be
expected to fluctuate less as a result of changes in interest rates.
Municipal Bonds may include general obligation bonds of a state and its
political subdivisions, revenue bonds of utility systems, highways, bridges,
port and airport facilities, colleges, hospitals, housing facilities, etc., and
industrial development bonds or private activity bonds. The interest on such
obligations may bear a fixed rate or be payable at a variable or floating rate.
The Municipal Bonds purchased by each Fund will be primarily what are commonly
referred to as "investment grade" securities, which are obligations rated at
the time of purchase within the four highest quality ratings as determined by
either Moody's Investors Service, Inc. ("Moody's") (currently Aaa, Aa, A and
Baa), Standard & Poor's Corporation ("Standard & Poor's") (currently AAA, AA, A
and BBB) or Fitch Investors Service, Inc. ("Fitch") (currently AAA, AA, A and
BBB). If unrated, such securities will possess creditworthiness comparable, in
the opinion of the Manager, to investment grade obligations.
Certain Municipal Bonds may be entitled to the benefits of letters of credit
or similar credit enhancements issued by financial institutions. In such
instances, the Trustees and the Manager will take into account in assessing the
quality of such obligations not only the creditworthiness of the issuer of such
obligations but also the creditworthiness of the financial institution. In
evaluating the creditworthiness of the financial institution, the Trustees and
the Manager will consider factors such as whether the letter of credit or
similar credit enhancement being issued is conditional or unconditional.
The Funds ordinarily do not intend to realize investment income not exempt
from Federal income taxes, the designated state's personal income taxes and,
where applicable, local personal income taxes, or to hold investments that
would subject shareholders to intangible personal property taxes in the
designated state.
2
<PAGE>
However, to the extent that suitable State Municipal Bonds are not available
for investment by a Fund, a Fund may purchase Municipal Bonds issued by other
states or their agencies or instrumentalities, the interest income on which is
exempt, in the opinion of bond counsel to the issuer, from Federal but not the
designated state's taxation. Each Fund also may invest in securities not issued
by or on behalf of a state or territory or by an agency or instrumentality
thereof, if the Fund nevertheless believes such securities to be exempt from
Federal income taxation ("Non-Municipal Tax-Exempt Securities"). Non-Municipal
Tax-Exempt Securities may include securities issued by other investment
companies that invest in municipal bonds, to the extent permitted by applicable
law. Other Non-Municipal Tax-Exempt Securities could include trust certificates
or other instruments evidencing interests in one or more long-term municipal
securities.
Except when acceptable securities are unavailable as determined by the
Manager, each Fund, under normal circumstances, will invest at least 65% (80%
in the case of the New Jersey Fund) of its total assets in its respective State
Municipal Bonds. For temporary defensive purposes or to provide liquidity, each
Fund has the authority to invest as much as 35% (20% in the case of the New
Jersey Fund) of its total assets in tax-exempt or taxable money market
obligations with maturities of one year or less (such short-term obligations
being referred to herein as "Temporary Investments"), except that taxable
Temporary Investments shall not exceed 20% of a Fund's net assets. Each Fund at
all times will have at least 80% of its net assets invested in securities
exempt from Federal income taxation. However, interest received on certain
otherwise tax-exempt securities which are classified as "private activity
bonds" (in general, bonds that benefit non-governmental entities) may be
subject to an alternative minimum tax. Each Fund may purchase such private
activity bonds. See "Distributions and Taxes". In addition, each Fund reserves
the right to invest temporarily a greater portion of its assets in Temporary
Investments for defensive purposes, when, in the judgment of the Manager,
market conditions warrant. The investment objective of each Fund set forth in
this paragraph is a fundamental policy of the Fund which may not be changed
without a vote of a majority of the outstanding shares of the Fund. A Fund's
hedging strategies are not fundamental policies and may be modified by the
Trustees of the Trust without the approval of the Fund's shareholders.
Municipal Bonds at times may be purchased or sold on a delayed delivery basis
or on a when-issued basis. These transactions arise when securities are
purchased or sold by a Fund with payment and delivery taking place in the
future, often a month or more after the purchase. The payment obligation and
the interest rate are each fixed at the time the buyer enters into the
commitment. A Fund only will make commitments to purchase such securities with
the intention of actually acquiring the securities, but a Fund (subject to any
state or local personal income tax limitations) may sell these securities prior
to the settlement date if it is deemed advisable. Purchasing Municipal Bonds on
a when-issued basis involves the risk that the yields available in the market
when the delivery takes place actually may be higher than those obtained in the
transaction itself; if yields so increase, the value of the when-issued
obligations generally will decrease. Each Fund will maintain a separate account
at its custodian bank consisting of cash, cash equivalents or high-grade,
liquid municipal securities or Temporary Investments (valued on a daily basis)
equal at all times to the amount of the when-issued commitment.
The Funds may invest in Municipal Bonds the return on which is based on a
particular index of value or interest rates. For example, the Funds may invest
in Municipal Bonds that pay interest based on an index of Municipal Bond
interest rates or based on the value of gold or some other product. The
principal amount payable upon maturity of certain Municipal Bonds also may be
based on the value of an index. To the extent the Funds invest in these types
of Municipal Bonds, their return on such Municipal Bonds will be subject to
risk with respect to the value of the particular index. Also, the Funds may
invest in so-called "inverse floating obligations" or "residual interest bonds"
on which the interest rates typically vary inversely with a short-term floating
rate (which may be reset periodically by a dutch auction, by a remarketing
agent or by reference to a short-term tax-exempt interest rate index). The
Funds may purchase original issue inverse floating rate bonds in both the
primary and secondary markets and also may purchase in the secondary market
synthetically-created inverse floating rate bonds evidenced by custodial or
trust receipts. Generally, interest rates on inverse floating rate bonds will
decrease when short-term rates increase, and will increase when short-term
rates decrease. Such securities have the effect of providing a degree of
investment leverage, since they may increase
3
<PAGE>
or decrease in value in response to changes, as an illustration, in market
interest rates at a rate which is a multiple (typically two) of the rate at
which fixed-rate, long-term, tax-exempt securities increase or decrease in
response to such changes. As a result, the market values of such securities
generally will be more volatile than the market values of fixed-rate, tax-
exempt securities. To seek to limit the volatility of these securities, the
Funds may purchase inverse floating obligations with shorter term maturities or
which contain limitations on the extent to which the interest rate may vary.
The Manager believes that indexed and inverse floating obligations represent a
flexible portfolio management instrument for the Funds which allows the Manager
to vary the degree of investment leverage relatively efficiently under
different market conditions. Certain investments in such obligations may be
illiquid. A Fund may not invest in such illiquid obligations if such
investments, together with other illiquid investments, would exceed 15% of that
Fund's net assets.
The Funds may purchase a Municipal Bond issuer's right to call all or a
portion of such Municipal Bond for mandatory tender for purchase (a "Call
Right"). A holder of a Call Right may exercise such right to require a
mandatory tender for the purchase of related Municipal Bonds, subject to
certain conditions. A Call Right that is not exercised prior to the maturity of
the related Municipal Bond will expire without value. The economic effect of
holding both the Call Right and the related Municipal Bond is identical to
holding a Municipal Bond as a non-callable security. Certain investments in
such obligations may be illiquid. A Fund may not invest in such illiquid
obligations if such investments, together with other illiquid investments,
would exceed 15% of that Fund's net assets.
A Fund may invest up to 20% of its total assets in Municipal Bonds which are
rated below Baa by Moody's or below BBB by Standard & Poor's or Fitch or which,
in the Manager's judgment, possess similar credit characteristics ("high yield
securities"). See Appendix I--"Ratings of Municipal Bonds"--for additional
information regarding ratings of debt securities. The Manager considers the
ratings assigned by Standard & Poor's, Moody's or Fitch as one of several
factors in its independent credit analysis of issuers.
High yield securities are considered by Standard & Poor's, Moody's and Fitch
to have varying degrees of speculative characteristics. Consequently, although
high yield securities can be expected to provide higher yields, such securities
may be subject to greater market price fluctuations and risk of loss of
principal than lower yielding, higher rated debt securities. Investments in
high yield securities will be made only when, in the judgment of the Manager,
such securities provide attractive total return potential relative to the risk
of such securities, as compared to higher quality debt securities. The Funds
generally will not invest in debt securities in the lowest rating categories
(those rated CC or lower by Standard & Poor's or Fitch or Ca or lower by
Moody's) unless the Manager believes that the financial condition of the issuer
or the protection afforded the particular securities is stronger than otherwise
would be indicated by such low ratings.
Issuers or obligors of high yield securities may be highly leveraged and may
not have available to them more traditional methods of financing. Therefore,
the risks associated with acquiring the securities of such issuers or obligors
generally are greater than is the case with higher rated securities. For
example, during an economic downturn or a sustained period of rising interest
rates, issuers or obligors of high yield securities may be more likely to
experience financial stress, especially if such issuers or obligors are highly
leveraged. During periods of economic recession, such issuers may not have
sufficient revenues to meet their interest payment obligations. The issuer's
ability to service its debt obligations also may be adversely affected by
specific issuer developments, or the issuer's inability to meet specific
projected business forecasts, or the unavailability of additional financing.
The risk of loss due to default by the issuer is significantly greater for the
holders of high yield securities because such securities may be unsecured and
may be subordinated to other creditors of the issuer.
High yield securities frequently have call or redemption features that would
permit an issuer to repurchase the security from a Fund. If a call were
exercised by the issuer during a period of declining interest rates, a Fund
likely would have to replace such called security with a lower yielding
security, thus decreasing the net investment income to the Fund and dividends
to shareholders.
4
<PAGE>
The Funds may have difficulty disposing of certain high yield securities
because there may be a thin trading market for such securities. Because not all
dealers maintain markets in all high yield securities, there is no established
secondary market for many of these securities, and the Funds anticipate that
such securities could be sold only to a limited number of dealers or
institutional investors. To the extent that a secondary trading market for high
yield securities does exist, it generally is not as liquid as the secondary
market for higher rated securities. Reduced secondary market liquidity may have
an adverse impact on market price and a Fund's ability to dispose of particular
issues when necessary to meet the Fund's liquidity needs or in response to a
specific economic event such as a deterioration in the creditworthiness of the
issuer. Reduced secondary market liquidity for certain securities also may make
it more difficult for a Fund to obtain accurate market quotations for purposes
of valuing the Fund's portfolio. Market quotations generally are available on
many high yield securities only from a limited number of dealers and may not
necessarily represent firm bids of such dealers or prices for actual sales.
It is expected that a significant portion of the high yield securities
acquired by a Fund will be purchased upon issuance, which may involve special
risks because the securities so acquired are new issues. In such instances the
Fund may be a substantial purchaser of the issue and therefore have the
opportunity to participate in structuring the terms of the offering. Although
this may enable a Fund to seek to protect itself against certain of such risks,
the considerations discussed herein would nevertheless remain applicable.
Adverse publicity and investor perceptions, which may not be based on
fundamental analysis, also may decrease the value and liquidity of high yield
securities, particularly in a thinly traded market. Factors adversely affecting
the market value of high yield securities are likely to affect adversely a
Fund's net asset value. In addition, a Fund may incur additional expenses to
the extent that it is required to seek recovery upon a default on a portfolio
holding or participate in the restructuring of the obligation.
DESCRIPTION OF MUNICIPAL BONDS AND OTHER INVESTMENTS
Set forth below is a description of the Municipal Bonds and other instruments
in which each Fund may invest. A more complete discussion concerning futures
and options transactions and Municipal Bonds is set forth under "Investment
Objectives and Policies" in the Prospectus. Information with respect to ratings
assigned to tax-exempt obligations which the Funds may purchase is set forth in
Appendix I to this Statement of Additional Information.
DESCRIPTION OF MUNICIPAL BONDS
Municipal Bonds include debt obligations issued to obtain funds for various
public purposes, including construction of a wide range of public facilities,
refunding of outstanding obligations and obtaining of funds for general
operating expenses and loans to other public institutions and facilities. In
addition, certain types of industrial development bonds or private activity
bonds are issued by or on behalf of public authorities to finance or refinance
various privately owned or operated facilities, including certain facilities
for the local furnishing of electric energy or gas, sewage facilities, solid
waste disposal facilities and other specialized facilities. For purposes of
this Statement of Additional Information, such obligations are referred to as
Municipal Bonds if the interest paid thereon, in the opinion of bond counsel to
the issuer, is excluded from gross income for Federal income tax purposes. Such
obligations are referred to herein as State Municipal Bonds if the interest
paid thereon is exempt, in the opinion of bond counsel to the issuer, from
Federal income taxes, the designated state's personal income taxes and, where
applicable, local personal income taxes, and if the Fund's investment in such
obligations would not subject Fund shareholders to intangible personal property
taxes in the designated state. Other types of industrial development bonds or
private activity bonds, the proceeds of which are used for the construction,
equipment or improvement of privately operated industrial or commercial
facilities, may constitute Municipal Bonds, although the current Federal tax
laws place substantial limitations on the size of such issues.
The two principal classifications of Municipal Bonds are "general obligation"
bonds and "revenue" bonds. General obligation bonds are secured by the issuer's
pledge of faith, credit and taxing power for the
5
<PAGE>
repayment of principal and the payment of interest. Revenue bonds are payable
only from the revenues derived from a particular facility or class of
facilities or, in some cases, from the proceeds of a special or limited tax or
other specific revenue source such as payments from the user of the facility
being financed. Industrial development bonds ("IDBs") and private activity
bonds, are in most cases revenue bonds and generally do not constitute the
pledge of the credit or taxing power of the issuer of such bonds. Generally,
the repayment of the principal of and the payment of interest on such bonds
depends solely on the ability of the user of the facility financed by the bonds
to meet its financial obligations and the pledge, if any, of real and personal
property so financed as security for such payment, unless a line of credit,
bond insurance or other security is furnished. The Funds may invest in
Municipal Bonds that are so-called "moral obligation" bonds, which normally are
issued by special purpose public authorities and are payable from specific
revenue sources. Under a moral obligation bond, if the issuer thereof is unable
to meet its obligations from such sources, the repayment of the bond becomes a
moral commitment, but not a legal obligation, of the state or municipality in
question.
Municipal Lease Obligations. Also included within the general category of
Municipal Bonds are participation certificates issued by government authorities
or entities to finance the acquisition or construction of equipment, land
and/or facilities. The certificates represent participations in a lease, an
installment purchase contract or a conditional sales contract (hereinafter
collectively called "lease obligations") relating to such equipment, land or
facilities. Although lease obligations do not constitute general obligations of
the issuer for which the issuer's unlimited taxing power is pledged, a lease
obligation frequently is backed by the issuer's covenant to budget for,
appropriate and make the payments due under the lease obligation. However,
certain lease obligations contain "non-appropriation" clauses which provide
that the issuer has no obligation to make lease or installment purchase
payments in future years unless money is appropriated for such purpose on a
yearly basis. Certain investments in lease obligations may be illiquid. A Fund
may not invest in illiquid lease obligations if such investments, together with
all other illiquid investments, would exceed 15% of the Fund's net assets. A
Fund, however, may invest without regard to such limitation in lease
obligations which the Manager, pursuant to the guidelines which have been
adopted by the Board of Trustees and subject to the supervision of the Board of
Trustees, determines to be liquid. The Manager will deem lease obligations
liquid if they are publicly offered and have received an investment grade
rating of Baa or better by Moody's, or BBB or better by Standard & Poor's or
Fitch. Unrated lease obligations, or those rated below investment grade, will
be considered liquid if the obligations come to the market through an
underwritten public offering and at least two dealers are willing to give
competitive bids. In reference to the latter, the Manager, among other things,
also must review the creditworthiness of the municipality obligated to make
payment under the lease obligation and make certain specified determinations
based on such factors as the existence of a rating or credit enhancement such
as insurance, the frequency of trades or quotes for the obligation and the
willingness of dealers to make a market in the obligation.
Yields on Municipal Bonds are dependent on a variety of factors, including
the general condition of the money market and of the municipal bond market, the
size of a particular offering, the financial condition of the issuer, the
general conditions of the Municipal Bond market, the maturity of the
obligation, and the rating of the issue. The ability of a Fund to achieve its
investment objective also is dependent on the continuing ability of the issuers
of the bonds in which the Fund invests to meet their obligations for the
payment of interest and repayment of principal when due. There are variations
in the risks involved in holding Municipal Bonds, both within a particular
classification and between classifications, depending on numerous factors.
Furthermore, the rights of owners of Municipal Bonds and the obligations of the
issuer of such Municipal Bonds may be subject to applicable bankruptcy,
insolvency and similar laws and court decisions affecting the rights of
creditors generally and to general equitable principles, which may limit the
enforcement of certain remedies.
DESCRIPTION OF TEMPORARY INVESTMENTS AND VARIABLE RATE DEMAND OBLIGATIONS
The Fund may invest in Temporary Investments subject to the limitations set
forth under "Investment Objectives and Policies". The tax-exempt money market
securities may include municipal notes, municipal
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commercial paper, municipal bonds with a remaining maturity of less than one
year, variable rate demand notes and participations therein. Municipal notes
include tax anticipation notes, bond anticipation notes and grant anticipation
notes. Anticipation notes are sold as interim financing in anticipation of tax
collection, bond sales, government grants or revenue receipts. Municipal
commercial paper refers to short-term unsecured promissory notes generally
issued to finance short-term credit needs. The taxable money market securities
in which the Fund may invest as Temporary Investments consist of U.S.
Government securities, U.S. Government agency securities, domestic bank or
savings institution certificates of deposit and bankers' acceptances, short-
term corporate debt securities such as commercial paper, and repurchase
agreements. These Temporary Investments must have a stated maturity not in
excess of one year from the date of purchase.
The Funds also 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 on the part of the
holder thereof to receive payment of the unpaid principal balance plus accrued
interest upon a short notice period not to exceed seven days. There is,
however, the possibility that because of default or insolvency the demand
feature of VRDOs and Participating VRDOs, described below, may not be honored.
The interest rates are adjustable at intervals (ranging from daily to up to one
year) to some prevailing market rate for similar investments, such adjustment
formula being calculated to maintain the market value of the VRDOs at
approximately the par value of the VRDOs on the adjustment date. The
adjustments typically are set at a rate determined by the remarketing agent or
based upon the prime rate of a bank or some other appropriate interest rate
adjustment index. The Funds may invest in all types of tax-exempt instruments
currently outstanding or to be issued in the future which satisfy the short-
term maturity and quality standards of the Funds.
The Funds also may invest in VRDOs in the form of participation interests
("Participating VRDOs") in variable rate tax-exempt obligations held by a
financial institution, typically a commercial bank. Participating VRDOs provide
the Funds with a specified undivided interest (up to 100%) of the underlying
obligation and the right to demand payment of the unpaid principal balance plus
accrued interest on the Participating VRDOs from the financial institution upon
a specified number of days' notice, not to exceed seven days. In addition, a
Participating VRDO is backed by an irrevocable letter of credit or guaranty of
the financial institution. The Funds would have an undivided interest in the
underlying obligation and thus participate on the same basis as the financial
institution in such obligation except that the financial institution typically
retains fees out of the interest paid on the obligation for servicing the
obligation, providing the letter of credit and issuing the repurchase
commitment. The Trust has been advised by its counsel that the Funds should be
entitled to treat the income received on Participating VRDOs as interest from
tax-exempt obligations.
VRDOs that contain an unconditional right of demand to receive payment of the
unpaid principal balance plus accrued interest on a notice period exceeding
seven days may be deemed to be illiquid securities. A VRDO with a demand notice
period exceeding seven days therefore will be subject to a Fund's restriction
on illiquid investments unless, in the judgment of the Trustees, such VRDO is
liquid. The Trustees may adopt guidelines and delegate to the Manager the daily
function of determining and monitoring liquidity of such VRDOs. The Trustees,
however, will retain sufficient oversight and will be ultimately responsible
for such determination.
The Trust has established the following standards with respect to money
market securities and VRDOs in which the Funds invest. Commercial paper
investments at the time of purchase must be rated A-1+ through A-3 by Standard
& Poor's, Prime-1 through Prime-3 by Moody's or F-1+ through F-3 by Fitch or,
if not rated, issued by companies having an outstanding debt issue rated at
least A by Standard & Poor's, Fitch or Moody's. Investments in corporate bonds
and debentures (which must have maturities at the date of purchase of one year
or less) must be rated at the time of purchase at least A by Standard & Poor's,
Moody's or Fitch. Notes and VRDOs at the time of purchase must be rated SP-
1+/A-1 through SP-2/A-3 by Standard & Poor's, MIG-l/VMIG-1 through MIG-4/VMIG-4
by Moody's or F-1+ through F-3 by Fitch.
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Temporary Investments, if not rated, must be of comparable quality to
securities rated in the above rating categories in the opinion of the Manager.
A Fund may not invest in any security issued by a commercial bank or a savings
institution unless the bank or institution is organized and operating in the
United States, has total assets of at least one billion dollars and is a member
of the Federal Deposit Insurance Corporation (the "FDIC"), except that up to
10% of a Fund's total assets may be invested in certificates of deposit of
small institutions if such certificates are insured fully by the FDIC.
REPURCHASE AGREEMENTS AND PURCHASE AND SALE CONTRACTS
As Temporary Investments, the Funds may invest in securities pursuant to
repurchase agreements or purchase and sale contracts. Repurchase agreements and
purchase and sale contracts may be entered into only with a member bank of the
Federal Reserve System or a primary dealer in U.S. Government securities. Under
such agreements, the bank or the primary dealer agrees, upon entering into the
contract, to repurchase the security at a mutually agreed upon time and price,
thereby determining the yield during the term of the agreement. This results in
a fixed rate of return insulated from market fluctuations during such period.
In the case of repurchase agreements, the prices at which the trades are
conducted do not reflect accrued interest on the underlying obligations;
whereas, in the case of purchase and sale contracts, the prices take into
account accrued interest. Such agreements usually cover short periods, such as
under one week. Repurchase agreements may be construed to be collateralized
loans by the purchaser to the seller secured by the securities transferred to
the purchaser. In the case of a repurchase agreement, 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; a Fund does not have the right to seek additional collateral in the
case of purchase and sale contracts. In the event of default by the seller
under a repurchase agreement construed to be a collateralized loan, the
underlying securities are not owned by a Fund but only constitute collateral
for the seller's obligation to pay the repurchase price. Therefore, a Fund may
suffer time delays and incur costs or possible losses in connection with the
disposition of the collateral. A purchase and sale contract differs from a
repurchase agreement in that the contract arrangements stipulate that the
securities are owned by a Fund. In the event of a default under such a
repurchase agreement or under a purchase and sale contract, instead of the
contractual fixed rate of return, the rate of return to a Fund will depend on
intervening fluctuations of the market value of such security and the accrued
interest on the security. In such event, a Fund would have rights against the
seller for breach of contract with respect to any losses arising from market
fluctuations following the failure of the seller to perform. A Fund may not
invest in repurchase agreements or purchase and sale contracts maturing in more
than seven days if such investments, together with all other illiquid
investments, would exceed 15% of that Fund's net assets. While the substance of
purchase and sale contracts is similar to repurchase agreements, because of the
different treatment with respect to accrued interest and additional collateral,
management believes that purchase and sale contracts are not repurchase
agreements as such term is understood in the banking and brokerage community.
In general, for Federal income tax purposes, repurchase agreements are
treated as collateralized loans secured by the securities "sold". Therefore,
amounts earned under such agreements will not be considered tax-exempt
interest. The treatment of purchase and sale contracts is less certain.
However, it is likely that income from such arrangements also will not be
considered tax-exempt interest.
FINANCIAL FUTURES CONTRACTS AND OPTIONS
Reference is made to the discussion concerning futures and options
transactions under "Investment Objectives and Policies" in the Prospectus. Set
forth below is additional information concerning these transactions.
As described in the Prospectus, each Fund may purchase and sell exchange-
traded financial futures contracts ("financial futures contracts") and options
thereon to hedge its portfolio of Municipal Bonds against declines in the value
of such securities and to hedge against increases in the cost of securities a
Fund intends to purchase. However, any transactions involving financial futures
or options (which options may include
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both puts and calls) will be in accordance with a Fund's investment policies
and limitations. To hedge its portfolio, a Fund may take an investment position
in a financial futures contract or option thereon which will move in the
opposite direction from the portfolio position being hedged. While a Fund's use
of hedging strategies is intended to moderate capital changes in portfolio
holdings and thereby reduce volatility of the net asset value of Fund shares,
each Fund anticipates that its net asset value will fluctuate. Set forth below
is information concerning financial futures contracts and options thereon.
Description of Financial Futures Contracts. A financial futures contract is
an agreement between two parties to buy and sell a security, or in the case of
an index-based futures contract, to make and accept a cash settlement for a set
price on a future date. A majority of transactions in financial futures
contracts, however, do not result in the actual delivery of the underlying
instrument or cash settlement, but are settled through liquidation, i.e., by
entering into an offsetting transaction. Financial futures contracts have been
designed by boards of trade which have been designated "contracts markets" by
the Commodity Futures Trading Commission (the "CFTC").
The purchase or sale of a financial futures contract differs from the
purchase or sale of a security in that no price or premium is paid or received.
Instead, an amount of cash or securities acceptable to the broker and the
relevant contract market, which varies, but is generally about 5% of the
contract amount, must be deposited with the broker. This amount is known as
"initial margin" and represents a "good faith" deposit assuring the performance
of both the purchaser and seller under the financial futures contract.
Subsequent payments to and from the broker, called "variation margin", are
required to be made on a daily basis as the price of the financial futures
contract fluctuates making the long and short positions in the financial
futures contract more or less valuable, a process known as "mark to the
market". At any time prior to the settlement date of the financial futures
contract, the position may be closed out by taking an opposite position which
will operate to terminate the position in the financial futures contract. A
final determination of variation margin is then made, additional cash is
required to be paid to or released by the broker, and the purchaser realizes a
loss or gain. In addition, a nominal commission is paid on each completed sale
transaction.
The Funds may deal in financial futures contracts based on a long-term
municipal bond index developed by the Chicago Board of Trade (the "CBT") and
The Bond Buyer (the "Municipal Bond Index"). The Municipal Bond Index is
comprised of 40 tax-exempt municipal revenue bonds and general obligation
bonds. Each bond included in the Municipal Bond Index must be rated A or higher
by Moody's or Standard & Poor's and must have a remaining maturity of 19 years
or more. Twice a month new issues satisfying the eligibility requirements are
added to, and an equal number of old issues are deleted from, the Municipal
Bond Index. The value of the Municipal Bond Index is computed daily according
to a formula based on the price of each bond in the Municipal Bond Index, as
evaluated by six dealer-to-dealer brokers.
The Municipal Bond Index financial futures contract is traded only on the
CBT. Like other contract markets, the CBT assures performance under financial
futures contracts through a clearing corporation, a nonprofit organization
managed by the exchange membership which also is responsible for handling daily
accounting of deposits or withdrawals of margin.
As described in the Prospectus, the Funds may purchase and sell financial
futures contracts on U.S. Government securities as a hedge against adverse
changes in interest rates as described below. With respect to U.S. Government
securities, currently there are financial futures contracts based on long-term
U.S. Treasury bonds, U.S. Treasury notes, Government National Mortgage
Association ("GNMA") Certificates and three-month U.S. Treasury bills. The
Funds may purchase and write call and put options on financial futures
contracts on U.S. Government securities in connection with their hedging
strategies.
Subject to policies adopted by the Trustees, the Funds also may enter into
other financial futures contracts and options thereon, such as financial
futures contracts or options on other municipal bond indices which may become
available if the Manager and the Trustees should determine that there is
normally a
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sufficient correlation between the prices of such financial futures contracts
or options thereon and the Municipal Bonds in which the Funds invest to make
such hedging appropriate.
Financial Futures Strategies. A Fund may sell a financial futures contract
(i.e., assume a short position) in anticipation of a decline in the value of
its investments in Municipal Bonds resulting from an increase in interest rates
or otherwise. The risk of decline could be reduced without employing futures as
a hedge by selling such Municipal Bonds and either reinvesting the proceeds in
securities with shorter maturities or by holding assets in cash. This strategy,
however, entails increased transaction costs in the form of dealer spreads and
typically would reduce the average yield of a Fund's portfolio securities as a
result of the shortening of maturities. The sale of financial futures contracts
provides an alternative means of hedging against declines in the value of a
Fund's investments in Municipal Bonds. As such values decline, the value of a
Fund's positions in the financial futures contracts will tend to increase, thus
offsetting all or a portion of the depreciation in the market value of the
Fund's Municipal Bond investments which are being hedged. While a Fund will
incur commission expenses in selling and closing out financial futures
positions, commissions on financial futures contracts are lower than
transaction costs incurred in the purchase and sale of Municipal Bonds. In
addition, the ability of a Fund to trade in the standardized contracts
available in the financial futures contract markets may offer a more effective
defensive position than a program to reduce the average maturity of the
portfolio securities due to the unique and varied credit and technical
characteristics of the municipal debt instruments available to a Fund.
Employing financial futures contracts as a hedge also may permit a Fund to
assume a defensive posture without reducing the yield on its investments beyond
any amounts required to engage in financial futures contract trading.
When the Funds intend to purchase Municipal Bonds, the Funds may purchase
financial futures contracts as a hedge against any increase in the cost of such
Municipal Bonds, resulting from an increase in interest rates or otherwise,
that may occur before such purchases can be effected. Subject to the degree of
correlation between the Municipal Bonds and the financial futures contracts,
subsequent increases in the cost of Municipal Bonds should be reflected in the
value of the financial futures contracts held by the Funds. As such purchases
are made, an equivalent amount of financial futures contracts will be closed
out. Due to changing market conditions and interest rate forecasts, however, a
financial futures contract position may be terminated without a corresponding
purchase of portfolio securities.
Call Options on Financial Futures Contracts. The Funds also may purchase and
sell exchange-traded call and put options on financial futures contracts on
U.S. Government securities. The purchase of a call option on a financial
futures contract is analogous to the purchase of a call option on an individual
security. Depending on the pricing of the option compared to either the futures
contract on which it is based, or the price of the underlying debt securities,
it may or may not be less risky than ownership of the financial futures
contract or underlying debt securities. Like the purchase of a financial
futures contract, a Fund will purchase a call option on financial futures
contracts to hedge against a market advance when such Fund is not fully
invested.
The writing of a call option on a financial futures contract constitutes a
partial hedge against declining prices of the securities which are deliverable
upon exercise of the financial futures contract. If the futures price at
expiration is below the exercise price, a Fund will retain the full amount of
the option premium which provides a partial hedge against any decline that may
have occurred in such Fund's portfolio holdings.
Put Options on Financial Futures Contracts. The purchase of a put option on a
financial futures contract is analogous to the purchase of a protective put
option on portfolio securities. A Fund will purchase put options on financial
futures contracts to hedge such Fund's portfolio against the risk of rising
interest rates.
The writing of a put option on a financial futures contract constitutes a
partial hedge against increasing prices of the securities which are deliverable
upon exercise of the financial futures contract. If the futures price at
expiration is higher than the exercise price, a Fund will retain the full
amount of the option premium which
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provides a partial hedge against any increase in the price of Municipal Bonds
which such Fund intends to purchase.
The writer of an option on a financial futures contract is required to
deposit initial and variation margin pursuant to requirements similar to those
applicable to financial futures contracts. Premiums received from the writing
of an option will be included in initial margin. The writing of an option on a
financial futures contract involves risks similar to those relating to
financial futures contracts.
----------------
The Trust has received an order from the Securities and Exchange Commission
(the "Commission") exempting it from the provisions of Section 17(f) and
Section 18(f) of the Investment Company Act of 1940, as amended (the "1940
Act"), in connection with its strategy of investing in financial futures
contracts. Section 17(f) relates to the custody of securities and other assets
of an investment company and may be deemed to prohibit certain arrangements
between the Trust and commodities brokers with respect to initial and variation
margin. Section 18(f) of the 1940 Act prohibits an open-end investment company
such as the Trust from issuing a "senior security" other than a borrowing from
a bank. The staff of the Commission in the past has indicated that a financial
futures contract may be a "senior security" under the 1940 Act.
Restrictions on Use of Financial Futures Transactions. Regulations of the
CFTC applicable to each Fund require that all of a Fund's financial futures
transactions constitute bona fide hedging transactions and that a Fund purchase
and sell futures contracts and options thereon (i) for bona fide hedging
purposes, and (ii) for non-hedging purposes, if the aggregate initial margin
and premiums required to establish positions in such contracts and options does
not exceed 5% of the liquidation value of the Fund's portfolio assets after
taking into account unrealized profits and unrealized losses on any such
contracts and options. Each Fund intends to engage in options and futures
transactions only for hedging purposes. Margin deposits may consist of cash or
securities acceptable to the broker and the relevant contract market.
When a Fund purchases a financial futures contract or a call option with
respect thereto or writes a put option on a futures contract, an amount of
cash, cash equivalents or short-term, high-grade, fixed-income securities will
be deposited in a segregated account with the Fund's custodian so that the
amount so segregated, plus the amount of initial and variation margin held in
the account of its broker, equals the market value of the financial futures
contract or related option, thereby ensuring that the use of such futures
transaction is unleveraged.
Risk Factors in Financial Futures Contracts and Options Thereon. Investment
in financial futures contracts and options thereon involves the risk of
imperfect correlation between movements in the price of the financial futures
contract and the price of the security being hedged. The hedge will not be
fully effective when there is imperfect correlation between the movements in
the prices of two financial instruments. For example, if the price of a
financial futures contract moves more than the price of the hedged security, a
Fund will experience either a loss or gain on the financial futures contract
which is not offset completely by movements in the price of the hedged
securities. To compensate for imperfect correlations, a Fund may purchase or
sell financial futures contracts or options thereon in a greater dollar amount
than the hedged securities if the volatility of the hedged securities is
historically greater than the volatility of the futures transaction.
Conversely, a Fund may purchase or sell fewer financial futures contracts or
options thereon if the volatility of the price of the hedged securities is
historically less than that of the futures transaction.
The particular municipal bonds comprising the index underlying the Municipal
Bond Index financial futures contract may vary from the Municipal Bonds held by
a Fund. As a result, a Fund's ability to hedge effectively all or a portion of
the value of its Municipal Bonds through the use of financial futures contracts
or options thereon will depend in part on the degree to which price movements
in the index underlying the financial futures contract correlate with the price
movements of the Municipal Bonds held by a Fund. The correlation may be
affected by disparities in the average maturity, ratings, geographical mix or
structure of a Fund's investments as compared to those comprising the Municipal
Bond Index, and general economic or political factors. In addition, the
correlation between movements in the value of the Municipal Bond Index
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may be subject to change over time as additions to and deletions from the
Municipal Bond Index alter its structure. The correlation between financial
futures contracts on U.S. Government securities or options thereon and the
Municipal Bonds held by a Fund may be affected adversely by similar factors and
the risk of imperfect correlation between movements in the prices of financial
futures contracts or options thereon and the prices of the Municipal Bonds held
by a Fund may be greater.
Each Fund expects to liquidate a majority of the financial futures contracts
it enters into through offsetting transactions on the applicable contract
market. There can be no assurance, however, that a liquid secondary market will
exist for any particular financial futures contract at any specific time. Thus,
it may not be possible to close out a futures position. In the event of adverse
price movements, a Fund would continue to be required to make daily cash
payments of variation margin. In such situations, if a Fund has insufficient
cash, it may be required to sell portfolio securities to meet daily variation
margin requirements at a time when it may be disadvantageous to do so. The
inability to close out financial futures positions also could have an adverse
impact on a Fund's ability to hedge effectively its investments in Municipal
Bonds. A Fund will enter into a financial futures position only if, in the
judgment of the Manager, there appears to be an actively traded secondary
market for such financial futures contracts or options thereon.
The successful use of transactions in financial futures and related options
also depends on the ability of the Manager to forecast correctly the direction
and extent of interest rate movements within a given time frame. To the extent
interest rates remain stable during the period in which a financial futures
contract or option is held by a Fund or such rates move in a direction opposite
to that anticipated, a Fund may realize a loss on the hedging transaction which
is not fully or partially offset by an increase in the value of portfolio
securities. As a result, a Fund's total return for such period may be less than
if it had not engaged in the hedging transaction.
Because of low initial margin deposits made on the opening of a financial
futures position, financial futures transactions involve substantial leverage.
As a result, relatively small movements in the price of the financial futures
contracts or related options can result in substantial unrealized gains or
losses. Because a Fund will engage in the purchase and sale of financial
futures contracts or related options solely for hedging purposes, however, any
losses incurred in connection therewith should, if the hedging strategy is
successful, be offset in whole or in part by increases in the value of
securities held by a Fund or decreases in the price of securities a Fund
intends to acquire.
The amount of risk a Fund assumes when it purchases an option on a financial
futures contract is the premium paid for the option plus related transaction
costs. In addition to the correlation risks discussed above, the purchase of an
option on a financial futures contract also entails the risk that changes in
the value of the underlying financial futures contract will not be reflected
fully in the value of the option purchased.
Municipal Bond Index financial futures contracts only recently have been
approved for trading and therefore have little trading history. It is possible
that trading in such financial futures contracts will be less liquid than that
in other futures contracts. The trading of financial futures contracts also is
subject to certain market risks, such as inadequate trading activity, which
could at times make it difficult or impossible to liquidate existing positions.
INVESTMENT RESTRICTIONS
The Trust has adopted a number of restrictions and policies relating to the
investment of the assets of each Fund and its activities, which are fundamental
policies of each Fund and may not be changed without the approval of the
holders of a majority of such Fund's outstanding voting securities (which for
this purpose and under the 1940 Act means the lesser of (i) 67% of a Fund's
shares present at a meeting at which more than 50% of the outstanding shares of
that Fund are represented or (ii) more than 50% of such Fund's outstanding
shares). A Fund may not: (1) purchase any securities other than securities
referred to under "Investment Objectives and Policies" herein and in the
Prospectus; (2) invest more than 25% of its total
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assets (taken at market value at the time of each investment) in securities of
issuers in any particular industry (other than U.S. Government securities or
U.S. Government agency securities, Municipal Bonds and Non-Municipal Tax-Exempt
Securities); (3) invest more than 10% of its total assets (taken at market
value at the time of each investment) in revenue bonds where the entity
supplying the revenues from which the issue is to be paid, and the guarantor of
the obligation, including predecessors, each have a record of less than three
years of continuous business operation; (4) make investments for the purpose of
exercising control or management; (5) purchase securities of other investment
companies, except to the extent that such purchases are permitted by applicable
law; (6) purchase or sell real estate (provided that such restriction shall not
apply to securities secured by real estate or interests therein or issued by
companies which invest in real estate or interests therein), commodities or
commodity contracts (except that each Fund may purchase and sell financial
futures contracts), except to the extent the Fund may do so in accordance with
applicable law and the Trust's Prospectus and Statement of Additional
Information and without registering as a commodity pool operator under the
Commodity Exchange Act; (7) purchase any securities on margin, except for use
of short-term credit necessary for clearance of purchases and sales of
portfolio securities (the deposit or payment by a Fund of initial or variation
margin in connection with financial futures contracts is not considered the
purchase of a security on margin); (8) make short sales of securities or
maintain a short position, except to the extent permitted by applicable law
(this restriction does not apply to options on financial futures contracts);
(9) make loans to other persons, provided that the Fund may purchase a portion
of an issue of tax-exempt securities (the acquisition of a portion of an issue
of tax-exempt securities or bonds, debentures or other debt securities which
are not publicly distributed is considered to be the making of a loan under the
1940 Act) and provided further that investments in repurchase agreements and
purchase and sale contracts shall not be deemed to be the making of a loan;
(10) borrow amounts in excess of 20% of its total assets, taken at market value
(including the amount borrowed), and then only from banks as a temporary
measure for extraordinary or emergency purposes [Usually only "leveraged"
investment companies may borrow in excess of 5% of their assets; however, each
Fund will not borrow to increase income but only to meet redemption requests
which might otherwise require untimely disposition of portfolio securities. No
Fund will purchase securities while borrowings are outstanding. Interest paid
on such borrowings will reduce net income.]; (11) 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 (10) above, and then such mortgaging, pledging or hypothecating
may not exceed 10% of its total assets, taken at market value, or except as may
be necessary in connection with transactions in financial futures contracts;
(12) invest in securities which cannot be readily resold because of legal or
contractual restrictions or which are not readily marketable, including
individually negotiated loans that constitute illiquid investments and illiquid
lease obligations, or in repurchase agreements or purchase and sale contracts
maturing in more than seven days, if, regarding all such securities, more than
15% of its net assets (taken at market value), would be invested in such
securities; and (13) act as an underwriter of securities, except to the extent
that the Fund technically may be deemed an underwriter when engaged in the
activities described in (12) above or insofar as the Fund may be deemed an
underwriter under the Securities Act of 1933, as amended, in selling portfolio
securities.
Additional investment restrictions adopted by the Trust, which may be changed
by the Trustees, provide that a Fund may not: (1) invest in real estate limited
partnership interests or in oil, gas or mineral leases; and (2) write, purchase
or sell puts, calls, straddles, spreads or combinations thereof, except to the
extent permitted by the Trust's Prospectus and Statement of Additional
Information, as amended from time to time.
In addition, to comply with tax requirements for qualifications 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 Fund will regard each state and each
political subdivision, agency or instrumentality of such state and each multi-
state agency of which such state is a member and each public authority which
issues securities on behalf of a private entity as a separate issuer,
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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.
Because of the affiliation of Merrill Lynch, Pierce, Fenner & Smith
Incorporated ("Merrill Lynch") with the Trust, each Fund is prohibited from
engaging in certain transactions involving such firm or its affiliates except
for brokerage transactions permitted under the 1940 Act involving only usual
and customary commissions or transactions pursuant to an exemptive order under
the 1940 Act. Included among such restricted transactions will be purchases
from or sales to Merrill Lynch of securities in transactions in which it acts
as a principal. See "Portfolio Transactions". An exemptive order has been
obtained which permits the Trust to effect principal transactions with Merrill
Lynch in high quality, short-term, tax-exempt securities subject to conditions
set forth in such order.
MANAGEMENT OF THE TRUST
TRUSTEES AND OFFICERS
The Trustees and executive officers of the Trust and their principal
occupations for at least the last five years are set forth below. Unless
otherwise noted, the address of each Trustee and executive officer is Box 9011,
Princeton, New Jersey 08543-9011.
Arthur Zeikel--President and Trustee(1)(2)--President and Chief Investment
Officer of the Manager since 1977; President of Merrill Lynch Investment
Management, L.P. (doing business as Merrill Lynch Asset Management and referred
to herein as "MLAM") since 1977 and Chief Investment Officer thereof since
1976; President and Director of Princeton Services, Inc. ("Princeton Services")
since 1993; Executive Vice President of Merrill Lynch & Co., Inc. since 1991;
Executive Vice President of Merrill Lynch since 1990 and a Senior Vice
President thereof from 1985 to 1990; Director of Merrill Lynch Funds
Distributor, Inc. ("MLFD" or the "Distributor").
Kenneth S. Axelson--Trustee(2)--75 Jameson Point Road, Rockland, Maine 04841.
Executive Vice President and Director, J.C. Penney Company, Inc. until 1982;
Director, UNUM Corporation, Protection Mutual Insurance Company, Zurn
Industries, Inc. and, formerly, of Central Maine Power Company (until 1992),
Key Trust Company of Maine (until 1992) and Grumman Corporation (until 1994);
Trustee, The Chicago Dock and Canal Trust.
Herbert I. London--Trustee(2)--New York University--Gallatin Division, 113-
115 University Place, New York, New York 10003. John M. Olin Professor of
Humanities, New York University since 1993 and Professor thereof since 1973;
Dean, Gallatin Division of New York University from 1978 to 1993 and Director
from 1975 to 1976; Distinguished Fellow, Herman Kahn Chair, Hudson Institute
from 1984 to 1985; Director, Damon Corporation since 1991; Overseer, Center for
Naval Analyses.
Robert R. Martin--Trustee(2)--513 Grand Hill, St. Paul, Minnesota 55102.
Chairman of the Board, WTC Industries, Inc. since 1994; Chairman and Chief
Executive Officer, Kinnard Investments, Inc. from 1990 to 1993; Executive Vice
President, Dain Bosworth, Inc. from 1974 to 1989; Director, Securities Industry
Association from 1981 to 1982 and Public Securities Association from 1979 to
1980; Director, Carnegie Capital Management from 1977 to 1985 and Chairman
thereof in 1979; Trustee, Northland College since 1992.
Joseph L. May--Trustee(2)--424 Church Street, Suite 2000, Nashville,
Tennessee 37219. Attorney in private practice since 1984; President, May and
Athens Hosiery Mills Division, Wayne-Gossard Corporation from 1954 to 1983;
Vice President, Wayne-Gossard Corporation from 1972 to 1983; Chairman, The May
Corporation (personal holding company) from 1972 to 1983; Director, Signal
Apparel Co. from 1972 to 1989.
Andre F. Perold--Trustee(2)--Morgan Hall, Soldiers Field, Boston,
Massachusetts 02163. Professor, Harvard Business School since 1989 and
Associate Professor from 1983 to 1989; Trustee, The Common Fund, since 1989;
Director, Quantec Investment Technology (a private United Kingdom company).
Terry K. Glenn--Executive Vice President(1)(2)--Executive Vice President of
the Manager and of MLAM since 1983; Executive Vice President and Director of
Princeton Services since 1993; President of the Distributor since 1986 and
Director thereof since 1991.
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Vincent R. Giordano--Senior Vice President and Portfolio Manager(1)(2)--
Portfolio Manager of the Manager and of MLAM since 1977 and Senior Vice
President of the Manager and of MLAM since 1984; Vice President of MLAM from
1980 to 1984; Senior Vice President of Princeton Services since 1993.
Kenneth A. Jacob--Vice President and Portfolio Manager(1)(2)--Vice President
of the Manager and of MLAM since 1984.
Peter J. Hayes--Vice President and Portfolio Manager(1)(2)--Vice President of
MLAM since 1989 and Assistant Vice President of MLAM from 1987 to 1989;
Assistant Vice President of Shawmut Bank, N.A. from 1985 to 1987.
Donald C. Burke--Vice President(1)(2)--Vice President and Director of
Taxation of MLAM since 1990; Employee of Deloitte & Touche from 1982 to 1990.
Gerald M. Richard--Treasurer(1)(2)--Senior Vice President and Treasurer of
the Manager and MLAM since 1984; Senior Vice President and Treasurer of
Princeton Services since 1993; Treasurer of the Distributor since 1984 and a
Vice President thereof since 1981.
Robert Harris--Secretary(1)(2)--Vice President of MLAM since 1984; Secretary
of the Distributor since 1982.
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(1) Interested person, as defined in the 1940 Act, of the Trust.
(2) Such Trustee or officer is a director or officer of certain other
investment companies for which the Manager or MLAM acts as investment
adviser or manager.
At April 29, 1994, the Trustees and officers of the Trust as a group (13
persons) owned an aggregate of less than 1/4 of 1% of the outstanding shares of
Common Stock of Merrill Lynch & Co., Inc. and owned an aggregate of less than
1% of the outstanding shares of any Fund.
The Trust pays each Trustee not affiliated with the Manager a fee of $5,000
per year plus $500 per meeting attended, together with such Trustee's actual
out-of-pocket expenses relating to attendance at meetings. The Trust also pays
members of its Audit Committee, which consists of all of the non-affiliated
Trustees, an additional fee of $1,000 per year plus $250 per meeting attended.
MANAGEMENT AND ADVISORY ARRANGEMENTS
Reference is made to "Management of the Trust--Management and Advisory
Arrangements" in the Prospectus for certain information concerning the
management and advisory arrangements of the Funds.
Securities held by the Funds also may be held by, or be appropriate
investments for, other funds or investment advisory clients of the Manager or
its affiliates (collectively, the "clients"). Because of different objectives
or other factors, a particular security may be bought for one or more clients
when one or more clients are selling the same security. If the Manager or its
affiliates purchase or sell securities for the Funds or other funds for which
they act as manager or for their advisory clients and such sales or purchases
arise for consideration at or about the same time, transactions in such
securities will be made, insofar as feasible, for the respective funds and
clients in a manner deemed equitable to all. To the extent that transactions on
behalf of more than one client of the Manager or its affiliates during the same
period may increase the demand for securities being purchased or the supply of
securities being sold, there may be an adverse effect on price.
Pursuant to separate management agreements between the Trust on behalf of
each Fund and the Manager (each a "Management Agreement"), the Manager receives
for its services to each Fund monthly compensation based upon the average daily
net assets of that Fund at the annual rate of 0.35% of the average daily net
assets of that Fund.
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California imposes limitations on the expenses of each Fund. These annual
expense limitations require that the Manager reimburse each Fund in an amount
necessary to prevent that Fund's aggregate ordinary operating expenses
(excluding taxes, brokerage fees and commissions, distribution fees and
extraordinary charges such as litigation costs) from exceeding in any fiscal
year 2.5% of the Fund's first $30,000,000 of average net assets, 2.0% of the
next $70,000,000 of average net assets and 1.5% of the remaining average net
assets. The Manager's obligation to reimburse the Funds is limited to the
amount of the management fee. Expenses not covered by this limitation are
interest, taxes, brokerage commissions and other items such as extraordinary
legal expenses. No fee payment will be made to the Manager by any Fund during
any fiscal year which will cause such expenses of that Fund to exceed expense
limitations at the time of such payment.
Each Management Agreement obligates the Manager to provide investment
advisory services to the related Fund and to pay all compensation of and
furnish office space for officers and employees of the Trust connected with
investment and economic research, trading and investment management of the
Trust, as well as the fees of all Trustees of the Trust who are affiliated
persons of the Manager or any of its subsidiaries. Each Fund pays all other
expenses incurred in its operation and a portion of the Trust's general
administrative expenses allocated pro rata on the basis of the asset size of
the respective series of the Trust ("Series"), including the Funds and any
additional Series added in the future. Expenses that will be borne directly by
the Series include, among other things, redemption expenses, expenses of
portfolio transactions, expenses of registering the shares under Federal and
state securities laws, pricing costs (including the daily calculation of net
asset value), expenses of printing shareholder reports, prospectuses and
statements of additional information (except to the extent paid by the
Distributor as described below), fees for legal and auditing services,
Commission fees, interest, certain taxes, and other expenses attributable to a
particular Series. Expenses which will be allocated on the basis of asset size
of the respective Series include fees and expenses of unaffiliated Trustees,
state franchise taxes, costs of printing proxies and other expenses related to
shareholder meetings, and other expenses properly payable by the Trust. The
organizational expenses of the Trust were paid by the Trust, and as additional
Series are added to the Trust, the organizational expenses are allocated among
the Series in a manner deemed equitable by the Trustees. Depending upon the
nature of a lawsuit, litigation costs may be assessed to the specific Series to
which the lawsuit relates or allocated on the basis of the asset size of the
respective Series. The Trustees have determined that this is an appropriate
method of allocation of expenses. Accounting services are provided to the Funds
by the Manager and each Fund reimburses the Manager for the Manager's costs in
connection with such services. As required by the Funds' distribution
agreements, the Distributor will pay the promotional expenses of the Funds
incurred in connection with the offering of shares of the Funds. Certain
expenses in connection with account maintenance and the distribution of Class B
shares will be financed by the Funds pursuant to Distribution Plans in
compliance with Rule 12b-1 under the 1940 Act. See "Purchase of Shares--
Deferred Sales Charge Alternative--Class B Shares--Distribution Plans".
The Manager is a limited partnership, the partners of which are Merrill Lynch
& Co., Inc., Fund Asset Management, Inc. and Princeton Services, Inc.
Duration and Termination. Unless earlier terminated as described below, the
Management Agreements will remain in effect from year to year if approved
annually (a) by the Trustees of the Trust or by a majority of the outstanding
shares of the Funds and (b) by a majority of the Trustees who are not parties
to such contract or interested persons (as defined in the 1940 Act) of any such
party. Such contracts are not assignable and may be terminated without penalty
on 60 days' written notice at the option of either party thereto or by vote of
the shareholders of the Funds.
PURCHASE OF SHARES
Reference is made to "Purchase of Shares" in the Prospectus for certain
information as to the purchase of shares of each Fund.
ALTERNATIVE SALES ARRANGEMENTS
Each Fund issues two classes of shares: Class A shares are sold to investors
choosing the initial sales charge alternative and Class B shares are sold to
investors choosing the deferred sales charge alternative. The
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two classes of shares represent identical interests in the same portfolio of
investments of a Fund, have the same rights and are identical in all respects,
except that Class B shares of a Fund bear the expenses of the deferred sales
arrangements of that Fund and any expenses (including incremental transfer
agency costs) resulting from such sales arrangements and the expenses paid by
the account maintenance fee of that Fund. The two classes also have different
exchange privileges. See "Shareholder Services--Exchange Privilege".
On behalf of each Fund, the Trust entered into a separate distribution
agreement with the Distributor in connection with the continuous offerings of
Class A shares and Class B shares of such Fund (each a "Distribution
Agreement"). Each Distribution Agreement obligates the Distributor to pay
certain expenses in connection with the offering of the Class A shares and
Class B shares of the related Fund. After the prospectuses, statements of
additional information and periodic reports have been prepared, set in type and
mailed to shareholders, the Distributor pays for the printing and distribution
of copies thereof used in connection with the offering to dealers and
prospective investors. The Distributor also pays for other supplementary sales
literature and advertising costs. The Distribution Agreements are subject to
the same renewal requirements and termination provisions as the Management
Agreements described above.
INITIAL SALES CHARGE ALTERNATIVE--CLASS A SHARES
The term "purchase", as used in the Prospectus and in this Statement of
Additional Information in connection with an investment in Class A shares of a
Fund, refers to a single purchase by an individual, or to concurrent purchases,
which in the aggregate are at least equal to the prescribed amounts, by an
individual, his or her spouse and their children under the age of 21 years
purchasing shares for his or her or their own account and to single purchases
by a trustee or other fiduciary purchasing shares for a single trust estate or
single fiduciary account although more than one beneficiary is involved. The
term "purchase" also includes purchases by any "company", as that term is
defined in the 1940 Act, but does not include purchases by any such company
which has not been in existence for at least six months or which has no purpose
other than the purchase of shares of the Fund or shares of other registered
investment companies at a discount; provided, however, that it shall not
include purchases by any group of individuals whose sole organizational nexus
is that the participants therein are credit cardholders of a company,
policyholders of an insurance company, customers of either a bank or broker-
dealer or clients of an investment adviser.
REDUCED INITIAL SALES CHARGES--CLASS A SHARES
Right of Accumulation. Reduced sales charges are applicable through a right
of accumulation under which eligible investors are permitted to purchase Class
A shares of a Fund at the offering price applicable to the total of (a) the
dollar amount then being purchased plus (b) an amount equal to the then current
net asset value or cost, whichever is higher, of the purchaser's combined
holdings of the Class A shares and Class B shares of a Fund and of any other
investment company with an initial sales charge or a deferred sales charge for
which the Distributor acts as the distributor. For any such right of
accumulation to be made available, the Distributor must be provided at the time
of purchase, by the purchaser or the purchaser's securities dealer, with
sufficient information to permit confirmation of qualification. Acceptance of
the purchase order is subject to such confirmation. The right of accumulation
may be amended or terminated at any time.
Letter of Intention. Reduced sales charges are applicable to purchases
aggregating $100,000 or more of the Class A shares of a Fund or any other
investment company with an initial sales charge or a deferred sales charge for
which the Distributor acts as the distributor made within a 13-month period
starting with the first purchase pursuant to a Letter of Intention in the form
provided in the Prospectus. The Letter of Intention is available only to
investors whose accounts are maintained at the Trust's Transfer Agent. The
Letter of Intention is not available to employee benefit plans for which
Merrill Lynch provides plan participant record-keeping services. The Letter of
Intention is not a binding obligation to purchase any amount of Class A shares
of any Fund; however, its execution will result in the purchaser paying a lower
sales charge at the appropriate quantity purchase level. A purchase not
originally made pursuant to a Letter of Intention may be included
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under a subsequent Letter of Intention executed within 90 days of such purchase
if the Distributor is informed in writing of this intent within such 90-day
period. The value of Class A shares of a Fund and of other investment companies
with an initial sales charge or a deferred sales charge for which the
Distributor acts as the distributor presently held, at cost or maximum offering
price (whichever is higher), on the date of the first purchase under the Letter
of Intention, may be included as a credit toward the completion of such Letter,
but the reduced sales charge applicable to the amount covered by such Letter
will be applied only to new purchases. If the total amount of shares does not
equal the amount stated in the Letter of Intention (minimum of $100,000), the
investor will be notified and must pay, within 20 days of the expiration of
such Letter, the difference between the sales charge on the Class A shares of
the Fund purchased at the reduced rate and the sales charge applicable to the
shares of the Fund actually purchased through the Letter. Class A shares of the
Fund equal to at least five percent of the intended amount will be held in
escrow during the thirteen-month period (while remaining registered in the name
of the purchaser) for this purpose. The first purchase under the Letter of
Intention must be at least five percent of the dollar amount of such Letter. If
during the term of such Letter, a purchase brings the total amount invested to
an amount equal to or in excess of the amount indicated in the Letter, the
purchaser will be entitled on that purchase and subsequent purchases to the
reduced percentage sales charge which would be applicable to a single purchase
equal to the total dollar value of the Class A shares then being purchased
under such Letter, but there will be no retroactive reduction of the sales
charges on any previous purchase. The value of any shares redeemed or otherwise
disposed of by the purchaser prior to termination or completion of the Letter
of Intention will be deducted from the total purchases made under such Letter.
An exchange from Merrill Lynch Ready Assets Trust, Merrill Lynch Retirement
Reserves Money Fund, Merrill Lynch U.S. Treasury Money Fund or Merrill Lynch
U.S.A. Government Reserves into a Fund that creates a sales charge will count
toward completing a new or existing Letter of Intention to the Fund.
Purchase Privilege of Certain Persons. Trustees of the Trust, directors and
trustees of other Merrill Lynch-sponsored investment companies, directors and
employees of Merrill Lynch & Co., Inc. and its subsidiaries and any trust,
pension, profit-sharing or other benefit plan for such persons, may purchase
Class A shares of a Fund at net asset value. Under such programs, a Fund
realizes economies of scale and reduction of sales-related expenses by virtue
of familiarity with the Fund.
Class A shares of each Fund will be offered at net asset value, without a
sales charge, to an investor who has a business relationship with a financial
consultant who joined Merrill Lynch from another investment firm within six
months prior to the date of purchase by such investor, if the following
conditions are satisfied. First, the investor must purchase Class A shares of a
Fund with proceeds from a redemption of shares of a mutual fund that was
sponsored by the financial consultant's previous firm and imposed a sales
charge either at the time of purchase or on a deferred basis. Second, such
redemption must have been made within 60 days prior to the investment in the
Fund, and the proceeds from the redemption must have been maintained in the
interim in cash or a money market fund.
Closed-End Fund Option. Class A shares of each Fund and certain other mutual
funds advised by the Manager or MLAM (the "Eligible Class A shares") are
offered at net asset value to shareholders of certain closed-end funds advised
by the Manager or MLAM who wish to reinvest the net proceeds of a sale of their
closed-end fund shares of common stock in Eligible Class A shares, if the
conditions set forth below are satisfied. First, the sale of closed-end fund
shares must be made through Merrill Lynch, and the net proceeds therefrom must
be reinvested immediately in Eligible Class A shares. Second, the closed-end
fund shares must have either been acquired in the initial public offering or be
shares representing dividends from shares of common stock acquired in such
offering. Third, the closed-end fund shares must have been maintained
continuously in a Merrill Lynch securities account. Fourth, there must be a
minimum purchase of $250 to be eligible for the investment option. Class A
shares of each Fund are offered at net asset value to shareholders of Merrill
Lynch Senior Floating Rate Fund, Inc. (formerly known as Merrill Lynch Prime
Fund, Inc.) ("Senior Floating Rate Fund") who wish to reinvest the net proceeds
from a sale of certain of their shares of common stock of Senior Floating Rate
Fund in shares of the Fund. In order to exercise this investment option, Senior
Floating Rate Fund shareholders must sell their Senior Floating Rate Fund
shares to Senior
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Floating Rate Fund in connection with a tender offer conducted by Senior
Floating Rate Fund and reinvest the proceeds immediately in the Fund. This
investment option is available only with respect to the proceeds of Senior
Floating Rate Fund shares as to which no Early Withdrawal Charge (as defined in
the Senior Floating Rate Fund prospectus) is applicable. Purchase orders from
Senior Floating Rate Fund shareholders wishing to exercise this investment
option will be accepted only on the day that the related Senior Floating Rate
Fund tender offer terminates and will be effected at the net asset value of the
Fund at such day.
Acquisition of Certain Investment Companies. The public offering price of
Class A shares of a Fund may be reduced to the net asset value per Class A
share of that Fund in connection with the acquisition of the assets of or
merger or consolidation with a personal holding company or a public or private
investment company. The value of the assets or company acquired in a tax-free
transaction may be adjusted in appropriate cases to reduce possible adverse tax
consequences to each Fund which might result from an acquisition of assets
having net unrealized appreciation which is disproportionately higher at the
time of acquisition than the realized or unrealized appreciation of each Fund.
DEFERRED SALES CHARGE ALTERNATIVE--CLASS B SHARES
Distribution Plan. Reference is made to "Purchase of Shares--Deferred Sales
Charge Alternative--Class B Shares--Distribution Plans" in the Prospectus for
certain information with respect to the Distribution Plan of each Fund.
The payment of the distribution fee with respect to Class B shares is subject
to the provisions of Rule 12b-1 under the 1940 Act. Among other things, each
Distribution Plan provides that the Distributor shall provide and the Trustees
shall review quarterly reports of the disbursement of the distribution fees
paid by each Fund to the Distributor. In their consideration of the
Distribution Plans, the Trustees must consider all factors they deem relevant,
including information as to the benefits of each Distribution Plan to its Fund
and its respective Class B shareholders. The Distribution Plans further provide
that, so long as a Distribution Plan remains in effect, the selection and
nomination of Trustees who are not "interested persons" of the Trust, as
defined in the 1940 Act (the "Independent Trustees"), shall be committed to the
discretion of the Independent Trustees then in office. In separately approving
each Distribution Plan in accordance with Rule 12b-1, the Independent Trustees
concluded that there is a reasonable likelihood that each Distribution Plan
will benefit the related Fund and its Class B shareholders. Any 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 Class B voting securities of the related Fund. No Distribution Plan
can be amended to increase materially the amount to be spent by the related
Fund without approval by Class B shareholders of that Fund, and all material
amendments are required to be approved by the vote of Trustees, including a
majority of the Independent Trustees who have no direct or indirect financial
interest in the Distribution Plan, cast in person at a meeting called for that
purpose. Rule 12b-1 further requires that the Trust preserve copies of each
Distribution Plan and any report made pursuant to such plan for a period of not
less than six years from the date of the Distribution Plan or such report, the
first two years in an easily accessible place.
REDEMPTION OF SHARES
Reference is made to "Redemption of Shares" in the Prospectus for certain
information as to the redemption and repurchase of shares of each Fund.
The right to redeem shares of any Fund or to receive payment with respect to
any such redemption may be suspended only for any period during which trading
on the New York Stock Exchange is restricted as determined by the Commission or
such Exchange is closed (other than customary weekend and holiday closings),
for any period during which an emergency exists, as defined by the Commission,
as a result of which disposal of portfolio securities or determination of the
net asset value of a Fund is not reasonably practicable, and for such other
periods as the Commission may by order permit for the protection of
shareholders of the Funds.
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CONTINGENT DEFERRED SALES CHARGE--CLASS B SHARES
As discussed in the Prospectus under "Purchase of Shares--Alternative Sales
Arrangements--Deferred Sales Charge Alternative--Class B Shares", while Class B
shares redeemed within one year of purchase are subject to a contingent
deferred sales charge ("CDSC") under most circumstances, the charge is waived
on redemptions of Class B shares following the death or disability of a Class B
shareholder. Redemptions for which the waiver applies are any partial or
complete redemption following the death or disability (as defined in the
Internal Revenue Code of 1986, as amended (the "Code")) of a Class B
shareholder (including one who owns the Class B shares as joint tenant with his
or her spouse), provided the redemption is requested within one year of the
death or initial determination of disability.
PORTFOLIO TRANSACTIONS
Reference is made to "Investment Objectives and Policies" and "Portfolio
Transactions" in the Prospectus.
Under the 1940 Act, persons affiliated with the Trust are prohibited from
dealing with the Trust or any Fund as principals in the purchase and sale of
securities unless such trading is permitted by an exemptive order issued by the
Commission. Since over-the-counter transactions are usually principal
transactions, affiliated persons of the Trust, including Merrill Lynch, may not
serve as dealers in connection with transactions with the Funds absent an
exemptive order from the Commission. The Trust has obtained an exemptive order
permitting it to engage in certain principal transactions with Merrill Lynch
involving high quality short-term municipal bonds subject to certain
conditions. Affiliated persons of the Trust may serve as brokers for the Funds
in over-the-counter transactions conducted on an agency basis. Certain court
decisions have raised questions as to the extent to which investment companies
should seek exemptions under the 1940 Act in order to seek to recapture
underwriting and dealer spreads from affiliated entities. The Trustees have
considered all factors deemed relevant, and have made a determination not to
seek such recapture at this time. The Trustees will reconsider this matter from
time to time.
As a non-fundamental restriction, the Trust will prohibit the purchase or
retention by any Fund of the securities of any issuer if the officers,
directors or trustees of the Trust or the Manager owning beneficially more than
one-half of one per cent of the securities of an issuer together own
beneficially more than five per cent of the securities of that issuer. In
addition, under the 1940 Act, the Funds may not purchase securities during the
existence of any underwriting syndicate of which Merrill Lynch is a member
except pursuant to an exemptive order or rules adopted by the Commission. Rule
10f-3 under the 1940 Act sets forth conditions under which a Fund may purchase
municipal bonds in such transactions. The rule sets forth requirements relating
to, among other things, the terms of an issue of municipal bonds purchased by a
Fund, the amount of municipal bonds which may be purchased in any one issue and
the assets of a Fund which may be invested in a particular issue.
The Funds do not expect to use any particular dealer in the execution of
transactions but, subject to obtaining the best net results, dealers who
provide supplemental investment research (such as information concerning tax-
exempt securities, economic data and market forecasts) to the Manager may
receive orders for transactions by the Funds. Information so received will be
in addition to and not in lieu of the services required to be performed by the
Manager under its Management Agreement and the expenses of the Manager will not
necessarily be reduced as a result of the receipt of such supplemental
information.
The Funds have no obligation to deal with any broker in the execution of
transactions for its portfolio securities. In addition, consistent with the
Rules of Fair Practice of the National Association of Securities Dealers, Inc.
and policies established by the Trustees of the Trust, the Manager may consider
sales of shares of the Funds as a factor in the selection of brokers or dealers
to execute portfolio transactions for the Funds.
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Generally, the Funds do not purchase securities for short-term trading
profits. However, a Fund may dispose of securities without regard to the time
they have been held when such action, for defensive or other reasons, appears
advisable to the Manager. While it is not possible to predict turnover rates
with any certainty, at present it is anticipated that each Fund's annual
portfolio turnover rate, under normal circumstances after the Fund's portfolio
is invested in accordance with its respective investment objective, will be
less than 100%. (The portfolio turnover rate is calculated by dividing the
lesser of purchases or sales of a Fund's portfolio securities for the
particular fiscal year by the monthly average of the value of the portfolio
securities owned by the Fund during the particular fiscal year. For purposes of
determining this rate, all securities whose maturities at the time of
acquisition are one year or less are excluded.)
DETERMINATION OF NET ASSET VALUE
The net asset value of each Fund is determined by the Manager once daily,
Monday through Friday, as of 4:15 P.M., New York City time, on each day during
which the New York Stock Exchange is open for trading. The New York Stock
Exchange is not open on New Year's Day, President's Day, Good Friday, Memorial
Day, Independence Day, Labor Day, Thanksgiving Day and Christmas Day. Net asset
value per share of a Fund is computed by dividing the sum of the value of the
securities held by the Fund plus any cash or other assets minus all liabilities
by the total number of shares outstanding at such time, rounded to the nearest
cent. Expenses, including the fees payable to the Manager and Distributor, are
accrued daily. The net asset value per share of the Class A shares of a Fund
and the net asset value per share of the Class B shares of that Fund are
expected to be equivalent. Under certain circumstances, however, the per share
net asset value of a Fund's Class B shares may be lower than the per share net
asset value of its Class A shares reflecting the higher daily expense accruals
of the account maintenance and distribution fees (and incremental transfer
agency costs) applicable with respect to the Class B shares of the Fund. Even
under those circumstances, the per share net asset value of the two classes
will tend to converge immediately after the payment of dividends, which will
differ by approximately the amount of the expense accrual differential between
the classes.
The Municipal Bonds, and other portfolio securities in which the Funds
invest, are traded primarily in over-the-counter municipal bond and money
markets and are valued at the last available bid price in the over-the-counter
market or on the basis of yield equivalents as obtained from one or more
dealers that make markets in the securities. One bond is the "yield equivalent"
of another bond when, taking into account market price, maturity, coupon rate,
credit rating and ultimate return of principal, both bonds theoretically will
produce an equivalent return to the bondholder. Financial futures contracts and
options thereon, which are traded on exchanges, are valued at their settlement
prices as of the close of such exchanges. Short-term investments with a
remaining maturity of 60 days or less are valued on an amortized cost basis,
which approximates market value. Securities and assets for which market
quotations are not readily available are valued at fair value as determined in
good faith by or under the direction of the Trustees of the Trust, including
valuations furnished by a pricing service retained by the Trust, which may
utilize a matrix system for valuations. The procedures of the pricing service
and its valuations are reviewed by the officers of the Trust under the general
supervision of the Trustees.
SHAREHOLDER SERVICES
The Trust offers a number of shareholder services described below which are
designed to facilitate investment in shares of the Funds. Full details as to
each of such services can be obtained from the Trust, the Distributor or
Merrill Lynch.
INVESTMENT ACCOUNT
Each shareholder whose account is maintained at the Transfer Agent has an
Investment Account and will receive quarterly statements from the Transfer
Agent. These quarterly statements will serve as transaction confirmations for
automatic investment purchases and the reinvestment of income dividends, and
long-term capital gain distributions. The quarterly statements will also show
any other activity in the account since the preceding statement. Shareholders
will receive separate transaction confirmations for each purchase
21
<PAGE>
or sale transaction other than automatic investment purchases and the
reinvestment of income dividends, and long-term capital gain distributions.
Shareholders considering transferring their Class A shares from Merrill Lynch
to another brokerage firm or financial institution should be aware that, if the
firm to which the Class A shares are to be transferred will not take delivery
of shares of the relevant Fund, a shareholder either must redeem the Class A
shares so that the cash proceeds can be transferred to the account at the new
firm or such shareholder must continue to maintain an Investment Account at the
Transfer Agent for those Class A shares. Shareholders interested in
transferring their Class B shares from Merrill Lynch and who do not wish to
have an Investment Account maintained for such shares at the Transfer Agent may
request their new brokerage firm to maintain such shares in an account
registered in the name of the brokerage firm for the benefit of the
shareholder. If the new brokerage firm is willing to accommodate the
shareholder in this manner, the shareholder must request that he or she be
issued certificates for his or her shares, and then must turn the certificates
over to the new firm for re-registration as described in the preceding
sentence. A shareholder may make additions to his or her Investment Account at
any time by mailing a check directly to the Transfer Agent.
Share certificates are issued only for full shares and only upon the specific
request of the shareholder who has an Investment Account. Issuance of
certificates representing all or only part of the full shares in an Investment
Account may be requested by a shareholder directly from the Transfer Agent.
AUTOMATIC INVESTMENT PLAN
A shareholder of a Fund may make additions to an Investment Account at any
time by purchasing Class A shares or Class B shares at the applicable public
offering price either through the shareholder's securities dealer, or by mail
directly to the Transfer Agent, acting as agent for such securities dealers.
Voluntary accumulation also can be made through a service known as the
Automatic Investment Plan whereby each Fund is authorized through pre-
authorized checks of $50 or more to charge the regular bank account of the
shareholder on a regular basis to provide systematic additions to the
Investment Account of such shareholder. A Fund's Automatic Investment Program
is not available to shareholders whose shares are held in brokerage account
with Merrill Lynch. Alternatively, an investor who maintains a CMA(R) account
may arrange to have periodic investments made in a Fund in such CMA(R) account
or in certain related accounts in amounts of $100 or more through the CMA(R)
Automatic Investment Program.
AUTOMATIC REINVESTMENT OF DIVIDENDS AND CAPITAL GAINS DISTRIBUTIONS
Unless specific instructions are given as to the method of payment of
dividends and capital gains distributions, dividends and distributions will be
reinvested automatically in additional shares of the respective Fund. Such
reinvestment will be at the net asset value of shares of the respective Fund as
of the close of business on the monthly payment date for such dividends and
distributions. Shareholders may elect in writing to receive either their income
dividends or capital gains distributions, or both, in cash, in which event
payment will be mailed on or about the payment date.
Shareholders, at any time, may notify the Transfer Agent in writing or by
telephone (1-800-MER-FUND) that they no longer wish to have their dividends
and/or capital gains distributions reinvested in shares of the respective Fund
or vice versa and, commencing ten days after the receipt by the Transfer Agent
of such notice, such instructions will be effected.
SYSTEMATIC WITHDRAWAL PLANS--CLASS A SHARES
A Class A shareholder may elect to make systematic withdrawals from an
Investment Account on either a monthly or a quarterly basis as provided below.
Quarterly withdrawals are available for shareholders who have acquired Class A
shares of a Fund having a value, based on cost or the current offering price,
of $5,000 or more, and monthly withdrawals for shareholders with Class A shares
with such a value of $10,000 or more.
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<PAGE>
At the time of each withdrawal payment, sufficient Class A shares are
redeemed from those on deposit in the shareholder's account to provide the
withdrawal payment specified by the shareholder. The shareholder may specify
either a dollar amount or a percentage of the value of his or her Class A
shares. Redemptions will be made at net asset value as determined at the normal
close of business on the New York Stock Exchange on the 24th day of each month
or the 24th day of the last month of each quarter, whichever is applicable. If
the Exchange is not open for business on such date, the Class A shares will be
redeemed at the close of business on the following business day. The check for
the withdrawal payment will be mailed, or the direct deposit for the withdrawal
payment will be made, on the next business day following redemption. When a
shareholder is making systematic withdrawals, dividends and distributions on
all Class A shares in the Investment Account are reinvested automatically in
the respective Fund's Class A shares. A shareholder's Systematic Withdrawal
Plan may be terminated at any time, without charge or penalty, by either the
shareholder, the Trust, the Transfer Agent or the Distributor. Withdrawal
payments should not be considered as dividends, yield or income. Each
withdrawal is a taxable event. If periodic withdrawals continuously exceed
reinvested dividends, the shareholder's original investment may be reduced
correspondingly. Purchases of additional Class A shares concurrent with
withdrawals are ordinarily disadvantageous to the shareholder because of sales
charges and tax liabilities. The Trust will not knowingly accept purchase
orders for Class A shares of a Fund from investors who maintain a Systematic
Withdrawal Plan unless such purchase is equal to at least one year's scheduled
withdrawals or $1,200, whichever is greater. Periodic investments may not be
made into an Investment Account in which the shareholder has elected to make
systematic withdrawals.
A Class A shareholder whose shares are held within a CMA(R), CBA(R) or
Retirement Account may elect to have shares redeemed on a monthly, bimonthly,
quarterly, semiannual or annual basis through the Systematic Redemption
Program. The minimum fixed dollar amount redeemable is $25. The proceeds of
systematic redemptions will be posted to the shareholder's account five
business days after the date the shares are redeemed. Monthly systematic
redemptions will be made at net asset value on the first Monday of each month,
bimonthly systematic redemption will be made at net asset value on the first
Monday of every other month, and quarterly, semiannual or annual redemptions
are made at net asset value on the first Monday of months selected at the
shareholder's option. If the first Monday of the month is a holiday, the
redemption will be processed at net asset value on the next business day. The
Systematic Redemption Program is not available if Fund shares are being
purchased within the account pursuant to the Automatic Investment Program. For
more information on the Systematic Redemption Program, eligible shareholders
should contact their Financial Consultant.
EXCHANGE PRIVILEGE
Class A shareholders and Class B shareholders of each Fund may exchange their
Class A shares or Class B shares of a Fund for shares of the same class of
Merrill Lynch Adjustable Rate Securities Fund, Inc., Merrill Lynch Americas
Income Fund, Inc., Merrill Lynch Arizona Municipal Bond Fund, Merrill Lynch
Balanced Fund for Investment and Retirement, Merrill Lynch Basic Value Fund,
Inc., Merrill Lynch California Municipal Bond Fund, Merrill Lynch California
Insured Municipal Bond Fund, Merrill Lynch Capital Fund, Inc., Merrill Lynch
Colorado Municipal Bond Fund, Merrill Lynch Corporate Bond Fund, Inc., Merrill
Lynch Developing Capital Markets Fund, Inc. (shares of which are deemed Class A
shares for purposes of the exchange privilege), Merrill Lynch Dragon Fund,
Inc., Merrill Lynch EuroFund, Merrill Lynch Federal Securities Trust, Merrill
Lynch Florida Municipal Bond Fund, Merrill Lynch Fund For Tomorrow, Inc.,
Merrill Lynch Fundamental Growth Fund, Inc., Merrill Lynch Global Allocation
Fund, Inc., Merrill Lynch Global Bond Fund for Investment and Retirement,
Merrill Lynch Global Convertible Fund, Inc., Merrill Lynch Global Holdings
(residents of Arizona must meet investor suitability standards), Merrill Lynch
Global Resources Trust, Merrill Lynch Global Utility Fund, Inc., Merrill Lynch
Growth Fund for Investment and Retirement, Merrill Lynch Healthcare Fund, Inc.
(residents of Wisconsin must meet investor suitability standards), Merrill
Lynch International Equity Fund, Merrill Lynch Latin America Fund, Inc.,
Merrill Lynch Maryland Municipal Bond Fund, Merrill Lynch Massachusetts
Municipal Bond Fund, Merrill Lynch Michigan Municipal Bond Fund, Merrill Lynch
Minnesota Municipal Bond Fund, Merrill
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<PAGE>
Lynch Municipal Bond Fund, Inc., Merrill Lynch Municipal Intermediate Term
Fund, Merrill Lynch New Jersey Municipal Bond Fund, Merrill Lynch New York
Municipal Bond Fund, Merrill Lynch North Carolina Municipal Bond Fund, Merrill
Lynch Ohio Municipal Bond Fund, Merrill Lynch Oregon Municipal Bond Fund,
Merrill Lynch Pacific Fund, Inc., Merrill Lynch Pennsylvania Municipal Bond
Fund, Merrill Lynch Phoenix Fund, Inc., Merrill Lynch Short-Term Global Income
Fund, Inc., Merrill Lynch Special Value Fund, Inc., Merrill Lynch Strategic
Dividend Fund, Merrill Lynch Technology Fund, Inc., Merrill Lynch Texas
Municipal Bond Fund, Merrill Lynch Utility Income Fund, Inc. and Merrill Lynch
World Income Fund, Inc., on the basis described below. In addition, Class A
shareholders of the Funds may exchange their Class A shares for shares of
Merrill Lynch U.S.A. Government Reserves, Merrill Lynch U.S. Treasury Money
Fund and Merrill Lynch Ready Assets Trust (or Merrill Lynch Retirement Reserves
Money Fund if the exchange occurs within certain retirement plans) (together
the "Class A money market funds"), and Class B shareholders of the Funds may
exchange their Class B shares for shares of Merrill Lynch Government Fund,
Merrill Lynch Institutional Fund, Merrill Lynch Treasury Fund and Merrill Lynch
Institutional Tax-Exempt Fund (together the "Class B money market funds") on
the basis described below. Shares with a net asset value of at least $250 are
required to qualify for the exchange privilege, and any shares utilized in an
exchange must have been held by the shareholder for at least 15 days. Certain
funds into which exchanges may be made may impose a redemption fee (not in
excess of 2.00% of the amount redeemed) on shares purchased through the
exchange privilege when such shares are subsequently redeemed, including
redemption through subsequent exchanges. Such redemption fee would be in
addition to any contingent deferred sales charge otherwise applicable to a
redemption of Class B shares. It is contemplated that the exchange privilege
may be applicable to other new mutual funds whose shares may be distributed by
the Distributor.
Under the exchange privilege, each of the funds with Class A shares
outstanding offers to exchange its Class A shares ("new Class A shares") for
Class A shares ("outstanding Class A shares") of any of the other funds, on the
basis of relative net asset value per Class A share, plus an amount equal to
the difference, if any, between the sales charge previously paid on the
outstanding Class A shares and the sales charge payable at the time of the
exchange on the new Class A shares. With respect to outstanding Class A shares
as to which previous exchanges have taken place, the "sales charge previously
paid" shall include the aggregate of the sales charges paid with respect to
such Class A shares in the initial purchase and any subsequent exchange. Class
A shares issued pursuant to dividend reinvestment are sold on a no-load basis
in each of the funds offering Class A shares. For purposes of the exchange
privilege, Class A shares acquired through dividend reinvestment will be
exchanged into the Class A shares of the other funds or into shares of the
Class A money market funds without a sales charge.
In addition, each of the Funds with Class B shares outstanding offers to
exchange its Class B shares ("new Class B shares") for Class B shares
("outstanding Class B shares") of any of the other funds on the basis of
relative net asset value per Class B share, without the payment of any CDSC
that might otherwise be due on redemption of the outstanding shares. Class B
shareholders of each Fund exercising the exchange privilege will continue to be
subject to the Fund's CDSC schedule if such schedule is higher than the
deferred sales charge schedule relating to the new Class B shares acquired
through use of the exchange privilege. In addition, Class B shares of each Fund
acquired through use of the exchange privilege will be subject to that Fund's
CDSC schedule if such schedule is higher than the deferred sales charge
schedule relating to the Class B shares of the fund from which the exchange has
been made. For purposes of computing the sales load that may be payable on a
disposition of the new Class B shares, the holding period for the outstanding
Class B shares is "tacked" to the holding period of the new Class B shares. For
example, an investor may exchange Class B shares of a Fund for those of Merrill
Lynch Global Resources Trust (formerly known as Merrill Lynch Natural Resources
Trust) after having held the Fund's Class B shares for two and a half years.
The 2% sales charge that generally would apply to a redemption would not apply
to the exchange. Three years later the investor may decide to redeem the Class
B shares of Merrill Lynch Global Resources Trust and receive cash. There will
be no CDSC due on this redemption, since by "tacking" the two and a half year
holding period of the Fund's Class B shares to the three year holding period
for the Merrill Lynch Global
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<PAGE>
Resources Trust Class B shares, the investor will be deemed to have held the
new Class B shares for more than five years.
Shareholders also may exchange Class A shares and Class B shares from any of
the Funds into shares of the Class A money market funds and Class B money
market funds, respectively, but the period of time that Class B shares are held
in a Class B money market fund will not count towards satisfaction of the
holding period requirement for purposes of reducing the CDSC. However, shares
of a Class B money market fund which were acquired as a result of an exchange
for Class B shares of a Fund may, in turn, be exchanged back into Class B
shares of any Fund offering such shares, in which event the holding period for
Class B shares of the Fund will be aggregated with previous holding periods for
purposes of reducing the CDSC. Thus, for example, an investor may exchange
Class B shares of a Fund for shares of Merrill Lynch Institutional Fund after
having held the Fund's Class B shares for two and a half years and three years
later decide to redeem the shares of Merrill Lynch Institutional Fund for cash.
At the time of this redemption, the 2% CDSC that would have been due had the
Class B shares of the Fund been redeemed for cash rather than exchanged for
shares of Merrill Lynch Institutional Fund will be payable. If, instead of such
redemption the shareholder exchanged such shares for Class B shares of a fund
which the shareholder continues to hold for an additional two and a half years,
any subsequent redemption will not incur a CDSC.
Merrill Lynch Mutual Fund Adviser Program. Class A shareholders of the Funds
that participate in the Merrill Lynch Mutual Fund Adviser Program may exchange
Class A shares of a Fund for Class A shares of the funds listed below at net
asset value. Once the initial allocation of assets is made under the program,
any subsequent exchange under the program of Class A shares of a fund for Class
A shares of a Fund will be made on the basis of the relative net asset values
of the shares being exchanged with no additional charges for any difference
between the sales charge previously paid on Fund shares exchanged and the sales
charge payable on fund shares acquired in the exchange.
Set forth below is a description of the other funds into which exchanges can
be made:
Merrill Lynch Adjustable
Rate Securities Fund,
Inc. ..................... High current income consistent with a policy of
limiting the degree of fluctuation in net asset
value by investing primarily in a portfolio of
adjustable rate securities, consisting
principally of mortgage-backed and asset-backed
securities.
Merrill Lynch Americas
Income Fund, Inc. ........
A high level of current income, consistent with
prudent investment risk, by investing primarily
in debt securities denominated in a currency of
a country located in the Western Hemisphere
(i.e., North and South America and the
surrounding waters).
Merrill Lynch Arizona
Municipal Bond Fund.......
A portfolio of Merrill Lynch Multi-State
Municipal Series Trust, a series fund, whose
objective is to provide investors with as high a
level of income exempt from Federal and Arizona
income taxes as is consistent with prudent
investment management.
Merrill Lynch Balanced
Fund for Investment and
Retirement................
As high a level of total investment return as is
consistent with reasonable risk by investing in
common stock and other types of securities,
including fixed-income securities and
convertible securities.
Merrill Lynch Basic Value
Fund, Inc. ...............
Capital appreciation and, secondarily, income
through investment in securities, primarily
equities, that are undervalued and therefore
represent basic investment value.
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<PAGE>
Merrill Lynch California
Municipal Bond Fund.......
A portfolio of Merrill Lynch California Municipal
Series Trust, a series fund, whose objective is
to provide investors with as high a level of
income exempt from Federal and California income
taxes as is consistent with prudent investment
management.
Merrill Lynch California
Insured Municipal Bond
Fund......................
A portfolio of Merrill Lynch California Municipal
Series Trust, a series fund, whose objective is
to provide shareholders with as high a level of
income exempt from Federal and California income
taxes as is consistent with prudent investment
management through investment in a portfolio
primarily of insured California Municipal Bonds.
Merrill Lynch Capital
Fund, Inc. ...............
The highest total investment return consistent
with prudent risk through a fully managed
investment policy utilizing equity, debt and
convertible securities.
Merrill Lynch Colorado
Municipal Bond Fund.......
A portfolio of Merrill Lynch Multi-State
Municipal Series, a series fund, whose objective
is as high a level of income exempt from Federal
and Colorado income taxes as is consistent with
prudent investment management.
Merrill Lynch Corporate
Bond Fund, Inc. ..........
Current income from three separate diversified
portfolios of fixed-income securities.
Merrill Lynch Developing
Capital Markets Fund,
Inc. ..................... Long-term appreciation through investment in
securities, principally equities, of issuers in
countries having smaller capital markets.
Merrill Lynch Dragon Fund,
Inc. .....................
Capital appreciation primarily through investment
in equity and debt securities of issuers
domiciled in developing countries located in
Asia and the Pacific Basin, other than Japan,
Australia and New Zealand.
Merrill Lynch Eurofund..... Capital appreciation primarily through investment
in equity securities of corporations domiciled
in Europe.
Merrill Lynch Federal
Securities Trust..........
High current return through investments in U.S.
Government and Government agency securities,
including GNMA mortgage-backed certificates and
other mortgage-backed Government securities.
Merrill Lynch Florida
Municipal Bond Fund.......
A portfolio of Merrill Lynch Multi-State
Municipal Series Trust, a series fund, whose
objective is to provide investors with as high a
level of income exempt from Federal income taxes
as is consistent with prudent investment
management while seeking to offer shareholders
the opportunity to own securities exempt from
Florida intangible personal property taxes.
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<PAGE>
Merrill Lynch Fund for
Tomorrow, Inc. ...........
Long-term growth through investment in a
portfolio of good quality securities, primarily
common stock, potentially positioned to benefit
from demographic and cultural changes as they
affect consumer markets.
Merrill Lynch Fundamental
Growth Fund, Inc. .......
Long-term growth of capital through investment in
a diversified portfolio of equity securities
placing particular emphasis on companies that
have exhibited an above-average growth rate in
earnings.
Merrill Lynch Global
Allocation Fund, Inc......
High total return, consistent with prudent risk,
through a fully managed investment policy
utilizing United States and foreign equity, debt
and money market securities, the combination of
which will be varied from time to time both with
respect to the types of securities and markets
in response to changing market and economic
trends.
Merrill Lynch Global Bond
Fund for Investment and
Retirement................
High total investment return from investment in a
global portfolio of debt instruments denominated
in various currencies and multi-national
currency units.
Merrill Lynch Global
Convertible Fund, Inc.....
High total return from investment primarily in an
internationally diversified portfolio of
convertible debt securities, convertible
preferred stock and "synthetic" convertible
securities consisting of a combination of debt
securities or preferred stock and warrants or
options.
Merrill Lynch Global
Holdings (residents of
Arizona must meet
investor suitability
standards)................
The highest total investment return consistent
with prudent risk through worldwide investment
in an internationally diversified portfolio of
securities.
Merrill Lynch Global
Resources Trust......
Long-term growth and protection of capital from
investment in securities of domestic and foreign
companies that possess substantial natural re-
source assets.
Merrill Lynch Global
Utility Fund, Inc. .......
Capital appreciation and current income through
investment of at least 65% of its total assets
in equity and debt securities issued by domestic
and foreign companies which are primarily en-
gaged in the ownership or operation of facili-
ties used to generate, transmit or distribute
electricity, telecommunications, gas or water.
Merrill Lynch Government
Fund......................
A portfolio of Merrill Lynch Funds for Institu-
tions Series, a series fund, whose objective is
to provide current income consistent with li-
quidity and security of principal from invest-
ment in securities issued or guaranteed by the
U.S. Government, its agencies and instrumentali-
ties and in repurchase agreements secured by
such obligations.
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<PAGE>
Merrill Lynch Growth Fund
for Investment and
Retirement................
Growth of capital and, secondarily, income from
investment in a diversified portfolio of equity
securities placing principal emphasis on those
securities which management of the fund believes
to be undervalued.
Merrill Lynch Healthcare
Fund, Inc. (residents of
Wisconsin must meet
investor suitability
standards)................
Capital appreciation through worldwide investment
in equity securities of companies that derive or
are expected to derive a substantial portion of
their sales from products and services in
healthcare.
Merrill Lynch
Institutional Fund........
A portfolio of Merrill Lynch Funds for
Institutions Series, a series fund, whose
objective is to provide maximum current income
consistent with liquidity and the maintenance of
a high quality portfolio of money market
securities.
Merrill Lynch
Institutional Tax-Exempt
Fund......................
A portfolio of Merrill Lynch Funds For
Institutions Series, a series fund, whose
objective is to provide current income exempt
from Federal income taxes, preservation of
capital and liquidity available from investing
in a diversified portfolio of short-term, high
quality municipal bonds.
Merrill Lynch
International Equity
Fund...................... Capital appreciation and, secondarily, income by
investing in a diversified portfolio of equity
securities of issuers located in countries other
than the United States.
Merrill Lynch Latin
America Fund, Inc.........
Capital appreciation by investing primarily in
Latin American equity and debt securities.
Merrill Lynch Maryland
Municipal Bond Fund.......
A portfolio of Merrill Lynch Multi-State Munici-
pal Series Trust, a series fund, whose objective
is to provide investors with as high a level of
income exempt from Federal and Maryland income
taxes as is consistent with prudent investment
management.
Merrill Lynch
Massachusetts Municipal
Bond Fund.................
A portfolio of Merrill Lynch Multi-State Munici-
pal Series Trust, a series fund, whose objective
is to provide investors with as high a level of
income exempt from Federal and Massachusetts in-
come taxes as is consistent with prudent invest-
ment management.
Merrill Lynch Michigan
Municipal Bond Fund.......
A portfolio of Merrill Lynch Multi-State
Municipal Series Trust, a series fund, whose
objective is to provide investors with as high a
level of income exempt from Federal and Michigan
income taxes as is consistent with prudent
investment management.
Merrill Lynch Minnesota
Municipal Bond Fund.......
A portfolio of Merrill Lynch Multi-State Munici-
pal Series Trust, a series fund, whose objective
is to provide investors with as high a level of
income exempt from Federal and Minnesota income
taxes as is consistent with prudent investment
management.
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<PAGE>
Merrill Lynch Municipal
Bond Fund, Inc. ..........
Tax-exempt income from three separate diversified
portfolios of municipal bonds.
Merrill Lynch Municipal
Intermediate Term Fund....
Currently the only portfolio of Merrill Lynch Mu-
nicipal Series Trust, a series fund, whose ob-
jective is to provide investors with as high a
level of income exempt from Federal income taxes
as possible by investing in investment grade ob-
ligations with a dollar weighted average matu-
rity of five to twelve years.
Merrill Lynch New Jersey
Municipal Bond Fund.......
A portfolio of Merrill Lynch Multi-State Munici-
pal Series Trust, a series fund, whose objective
is to provide investors with as high a level of
income exempt from Federal and New Jersey income
taxes as is consistent with prudent investment
management.
Merrill Lynch New York
Municipal Bond Fund.......
A portfolio of Merrill Lynch Multi-State Munici-
pal Series Trust, a series fund, whose objective
is to provide investors with as high a level of
income exempt from Federal, New York State and
New York City income taxes as is consistent with
prudent investment management.
Merrill Lynch North Caro-
lina Municipal Bond Fund..
A portfolio of Merrill Lynch Multi-State Munici-
pal Series Trust, a series fund, whose objective
is to provide investors with as high a level of
income exempt from Federal and North Carolina
income taxes as is consistent with prudent in-
vestment management.
Merrill Lynch Ohio Munici-
pal Bond Fund.............
A portfolio of Merrill Lynch Multi-State Munici-
pal Series Trust, a series fund, whose objective
is to provide investors with as high a level of
income exempt from Federal and Ohio income taxes
as is consistent with prudent investment manage-
ment.
Merrill Lynch Oregon
Municipal Bond Fund.......
A portfolio of Merrill Lynch Multi-State Munici-
pal Series Trust, a series fund, whose objective
is to provide investors with as high a level of
income exempt from Federal and Oregon income
taxes as is consistent with prudent investment
management.
Merrill Lynch Pacific
Fund, Inc. ...............
Capital appreciation by investing in equity secu-
rities of corporations domiciled in Far Eastern
and Western Pacific countries, including Japan,
Australia, Hong Kong and Singapore.
Merrill Lynch Pennsylvania
Municipal Bond Fund.......
A portfolio of Merrill Lynch Multi-State Munici-
pal Series Trust, a series fund, whose objective
is to provide investors with as high a level of
income exempt from Federal and Pennsylvania in-
come taxes as is consistent with prudent invest-
ment management.
Merrill Lynch Phoenix
Fund, Inc. ...............
Long-term growth of capital by investing in
equity and fixed-income securities, including
tax-exempt securities, of issuers in weak
financial condition or experiencing poor
operating results believed to be undervalued
relative to the current or prospective condition
of such issuer.
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<PAGE>
Merrill Lynch Ready Assets
Trust.....................
Preservation of capital, liquidity and the high-
est possible current income consistent with the
foregoing objectives from the short-term money
market securities in which the Trust invests.
Merrill Lynch Retirement
Reserves Money Fund
(available only if the
exchange occurs within
certain retirement
plans)....................
Currently the only portfolio of Merrill Lynch
Retirement Series Trust, a series fund, whose
objectives are current income, preservation of
capital and liquidity available from investing
in a diversified portfolio of short-term money
market securities.
Merrill Lynch Short-Term
Global Income Fund,
Inc. ..................... As high a level of current income as is
consistent with prudent investment management
from a global portfolio of high quality debt
securities denominated in various currencies and
multi-national currency units and having
remaining maturities not exceeding three years.
Merrill Lynch Special
Value Fund, Inc. .........
Long-term growth of capital from investments in
securities, primarily common stock, of
relatively small companies believed to have
special investment value and emerging growth
companies regardless of size.
Merrill Lynch Strategic
Dividend Fund.............
Long-term total return from investment in divi-
dend paying common stocks which yield more than
Standard & Poor's 500 Composite Stock Price In-
dex.
Merrill Lynch Technology
Fund, Inc. ...............
Capital appreciation through worldwide investment
in equity securities of companies that derive or
are expected to derive a substantial portion of
their sales from products and services in
technology.
Merrill Lynch Texas
Municipal Bond Fund.......
A portfolio of Merrill Lynch Multi-State
Municipal Series Trust, a series fund, whose
objective is to provide investors with as high a
level of income exempt from Federal income taxes
as is consistent with prudent investment
management by investing primarily in a portfolio
of long-term, investment grade obligations
issued by the State of Texas, its political
subdivisions, agencies and instrumentalities.
Merrill Lynch Treasury
Fund......................
A portfolio of Merrill Lynch Funds for
Institutions Series, a series fund, whose
objective is to provide current income
consistent with liquidity and security of
principal from investment in direct obligations
of the U.S. Treasury and up to 10% of its total
assets in repurchase agreements secured by such
obligations.
Merrill Lynch U.S.A.
Government Reserves.......
Preservation of capital, current income and
liquidity available from investing in direct
obligations of the U.S. Government and
repurchase agreements relating to such
securities.
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<PAGE>
Merrill Lynch U.S.
Treasury Money Fund.......
Preservation of capital, liquidity and current
income through investment exclusively in a
diversified portfolio of short-term marketable
securities which are direct obligations of the
U.S. Treasury.
Merrill Lynch Utility
Income Fund, Inc. ........
High current income through investment in equity
and debt securities issued by companies which
are primarily engaged in the ownership or
operation of facilities used to generate,
transmit or distribute electricity,
telecommunications, gas or water.
Merrill Lynch World Income
Fund, Inc. ...............
High current income by investing in a global
portfolio of fixed-income securities denominated
in various currencies, including multi-national
currencies.
Before effecting an exchange, shareholders of a Fund should obtain a
currently effective prospectus of the fund into which the exchange is to be
made. Exercise of the exchange privilege is treated as a sale for Federal
income tax purposes and, depending on the circumstances, a short- or long-term
capital gain or loss may be realized. In addition, a shareholder exchanging
shares of any of the funds may be subject to a backup withholding tax unless
such shareholder certifies under penalty of perjury that the taxpayer
identification number on file with any such fund is correct and that such
investor is not otherwise subject to backup withholding. See "Distributions and
Taxes" below.
To exercise the exchange privilege, a shareholder should contact his or her
Merrill Lynch financial consultant, who will advise the relevant Fund of the
exchange, or, if the exchange does not involve a money market fund, the
shareholder may write to the Transfer Agent requesting that the exchange be
effected. Such letter must be signed exactly as the account is registered with
signatures guaranteed by an "eligible guarantor institution" as such term is
defined in Rule 17Ad-15 under the Securities Exchange Act of 1934, as amended,
the existence and validity of which may be verified by the Transfer Agent
through the use of industry publications. Shareholders of the Funds, and
shareholders of the other funds described above with shares for which
certificates have not been issued, may exercise the exchange privilege by wire
through their securities dealers. Each Fund reserves the right to require a
properly completed Exchange Application. This exchange privilege may be
modified or terminated at any time in accordance with the rules of the
Commission. Each Fund reserves the right to limit the number of times an
investor may exercise the exchange privilege. Certain funds may suspend the
continuous offering of their shares at any time and thereafter may resume such
offering from time to time. The exchange privilege is available only to U.S.
shareholders in states where the exchange legally may be made.
DISTRIBUTIONS AND TAXES
FEDERAL
The Trust intends to continue to qualify each Fund for the special tax
treatment afforded regulated investment companies ("RICs") under the Internal
Revenue Code of 1986, as amended (the "Code"). If a Fund so qualifies, in any
taxable year in which it distributes at least 90% of its taxable net income and
90% of its tax-exempt net income (see below), the Fund (but not its
shareholders) will not be subject to Federal income tax to the extent that it
distributes its net investment income and net realized capital gains. The Trust
intends to cause each Fund to distribute substantially all of such income.
As discussed in the Prospectus for the Trust, the Trust has established a
number of series, each referred to herein as a "Fund". Each Fund is treated as
a separate corporation for Federal income tax purposes 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.
31
<PAGE>
The Code requires a RIC to pay a nondeductible 4% excise tax to the extent
the RIC does not distribute, during each calendar year, 98% of its ordinary
income, determined on a calendar year basis, and 98% of its capital gains,
determined, in general, on an October 31 year-end, plus certain undistributed
amounts from previous years. The required distributions, however, are based
only on the taxable income of a RIC. The excise tax, therefore, generally will
not apply to the tax-exempt income of RICs, such as the Funds, that pay exempt-
interest dividends. While each Fund intends to distribute its income and
capital gains in the manner necessary to avoid imposition of the 4% excise tax,
there can be no assurance that sufficient amounts of the Fund's taxable income
and capital gains will be distributed to avoid entirely the imposition of the
tax. In such event, the Fund will be liable for the tax only on the amount by
which it does not meet the foregoing distribution requirements.
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 the Fund's taxable year, at least 50% of the value of its
total assets consists of obligations exempt from Federal income tax ("tax-
exempt obligations") under Section 103(a) of the Code (relating generally to
obligations of a state or local governmental unit), a Fund shall be qualified
to pay exempt-interest dividends to its shareholders. Exempt-interest dividends
are dividends or any part thereof paid by a Fund which are attributable to
interest on tax-exempt obligations and designated by the Trust as exempt-
interest dividends in a written notice mailed to each Fund's shareholders
within 60 days after the close of such 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, subject to the
possible application of the Federal alternative minimum tax as described below.
Exempt-interest dividends are included, however, in determining the portion, if
any, of a person's social security and railroad retirement benefits subject to
Federal income taxes. 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. The Trust will inform shareholders annually regarding the portion of each
Fund's distributions which constitutes exempt-interest dividends.
To the extent that a Fund's distributions are derived from interest on its
taxable investments or from an excess of net short-term capital gains over net
long-term capital losses ("ordinary income dividends"), such distributions are
considered ordinary income for Federal income tax purposes. Such distributions
are not eligible for the dividends received deduction for corporations.
Distributions, if any, of net long-term capital gains from the sale of
securities or from certain transactions in futures or options ("capital gain
dividends") are taxable at long-term capital gains rates for Federal income tax
purposes, regardless of the length of time the shareholder has owned Fund
shares. Under the Revenue Reconciliation Act of 1993, all or a portion of 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 the Fund's earnings and profits will
first reduce the adjusted tax basis of a holder's shares and, after such
adjusted tax basis is reduced to zero, will constitute capital gains to such
holder (assuming the shares are held as a capital asset). Any loss upon the
sale or exchange of shares held for six months or less will be treated as long-
term capital loss to the extent of any capital gain dividends received by the
shareholder. In addition, such loss will be disallowed to the extent of any
exempt-interest dividends received by the shareholder. If 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.
32
<PAGE>
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. Each Fund will purchase
such "private activity bonds" and the Trust will report to shareholders within
60 days after such Fund's taxable year-end the portion of the Fund's dividends
declared during the year which constitutes an item of tax preference for
alternative minimum tax purposes. The Code further provides that corporations
are subject to an alternative minimum tax based, in part, on certain
differences between taxable income as adjusted for other tax preferences and
the corporation's "adjusted current earnings", which more closely reflect a
corporation's economic income. Because exempt-interest dividends paid by a Fund
will be included in adjusted current earnings, a corporate shareholder may be
required to pay alternative minimum tax on exempt-interest dividends paid by a
Fund.
The Revenue Reconciliation Act of 1993 has added new marginal tax brackets of
36% and 39.6% for individuals and has created a graduated structure of 26% and
28% for the alternative minimum tax applicable to individual taxpayers. These
rate increases may affect an individual investor's after-tax return from an
investment in one of the Funds listed in the Prospectus as compared with such
investor's return from taxable investments.
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.
Ordinary income dividends paid by a Fund to shareholders who are nonresident
aliens or foreign entities will be subject to a 30% United States withholding
tax under existing provisions of the Code applicable to foreign individuals and
entities unless a reduced rate of withholding or a withholding exemption is
provided under applicable treaty law. Nonresident shareholders are urged to
consult their own tax advisers concerning the applicability of the United
States withholding tax.
The Code provides that every person required to file a tax return must
include for information purposes on such return the amount of exempt-interest
dividends received from all sources (including the Funds) during the taxable
year.
ENVIRONMENTAL TAX
The Code 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 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 tax preferences for corporate
shareholders under the Code (as described above) may subject corporate
shareholders of such Funds to the Environmental Tax.
33
<PAGE>
TAX TREATMENT OF FINANCIAL FUTURES CONTRACTS AND OPTIONS THEREON
Each Fund may purchase or sell municipal bond index futures contracts and
interest rate futures contracts on U.S. Government securities ("financial
futures contracts"). Each Fund also may purchase and write call and put options
on such financial futures contracts. In general, unless an election is
available to a Fund or an exception applies, options and financial futures
contracts that are "Section 1256 contracts" will be "marked-to-market" for
Federal income tax purposes at the end of each taxable year, i.e., each such
option or financial futures contract will be treated as sold for its fair
market value on the last day of the taxable year, and any gain or loss
attributable to such contracts will be 60% long-term and 40% short-term capital
gain or loss. Application of these rules to Section 1256 contracts held by a
Fund may alter the timing and character of distributions to shareholders.
Code Section 1092, which applies to certain "straddles", may affect the
taxation of a Fund's transactions in options and financial futures contracts.
Under Section 1092, a Fund may be required to postpone recognition for tax
purposes of losses incurred in certain closing transactions in options and
financial futures contracts.
One of the requirements for qualification as a RIC is that less than 30% of a
Fund's gross income may be derived from gains from the sale or other
disposition of securities held for less than three months. Accordingly, a Fund
may be restricted in effecting closing transactions within three months after
entering into an option or financial futures contract.
----------------
The foregoing is a general and abbreviated summary of the applicable
provisions of the Code 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, foreign, state or local taxes.
STATE
Arizona. Exempt-interest dividends from the Arizona Fund will not be subject
to Arizona income tax for shareholders who are Arizona residents to the extent
that the dividends are attributable to interest earned on Arizona State
Municipal Bonds. To the extent that the Arizona Fund's distributions are
derived from interest on its taxable investments or from an excess of net
short-term capital gains over net long-term capital losses, such distributions
are considered ordinary income for Arizona income tax purposes. Such
distributions are not eligible for the dividends received deduction for
corporations. Distributions, if any, of net long-term capital gains from the
sale of securities or from certain transactions in futures or options are
taxable as ordinary income for Arizona purposes. The Arizona Fund (but not its
shareholders) may be subject to the Arizona minimum corporate income tax of
$50.
California. Exempt-interest dividends from the California Fund will not be
subject to California personal income taxes for California resident individuals
to the extent attributable to interest from California State Municipal Bonds,
and such exempt-interest dividends will also be excludable from the income base
used in calculating the California corporate income tax to the extent
attributable to interest from California State Municipal Bonds. However,
exempt-interest dividends paid to a corporate shareholder subject to California
state corporate franchise tax will be taxable as ordinary income. Distributions
of long-term capital gains will be treated as capital gains which are taxed at
ordinary income rates for California state income tax purposes.
Florida. The Florida Fund has received a ruling from the Florida Department
of Revenue that if on the last business day of any calendar year the Florida
Fund's assets consist solely of assets exempt from
34
<PAGE>
Florida intangible personal property tax, shares of the Florida Fund will be
exempt from Florida intangible personal property tax in the following year. The
Florida Department of Revenue has the authority to revoke or modify a
previously issued ruling; however, if a ruling is revoked or modified, the
revocation or modification is prospective only. Thus, if the ruling is not
revoked or modified and if 100% of the Florida Fund's assets on the last
business day of each calendar year consists of assets exempt from Florida
intangible personal property tax, shares of the Florida Fund owned by Florida
residents will be exempt from Florida intangible personal property tax. Assets
exempt from Florida intangible personal property tax include obligations of the
State of Florida and its political subdivisions; obligations of the United
States Government or its agencies; and cash. If shares of the Florida Fund are
subject to Florida intangible personal property tax because less than 100% of
the Florida Fund's assets on the last business day of the calendar year
consists of assets exempt from Florida intangible personal property tax, only
the portion of the net asset value of the Florida Fund that is attributable to
obligations of the U.S. Government will be exempt from taxation. The Florida
Fund anticipates that on the last business day of each calendar year the
Florida Fund's assets will consist solely of assets exempt from Florida
intangible personal property tax.
Dividends paid by the Florida Fund to individuals who are Florida residents
are not subject to personal income taxation by Florida, because Florida does
not impose a personal income tax. Distributions of investment income and
capital gains by the Florida Fund will be subject to Florida corporate income
tax, state taxes in states other than Florida and local taxes in cities other
than those in Florida. Shareholders subject to taxation by states other than
Florida may realize a lower after-tax rate of return than Florida shareholders
since the dividends distributed by the Florida Fund may not be exempt, to any
significant degree, from income taxation by such other states.
If the Florida Fund does not have a taxable nexus to Florida, such as through
the location within the state of the Trust's or the Florida Fund's activities
or those of the Manager, under present Florida law, the Florida Fund is not
subject to Florida corporate income taxation. Additionally, if the Florida
Fund's assets do not have a taxable situs in Florida as of January 1 of each
calendar year, the Florida Fund will not be subject to Florida intangible
personal property tax. If the Florida Fund has a taxable nexus to Florida or
the Florida Fund's assets have a taxable situs in Florida, the Florida Fund
will be subject to Florida taxation.
Massachusetts. Under existing Massachusetts law, as long as the Massachusetts
Fund qualifies as a separate "regulated investment company" under the Code, (i)
the Massachusetts Fund will not be liable for any personal income or any
corporate excise tax in the Commonwealth of Massachusetts and (ii) shareholders
of the Massachusetts Fund who are subject to Massachusetts personal income
taxation will not be required to include in their Massachusetts taxable income
(a) that portion of their "exempt-interest dividends" (as defined in Section
852(b)(5) of the Code) from the Massachusetts Fund which the Massachusetts Fund
clearly identifies as directly attributable to interest received by the
Massachusetts Fund on Massachusetts State Municipal Bonds or (b) that portion
of their dividends which is identified as attributable to interest received by
the Massachusetts Fund on obligations of the United States or its agencies or
possessions that are exempt from state taxation.
Any capital gains distributed by the Massachusetts Fund (except for capital
gains on certain Massachusetts State Municipal Bonds which are specifically
exempt by statute), or gains realized by the shareholder on a redemption or
sale of shares of the Massachusetts Fund, will be subject to Massachusetts
personal income taxation.
In the case of any corporate shareholder otherwise subject to the
Massachusetts corporate excise tax, distributions received from the
Massachusetts Fund, and any gain on the sale or other disposition of
Massachusetts Fund Shares, will be includable in the corporation's
Massachusetts gross income and taxed accordingly. Similarly, the value of
shares held in the Massachusetts Fund will be taken into account in calculating
the property component of the Massachusetts corporate excise tax.
35
<PAGE>
Michigan. Shareholders who are subject to the Michigan income tax or single
business tax will not be subject to the Michigan income tax or single business
tax on exempt-interest dividends from the Michigan Fund to the extent they are
attributable to interest from Michigan State Municipal Bonds. To the extent the
distributions from the Michigan Fund are attributable to sources other than
Michigan State Municipal Bonds, 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.
In 1986, the Michigan Department of Treasury issued a Bulletin stating that
holders of interests in regulated investment companies who are subject to the
Michigan intangibles tax will be exempt from the tax to the extent that the
company's investment portfolio consists of items such as Michigan State
Municipal Bonds. In addition, 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.
New Jersey. To the extent distributions from the New Jersey Fund are derived
from interest or gains on New Jersey State Municipal Bonds, such distributions
will be exempt from New Jersey personal income tax. In order to pass through
tax-exempt interest for New Jersey personal income tax purposes, the New Jersey
Fund, among other requirements, must have not less than 80% of the aggregate
principal amount of its investments invested in New Jersey State Municipal
Bonds at the close of each quarter of the tax year (the "80% Test"). For
purposes of calculating whether the 80% Test is satisfied, financial options,
futures, forward contracts and similar financial instruments relating to
interest-bearing obligations are excluded from the principal amount of the New
Jersey Fund's investments. The New Jersey Fund intends to comply with this
requirement so as to enable it to pass through tax-exempt interest. In the
event the New Jersey Fund does not so comply, distributions by the New Jersey
Fund will be taxable to shareholders for New Jersey personal income tax
purposes. Distributions from the New Jersey Fund derived from interest or gains
on New Jersey State Municipal Bonds and paid to a corporate shareholder will be
subject to the New Jersey corporation business (franchise) tax or, if
applicable, the New Jersey corporation income tax.
Under present New Jersey law, a RIC, such as the New Jersey Fund, pays a flat
tax of $250 per year. The New Jersey Fund might be subject to the New Jersey
corporation business (franchise) tax for any taxable year in which it does not
qualify as a RIC.
New York. The portion of the exempt-interest dividends equal to the
proportion which the New York Fund's interest on New York State Municipal Bonds
bears to all of the New York Fund's tax-exempt interest (whether or not
distributed) will be exempt from New York State and New York City personal
income taxes. To the extent the New York Fund's distributions are derived from
interest on taxable investments, from gain from the sale of investments or from
tax-exempt interest that is not attributable to New York State Municipal Bonds,
they will constitute taxable income for New York State and New York City
personal income tax purposes. Distributions from investment income and capital
gains of the New York Fund, including exempt-interest dividends paid to a
corporate shareholder, will be subject to New York State corporate franchise
and New York City corporation income tax.
Pennsylvania. To the extent distributions from the Pennsylvania Fund are
derived from interest on Pennsylvania State Municipal Bonds, such distributions
will also be exempt from the Pennsylvania personal income tax. In the case of
residents of the City of Philadelphia, distributions which are derived from
interest on Pennsylvania State Municipal Bonds will be exempt from the
Philadelphia School District investment income tax. Pennsylvania recently
enacted legislation which eliminated the necessity for certain restrictions on
the Pennsylvania Fund's ability to vary portfolio investments which had been
required in order for the Pennsylvania Fund to pass-through to investors the
tax-exempt nature of its income. However, that legislation also repealed the
Pennsylvania income tax exemption for gains from the sale of tax-exempt
obligations (including any exemption for distributions from the Pennsylvania
Fund to the extent they are derived from gain on the sale of Pennsylvania State
Municipal Bonds or other tax-exempt obligations).
36
<PAGE>
Shares of the Pennsylvania Fund will be exempt from Pennsylvania county
personal property taxes, the City of Pittsburgh personal property tax and the
School District of Pittsburgh personal property tax to the extent the
Pennsylvania Fund's portfolio securities consist of Pennsylvania State
Municipal Bonds on the annual assessment date.
At present it appears that 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 above discussion is a general and abbreviated summary of the relevant
state and local tax provisions presently in effect. Shareholders are urged to
consult their tax advisers regarding specific questions as to state or local
taxes.
PERFORMANCE DATA
From time to time each Fund may include its average annual total return and
other total return data, as well as yield and tax-equivalent yield, in
advertisements or information furnished to present or prospective shareholders.
From time to time, the Fund may include the Fund's Morningstar risk-adjusted
ratings in advertisements or supplemental sales literature. Total return and
yield and tax-equivalent yield figures are based on a Fund's historical
performance and are not intended to indicate future performance. Average annual
total return, yield and tax equivalent yield are determined separately for
Class A shares and Class B shares of each Fund in accordance with formulas
specified by the Commission.
Average annual total return quotations for the specified periods are computed
by finding the average annual compounded rates of return (based on net
investment income and any realized and unrealized capital gains or losses on
portfolio investments over such periods) that would equate the initial amount
invested to the redeemable value of such investment at the end of each period.
Average annual total return is computed assuming all dividends and
distributions are reinvested and taking into account all applicable recurring
and nonrecurring expenses, including the maximum sales charge in the case of
Class A shares of a Fund and the contingent deferred sales charge that would be
applicable to a complete redemption of the investment at the end of the
specified period in the case of Class B shares of that Fund.
The Funds also may quote annual, average annual and annualized total return
and aggregate total return performance data, both as a percentage and as a
dollar amount based on a hypothetical $1,000 investment, for various periods
other than those noted below. Such data will be computed as described above,
except that (1) as required by the periods of the quotations, actual annual,
annualized or aggregate data, rather than average annual data, may be quoted
and (2) the maximum applicable sales charges will not be included with respect
to annual or annualized rates of return calculations. Aside from the impact on
the performance data calculations of including or excluding the maximum
applicable sales charges, actual annual or annualized total return data
generally will be lower than average annual total return data since the average
rates of return reflect compounding of return; aggregate total return data
generally will be higher than average annual total return data since the
aggregate rates of return reflect compounding over a longer period of time.
37
<PAGE>
Set forth below is the total return, yield and tax equivalent yield
information (based on a Federal tax rate of 28%) for the Class A and Class B
shares of each of the Funds for the periods indicated. Investors' tax-
equivalent yields may differ from those stated below because of the application
of state and local income and intangibles taxes and Federal income tax rates
which are higher or lower than 28%.
<TABLE>
<CAPTION>
CLASS A SHARES CLASS B SHARES
----------------------------------- -----------------------------------
REDEEMABLE REDEEMABLE
EXPRESSED AS VALUE EXPRESSED AS VALUE
A PERCENTAGE OF A HYPOTHETICAL A PERCENTAGE OF A HYPOTHETICAL
BASED ON A $1,000 INVESTMENT BASED ON A $1,000 INVESTMENT
HYPOTHETICAL AT THE END OF HYPOTHETICAL AT THE END OF
$1,000 INVESTMENT THE PERIOD $1,000 INVESTMENT THE PERIOD
----------------- ----------------- ----------------- -----------------
<S> <C> <C> <C> <C>
ARIZONA FUND
- ------------
Average Annual Total
Return (including
maximum applicable
sales charges)*....... 2.20% $1,003.90 1.95% $1,003.50
Annual Total Return
(excluding maximum
applicable sales
charges)*............. 1.41% $1,014.10 1.35% $1,013.50
Aggregate Total Return
(including maximum
applicable sales
charges)*............. 0.39% $1,003.90 0.35% $1,003.50
Yield**................ 2.89% 2.57%
Tax Equivalent Yield**. 4.01% 3.57%
CALIFORNIA FUND
- ---------------
Average Annual Total
Return (including
maximum applicable
sales charges)*....... 3.78% $1,006.70 3.54% $1,006.30
Annual Total Return
(excluding maximum
applicable sales
charges)*............. 1.69% $1,016.90 1.63% $1,016.30
Aggregate Total Return
(including maximum
applicable sales
charges)*............. 0.67% $1,006.70 0.63% $1,006.30
Yield**................ 3.14% 3.50%
Tax Equivalent Yield**. 4.36% 4.86%
FLORIDA FUND
- ------------
Average Annual Total
Return (including
maximum applicable
sales charges)*....... 1.50% $1,002.70 1.24% $1,002.20
Annual Total Return
(excluding maximum
applicable sales
charges)*............. 1.28% $1,012.80 1.22% $1,012.20
Aggregate Total Return
(including maximum
applicable sales
charges)*............. 0.27% $1,002.70 0.22% $1,002.20
Yield**................ 3.32% 3.01%
Tax Equivalent Yield**. 4.61% 4.18%
MASSACHUSETTS FUND
- ------------------
Average Annual Total
Return (including
maximum applicable
sales charges)*....... 0.65% $1,001.20 0.39% $1,000.70
Annual Total Return
(excluding maximum
applicable sales
charges)*............. 1.13% $1,011.30 1.07% $1,010.70
Aggregate Total Return
(including maximum
applicable sales
charges)*............. 0.12% $1,001.20 0.07% $1,000.70
Yield**................ 3.66% 3.35%
Tax Equivalent Yield**. 5.08% 4.65%
</TABLE>
* November 26, 1993 (commencement of operations) to January 31, 1994
** 30 days ended on February 28, 1994
38
<PAGE>
<TABLE>
<CAPTION>
CLASS A SHARES CLASS B SHARES
----------------------------------- -----------------------------------
REDEEMABLE REDEEMABLE
EXPRESSED AS VALUE EXPRESSED AS VALUE
A PERCENTAGE OF A HYPOTHETICAL A PERCENTAGE OF A HYPOTHETICAL
BASED ON A $1,000 INVESTMENT BASED ON A $1,000 INVESTMENT
HYPOTHETICAL AT THE END OF HYPOTHETICAL AT THE END OF
$1,000 INVESTMENT THE PERIOD $1,000 INVESTMENT THE PERIOD
----------------- ----------------- ----------------- -----------------
<S> <C> <C> <C> <C>
MICHIGAN FUND
- -------------
Average Annual Total
Return (including
maximum applicable
sales charges)*....... 2.31% $1,004.10 2.06% $1,003.70
Annual Total Return
(excluding maximum
applicable sales
charges)*............. 1.43% $1,014.30 1.37% $1,013.70
Aggregate Total Return
(including maximum
applicable sales
charges)*............. 0.41% $1,004.10 0.37% $1,003.70
Yield**................ 3.30% 2.97%
Tax Equivalent Yield**. 4.58% 4.13%
NEW JERSEY FUND
- ---------------
Average Annual Total
Return (including
maximum applicable
sales charges)*....... 0.88% $1,001.60 1.18% $1,002.10
Annual Total Return
(excluding maximum
applicable sales
charges)*............. 1.17% $1,011.70 1.21% $1,012.10
Aggregate Total Return
(including maximum
applicable sales
charges)*............. 0.16% $1,001.60 0.21% $1,002.10
Yield**................ 3.17% 2.87%
Tax Equivalent Yield**. 4.40% 3.99%
NEW YORK FUND
- -------------
Average Annual Total
Return (including
maximum applicable
sales charges)*....... 3.50% $1,006.20 3.26% $1,005.80
Annual Total Return
(excluding maximum
applicable sales
charges)*............. 1.64% $1,016.40 1.58% $1,015.80
Aggregate Total Return
(including maximum
applicable sales
charges)*............. 0.62% $1,006.20 0.58% $1,005.80
Yield**................ 3.22% 2.90%
Tax Equivalent Yield**. 4.47% 4.03%
PENNSYLVANIA FUND
- -----------------
Average Annual Total
Return (including
maximum applicable
sales charges)*....... 1.38% $1,002.50 1.12% $1,002.00
Annual Total Return
(excluding maximum
applicable sales
charges)*............. 1.26% $1,012.60 1.20% $1,012.00
Aggregate Total Return
(including maximum
applicable sales
charges)*............. 0.25% $1,002.50 0.20% $1,002.00
Yield**................ 2.94% 2.62%
Tax Equivalent Yield**. 4.08% 3.64%
</TABLE>
* November 26, 1993 (commencement of operations) to January 31, 1994
** 30 days ended on February 28, 1994
39
<PAGE>
In order to reflect the reduced sales charges in the case of Class A shares
or the waiver of the CDSC in the case of Class B shares applicable to certain
investors, as described under "Purchase of Shares" and "Redemption of Shares",
respectively, the total return data quoted by a Fund in advertisements directed
to such investors may take into account the reduced, and not the maximum, sales
charge or may take into account the CDSC and therefore may reflect greater
total return since, due to the reduced sales charge or the waiver of sales
charges, a lower amount of expenses is deducted.
GENERAL INFORMATION
DESCRIPTION OF SHARES
The Declaration of Trust, dated February 14, 1991, of the Trust, as amended
(the "Declaration"), provides that the Trust shall be comprised of separate
Series, each of which will consist of a separate portfolio which will issue
separate shares. The Trust is presently comprised of the Arizona Fund, the
California Fund, the Florida Fund, the Massachusetts Fund, the Michigan Fund,
the New Jersey Fund, the New York Fund and the Pennsylvania Fund. The Trustees
are authorized to create an unlimited number of Series and, with respect to
each Series, to issue an unlimited number of full and fractional shares of
beneficial interest, par value $.10 per share, of different classes and to
divide or combine the shares into a greater or lesser number of shares without
thereby changing the proportionate beneficial interests in the Series.
Shareholder approval is not necessary for the authorization of additional
Series or classes of a Series of the Trust. At the date of this Statement of
Additional Information, the shares of each Fund are divided into Class A shares
and Class B shares. Both Class A shares and Class B shares represent an
interest in the same assets of the relevant Fund and have identical voting,
dividend, liquidation and other rights and the same terms and conditions,
except that expenses related to the account maintenance and distribution of the
Class B shares are borne solely by such Class B shares and the Class B shares
have exclusive voting rights with respect to matters relating to such
expenditures. See "Purchase of Shares". The Trust has received an order from
the Commission permitting the issuance and sale of two classes of shares of
beneficial interest and the issuance and sale of any additional classes will
require an additional order from the Commission. There is no assurance that
such an additional order will be granted.
All shares of the Trust have equal voting rights, except that only shares of
the respective Series are entitled to vote on matters concerning only that
Series and, as noted above, Class B shares of a Series will have exclusive
voting rights with respect to matters relating to the account maintenance and
distribution expenses being borne solely by such class. Each issued and
outstanding share is entitled to one vote and to participate equally in
dividends and distributions declared by a Series and in the net assets of such
Series upon liquidation or dissolution remaining after satisfaction of
outstanding liabilities, except that, as noted above, expenses related to the
account maintenance and distribution of the Class B shares of a Series will be
borne solely by such class. There normally will be no meeting of shareholders
for the purposes of electing Trustees unless and until such time as less than a
majority of the Trustees holding office have been elected by shareholders, at
which time the Trustees then in office will call a shareholders' meeting for
the election of Trustees. Shareholders, in accordance with the terms of the
Declaration, may cause a meeting of shareholders to be held for the purpose of
voting on the removal of Trustees. Also, the Trust will be required to call a
special meeting of shareholders in accordance with the requirements of the 1940
Act to seek approval of new management and advisory arrangements, of a material
increase in distribution fees or of a change in the fundamental policies,
objectives or restrictions of a Series.
The obligations and liabilities of a particular Series are restricted to the
assets of that Series and do not extend to the assets of the Trust generally.
The shares of each Series, when issued, will be fully paid and nonassessable,
have no preference, preemptive, conversion, exchange or similar rights, and
will be freely transferable. Holders of shares of any Series are entitled to
redeem their shares as set forth elsewhere herein and in the Prospectus. Shares
do not have cumulative voting rights and the holders of more than 50% of the
shares of the Trust voting for the election of Trustees can elect all of the
Trustees if they choose to do so and in such event the holders of the remaining
shares would not be able to elect any Trustees. No amendments may be made to
the Declaration without the affirmative vote of a majority of the outstanding
shares of the Trust.
40
<PAGE>
COMPUTATION OF OFFERING PRICE PER SHARE
An illustration of the computation of the offering price for Class A shares
and Class B shares of each Fund based on the Funds' net assets on January 31,
1994 and their shares outstanding on that date is as follows:
TABLE
<TABLE>
<CAPTION>
CLASS A CLASS B
----------- -----------
<S> <C> <C>
ARIZONA FUND
Net Assets............................................ $ 1,867,331 $ 4,532,343
Number of Shares Outstanding.......................... 185,294 449,731
=========== ===========
Net Asset Value Per Share (net assets divided by num-
ber of shares outstanding)........................... $ 10.08 $ 10.08
Sales Charge (for Class A shares: 1.00% of offering
price (1.01% of net asset value per share))*......... $ 0.10 $ **
----------- -----------
Offering Price........................................ $ 10.18 $ 10.08
=========== ===========
CALIFORNIA FUND
Net Assets............................................ $ 3,914,015 $11,042,161
Number of Shares Outstanding.......................... 387,072 1,091,984
=========== ===========
Net Asset Value Per Share (net assets divided by num-
ber of shares outstanding)........................... $ 10.11 $ 10.11
Sales Charge (for Class A shares: 1.00% of offering
price (1.01% of net asset value per share))*......... $ 0.10 $ **
----------- -----------
Offering Price........................................ $ 10.21 $ 10.11
=========== ===========
FLORIDA FUND
Net Assets............................................ $20,565,395 $17,748,664
Number of Shares Outstanding.......................... 2,041,870 1,762,106
=========== ===========
Net Asset Value Per Share (net assets divided by num-
ber of shares outstanding)........................... $ 10.07 $ 10.07
Sales Charge (for Class A shares: 1.00% of offering
price (1.01% of net asset value per share))*......... $ 0.10 $ **
----------- -----------
Offering Price........................................ $ 10.17 $ 10.07
=========== ===========
MASSACHUSETTS FUND
Net Assets............................................ $ 5,504,174 $ 7,679,349
Number of Shares Outstanding.......................... 547,931 764,425
=========== ===========
Net Asset Value Per Share (net assets divided by num-
ber of shares outstanding)........................... $ 10.05 $ 10.05
Sales Charge (for Class A shares: 1.00% of offering
price (1.01% of net asset value per share))*......... $ 0.10 $ **
----------- -----------
Offering Price........................................ $ 10.15 $ 10.05
=========== ===========
MICHIGAN FUND
Net Assets............................................ $ 3,182,283 $ 2,512,412
Number of Shares Outstanding.......................... 315,626 249,188
=========== ===========
Net Asset Value Per Share (net assets divided by num-
ber of shares outstanding)........................... $ 10.08 $ 10.08
Sales Charge (for Class A shares: 1.00% of offering
price (1.01% of net asset value per share))*......... $ 0.10 $ **
----------- -----------
Offering Price........................................ $ 10.18 $ 10.08
=========== ===========
NEW JERSEY FUND
Net Assets............................................ $ 5,028,448 $ 7,205,404
Number of Shares Outstanding.......................... 499,810 715,779
=========== ===========
Net Asset Value Per Share (net assets divided by num-
ber of shares outstanding)........................... $ 10.06 $ 10.07
Sales Charge (for Class A shares: 1.00% of offering
price (1.01% of net asset value per share))*......... $ 0.10 $ **
----------- -----------
Offering Price........................................ $ 10.16 $ 10.07
=========== ===========
</TABLE>
41
<PAGE>
<TABLE>
<CAPTION>
CLASS A CLASS B
----------- -----------
<S> <C> <C>
NEW YORK FUND
Net Assets............................................ $ 4,280,288 $ 8,520,803
Number of Shares Outstanding.......................... 423,938 843,924
=========== ===========
Net Asset Value Per Share (net assets divided by num-
ber of shares outstanding)........................... $ 10.10 $ 10.10
Sales Charge (for Class A shares: 1.00% of offering
price (1.01% of net asset value per share))*......... $ 0.10 $ **
----------- -----------
Offering Price........................................ $ 10.20 $ 10.10
=========== ===========
PENNSYLVANIA FUND
Net Assets............................................ $ 903,952 $10,121,265
Number of Shares Outstanding.......................... 89,757 1,005,047
=========== ===========
Net Asset Value Per Share (net assets divided by num-
ber of shares outstanding)........................... $ 10.07 $ 10.07
Sales Charge (for Class A shares: 1.00% of offering
price (1.01% of net asset value per share))*......... $ 0.10 $ **
----------- -----------
Offering Price........................................ $ 10.17 $ 10.07
=========== ===========
</TABLE>
- --------
* Rounded to the nearest one-hundredth percent; assumes maximum sales charge
is applicable.
** Class B shares are not subject to an initial sales charge but may be
subject to a CDSC on redemption of shares within one year of purchase. See
"Purchase of Shares--Deferred Sales Charge Alternative-- Class B Shares"
herein and in the Prospectus.
INDEPENDENT AUDITORS
Deloitte & Touche, 117 Campus Drive, Princeton, New Jersey 08540-6400, has
been selected as the independent auditors of the Trust. The employment of such
auditors may be terminated without any penalty by vote of a majority of the
outstanding shares of the Trust at a meeting called for the purpose of
terminating such employment. The independent auditors are responsible for
auditing the annual financial statements of each Fund.
CUSTODIAN
The Bank of New York, 110 Washington Street, New York, New York 10286, acts
as the custodian of the Trust's assets. The custodian is responsible for
establishing a separate account for each Fund, safeguarding and controlling
each Fund's cash and securities, handling the delivery of securities and
collecting interest on each Fund's investments.
TRANSFER AGENT
Financial Data Services, Inc. (the "Transfer Agent"), Transfer Agency Mutual
Fund Operations, 4800 Deer Lake Drive East, Jacksonville, Florida 32246-6484,
acts as the Trust's transfer agent. The Transfer Agent is responsible for the
issuance, transfer and redemption of Fund shares and the opening, maintenance
and servicing of Fund shareholder accounts. See "Management of the Trust--
Transfer Agency Services" in the Prospectus.
LEGAL COUNSEL
Brown & Wood, 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 July 31 of each year. The Trust sends to
shareholders of each Fund at least semi-annually reports showing the Fund's
portfolio and other information. An annual report, containing financial
statements audited by independent auditors, is sent to shareholders each year.
After the end of each year shareholders will receive Federal income tax
information regarding dividends and capital gains distributions.
42
<PAGE>
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 the Trust has filed with the Securities and Exchange
Commission, Washington, D.C., under the Securities Act of 1933 and the
Investment Company Act of 1940, to which reference is hereby made.
The Declaration, a copy of which is on file in the office of the Secretary of
The Commonwealth of Massachusetts, provides that the name "Merrill Lynch Multi-
State Limited Maturity Municipal Series Trust" refers to the Trustees under the
Declaration collectively as Trustees, but not as individuals or personally; and
no Trustee, shareholder, officer, employee or agent of the Trust shall be held
to any personal liability; nor shall resort be had to any such person's private
property for the satisfaction of any obligation or claim of the Trust but the
"Trust Property" (as defined in the Declaration) only shall be liable.
To the knowledge of the Trust, the following persons or entities owned
beneficially 5% or more of a Fund's shares on April 29, 1994.
<TABLE>
<CAPTION>
PERCENT OF
NAME ADDRESS FUND'S SHARES
---- ------- -------------
<S> <C> <C> <C>
Arizona Fund............ Paul Morrow, 7500 N. Calle Sin Envidia 9.57%
Morrow Revocable Trust Apartment 10201
Tucson, Arizona 85718
California Fund......... Bernard Lipinsky, 700 Front Street #2501 10.69%
Dorris Lipinsky San Diego, California 92101
Gunjit S. Sikand, 15230 Burbank Boulevard 5.02%
Margarete Sikand Suite 100
Van Nuys, California 91411
Florida Fund............ Walter Rudisch, 5601 SW 136th Avenue 8.66%
Jacqueline Rudisch Fort Lauderdale, Florida 33330
Massachusetts Fund...... F.B. Washburn P.O. Box 3277 6.89%
Candy Corporation 137 Perkins Avenue
Brockton, Massachusetts 02404
Heatbath Corporation, P.O. Box 2978 6.60%
Ernest Walen Springfield, Massachusetts 01102
Michigan Fund........... Alice K. Vandenhaute 4146 Trillium Court 7.63%
Okemos, Michigan 48864
New Jersey Fund......... Patrick Welsh, 3 Essex Road 20.71%
Carol Welsh Summit, New Jersey 07901
Ronin Development Corporation 103 Carnegie Center 5.54%
Princeton, New Jersey 08540
New York Fund........... Peekskill Muffler Corporation 16 Fulton Street 5.30%
White Plains, New York 10606
Pennsylvania Fund....... A.J. Clegg 10 Leopard Road 9.17%
Paoli, Pennsylvania 19301
Stephen Mickelberg 5 Foxcroft Square 6.76%
Jenkintown, Pennsylvania 19046
</TABLE>
43
<PAGE>
[THIS PAGE INTENTIONALLY LEFT BLANK]
44
<PAGE>
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 THE ISSUERS
OF A SPECIFIC STATE. THE INFORMATION CONTAINED THEREIN CONSTITUTES ONLY A BRIEF
SUMMARY OF A NUMBER OF COMPLEX FACTORS THAT MAY AFFECT MUNICIPAL ISSUERS IN THE
VARIOUS STATES AND DOES NOT PURPORT TO BE A COMPLETE DESCRIPTION OF ALL
CONDITIONS TO WHICH MUNICIPAL ISSUERS IN EACH STATE MAY BE SUBJECT. SUCH
INFORMATION IS DERIVED FROM SOURCES THAT ARE GENERALLY AVAILABLE TO INVESTORS,
SUCH AS OFFICIAL STATEMENTS PREPARED IN CONNECTION WITH THE ISSUANCE OF
MUNICIPAL AND STATE SECURITIES AND OTHER STATE-RELATED PUBLICATIONS. NEITHER
THE TRUST NOR ANY FUND HAS INDEPENDENTLY VERIFIED THIS INFORMATION.
APPENDIX A
ECONOMIC AND FINANCIAL CONDITIONS IN ARIZONA
Arizona's total population of approximately 3,895,600 ranks it as the twenty-
fourth largest state by population. From 1980 to 1992, the State's population
increased by 43.31%. The U.S. Census Bureau has ranked Arizona (sometimes
referred to as the "State") third among states in percentage growth of
population between 1980 and 1990. The State's overall growth rate is expected
to continue to exceed the national average through the turn of the century.
Over the last several decades, the State's economy has grown faster than that
of most other regions of the country, as measured by nearly every major
indicator of economic growth, including aggregate personal income growth,
employment growth, gross state product and job creation. From 1987 to 1992, the
State's aggregate personal income grew nearly 38.2% to approximately $66.916
billion. Over the same period, the State's total secondary assessed valuation
of property, the measure used to assess property taxes to service general
obligation indebtedness, increased by 13.4%.
Although the rate of growth has slowed considerably over the last two years,
diversification of the State's economy has helped enable the State to maintain
a moderate rate of growth. Jobs in industries such as mining and agriculture
have diminished in relative importance to the State's economy over the past two
decades, while substantial growth has occurred in the areas of aerospace, high
technology, light manufacturing, finance and insurance. Jobs in the
construction and real estate sectors have also experienced substantial growth
over the past 20 years, but have declined recently as the result of contraction
in the real estate sector. The unemployment rate for the State in 1992 was
7.4%, the same as the national rate.
Maricopa County is the State's most populous county. Within Maricopa County's
boundaries lies the Phoenix Metropolitan Statistical Area, which includes the
City of Phoenix, the State's largest city and the ninth 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. The Phoenix
Metropolitan Area accounts for 58% of the State's population, 65% of the
State's nonagricultural employment, and 64% of its aggregate personal income.
The population of the Phoenix Metropolitan Statistical Area grew from 1,509,175
in 1980 to approximately 2,253,500 persons as of the fourth quarter of 1992, a
growth of approximately 49.3%. Rapid population growth has been accompanied by
moderate employment growth. From 1988 to 1992, non-agricultural employment in
Maricopa County grew by 4.6%, bringing the average number of persons employed
in wage and salary jobs in Maricopa County during 1992 to 981,400. Unemployment
in Maricopa County averaged 6.3% in 1992, as compared to 7.4% nationally,
continuing the trend that since 1977 Maricopa County's average annual
unemployment rate has been below the national average.
Good transportation facilities, a substantial pool of available labor, a
variety of support industries and a warm climate have made the Phoenix
Metropolitan Area a major business center in the southwestern United States.
Once dependent primarily upon an agriculturally based economy, Maricopa County
has substantially diversified its economic base. The service producing sector,
including transportation, communications, public utilities, hospitality and
entertainment, trade, finance, insurance, real estate, services and government,
is the
A-1
<PAGE>
leading source of employment in Maricopa County, employing an average of
800,500 persons in 1992, representing over 81.5% of Maricopa County's non-
agricultural employment in that year. The size of this sector reflects in part
the substantial contribution of tourism to the State's economy; during 1991,
an estimated $6.8 billion of tourist expenditures were made in the State, of
which approximately $3.95 billion were made in Maricopa County.
Pima County is the State's second most populous county, and encompasses the
City of Tucson. The population of the Tucson metropolitan area has grown
nearly 32.9% since 1980 to its current population of approximately 706,200,
representing approximately 18.1% of Arizona's population. Pima County's
economy is based primarily upon manufacturing, mining, government,
agriculture, tourism, education and finance. The service producing sector is
the largest employment source, employing an average of 224,600 persons in
1992, representing more than 84.5% of Pima County's non-agricultural
employment in that year. The Pima County manufacturing sector employed an
average of 23,900 persons in 1992. The declines in the real estate,
construction and related finance industries have adversely affected the Pima
County economy in recent years, and employment growth has remained relatively
flat over the past two years.
Much of the attention on the State's economic condition over the past three
years has focused on the sharp declines in the real estate and construction
industries. The aggregate value of building permits in the State decreased
each year between 1985 and 1991, with a moderate increase experienced in 1992.
This downturn has been caused by a number of factors, including overbuilding
in virtually every category of real property and the effect of the Tax Reform
Act of 1986 on real estate tax investments. Large real estate-related losses,
coupled with a slowed rate of economic growth, have also severely affected the
financial services industry. As a result, most of the savings and loan
associations that had been operating in the State in 1986, as well as several
smaller banks, have been placed in Federal conservatorship and/or
receivership, with their operations being supervised with agencies of the
Federal government. Although most of these institutions have now been sold to
other financial institutions, including large out-of-state banks, many of the
real property assets of the failed institutions remain in the hands of the
Federal government. While Arizona's real estate markets may have begun to
stabilize during 1990, as evidenced by flat vacancy rates in several real
estate sectors and a marked upturn in new home sales, prior overbuilding, the
relative unavailability of real estate financing, the large inventory of real
estate held or controlled by the Federal government, and various other factors
make it likely that the overall downturn in the real estate and related
industries will continue for at least the next three to five years.
The State government's fiscal situation has improved in recent years. After
experiencing several years of budget shortfalls requiring mid-year
adjustments, the State had a budget surplus of $86 million for fiscal year
1992-93, as compared to a total State budget of $3.7 billion. For fiscal year
1993-94, the Legislature is projecting a surplus of $107.1 million. For fiscal
year 1994-95, a surplus between $4.9 million and $47 million is projected,
depending upon whether additional spending is authorized during an anticipated
special legislative session on education reform. The Legislature enacted a
personal income tax reduction of approximately $107 million in 1994, in part
owing to the improved fiscal picture.
A-2
<PAGE>
APPENDIX B
ECONOMIC AND FINANCIAL CONDITIONS IN CALIFORNIA
ECONOMIC CONDITIONS
California's economy is the largest among the 50 states and one of the
largest in the world. Total employment is about 14 million, the majority of
which is in the service, trade and manufacturing sectors.
Since the start of the 1990-91 fiscal year (July 1-June 30), the State of
California (sometimes referred to as the "State") has faced the worst economic,
fiscal, and budget conditions since the 1930s. Construction, manufacturing
(especially aerospace), exports and financial services, among others, have all
been severely affected.
Job losses have been the worst of any post-war recession. Employment levels
are expected to stabilize by late 1994 before net employment starts to
increase, and pre-recession job levels are not expected to be reached for
several more years. Unemployment is expected to remain well above the national
average through 1994. According to the Department of Finance, recovery from the
recession in California is not expected in meaningful terms until late 1994,
notwithstanding signs of recovery elsewhere in the nation.
California has lost over 850,000 payroll jobs, making this by far the longest
and deepest downturn of the post-World War II era. By contrast, in both the
1969-70 and 1981-82 recessions, the State had recovered its job losses by two
years after the start of the recession.
Major cuts in federal defense spending are now recognized as the main source
of the recession and the largest obstacle to recovery. This year and for the
next several years to come, the principal question in the California outlook is
when and whether other elements in the state's economy can muster sufficient
strength to overcome the continuing drag of defense cuts.
This forecast does not contemplate a significant recovery in 1994, but
anticipates stabilization of the economy and a modest recovery in 1995. This
pattern produces an annual average decline in nonfarm employment of 0.6%, an
improvement from last year's 1.4% drop and the similar 1.5% decline in 1992.
Next year, employment is forecast to increase a modest 0.7%.
Personal income growth in 1993 was held below 1% due to tax-driven bonus
activity which artificially boosted income in 1992. Following President
Clinton's election, bonus and stock option payments added $5 to $6 billion to
fourth quarter 1992 personal income, as individuals shifted income to avoid
promised federal tax increases. With income having fallen sharply in the first
quarter, it is clear that this surge was "borrowed" from 1993. It also appears
that year-end 1993 bonus activity was weaker than normal, since part of the
late-1992 surge reflected the exercise of stock options which would have
otherwise occurred in 1993 to 1995.
Personal income is expected to increase 4% this year and 5% in 1995,
reflecting a more normal relationship between employment and income.
The main elements of this forecast include:
. further declines in aerospace and electronics manufacturing, albeit
at a reduced pace compared to 1993;
. a modest pickup in homebuilding and a stabilization in nonresidential
construction;
. continuing restructuring in finance, the utilities and air
transportation; and
. slow gains in retail sales and wholesale and retail trade employment.
B-1
<PAGE>
There are some bright spots in the economy which may be sufficient this year
to offset the continued drop in defense outlays. These include a small upturn
in housing, mainly related to lower interest rates; a continued recovery in
tourism, entertainment and recreation; and--especially late this year and in
1995--improved foreign trade prospects. Business services--mainly temporary
employment agencies--and management consulting and research and development,
which includes the biotechnology industry, are also expected to contribute to
growth this year and next.
California--along with other areas of the nation--continues to experience the
effects of corporate downsizing. By 1995, it is expected that a substantial
portion of this restructuring will have run its course. A more stable situation
in finance, the utilities and air transportation, for example, should allow
modest gains in total employment by next year.
The rate of decline in defense-related aerospace is forecast to moderate
slowly over the next several years, from a 17% plunge last year, to 14% in 1994
and 11% in 1995. In addition, there is evidence that cuts in defense employment
are "front-loaded," as firms strive to slash overhead costs, including
management and technical staffs, in order to remain profitable in a shrinking
market. It is likely that President Clinton's election and his February budget
announcement triggered a further reassessment of long-range strategies in many
aerospace firms, and was at least partially responsible for the steep drop in
employment last year.
Base closings--the other element of defense cuts--are expected to play a
somewhat smaller role in 1994, but could be a renewed source of weakness
thereafter. This year's closure calendar includes Norton Air Force Base in San
Bernardino County, Moffet Field in Sunnyvale, and most of the San Francisco
Presidio. Together, these will directly remove about 14,000 civilian and
military jobs from the State.
In 1995, Monterey County's Fort Ord (16,500 jobs), Castle Air Force Base in
Merced County (6,400 jobs) and Mare Island Naval Shipyard (9,500 jobs) are all
slated to close. All told, the base closure impact will be twice as large in
1995 as this year.
The Department of Finance Bulletins for February and March indicate that,
absent the January 12, 1994 earthquake (the "Northridge earthquake"), the
State's economy has been showing the first signs of recovery. Nonfarm
employment was up slightly in February, although aerospace job losses continue.
Unemployment fell in February to 9% from 10.1% in January, although month-to-
month changes can have wide swings which require them to be viewed with
caution. Because of changes in methodology, these figures cannot be compared
with pre-1994 rates. California's unemployment remains significantly higher
than the national average, and it is too soon to tell if the gap will continue
to narrow.
The Department reported that both residential and nonresidential construction
continued to be weak, with building permits less than half the level of the
peak in 1988. Solid recovery will be difficult without some improvement in this
sector. Repair and rebuilding after the Northridge earthquake will provide a
stimulus for the construction industry in the region, however.
Retail sales are up, but remain relatively weak. Sales gains in December,
1993, at 3% over the year earlier, were the strongest in three years, but still
lagged behind the national recovery. Inflation is low, with the California
consumer price index up only 1.9% for the year ended in January, compared to
2.5% nationally.
Finally, the Department reported that preliminary analysis of the effects of
the Northridge earthquake suggest its impact on personal income will be minor,
mostly from write-offs of uninsured losses. Personal income growth in 1994
might be reduced by one-half percent. Other impacts of the earthquake, such as
tourism or business investment decisions, cannot yet be assessed.
B-2
<PAGE>
The Commission on State Finance's ("COSF") February, 1994 Report provided
some preliminary estimates of the earthquake's economic impact. Of a projected
up to $20 billion of property damage, federal and state aid and insurance was
estimated to provide about $14 billion of reimbursements. This sum, together
with additional private moneys, would provide short-term stimulus to
construction and sales. In the longer term, the region will have to absorb up
to $6 billion of additional losses, plus the costs of disruption caused by the
earthquake, which could moderately depress, but not stop, the economic recovery
in Southern California. The COSF noted that this amount was small compared to
the overall wealth of the region.
The COSF February Report noted that evidence pointed to reaching the bottom
of the recession in 1994, with modest improvements most evident in northern and
central California. The surprisingly strong national economic recovery was
estimated to help spur demand for California products.
The State. The recession has seriously affected State tax revenues, which
basically mirror economic conditions. The State has also been facing a
structural imbalance in its budget with the largest programs supported by the
General Fund--K-12 schools and community colleges, health and welfare, and
corrections--growing at rates higher than the growth rates for the principal
revenue sources of the General Fund. As a result, the State has experienced
recurring budgeted deficits. The Controller reports that expenditures exceeded
revenues for four of the five fiscal years ending with 1991-92. Revenues and
expenditures were essentially equal in 1992-93, but the original budget for
that year projected revenues exceeding expenditures by $2.6 billion. By June
30, 1993, according to the Department of Finance, the State's Reserve for
Economic Uncertainties had a deficit, on a budget basis, of approximately $2.8
billion.
A further consequence of the large budget imbalances over the last three
fiscal years has been that the State depleted its available cash resources and
has had to use a series of external borrowings to meet its cash needs. The
Governor's Budget Proposal for 1994-95, released January 7, 1994, now projects
General Fund revenues and transfers in the 1993-94 Fiscal Year of $39.7 billion
(a reduction of $900 million from the original 1993-94 Budget Act) and
expenditures of $39.3 billion (an increase of $800 million over the original
1993-94 Budget Act). The Governor's Budget for 1994-95 proposes General Fund
revenues and transfers of $41.3 billion (including $2.0 billion from the
federal government) and expenditures of $38.8 billion, which would leave a
balance of approximately $260 million in the budget reserve, the Special Fund
for Economic Uncertainties, at June 30, 1995 after repayment of the accumulated
1992-93 budget deficit of $2.8 billion.
The 1992-93 Budget Act closed a "gap" of about $7.9 billion, but budgeted a
reserve at June 30, 1993 of only $28 million. However, the Budget was based on
economic forecasts and projections of major tax sources. Shortly after the
1992-93 Budget Act was enacted, it became evident that economic conditions in
the State were not beginning to improve in the second half of 1992, as assumed
by the Department of Finance's May, 1992 Revision economic estimates, which
underlay the Budget. This was exacerbated by enactment of an initiative measure
in November, 1992 which repealed a sales tax for certain candy, snack foods and
bottled water, reducing revenues by about $300 million for a full fiscal year
($200 million in 1992-93). The Commission on State Finance reported, in Fall
1992, that the 1992-93 Budget would be about $2.7 billion out of balance, with
about $2.1 billion attributed to reduced revenues. This was a "primary"
forecast, which could be worse if the economy fell into a deeper recession
rather than continuing in a stagnant mode. The Legislative Analyst issued a
report consistent with the Commission's predictions. In addition, certain
lawsuits were filed concerning implementation of the K-14 school financing
portion of the Budget Act.
The Governor's 1993-94 Budget introduced on January 8, 1993 proposed General
Fund expenditures of $37.3 billion, with projected revenues of $39.9 billion.
It also proposed Special Fund expenditures of $12.4 billion and Special Fund
Revenues of $12.1 billion. To balance the budget in the face of declining
revenues, the Governor proposed a series of revenue shifts from local
government, reliance on increased federal aid, and reductions in state
spending.
The May Revision of the Governor's Budget, released on May 20, 1993,
indicated that the revenue projections of the January Budget Proposal were
tracking well, with the full year 1992-93 about $80 million
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higher than the January projection. Personal income tax revenue was higher than
projected, sales tax was close to target, and bank and corporation taxes were
lagging behind projections. The May Revision projected the State would have an
accumulated deficit of about $2.75 billion by June 30, 1993. The Governor
proposed to eliminate this deficit over an 18-month period. He also agreed to
retain the 0.5% sales tax scheduled to expire June 30, 1993 for a six-month
period, dedicated to local public safety purposes, with a November election to
determine a permanent extension. Unlike pervious years, the Governor's Budget
and May Revision did not calculate a "gap" to be closed, but rather set forth
revenue and expenditure forecasts and proposals designed to produce a balanced
budget.
The 1993-94 Budget Act was signed by the Governor on June 30, 1993, along
with implementing legislation and was predicated on General Fund revenues and
transfers estimated at $40.6 billion, about $700 million higher than the
January Governor's Budget, but still about $400 million below 1992-93 (and the
second consecutive year of actual decline). The principal reasons for declining
revenue were the continued weak economy and the expiration (or repeal) of three
fiscal steps taken in 1991--a half cent temporary sales tax, a deferral of
operating loss carry forwards, and repeal by initiative of a sales tax on candy
and snack foods. The 1993-94 Budget Act also assumed Special Fund revenues of
$11.9 billion, an increase of 2.9% over 1992-93.
The 1993-94 Budget Act included General Fund expenditures of $38.5 billion (a
6.3% reduction from projected 1992-93 expenditures of $41.1 billion), in order
to keep a balanced budget within the available revenues. The 1993-94 Budget Act
also included Special Fund expenditures of $12.1 billion, a 4.2% increase.
The 1994-95 Governor's Budget released January 7, 1994 indicates that the
continued sluggish performance of the State's economy will have an adverse
effect on results for the 1993-94 Fiscal Year. Revenues are now projected to be
$39.7 billion, about $900 million less than the 1993-94 Budget Act, even though
revenues in the first half of the fiscal year have been very close to original
projections.
Expenditures for the 1993-94 Fiscal Year are now projected in the 1994-95
Governor's Budget to be $39.3 billion, about $800 million above the original
1993-94 Budget Act. The main reasons for this change are increased health and
welfare caseloads, lower local property taxes (which require State support for
K-14 education to make up the shortfall), and lower than expected federal
government payments for immigration-related costs. The 1994-95 Governor's
Budget does not reflect possible additional General Fund costs in the 1993-94
Fiscal Year for earthquake relief.
On January 17, 1994, a major earthquake measuring an estimated 6.8 on the
Richter Scale struck Los Angeles. Significant property damage to private and
public facilities occurred in a four-county area including northern Los Angeles
County, Ventura County, and parts of Orange and San Bernardino Counties, which
were declared as State and federal disaster areas by January 18. Preliminary
estimates of total property damage (private and public) are in the range of $15
billion or more. However, precise estimates of the damage are being developed
and may change.
The Department of Finance's March Bulletin reports the February revenue
collections were $182 million below the estimate contained in the 1994-95
Governor's Budget, bringing actual year-to-date collections to within $237
million (0.9%) of the forecasted level. Most of February's shortfall can be
attributed to the sales and use tax. However, both the sales and use tax and
the personal income tax withholding are tracking their forecasted levels very
well, giving encouragement that actual collections will meet expectations.
A report issued in December, 1993 by the staff of the COSF reviewed budget
projections for the 1993-94 and 1994-95 Fiscal Years. The COSF Report projected
1993-94 results similar to the information contained in the Governor's Budget.
The COSF Report noted that the adverse revenue and expenditure trends would
affect the 1994-95 budget, so that the combined two-year results would be an
estimated $3.8 billion out of balance compared to
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the projections made when the 1993-94 Budget Act was adopted. These factors are
also recognized in the Governor's Budget. The COSF warned that the State's
fiscal condition could be further worsened if a lower court ruling on school
financing is upheld, if the State loses a tax case now before the United States
Supreme Court, or if the economy falters.
In February, 1994 the COSF released an update to its December Report, which
indicated that the Governor's Budget proposes to close a $4.5 billion gap by
June 30, 1995, up from COSF's estimate of $3.8 billion in December. The newest
COSF Report states that weakness in revenues between December and February had
led to a revised estimate of revenues in 1993-94 around $500 million lower than
those projected in the Governor's Budget, adding to the projected budget gap.
The risk factors noted in the December Report also remained possible, although
the February Report noted that (aside from the recent earthquake), economic
conditions appeared to be mildly encouraging.
Certain issuers of California Municipal Bonds receive subventions from the
State which are eligible to be used to make payments on said Bonds. No
prediction can be made as to what effect continued decreases in subventions may
have on the ability of some issuers to make such payments.
CONSTITUTIONAL AND STATUTORY LIMITATIONS; RECENT INITIATIVES; PENDING
LITIGATION
Article XIIIA of the California Constitution (which resulted from the voter-
approved Proposition 13 in 1978) limits the taxing powers of California public
agencies. Article XIIIA provides that the maximum ad valorem tax on real
property cannot exceed 1% of the "full cash value" of the property, and
effectively prohibits the levying of any other ad valorem property tax for
general purposes. However, on May 3, 1986, Proposition 46, an amendment to
Article XIIIA, was approved by the voters of the State of California, creating
a new exemption under Article XIIIA permitting an increase in ad valorem taxes
on real property in excess of 1% for bonded indebtedness approved by two-thirds
of the voters voting on the proposed indebtedness. "Full cash value" is defined
as "the County Assessor's valuation of real property as shown on the 1975-76
tax bill under "full cash value' or, thereafter, the appraised value of real
property when purchased, newly constructed, or a change in ownership has
occurred after the 1975 assessment." The "full cash value" is subject to annual
adjustment to reflect increases (not to exceed 2%) or decreases in the consumer
price index or comparable local data, or to reflect reductions in property
value caused by damage, destruction or other factors.
Article XIIIB of the California Constitution limits the amount of
appropriations of the State and of 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 the local government has
financial responsibility for providing. To the extent 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 local governments be approved by a majority of
the electorate of the government entity, (ii) required that any special tax
(defined as taxes levied for other than general government purposes) imposed by
a local government 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
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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. While several
recent decisions of the California Courts of Appeal have held that all or
portions of Proposition 62 are unconstitutional, the California Supreme Court
has yet to consider the matter.
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 as 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 requirement 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.
On November 3, 1992, voters approved an initiative statute, Proposition 163,
which exempts certain food products, including candy and other snack foods,
from California's sales tax. The sales tax had been broadened to include those
items as part of the 1991-92 budget legislation. The State Legislative Analyst
estimates a revenue reduction of $200 million for the remainder of Fiscal Year
1992-93 and $300-350 million reduction per year thereafter.
Article XIIIA, Article XIIIB and a number of 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.
Recent Initiatives. In July 1991, California increased taxes by adding two
new marginal tax rates, at 10% and 11%, effective for tax years 1991 through
1995. After 1995, the maximum personal income tax rate is scheduled to return
to 9.3%, and the alternative minimum tax rate is scheduled to drop from 8.5% to
7%. In addition, legislation in July 1991 raised the sales tax by 1.25%, of
which 0.5% was a permanent addition. This tax increase will be cancelled if a
court rules that such tax increase violates any constitutional requirements.
Although 0.5% of the State tax rate was scheduled to expire on June 30, 1993,
such amount was extended for six months for the benefit of counties and cities.
On November 2, 1993, voters approved extension of this 0.5% levy as a permanent
source of funding for local government.
The November 2, 1993 special election ballot also contained an initiative
constitutional amendment providing parental choice regarding education. This
initiative would have required the State to allocate every school-age child a
scholarship in an amount equal to at least 50% of the prior year's per-pupil
State and local government expenditure for kindergarten through twelfth grade
education. Such scholarships would have been redeemable by public or private
schools. If passed, the parental choice initiative could have threatened the
fiscal stability of any school district in which a significant number of
students withdraw and enrolls elsewhere. Although the initiative failed, other
parental choice initiatives have already been filed in an attempt to qualify
them for future voter consideration.
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Pending Litigation. On November 1, 1993, the United States Supreme Court
granted certiorari to hear two consolidated cases dealing with the validity of
California's prior method of taxing multinational corporations under a
"unitary" method of accounting for their worldwide earnings. Barclays Bank PLC
v. Franchise Tax Board concerns foreign corporations, and Colgate-Palmolive v.
Franchise Tax Board concerns domestic corporations. California courts have
upheld the State's unitary method of taxation, which has since been modified by
the Legislature. If the Court does not uphold the State's prior method of
taxation, the State could be liable for tax refunds and will be unable to
collect taxes previously assessed, with an aggregate impact of $3.5-$4 billion.
In the spring of 1991, the Richmond Unified School District ("RUSD") Board of
Directors attempted to end classes six weeks early because of a fiscal crisis.
In response to lawsuits, a lower court judge, in a case called Butt v. State of
California, ordered the State, over objections from the Governor, to provide
funding to allow the school year to be completed, and an emergency loan was
arranged by the State Controller. On appeal, the California Supreme Court in
late December, 1992 upheld the lower court's action, ruling that the State
Constitution's guarantee of public education required the State to ensure a
full year's education in all school districts. The Court, however, overturned a
portion of the original order relating to the source of funds for RUSD's
emergency loan; the decision leaves unclear just where the State must find
funds to make any future loans of this kind.
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. The next phase of the trial will focus on the
issue of damages. The maximum amount of damages is the amount of the salary
originally owed or approximately $350 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.
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. A conservative estimate of the State's
potential liability is $250 million to $550 million. A group of 17 of the
plaintiffs has received a verdict of $159,000 against the State. In a separate
lawsuit, United States, People of the State of California v. J. B.
Stringfellow, Jr. et al., the State is seeking recovery for past costs of
cleanup of the site, a declaration that the defendants are jointly and
severally liable for future costs, and an injunction ordering completion of the
cleanup. However, the defendants have filed a counterclaim against the State
for alleged negligent acts. Because the State is the present owner of the site,
the State may be found liable. Present estimates of the cleanup range from $200
million to $800 million.
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APPENDIX C
ECONOMIC AND FINANCIAL CONDITIONS IN FLORIDA
Throughout the 1980s, the unemployment rate in the State of Florida
(sometimes referred to as the "State") had, generally, tracked below that of
the nation. In recent years, however, the State's jobless rate has moved ahead
of the national average. The State's unemployment rate is projected to be 6.5%
in 1993-94 and 6.0% in 1994-95. Nevertheless, the average rate of unemployment
for the State since 1980 is 6.5%, while the national average is 7.1%.
Personal income in the State has been growing strongly the last several years
and generally has outperformed both the nation as a whole and the Southeast in
particular. From 1983 through 1992, the State's per capita income rose an
average of 5.4% per year, while the national per capita income increased an
average of 5.5%. By the end of 1994-95, real personal income per capita in the
State is projected to average 4.8% higher than its 1992-93 level. Growth in
real personal income in the State is expected to increase 3.7% in 1993-94 and
increase 4.6% in 1994-95.
The State's strong population growth is one main reason why its economy has
typically performed better than the nation as a whole. In 1980, the State was
ranked seventh among the 50 states with a population of 9.7 million people. The
State has continued to grow since then and as of April 1, 1992 ranks fourth
with an estimated population of 13.4 million. Since 1982, the State's average
annual rate of population increase has been approximately 2.8% as compared to
an approximately 1.0% average annual increase for the nation as a whole. While
annual growth in the State's population is expected to decline somewhat, it is
still expected to hover close to the 250,000 throughout the 1990s.
Tourism is one of the State's most important industries. 41.9 million
tourists are expected to have visited the State in 1993-94, up 0.2% from 1992-
93. 43.6 million visitors are expected to visit the State in 1994-95.
Until recently, the State has had a dynamic construction industry, with
single and multi-family housing starts accounting for 8.3% of total U.S.
housing starts in 1992, while the State's population was only 5.3% of the
nation's total population. The reason for such a dynamic construction industry
was the rapid growth of the State's population. Hurricane Andrew left some
parts of South Florida devastated. Post-hurricane cleanup and rebuilding have
changed the outlook for Florida's economy. In Florida, single and multi-family
housing starts in 1993-94 are projected to reach a combined level of 120,000
increasing to 138,100 in 1994-95. These housing start figures include, over the
two year period, additional starts as a result of destruction by the storm.
Total construction expenditures are forecasted to increase 13.8% in 1993-94 and
increase by 14.3% in 1994-95.
Financial operations of the State covering all receipts and expenditures are
maintained through the use of three funds--General Revenue Fund, Trust Funds,
and Working Capital Fund. In fiscal year 1992-93, the State derived
approximately 62% of its total direct revenues to these funds from State taxes.
Federal funds and other special revenues accounted for the remaining revenues.
Major sources of tax revenues to the General Revenue Fund are the sales and use
tax, corporate income tax, intangible personal property tax, and beverage tax,
which amounted to 68%, 7%, 4%, and 4%, respectively, of total General Revenue
Fund receipts. State expenditures are categorized for budget and appropriation
purposes by type of fund and spending unit, which are further subdivided by
line item. In fiscal year 1992-93, expenditures from the General Revenue Fund
for education, health and welfare, and public safety amounted to approximately
49%, 30% and 11%, respectively, of total General Revenues.
The estimated General Revenue plus Working Capital funds available to the
State for fiscal year 1993-94 total $13,554.8 million. (Actual results will not
be known until October, 1994.) Compared to effective appropriations from
General Revenues plus Working Capital funds for fiscal year 1993-94 of
$13,276.9 million, this results in unencumbered reserves estimated at $277.9
million at the end of fiscal year 1993-94.
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Estimated fiscal year 1994-95 General Revenue plus Working Capital funds
available total $14,310.7 million, a 5.6% increase over fiscal year 1993-94.
The sales and use tax is the greatest single source of tax receipts in the
State. For the State fiscal year ended June 30, 1993, receipts from this source
were $9,426.0 million, an increase of 12.5% from fiscal year 1991-92. The
second largest source of State tax receipts is the motor fuel tax. The
estimated collections from this source during fiscal year 1991-92 were $1,475.5
million. Alcoholic beverage tax revenues totalled $442.2 million for the State
fiscal year 1992-93, up 1.6% from the previous year. The receipts of corporate
income tax for the fiscal year 1992-93 were $846.6 million, an increase of 5.6%
from the previous fiscal year. Gross Receipt tax collections for fiscal year
1992-93 totalled $447.9 million, an increase of 14.4% over the previous fiscal
year. Documentary stamp tax collections totalled $639.0 million during fiscal
year 1992-93, increasing 27% from the previous fiscal year. The intangible
personal property tax is a tax on stocks, bonds, notes, governmental
leaseholds, certain limited partnership interests, mortgages and other
obligations secured by liens on Florida realty, and other intangible personal
property. Total collections from intangible personal property taxes were $783.4
million during fiscal year 1992-93, up 33% from the previous fiscal year.
Severance taxes totalled $64.5 million during fiscal year 1992-93, down 4% from
the previous fiscal year. In November, 1986, the voters of the State approved a
constitutional amendment to allow the State to operate a lottery. Fiscal year
1992-93 produced ticket sales of $2.13 billion of which education received
approximately $810.4 million.
The State Constitution does not permit a state or local personal income tax.
An amendment to the State Constitution by the electors of the State is required
to impose a personal income tax in the State.
Beginning January 1, 1994, property valuations for homestead property will be
subject to a growth cap. Growth in the just (market) value of property
qualifying for the homestead exemption will be limited to 3% or the change in
the Consumer Price Index, whichever is less. If the property changes ownership
or homestead status, it is to be re-valued at full just value on the next tax
roll.
According to the Office of Comptroller, Department of Banking and Finance of
the State, as of January 12, 1994, the State maintains a high bond rating from
Moody's Investors Service, Inc. (Aa), Standard & Poor's Corporation (AA) and
Fitch Investors Service, Inc. (AA) on the majority of its general bonds.
Outstanding general obligation bonds at June 30, 1993 totalled almost $5.6
billion and were issued to finance capital outlay for educational projects of
both local school districts and state universities, environmental protection
and highway construction. The State has issued almost $873 million of general
obligation bonds since July 1, 1993.
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APPENDIX D
ECONOMIC AND FINANCIAL CONDITIONS IN MASSACHUSETTS
Throughout much of the 1980s, the Commonwealth of Massachusetts (sometimes
referred to as the "Commonwealth") had a strong economy which was evidenced by
low unemployment and high personal income growth as compared to national
trends. Economic growth in the Commonwealth has slowed since 1988, however,
particularly in the construction, real estate, financial and manufacturing
sectors, including certain high technology areas, with especially adverse
results in 1990 and the first half of 1991. Unemployment has been rising, and
in 1990, for the first time since 1977, the Commonwealth's unemployment rate
significantly exceeded the national average. As of December, 1993, the
Commonwealth's unemployment rate was 6.3% as compared to a national average of
6.4%, but the unemployment rate in Massachusetts has levelled off in the last
year--averaging 8.5% during 1992 after rising steadily for three years, from
3.4% at the beginning of 1989. Increasing unemployment claims have also reduced
the balances in the unemployment compensation trust fund. In addition, per
capita personal income in the Commonwealth is currently growing at a rate lower
than the national average. Between the second quarter of 1992 and the second
quarter of 1993, aggregate personal income in the Commonwealth increased 4.0%,
as compared to 5.5% for the nation as a whole.
Moreover, Commonwealth spending exceeded revenues in each of the five fiscal
years commencing fiscal 1987. In particular, from 1987 to 1990, spending in
five major expenditure categories--Medicaid, debt service, public assistance,
group health insurance and transit subsidies--grew at rates in excess of the
rate of inflation for the comparable period. In addition, the Commonwealth's
tax revenues during this period repeatedly failed to meet official forecasts.
For the budgeted funds, operating losses in fiscal 1988 of $370 million were
covered by surplus carried forward from the prior year. The operating losses in
fiscal 1989 and 1990, which totalled $672 million and $1.251 billion,
respectively, were covered primarily through deficit borrowings. During the
period, fund balances in the budgeted operating funds declined from an opening
balance of $1.072 billion in fiscal 1987 to an ending balance of negative
$1.104 billion in fiscal 1990. For fiscal 1991, these funds attained positive
ending balances of $237.1 million.
In fiscal 1992, which ended June 30, 1992, the total revenues of the budgeted
operating funds of the Commonwealth during such fiscal year increased by
approximately 0.7% over the prior fiscal year, to $13.728 billion. Expenditures
decreased, although by only 1.7% over the prior year, to $13.420 billion. As a
result, in fiscal 1992 revenues exceeded expenditures by $312.3 million. The
Commonwealth ended fiscal 1992 with a positive closing fund balance of $549.4
million, after carrying forward the fund balances from fiscal 1991.
Fitch, Standard & Poor's Corporation and Moody's Investors Service, Inc. have
upgraded their ratings of the Commonwealth's general obligation bonds from A,
BBB and Baa, respectively, to A+, A+ and A, respectively. Fitch Investors
Service, Inc. has recently upgraded its rating of the Commonwealth's bonds from
A to A+. Ratings have been lowered on short-term debt and some state agency
obligations. From time to time, the rating agencies may further change their
ratings.
Budgeted revenues and other sources for fiscal 1993 totalled approximately
$14.710 billion, including tax revenues of $9.930 billion. Commonwealth
expenditures and other uses in fiscal 1993 totalled approximately $14.696
billion. The ending fund balances of the budgeted operating funds of the
Commonwealth for fiscal 1993 aggregated approximately $562.5 million.
On July 19, 1993, the Governor signed the Commonwealth's budget for fiscal
1994. The budget relies on estimated revenues of $15.483 billion. Fiscal 1994
revenues include an estimated $10.560 billion in tax revenue. The budget signed
by the Governor will result in projected expenditures of $15.463 billion.
Growth of tax revenues in the Commonwealth is limited by law. Tax revenues in
fiscal years 1988 through 1993 were lower than the limits set by law, and the
Executive Office for Administration and Finance estimates that state tax
revenues in fiscal 1994 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 the
total appropriation in any fiscal year that may be expended for repayment
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of principal of and payment of interest on general obligation debt of the
Commonwealth was limited to 10% of such appropriation. Bonds in the aggregate
principal amount of $1.399 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, or result in defaults in payment on, 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.
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% and the decrease and delay in local aid from the Commonwealth,
discussed below.
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
1989 level of $2.961 billion. Direct local aid decreased from fiscal 1989 to
$2.328 billion in fiscal 1992 and increased to $2.547 billion in fiscal 1993.
It is estimated that fiscal 1994 expenditures for direct local aid will be
$2.737 billion.
The Commonwealth's fiscal circumstances have led to delays in the
distribution of local aid. Of the $2.961 billion direct local aid payments for
fiscal 1989, $305 million in Chapter 70 school aid due on June 30, 1989, was
delayed and not disbursed until July, 1989, because of the fiscal 1989 deficit.
The Commonwealth issued fiscal 1990 revenue anticipation notes in July in order
to make this local aid payment. Similarly, because of the Commonwealth's fiscal
1990 deficit, the Commonwealth deferred $1.26 billion of local aid due June 30,
1990 into fiscal 1991. All local aid due in fiscal 1991 has been paid, but no
assurance can be given that amounts appropriated for local aid in the fiscal
1992 budget will be forwarded or paid when due.
The aggregate unfunded actuarial liabilities of the pension systems of the
Commonwealth and the unfunded liability of the Commonwealth related to local
retirement systems are significant--estimated to be approximately $8.485
billion as of January 1, 1992 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 of
Administration and Finance and approved by the legislature. The amounts
required for funding of current pension liabilities in fiscal years 1992, 1993
and 1994 are estimated to be $724 million, $778 million and $844 million,
respectively. As of June 30, 1993, the Commonwealth's state pension reserve was
approximately $3.877 billion.
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APPENDIX E
ECONOMIC AND FINANCIAL CONDITIONS IN MICHIGAN
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 15.1% in 1993, 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.
Recently, as well as historically, the average monthly unemployment rate in
the State has been higher than the average figures for the United States. For
example, for 1993 the average monthly unemployment rate in this State was 7.0%
as compared to a national average of 6.8% in the United States.
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. In particular, General Motors
Corporation has announced the scheduled closing of several of its plants in
Michigan beginning in 1993 and continuing into 1994. The impact these closures
will have on the State's revenues and expenditures is not currently known. 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. 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 the 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 59% from the payment of State taxes
and 41% 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
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60% of total General Fund expenditures have been 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 each of the five
fiscal years ending with the fiscal year ended September 30, 1989, the State
reported positive year-end balances and positive cash balances in the combined
General Fund/School Aid Fund. 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 fiscal year with
its General Fund in balance. A positive cash balance in the combined General
Fund/School Aid Fund was recorded at September 30, 1990. The State reported a
balance in the General Fund as of September 30, 1993 of $26.0 million after a
transfer of $283 million to the Budget Stabilization Fund described below. In
each of the last three fiscal years, the State has undertaken mid-year actions
to address projected year-end budget deficits, including expenditure cuts and
deferrals and one-time expenditures or revenue recognition adjustments. From
1991 through 1993, the State experienced deteriorating cash balances which
necessitated short-term borrowings and the deferral of certain scheduled cash
payments to local units of government. The State borrowed $700 million for cash
flow purposes in the 1992 fiscal year and $900 million in the 1993 fiscal year.
The State has a Budget Stabilization Fund which had an accrued balance of $20.1
million as of September 30, 1992, and, after the transfer of $283 million on an
accrual basis upon completion of the State's financial reports, an ending
balance of $303 million as of September 30, 1993.
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 reduced revenue sharing
payments to municipalities below the level provided under formulas by $10.9
million in the 1991 fiscal year, $34.4 million in the 1992 fiscal year, $45.5
million in the 1993 fiscal year and $64.6 million (budgeted) in the 1994 fiscal
year.
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 further provides for a cut in State's income tax rate from 4.6% to
4.4%. In addition, property taxes for school operating purposes will be reduced
and school funding will be provided from a combination of property taxes and
state revenues, some of which will be 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.
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Currently, this State's general obligation bonds are rated A1 by Moody's
Investors Service, Inc. and AA by Fitch Investors Service, Inc. In October,
1989, Standard & Poor's Corporation ("Standard & Poor's") raised its rating on
the State's general obligation bonds to AA. In January, 1991, Standard & Poor's
placed the State's general obligation debt on CreditWatch with negative
implications for Standard & Poor's AA rating on such debt. In July, 1991,
Standard & Poor's removed the State general obligation debt from CreditWatch
and in 1992 reconfirmed the AA rating.
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APPENDIX F
ECONOMIC AND FINANCIAL CONDITIONS IN NEW JERSEY
After enjoying an extraordinary boom during the mid-1980s, the State of New
Jersey (sometimes referred to as the "State"), as well as the rest of the
northeast United States, 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). The undesignated General Fund balance
was $1.4 million for the fiscal year 1991, $760.8 million for the fiscal year
1992, and $937 million for the fiscal year 1993. For the fiscal year 1994, the
balance in the undesignated General Fund is projected to be $772.3 million,
and for the fiscal year 1995, the balance in the undesignated General Fund is
projected to be $303.1 million.
On November 2, 1993, Christine Todd Whitman was elected to replace James
Florio as Governor of the State. As a matter of public record, Governor
Whitman during her campaign publicized her intention to reduce taxes in the
State. Effective January 1, 1994, the State's personal income tax rates were
cut by 5% for all taxpayers. At this time the effect of this tax reduction
cannot be evaluated.
In May, 1992, the State legislature passed a bill reducing the sales tax
from 7% back to 6% effective July 1, 1992. The final 1993 budget followed the
earlier reduction of the State's sales tax and reduced revenues by $408
million. It is unclear at the present time what effect this rollback in the
sales tax rate will have on the State's economy. To bring the budget into
balance, the legislature reduced the popular homestead tax rebate program by
$300 million and induced savings of close to $500 million including
management/administrative personnel cuts, targeting unclassified positions
earning over $50,000. Other cuts were in travel, overtime and moving of
health-related programs directly to hospitals and other entities. Education
and municipal aid were largely unaffected.
The State finances capital projects primarily through the sale of the
general obligation bonds of the State. These bonds are backed by the full
faith and credit of the State. State tax revenues and certain other fees are
pledged to meet the principal 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.
While New Jersey's economy continued to expand during the late 1980s, the
level of growth slowed considerably after its performance during the 1983-1987
period. By the beginning of the national recession, construction activity had
already been declining in New Jersey for nearly two years. As the rapid
acceleration of real estate prices forced many would-be homeowners out of the
market and high non-residential vacancy rates reduced new commitments for
offices and commercial facilities, construction employment began to decline;
also growth had tapered off markedly in the service sectors and the long-term
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.
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 9.3%
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
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then, the unemployment rate fell to 6.7% during the fourth quarter of 1993. The
jobless rate averaged 7.8% during the first quarter of 1994, but this estimate
is not comparable to those prior to January 1994 because of major changes in
the federal survey from which these statistics are obtained.
In 1992, employment in services and government turned around in the State,
growing over the year by 0.7% and 0.3%, respectively. These increases were
outweighed by declines in other sectors--especially in manufacturing, wholesale
and retail trade, and construction--resulting in a net decline in non-farm
employment of 1.7% in 1992. Non-farm employment continued to decline in 1993
but the rate of decline has tapered off. Employment in the first nine months of
1993 was 1.0% lower than in the same period in 1992. Gains were recorded in
services, government, finance/insurance/real estate and transportation/
communication/public utilities. Declines continued in trade, construction and
manufacturing.
The State should benefit by the national recovery as rising consumer and
business spending generate increased factory orders, building activity and a
flow of commerce without regard to the state lines.
One of the major reasons for cautious optimism is found in the construction
industry. Total construction contracts awarded in New Jersey have turned
around, rising by 7.0% in 1993 compared with 1992. By far, the largest boost
came from residential construction awards which increased by 26% in 1993
compared with 1992. In addition, non-residential building construction awards
have turned around, posting a 17% gain.
Nonbuilding construction awards have been at high levels since 1991 due to
substantial outlays for roads, bridges and other infrastructure projects.
Although nonbuilding construction awards declined in 1993 compared with 1992,
this was due to an unusually large amount of contracts in the spring of 1992.
The fiscal 1994 State budget projects spending of funds received from the
Federal government. This projection does not take into consideration any
reductions to these anticipated funds that may occur as a result of efforts to
reduce the Federal deficit or required reductions to meet spending limits. Any
such reductions will require the State to adjust its programs and budget to
accommodate the reductions. As with prior reductions of Federal financial
support, the State would evaluate each program affected by such cuts and act
based on that evaluation and the amount of funds available. Any reductions in
Federal funds received by the State or its political subdivisions could slow
economic development. Also, changes to the Internal Revenue Code, by
restricting certain types of tax-exempt financing, may limit the ability of New
Jersey and its political subdivisions to incur indebtedness to carry out their
programs. Such developments also could have an adverse effect on economic
conditions in New Jersey.
On March 12, 1990, the Fair Automobile Insurance Reform Act of 1990 (the
"Reform Act") was enacted into law. The Reform Act substantially altered New
Jersey's statutory scheme governing private passenger automobile insurance. The
New Jersey Automobile Full Insurance Underwriting Association (the "JUA"), an
unincorporated non-profit association created in 1983 to provide automobile
insurance to those unable to secure such coverage in the voluntary market, was
precluded from issuing or renewing automobile insurance policies since October
1, 1990. The Reform Act includes provisions governing the transition of drivers
insured by the JUA to the voluntary market and, to the extent such coverage is
not available, to an assigned risk plan. The Reform Act also provides for the
imposition of taxes and assessments to meet the financial obligations of the
JUA, which are not debts, liabilities or obligations of the State. The Reform
Act's revenue raising measures were not reflected in the current budget because
the anticipated revenues were to be applied by statute to the JUA financial
obligations. The Reform Act also provides for the making of assessments by the
New Jersey Property Liability Insurance Guaranty Association upon property and
casualty liability insurers in order to raise $160,000,000 per year for the
period 1990-1997. Litigation challenging various portions of the Reform Act
still remains pending. "As applied" challenges to the Reform Act surtax and
assessment provisions have been brought. Litigation was filed in the Mercer
County Superior Court--Chancery Division, by Allstate and State Farm alleging
that their constitutional rights have been
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violated and that they are entitled to refunds of their Reform Act surtaxes and
assessments. The State Farm matter is pending on appeal.
Legislation approved June 30, 1992, effective immediately, called for
revaluation of several public employee pension funds, authorized an adjustment
to the assumed rate of return on investment and refunds $773 million in public
employer contributions to the State from various pension funds, to be reflected
as a revenue source for fiscal year 1992. In addition, it is estimated that
this plan will effect a further savings of $226 million in fiscal year 1993 and
each fiscal year thereafter. Several labor unions filed suit seeking a judgment
directing the State Treasurer to refund all monies transferred from the pension
funds and paid into the General Fund. On February 5, 1993, the Superior Court
granted the State's motion for summary judgment as to all claims. An appeal has
been filed with the Appellate Division of Superior Court. An adverse
determination in this matter would have a significant impact on fiscal year
1994 and subsequent fiscal year fund balances.
In July 1991, Standard & Poor's Corporation ("Standard & Poor's") downgraded
New Jersey general obligation bonds from AAA to AA+. Fitch Investors Service,
Inc. rates New Jersey general obligation bonds AAA. On June 4, 1992, Standard &
Poor's placed New Jersey general obligation bonds on CreditWatch with negative
implications. On July 6, 1992, Standard & Poor's removed New Jersey's general
obligation bonds from CreditWatch and reaffirmed its AA+ rating of such bonds
but with negative long-term implications. On August 24, 1992, Moody's Investors
Service, Inc. lowered its rating on New Jersey's general obligation bonds to
Aa1 from Aaa.
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APPENDIX G
ECONOMIC AND FINANCIAL CONDITIONS IN NEW YORK
From the mid-1970s to the present time, New York State (sometimes referred to
as the "State"), some of its agencies, instrumentalities and public benefit
corporations (the "Authorities"), and certain of its municipalities, have faced
serious financial difficulties. Any further financial problems experienced by
these Authorities or municipalities could have a direct adverse effect on the
New York Municipal Bonds 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. The City now projects, and its current four-year
financial plan assumes, that the City's economy will continue to improve and
that a modest employment recovery will occur during calendar year 1994.
For each of the 1991 through 1993 fiscal years, the City achieved balanced
operating results as reported in accordance with generally accepted accounting
principles ("GAAP") and the City's 1994 fiscal year results are projected to be
balanced in accordance with GAAP. The City was required to close substantial
budget gaps in recent years in order to maintain balanced operating results.
There can be no assurance that the City will continue to maintain a balanced
budget as required by State law without additional tax or other revenue
increases or reductions in City services, which could adversely affect the
City's economic base.
The Mayor is responsible for preparing the City's four-year financial plan,
including the City's current financial plan for the 1994 through 1997 fiscal
years (the "1994-1997 Financial Plan," or "Financial Plan"). The City's
projections set forth in the 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 timing and pace of
any regional and local economic recovery, the impact on real estate tax
revenues of the current downturn in the real estate market, wage increases for
City employees consistent with those assumed in the Financial Plan, employment
growth, the ability to implement proposed reductions in City personnel and
other cost reduction initiatives which may require in certain cases the
cooperation of the City's municipal unions and the Municipal Assistance
Corporation for The City of New York ("MAC"), provision of State and Federal
aid and mandate relief, adoption of the budget by the City Council in
substantially the form submitted by the Mayor and the impact on the New York
City region of the tax increases contained in President Clinton's economic
plan.
Implementation of the 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 1994 through 1997 contemplates the
issuance of $12.47 billion of general obligation bonds primarily to reconstruct
and rehabilitate the City's infrastructure and physical assets and to make
capital investments. In addition, the City issues revenue 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.
The City Comptroller and other agencies and public officials have issued
reports and made public statements which, among other things, state that
projected revenues may be less and future expenditures may
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be greater than forecast in the Financial Plan. In addition, the Control Board
staff and others have questioned whether the City has the capacity to generate
sufficient revenues in the future to provide the level of services included in
the Financial Plan. It is reasonable to expect that such reports and statements
will continue to be issued and to engender public comment.
1994-1997 Financial Plan. The 1994-1997 Financial Plan projects revenues and
expenditures for the 1994 fiscal year balanced in accordance with GAAP. The
Financial Plan sets forth actions to close a projected gap of approximately
$2.0 billion in the 1994 fiscal year. The gap-closing actions for the 1994
fiscal year included productivity savings and savings from restructuring the
delivery of City services, service reductions and the sale of delinquent real
property tax receivables. The proposed sale of real property tax receivables
requires authorization by the City Council.
The Financial Plan also sets forth projections for the 1995 through 1997
fiscal years and outlines a proposed gap-closing program to close projected
budget gaps of $2.3 billion, $3.2 billion and $3.3 billion for the 1995 through
1997 years, respectively. These projections include the continuation of the
personal income tax surcharge and reflect a decline in the property tax
forecast. Proposed gap-closing actions include City, State and Federal actions,
including expected increases in State and Federal assistance and other
unspecified City, State or Federal actions. Various actions proposed in the
Financial Plan, including the continuation of the personal income tax surcharge
beyond December 31, 1995, an increase in State aid, State assumption of certain
Medicaid costs, mandate relief and reallocation of State education aid are
subject to approval by the Governor and the State Legislature, and the proposed
increase in Federal aid is subject to approval by Congress and the President.
The State Legislature has in previous legislative sessions failed to approve
proposals for State assumption of certain Medicaid costs, mandate relief and
reallocation of State education aid, thereby increasing the uncertainty as to
the receipt of the State assistance included in the City Plan. If these actions
cannot be implemented, the City will be required to take other actions to
decrease expenditures or increase revenues to maintain a balanced financial
plan.
The Financial Plan reflects certain cost and expenditure increases including
increases in salaries and benefits paid to City employees pursuant to certain
collective bargaining agreements. In the event of a collective bargaining
impasse, the terms of wage settlements could be determined through an impasse
procedure in the New York City Collective Bargaining Law, which can impose a
binding settlement.
Ratings
As of March 24, 1994, Moody's Investors Service, Inc. ("Moody's") rated the
City's general obligation bonds Baa1 and Standard & Poor's Corporation
("Standard & Poor's") and Fitch Investors Service, Inc. ("Fitch") each rated
such bonds A-. 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 be revised downward or withdrawn
entirely. Any such downward revision or withdrawal could have an adverse effect
on the market prices of bonds.
Outstanding Net Indebtedness
As of December 31, 1993, the City and MAC had, respectively, $21.404 billion
and $4.461 billion of outstanding net long-term debt.
The City depends on the State for State aid both to enable the City to
balance its budget and to meet its cash requirements. There can be no assurance
that there will not be reductions in State aid to the City from amounts
previously projected or that State budgets in future fiscal years will be
adopted by the April 1 statutory deadline and that there will not be adverse
effects on the City's cash flow and additional City expenditures as a result of
such reductions or delays.
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 violations
of law and condemnation proceedings and other tax
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and miscellaneous actions. While the ultimate outcome and fiscal impact, if
any, on the proceedings and claims are not currently predictable, adverse
determination in certain of them might have a material adverse effect upon the
City's ability to carry out the City Plan. As of June 30, 1993, the City
estimated its potential future liability on account of all outstanding claims
to be approximately $2.2 billion.
NEW YORK STATE
Recent Developments. Due to the national recession, the New York economy
experienced a downturn throughout the State's 1990-91 fiscal year followed by a
period of weak economic growth during the 1991 and 1992 calendar years. The New
York economy, as measured by employment, shifted from recession to recovery
near the start of calendar year 1993. During the course of calendar year 1993,
employment began to increase, albeit sporadically, and the unemployment rate
declined. The recovery is expected to continue in calendar year 1994, with
employment growing more rapidly, on average, than in the previous calendar
year. 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 1993-94 and 1994-1995 fiscal years, with corresponding material
and adverse effects on the State's projections of receipts and disbursements.
1993-94 Fiscal Year. The 1993-94 State Financial Plan projects a surplus of
$339 million, more than one percent of the General Fund. Positive developments
affecting both receipts and disbursements contributed to this improved outlook
for the 1993-94 fiscal year.
1994-95 Fiscal Year
The Governor's Recommended 1994-95 State Financial Plan (the "1994-95" State
Financial Plan") projects a balanced General Fund, with receipts and transfers
from other funds projected at $33.422 billion, including $339 million carried
over from the surplus anticipated for the State's 1993-94 fiscal year.
Disbursements and transfers to other funds are projected at $33.399 billion
and, in addition, the 1994-95 State Financial Plan includes a $23 million
repayment to the State's Tax Stabilization Reserve Fund. The Recommended 1994-
95 State Financial Plan is predicated on modest growth in the State economy.
Major revenue actions recommended in the 1994-95 Executive Budget include tax
and fee reductions; preservation of revenues currently received, primarily
through deferral of a scheduled personal income tax rate reduction; additional
revenue measures, resulting primarily from the collection of unredeemed
deposits on bottles and cans; increased lottery revenues due to changes
proposed in lottery games; and enhanced revenue collection and enforcement
measures.
Major programmatic recommendations include an increase in school aid (on a
school year basis), statutory Medicaid cost-containment initiatives, additional
State takeover of local government Medicaid costs, funding for new programs to
fight crime and spur economic development, increased funding for community-
based mental hygiene programs consistent with legislation passed in the 1993
Legislative session, and productivity initiatives which constrain the cost of
operating State government.
There can be no assurance that the Legislature will enact the 1994-95
Executive Budget as proposed. In addition, as of May 16, 1994, the Legislature
had failed to enact the budget for the 1994-95 fiscal year which began April 1,
1994. A protracted delay in legislative enactment of the 1994-95 fiscal year
budget may reduce the effectiveness of several of the actions proposed. The
1994-95 State Financial Plan, when formulated after enactment of the budget,
would have to take into account any reduced savings arising from any late
budget enactment.
There can be no assurance that the State will not face substantial potential
budget gaps resulting from a significant disparity between tax revenues
projected from a lower recurring receipts base and the spending
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required to maintain State programs at current levels. To address any potential
budgetary imbalance, the State may need to take significant actions to align
recurring receipts and disbursements in future fiscal years.
As a result of the United States Supreme Court decision in the case of State
of Delaware v. State of New York, on January 21, 1994 the State entered into a
settlement agreement with Delaware. The State made an immediate $35 million
payment to Delaware and agreed to make annual payments of $33 million in each
of the five fiscal years 1994-95 through 1998-99. In return, Delaware has
agreed to withdraw its claims and its request for summary judgment. Litigation
continues with respect to the other parties and the State may be required to
make additional payments during the State's 1994-95 fiscal year.
On November 16, 1993, the Court of Appeals, the State's highest court,
affirmed the decision of the Appellate Division (Third Department) of the
State's Supreme Court in three actions (McDermott, et al. v. Regan, et al.;
Puma, et al. v. Regan, et al.; and Guzdek, et al. v. Regan, et al.) declaring
unconstitutional certain legislation enacted in 1990. That legislation mandated
a change in the actuarial funding method for determining contributions by the
State and its local governments to the State and local retirement systems from
the aggregate cost (AC) method, previously used by the Comptroller, to the
projected unit credit (PUC) method, and it required the application of the
surplus reported under the PUC method as a credit to employer contributions. As
a result, contributions to the retirement systems have been significantly
reduced since the State's 1990-91 fiscal year. The Court of Appeals held, among
other things, that the State Constitution, which prohibits the benefits of
membership in the retirement systems from being impaired or diminished, was
violated because the PUC legislation impaired "the means designed to assure
benefits to public employees by depriving the Comptroller of his personal
responsibility to maintain "the security and sources of benefits' of the
pension fund." As a result of this decision, the Comptroller has developed a
plan to return to the AC method and to restore prior funding levels of the
retirement systems. The Comptroller expects to achieve this objective in a
manner that, consistent with his fiduciary responsibilities, will not
materially and adversely affect the financial condition of the State. The
Comptroller's plan calls for a return to the AC method, using a four-year
phase-in in the New York State and Local Employees' Retirement System (ERS),
with State AC contributions to ERS capped at a percentage of payroll that
increases each year during the phase-in. Although State contributions under the
plan are expected to be lower during the phase-in period than they would have
been if the AC method were reinstated immediately, they are expected to exceed
PUC levels by $30 million in fiscal 1994-95, $63 million in fiscal 1995-96,
$116 million in fiscal 1996-1997, and $193 million in fiscal 1997-1998. The
excess over PUC levels is expected to peak at $241 million in fiscal 1998-99,
when State contributions under the Comptroller's plan are first projected to
exceed levels that would have been required by an immediate return to the AC
method. The excess over PUC levels is projected to decline after fiscal 1998-
99, and, beginning in fiscal 2001-02, State contributions required under the
Comptroller's plan are projected to be less than PUC requirements would have
been.
Composition of State Cash Receipts and Disbursements. Substantially all State
non-pension financial operations are accounted for in the State's governmental
funds group. Governmental funds include the General Fund, which receives all
income not required by law to be deposited in another fund and which for the
State's 1993-94 fiscal year comprised approximately 53% of total projected
governmental fund receipts; Special Revenue Funds, which receive the
preponderance of moneys received by the State from the Federal government and
other income the use of which is legally restricted to certain purposes and
which comprised approximately 39% of total projected governmental funds
receipts in the 1993-94 fiscal year; Capital Projects Funds, used to finance
the acquisition and construction of major capital facilities by the State and
to aid in certain of such projects conducted by local governments or public
authorities; and Debt Service Funds, which are used for the accumulation of
moneys for the payment of principal of and interest on long-term debt and to
meet lease-purchase and other contractual-obligation commitments. Receipts in
Capital Projects and Debt Service Funds comprised an aggregate of approximately
8% of total projected governmental funds receipts in the 1993-94 fiscal year.
A legislative change implemented in August 1990 affects the way in which a
portion of the State's sales and use tax collections are recorded as receipts
in the General Fund. Pursuant to the legislation creating the
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New York Local Government Assistance Corporation ("LGAC"), the Comptroller is
required to credit the equivalent of one percentage point of the four percent
sales and use tax collections to the Local Government Assistance Tax Fund (the
"Tax Fund"), which is a Debt Service Fund, for purposes of making payments to
LGAC to provide for the payment of debt service on its bonds and notes. To the
extent that these moneys are not necessary for payment to LGAC, they are
transferred from the Tax Fund to the General Fund and are reported in the
General Fund as a transfer from other funds, rather than as sales and use tax
receipts. During the State's 1991-92 and 1992-93 fiscal years $1.435 billion
and $1.504 billion, respectively, in sales and use tax receipts were credited
to the Tax Fund, and $1.522 billion and $1.600 billion are estimated to be
credited to the Tax Fund during the State's 1993-94 and 1994-95 fiscal years,
respectively. For the 1991-92 fiscal year, the amount transferred to the
General Fund from the Tax Fund was $1.316 billion, after providing for the
payment of $119 million to LGAC for the purpose of meeting debt service on its
bonds and its other cash requirements. For the 1992-93 fiscal year, $1.280
billion was transferred to the General Fund from the Tax Fund after providing
for payment of $224 million to LGAC for debt service and other cash
requirements, while $1.278 billion is estimated to be transferred in 1993-94,
after payment of $244 million to LGAC for debt service and other cash
requirements and $1.303 billion is recommended to be transferred in the State's
1994-95 fiscal year, after payment of $297 million to LGAC for debt service and
its other cash requirements.
The enacted 1993-94 Executive Budget includes several changes in the manner
in which General Fund tax receipts are recorded. Receipts from user taxes and
fees in the 1993-94 and 1994-95 fiscal years are reduced by approximately $432
million and $462 million, respectively, to reflect receipts that are dedicated
for highway and bridge capital purposes, which are to be deposited in the
Capital Projects Funds. Also, business taxes are reduced by approximately $175
million and $475 million in the 1993-94 and 1994-95 fiscal years, respectively,
to reflect tax receipts that are dedicated for transportation purposes and
which will be deposited in the Special Revenue and Capital Projects Funds.
Authorities. The fiscal stability of the State is related to the fiscal
stability of its Authorities, which generally have responsibility for
financing, constructing and operating revenue-producing public benefit
facilities. Authorities are not subject to the constitutional restrictions on
the incurrence of debt which apply to the State itself, and may issue bonds and
notes within the amounts of, and as otherwise restricted by, their legislative
authorization. As of September 30, 1993, the latest data available, there were
18 Authorities that had outstanding debt of $100 million or more. The aggregate
outstanding debt, including refunding bonds, of these 18 Authorities was $63.5
billion as of September 30, 1993, of which approximately $7.7 billion was moral
obligation debt and approximately $19.3 billion was financed under lease-
purchase or contractual-obligation financing arrangements.
Authorities are generally supported by revenues generated by the projects
financed or operated, such as fares, user fees on bridges, highway tolls and
rentals for dormitory rooms and housing. In recent years, however, the State
has provided financial assistance through appropriations, in some cases of a
recurring nature, to certain of the 18 Authorities for operating and other
expenses and, in fulfillment of its commitments on moral obligation
indebtedness or otherwise, for debt service. This operating assistance is
expected to continue to be required in future years.
The State's experience has been that if an Authority suffers serious
financial difficulties, both the ability of the State and the Authorities to
obtain financing in the public credit markets and the market price of the
State's outstanding bonds and notes may be adversely affected. The New York
State Housing Finance Agency ("HFA") and the New York State Urban Development
Corporation ("UDC") have in the past required substantial amounts of assistance
from the State to meet debt service costs or to pay operating expenses. Further
assistance, possibly in increasing amounts, may be required for these, or
other, Authorities in the future. In addition, certain statutory arrangements
provide for State local assistance payments otherwise payable to localities to
be made under certain circumstances to certain Authorities. The State has no
obligation to provide additional assistance to localities whose local
assistance payments have been paid to Authorities under these arrangements.
However, in the event that such local assistance payments are so diverted, the
affected localities could seek additional State funds.
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Ratings. On June 6, 1990, Moody's changed its ratings on all of the State's
outstanding general obligation bonds from A1 to A. On March 26, 1990, Standard
& Poor's changed its ratings on all of the State's outstanding general
obligation bonds from AA- to A. On January 13, 1992, Standard & Poor's changed
its ratings on all of the State's outstanding general obligation bonds from A
to A-. 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, or either of them, may have an effect
on the market price of the New York State Municipal Bonds in which the New York
Fund invests.
General Obligation Debt. As of December 31, 1993, the State had approximately
$4.977 billion in general obligation bonds, excluding refunding bonds, and $294
million in bond anticipation notes outstanding. On May 4, 1993, the State
issued $850 million in tax and revenue anticipation notes, all of which matured
and were redeemed on December 31, 1993. Principal and interest due on general
obligation bonds and interest due on bond anticipation notes and on tax and
revenue anticipation notes were $890.0 million and $818.8 million for the 1991-
92 and 1992-93 fiscal years, respectively, and are estimated and recommended to
be $783.5 million and $787.7 million for the State's 1993-94 and 1994-95 fiscal
years, respectively, not including interest on refunding bonds, to the extent
that such interest is to be paid from escrowed funds.
Litigation. The State is a defendant in numerous legal proceedings pertaining
to matters incidental to the performance of routine governmental operations.
Such litigation includes, but is 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.
Included in the State's outstanding litigation are a number of cases
challenging the constitutionality or the adequacy and effectiveness of a
variety of significant social welfare programs primarily involving the State's
health and mental hygiene programs. Adverse judgments in these matters
generally could result in injunctive relief coupled with prospective changes in
patient care which could require substantial increased financing of the
litigated programs in the future. Because of the prospective nature of these
matters, no provision for this potential exposure has been made in the State's
audited financial statements for the 1992-93 fiscal year.
In an action commenced on August 6, 1991 (Schulz, et al, v. State of New
York, et al., Supreme Court, Albany County), plaintiffs challenge the
constitutionality of two bonding programs of the New York State Thruway
Authority authorized by Chapters 166 and 410 of the Laws of 1991. Plaintiffs
argue that cooperative highway contractual agreements and service contracts to
be entered into by the State and the Thruway Authority in connection with the
bonding programs constitute State debt and a gift or loan of State credit in
violation of Sections 8 and 11 of Article VII and Section 5 of Article X of the
State Constitution. In addition, plaintiffs challenge the fiscal year 1991-92
Judiciary budget as having been enacted in violation of Sections 1 and 2 of
Article VII of the State Constitution. The defendants' motion to dismiss the
action on procedural grounds was denied by order of the Supreme Court dated
January 2, 1992. By order dated November 5, 1992, the Appellate Division, Third
Department, reversed the order of the Supreme Court and granted defendants'
motion to dismiss on grounds of standing and mootness. By order dated September
16, 1993, on motion to reconsider, the Appellate Division, Third Department,
ruled that plaintiffs have standing to challenge the bonding program authorized
by Chapter 166 of the Laws of 1991. The action is pending in Supreme Court,
Albany County.
In Schulz, et al. v. State of New York, et al. (Supreme Court, Albany County,
commenced May 24, 1993), plaintiffs challenge, among other things, the
constitutionality of, and seek to enjoin, certain highway, bridge and mass
transportation bonding programs of the New York State Thruway Authority and the
Metropolitan Transportation Authority authorized by Chapter 56 of the Laws of
1993. Plaintiffs contend that the application of State tax receipts held in
dedicated transportation funds to pay debt service on bonds of the
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Thruway Authority and the Metropolitan Transportation Authority violates
Sections 8 and 11 of Article VII and Section 5 of Article X of the State
Constitution and due process provisions of the State and Federal constitutions.
By order dated July 27, 1993, the Supreme Court granted defendants' motions for
summary judgment, dismissed the complaint and vacated the temporary restraining
order. By decision dated October 21, 1993, the Appellate Division, Third
Department, affirmed the judgment of the Supreme Court. Plaintiffs' appeal of
the decision of the Appellate Division is pending in the Court of Appeals.
Other Localities. Certain localities in addition to the City could have
financial problems leading to requests for additional State assistance during
the State's 1993-94 and 1994-95 fiscal years 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 1993-94 and
1994-95 fiscal years.
Fiscal difficulties experienced by the City of Yonkers ("Yonkers") resulted
in the creation of the Financial Control Board for the City of 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 PENNSYLVANIA
Many factors affect the financial condition of the Commonwealth of
Pennsylvania (sometimes referred to as the "Commonwealth") and its political
subdivisions, such as social, environmental and economic conditions, many of
which are not within the control of such entities. Pennsylvania and certain of
its counties, cities and school districts and public bodies 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
Pennsylvania Fund. For example, the financial condition of the City of
Philadelphia had impaired its ability to borrow and resulted in its obligations
generally being downgraded by Moody's Investors Service, Inc. ("Moody's") and
Standard & Poor's Corporation ("Standard & Poor's") in some cases below
investment grade.
The General Fund, the Commonwealth's largest fund, receives all tax revenues,
non-tax revenues and Federal grants and entitlements that are not specified by
law to be deposited elsewhere. The majority of the Commonwealth's operating and
administrative expenses are payable from the General Fund. Debt service on all
bonded indebtedness of the Commonwealth, except that issued for highway
purposes or for the benefit of other special revenue funds, is payable from the
General Fund. For its fiscal year ended June 30, 1991, the Pennsylvania General
Fund experienced an $861.2 million operating deficit resulting in a fund
balance deficit of $980.9 million at June 30, 1992 (determined on a generally
accepted accounting principles basis). On a budgetary basis, the Commonwealth
experienced a budget deficit of $453.6 million for the fiscal year ended June
30, 1991.
For its fiscal year ended June 30, 1992, the General Fund recorded a $1.1
billion operating surplus (determined on a generally accepted accounting
principles basis). Tax increases enacted as a part of the fiscal 1992 budget
are estimated to have increased receipts for the fiscal 1992 year by over $2.7
billion. The budget revenue estimates for fiscal 1992 were revised downward
during the fiscal year to reflect continued recessionary economic activity.
Cost reductions were implemented during fiscal 1992 which contributed to $296.8
million of appropriation lapses. These appropriation lapses contributed to the
$8.8 million budget surplus at June 30, 1992 (determined on a budgetary basis).
The 1993 fiscal year closed with revenues higher than anticipated and
expenditures about as projected, resulting in an ending unappropriated balance
surplus (on a budgetary basis) of $242.3 million. Cash revenues were $41.5
million above the budget estimate and totalled $14.633 billion (representing
less than a 1% increase over revenues for the 1992 fiscal year). A reduction in
the personal income tax rate in July, 1992 and revenues from retroactive
corporate tax increases received in fiscal 1992 were reportedly responsible for
the low rate of revenue growth. Appropriations (less lapses) totaled an
estimated $13.870 billion representing a 1.1% increase over fiscal 1992
amounts. The low growth in spending is reportedly a consequence of a low rate
of revenue growth, significant one-time expenses during fiscal 1992, increased
tax refund reserves to cushion against adverse decisions on pending
litigations, and the receipt of Federal funds for expenditures previously paid
out of Commonwealth funds. By state statute, 10% of the budgetary basis
unappropriated surplus at the end of a fiscal year is to be transferred to the
Tax Stabilization Reserve Fund. The transfer for the fiscal 1993 balance is
$24.2 million. The remaining unappropriated surplus of $218.0 million will be
carried forward into the 1994 fiscal year.
The enacted 1994 fiscal budget provides for $14.999 billion of
appropriations. The budget estimates revenue growth of 3.7% over fiscal 1993
actual revenues. The revenue estimate is based on an expectation of continued
economic recovery, but at a slow rate. In February, 1994, the Governor
recommended that $46.4 million of additional appropriations be enacted for
fiscal 1994, raising total appropriations to $15,041.7 million.
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For the fiscal year beginning July 1, 1994, the Governor has proposed a
budget containing a 4.1% increase in appropriations over the actual and
proposed supplemental appropriations for fiscal 1994. Total appropriations
recommended amount to $15,665 million. The budget is balanced by drawing down
of a projected $267 million unappropriated surplus for fiscal 1994. The
Governor's proposal also includes a recommended reduction in the corporate net
income tax rate from 12.25% to 9.99% over a three year period. The corporate
tax cut and a proposed increase in the poverty exemption for the personal
income tax are estimated to cost $124.7 million in fiscal 1995. The recommended
budget contemplates revenue growth of 4.7% without the effect of the proposed
tax reduction. The revenue estimate is based on the expectation of a continued
slow national economic recovery and continued economic growth of the
Pennsylvania economy at a rate slightly below the national rate.
The economy of Pennsylvania is composed of many diverse sectors including
manufacturing, mining, agriculture, services, and wholesale and retail trade.
Certain industries traditionally strong in the Commonwealth, such as coal,
steel and railways, have declined and account for a decreasing share of total
employment. Non-manufacturing employment has increased steadily since 1980 to
its 1992 level of 81.3% of total Commonwealth employment.
Non-agricultural employment in the Commonwealth declined by 5.1% during the
recessionary period from 1980 to 1983. In 1984, the declining trend was
reversed as employment grew by 2.9% over 1983 levels. From 1983 to 1990,
Commonwealth employment continued to grow each year, increasing an additional
14.3%. For 1991 and 1992, employment in the Commonwealth has declined 1.9%. The
unemployment rate in Pennsylvania in February, 1994 stood at a seasonally
adjusted rate of 5.1%. The seasonally adjusted national unemployment rate for
February, 1994 was 6.5%.
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, 1993, the
Commonwealth had $5,038.8 million of general obligation debt outstanding.
Other state-related obligations include "moral obligations". Moral
obligation indebtedness may be issued by the Pennsylvania Housing Finance
Agency ("PHFA"), a state-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 supported by assets of, or revenues derived from, the
various projects financed and is not an obligation of the Commonwealth. Some of
these agencies, however, are indirectly dependent on Pennsylvania
appropriations. In addition, the Commonwealth maintains pension plans covering
state employees, public school employees and employees of certain state-related
organizations. The total unfunded actuarial accrued liability under these
pension plans for their fiscal years ended in 1993 was at least $4,359 million.
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The City of Philadelphia is the largest city in the Commonwealth with an
estimated population of 1,585,577 according to the 1990 Census. For the fiscal
year ending June 30, 1991, Philadelphia experienced a cumulative General Fund
balance deficit of $153.5 million. The audited findings for the fiscal year
ending June 30, 1992 placed the cumulative General Fund balance deficit at
$224.9 million.
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 to liquidate budget deficits and to make factual
findings and recommendations to Philadelphia concerning its budgetary and
fiscal affairs. An Intergovernmental Cooperation Agreement between Philadelphia
and PICA was approved by City Council on January 3, 1992, and approved by the
PICA Board and signed by the Mayor on January 8, 1992. At this time,
Philadelphia is operating under a five year fiscal plan approved by PICA on
April 6, 1992. Full implementation of the five year plan was delayed due to
labor negotiations which were not completed until October, 1992. The terms of
the new labor contracts are estimated to cost approximately $144.0 million more
than what was budgeted in the original five year plan. The audit findings show
a surplus of approximately $3 million for the fiscal year ending June 30, 1993.
The Mayor's latest five-year financial plan was approved by PICA on May 2,
1994. The plan projects a $1 million budget surplus for the fiscal year ending
June 30, 1994 and a balanced budget for the fiscal year ending June 30, 1995.
On June 7, 1992, PICA issued $474,555,000 of its Special Tax Revenue Bonds to
provide financial assistance to Philadelphia and to liquidate the cumulative
General Fund balance deficit. In July, 1993, PICA issued $643,430,000 of
Special Tax Revenue Bonds to refund certain general obligation bonds of the
city and to fund additional capital projects.
There is various litigation pending against the Commonwealth, its officers
and employees. An adverse decision in one or more of these cases could
materially affect the Commonwealth's governmental operations.
Currently, Pennsylvania general obligation bonds are rated AA- by Standard &
Poor's and Fitch Investors Service, Inc., 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 I
RATINGS OF MUNICIPAL BONDS
DESCRIPTION OF MOODY'S INVESTORS SERVICE, INC.'S ("MOODY'S") MUNICIPAL BOND
RATINGS
Aaa Bonds which are rated Aaa are judged to be of the best quality. They
carry the smallest degree of investment risk and are generally referred
to as "gilt edge". Interest payments are protected by a large or by an
exceptionally stable margin and principal is secure. While the various
protective elements are likely to change, such changes as can be
visualized are most unlikely to impair the fundamentally strong
position of such issues.
Aa Bonds which are rated Aa are judged to be of high quality by all
standards. Together with the Aaa group they comprise what are generally
known as high-grade bonds. They are rated lower than the best bonds
because margins of protection may not be as large as in Aaa securities
or fluctuation of protective elements may be of greater amplitude or
there may be other elements present which make the long-term risks
appear somewhat larger than in Aaa securities.
A Bonds which are rated A possess many favorable investment attributes
and are to be considered as upper-medium-grade obligations. Factors
giving security to principal and interest are considered adequate, but
elements may be present which suggest a susceptibility to impairment
sometime in the future.
Baa Bonds which are rated Baa are considered as medium-grade obligations,
i.e., they are neither highly protected nor poorly secured. Interest
payment and principal security appear adequate for the present but
certain protective elements may be lacking or may be characteristically
unreliable over any great length of time. Such bonds lack outstanding
investment characteristics and in fact have speculative characteristics
as well.
Ba Bonds which are rated Ba are judged to have speculative elements; their
future cannot be considered as well assured. Often the protection of
interest and principal payments may be very moderate and thereby not
well safeguarded during both good and bad times over the future.
Uncertainty of position characterizes bonds in this class.
B Bonds which are rated B generally lack characteristics of the desirable
investment. Assurance of interest and principal payments or of
maintenance of other terms of the contract over any long period of time
may be small.
Caa Bonds which are rated Caa are of poor standing. Such issues may be in
default or there may be present elements of danger with respect to
principal or interest.
Ca Bonds which are rated Ca represent obligations which are speculative in
a high degree. Such issues are often in default or have other marked
shortcomings.
C Bonds which are rated C are the lowest rated class of bonds, and issues
so rated can be regarded as having extremely poor prospects of ever
attaining any real investment standing.
Note: Those bonds in the Aa, A, Baa, Ba and B groups which Moody's believes
possess the strongest investment attributes are designated by the symbols Aa1,
A1, Baa1, Ba1 and B1.
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Short-term Notes: The four ratings of Moody's for short-term notes are MIG
1/VMIG1, MIG 2/VMIG2, MIG 3/VMIG3 and MIG 4/VMIG4; MIG 1/VMIG1 denotes "best
quality . . . strong protection by established cash flows"; MIG 2/VMIG2 denotes
"high quality" with ample margins of protection; MIG 3/VMIG3 notes are of
"favorable quality . . . but . . . lacking the undeniable strength of the
preceding grades"; MIG 4/VMIG4 notes are of "adequate quality . . .
[p]rotection commonly regarded as required of an investment security is
present . . . there is specific risk."
DESCRIPTION OF MOODY'S CORPORATE BOND RATINGS
Excerpts from Moody's description of its corporate bond ratings: Aaa--judged
to be the best quality, carry the smallest degree of investment risk; Aa--
judged to be of high quality by all standards; A--possess many favorable
investment attributes and are to be considered as upper-medium-grade
obligations; Baa--considered as medium grade obligations, i.e., they are
neither highly protected nor poorly secured.
DESCRIPTION OF MOODY'S COMMERCIAL PAPER RATINGS
Moody's Commercial Paper ratings are opinions of the ability of issuers to
repay punctually promissory obligations not having an original maturity in
excess of nine months. Moody's employs the following three designations, all
judged to be investment grade, to indicate the relative repayment capacity of
rated issuers:
Issuers rated Prime-1 (or related supporting institutions) have a superior
capacity for repayment of short-term promissory obligations. Prime-1 repayment
capacity will normally be evidenced by the following characteristics: leading
market positions in well established industries; high rates of return on funds
employed; conservative capitalization structures with moderate reliance on debt
and ample asset protection; broad margins in earning coverage of fixed
financial charges and high internal cash generation; and well established
access to a range of financial markets and assured sources of alternate
liquidity.
Issuers rated Prime-2 (or related supporting institutions) have a strong
capacity for repayment of short-term promissory obligations. This will normally
be evidenced by many of the characteristics cited above but to a lesser degree.
Earnings trends and coverage ratios, while sound, will be more subject to
variation. Capitalization characteristics, while still appropriate, may be more
affected by external conditions. Ample alternate liquidity is maintained.
Issuers rated Prime-3 (or related supporting institutions) have an acceptable
capacity for repayment of short-term promissory obligations. The effects of
industry characteristics and market composition may be more pronounced.
Variability in earnings and profitability may result in changes in the level of
debt protection measurements and the requirement for relatively high financial
leverage. Adequate alternate liquidity is maintained.
Issuers rated Not Prime do not fall within any of the Prime rating
categories.
DESCRIPTION OF STANDARD & POOR'S CORPORATION'S ("STANDARD & POOR'S") MUNICIPAL
DEBT RATINGS
A Standard & Poor's municipal debt rating is a current assessment of the
creditworthiness of an obligor with respect to a specific obligation. This
assessment may take into consideration obligors such as guarantors, insurers or
lessees.
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The debt rating is not a recommendation to purchase, sell or hold a security,
inasmuch as it does not comment as to market price or suitability for a
particular investor.
The ratings are based on current information furnished by the issuer or
obtained by Standard & Poor's from other sources Standard & Poor's considers
reliable. Standard & Poor's does not perform an audit in connection with any
rating and may, on occasion, rely on unaudited financial information. The
ratings may be changed, suspended or withdrawn as a result of changes in, or
unavailability of, such information, or for other circumstances.
The ratings are based, in varying degrees, on the following considerations:
I. Likelihood of default--capacity and willingness of the obligor as
to the timely payment of interest and repayment of principal in
accordance with the terms of the obligation;
II. Nature of and provisions of the obligation;
III. Protection afforded by, and relative position of, the obligation
in the event of bankruptcy, reorganization or other arrangement
under the laws of bankruptcy and other laws affecting creditors'
rights.
AAA Debt rated "AAA" has the highest rating assigned by Standard &
Poor's. Capacity to pay interest and repay principal is
extremely strong.
AA Debt rated "AA" has a very strong capacity to pay interest and
repay principal and differs from the higher-rated issues only
in small degree.
A Debt rated "A" has a strong capacity to pay interest and repay
principal although it is somewhat more susceptible to the
adverse effects of changes in circumstances and economic
conditions than debt in higher-rated categories.
BBB Debt rated "BBB" is regarded as having an adequate capacity to
pay interest and repay principal. Whereas it normally exhibits
adequate protection parameters, adverse economic conditions or
changing circumstances are more likely to lead to a weakened
capacity to pay interest and repay principal for debt in this
category than for debt in higher-rated categories.
BB B CCC CC C
Debt rated "BB", "B", "CCC", "CC" and "C" is regarded, on
balance, as predominately speculative with respect to capacity
to pay interest and repay principal in accordance with the
terms of the obligation. "BB" indicates the lowest degree of
speculation and "C" the highest degree of speculation. While
such debt will likely have some quality and protective
characteristics, these are outweighed by large uncertainties
or major exposures to adverse conditions.
CI The rating "CI" is reserved for income bonds on which no
interest is being paid.
D Debt rated "D" is in payment default. The "D" rating category
is used when interest payments or principal payments are not
made on the date due even if the applicable grace period has
not expired, unless Standard & Poor's believes that such
payments will be made during such grace period. The "D" rating
also will be used upon the filing of a bankruptcy petition if
debt service payments are jeopardized.
Plus (+) or Minus (-): The ratings from "AA" to "CCC" may be modified by the
addition of a plus or minus sign to show relative standing within the major
rating categories.
I-3
<PAGE>
DESCRIPTION OF STANDARD & POOR'S CORPORATE BOND RATINGS
A Standard & Poor's corporate debt rating is a current assessment of the
creditworthiness of an obligor with respect to a specific obligation. Debt
rated "AAA" has the highest rating assigned by Standard & Poor's. Capacity to
pay interest and repay principal is extremely strong. Debt rated "AA" has a
very strong capacity to pay interest and to repay principal and differs from
the highest rated issues only in small degree. Debt rated "A" has a strong
capacity to pay interest and repay principal although it is somewhat more
susceptible to the adverse effects of changes in circumstances and economic
conditions than debt of a higher-rated category. Debt rated "BBB" is regarded
as having an adequate capacity to pay interest and repay principal. Whereas it
normally exhibits adequate protection parameters, adverse economic conditions
or changing circumstances are more likely to lead to a weakened capacity to pay
interest and repay principal for debt in this category than in higher-rated
categories.
The ratings from "AA" to "BBB" may be modified by the addition of a plus or
minus sign to show relative standing within the major rating categories.
DESCRIPTION OF STANDARD & POOR'S COMMERCIAL PAPER RATINGS
A Standard & Poor's Commercial Paper Rating is a current assessment of the
likelihood of timely payment of debt having an original maturity of no more
than 365 days. Ratings are graded into four categories, ranging from "A" for
the highest quality obligations to "D" for the lowest. Ratings are applicable
to both taxable and tax-exempt commercial paper. Issues assigned the highest
rating are regarded as having the greatest capacity for timely payment. Issues
in this category are further refined with the designation 1, 2 or 3 to indicate
the relative degree of safety. These categories are as follows:
A-1
This designation indicates that the degree of safety regarding timely
payment is either overwhelming or very strong. Those issues determined
to possess extremely strong safety characteristics are denoted with a
plus sign (+) designation.
A-2
Capacity for timely payment on issues with this designation is strong.
However, the relative degree of safety is not as overwhelming as for
issues designated "A-1".
A-3
Issues carrying this designation have a satisfactory capacity for
timely payment. They are, however, somewhat more vulnerable to the
adverse effects of changes in circumstances than obligations carrying
the higher designations.
B
Issues rated "B" are regarded as having only speculative capacity for
timely payment.
C
This rating is assigned to short-term debt obligations with a doubtful
capacity for payment.
D
Debt rated "D" is in payment default. The "D" rating category is used
when interest payments or principal payments are not made on the date
due, even if the applicable grace period has not expired, unless S&P
believes that such payments will be made during such grace period.
A Commercial Paper Rating is not a recommendation to purchase or sell a
security. The ratings are based on current information furnished to Standard &
Poor's by the issuer and obtained by Standard & Poor's from other sources it
considers reliable. The ratings may be changed, suspended or withdrawn as a
result of changes in, or unavailability of, such information.
A Standard & Poor's note rating reflects the liquidity concerns and market
access risks unique to notes. Notes due in 3 years or less will likely receive
a note rating. Notes maturing beyond 3 years will most likely receive a long-
term debt rating. The following criteria will be used in making that
assessment.
I-4
<PAGE>
--Amortization schedule (the larger the final maturity relative to other
maturities, the more likely it will be treated as a note).
--Source of payment (the more dependent the issue is on the market for its
refinancing, the more likely it will be treated as a note).
Note rating symbols are as follows:
SP-1 A very strong or strong capacity to pay principal and interest. Those
issues determined to possess overwhelming safety characteristics will
be given a "+" designation.
SP-2 A satisfactory capacity to pay principal and interest.
SP-3 A speculative capacity to pay principal and interest.
Standard & Poor's may continue to rate note issues with a maturity greater
than three years in accordance with the same rating scale currently employed
for municipal bond ratings.
Unrated: Where no rating has been assigned or where a rating has been
suspended or withdrawn, it may be for reasons unrelated to the quality of the
issue.
Should no rating be assigned, the reason may be one of the following:
1. An application for rating was not received or accepted.
2. The issue or issuers belongs to a group of securities that are not
rated as a matter of policy.
3. There is a lack of essential data pertaining to the issue or issuer.
4. The issue was privately placed, in which case the rating is not
published in Moody's publications.
Suspension or withdrawal may occur if new and material circumstances arise, the
effects of which preclude satisfactory analysis; if there is no longer
available reasonable up-to-date information to permit a judgment to be formed;
if a bond is called for redemption; or for other reasons.
DESCRIPTION OF FITCH INVESTORS SERVICE, INC.'S ("FITCH") INVESTMENT GRADE BOND
RATINGS
Fitch investment grade bond ratings provide a guide to investors in
determining the credit risk associated with a particular security. The ratings
represent Fitch's assessment of the issuer's ability to meet the obligations of
a specific debt issue or class of debt in a timely manner.
The rating takes into consideration special features of the issue, its
relationship to other obligations of the issuer, the current and prospective
financial condition and operating performance of the issuer and of any
guarantor, as well as the economic and political environment that might affect
the issuer's future financial strength and credit quality.
Fitch ratings do not reflect any credit enhancement that may be provided by
insurance policies or financial guaranties unless otherwise indicated.
Bonds that have the same rating are of similar but not necessarily identical
credit quality since the rating categories do not fully reflect small
differences in the degrees of credit risk.
Fitch ratings are not recommendations to buy, sell or hold any security.
Ratings do not comment on the adequacy of market price, the suitability of any
security for a particular investor, or the tax-exempt nature or taxability of
payments made in respect of any security.
I-5
<PAGE>
Fitch ratings are based on information obtained from issuers, other obligors,
underwriters, their experts, and other sources Fitch believes to be reliable.
Fitch does not audit or verify the truth or accuracy of such information.
Ratings may be changed, suspended or withdrawn as a result of changes in, or
the unavailability of, information or for any other reasons.
AAA Bonds considered to be investment grade and of the highest
credit quality. The obligor has an exceptionally strong
ability to pay interest and repay principal, which is unlikely
to be affected by reasonably foreseeable events.
AA Bonds considered to be investment grade and of very high
credit quality. The obligor's ability to pay interest and
repay principal is very strong, although not quite as strong
as bonds rated "AAA". Because bonds rated in the "AAA" and
"AA" categories are not significantly vulnerable to
foreseeable future developments, short-term debt of these
issuers is generally rated "F-1+".
A Bonds considered to be investment grade and of high credit
quality. The obligor's ability to pay interest and repay
principal is considered to be strong, but may be more
vulnerable to adverse changes in economic conditions and
circumstances than bonds with higher ratings.
BBB Bonds considered to be investment grade and of satisfactory
credit quality. The obligor's ability to pay interest and
repay principal is considered to be adequate. Adverse changes
in economic conditions and circumstances, however, are more
likely to have adverse impact on these bonds, and therefore,
impair timely payment. The likelihood that the ratings of
these bonds will fall below investment grade is higher than
for bonds with higher ratings.
Plus (+) or Minus (-): Plus and minus signs are used with a rating symbol to
indicate the relative position of a credit within the rating category. Plus and
minus signs, however, are not used in the "AAA" category.
Credit Trend Indicator: Credit trend indicators show whether credit
fundamentals are improving, stable, declining, or uncertain, as follows:
Improving ^^
Stable ^^
^^
Declining ^^
Uncertain ^^
^^
Credit trend indicators are not predictions that any rating change will occur,
and have a longer-term time frame than issues placed on FitchAlert.
NR Indicates that Fitch does not rate the specific issue.
CONDITIONAL A conditional rating is premised on the successful completion
of a project or the occurrence of a specific event.
SUSPENDED
A rating is suspended when Fitch deems the amount of
information available from the issuer to be inadequate for
rating purposes.
I-6
<PAGE>
WITHDRAWN A rating will be withdrawn when an issue matures or is called
or refinanced and, at Fitch's discretion, when an issuer
fails to furnish proper and timely information.
FITCHALERT Ratings are placed on FitchAlert to notify investors of an
occurrence that is likely to result in a rating change and
the likely direction of such change. These are designated as
"Positive," indicating a potential upgrade, "Negative," for
potential downgrade, or "Evolving," where ratings may be
raised or lowered. FitchAlert is relatively short-term, and
should be resolved within 12 months.
DESCRIPTION OF FITCH SPECULATIVE GRADE BOND RATINGS
Fitch speculative grade bond ratings provide a guide to investors in
determining the credit risk associated with a particular security. The ratings
("BB" to "C") represent Fitch's assessment of the likelihood of timely payment
of principal and interest in accordance with the terms of obligation for bond
issues not in default. For defaulted bonds, the rating ("DDD" to "D") is an
assessment of the ultimate recovery value through reorganization or
liquidation.
The rating takes into consideration special features of the issue, its
relationship to other obligations of the issuer, the current and prospective
financial condition and operating performance of the issuer and any guarantor,
as well as the economic and political environment that might affect the
issuer's future financial strength.
Bonds that have the same rating are of similar but not necessarily identical
credit quality since rating categories cannot fully reflect the differences in
degrees of credit risk.
BB Bonds are considered speculative. The obligor's ability to pay
interest and repay principal may be affected over time by
adverse economic changes. However, business and financial
alternatives can be identified which could assist the obligor
in satisfying its debt service requirements.
B Bonds are considered highly speculative. While bonds in this
class are currently meeting debt service requirements, the
probability of continued timely payment of principal and
interest reflects the obligor's limited margin of safety and
the need for reasonable business and economic activity
throughout the life of the issue.
CCC Bonds have certain identifiable characteristics which, if not
remedied, may lead to default. The ability to meet obligations
requires an advantageous business and economic environment.
CC Bonds are minimally protected. Default in payment of interest
and/or principal seems probable over time.
C Bonds are in imminent default in payment of interest or
principal.
DDD, DD and D Bonds are in default on interest and/or principal payments.
Such bonds are extremely speculative and should be valued on
the basis of their ultimate recovery value in liquidation or
reorganization of the obligor. "DDD" represents the highest
potential for recovery on these bonds, and "D" represents the
lowest potential for recovery.
Plus (+) or Minus (-): Plus and minus signs are used with a rating symbol to
indicate the relative position of a credit within the rating category. Plus and
minus signs, however, are not used in the "DDD", "DD", or "D" categories.
I-7
<PAGE>
DESCRIPTION OF FITCH INVESTMENT GRADE SHORT-TERM RATINGS
Fitch's short-term ratings apply to debt obligations that are payable on
demand or have original maturities of generally up to three years, including
commercial paper, certificates of deposit, medium-term notes, and municipal and
investment notes.
The short-term rating places greater emphasis than a long-term rating on the
existence of liquidity necessary to meet the issuer's obligations in a timely
manner.
Fitch short-term ratings are as follows:
F-1+ Exceptionally Strong Credit Quality. Issues assigned this
rating are regarded as having the strongest degree of
assurance for timely payment.
F-1 Very Strong Credit Quality. Issues assigned this rating
reflect an assurance of timely payment only slightly less in
degree than issues rated "F-1+".
F-2 Good Credit Quality. Issues assigned this rating have a
satisfactory degree of assurance for timely payment, but the
margin of safety is not as great as for issues assigned "F-1+"
and "F-1" ratings.
F-3 Fair Credit Quality. Issues assigned this rating have
characteristics suggesting that the degree of assurance for
timely payment is adequate; however, near-term adverse changes
could cause these securities to be rated below investment
grade.
F-4 Weak Credit Quality. Issues assigned this rating have
characteristics suggesting a minimal degree of assurance for
timely payment and are vulnerable to near-term adverse changes
in financial and economic conditions.
D Default. Issues assigned this rating are in actual or imminent
payment default.
LOC The symbol "LOC" indicates that the rating is based on a
letter of credit issued by a commercial bank.
INS The symbol "INS" indicates that the rating is based on an
insurance policy or financial guaranty issued by an insurance
company.
I-8
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Trustees and Shareholder,
Merrill Lynch Arizona Limited Maturity Municipal Bond Fund of Merrill Lynch
Multi-State Limited Maturity Municipal Series Trust:
We have audited the accompanying statement of assets and liabilities of Merrill
Lynch Arizona Limited Maturity Municipal Bond Fund of Merrill Lynch Multi-State
Limited Maturity Municipal Series Trust as of November 12, 1993. This financial
statement is the responsibility of the Fund's management. Our responsibility is
to express an opinion on this financial statement based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statement is free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statement. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, such financial statement presents fairly, in all material
respects, the financial position of Merrill Lynch Arizona Limited Maturity
Municipal Bond Fund of Merrill Lynch Multi-State Limited Maturity Municipal
Series Trust as of November 12, 1993, in conformity with generally accepted
accounting principles.
Deloitte & Touche
Princeton, New Jersey
November 15, 1993
I-1
<PAGE>
MERRILL LYNCH ARIZONA LIMITED MATURITY MUNICIPAL BOND FUND
MERRILL LYNCH MULTI-STATE LIMITED MATURITY MUNICIPAL SERIES TRUST
STATEMENT OF ASSETS AND LIABILITIES
NOVEMBER 12, 1993
<TABLE>
<S> <C>
Assets:
Cash in bank..................................................... $100,000
Prepaid registration fees (Note 3)............................... 12,400
Deferred organization expenses (Note 4).......................... 47,600
--------
Total Assets....................................................... 160,000
Liabilities-Accrued expenses....................................... 60,000
--------
Net Assets (equivalent to $10.00 per share on 5,000 Class A shares
of beneficial interest (par value $0.10) and 5,000 Class B shares
of beneficial interest (par value $0.10) outstanding with an un-
limited number of shares authorized) (Note 1)..................... $100,000
========
</TABLE>
- --------
Notes to the Statement of Assets and Liabilities:
(1) Merrill Lynch Multi-State Limited Maturity Municipal Series Trust (the
"Trust") was organized as a Massachusetts business trust on February 14,
1991. To date, Merrill Lynch Arizona Limited Maturity Municipal Bond Fund
(the "Fund") has not had any transactions other than those relating to
organizational matters and the sale of 5,000 Class A shares and 5,000 Class
B shares of beneficial interest of the Fund to Fund Asset Management, Inc.
(the "Manager"). The Trust is registered under the Investment Company Act
of 1940 as an open-end management investment company.
(2) The Trust has entered into a Management Agreement with the Manager and
separate Class A and Class B Distribution Agreements and a Distribution
Plan with Merrill Lynch Funds Distributor, Inc. (the "Distributor") on
behalf of the Fund. (See "Management of the Trust--Management and Advisory
Arrangements" in the Prospectus and the Statement of Additional
Information.) Certain officers and/or Trustees of the Trust are officers
and/or directors of the Manager and of the Distributor.
(3)Prepaid registration fees are charged to income as the related shares are
issued.
(4) Deferred organization expenses will be amortized over a period from the
date the Fund commences operations not exceeding five years. In the event
that the Manager (or any subsequent holder) redeems any of its original
shares prior to the end of the five-year period, the proceeds of the
redemption payable in respect of such shares shall be reduced by the pro
rata share (based on the proportionate share of the original shares
redeemed to the total number of original shares outstanding at the time of
redemption) of the unamortized deferred organization expenses as of the
date of such redemption. In the event that the Fund is liquidated prior to
the end of the five-year period, the Manager (or any subsequent holder)
shall bear the unamortized deferred organization expenses.
I-2
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Trustees and Shareholder,
Merrill Lynch California Limited Maturity Municipal Bond Fund of Merrill Lynch
Multi-State Limited Maturity Municipal Series Trust:
We have audited the accompanying statement of assets and liabilities of Merrill
Lynch California Limited Maturity Municipal Bond Fund of Merrill Lynch Multi-
State Limited Maturity Municipal Series Trust as of November 12, 1993. This
financial statement is the responsibility of the Fund's management. Our
responsibility is to express an opinion on this financial statement based on
our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statement is free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statement. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, such financial statement presents fairly, in all material
respects, the financial position of Merrill Lynch California Limited Maturity
Municipal Bond Fund of Merrill Lynch Multi-State Limited Maturity Municipal
Series Trust as of November 12, 1993, in conformity with generally accepted
accounting principles.
Deloitte & Touche
Princeton, New Jersey
November 15, 1993
II-1
<PAGE>
MERRILL LYNCH CALIFORNIA LIMITED MATURITY MUNICIPAL BOND FUND
MERRILL LYNCH MULTI-STATE LIMITED MATURITY MUNICIPAL SERIES TRUST
STATEMENT OF ASSETS AND LIABILITIES
NOVEMBER 12, 1993
<TABLE>
<S> <C>
Assets:
Cash in bank..................................................... $100,000
Prepaid registration fees (Note 3)............................... 14,600
Deferred organization expenses (Note 4).......................... 47,600
--------
Total Assets....................................................... 162,200
Liabilities-Accrued expenses....................................... 62,200
--------
Net Assets (equivalent to $10.00 per share on 5,000 Class A shares
of beneficial interest (par value $0.10) and 5,000 Class B shares
of beneficial interest (par value $0.10) outstanding with an un-
limited number of shares authorized) (Note 1)..................... $100,000
========
</TABLE>
- --------
Notes to the Statement of Assets and Liabilities:
(1) Merrill Lynch Multi-State Limited Maturity Municipal Series Trust (the
"Trust") was organized as a Massachusetts business trust on February 14,
1991. To date, Merrill Lynch California Limited Maturity Municipal Bond
Fund (the "Fund") has not had any transactions other than those relating to
organizational matters and the sale of 5,000 Class A shares and 5,000 Class
B shares of beneficial interest of the Fund to Fund Asset Management, Inc.
(the "Manager"). The Trust is registered under the Investment Company Act
of 1940 as an open-end management investment company.
(2) The Trust has entered into a Management Agreement with the Manager and
separate Class A and Class B Distribution Agreements and a Distribution
Plan with Merrill Lynch Funds Distributor, Inc. (the "Distributor") on
behalf of the Fund. (See "Management of the Trust--Management and Advisory
Arrangements" in the Prospectus and the Statement of Additional
Information.) Certain officers and/or Trustees of the Trust are officers
and/or directors of the Manager and of the Distributor.
(3)Prepaid registration fees are charged to income as the related shares are
issued.
(4) Deferred organization expenses will be amortized over a period from the
date the Fund commences operations not exceeding five years. In the event
that the Manager (or any subsequent holder) redeems any of its original
shares prior to the end of the five-year period, the proceeds of the
redemption payable in respect of such shares shall be reduced by the pro
rata share (based on the proportionate share of the original shares
redeemed to the total number of original shares outstanding at the time of
redemption) of the unamortized deferred organization expenses as of the
date of such redemption. In the event that the Fund is liquidated prior to
the end of the five-year period, the Manager (or any subsequent holder)
shall bear the unamortized deferred organization expenses.
II-2
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Trustees and Shareholder,
Merrill Lynch Florida Limited Maturity Municipal Bond Fund of Merrill Lynch
Multi-State Limited Maturity Municipal Series Trust:
We have audited the accompanying statement of assets and liabilities of Merrill
Lynch Florida Limited Maturity Municipal Bond Fund of Merrill Lynch Multi-State
Limited Maturity Municipal Series Trust as of November 12, 1993. This financial
statement is the responsibility of the Fund's management. Our responsibility is
to express an opinion on this financial statement based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statement is free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statement. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, such financial statement presents fairly, in all material
respects, the financial position of Merrill Lynch Florida Limited Maturity
Municipal Bond Fund of Merrill Lynch Multi-State Limited Maturity Municipal
Series Trust as of November 12, 1993, in conformity with generally accepted
accounting principles.
Deloitte & Touche
Princeton, New Jersey
November 15, 1993
III-1
<PAGE>
MERRILL LYNCH FLORIDA LIMITED MATURITY MUNICIPAL BOND FUND
MERRILL LYNCH MULTI-STATE LIMITED MATURITY MUNICIPAL SERIES TRUST
STATEMENT OF ASSETS AND LIABILITIES
NOVEMBER 12, 1993
<TABLE>
<S> <C>
Assets:
Cash in bank..................................................... $100,000
Prepaid registration fees (Note 3)............................... 11,450
Deferred organization expenses (Note 4).......................... 47,600
--------
Total Assets....................................................... 159,050
Liabilities-Accrued expenses....................................... 59,050
--------
Net Assets (equivalent to $10.00 per share on 5,000 Class A shares
of beneficial
interest (par value $0.10) and 5,000 Class B shares of beneficial
interest (par value $0.10) outstanding with an unlimited number of
shares authorized) (Note 1)....................................... $100,000
========
</TABLE>
- --------
Notes to the Statement of Assets and Liabilities:
(1) Merrill Lynch Multi-State Limited Maturity Municipal Series Trust (the
"Trust") was organized as a Massachusetts business trust on February 14,
1991. To date, Merrill Lynch Florida Limited Maturity Municipal Bond Fund
(the "Fund") has not had any transactions other than those relating to
organizational matters and the sale of 5,000 Class A shares and 5,000 Class
B shares of beneficial interest of the Fund to Fund Asset Management, Inc.
(the "Manager"). The Trust is registered under the Investment Company Act
of 1940 as an open-end management investment company.
(2) The Trust has entered into a Management Agreement with the Manager and
separate Class A and Class B Distribution Agreements and a Distribution
Plan with Merrill Lynch Funds Distributor, Inc. (the "Distributor") on
behalf of the Fund. (See "Management of the Trust--Management and Advisory
Arrangements" in the Prospectus and the Statement of Additional
Information.) Certain officers and/or Trustees of the Trust are officers
and/or directors of the Manager and of the Distributor.
(3)Prepaid registration fees are charged to income as the related shares are
issued.
(4) Deferred organization expenses will be amortized over a period from the
date the Fund commences operations not exceeding five years. In the event
that the Manager (or any subsequent holder) redeems any of its original
shares prior to the end of the five-year period, the proceeds of the
redemption payable in respect of such shares shall be reduced by the pro
rata share (based on the proportionate share of the original shares
redeemed to the total number of original shares outstanding at the time of
redemption) of the unamortized deferred organization expenses as of the
date of such redemption. In the event that the Fund is liquidated prior to
the end of the five-year period, the Manager (or any subsequent holder)
shall bear the unamortized deferred organization expenses.
III-2
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Trustees and Shareholder,
Merrill Lynch Massachusetts Limited Maturity Municipal Bond Fund of Merrill
Lynch Multi-State Limited Maturity Municipal Series Trust:
We have audited the accompanying statement of assets and liabilities of Merrill
Lynch Massachusetts Limited Maturity Municipal Bond Fund of Merrill Lynch
Multi-State Limited Maturity Municipal Series Trust as of November 12, 1993.
This financial statement is the responsibility of the Fund's management. Our
responsibility is to express an opinion on this financial statement based on
our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statement is free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statement. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, such financial statement presents fairly, in all material
respects, the financial position of Merrill Lynch Massachusetts Limited
Maturity Municipal Bond Fund of Merrill Lynch Multi-State Limited Maturity
Municipal Series Trust as of November 12, 1993, in conformity with generally
accepted accounting principles.
Deloitte & Touche
Princeton, New Jersey
November 15, 1993
IV-1
<PAGE>
MERRILL LYNCH MASSACHUSETTS LIMITED MATURITY MUNICIPAL BOND FUND
MERRILL LYNCH MULTI-STATE LIMITED MATURITY MUNICIPAL SERIES TRUST
STATEMENT OF ASSETS AND LIABILITIES
NOVEMBER 12, 1993
<TABLE>
<S> <C>
Assets:
Cash in bank..................................................... $100,000
Prepaid registration fees (Note 3)............................... 16,000
Deferred organization expenses (Note 4).......................... 47,600
--------
Total Assets....................................................... 163,600
Liabilities-Accrued expenses....................................... 63,600
--------
Net Assets (equivalent to $10.00 per share on 5,000 Class A shares
of beneficial interest (par value $0.10) and 5,000 Class B shares
of beneficial interest (par value $0.10) outstanding with an un-
limited number of shares authorized) (Note 1)..................... $100,000
========
</TABLE>
- --------
Notes to the Statement of Assets and Liabilities:
(1) Merrill Lynch Multi-State Limited Maturity Municipal Series Trust (the
"Trust") was organized as a Massachusetts business trust on February 14,
1991. To date, Merrill Lynch Massachusetts Limited Maturity Municipal Bond
Fund (the "Fund") has not had any transactions other than those relating to
organizational matters and the sale of 5,000 Class A shares and 5,000 Class
B shares of beneficial interest of the Fund to Fund Asset Management, Inc.
(the "Manager"). The Trust is registered under the Investment Company Act
of 1940 as an open-end management investment company.
(2) The Trust has entered into a Management Agreement with the Manager and
separate Class A and Class B Distribution Agreements and a Distribution
Plan with Merrill Lynch Funds Distributor, Inc. (the "Distributor") on
behalf of the Fund. (See "Management of the Trust--Management and Advisory
Arrangements" in the Prospectus and the Statement of Additional
Information.) Certain officers and/or Trustees of the Trust are officers
and/or directors of the Manager and of the Distributor.
(3)Prepaid registration fees are charged to income as the related shares are
issued.
(4) Deferred organization expenses will be amortized over a period from the
date the Fund commences operations not exceeding five years. In the event
that the Manager (or any subsequent holder) redeems any of its original
shares prior to the end of the five-year period, the proceeds of the
redemption payable in respect of such shares shall be reduced by the pro
rata share (based on the proportionate share of the original shares
redeemed to the total number of original shares outstanding at the time of
redemption) of the unamortized deferred organization expenses as of the
date of such redemption. In the event that the Fund is liquidated prior to
the end of the five-year period, the Manager (or any subsequent holder)
shall bear the unamortized deferred organization expenses.
IV-2
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Trustees and Shareholder,
Merrill Lynch Michigan Limited Maturity Municipal Bond Fund of Merrill Lynch
Multi-State Limited Maturity Municipal Series Trust:
We have audited the accompanying statement of assets and liabilities of Merrill
Lynch Michigan Limited Maturity Municipal Bond Fund of Merrill Lynch Multi-
State Limited Maturity Municipal Series Trust as of November 12, 1993. This
financial statement is the responsibility of the Fund's management. Our
responsibility is to express an opinion on this financial statement based on
our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statement is free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statement. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, such financial statement presents fairly, in all material
respects, the financial position of Merrill Lynch Michigan Limited Maturity
Municipal Bond Fund of Merrill Lynch Multi-State Limited Maturity Municipal
Series Trust as of November 12, 1993, in conformity with generally accepted
accounting principles.
Deloitte & Touche
Princeton, New Jersey
November 15, 1993
V-1
<PAGE>
MERRILL LYNCH MICHIGAN LIMITED MATURITY MUNICIPAL BOND FUND
MERRILL LYNCH MULTI-STATE LIMITED MATURITY MUNICIPAL SERIES TRUST
STATEMENT OF ASSETS AND LIABILITIES
NOVEMBER 12, 1993
<TABLE>
<S> <C>
Assets:
Cash in bank..................................................... $100,000
Prepaid registration fees (Note 3)............................... 19,300
Deferred organization expenses (Note 4).......................... 47,600
--------
Total Assets....................................................... 166,900
Liabilities-Accrued expenses....................................... 66,900
--------
Net Assets (equivalent to $10.00 per share on 5,000 Class A shares
of beneficial interest (par value $0.10) and 5,000 Class B shares
of beneficial interest (par value $0.10) outstanding with an un-
limited number of shares authorized) (Note 1)..................... $100,000
========
</TABLE>
- --------
Notes to the Statement of Assets and Liabilities:
(1) Merrill Lynch Multi-State Limited Maturity Municipal Series Trust (the
"Trust") was organized as a Massachusetts business trust on February 14,
1991. To date, Merrill Lynch Michigan Limited Maturity Municipal Bond Fund
(the "Fund") has not had any transactions other than those relating to
organizational matters and the sale of 5,000 Class A shares and 5,000 Class
B shares of beneficial interest of the Fund to Fund Asset Management, Inc.
(the "Manager"). The Trust is registered under the Investment Company Act
of 1940 as an open-end management investment company.
(2) The Trust has entered into a Management Agreement with the Manager and
separate Class A and Class B Distribution Agreements and a Distribution
Plan with Merrill Lynch Funds Distributor, Inc. (the "Distributor") on
behalf of the Fund. (See "Management of the Trust--Management and Advisory
Arrangements" in the Prospectus and the Statement of Additional
Information.) Certain officers and/or Trustees of the Trust are officers
and/or directors of the Manager and of the Distributor.
(3)Prepaid registration fees are charged to income as the related shares are
issued.
(4) Deferred organization expenses will be amortized over a period from the
date the Fund commences operations not exceeding five years. In the event
that the Manager (or any subsequent holder) redeems any of its original
shares prior to the end of the five-year period, the proceeds of the
redemption payable in respect of such shares shall be reduced by the pro
rata share (based on the proportionate share of the original shares
redeemed to the total number of original shares outstanding at the time of
redemption) of the unamortized deferred organization expenses as of the
date of such redemption. In the event that the Fund is liquidated prior to
the end of the five-year period, the Manager (or any subsequent holder)
shall bear the unamortized deferred organization expenses.
V-2
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Trustees and Shareholder,
Merrill Lynch New Jersey Limited Maturity Municipal Bond Fund of Merrill Lynch
Multi-State Limited Maturity Municipal Series Trust:
We have audited the accompanying statement of assets and liabilities of Merrill
Lynch New Jersey Limited Maturity Municipal Bond Fund of Merrill Lynch Multi-
State Limited Maturity Municipal Series Trust as of November 12, 1993. This
financial statement is the responsibility of the Fund's management. Our
responsibility is to express an opinion on this financial statement based on
our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statement is free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statement. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, such financial statement presents fairly, in all material
respects, the financial position of Merrill Lynch New Jersey Limited Maturity
Municipal Bond Fund of Merrill Lynch Multi-State Limited Maturity Municipal
Series Trust as of November 12, 1993, in conformity with generally accepted
accounting principles.
Deloitte & Touche
Princeton, New Jersey
November 15, 1993
VI-1
<PAGE>
MERRILL LYNCH NEW JERSEY LIMITED MATURITY MUNICIPAL BOND FUND
MERRILL LYNCH MULTI-STATE LIMITED MATURITY MUNICIPAL SERIES TRUST
STATEMENT OF ASSETS AND LIABILITIES
NOVEMBER 12, 1993
<TABLE>
<S> <C>
Assets:
Cash in bank..................................................... $100,000
Prepaid registration fees (Note 3)............................... 12,900
Deferred organization expenses (Note 4).......................... 47,600
--------
Total Assets....................................................... 160,500
Liabilities-Accrued expenses....................................... 60,500
--------
Net Assets (equivalent to $10.00 per share on 5,000 Class A shares
of beneficial interest (par value $0.10) and 5,000 Class B shares
of beneficial interest (par value $0.10) outstanding with an un-
limited number of shares authorized) (Note 1)..................... $100,000
========
</TABLE>
- --------
Notes to the Statement of Assets and Liabilities:
(1) Merrill Lynch Multi-State Limited Maturity Municipal Series Trust (the
"Trust") was organized as a Massachusetts business trust on February 14,
1991. To date, Merrill Lynch New Jersey Limited Maturity Municipal Bond
Fund (the "Fund") has not had any transactions other than those relating to
organizational matters and the sale of 5,000 Class A shares and 5,000 Class
B shares of beneficial interest of the Fund to Fund Asset Management, Inc.
(the "Manager"). The Trust is registered under the Investment Company Act
of 1940 as an open-end management investment company.
(2) The Trust has entered into a Management Agreement with the Manager and
separate Class A and Class B Distribution Agreements and a Distribution
Plan with Merrill Lynch Funds Distributor, Inc. (the "Distributor") on
behalf of the Fund. (See "Management of the Trust--Management and Advisory
Arrangements" in the Prospectus and the Statement of Additional
Information.) Certain officers and/or Trustees of the Trust are officers
and/or directors of the Manager and of the Distributor.
(3)Prepaid registration fees are charged to income as the related shares are
issued.
(4) Deferred organization expenses will be amortized over a period from the
date the Fund commences operations not exceeding five years. In the event
that the Manager (or any subsequent holder) redeems any of its original
shares prior to the end of the five-year period, the proceeds of the
redemption payable in respect of such shares shall be reduced by the pro
rata share (based on the proportionate share of the original shares
redeemed to the total number of original shares outstanding at the time of
redemption) of the unamortized deferred organization expenses as of the
date of such redemption. In the event that the Fund is liquidated prior to
the end of the five-year period, the Manager (or any subsequent holder)
shall bear the unamortized deferred organization expenses.
VI-2
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Trustees and Shareholder,
Merrill Lynch New York Limited Maturity Municipal Bond Fund of Merrill Lynch
Multi-State Limited Maturity Municipal Series Trust:
We have audited the accompanying statement of assets and liabilities of Merrill
Lynch New York Limited Maturity Municipal Bond Fund of Merrill Lynch Multi-
State Limited Maturity Municipal Series Trust as of November 12, 1993. This
financial statement is the responsibility of the Fund's management. Our
responsibility is to express an opinion on this financial statement based on
our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statement is free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statement. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, such financial statement presents fairly, in all material
respects, the financial position of Merrill Lynch New York Limited Maturity
Municipal Bond Fund of Merrill Lynch Multi-State Limited Maturity Municipal
Series Trust as of November 12, 1993, in conformity with generally accepted
accounting principles.
Deloitte & Touche
Princeton, New Jersey
November 15, 1993
VII-1
<PAGE>
MERRILL LYNCH NEW YORK LIMITED MATURITY MUNICIPAL BOND FUND
MERRILL LYNCH MULTI-STATE LIMITED MATURITY MUNICIPAL SERIES TRUST
STATEMENT OF ASSETS AND LIABILITIES
NOVEMBER 12, 1993
<TABLE>
<S> <C>
Assets:
Cash in bank..................................................... $100,000
Prepaid registration fees (Note 3)............................... 16,500
Deferred organization expenses (Note 4).......................... 47,600
--------
Total Assets....................................................... 164,100
Liabilities-Accrued expenses....................................... 64,100
--------
Net Assets (equivalent to $10.00 per share on 5,000 Class A shares
of beneficial interest (par value $0.10) and 5,000 Class B shares
of beneficial interest (par value $0.10) outstanding with an un-
limited number of shares authorized) (Note 1)..................... $100,000
========
</TABLE>
- --------
Notes to the Statement of Assets and Liabilities:
(1) Merrill Lynch Multi-State Limited Maturity Municipal Series Trust (the
"Trust") was organized as a Massachusetts business trust on February 14,
1991. To date, Merrill Lynch New York Limited Maturity Municipal Bond Fund
(the "Fund") has not had any transactions other than those relating to
organizational matters and the sale of 5,000 Class A shares and 5,000 Class
B shares of beneficial interest of the Fund to Fund Asset Management, Inc.
(the "Manager"). The Trust is registered under the Investment Company Act
of 1940 as an open-end management investment company.
(2) The Trust has entered into a Management Agreement with the Manager and
separate Class A and Class B Distribution Agreements and a Distribution
Plan with Merrill Lynch Funds Distributor, Inc. (the "Distributor") on
behalf of the Fund. (See "Management of the Trust--Management and Advisory
Arrangements" in the Prospectus and the Statement of Additional
Information.) Certain officers and/or Trustees of the Trust are officers
and/or directors of the Manager and of the Distributor.
(3)Prepaid registration fees are charged to income as the related shares are
issued.
(4) Deferred organization expenses will be amortized over a period from the
date the Fund commences operations not exceeding five years. In the event
that the Manager (or any subsequent holder) redeems any of its original
shares prior to the end of the five-year period, the proceeds of the
redemption payable in respect of such shares shall be reduced by the pro
rata share (based on the proportionate share of the original shares
redeemed to the total number of original shares outstanding at the time of
redemption) of the unamortized deferred organization expenses as of the
date of such redemption. In the event that the Fund is liquidated prior to
the end of the five-year period, the Manager (or any subsequent holder)
shall bear the unamortized deferred organization expenses.
VII-2
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Trustees and Shareholder,
Merrill Lynch Pennsylvania Limited Maturity Municipal Bond Fund of Merrill
Lynch Multi-State Limited Maturity Municipal Series Trust:
We have audited the accompanying statement of assets and liabilities of Merrill
Lynch Pennsylvania Limited Maturity Municipal Bond Fund of Merrill Lynch Multi-
State Limited Maturity Municipal Series Trust as of November 12, 1993. This
financial statement is the responsibility of the Fund's management. Our
responsibility is to express an opinion on this financial statement based on
our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statement is free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statement. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, such financial statement presents fairly, in all material
respects, the financial position of Merrill Lynch Pennsylvania Limited Maturity
Municipal Bond Fund of Merrill Lynch Multi-State Limited Maturity Municipal
Series Trust as of November 12, 1993, in conformity with generally accepted
accounting principles.
Deloitte & Touche
Princeton, New Jersey
November 15, 1993
VIII-1
<PAGE>
MERRILL LYNCH PENNSYLVANIA LIMITED MATURITY MUNICIPAL BOND FUND
MERRILL LYNCH MULTI-STATE LIMITED MATURITY MUNICIPAL SERIES TRUST
STATEMENT OF ASSETS AND LIABILITIES
NOVEMBER 12, 1993
<TABLE>
<S> <C>
Assets:
Cash in bank..................................................... $100,000
Prepaid registration fees (Note 3)............................... 14,300
Deferred organization expenses (Note 4).......................... 47,600
--------
Total Assets....................................................... 161,900
Liabilities-Accrued expenses....................................... 61,900
--------
Net Assets (equivalent to $10.00 per share on 5,000 Class A shares
of beneficial interest (par value $0.10) and 5,000 Class B shares
of beneficial interest (par value $0.10) outstanding with an un-
limited number of shares authorized) (Note 1)..................... $100,000
========
</TABLE>
- --------
Notes to the Statement of Assets and Liabilities:
(1) Merrill Lynch Multi-State Limited Maturity Municipal Series Trust (the
"Trust") was organized as a Massachusetts business trust on February 14,
1991. To date, Merrill Lynch Pennsylvania Limited Maturity Municipal Bond
Fund (the "Fund") has not had any transactions other than those relating to
organizational matters and the sale of 5,000 Class A shares and 5,000 Class
B shares of beneficial interest of the Fund to Fund Asset Management, Inc.
(the "Manager"). The Trust is registered under the Investment Company Act
of 1940 as an open-end management investment company.
(2) The Trust has entered into a Management Agreement with the Manager and
separate Class A and Class B Distribution Agreements and a Distribution
Plan with Merrill Lynch Funds Distributor, Inc. (the "Distributor") on
behalf of the Fund. (See "Management of the Trust--Management and Advisory
Arrangements" in the Prospectus and the Statement of Additional
Information.) Certain officers and/or Trustees of the Trust are officers
and/or directors of the Manager and of the Distributor.
(3)Prepaid registration fees are charged to income as the related shares are
issued.
(4) Deferred organization expenses will be amortized over a period from the
date the Fund commences operations not exceeding five years. In the event
that the Manager (or any subsequent holder) redeems any of its original
shares prior to the end of the five-year period, the proceeds of the
redemption payable in respect of such shares shall be reduced by the pro
rata share (based on the proportionate share of the original shares
redeemed to the total number of original shares outstanding at the time of
redemption) of the unamortized deferred organization expenses as of the
date of such redemption. In the event that the Fund is liquidated prior to
the end of the five-year period, the Manager (or any subsequent holder)
shall bear the unamortized deferred organization expenses.
VIII-2
<PAGE>
[THIS PAGE INTENTIONALLY LEFT BLANK]
<PAGE>
<TABLE>
<CAPTION>
SCHEDULE OF INVESTMENTS (in Thousands)
Arizona Limited Maturity Municipal Bond Fund
S&P Moody's Face Value
STATE Ratings Ratings Amount Issue (Note 1a)
<S> <S> <S> <C> <S> <C>
Arizona--85.2% A1+ P1 $ 200 Apache County, Arizona, IDA, IDR (Tucson Electric Power-
Springerville Project), VRDN, 2.25% due 12/15/2018(a) $ 200
AAA Aaa 270 Arizona Health Facilities Authority, Hospital System Revenue Bonds
(Samaritan Health Services), 5.30% due 12/01/1995(d) 280
A-1 VMIG1 200 Arizona Health Facilities Authority Revenue Bonds (Arizona
Voluntary Hospital Federation), VRDN, Series B, 2.25%
due 10/01/2015(a)(c) 200
AAA Aaa 275 Arizona State, COP, Refunding Bonds, Series B, 4.375% due 5/01/2000 279
AA Aa 295 Arizona State Transportation Board, Highway Revenue Refunding Bonds,
Sub-Series A, 3.20% due 7/01/1995 296
AA A1 500 Arizona State University, University System Revenue Refunding Bonds,
Series A, 4.25% due 7/01/1996 511
AAA Aaa 220 Maricopa County, Arizona, Alhambra Elementary School District
Number 68, Refunding and Improvement Bonds, UT, 7.75% due 7/01/2000(b) 263
AAA Aaa 250 Maricopa County, Arizona, Mesa Unified School District Number 4, UT,
5.25% due 7/01/2003(c) 267
A1+ P1 300 Maricopa County, Arizona, Pollution Control Corporation, PCR
(Arizona Public Service Company--Palo Verde Project), Series D, VRDN,
2% due 2/03/1994(a) 300
SP1+ MIG2 200 Maricopa County, Arizona, TAN, 3.10% due 7/29/1994 201
AA A1 500 Phoenix, Arizona, Street and Highway User Revenue Refunding Bonds,
Senior Lien, 5.60% due 7/01/1998 535
A1+ VMIG1 100 Pima County, Arizona, IDR (Tucson Electric), VRDN, Series A, 2.05%
due 12/01/2022(a) 100
A+ Aa 260 Pima County, Arizona, Refunding Bonds, 5.375% due 7/01/1996 272
A1+ NR 200 Pinal County, Arizona, IDR (Calsonic Incorporated Project), VRDN,
2.30% due 12/01/2005(a) 200
AA Aa 1,000 Salt River Project, Arizona, Agricultural Improvement and Power
District, Electric System Revenue Refunding Bonds, Series C, 4.30%
due 1/01/2002 1,003
AA Aaa 500 Scottsdale, Arizona, Improvement Bonds, 6.60% due 7/01/1996(e) 548
Puerto Rico--4.7% SP1+ MIG1++ 200 Puerto Rico Commonwealth, TRAN, Series A, 3% due 7/29/1994 201
A1+ NR 100 Puerto Rico, Industrial, Medical and Environmental Pollution
Control Facilities Financing Authority Revenue Bonds (Anna G.
Mendez Educational Foundation), TECP, 2.10% due 2/04/1994 100
Total Investments (Cost--$5,716)--89.9% 5,756
Other Assets Less Liabilities--10.1% 644
-------
Net Assets--100.0% $ 6,400
=======
<FN>
(a) The interest rate is subject to change periodically based upon prevailing
market rates. The interest rates shown are those in effect at January 31, 1994.
(b) AMBAC Insured.
(c) FGIC Insured.
(d) MBIA Insured.
(e) Prerefunded.
++Highest short-term rating by Moody's Investors Service, Inc.
See Notes to Financial Statements.
California Limited Maturity Municipal Bond Fund
S&P Moody's Face Value
STATE Ratings Ratings Amount Issue (Note 1a)
<S> <S> <S> <C> <S> <C>
California--95.1% California Health Facilities Financing Authority Revenue Bonds:
AAA VMIG1 $ 500 (Pooled Loan Program), Series 85B, VRDN, 2.10% due
10/01/2010(b)(e) $ 500
AA- NR 400 (Saint Joseph Health System), 6.90% due 7/01/1999(a)(f) 465
AAA Aaa 500 California Health Facilities, Financing Revenue Refunding Bonds
(Catholic Insured Health Facilities), Series E, 4.40% due
7/01/2001(d) 506
California Pollution Control Financing Authority, Resources Recovery
Revenue Bonds, VRDN(b):
NR P1 200 (Delano Project), AMT, 2.25% due 8/01/2019 200
NR P1 100 (Delano Project), Series 1991, 2.25% due 8/01/2019 100
</TABLE>
1
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C>
NR P1 500 (Ultra Power Rocklin), AMT, Series A, 2.30% due 6/01/2017 500
A+ Aa 1,040 California State, GO, UT, 5.60% due 9/01/2000 1,127
California State, GO, Veteran's Board, UT:
A+ Aa 785 Series VV, 5% due 8/01/1996 816
AA Aa 1,000 Series XX, 5.50% due 8/01/1997 1,063
California State Public Works Board, Lease Revenue Bonds:
A A1 575 (California State University Various Projects), Series A,
4.30% due 12/01/1999 580
A A1 1,500 (Department of Corrections Madera State Prison), Series E, 4.30%
due 6/01/1999 1,513
AAA Aaa 400 Eastern Municipal Water District, California, COP, 6.60%
due 11/01/1997(d)(f) 443
A1+ VMIG1 500 Foothill/Eastern Transportation Corridor Agency, California,
Toll Road Revenue Bonds, VRDN, 2.20% due 7/01/2023(b) 500
A-1 NR 200 Irvine, California, M/F Housing Revenue Bonds, VRDN, Series 1983-A,
2.10% due 12/15/1995(b) 200
NR A1 600 Los Angeles, California, Municipal Improvement Corporation,
Lease Revenue Refunding Bonds (Central Library Project), Series B,
4.875% due 6/01/2001 618
A1+ VMIG1 300 Los Angeles County, California, Metropolitan Transportation Authority,
Sales Tax Revenue Refunding Bonds, VRDN, Second Senior Series A,
2.20% due 7/01/2020(b)(c) 300
AAA Aaa 500 Los Angeles County, California, Public Works Financing Authority,
Lease Revenue Bond, Multiple Capital Facilities (Project IV),
3.80% due 12/01/1997(c) 506
SP1+ MIG1++ 700 Los Angeles County, California, TRAN, Series A, 3% due 6/30/1994 702
A1+ NR 500 Moor Park California, M/F Revenue Refunding Bonds (Le Club Apartment
Project), Series A, VRDN, 2.10% due 11/01/2015(b) 500
AAA Aaa 300 Orange County, California, Various Sanitation Districts, COP,
Revenue Refunding Bonds (#1-3,5-7+11), VRDN, 2.20% due 8/01/2013(b)(d) 300
AA Aa 500 Sacramento County, California, Sanitation District Financing Authority,
Revenue Refunding Bonds, 4% due 12/01/1998 506
AA- Aaa 800 San Diego County, California, Regional Transportation Commission,
Sales Tax Revenue Bonds, Series A, 7.25% due 4/01/1999(a) 936
AAA Aaa 300 San Jose, California, Redevelopment Agency, Tax Allocation Revenue
Refunding Bonds (Merged Area Redevelopment Project),
4.40% due 8/01/1999(c) 305
AAA Aaa 505 Signal Hill, California, Redevelopment Agency, Tax Allocation Revenue
Refunding Bonds (Signal Hill Redevelopment Project 1-B), 5.20% due
10/01/2002(c) 537
AAA Aaa 500 University of California, Revenue Refunding Bonds (Multiple Purpose
Projects), Series C, 4% due 9/01/1999(d) 502
Puerto Rico--4.7% A1+ VMIG1 200 Puerto Rico Commonwealth Government Development Bank, Revenue
Refunding Bonds, VRDN, 1.75% due 12/01/2015(b) 200
SP1+ MIG1++ 500 Puerto Rico Commonwealth, TRAN, Series A, 3% due 7/29/1994 502
Total Investments (Cost--$14,778)--99.8% 14,927
Other Assets Less Liabilities--0.2% 29
-------
Net Assets--100.0% $14,956
=======
</TABLE>
<TABLE>
<CAPTION>
<FN>
<S> <C>
(a) Prerefunded.
(b) The interest rate is subject to change periodically based upon the prevailing
market rate. The interest rates shown are those rates in effect at January 31, 1994.
(c) MBIA Insured.
(d) AMBAC Insured.
(e) FGIC Insured.
(f) Escrowed to Maturity.
++Highest short-term rating by Moody's Investors Service, Inc.
See Notes to Financial Statements.
</TABLE>
Portfolio
Abbreviations: To simplify the listings of
Merrill Lynch Multi-State
Limited Maturity Municipal
Series Trust's portfolio
holdings in the Schedule of
Investments, we have abbrev-
iated the names of many of
the securities according to
the list at right.
ACESSM Adjustable Convertible Extendable Securities
AMT Alternative Minimum Tax (subject to)
BAN Bond Anticipation Notes
COP Certificates of Participation
DATES Daily Adjustable Tax-Exempt Securities
EDA Economic Development Authority
GO General Obligation Bonds
HFA Housing Finance Authority
IDA Industrial Development Authority
IDR Industrial Development Revenue Bonds
M/F Multi-Family
PCR Pollution Control Revenue Bonds
RAN Revenue Anticipation Notes
S/F Single-Family
TAN Tax Anticipation Notes
TECP Tax-Exempt Commercial Paper
TRAN Tax Revenue Anticipation Notes
UT Unlimited Tax
VRDN Variable Rate Demand Notes
2
<PAGE>
<TABLE>
SCHEDULE OF INVESTMENTS (continued) (in Thousands)
<CAPTION>
Florida Limited Maturity Municipal Bond Fund
S&P Moody's Face Value
STATE Ratings Ratings Amount Issue (Note 1a)
<C> <C> <C> <C> <S> <C>
Florida--96.1% AAA Aaa $ 650 Broward County, Florida, Water & Sewer Utility, Revenue Refunding
Bonds, 4.50% due 10/01/2002(b) $ 662
A-1 VMIG1 1,500 Dade County, Florida, Aviation Revenue Refunding Bonds,
Series V, VRDN, 2.20% due 10/01/2007(a) 1,500
A+ A1 1,000 Dade County, Florida, School District, 7% due 7/01/1999 1,145
A-1 VMIG1 1,400 Dade County, Florida, Solid Waste, IDR (Montenay--Dade Limited
Project), VRDN, Series A, 2.35% due 12/01/2013 (a) 1,400
Dade County, Florida, Water & Sewer System Revenue Refunding
Bonds (c):
AAA Aaa 1,000 5% due 10/01/2000 1,056
AAA Aaa 500 4.40% due 10/01/2001 509
AAA Aaa 2,000 Florida State Board of Education, Capital Outlay, GO, Series C,
6.90% due 6/01/1997 2,211
AAA Aaa 1,500 Florida State Division, Board of Finance, Department of General
Services, Revenue Bonds (Department of Natural Resource Preservation),
Series 2000--A, 5.75% due 7/01/2000(d) 1,639
AA Aa 1,500 Florida State, Refunding, GO, Dade County Road, 4.70% due 7/01/2000 1,558
A1+ VMIG1 200 Hillsborough County, Florida, IDA, PCR, Refunding (Tampa Electric
Company), VRDN, 2.10% due 5/15/2018 (a) 200
AA Aa1 4,000 Jacksonville, Florida, Electric Authority Revenue Refunding Bonds
(Saint Johns River), Issue 2, Series 8, 3.65% due 10/01/1996 4,042
AAA Aaa 1,500 Lake County, Florida, School Board COP, 4% due 12/01/1999(b) 1,502
Orlando, Florida, Utilities Commission, Water & Electric
Revenue Bonds:
AA Aa1 1,500 Refunding, 5.60% due 10/01/2003 1,642
AA- Aa 1,885 Series B, 4.75% due 10/01/2002 1,954
Pinellas County, Florida, Capital Improvement Revenue Bonds:
AA- Aa 1,500 5.20% due 10/01/1995 1,550
AA- Aa 4,825 5.30% due 10/01/1996 5,064
A-1 VMIG1 200 Pinellas County, Florida, Health Facilities Authority, Revenue
Refunding Bonds (Pooled Hospital Loan Program), DATES, 2.20%
due 12/01/2015(a) 200
AAA Aaa 700 Pinellas County, Florida, Resource Recovery Revenue Refunding
Bonds, Series A, 6.80% due 10/01/2002(d) 810
AAA A1 1,400 Reedy Creek, Florida, Improvement District Refunding Bonds,
UT, 7.25% due 6/01/1997 1,558
A-1 P1 300 Saint Lucie County, Florida, PCR, Refunding (Florida Power & Light
Company), VRDN, 2.10% due 5/01/2027(a) 300
Sarasota County, Florida, Health Facilities Authority, Hospital
Revenue Bonds (Aces-Venice Hospital Project), VRDN(a):
A-3 VMIG2 200 2.25% due 12/01/2015 200
NR VMIG1 200 2.25% due 12/01/2022 200
A1+ VMIG1 1,600 Sarasota County, Florida, Public Hospital District, Hospital
Revenue Bonds (Sarasota Memorial Hospital Project), Series C, TECP,
2.30% due 2/10/1994 1,600
NR VMIG1 1,400 Sunshine State Governmental Financing Commission, Florida, Revenue
Bonds, TECP, 2.25% due 2/10/1994 1,400
A-1 VMIG1 1,500 Volusia County, Florida, Health Facilities Authority Revenue Bonds
(ACESSM-Pooled Hospital Loan Program), VRDN, 2.20%
due 11/01/2015(a)(c) 1,500
AAA Aaa 1,415 West Palm Beach, Florida, Public Service Tax, Revenue
Refunding Bonds, 4.15% due 3/01/2000(b) 1,427
Puerto Rico--2.9% SP1+ MIG1++ 1,100 Puerto Rico Commonwealth, TRAN, Series A, 3% due 7/29/1994 1,104
Total Investments (Cost--$37,678)--99.0% 37,933
Other Assets Less Liabilities--1.0% 381
-------
Net Assets--100.0% $38,314
=======
<FN>
(a) The interest rate is subject to change periodically based upon the prevailing
market rate. The interest rate shown is the rate in effect at January 31, 1994.
(b) AMBAC Insured.
(c) FGIC Insured.
(d) MBIA Insured.
++Highest short-term rating issued by Moody's Investors Service, Inc.
</TABLE>
See Notes to Financial Statements.
3
<PAGE>
<TABLE>
<CAPTION>
Massachusetts Limited Maturity Municipal Bond Fund
S&P Moody's Face Value
STATE Ratings Ratings Amount Issue (Note 1a)
<S> <S> <S> <C> <S> <C>
Massachusetts--
89.9% AAA Aaa $ 400 Ashburnham and Westminister, Massachusetts, Regional School
District, 3.75% due 12/15/1998(b) $ 400
A A 315 Boston, Massachusetts, Metropolitan District, Revenue
Refunding Bonds, Series A, B, & C, 3.90% due 12/01/1995 317
A A 400 Boston, Massachusetts, Revenue Refunding Bonds, Series A, 5%
due 2/01/2001 416
SP-1 MIG2 400 Massachusetts Bay Transportation Authority Notes, Series A, 2.80%
due 3/01/1994 400
BBB+ A 500 Massachusetts Municipal Wholesale Electric Company, Supply
System Revenue Bonds, Series A, 6.10% due 7/01/1998 538
A+ A 1,000 Massachusetts State Consolidated Loan, Series A, 4% due 1/01/1997 1,011
A A 500 Massachusetts State Convention Center Authority Refunding Bonds
(Hynes Convention Center), 5.20% due 9/01/1995 514
Massachusetts State Health and Educational Facilities Authority
Revenue Bonds:
AAA NR 500 (Holy Cross College), Series F, 8.40% due 5/01/1995(d) 544
AAA Aaa 400 (New England Medical Center Hospitals), Series G, 4.30%
due 7/01/2000(b) 406
AAA Aaa 410 (Saint Luke's Hospital), Series C, 4% due 8/15/1996(b) 417
A+ A1 600 Massachusetts State, HFA, Revenue Refunding Bonds (Housing Projects),
Series A, 5.20% due 10/01/2000 626
NR MIG1++ 400 Massachusetts State Industrial Finance Agency, Health Care Facility
Revenue Bonds (Beverly Enterprises), VRDN, 2.20% due 4/01/2009(a) 400
AA- Aaa 400 Massachusetts State Port Authority Revenue Bonds, Series B, 9.375%
due 7/01/1995(d) 443
A+ A 1,000 Massachusetts State Revenue Refunding Bonds, Series C, 4.55%
due 9/01/1997 1,031
A A 500 Massachusetts State Special Obligation Revenue Bonds, Series A,
5.30% due 6/01/1998 528
A+ A1 500 Massachusetts State Turnpike Authority, Revenue Refunding Bonds,
Series A, 4.625% due 1/01/2002 508
SP-1 MIG1++ 1,500 Massachusetts State Water Resources Authority, BAN, Series A,
4.125% due 10/15/1995 1,525
AAA Aaa 400 Quincy, Massachusetts, Revenue Refunding Bonds (Quincy Hospital),
4.50% due 1/15/2000(c) 407
A+ A1 600 Salem, Massachusetts, GO, 5% due 7/15/1997 625
NR NR 400 South Hadley, Massachusetts, Industrial Revenue Bonds,
(South Hadley Health Care), AMT, Series A, 5% due 12/01/1996 400
NR NR 400 Springfield, Massachusetts, RAN, 3.90% due 4/01/1994 401
Puerto Rico--6.0% SP1+ MIG1++ 400 Puerto Rico Commonwealth, TRAN, Series A, 3% due 7/29/1994 401
AAA Aaa 350 Puerto Rico Electric Power Authority, Power Revenue Bonds, Series J,
9% due 7/01/1995(d) 389
Total Investments (Cost--$12,592)--95.9% 12,647
Other Assets Less Liabilities--4.1% 537
-------
Net Assets--100.0% $13,184
=======
<FN>
(a) The interest rate is subject to change periodically based upon prevailing
market rates. The interest rates shown are those in effect at January 31, 1994.
(b) MBIA Insured.
(c) FSA Insured.
(d) Prerefunded.
++Highest short-term ratings issued by Moody's Investors Service, Inc.
See Notes to Financial Statements.
</TABLE>
4
<PAGE>
<TABLE>
SCHEDULE OF INVESTMENTS (continued) (in Thousands)
<CAPTION>
Michigan Limited Maturity Municipal Bond Fund
S&P Moody's Face Value
STATE Ratings Ratings Amount Issue (Note 1a)
<C> <C> <C> <C> <S> <C>
Michigan--92.4% NR P1 $ 200 Delta County, Michigan, Economic Development Corp., Environmental
Improvement Revenue Bonds (Mead Escambia Paper), VRDN, 2.20%
due 12/01/2023(a) $ 200
AAA Aaa 1,000 Detroit, Michigan, Distributable State Aid, 6.80% due 5/01/1998(b) 1,117
A1+ VMIG1 100 Grand Rapids, Michigan, Water Supply System, Revenue Refunding Bonds,
VRDN, 2.10% due 1/01/2020(a)(d) 100
AA- Aa 140 Holland, Michigan, Electric Revenue Refunding Bonds, 4.75%
due 7/01/1997 145
AAA Aaa 250 Kalamazoo, Michigan, Hospital Finance Authority, Hospital Facility
Revenue Refunding Bonds (Borgess Medical Center), Series A, 4%
due 6/01/1998(d) 252
AA Aa 235 Lansing, Michigan, Board of Water and Light, Water Supply and Electric
Utility System Revenue Bonds, Series A, 6.20% due 7/01/2000 262
A1+ VMIG1 200 Michigan Higher Education Student Loan Authority, Revenue Refunding
Bonds, Series XII-B, AMT, VRDN, 2.55% due 10/01/2013(a)(b) 200
AA Aaa 200 Michigan Municipal Bond Authority Revenue Bonds (State Revolving
Fund), 4.15% due 10/01/1999 202
AA- A 200 Michigan State Building Authority Revenue Bonds, Series II, 5.90% due
10/01/1999 219
A- A 200 Michigan State Hospital Finance Authority, Revenue Refunding Bonds
(Detroit Medical Center), Series B, 4.70% due 8/15/2001 201
Michigan State Housing Development Authority, Limited Obligation Bonds,
VRDN(a):
NR VMIG1 200 (Pine Ridge), 2.25% due 10/01/2007 200
NR VMIG1 100 (Shoal Creek), 2.25% due 10/01/2007 100
AA A1 250 Michigan State Housing Development Authority, S/F Mortgage
Revenue Bonds, Convertible Option, Series B, 3.55% due 6/01/1995(b) 250
NR P1 200 Michigan State Strategic Fund, Limited Obligation Revenue Bonds
(Dow Chemical Co. Project), AMT, VRDN, 2.35% due 1/01/2014(a) 200
NR VMIGI 200 Michigan State Strategic Fund, Solid Waste Disposal Revenue Bonds
(Grayling Generating Project), AMT, VRDN, 2.40% due 12/01/2014(a) 200
NR P1 100 Monroe County, Michigan, Economic Development Corp., Limited
Obligation Revenue Refunding Bonds (Detroit Edison), Series CC,
VRDN, 2.20% due 10/01/2024(a) 100
AA Aa 750 University of Michigan, University Hospital Revenue Refunding Bonds,
Series A, 7.50% due 12/01/2001 895
AAA Aaa 200 Wayne Charter County, Michigan, Airport Revenue Refunding Bonds,
Subordinated Lien (Detroit Metro), Series C, 4.60% due 12/01/2002(c) 202
AAA Aaa 200 West Bloomfield, Michigan, School District Refunding Bonds, UT, 5.50%
due 5/01/1998(c) 214
Puerto Rico--3.5% SP1+ MIG1++ 200 Puerto Rico Commonwealth, TRAN, Series A, 3% due 7/29/1994 201
Total Investments (Cost--$5,420)--95.9% 5,460
Other Assets Less Liabilities--4.1% 235
------
Net Assets--100.0% $5,695
======
<FN>
(a) The interest rate is subject to change periodically based upon the prevailing
market rates. The interest rate shown is the rate in effect at January 31, 1994.
(b) AMBAC Insured.
(c) MBIA Insured.
(d) FGIC Insured.
++Highest short-term rating by Moody's Investors Service, Inc.
</TABLE>
See Notes to Financial Statements.
5
<PAGE>
<TABLE>
<CAPTION>
New Jersey Limited Maturity Municipal Bond Fund
S&P Moody's Face Value
STATE Ratings Ratings Amount Issue (Note 1a)
<S> <C> <C> <C> <S> <C>
New Jersey--93.1% NR Baa $1,000 Atlantic County, New Jersey, Utilities Authority, Solid Waste
Revenue Bonds, 6.25% due 3/01/1997 $ 1,054
NR Aaa 500 Bergen County, New Jersey, Refunding, GO, UT, 6.50% due 8/01/1995 526
AA Aa 1,030 Burlington County, New Jersey, Various Purpose Bonds, UT, 4.35%
due 10/15/2003 1,033
AAA Aaa 500 Cape May County, New Jersey, Improvement Bonds, UT, 5.85%
due 4/15/1995(b) 516
A+ NR 1,000 Hudson County, New Jersey, GO, UT, 4.10% due 8/01/1998 1,010
SP1+ VMIG1 300 Mercer County, New Jersey, Improvement Authority Revenue Bonds,
VRDN, 2.05% due 11/01/1998(a) 300
AA+ Aaa 500 Middlesex County, New Jersey, Refunding Bonds, UT, 3.60%
due 7/15/1996 506
AA- Aa 500 New Jersey Building Authority, State Building Revenue Bonds,
4.20% due 6/15/1997 512
New Jersey, EDA, Revenue Bonds(a):
NR Aaa 100 (400 International Drive Partners), VRDN, 2.10% due 9/01/2005 100
NR Aaa 200 (Hoffman-La Roche Incorporated Project), AMT, VRDN, 2.25%
due 11/01/2011 200
AA+ Aa1 500 New Jersey, GO, 6.25% due 9/15/1995 526
New Jersey Health Care Facilities Financing Authority Revenue Bonds:
AAA Aaa 500 (Carrier Foundation), Series C, VRDN, 1.95% due 7/01/2005(a)(d) 500
AAA Aaa 550 Refunding (Allegany Health--Our Lady of Lourdes), 4.40%
due 7/01/2001(c) 556
AAA Aaa 300 New Jersey State Educational Facilities Authority Revenue Bonds
(Princeton University), Series A, 5.40% due 7/01/1995 310
AA- A1 600 New Jersey State Highway Authority, General Revenue Refunding Bonds
(Garden State Parkway--Senior Parkway), 4.70% due 1/01/2003 613
A+ Aa 1,500 New Jersey State Transportation Trust Fund Authority Bonds
(Transportation System), Series A, 4.60% due 6/15/2001 1,537
A A 465 New Jersey State Turnpike Authority, Revenue Refunding Bonds,
Series A, 5.50% due 1/01/1996 484
AA Aa1 500 Parsippany, Troy Hills Township, New Jersey, Refunding Bonds,
UT, 5.90% due 4/01/2003 556
AA A1 300 Rutgers State University, New Jersey, University Revenue Refunding
Bonds (State University of New Jersey), Series R, 5.10%
due 5/01/1997 315
AAA Aaa 225 Somerset County, New Jersey, GO, 6.20% due 8/01/1995 236
Puerto Rico--2.5% SP1+ MIG1++ 300 Puerto Rico Commonwealth, TRAN, Series A, 3% due 7/29/1994 301
Total Investments (Cost--$11,625)--95.6% 11,691
Other Assets Less Liabilities--4.4% 543
------
Net Assets--100.0% 12,234
======
<FN>
(a) The interest rate is subject to change periodically based upon the
prevailing market rate. The interest rates shown are those in effect at
January 31, 1994.
(b) AMBAC Insured.
(c) MBIA Insured.
(d) FGIC Insured.
++Highest short-term rating issued by Moody's Investors Service, Inc.
See Notes to Financial Statements.
</TABLE>
6
<PAGE>
<TABLE>
SCHEDULE OF INVESTMENTS (concluded) (in Thousands)
<CAPTION>
New York Limited Maturity Municipal Bond Fund
S&P Moody's Face Value
STATE Ratings Ratings Amount Issue (Note 1a)
<S> <S> <S> <C> <S> <C>
New York--95.6% A A $ 500 Battery Park City Authority, New York, Revenue Refunding
Bonds, Series B, 4.25% due 11/01/1997 $ 507
AAA Aaa 400 Metropolitan Transportation Authority, New York,
Transportation Facilities Revenue Bonds, Series F, 8.375%
due 7/01/1996(b) 455
NR NR 500 Monroe County, New York, BAN, UT, 3% due 6/10/1994 501
AA- Aa 300 Municipal Assistance Corporation for the City of New York, New York,
GO, Series 67, 7.20% due 7/01/1999 346
A- Baa1 600 New York City, New York, GO, Series C, 4.80% due 10/01/2000 597
NR NR 600 New York City, New York, Industrial Development Agency, Industrial
Development Revenue Bonds (Japan Airlines Company Limited), AMT,
VRDN, 2.30% due 11/01/2015(a) 600
SP-1 MIG1++ 500 New York City, New York, Municipal Water Finance Authority,
Water and Sewer System BAN, Series A, 2.75% due 4/15/1994 500
AAA Aaa 500 New York City, New York, Municipal Water Finance Authority,
Water and Sewer System Revenue Bonds, Series A, 5.40% due 6/15/2000(c) 535
A1+ VMIG1 500 New York City Trust For Cultural Restoration, New York, Revenue Bonds
(Museum of Broadcasting), VRDN, 2.10% due 5/01/2014(a) 500
New York State Dormitory Authority Revenue Bonds:
AA Aa 230 (Cornell University), 7.40% due 7/01/1995 243
AAA Aaa 500 Refunding (New York University), Series A, 4.40% due 7/01/2001(d) 509
A1+ NR 400 New York State Environmental Facilities, Corporate Resource Recovery
Revenue Bonds (Equity Huntington Project), AMT, VRDN, 2.35%
due 11/01/2014(a) 400
A1+ VMIG1 500 New York State Housing Finance Agency, Revenue Bonds (Normandie Court
I Project), VRDN, 2.10% due 5/15/2015(a) 500
A A 575 New York State Local Government Assistance Corporation, Refunding
Bonds, Series D, 4.375% due 4/01/2001 579
AAA Aa 500 New York State Medcare Facilities Finance Authority Refunding Bonds
(Presbyterian Hospital), Series A, 4.35% due 2/15/2001 503
AAA Aaa 500 New York State Thruway Authority, Emergency Highway Construction and
Reconstruction Bonds, Series A, 4.90% due 3/01/2002(e) 521
BBB Baa1 500 New York State Urban Development Corporation Revenue Bonds
(Correctional Capital Facilities), Series 4, 4.50% due 1/01/1998 504
AA- A1 1,580 Port Authority of New York and New Jersey, Construction Bonds,
Ninety-First Series, 4.10% due 11/15/1999 1,598
AAA Aaa 600 Sullivan County, New York, GO, Refunding, Public Improvement Bonds,
4.375% due 3/15/2001(d) 606
A+ Aaa 1,500 Triborough Bridge and Tunnel Authority, New York, Revenue Refunding
Bonds, Series M, 7.375% due 1/01/1998(b) 1,732
Puerto Rico--3.9% SP1+ MIG1++ 500 Puerto Rico Commonwealth, TRAN, Series A, 3% due 7/29/1994 502
Total Investments (Cost--$12,623)--99.5% 12,738
Other Assets Less Liabilities--0.5% 63
-------
Net Assets--100.0% $12,801
=======
<FN>
(a) The interest rate is subject to change periodically based upon the prevailing
market rate. The interest rate shown is the rate in effect at January 31, 1994.
(b) Prerefunded.
(c) AMBAC Insured.
(d) MBIA Insured.
(e) FGIC Insured.
++Highest short-term ratings issued by Moody's Investors Service, Inc.
</TABLE>
See Notes to Financial Statements.
7
<PAGE>
<TABLE>
<CAPTION>
Pennsylvania Limited Maturity Municipal Bond Fund
S&P Moody's Face Value
STATE Ratings Ratings Amount Issue (Note 1a)
<C> <C> <C> <C> <S> <C>
Pennsylvania--88.9% A1+ VMIG1 $ 200 Allegheny County, Pennsylvania, Authority Improvement
Municipalities, Hospital Revenue Bonds (Pooled Hospital
Equipment Leasing), VRDN, 2.25% due 9/01/1995(a)(e) $ 200
AAA Aaa 1,500 Berks County, Pennsylvania, GO, 7.80% due 11/15/1998(b)(f) 1,762
AA Aa 500 Bucks County, Pennsylvania, GO, Series A, UT, 6% due 3/01/2001 554
A-1 NR 200 Delaware County, Pennsylvania, Health Care Authority Revenue Bonds
Capital Asset), Series B, VRDN, 2.40% due 7/01/2015(e) 200
A A 600 Delaware River, Pennsylvania, Joint Toll Bridge Commission,
Bridge Revenue Bonds, 7.875% due 7/01/1998(f) 709
AAA Aaa 1,000 Delaware River Port Authority of Pennsylvania and New Jersey,
Delaware River Bridges, Revenue Refunding Bonds, 6.90%
due 1/01/1996(c) 1,068
AAA Aaa 475 Doylestown, Pennsylvania, Hospital Authority Revenue Refunding Bonds,
Series A, 4.25% due 7/01/2000(c) 479
A1+ NR 400 Emmaus, Pennsylvania, General Authority Revenue Bonds, VRDN, 2.30% due
3/01/2024(e) 400
AAA Aaa 350 Jersey Shore Area, Pennsylvania, Joint Water Authority, Water Revenue
Bonds, 7.70% due 4/01/1996(c)(f) 383
BBB NR 450 Northeastern, Pennsylvania, Hospital and Education Authority,
Revenue Refunding Bonds (Wilkes University), 5% due 10/01/2000 457
AA- A1 500 Pennsylvania, GO, 6.25% due 9/01/2001 537
A1+ VMIG1 400 Pennsylvania Higher Education Assistance Agency, Student Loan Revenue
Bonds, Series B, AMT, VRDN, 2.25% due 7/01/2018(e) 400
AAA Aaa 500 Pennsylvania Housing Finance Agency Refunding Bonds (Rental Housing),
4.15% due 7/01/1995(d) 505
AAA Aaa 450 Pennsylvania Turnpike Commission, Turnpike Revenue Bonds, Series A,
7.875% due 12/01/1996(f) 514
A1+ NR 400 Philadelphia, Pennsylvania, Authority for Industrial Development
Revenue Bonds (Fox Chase Institute of Cancer Research), Series A,
VRDN, 2.10% due 7/01/2013(e) 400
AAA Aaa 400 Pittsburgh, Pennsylvania, Revenue Refunding Bonds, Series B, 4.10% due
9/01/1995(c) 406
AAA Aaa 750 Union County, Pennsylvania, Higher Education Facilities Financing
Authority (Bucknell University), 6% due 4/01/2002(a) 830
Puerto Rico--5.5% SP1+ MIG1++ 265 Puerto Rico Commonwealth, TRAN, Series A, 3% due 7/29/1994 266
AAA Aaa 300 Puerto Rico Electric Power Authority Revenue Bonds,
9% due 7/01/1995 (f) 334
Total Investments (Cost--$10,333)--94.4% 10,404
Other Assets Less Liabilities--5.6% 621
-------
Net Assets--100.0% $11,025
=======
<FN>
(a) MBIA Insured.
(b) FGIC Insured.
(c) AMBAC Insured.
(d) FNMA Insured.
(e) The interest rate is subject to change periodically based on prevailing
market rates. The rates shown are those in effect at January 31, 1994.
(f) Prerefunded.
++Highest short-term rating by Moody's Investors Service, Inc.
See Notes to Financial Statements.
</TABLE>
8
<PAGE>
<TABLE>
STATEMENTS OF ASSETS AND LIABILITIES
<CAPTION>
Arizona California Florida Massachusetts
Limited Limited Limited Limited
Maturity Maturity Maturity Maturity
<C> <S> <C> <C> <C> <C>
Assets: Investments, at value* (Note 1a) $5,756,257 $14,927,080 $37,933,206 $12,647,321
Cash 99,542 18,277 278,932 14,188
Receivables:
Securities sold 200,058 -- 1,500,216 --
Beneficial interest sold 293,996 -- 566,652 365,090
Interest 36,129 165,918 376,927 143,576
Investment adviser (Note 2) 15,948 21,208 28,994 18,756
Deferred organization expenses
(Note 1e) 47,600 47,600 47,600 47,600
---------- ----------- ----------- -----------
Total assets 6,449,530 15,180,083 40,732,527 13,236,531
---------- ----------- ----------- -----------
Liabilities: Payables:
Securities purchased -- -- 2,316,449 --
Beneficial interest redeemed -- 164,676 24,989 --
Distributor (Note 2) 1,189 3,010 4,792 2,010
Dividends to shareholders (Note 1f) 3,687 9,297 23,285 9,318
Accrued expenses and other liabilities 44,980 46,924 48,953 41,680
---------- ----------- ----------- -----------
Total liabilities 49,856 223,907 2,418,468 53,008
---------- ----------- ----------- -----------
Net Assets: Net assets $6,399,674 $14,956,176 $38,314,059 $13,183,523
========== =========== =========== ===========
Net Assets Class A Shares of beneficial interest,
Consist of: $0.10 par value, unlimited number of
shares authorized $ 18,529 $ 38,707 $ 204,187 $ 54,793
Class B Shares of beneficial interest,
$0.10 par value, unlimited number of
shares authorized 44,973 109,198 176,211 76,443
Paid-in capital in excess of par 6,291,084 14,654,447 37,677,325 12,996,606
Undistributed realized capital
gains--net 4,340 4,458 1,154 180
Unrealized appreciation on
investments--net 40,748 149,366 255,182 55,501
---------- ----------- ----------- -----------
Net assets $6,399,674 $14,956,176 $38,314,059 $13,183,523
========== =========== =========== ===========
Net Asset Value: Class A:
Net assets $1,867,331 $ 3,914,015 $20,565,395 $ 5,504,174
========== =========== =========== ===========
Shares outstanding 185,294 387,072 2,041,870 547,931
========== =========== =========== ===========
Net asset value and redemption price
per share $ 10.08 $ 10.11 $ 10.07 $ 10.05
========== =========== =========== ===========
Class B:
Net assets $4,532,343 $11,042,161 $17,748,664 $ 7,679,349
========== =========== =========== ===========
Shares outstanding 449,731 1,091,984 1,762,106 764,425
========== =========== =========== ===========
Net asset value and redemption price
per share $ 10.08 $ 10.11 $ 10.07 $ 10.05
========== =========== =========== ===========
<FN>
*Identified cost $5,715,509 $14,777,714 $37,678,024 $12,591,820
========== =========== =========== ===========
</TABLE>
9
<PAGE>
<TABLE>
<CAPTION>
Michigan New Jersey New York Pennsylvania
Limited Limited Limited Limited
Maturity Maturity Maturity Maturity
<S> <S> <C> <C> <C> <C>
Assets: Investments, at value* (Note 1a) $ 5,459,952 $ 11,691,172 $ 12,737,887 $ 10,404,209
Cash 98,128 34,654 53,626 --
Receivables:
Securities sold 1,716,550 500,026 1,103,626 1,025,467
Beneficial interest sold -- 604,530 101,750 20,585
Interest 45,716 129,314 101,612 110,255
Investment adviser (Note 2) 17,266 17,527 21,775 19,659
Deferred organization expenses
(Note 1e) 47,600 47,600 47,600 47,600
------------ ------------ ------------ ------------
Total assets 7,385,212 13,024,823 14,167,876 11,627,775
------------ ------------ ------------ ------------
Liabilities: Payables:
Securities purchased 1,640,162 735,205 1,099,197 --
Beneficial interest redeemed -- -- 210,306 --
Distributor (Note 2) 683 1,852 2,395 2,768
Dividends to shareholders (Note 1f) 3,374 7,766 8,426 6,977
Accrued expenses and other liabilities 46,298 46,148 46,461 592,813
------------ ------------ ------------ ------------
Total liabilities 1,690,517 790,971 1,366,785 602,558
------------ ------------ ------------ ------------
Net Assets: Net assets $ 5,694,695 $ 12,233,852 $ 12,801,091 $ 11,025,217
============ ============ ============ ============
Net Assets Class A Shares of beneficial interest,
Consist of: $0.10 par value, unlimited number of
shares authorized $ 31,563 $ 49,981 $ 42,394 $ 8,976
Class B Shares of beneficial interest,
$0.10 par value, unlimited number of
shares authorized 24,919 71,578 84,392 100,505
Paid-in capital in excess of par 5,594,687 12,042,088 12,556,307 10,843,669
Undistributed realized capital
gains--net 4,056 3,968 2,616 544
Unrealized appreciation on
investments--net 39,470 66,237 115,382 71,523
------------ ------------ ------------ ------------
Net assets $ 5,694,695 $ 12,233,852 $ 12,801,091 $ 11,025,217
============ ============ ============ ============
Net Asset Value: Class A:
Net assets $ 3,182,283 $ 5,028,448 $ 4,280,288 $ 903,952
============ ============ ============ ============
Shares outstanding 315,626 499,810 423,938 89,757
Net asset value and redemption price
per share $ 10.08 $ 10.06 $ 10.10 $ 10.07
============ ============ ============ ============
Class B:
Net assets $ 2,512,412 $ 7,205,404 $ 8,520,803 $ 10,121,265
============ ============ ============ ============
Shares outstanding 249,188 715,779 843,924 1,005,047
============ ============ ============ ============
Net asset value and redemption price
per share $ 10.08 $ 10.07 $ 10.10 $ 10.07
============ ============ ============ ============
<FN>
*Identified cost $ 5,420,482 $ 11,624,935 $ 12,622,505 $ 10,332,686
============ ============ ============ ============
See Notes to Financial Statements.
</TABLE>
10
<PAGE>
<TABLE>
<CAPTION>
STATEMENTS OF OPERATIONS
Arizona California Florida Massachusetts
For the Period November 26, 1993++ Limited Limited Limited Limited
to January 31, 1994 Maturity Maturity Maturity Maturity
<S> <S> <C> <C> <C> <C>
Investment Interest and amortization of premium
Income (Note 1d): and discount earned $ 32,768 $ 76,137 $ 190,412 $ 68,524
---------- ---------- ---------- ----------
Expenses: Investment advisory fees (Note 2) 3,679 8,704 21,994 7,154
Distribution fees--Class B (Note 2) 2,622 6,385 10,270 4,420
Transfer agent fees--Class A (Note 2) 137 224 700 273
Transfer agent fees--Class B (Note 2) 381 678 747 526
Printing and shareholder reports 1,239 3,031 5,535 1,833
Accounting services (Note 2) 5,701 6,491 5,490 5,702
Pricing fees 749 651 811 598
Registration fees (Note 1e) 4,375 4,409 6,693 5,754
Custodian fees 702 672 1,003 743
Professional fees 278 781 1,619 448
Directors' fees and expenses 729 1,862 3,402 1,197
Amortization of organization expenses
(Note 1e) 1,561 1,737 1,689 1,562
Other 96 672 1,305 120
---------- ---------- ---------- ----------
Total expenses before reimbursement 22,249 36,297 61,258 30,330
Reimbursement of expenses (Note 2) (19,627) (29,912) (50,988) (25,910)
---------- ---------- ---------- ----------
Total expenses after reimbursement 2,622 6,385 10,270 4,420
---------- ---------- ---------- ----------
Investment income--net 30,146 69,752 180,142 64,104
---------- ---------- ---------- ----------
Realized & Realized gain on investments--net 4,340 4,458 1,154 180
Unrealized Gain Unrealized appreciation
on Investment-- on investments--net 40,748 149,366 255,182 55,501
Net (Notes 1d ---------- ---------- ---------- ----------
& 3): Net Increase in Net Assets Resulting
from Operations $ 75,234 $ 223,576 $ 436,478 $ 119,785
========== ========== ========== ==========
<CAPTION>
Michigan New Jersey New York Pennsylvania
Limited Limited Limited Limited
For the Period November 26, 1993++ Maturity Maturity Maturity Maturity
to January 31, 1994
<S> <S> <C> <C> <C> <C>
Investment Interest and amortization of premium
Income and discount earned $ 29,409 $ 55,741 $ 72,797 $ 53,625
(Note 1d): ----------- ---------- --------- ----------
Expenses: Investment advisory fees (Note 2) 3,202 6,477 7,684 6,477
Distribution fees--Class B (Note 2) 1,507 4,153 5,416 6,030
Transfer agent fees--Class A (Note 2) 311 208 266 44
Transfer agent fees--Class B (Note 2) 304 464 702 670
Printing and shareholder reports 1,432 1,800 3,047 1,744
Accounting services (Note 2) 6,232 4,379 6,526 5,832
Pricing fees 327 829 655 592
Registration fees (Note 1e) 4,882 5,040 4,940 5,835
Custodian fees 441 806 730 740
Professional fees 354 534 784 662
Directors' fees and expenses 722 1,021 1,702 1,181
Amortization of organization expenses
(Note 1e) 1,727 1,726 1,747 1,595
</TABLE>
11
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C>
Other 534 720 676 764
----------- ---------- --------- ----------
Total expenses before reimbursement 21,975 28,157 34,875 32,166
----------- ---------- --------- ----------
Reimbursement of expenses (Note 2) (20,468) (24,004) (29,459) (26,135)
----------- ---------- --------- ----------
Total expenses after reimbursement 1,507 4,153 5,416 6,031
----------- ---------- --------- ----------
Investment income--net 27,902 51,588 67,381 47,594
----------- ---------- --------- ----------
Realized & Realized gain on investments--net 4,056 3,968 2,616 544
Unrealized Unrealized appreciation on
Gain on investments--net 39,470 66,237 115,382 71,523
Investments--Net ----------- ---------- --------- ----------
(Notes 1d & 3): Net Increase in Net Assets Resulting
from Operations $ 71,428 $ 121,793 $ 185,379 $ 119,661
=========== ========== ========= ==========
<FN>
++Commencement of operations.
See Notes to Financial Statements.
</TABLE>
<TABLE>
<CAPTION>
STATEMENTS OF CHANGES IN NET ASSETS
For the Period November 26, 1993++ to January 31, 1994
Arizona California Florida Massachusetts
Limited Limited Limited Limited
Increase (Decrease) in Net Assets: Maturity Maturity Maturity Maturity
<S> <S> <C> <C> <C> <C>
Operations: Investment income--net $ 30,146 $ 69,752 $ 180,142 $ 64,104
Realized gain on investments--net 4,340 4,458 1,154 180
Unrealized appreciation
on investments--net 40,748 149,366 255,182 55,501
---------- ----------- ----------- -----------
Net increase in net assets resulting
from operations 75,234 223,576 436,478 119,785
---------- ----------- ----------- -----------
Dividends to Investment income--net:
Shareholders Class A (9,395) (20,246) (102,470) (26,774)
(Note 1f): Class B (20,751) (49,506) (77,672) (37,330)
---------- ----------- ----------- -----------
Net decrease in net assets resulting
from dividends to shareholders (30,146) (69,752) (180,142) (64,104)
---------- ----------- ----------- -----------
Beneficial Net increase in net assets derived
Interest from beneficial interest transactions 6,254,586 14,702,352 37,957,723 13,027,842
Transactions ---------- ----------- ----------- -----------
(Note 4):
Net Assets: Total increase in net assets 6,299,674 14,856,176 38,214,059 13,083,523
Beginning of period 100,000 100,000 100,000 100,000
---------- ----------- ----------- -----------
End of period $6,399,674 $14,956,176 $38,314,059 $13,183,523
========== =========== =========== ===========
<FN>
++Commencement of operations.
See Notes to Financial Statements.
</TABLE>
12
<PAGE>
<TABLE>
STATEMENTS OF CHANGES IN NET ASSETS (concluded)
<CAPTION>
For the Period November 26, 1993++ to January 31, 1994
Michigan New Jersey New York Pennsylvania
Limited Limited Limited Limited
Increase (Decrease) in Net Assets: Maturity Maturity Maturity Maturity
<C> <S> <C> <C> <C> <C>
Operations: Investment income--net $ 27,902 $ 51,588 $ 67,381 $ 47,594
Realized gain on investments--net 4,056 3,968 2,616 544
Change in unrealized appreciation
on investments--net 39,470 66,237 115,382 71,523
---------- ----------- ----------- -----------
Net increase in net assets
resulting from operations 71,428 121,793 185,379 119,661
---------- ----------- ----------- -----------
Dividends to Investment income--net
Shareholders Class A (15,592) (20,740) (21,666) (3,767)
(Note 1f): Class B (12,310) (30,848) (45,715) (43,827)
---------- ----------- ----------- -----------
Net decrease in net assets
resulting from dividends
to shareholders (27,902) (51,588) (67,381) (47,594)
---------- ----------- ----------- -----------
Beneficial Net increase in net assets derived
Interest Trans- from beneficial interest transactions 5,551,169 12,063,647 12,583,093 10,853,150
actions (Note 4): ---------- ----------- ----------- -----------
Net Assets: Total increase in net assets 5,594,695 12,133,852 12,701,091 10,925,217
Beginning of period 100,000 100,000 100,000 100,000
---------- ----------- ----------- -----------
End of period $5,694,695 12,233,852 $12,801,091 $11,025,217
========== =========== =========== ===========
<FN>
++Commencement of Operations.
See Notes to Financial Statements.
</TABLE>
FINANCIAL HIGHLIGHTS
The following per share data and ratios have been derived
from information provided in the financial statements.
Increase (Decrease) in Net Asset Value:
<TABLE>
<CAPTION>
For the Period November 26, 1993++ to January 31, 1994
Arizona California Florida Massachusetts
Limited Maturity Limited Maturity Limited Maturity Limited Maturity
Class A Class B Class A Class B Class A Class B Class A Class B
<S> <S> <C> <C> <C> <C> <C> <C> <C> <C>
Per Share Net asset value, beginning of period $ 10.00 $ 10.00 $ 10.00 $ 10.00 $ 10.00 $ 10.00 $ 10.00 $ 10.00
Operating ------- ------- ------- ------- ------- ------- ------- -------
Performance: Investment income--net .06 .05 .06 .05 .05 .05 .06 .05
Realized and unrealized gain on
investments--net .08 .08 .11 .11 .07 .07 .05 .05
------- ------- ------- ------- ------- ------- ------- -------
Total from investment operations .14 .13 .17 .16 .12 .12 .11 .10
------- ------- ------- ------- ------- ------- ------- -------
Less dividends:
Investment income--net (.06) (.05) (.06) (.05) (.05) (.05) (.06) (.05)
------- ------- ------- ------- ------- ------- ------- -------
Total dividends (.06) (.05) (.06) (.05) (.05) (.05) (.06) (.05)
------- ------- ------- ------- ------- ------- ------- -------
Net asset value, end of period $ 10.08 $ 10.08 $ 10.11 $ 10.11 $ 10.07 $ 10.07 $ 10.05 $ 10.05
======= ======= ======= ======= ======= ======= ======= =======
</TABLE>
13
<PAGE>
<TABLE>
<S> <S> <C> <C> <C> <C> <C> <C> <C> <C>
Total Invest- Based on net asset value per share 1.41%+++ 1.35%+++ 1.69%+++ 1.63%+++ 1.28%+++ 1.22%+++ 1.13%+++ 1.07%+++
ment Return:** ======= ======= ======= ======= ======= ======= ======= =======
Ratios to Expenses, excluding distribution fees
Average Net and net of reimbursement .00% .00% .00% .00% .00% .00% .00% .00%
Assets: ======= ======= ======= ======= ======= ======= ======= =======
Expenses, net of reimbursement .00% .35%* .00% .35%* .00% .35%* .00% .35%*
======= ======= ======= ======= ======= ======= ======= =======
Expenses 1.86%* 2.22%* 1.20%* 1.55%* .81%* 1.17%* 1.25%* 1.63%*
======= ======= ======= ======= ======= ======= ======= =======
Investment income--net 3.11%* 2.77%* 3.06%* 2.71%* 3.06%* 2.65%* 3.43%* 2.96%*
======= ======= ======= ======= ======= ======= ======= =======
Supplemental Net assets, end of period (in
Data: (thousands) $ 1,867 $ 4,532 $ 3,914 $11,042 $20,565 $17,749 $ 5,504 $ 7,679
======= ======= ======= ======= ======= ======= ======= =======
Portfolio turnover 44.78% 44.78% .00% .00% 1.98% 1.98% .00% .00%
======= ======= ======= ======= ======= ======= ======= =======
</TABLE>
<TABLE>
<CAPTION>
The following per share data and ratios have been derived
from information provided in the financial statements.
Increase (Decrease) in Net Asset Value:
For the Period November 26, 1993++ to January 31, 1994
Michigan New Jersey New York Pennsylvania
Limited Maturity Limited Maturity Limited Maturity Limited Maturity
Class A Class B Class A Class B Class A Class B Class A Class B
<S> <S> <C> <C> <C> <C> <C> <C> <C> <C>
Per Share Net asset value, beginning of period $ 10.00 $ 10.00 $ 10.00 $ 10.00 $ 10.00 $ 10.00 $ 10.00 $ 10.00
Operating ------- ------- ------- ------- ------- ------- ------- -------
Performance: Investment income--net .06 .05 .05 .05 .06 .05 .05 .05
Realized and unrealized gain on
investments--net .08 .08 .06 .07 .10 .10 .07 .07
------- ------- ------- ------- ------- ------- ------- -------
Total from investment operations .14 .13 .11 .12 .16 .15 .12 .12
------- ------- ------- ------- ------- ------- ------- -------
Less dividends:
Investment income--net (.06) (.05) (.05) (.05) (.06) (.05) (.05) (.05)
------- ------- ------- ------- ------- ------- ------- -------
Total dividends (.06) (.05) (.05) (.05) (.06) (.05) (.05) (.05)
------- ------- ------- ------- ------- ------- ------- -------
Net asset value, end of period $ 10.08 $ 10.08 $ 10.06 $ 10.07 $ 10.10 $ 10.10 $ 10.07 $ 10.07
======= ======= ======= ======= ======= ======= ======= =======
Total Invest- Based on net asset value per share 1.43%+++ 1.37%+++ 1.17%+++ 1.21%+++ 1.64%+++ 1.58%+++ 1.26%+++ 1.20%+++
ment Return:** ======= ======= ======= ======= ======= ======= ======= =======
Ratios to Expenses, excluding distribution fees
Average Net and net of reimbursement .00% .00% .00% .00% .00% .00% .00% .00%
Assets: ======= ======= ======= ======= ======= ======= ======= =======
Expenses, net of reimbursement .00% .35%* .00% .35%* .00% .35%* .00% .35%*
======= ======= ======= ======= ======= ======= ======= =======
Expenses 2.23%* 2.59%* 1.24%* 1.68%* 1.34%* 1.69%* 1.41%* 1.76%*
======= ======= ======= ======= ======= ======= ======= =======
Investment income--net 3.22%* 2.86%* 3.12%* 2.60%* 3.34%* 2.95%* 2.95%* 2.54%*
======= ======= ======= ======= ======= ======= ======= =======
Supplemental Net assets, end of period
Data: (in thousands) $ 3,182 $ 2,512 $ 5,028 $ 7,205 $ 4,280 $ 8,521 $ 904 $10,121
======= ======= ======= ======= ======= ======= ======= =======
Portfolio turnover 68.74% 68.74% 29.55% 29.55% 25.84% 25.84% 18.07% 18.07%
======= ======= ======= ======= ======= ======= ======= =======
<FN>
*Annualized.
**Total investment returns exclude the effects of sales loads.
++Commencement of Operations.
+++Aggregate total investment return.
See Notes to Financial Statements.
</TABLE>
14
<PAGE>
NOTES TO FINANCIAL STATEMENTS
1. Significant Accounting Policies:
Merrill Lynch Multi-State Limited Maturity Municipal Series Trust
("the Trust") is registered under the Investment Company Act of 1940
as a diversified, open-end investment management company. The Trust
offers Class A and Class B Shares. Class A Shares are sold with a
front-end sales charge. Class B Shares may be subject to a contingent
deferred sales charge. Both classes of shares have identical voting,
dividend, liquidation and other rights and the same terms and con-
ditions, except that Class B Shares bear certain expenses related to
the distribution of such shares and have exclusive voting rights with
respect to matters relating to such distribution expenditures. The
following is a summary of significant accounting policies followed
by the Trust.
(a) Valuation of investments--Municipal bonds and other portfolio
securities in which the Trust invests are traded primarily in the
over-the-counter municipal bond and money markets and are valued
at the last available bid price in the over-the-counter market or on
the basis of yield equivalents as obtained from one or more dealers
that make markets in the securities. Financial futures contracts and
options thereon, which are traded on exchanges, are valued at their
settlement prices as of the close of such exchanges. Options, which
are traded on exchanges, are valued at their last sale price as of the
close of such exchanges or, lacking any sales, at the last available
bid price. Securities and assets for which market quotations are not
readily available are valued at fair value as determined in good faith
by or under the direction of the Board of Trustees of the Trust, in-
cluding valuations furnished by a pricing service retained by the Trust,
which may utilize a matrix system for valuations. The procedures of the
pricing service and its valuations are reviewed by the officers of the
Trust under the general supervision of the Trustees.
(b) Financial futures contracts--The Trust may purchase or sell in-
terest rate futures contracts and options on such futures contracts
for the purpose of hedging the market risk on existing securities or
the intended purchase of securities. Futures contracts are contracts
for delayed delivery of securities at a specific future date and at a
specific price or yield. Upon entering into a contract, the Trust
deposits and maintains as collateral such initial margin as required
by the exchange on which the transaction is effected. Pursuant to
the contract, the Trust agrees to receive from or pay to the broker
an amount of cash equal to the daily fluctuation in value of the con-
tract. Such receipts or payments are known as variation margin and
are recorded by the Trust as unrealized gains or losses. When the
contract is closed, the Trust records a realized gain or loss equal
to the difference between the value of the contract at the time it
was opened and the value at the time it was closed.
(c) Income taxes--It is the Trust's policy to comply with the require-
ments of the Internal Revenue Code applicable to regulated invest-
ment companies and to distribute substantially all of its taxable
income to its shareholders. Therefore, no Federal income tax
provision is required.
(d) Security transactions and investment income--Security transactions
are recorded on the dates the transactions are entered into (the trade
dates). Interest income is recognized on the accrual basis. Original
issue discounts and market premiums are amortized into interest income.
Realized gains and losses on security transactions are determined on the
identified cost basis.
(e) Deferred organization expenses and prepaid registration fees--
Deferred organization expenses are charged to expenses on a straight-
line basis over a five-year period. Costs related to the organization
of the second class of shares are charged to expense over a period not
exceeding five years. Prepaid registration fees are charged to expense
as the related shares are issued.
(f) Dividends and distributions--Dividends from net investment income
are declared daily and paid monthly. Distributions of capital gains
are recorded on the ex-dividend dates.
2. Investment Advisory Agreement and Transactions with Affiliates:
The Trust has entered into an Investment Advisory Agreement with Fund
Asset Management, L.P. ("FAM"). Effective January 1, 1994, the invest-
ment advisory business of FAM was reorganized from a corporation to a
limited partnership. Both prior to and after the reorganization, ultimate
control of FAM was vested with Merrill Lynch and Co., Inc. ("ML & Co.").
The general partner of FAM is Princeton Services, Inc., an indirect wholly-
owned subsidiary of ML & Co. The limited partners are ML & Co. and Merrill
Lynch Investment Management, Inc. ("MLIM"), which is also an indirect wholly-
owned subsidiary of ML & Co. The Trust has also entered into Distribution
Agreements and a Distribution Plan with Merrill Lynch Funds Distributor, Inc.
("MLFD" or "Distributor"), a wholly-owned subsidiary of MLIM.
FAM is responsible for the management of the Trust's portfolio and provides
the necessary personnel, facilities, equipment and certain other services
necessary to the operations of the Trust. For such services, the Trust pays
a monthly fee based upon the average daily value of the Trust's net assets
at the following annual rates: 0.35% of the Trust's average daily net assets.
The Investment Advisory Agreement obligates FAM to reimburse the Trust to
the extent the Trust's expenses (excluding interest, taxes, distribution
fees, brokerage fees and commissions, and extraordinary items) exceed 2.5% of
the Trust's first $30 million of average daily net assets, 2.0% of the next $70
million of average daily net assets and 1.5% of the average daily net assets in
excess thereof. FAM's obligation to reimburse the Trust is limited to the amount
of the management fee. No fee payment will be made during any fiscal year which
will cause such expenses to exceed expense limitation at the time of such
payment.
For the period November 26, 1993 to January 31, 1994, FAM had voluntarily
waived management fees and reimbursed the Trust for additional expenses
as follows:
15
<PAGE>
<TABLE>
<CAPTION>
Arizona California Florida
Limited Limited Limited
Maturity Maturity Maturity
<S> <C> <C> <C>
Management fee $ 3,679 $ 8,704 $ 21,994
Additional expenses 15,948 21,208 28,994
Massachusetts Michigan New Jersey
Limited Limited Limited
Maturity Maturity Maturity
Management fee $ 7,154 $ 3,202 $ 6,477
Additional expenses 18,756 17,266 17,527
New York Pennsylvania
Limited Limited
Maturity Maturity
Management fee $ 7,684 $ 6,477
Additional expenses 21,775 19,658
</TABLE>
The Trust has adopted a Plan of Distribution (the "Plan") pursuant
to Rule 12b-1 under the Investment Company Act of 1940 that each Fund
pays the Distributor an ongoing account maintenance fee and distribution
fee relating to Class B Shares, which are accrued daily and paid monthly
at the annual rates of 0.15% and 0.20%, respectively, of the average
daily net assets of the Class B Shares of that Fund. Pursuant to the
sub-agreements with the Distributor, Merrill Lynch also provides account
maintenance and distribution services to each Fund. As authorized by the
Plan, the Distributor has entered into an agreement with Merrill Lynch,
Pierce, Fenner & Smith Inc. ("MLPF&S"), an affiliate of MLIM, which
provides for the compensation of MLPF&S for providing distribution-
related services to the Trust.
For the period November 26, 1993 to January 31, 1994, MLFD earned
underwriting discounts and MLPF&S earned dealer concessions on
sales of the Trust's Class A Shares as follows:
<TABLE>
<CAPTION>
Arizona California Florida
Limited Limited Limited
Maturity Maturity Maturity
<S> <C> <C> <C>
MLFD $ 206 $ 428 $ 1,146
MLPF&S 53,445 22,567 61,490
Massachusetts Michigan New Jersey
Limited Limited Limited
Maturity Maturity Maturity
MLFD $ 1,518 $ 241 $ 180
MLPF&S 29,502 21,381 7,057
New York Pennsylvania
Limited Limited
Maturity Maturity
MLFD $ 482 $ 15
MLPF&S 17,281 4,088
</TABLE>
MLPF&S received contingent deferred sales charges relating to transactions
in Class B Shares, amounting to $0, $720, $801, $500, $0, $217, $1,000, and
$30 in the Arizona Limited Maturity, California Limited Maturity, Florida
Limited Maturity, Massachusetts Limited Maturity, Michigan Limited Maturity,
New Jersey Limited Maturity, New York Limited Maturity and Pennsylvania
Limited Maturity Funds, respectively.
Financial Data Services, Inc. ("FDS"), a wholly-owned subsidiary of ML & Co.,
is the Trust's transfer agent.
Accounting services are provided to the Trust by FAM at cost.
Certain officers and/or trustees of the Trust are officers and/or directors
of FAM, MLIM, MLFD, FDS, MLPF&S, and/or ML & Co.
3. Investments:
Purchases and sales of investments, excluding short-term securities, for
the period November 26, 1993 to January 31, 1994, were as follows:
<TABLE>
<CAPTION>
Purchases Sales
<S> <C> <C>
Arizona Limited Maturity $ 5,335,402 $ 1,112,910
California Limited Maturity 10,283,748 --
Florida Limited Maturity 28,365,848 252,070
Massachusetts Limited Maturity 10,998,927 --
Michigan Limited Maturity 5,223,222 1,301,280
New Jersey Limited Maturity 11,457,551 1,224,201
New York Limited Maturity 10,235,862 1,106,950
Pennsylvania Limited Maturity 9,095,505 609,138
</TABLE>
NOTES TO FINANCIAL STATEMENTS (continued)
Net realized and unrealized gains (losses) as of January 31, 1994 were
as follows:
<TABLE>
<CAPTION>
Realized Unrealized
Arizona Limited Maturity Gains Gains
<S> <C> <C>
Long-term investments $ 3,592 $ 40,207
Short-term investments 748 541
-------- --------
Total $ 4,340 $ 40,748
======== ========
Realized Unrealized
California Limited Maturity Gains Gains
</TABLE>
16
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C>
Long-term investments -- $147,985
Short-term investments $ 4,458 1,381
-------- --------
Total $ 4,458 $149,366
======== ========
Realized Unrealized
Florida Limited Maturity Gains Gains
Long-term investments $ 1,144 $253,444
Short-term investments 10 1,738
-------- --------
Total $ 1,154 $255,182
======== ========
Realized Unrealized
Massachusetts Limited Maturity Gains Gains
Long-term investments -- $ 54,667
Short-term investments $ 180 834
-------- --------
Total $ 180 $ 55,501
======== ========
Realized Unrealized
Michigan Limited Maturity Gains (Losses) Gains
Long-term investments $ 4,062 $ 39,154
Short-term investments (6) 316
-------- --------
Total $ 4,056 $ 39,470
======== ========
Realized Unrealized
New Jersey Limited Maturity Gains Gains
Long-term investments $ 3,953 $ 65,837
Short-term investments 15 400
-------- --------
Total $ 3,968 $ 66,237
======== ========
Realized Unrealized
New York Limited Maturity Gains Gains
Long-term investments $ 1,841 $114,026
Short-term investments 775 1,356
-------- --------
Total $ 2,616 $115,382
======== ========
Realized Unrealized
Pennsylvania Limited Maturity Gains (Losses) Gains
Long-term investments $ 798 $ 71,170
Short-term investments (254) 353
-------- --------
Total $ 544 $ 71,523
======== ========
</TABLE>
As of January 31, 1994, net unrealized appreciation for
Federal income tax purposes were as follows:
<TABLE>
<CAPTION>
Gross Gross Net
Unrealized Unrealized Unrealized
Appreciation Depreciation Appreciation
<S> <C> <C> <C>
Arizona Limited Maturity $ 40,748 -- $ 40,748
California Limited Maturity 149,366 -- 149,366
Florida Limited Maturity 255,182 -- 255,182
Massachusetts Limited
Maturity 57,383 ($1,882) 55,501
Michigan Limited Maturity 39,470 -- 39,470
New Jersey Limited Maturity 66,237 -- 66,237
New York Limited Maturity 115,382 -- 115,382
Pennsylvania Limited
Maturity 72,637 (1,114) 71,523
</TABLE>
The aggregate cost of investments at January 31, 1994 for Federal income tax
purposes was $5,715,509 for the Arizona Limited Maturity Fund, $14,777,714
for the California Limited Maturity Fund, $37,678,024 for the Florida
Limited Maturity Fund, $12,591,820 for the Massachusetts Limited Maturity
Fund, $5,420,482 for the Michigan Limited Maturity Fund, $11,624,935 for
the New Jersey Limited Maturity Fund, $12,622,505 for the New York Limited
Maturity Fund and $10,332,686 for the Pennsylvania Limited Maturity Fund.
4. Beneficial Interest Transactions:
Net increase in net assets derived from beneficial interest transactions
for the period ended January 31, 1994 were $6,254,586 for the Arizona
Limited Maturity Fund; $14,702,352 for the California Limited Maturity
Fund; $37,957,723 for the Florida Limited Maturity Fund; $13,027,842 for
the Massachusetts Limited Maturity Fund; $5,551,169 for the Michigan
Limited Maturity Fund; $12,063,647 for the New Jersey Limited Maturity
Fund; $12,583,093 for the New York Limited Maturity Fund; and $10,853,150
for the Pennsylvania Limited Maturity Fund.
Transactions in beneficial interest for Class A and Class B Shares
were as follows:
<TABLE>
<CAPTION>
Arizona Limited Maturity
<S> <C> <C>
Class A Shares for the Period Dollar
November 26, 1993++ to January 31, 1994 Shares Amount
Shares sold $ 201,702 $2,018,747
</TABLE>
17
<PAGE>
<TABLE>
<S> <C> <C>
Shares issued to shareholders in
reinvestment of dividends 411 4,126
--------- -----------
Total issued 202,113 2,022,873
Shares redeemed (21,819) (218,402)
--------- -----------
Net increase 180,294 $ 1,804,471
========= ===========
<FN>
++Prior to November 26, 1993 (commencement of operations), the Fund issued
5,000 shares to FAM for $50,000.
Arizona Limited Maturity
Class B Shares for the Period Dollar
November 26, 1993++ to January 31, 1994 Shares Amount
Shares sold $ 459,367 $ 4,596,648
Shares issued to shareholders in
reinvestment of dividends 813 8,165
--------- -----------
Total issued 460,180 4,604,813
Shares redeemed (15,449) (154,698)
--------- -----------
Net increase 444,731 $ 4,450,115
========= ===========
<FN>
++Prior to November 26, 1993 (commencement of operations), the Fund issued
5,000 shares to FAM for $50,000.
California Limited Maturity
Class A Shares for the Period Dollar
November 26, 1993++ to January 31, 1994 Shares Amount
Shares sold 422,588 $ 4,230,771
Shares issued to shareholders in
reinvestment of dividends 772 7,773
--------- -----------
Total issued 423,360 4,238,544
Shares redeemed (41,288) (416,069)
--------- -----------
Net increase 382,072 $ 3,822,475
========= ===========
<FN>
++Prior to November 26, 1993 (commencement of operations), the Fund issued
5,000 shares to FAM for $50,000.
California Limited Maturity
Class B Shares for the Period Dollar
November 26, 1993++ to January 31, 1994 Shares Amount
Shares sold 1,144,288 $11,455,675
Shares issued to shareholders in
reinvestment of dividends 1,922 19,352
--------- -----------
Total issued 1,146,210 11,475,027
Shares redeemed (59,226) (595,150)
--------- -----------
Net increase 1,086,984 $10,879,877
========= ===========
<FN>
++Prior to November 26, 1993 (commencement of operations), the Fund issued
5,000 shares to FAM for $50,000.
Florida Limited Maturity
Class A Shares for the Period Dollar
November 26, 1993++ to January 31, 1994 Shares Amount
Shares sold 2,275,154 $22,770,267
Shares issued to shareholders in
reinvestment of dividends 3,456 34,690
--------- -----------
Total issued 2,278,610 22,804,957
Shares redeemed (241,740) (2,425,673)
--------- -----------
Net increase 2,036,870 $20,379,284
========= ===========
<FN>
++Prior to November 26, 1993 (commencement of operations), the Fund issued
5,000 shares to FAM for $50,000.
Florida Limited Maturity
Class B Shares for the Period Dollar
November 26, 1993++ to January 31, 1994 Shares Amount
Shares sold 1,769,985 $17,707,730
Shares issued to shareholders in
reinvestment of dividends 2,830 28,409
--------- -----------
Total issued 1,772,815 17,736,139
Shares redeemed (15,709) (157,700)
--------- -----------
Net increase 1,757,106 $17,578,439
========= ===========
<FN>
++Prior to November 26, 1993 (commencement of operations), the Fund issued
5,000 shares to FAM for $50,000.
</TABLE>
18
<PAGE>
NOTES TO FINANCIAL STATEMENTS (concluded)
<TABLE>
<CAPTION>
Massachusetts Limited Maturity
Class A Shares for the Period Dollar
November 26, 1993++ to January 31, 1994 Shares Amount
<S> <C> <C>
Shares sold 663,619 $ 6,640,306
Shares issued to shareholders in
reinvestment of dividends 1,101 11,036
-------- -----------
Total issued 664,720 6,651,342
Shares redeemed (121,789) (1,219,788)
-------- -----------
Net increase 542,931 $ 5,431,554
======== ===========
</TABLE>
[FN]
++Prior to November 26, 1993 (commencement of operations), the Fund issued
5,000 shares to FAM for $50,000.
<TABLE>
<CAPTION>
Massachusetts Limited Maturity
Class B Shares for the Period Dollar
November 26, 1993++ to January 31, 1994 Shares Amount
<S> <C> <C>
Shares sold 764,545 $ 7,647,609
Shares issued to shareholders in
reinvestment of dividends 1,560 15,641
------- -----------
Total issued 766,105 7,663,250
Shares redeemed (6,680) (66,962)
-------- -----------
Net increase 759,425 $ 7,596,288
======== ===========
</TABLE>
[FN]
++Prior to November 26, 1993 (commencement of operations), the Fund issued
5,000 shares to FAM for $50,000.
<TABLE>
<CAPTION>
Michigan Limited Maturity
Class A Shares for the Period Dollar
November 26, 1993++ to January 31, 1994 Shares Amount
<S> <C> <C>
Shares sold 323,102 $ 3,233,808
Shares issued to shareholders in
reinvestment of dividends 262 2,625
------- -----------
Total issued 323,364 3,236,433
Shares redeemed (12,738) (127,702)
------- -----------
Net increase 310,626 $ 3,108,731
======= ===========
</TABLE>
[FN]
++Prior to November 26, 1993 (commencement of operations), the Fund issued
5,000 shares to FAM for $50,000.
<TABLE>
<CAPTION>
Michigan Limited Maturity
Class B Shares for the Period Dollar
November 26, 1993++ to January 31, 1994 Shares Amount
<S> <C> <C>
Shares sold 243,776 $ 2,438,309
Shares issued to shareholders in
reinvestment of dividends 412 4,129
------- -----------
Total issued 244,188 2,442,438
Shares redeemed -- --
------- -----------
Net increase 244,188 $ 2,442,438
======= ===========
</TABLE>
[FN]
++Prior to November 26, 1993 (commencement of operations), the Fund issued
5,000 shares to FAM for $50,000.
<TABLE>
<CAPTION>
New Jersey Limited Maturity
Class A Shares for the Period Dollar
November 26, 1993++ to January 31, 1994 Shares Amount
<S> <C> <C>
Shares sold 509,861 $ 5,103,320
Shares issued to shareholders in
reinvestment of dividends 404 4,047
-------- -----------
Total issued 510,265 5,107,367
Shares redeemed (15,455) (154,671)
-------- -----------
Net increase 494,810 $ 4,952,696
======== ===========
</TABLE>
[FN]
++Prior to November 26, 1993 (commencement of operations), the Fund issued
5,000 shares to FAM for $50,000.
<TABLE>
<CAPTION>
New Jersey Limited Maturity
Class B Shares for the Period Dollar
November 26, 1993++ to January 31, 1994 Shares Amount
<S> <C> <C>
Shares sold 720,314 $ 7,206,431
Shares issued to shareholders in
reinvestment of dividends 1,415 14,194
------- -----------
Total issued 721,729 7,220,625
Shares redeemed (10,950) (109,674)
-------- -----------
Net increase 710,779 $ 7,110,951
======= ===========
</TABLE>
[FN]
++Prior to November 26, 1993 (commencement of operations), the Fund issued
5,000 shares to FAM for $50,000.
19
<PAGE>
New York Limited Maturity
<TABLE>
<CAPTION>
Class A Shares for the Period Dollar
November 26, 1993++ to January 31, 1994 Shares Amount
<S> <C> <C>
Shares sold 472,522 $ 4,731,861
Shares issued to shareholders in
reinvestment of dividends 1,404 14,114
------- -----------
Total issued 473,926 4,745,975
Shares redeemed (54,988) (551,537)
------- -----------
Net increase 418,938 $ 4,194,438
======= ===========
</TABLE>
[FN]
++Prior to November 26, 1993 (commencement of operations), the Fund issued
5,000 shares to FAM for $50,000.
New York Limited Maturity
<TABLE>
<CAPTION>
Class B Shares for the Period Dollar
November 26, 1993++ to January 31, 1994 Shares Amount
<S> <C> <C>
Shares sold 874,974 $ 8,751,574
Shares issued to shareholders in
reinvestment of dividends 1,820 18,294
-------- -----------
Total issued 876,794 8,769,868
Shares redeemed (37,870) (381,213)
-------- -----------
Net increase 838,924 $ 8,388,655
======== ===========
</TABLE>
[FN]
++Prior to November 26, 1993 (commencement of operations), the Fund issued
5,000 shares to FAM for $50,000.
Pennsylvania Limited Maturity
<TABLE>
<CAPTION>
Class A Shares for the Period Dollar
November 26, 1993++ to January 31, 1994 Shares Amount
<S> <C> <C>
Shares sold 86,592 $ 867,265
Shares issued to shareholders in
reinvestment of dividends 226 2,272
------ -----------
Total issued 86,818 869,537
Shares redeemed (2,061) (20,672)
------ -----------
Net increase 84,757 $ 848,865
====== ===========
</TABLE>
[FN]
++Prior to November 26, 1993 (commencement of operations), the Fund issued
5,000 shares to FAM for $50,000.
Pennsylvania Limited Maturity
<TABLE>
<CAPTION>
Class B Shares for the Period Dollar
November 26, 1993++ to January 31, 1994 Shares Amount
<S> <C> <C>
Shares sold 1,001,643 $10,020,165
Shares issued to shareholders in
reinvestment of dividends 2,306 23,156
--------- -----------
Total issued 1,003,949 10,043,321
Shares redeemed (3,902) (39,036)
--------- -----------
Net increase 1,000,047 $10,004,285
========= ===========
</TABLE>
[FN]
++Prior to November 26, 1993 (commencement of operations), the Fund issued
5,000 shares to FAM for $50,000.
20
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Investment Objectives and Policies......................................... 2
Description of Municipal Bonds and
Other Investments......................................................... 5
Investment Restrictions.................................................... 12
Management of the Trust.................................................... 14
Purchase of Shares......................................................... 16
Redemption of Shares....................................................... 19
Portfolio Transactions..................................................... 20
Determination of Net Asset Value........................................... 21
Shareholder Services....................................................... 21
Distributions and Taxes.................................................... 31
Performance Data........................................................... 37
General Information........................................................ 40
Appendices................................................................. A-1
Independent Auditors' Report............................................... I-1
Financial Statements....................................................... IX-1
</TABLE>
Distributor:
Merrill Lynch
Funds Distributor, Inc.
This Statement of Additional Information should be retained for future
reference.
Code # 16926-0594
Statement of
Additional Information
[ART]
- -----------------------------------
MERRILL LYNCH MULTI-STATE LIMITED MATURITY MUNICIPAL SERIES TRUST
MERRILL LYNCH ARIZONA LIMITED MATURITY MUNICIPAL BOND FUND
MERRILL LYNCH CALIFORNIA LIMITED MATURITY MUNICIPAL BOND FUND
MERRILL LYNCH FLORIDA LIMITED MATURITY MUNICIPAL BOND FUND
MERRILL LYNCH MASSACHUSETTS LIMITED MATURITY MUNICIPAL BOND FUND
MERRILL LYNCH MICHIGAN LIMITED MATURITY MUNICIPAL BOND FUND
MERRILL LYNCH NEW JERSEY LIMITED MATURITY MUNICIPAL BOND FUND
MERRILL LYNCH NEW YORK LIMITED MATURITY MUNICIPAL BOND FUND
MERRILL LYNCH PENNSYLVANIA LIMITED MATURITY MUNICIPAL BOND FUND
May 17, 1994
<PAGE>
PART C. OTHER INFORMATION
ITEM 24. FINANCIAL STATEMENTS AND EXHIBITS.
(a)FINANCIAL STATEMENTS
Contained in Part A (for each of the Funds):
Financial Highlights for the period November 26, 1993 (commencement of
operations) to January 31, 1994 (unaudited).
Contained in Part B (for each of the Funds):
Financial Statement (audited):
Statement of Assets and Liabilities as of November 12, 1993.
Financial Statements (unaudited):
Schedule of Investments as of January 31, 1994.
Statement of Assets and Liabilities as of January 31, 1994.
Statement of Operations for the period November 26, 1993
(commencement of operations) to January 31, 1994.
Statement of Changes in Net Assets for the period November 26, 1993
(commencement of operations) to January 31, 1994.
Financial Highlights for the period November 26, 1993 (commencement
of operations) to January 31, 1994.
(b) EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER
-------
<C> <S>
1(a) --Amended and Restated Declaration of Trust of the Registrant,
dated
November 15, 1993.(d)
(b)(1) --Instrument establishing Merrill Lynch Arizona Limited Maturity
Municipal Bond Fund (the "Arizona Fund") as a Series of the
Registrant.(a)
(b)(2) --Instrument establishing Merrill Lynch California Limited
Maturity Municipal Bond Fund (the "California Fund") as a Series
of the Registrant.(a)
(b)(3) --Instrument establishing Merrill Lynch Florida Limited Maturity
Municipal Bond Fund (the "Florida Fund") as a Series of the
Registrant.(a)
(b)(4) --Instrument establishing Merrill Lynch Massachusetts Limited
Maturity Municipal Bond Fund (the "Massachusetts Fund") as a
Series of the Registrant.(a)
(b)(5) --Instrument establishing Merrill Lynch Michigan Limited Maturity
Municipal Bond Fund (the "Michigan Fund") as a Series of the
Registrant.(a)
(b)(6) --Instrument establishing Merrill Lynch New Jersey Limited
Maturity Municipal Bond Fund (the "New Jersey Fund") as a Series
of the Registrant.(a)
(b)(7) --Instrument establishing Merrill Lynch New York Limited Maturity
Municipal Bond Fund (the "New York Fund") as a Series of the
Registrant.(b)
(b)(8) --Instrument establishing Merrill Lynch Pennsylvania Limited
Maturity Municipal Bond Fund (the "Pennsylvania Fund") as a
Series of the Registrant.(a)
(c)(1) --Instrument establishing Class A shares and Class B shares of
beneficial interest of the Arizona Fund.(a)
(c)(2) --Instrument establishing Class A shares and Class B shares of
beneficial interest of the California Fund.(a)
(c)(3) --Instrument establishing Class A shares and Class B shares of
beneficial interest of the Florida Fund.(a)
(c)(4) --Instrument establishing Class A shares and Class B shares of
beneficial interest of the Massachusetts Fund.(a)
(c)(5) --Instrument establishing Class A shares and Class B shares of
beneficial interest of the Michigan Fund.(a)
</TABLE>
C-1
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER
-------
<C> <S>
(c)(6) --Instrument establishing Class A shares and Class B shares of
beneficial interest of the New Jersey Fund.(a)
(c)(7) --Instrument establishing Class A shares and Class B shares of
beneficial interest of the New York Fund.(c)
(c)(8) --Instrument establishing Class A shares and Class B shares of
beneficial interest of the Pennsylvania Fund.(a)
2 --By-Laws of the Registrant.(d)
3 --None.
4(a) --Portions of the Declaration of Trust, Establishment and
Designation of each series of the Registrant and By-Laws of the
Registrant defining the rights of holders of each Fund as a
series of the Registrant.(b)
(b)(1) --Share certificate for the Arizona Fund.(d)
(b)(2) --Share certificate for the California Fund.(d)
(b)(3) --Share certificate for the Florida Fund.(d)
(b)(4) --Share certificate for the Massachusetts Fund.(d)
(b)(5) --Share certificate for the Michigan Fund.(d)
(b)(6) --Share certificate for the New Jersey Fund.(d)
(b)(7) --Share certificate for the New York Fund.(d)
(b)(8) --Share certificate for the Pennsylvania Fund.(d)
5 --Form of Management Agreement between the Registrant and Fund
Asset Management, Inc. ("FAMI").(a)
6(a) --Form of Class A Shares Distribution Agreement between the
Registrant and Merrill Lynch Funds Distributor, Inc.(a)
(b) --Form of Class B Shares Distribution Agreement between the
Registrant and Merrill Lynch Funds Distributor, Inc.(a)
7 --None.
8 --Custody Agreement between the Registrant and The Bank of New
York.(d)
9 --Form of Transfer Agency, Dividend Disbursing Agency and
Shareholder Servicing Agency Agreement between the Registrant
and Financial Data Services, Inc.(a)
10 --None.
11 --Consent of Deloitte & Touche, independent auditors for the
Registrant.
12 --None.
13(a) --Certificate of FAMI with respect to the Arizona Fund.(d)
(b) --Certificate of FAMI with respect to the California Fund.(d)
(c) --Certificate of FAMI with respect to the Florida Fund.(d)
(d) --Certificate of FAMI with respect to the Massachusetts Fund.(d)
(e) --Certificate of FAMI with respect to the Michigan Fund.(d)
(f) --Certificate of FAMI with respect to the New Jersey Fund.(d)
(g) --Certificate of FAMI with respect to the New York Fund.(d)
(h) --Certificate of FAMI with respect to the Pennsylvania Fund.(d)
14 --None.
15 --Form of Class B Shares Distribution Plan and Class B Shares
Distribution Plan Sub-Agreement of the Registrant.(a)
16(a)(1) --Schedule for computation of each performance quotation provided
in the Registration Statement in response to Item 22 relating to
Class A Shares of the Arizona Fund.
(a)(2) --Schedule for computation of each performance quotation provided
in the Registration Statement in response to Item 22 relating to
Class A Shares of the California Fund.
(a)(3) --Schedule for computation of each performance quotation provided
in the Registration Statement in response to Item 22 relating to
Class A Shares of the Florida Fund.
(a)(4) --Schedule for computation of each performance quotation provided
in the Registration Statement in response to Item 22 relating to
Class A Shares of the Massachusetts Fund.
</TABLE>
C-2
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER
-------
<C> <S>
(a)(5) --Schedule for computation of each performance quotation provided
in the Registration Statement in response to Item 22 relating to
Class A Shares of the Michigan Fund.
(a)(6) --Schedule for computation of each performance quotation provided
in the Registration Statement in response to Item 22 relating to
Class A Shares of the New Jersey Fund.
(a)(7) --Schedule for computation of each performance quotation provided
in the Registration Statement in response to Item 22 relating to
Class A Shares of the New York Fund.
(a)(8) --Schedule for computation of each performance quotation provided
in the Registration Statement in response to Item 22 relating to
Class A Shares of the Pennsylvania Fund.
16(b)(1) --Schedule for computation of each performance quotation provided
in the Registration Statement in response to Item 22 relating to
Class B Shares of the Arizona Fund.
(b)(2) --Schedule for computation of each performance quotation provided
in the Registration Statement in response to Item 22 relating to
Class B Shares of the California Fund.
(b)(3) --Schedule for computation of each performance quotation provided
in the Registration Statement in response to Item 22 relating to
Class B Shares of the Florida Fund.
(b)(4) --Schedule for computation of each performance quotation provided
in the Registration Statement in response to Item 22 relating to
Class B Shares of the Massachusetts Fund.
(b)(5) --Schedule for computation of each performance quotation provided
in the Registration Statement in response to Item 22 relating to
Class B Shares of the Michigan Fund.
(b)(6) --Schedule for computation of each performance quotation provided
in the Registration Statement in response to Item 22 relating to
Class B Shares of the New Jersey Fund.
(b)(7) --Schedule for computation of each performance quotation provided
in the Registration Statement in response to Item 22 relating to
Class B Shares of the New York Fund.
(b)(8) --Schedule for computation of each performance quotation provided
in the Registration Statement in response to Item 22 relating to
Class B Shares of the Pennsylvania Fund.
</TABLE>
- --------
(a) Filed on September 28, 1993 as an Exhibit to the Registration Statement on
Form N-1A (File No. 33-50417) under the Securities Act of 1933 of the
Registrant (the "Registration Statement").
(b) Reference is made to Article II, Section 2.3 and Articles V, VI, VIII, IX,
X and XI of the Registrant's Declaration of Trust, previously filed as
Exhibit 1(a) to the Registration Statement referred to in paragraph (a)
above; to the Certificates of Establishment and Designation establishing
each series of the Registrant and establishing Class A and Class B shares
of beneficial interest of each series of the Registrant filed herewith, as
Exhibits 1(c) and 1(d), respectively, to this Registration Statement; and
to Articles I, V and VI of the Registrant's By-Laws, previously filed as
Exhibit 2 to the Registration Statement referred to in paragraph (a) above.
(c) Filed on October 13, 1993 as an Exhibit to Pre-Effective Amendment No. 1 to
the Registration Statement.
(d) Filed on November 17, 1993 as an Exhibit to Pre-Effective Amendment No. 2
to the Registration Statement.
C-3
<PAGE>
ITEM 25. PERSONS CONTROLLED BY OR UNDER COMMON CONTROL WITH THE REGISTRANT.
The Registrant is not controlled by or under common control with any person.
ITEM 26. NUMBER OF HOLDERS OF SECURITIES.
<TABLE>
<CAPTION>
NUMBER OF RECORD
HOLDERS AT
TITLE OF CLASS MARCH 31, 1994
-------------- ----------------
<S> <C>
Arizona Fund
Class A shares of beneficial interest, par value $0.10
per share............................................... 2
Class B shares of beneficial interest, par value $0.10
per share............................................... 5
California Fund
Class A shares of beneficial interest, par value $0.10
per share............................................... 3
Class B shares of beneficial interest, par value $0.10
per share............................................... 3
Florida Fund
Class A shares of beneficial interest, par value $0.10
per share............................................... 4
Class B shares of beneficial interest, par value $0.10
per share............................................... 8
Massachusetts Fund
Class A shares of beneficial interest, par value $0.10
per share............................................... 2
Class B shares of beneficial interest, par value $0.10
per share............................................... 5
Michigan Fund
Class A shares of beneficial interest, par value $0.10
per share............................................... 2
Class B shares of beneficial interest, par value $0.10
per share............................................... 2
New Jersey Fund
Class A shares of beneficial interest, par value $0.10
per share............................................... 2
Class B shares of beneficial interest, par value $0.10
per share............................................... 4
New York Fund
Class A shares of beneficial interest, par value $0.10
per share............................................... 3
Class B shares of beneficial interest, par value $0.10
per share............................................... 7
Pennsylvania Fund
Class A shares of beneficial interest, par value $0.10
per share............................................... 5
Class B shares of beneficial interest, par value $0.10
per share............................................... 11
</TABLE>
ITEM 27. INDEMNIFICATION.
Section 5.3 of the Registrant's Declaration of Trust provides as follows:
"The Trust shall indemnify each of its Trustees, officers, employees and
agents (including persons who serve at its request as directors, officers or
trustees of another organization in which it has any interest as a shareholder,
creditor or otherwise) against all liabilities and expenses (including amounts
paid in satisfaction of judgments, in compromise, as fines and penalties and as
counsel fees) reasonably incurred by him in connection with the defense or
disposition of any action, suit or other proceeding, whether civil or criminal,
in which he may be involved or with which he may be threatened, while in office
or thereafter, by reason of his being or having been such a trustee, officer,
employee or agent, except with respect to any matter as to which he shall have
been adjudicated to have acted in bad faith, willful misfeasance, gross
negligence or reckless disregard of his duties; provided, however, that as to
any matter disposed of by a compromise payment by such person, pursuant to a
consent decree or otherwise, no indemnification either for said payment or for
any other expenses shall be provided unless the Trust shall have received a
written opinion from independent legal counsel approved by the Trustees to the
effect that if either the matter of willful misfeasance, gross negligence or
reckless disregard of duty, or the matter of good faith and reasonable belief
as to the best interests of the Trust, had been adjudicated, it would have been
adjudicated in favor of such person. The rights accruing to any Person under
these provisions shall not exclude any other right to which
C-4
<PAGE>
he may be lawfully entitled; provided that no person may satisfy any right in
indemnity or reimbursement granted herein or in Section 5.1 or to which he may
be otherwise entitled except out of the property of the Trust, and no
Shareholder shall be personally liable to any Person with respect to any claim
for indemnity or reimbursement or otherwise. The Trustees may make advance
payments in connection with indemnification under this Section 5.3, provided
that the indemnified person shall have given a written undertaking to reimburse
the Trust in the event it is subsequently determined that he is not entitled to
such indemnification."
Insofar as the conditional advancing of indemnification monies for actions
based upon the Investment Company Act of 1940, as amended, may be concerned,
such payments will be made only on the following conditions: (i) the advances
must be limited to amounts used, or to be used, for the preparation or
presentation of a defense to the action, including costs connected with the
preparation of a settlement; (ii) advances may be made only upon receipt of a
written promise by, or on behalf of, the recipient to repay that amount of the
advance which exceeds the amount to which it is ultimately determined that he
is entitled to receive from the Registrant by reason of indemnification; and
(iii) (a) such promise must be secured by a surety bond, other suitable
insurance or an equivalent form of security which assures that any repayments
may be obtained by the Registrant without delay or litigation, which bond,
insurance or other form of security must be provided by the recipient of the
advance, or (b) a majority of a quorum of the Registrant's disinterested, non-
party Trustees, or an independent legal counsel in a written opinion, shall
determine, based upon a review of readily available facts that the recipient of
the advance ultimately will be found entitled to indemnification.
In Section 9 of the Distribution Agreements relating to the securities being
offered hereby, the Registrant agrees to indemnify the Distributor and each
person, if any, who controls the Distributor within the meaning of the
Securities Act of 1933, as amended (the "1933 Act"), against certain types of
civil liabilities arising in connection with this Registration Statement, the
Prospectus or the Statement of Additional Information.
Insofar as indemnification for liabilities arising under the 1933 Act may be
permitted to Trustees, officers and controlling persons of the Registrant and
the principal underwriter pursuant to the foregoing provisions or otherwise,
the Registrant has been advised that in the opinion of the Securities and
Exchange Commission such indemnification is against public policy as expressed
in the 1933 Act and, therefore, is unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by the
Registrant of expenses incurred or paid by a Trustee, officer or controlling
person of the Registrant and the principal underwriter in connection with the
successful defense of any action, suit or proceeding) is asserted by such
Trustee, officer or controlling person or the principal underwriter in
connection with the shares being registered, the Registrant, unless in the
opinion of its counsel the matter has been settled by controlling precedent,
will submit to a court of appropriate jurisdiction the question whether such
indemnification by it is against public policy as expressed in the 1933 Act and
will be governed by the final adjudication of such issue.
ITEM 28. BUSINESS AND OTHER CONNECTIONS OF INVESTMENT ADVISER.
Fund Asset Management, L.P. (the "Manager") acts as the investment adviser
for the following registered investment companies: Apex Municipal Fund, Inc.,
CBA Money Fund, CMA Government Securities Fund, CMA Money Fund, CMA Multi-State
Municipal Series Trust, CMA Tax-Exempt Fund, CMA Treasury Fund, The Corporate
Fund Accumulation Program, Inc., Corporate High Yield Fund, Inc., Corporate
High Yield Fund II, Inc., Financial Institutions Series Trust, Income
Opportunities Fund 1999, Inc., Income Opportunities Fund 2000, Inc., Merrill
Lynch Basic Value Fund, Inc., Merrill Lynch California Municipal Series Trust,
Merrill Lynch Corporate Bond Fund, Inc., Merrill Lynch Federal Securities
Trust, Merrill Lynch Funds for Institutions Series, Merrill Lynch Institutional
Tax-Exempt Fund, Merrill Lynch Multi-State Municipal Series Trust, Merrill
Lynch Municipal Bond Fund, Inc., Merrill Lynch Phoenix Fund, Inc., Merrill
Lynch Special Value Fund, Inc., Merrill Lynch World Income Fund, Inc.,
MuniAssets Fund, Inc., MuniBond Income Fund, Inc., The Municipal Fund
Accumulation Program, Inc., MuniEnhanced Fund, Inc., MuniInsured Fund, Inc.,
MuniVest Fund, Inc., MuniVest Fund II, Inc., MuniVest California
C-5
<PAGE>
Insured Fund, Inc., MuniVest Florida Fund, MuniVest Michigan Insured Fund,
Inc., MuniVest New Jersey Fund, Inc., MuniVest New York Insured Fund, Inc.,
MuniVest Pennsylvania Insured Fund, MuniYield Arizona Fund, Inc., MuniYield
Arizona Fund II, Inc., MuniYield California Fund, Inc., MuniYield California
Insured Fund, Inc., MuniYield California Insured Fund II, Inc., MuniYield
Florida Fund, MuniYield Florida Insured Fund, MuniYield Fund, Inc., MuniYield
Insured Fund, Inc., MuniYield Insured Fund II, Inc., MuniYield Michigan Fund,
Inc., MuniYield Michigan Insured Fund, Inc., MuniYield New Jersey Fund, Inc.,
MuniYield New Jersey Insured Fund, Inc., MuniYield New York Insured Fund, Inc.,
MuniYield New York Insured Fund II, Inc., MuniYield New York Insured Fund III,
Inc., MuniYield Pennsylvania Fund, MuniYield Quality Fund, Inc., MuniYield
Quality Fund II, Inc., Senior High Income Portfolio, Inc., Senior High Income
Portfolio II, Inc., Taurus MuniCalifornia Holdings, Inc., Taurus MuniNewYork
Holdings, Inc. and Worldwide DollarVest Fund, Inc. Merrill Lynch Asset
Management, L.P., doing business as Merrill Lynch Asset Management ("MLAM"), an
affiliate of the Manager, acts as the investment adviser for the following
companies: Convertible Holdings, Inc., Merrill Lynch Adjustable Rate Securities
Fund, Inc., Merrill Lynch Americas Income Fund, Inc., Merrill Lynch Balanced
Fund for Investment and Retirement, Merrill Lynch Capital Fund, Inc., Merrill
Lynch Developing Capital Markets Fund, Inc., Merrill Lynch Dragon Fund, Inc.,
Merrill Lynch EuroFund, Merrill Lynch Fundamental Growth Fund, Inc., Merrill
Lynch Fund For Tomorrow, Inc., Merrill Lynch Global Bond Fund for Investment
and Retirement, Merrill Lynch Global Allocation Fund, Inc., Merrill Lynch
Global Convertible Fund, Inc., Merrill Lynch Global Holdings, Merrill Lynch
Global Resources Trust, Merrill Lynch Global Utility Fund, Inc., Merrill Lynch
Growth Fund for Investment and Retirement, Merrill Lynch Healthcare Fund, Inc.,
Merrill Lynch High Income Municipal Bond Fund, Inc., Merrill Lynch
Institutional Intermediate Fund, Merrill Lynch International Equity Fund,
Merrill Lynch Latin America Fund, Inc., Merrill Lynch Municipal Series Trust,
Merrill Lynch Pacific Fund, Inc., Merrill Lynch Prime Fund, Inc., Merrill Lynch
Ready Assets Trust, Merrill Lynch Retirement Series Trust, Merrill Lynch Series
Fund, Inc., Merrill Lynch Short-Term Global Income Fund, Inc., Merrill Lynch
Strategic Dividend Fund, Merrill Lynch Technology Fund, Inc., Merrill Lynch
U.S. Treasury Money Fund, Merrill Lynch U.S.A. Government Reserves, Merrill
Lynch Utility Income Fund, Inc. and Merrill Lynch Variable Series Funds, Inc.
The address of each of these investment companies is Box 9011, Princeton, New
Jersey 08543-9011, except that the address of Merrill Lynch Funds for
Institutions Series and Merrill Lynch Institutional Intermediate Fund is One
Financial Center, 15th Floor, Boston, Massachusetts 02111-2646. The address of
the Manager, MLAM and Merrill Lynch Funds Distributor, Inc. ("MLFD") is also
Box 9011, Princeton, New Jersey 08543-9011. The address of Merrill Lynch,
Pierce, Fenner & Smith Incorporated ("Merrill Lynch") and Merrill Lynch & Co.,
Inc. ("ML & Co.") is World Financial Center, North Tower, 250 Vesey Street, New
York, New York 10281.
Set forth below is a list of each executive officer and partner of the
Manager indicating each business, profession, vocation or employment of a
substantial nature in which each such person or entity has been engaged since
December 1, 1991 for his or its own account or in the capacity of director,
officer, partner or trustee. In addition, Mr. Zeikel is President and Director
or Trustee, Mr. Richard is Treasurer and Mr. Glenn is Executive Vice President
of substantially all of the investment companies described in the preceding
paragraph and also hold the same positions with all or substantially all of the
investment companies advised by MLAM as they do with those advised by the
Manager, and Messrs. Durnin, Giordano, Harvey, Hewitt, and Monagle are
trustees, directors or officers of one or more of such companies.
OFFICERS AND PARTNERS OF FAM ARE SET FORTH AS FOLLOWS:
<TABLE>
<CAPTION>
POSITION(S) OTHER SUBSTANTIAL
WITH BUSINESS, PROFESSION,
NAME THE MANAGER VOCATION OR EMPLOYMENT
---- ----------- ----------------------
<S> <C> <C>
ML & Co. ............... Limited Partner Financial Services Holding Company
Fund Asset Management, Limited Partner Investment Advisory Services (through
Inc. .................. December 31, 1993)
Princeton Services, Inc. General Partner General Partner of MLAM
("Princeton Services")
</TABLE>
C-6
<PAGE>
<TABLE>
<CAPTION>
OTHER SUBSTANTIAL
POSITION(S) WITH BUSINESS, PROFESSION,
NAME THE MANAGER VOCATION OR EMPLOYMENT
---- ---------------- ----------------------
<S> <C> <C>
Arthur Zeikel........... President President of MLAM; President and
Director of Princeton Services;
Director of MLFD; Executive Vice
President of ML & Co.; Executive Vice
President of Merrill Lynch
Terry K. Glenn.......... Executive Vice President Executive Vice President of MLAM;
Executive Vice President and Director
of Princeton Services; President and
Director of MLFD; President of
Princeton Administrators, Inc.
Bernard J. Durnin....... Senior Vice President Senior Vice President of MLAM; Senior
Vice President of Princeton Services
Vincent R. Giordano..... Senior Vice President Senior Vice President of MLAM; Senior
Vice President of Princeton Services
Elizabeth Griffin....... Senior Vice President Senior Vice President of MLAM; Senior
Vice President of Princeton Services
Norman R. Harvey........ Senior Vice President Senior Vice President of MLAM; Senior
Vice President of Princeton Services
N. John Hewitt.......... Senior Vice President Senior Vice President of MLAM; Senior
Vice President of Princeton Services
Philip L. Kirstein...... Senior Vice President, Senior Vice President, General Counsel
General Counsel and and Secretary of MLAM; Senior Vice
Secretary President, General Counsel, Director
and Secretary of Princeton Services;
Director of MLFD
Ronald M. Kloss......... Senior Vice President Senior Vice President and Controller
and Controller of MLAM; Senior Vice President and
Controller of Princeton Services
Stephen M.M. Miller..... Senior Vice President Executive Vice President of Princeton
Administrators, Inc. since 1989; Vice
President and Secretary of Merrill
Lynch from 1982 to 1989; Secretary of
Merrill Lynch & Co. from 1982 to 1989
Joseph T. Monagle, Jr. . Senior Vice President Senior Vice President of MLAM; Senior
Vice President of Princeton Services
Gerald M. Richard....... Senior Vice President Senior Vice President and Treasurer of
and Treasurer MLAM; Senior Vice President and
Treasurer of Princeton Services; Vice
President and Treasurer of MLFD
Richard L. Rufener...... Senior Vice President Senior Vice President of MLAM; Vice
President of MLFD; Senior Vice
President of Princeton Services
Ronald L. Welburn....... Senior Vice President Senior Vice President of MLAM; Senior
Vice President of Princeton Services
Anthony Wiseman......... Senior Vice President Senior Vice President of MLAM; Senior
Vice President of Princeton Services
</TABLE>
C-7
<PAGE>
ITEM 29. PRINCIPAL UNDERWRITERS.
(a) MLFD acts as the principal underwriter for the Registrant and, for each
of the investment companies referred to in the first paragraph of Item 28
except Apex Municipal Fund, Inc., CBA Money Fund, CMA Government Securities
Fund, CMA Money Fund, CMA Multi-State Municipal Series Trust, CMA Tax-Exempt
Fund, CMA Treasury Fund, Convertible Holdings, Inc., The Corporate Fund
Accumulation Program, Inc., Corporate High Yield Fund, Inc., Corporate High
Yield Fund II, Inc., Income Opportunities Fund 1999, Inc., Income Opportunities
Fund 2000, Inc., MuniAssets Fund, Inc., MuniBond Income Fund, Inc., The
Municipal Fund Accumulation Program, Inc., MuniEnhanced Fund, Inc., MuniInsured
Fund, Inc., MuniVest Fund, Inc., MuniVest Fund II, Inc., MuniVest California
Insured Fund, Inc., MuniVest Florida Fund, MuniVest Michigan Insured Fund,
Inc., MuniVest New Jersey Fund, Inc., MuniVest New York Insured Fund, Inc.,
MuniVest Pennsylvania Insured Fund, MuniYield Arizona Fund, Inc., MuniYield
Arizona Fund II, Inc., MuniYield California Fund, Inc., MuniYield California
Insured Fund, Inc., MuniYield California Insured Fund II, Inc., MuniYield
Florida Fund, MuniYield Florida Insured Fund, MuniYield Fund, Inc., MuniYield
Insured Fund, Inc., MuniYield Insured Fund II, Inc., MuniYield Michigan Fund,
Inc., MuniYield Michigan Insured Fund, Inc., MuniYield New Jersey Fund, Inc.,
MuniYield New Jersey Insured Fund, Inc., MuniYield New York Insured Fund, Inc.,
MuniYield New York Insured Fund II, Inc., MuniYield New York Insured Fund III,
Inc., MuniYield Pennsylvania Fund, MuniYield Quality Fund, Inc., MuniYield
Quality Fund II, Inc., Senior High Income Portfolio, Inc., Senior High Income
Portfolio II, Inc., Taurus MuniCalifornia Holdings, Inc., Taurus MuniNewYork
Holdings, Inc. and Worldwide DollarVest Fund, Inc.
(b) Set forth below is information concerning each director and officer of
MLFD. The principal business address of each such person is Box 9011,
Princeton, New Jersey 08543-9011, except that the address of Messrs. Aldrich,
Breen, Crook, Graczyk, Fatseas and Wasel is One Financial Center, 15th Floor,
Boston, Massachusetts 02111-2646.
<TABLE>
<CAPTION>
POSITION(S) AND OFFICES POSITION(S) AND OFFICES
NAME WITH MLFD WITH REGISTRANT
---- ----------------------- -----------------------
<S> <C> <C>
Terry K. Glenn.......... President and Director Executive Vice President
Arthur Zeikel........... Director President and Trustee
Philip L. Kirstein...... Director None
William E. Aldrich...... Senior Vice President None
Robert W. Crook......... Senior Vice President None
Michael J. Brady........ Vice President None
William M. Breen........ Vice President None
Sharon Creveling........ Vice President and Assistant
Treasurer None
Mark A. DeSario......... Vice President None
James T. Fatseas........ Vice President None
Stanley Graczyk......... Vice President None
Debra W. Landsman-Yaros. Vice President None
Michelle T. Lau......... Vice President None
Gerald M. Richard....... Vice President and Treasurer Treasurer
Richard L. Rufener...... Vice President None
Salvatore Venezia....... Vice President None
William Wasel........... Vice President None
Robert Harris........... Secretary Secretary
</TABLE>
(c) Not applicable.
C-8
<PAGE>
ITEM 30. LOCATION OF ACCOUNTS AND RECORDS.
All accounts, books and other documents required to be maintained by Section
31(a) of the Investment Company Act of 1940, as amended (the "1940 Act") and
the Rules thereunder are maintained at the offices of the Registrant (800
Scudders Mill Road, Plainsboro, New Jersey) and Financial Data Services, Inc.
(4800 Deer Lake Drive East, Jacksonville, Florida 32246-6484).
ITEM 31. MANAGEMENT SERVICES.
Other than as set forth under the caption "Management of the Trust--
Management and Advisory Arrangements" in the Prospectus constituting Part A of
this Registration Statement and under "Management of the Trust--Management and
Advisory Arrangements" in the Statement of Additional Information constituting
Part B of this Registration Statement, the Registrant is not a party to any
management-related service contract.
ITEM 32. UNDERTAKINGS.
Not applicable.
C-9
<PAGE>
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933 AND THE INVESTMENT
COMPANY ACT OF 1940, THE REGISTRANT CERTIFIES THAT IT MEETS ALL OF THE
REQUIREMENTS FOR EFFECTIVENESS OF THIS REGISTRATION STATEMENT PURSUANT TO RULE
485(B) UNDER THE SECURITIES ACT OF 1933 AND HAS DULY CAUSED THIS REGISTRATION
STATEMENT TO BE SIGNED ON ITS BEHALF BY THE UNDERSIGNED, THEREUNTO DULY
AUTHORIZED, IN THE TOWNSHIP OF PLAINSBORO AND STATE OF NEW JERSEY, ON THE 16TH
DAY OF MAY, 1994.
Merrill Lynch Multi-State Limited
Maturity Municipal Series Trust
(Registrant)
/s/ Arthur Zeikel
By___________________________________
(Arthur Zeikel, President)
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THIS REGISTRATION
STATEMENT HAS BEEN SIGNED BELOW BY THE FOLLOWING PERSONS IN THE CAPACITIES AND
ON THE DATES INDICATED.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<S> <C> <C>
/s/ Arthur Zeikel
- ------------------------------------
(Arthur Zeikel) President (Principal
Executive Officer)
and Trustee May 16, 1994
/s/ Gerald M. Richard
- ------------------------------------
(Gerald M. Richard) Treasurer (Principal
Financial and
Accounting Officer) May 16, 1994
Kenneth S. Axelson*
- ------------------------------------
(Kenneth S. Axelson) Trustee
Herbert I. London*
- ------------------------------------
(Herbert I. London) Trustee
Robert R. Martin*
- ------------------------------------
(Robert R. Martin) Trustee
Joseph L. May*
- ------------------------------------
(Joseph L. May) Trustee
Andre F. Perold*
- ------------------------------------
(Andre F. Perold) Trustee
*By
/s/ Arthur Zeikel May 16, 1994
------------------------------------
(Arthur Zeikel, Attorney-in-fact)
</TABLE>
C-10
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<C> <S>
11 --Consent of Deloitte & Touche, independent auditors for the
Registrant.
16(a)(1) --Schedule for computation of each performance quotation provided in
the Registration Statement in response to Item 22 relating to Class
A Shares of the Arizona Fund.
(a)(2) --Schedule for computation of each performance quotation provided in
the Registration Statement in response to Item 22 relating to Class
A Shares of the California Fund.
(a)(3) --Schedule for computation of each performance quotation provided in
the Registration Statement in response to Item 22 relating to Class
A Shares of the Florida Fund.
(a)(4) --Schedule for computation of each performance quotation provided in
the Registration Statement in response to Item 22 relating to Class
A Shares of the Massachusetts Fund.
(a)(5) --Schedule for computation of each performance quotation provided in
the Registration Statement in response to Item 22 relating to Class
A Shares of the Michigan Fund.
(a)(6) --Schedule for computation of each performance quotation provided in
the Registration Statement in response to Item 22 relating to Class
A Shares of the New Jersey Fund.
(a)(7) --Schedule for computation of each performance quotation provided in
the Registration Statement in response to Item 22 relating to Class
A Shares of the New York Fund.
(a)(8) --Schedule for computation of each performance quotation provided in
the Registration Statement in response to Item 22 relating to Class
A Shares of the Pennsylvania Fund.
16(b)(1) --Schedule for computation of each performance quotation provided in
the Registration Statement in response to Item 22 relating to Class
B Shares of the Arizona Fund.
(b)(2) --Schedule for computation of each performance quotation provided in
the Registration Statement in response to Item 22 relating to Class
B Shares of the California Fund.
(b)(3) --Schedule for computation of each performance quotation provided in
the Registration Statement in response to Item 22 relating to Class
B Shares of the Florida Fund.
(b)(4) --Schedule for computation of each performance quotation provided in
the Registration Statement in response to Item 22 relating to Class
B Shares of the Massachusetts Fund.
(b)(5) --Schedule for computation of each performance quotation provided in
the Registration Statement in response to Item 22 relating to Class
B Shares of the Michigan Fund.
(b)(6) --Schedule for computation of each performance quotation provided in
the Registration Statement in response to Item 22 relating to Class
B Shares of the New Jersey Fund.
(b)(7) --Schedule for computation of each performance quotation provided in
the Registration Statement in response to Item 22 relating to Class
B Shares of the New York Fund.
(b)(8) --Schedule for computation of each performance quotation provided in
the Registration Statement in response to Item 22 relating to Class
B Shares of the Pennsylvania Fund.
</TABLE>
<PAGE>
Page where Description of Graphic
Graphic Appears or Cross-Reference
- --------------- ----------------------
Back Cover of Prospectus Rendering of calculator,
and back cover of Statement eyeglasses, pen and income
of Additional Information tax forms.
<PAGE>
INDEPENDENT AUDITORS' CONSENT
Merrill Lynch Multi-State Limited Maturity Municipal Series Trust
We consent to the use in Post-Effective Amendment No. 1 to Registration
Statement No. 33-50417 of our reports dated November 15, 1993 appearing in the
Statement of Additional Information, which is a part of such Registration
Statement.
Deloitte & Touche
Princeton, New Jersey
May 16, 1994
<PAGE>
MERRILL LYNCH ARIZONA LIMITED MATURITY MUNICIPAL BOND FUND--CLASS A
AVERAGE ANNUAL AND TOTAL RETURNS
(11/26/93-2/28/94)
<TABLE>
<CAPTION>
SINCE SINCE
INCEPTION INCEPTION
AVERAGE ANNUAL TOTAL
RETURN RETURN*
-------------- ---------
<S> <C> <C>
Initial Investment................................... $1,000.00 $1,000.00
Divided by Initial Maximum Offering Price............ 10.10
---------
Divided by Net Asset Value........................... 10.00
---------
Equals Shares Purchased.............................. 99.01 100.00
Plus Shares Acquired through Dividend Reinvestment... 0.76 0.77
--------- ---------
Equals Shares Held at 2/28/94........................ 99.77 100.77
Multiplied by Net Asset Value at 2/28/94............. 10.00 10.00
--------- ---------
Equals Ending Redeemable Value at $1,000 Investment
(ERV) at 2/28/94.................................... $ 997.71 $1,007.69
Divided by $1,000 (P)................................ 0.9977 1.0077
Subtract 1........................................... (0.0023) 0.0077
Expressed as a percentage equals the Aggregate Total
Return for the Period (T)........................... (0.23)%
=========
Expressed as a percentage equals the Aggregate Total
Return for the Period............................... 0.77%
=========
ERV divided by P..................................... 0.9977
Raise to the power of................................ 3.8830
Equals............................................... 0.9911
Subtract 1........................................... (0.0089)
Expressed as a percentage equals the Average
Annualized Total Return............................. (0.89)%
=========
</TABLE>
- --------
* Does not include sales charge for the period.
<PAGE>
MERRILL LYNCH ARIZONA LIMITED MATURITY MUNICIPAL BOND FUND--CLASS A
30 DAYS STANDARDIZED YIELD FOR THE PERIOD ENDED FEBRUARY 28, 1994
<TABLE>
<S> <C>
Long term income generally based on yield to maturity times market
value of each security........................................... $ 3,036
Plus short term income accrued for the past thirty days........... 1,437
-----------
Equals Total Income............................................... 4,473
Less expenses for the past thirty days............................ 0
-----------
Equals net monthly income for yield calculation................... 4,473
-----------
Average shares outstanding for 30 days............................ 185,324
Times the Maximum Offering Price.................................. 10.09
-----------
Equals total dollars.............................................. $ 1,869,919
===========
Net monthly income divided by total dollars equals................ 0.002392029
Add 1............................................................. 1.002392029
Raise to the power of 6........................................... 1.014438272
Subtract 1........................................................ 0.014438272
Times 2........................................................... 0.028876545
Expressed as a percentage equals the Standardized Yield for 30 day
period........................................................... 2.89%
===========
Tax Rate.......................................................... 28.00%
X = 1 minus Tax Rate.............................................. 72.00%
Standardized Yield divided by X equals Tax Equivalent Yield for 30
day period....................................................... 4.01%
===========
</TABLE>
<PAGE>
MERRILL LYNCH CALIFORNIA LIMITED MATURITY MUNICIPAL BOND FUND--CLASS A
AVERAGE ANNUAL AND TOTAL RETURNS
(11/26/93-2/28/94)
<TABLE>
<CAPTION>
SINCE SINCE
INCEPTION INCEPTION
AVERAGE ANNUAL TOTAL
RETURN RETURN*
-------------- ---------
<S> <C> <C>
Initial Investment................................... $1,000.00 $1,000.00
Divided by Initial Maximum Offering Price............ 10.10
---------
Divided by Net Asset Value........................... 10.00
---------
Equals Shares Purchased.............................. 99.01 100.00
Plus Shares Acquired through Dividend Reinvestment... 0.76 0.77
--------- ---------
Equals Shares Held at 2/28/94........................ 99.77 100.77
Multiplied by Net Asset Value at 2/28/94............. 9.98 9.98
--------- ---------
Equals Ending Redeemable Value at $1,000 Investment
(ERV) at 2/28/94.................................... $ 995.72 $1,005.68
Divided by $1,000 (P)................................ 0.9957 1.0057
Subtract 1........................................... (0.0043) 0.0057
Expressed as a percentage equals the Aggregate Total
Return for the Period (T)........................... (0.43)%
=========
Expressed as a percentage equals the Aggregate Total
Return for the Period............................... 0.57%
=========
ERV divided by P..................................... 0.9957
Raise to the power of................................ 3.8830
Equals............................................... 0.9835
Subtract 1........................................... (0.0165)
Expressed as a percentage equals the Average
Annualized Total Return............................. (1.65)%
=========
</TABLE>
- --------
* Does not include sales charge for the period.
<PAGE>
MERRILL LYNCH CALIFORNIA LIMITED MATURITY MUNICIPAL BOND FUND--CLASS A
30 DAYS STANDARDIZED YIELD FOR THE PERIOD ENDED FEBRUARY 28, 1994
<TABLE>
<S> <C>
Long term income generally based on yield to maturity times market
value of each security........................................... $ 8,138
Plus short term income accrued for the past thirty days........... 2,131
-----------
Equals Total Income............................................... 10,269
Less expenses for the past thirty days............................ 0
-----------
Equals net monthly income for yield calculation................... 10,269
-----------
Average shares outstanding for 30 days............................ 392,865
Times the Maximum Offering Price.................................. 10.07
-----------
Equals total dollars.............................................. $ 3,956,149
===========
Net monthly income divided by total dollars equals................ 0.002595812
Add 1............................................................. 1.002595812
Raise to the power of 6........................................... 1.015676296
Subtract 1........................................................ 0.015676296
Times 2........................................................... 0.031352592
Expressed as a percentage equals the Standardized Yield for 30 day
period........................................................... 3.14%
===========
Tax Rate.......................................................... 28.00%
X = 1 minus Tax Rate.............................................. 72.00%
Standardized Yield divided by X equals Tax Equivalent Yield for 30
day period....................................................... 4.36%
===========
</TABLE>
<PAGE>
MERRILL LYNCH FLORIDA LIMITED MATURITY MUNICIPAL BOND FUND--CLASS A
AVERAGE ANNUAL AND TOTAL RETURNS
(11/26/93-2/28/94)
<TABLE>
<CAPTION>
SINCE SINCE
INCEPTION INCEPTION
AVERAGE ANNUAL TOTAL
RETURN RETURN*
-------------- ---------
<S> <C> <C>
Initial Investment................................... $1,000.00 $1,000.00
Divided by Initial Maximum Offering Price............ 10.10
---------
Divided by Net Asset Value........................... 10.00
---------
Equals Shares Purchased.............................. 99.01 100.00
Plus Shares Acquired through Dividend Reinvestment... 0.75 0.76
--------- ---------
Equals Shares Held at 2/28/94........................ 99.76 100.76
Multiplied by Net Asset Value at 2/28/94............. 9.94 9.94
--------- ---------
Equals Ending Redeemable Value at $1,000 Investment
(ERV) at 2/28/94.................................... $ 991.62 $1,001.53
Divided by $1,000 (P)................................ 0.9916 1.0015
Subtract 1........................................... (0.0084) 0.0015
Expressed as a percentage equals the Aggregate Total
Return for the Period (T)........................... (0.84)%
=========
Expressed as a percentage equals the Aggregate Total
Return for the Period............................... 0.15%
=========
ERV divided by P..................................... 0.9916
Raise to the power of................................ 3.8830
Equals............................................... 0.9678
Subtract 1........................................... (0.0322)
Expressed as a percentage equals the Average
Annualized Total Return............................. (3.22)%
=========
</TABLE>
- --------
* Does not include sales charge for the period.
<PAGE>
MERRILL LYNCH FLORIDA LIMITED MATURITY MUNICIPAL BOND FUND--CLASS A
30 DAYS STANDARDIZED YIELD FOR THE PERIOD ENDED FEBRUARY 28, 1994
<TABLE>
<S> <C>
Long term income generally based on yield to maturity times market
value of each security........................................... $ 46,556
Plus short term income accrued for the past thirty days........... 10,454
-----------
Equals Total Income............................................... 57,010
Less expenses for the past thirty days............................ 0
-----------
Equals net monthly income for yield calculation................... 57,010
-----------
Average shares outstanding for 30 days............................ 2,066,220
Times the Maximum Offering Price.................................. 10.03
-----------
Equals total dollars.............................................. $20,724,186
===========
Net monthly income divided by total dollars equals................ 0.002750889
Add 1............................................................. 1.002750889
Raise to the power of 6........................................... 1.016619264
Subtract 1........................................................ 0.016619264
Times 2........................................................... 0.033238527
Expressed as a percentage equals the Standardized Yield for 30 day
period........................................................... 3.32%
===========
Tax Rate.......................................................... 28.00%
X = 1 minus Tax Rate.............................................. 72.00%
Standardized Yield divided by X equals Tax Equivalent Yield for 30
day period....................................................... 4.61%
===========
</TABLE>
<PAGE>
MERRILL LYNCH MASSACHUSETTS LIMITED MATURITY MUNICIPAL BOND FUND--CLASS A
AVERAGE ANNUAL AND TOTAL RETURNS
(11/26/93-2/28/94)
<TABLE>
<CAPTION>
SINCE SINCE
INCEPTION INCEPTION
AVERAGE ANNUAL TOTAL
RETURN RETURN*
-------------- ---------
<S> <C> <C>
Initial Investment................................... $1,000.00 $1,000.00
Divided by Initial Maximum Offering Price............ 10.10
---------
Divided by Net Asset Value........................... 10.00
---------
Equals Shares Purchased.............................. 99.01 100.00
Plus Shares Acquired through Dividend Reinvestment... 0.83 0.84
--------- ---------
Equals Shares Held at 2/28/94........................ 99.84 100.84
Multiplied by Net Asset Value at 2/28/94............. 9.97 9.97
--------- ---------
Equals Ending Redeemable Value at $1,000 Investment
(ERV) at 2/28/94.................................... $ 995.45 $1,005.41
Divided by $1,000 (P)................................ 0.9955 1.0054
Subtract 1........................................... (0.0045) 0.0054
Expressed as a percentage equals the Aggregate Total
Return for the Period (T)........................... (0.45)%
=========
Expressed as a percentage equals the Aggregate Total
Return for the Period............................... 0.54%
=========
ERV divided by P..................................... 0.9955
Raise to the power of................................ 3.8830
Equals............................................... 0.9825
Subtract 1........................................... (0.0175)
Expressed as a percentage equals the Average
Annualized Total Return............................. (1.75)%
=========
</TABLE>
- --------
* Does not include sales charge for the period.
<PAGE>
MERRILL LYNCH MASSACHUSETTS LIMITED MATURITY MUNICIPAL BOND FUND--CLASS A
30 DAYS STANDARDIZED YIELD FOR THE PERIOD ENDED FEBRUARY 28, 1994
<TABLE>
<S> <C>
Long term income generally based on yield to maturity times market
value of each security........................................... $ 15,462
Plus short term income accrued for the past thirty days........... 1,766
-----------
Equals Total Income............................................... 17,228
Less expenses for the past thirty days............................ 0
-----------
Equals net monthly income for yield calculation................... 17,228
-----------
Average shares outstanding for 30 days............................ 565,651
Times the Maximum Offering Price.................................. 10.06
-----------
Equals total dollars.............................................. $ 5,690,451
===========
Net monthly income divided by total dollars equals................ 0.003027482
Add 1............................................................. 1.003027482
Raise to the power of 6........................................... 1.018302934
Subtract 1........................................................ 0.018302934
Times 2........................................................... 0.036605868
Expressed as a percentage equals the Standardized Yield for 30 day
period........................................................... 3.66%
===========
Tax Rate.......................................................... 28.00%
X = 1 minus Tax Rate.............................................. 72.00%
Standardized Yield divided by X equals Tax Equivalent Yield for 30
day period....................................................... 5.08%
===========
</TABLE>
<PAGE>
MERRILL LYNCH MICHIGAN LIMITED MATURITY MUNICIPAL BOND FUND--CLASS A
AVERAGE ANNUAL AND TOTAL RETURNS
(11/26/93-2/28/94)
<TABLE>
<CAPTION>
SINCE SINCE
INCEPTION INCEPTION
AVERAGE ANNUAL TOTAL
RETURN RETURN*
-------------- ---------
<S> <C> <C>
Initial Investment................................... $1,000.00 $1,000.00
Divided by Initial Maximum Offering Price............ 10.10
---------
Divided by Net Asset Value........................... 10.00
---------
Equals Shares Purchased.............................. 99.01 100.00
Plus Shares Acquired through Dividend Reinvestment... 0.79 0.80
--------- ---------
Equals Shares Held at 2/28/94........................ 99.80 100.80
Multiplied by Net Asset Value at 2/28/94............. 9.98 9.98
--------- ---------
Equals Ending Redeemable Value at $1,000 Investment
(ERV) at 2/28/94.................................... $ 996.04 $1,006.00
Divided by $1,000 (P)................................ 0.9960 1.0060
Subtract 1........................................... (0.0040) 0.0060
Expressed as a percentage equals the Aggregate Total
Return for the Period (T)........................... (0.40)%
=========
Expressed as a percentage equals the Aggregate Total
Return for the Period............................... 0.60%
=========
ERV divided by P..................................... 0.9960
Raise to the power of................................ 3.8830
Equals............................................... 0.9847
Subtract 1........................................... (0.0153)
Expressed as a percentage equals the Average
Annualized Total Return............................. (1.53)%
=========
</TABLE>
- --------
* Does not include sales charge for the period.
<PAGE>
MERRILL LYNCH MICHIGAN LIMITED MATURITY MUNICIPAL BOND FUND--CLASS A
30 DAYS STANDARDIZED YIELD FOR THE PERIOD ENDED FEBRUARY 28, 1994
<TABLE>
<S> <C>
Long term income generally based on yield to maturity times market
value of each security........................................... $ 7,009
Plus short term income accrued for the past thirty days........... 1,975
-----------
Equals Total Income............................................... 8,984
Less expenses for the past thirty days............................ (8)
-----------
Equals net monthly income for yield calculation................... 8,976
-----------
Average shares outstanding for 30 days............................ 326,837
Times the Maximum Offering Price.................................. 10.07
-----------
Equals total dollars.............................................. $ 3,291,247
===========
Net monthly income divided by total dollars equals................ 0.002727291
Add 1............................................................. 1.002727291
Raise to the power of 6........................................... 1.016475726
Subtract 1........................................................ 0.016475726
Times 2........................................................... 0.032951453
Expressed as a percentage equals the Standardized Yield for 30 day
period........................................................... 3.30%
===========
Tax Rate.......................................................... 28.00%
X = 1 minus Tax Rate.............................................. 72.00%
Standardized Yield divided by X equals Tax Equivalent Yield for 30
day period....................................................... 4.58%
===========
</TABLE>
<PAGE>
MERRILL LYNCH NEW JERSEY LIMITED MATURITY MUNICIPAL BOND FUND--CLASS A
AVERAGE ANNUAL AND TOTAL RETURNS
(11/26/93-2/28/94)
<TABLE>
<CAPTION>
SINCE SINCE
INCEPTION INCEPTION
AVERAGE ANNUAL TOTAL
RETURN RETURN*
-------------- ---------
<S> <C> <C>
Initial Investment................................... $1,000.00 $1,000.00
Divided by Initial Maximum Offering Price............ 10.10
---------
Divided by Net Asset Value........................... 10.00
---------
Equals Shares Purchased.............................. 99.01 100.00
Plus Shares Acquired through Dividend Reinvestment... 0.74 0.75
--------- ---------
Equals Shares Held at 2/28/94........................ 99.75 100.75
Multiplied by Net Asset Value at 2/28/94............. 9.97 9.97
--------- ---------
Equals Ending Redeemable Value at $1,000 Investment
(ERV) at 2/28/94.................................... $ 994.52 $1,004.47
Divided by $1,000 (P)................................ 0.9945 1.0045
Subtract 1........................................... (0.0055) 0.0045
Expressed as a percentage equals the Aggregate Total
Return for the Period (T)........................... (0.55)%
=========
Expressed as a percentage equals the Aggregate Total
Return for the Period............................... 0.45%
=========
ERV divided by P..................................... 0.9945
Raise to the power of................................ 3.8830
Equals............................................... 0.9789
Subtract 1........................................... (0.0211)
Expressed as a percentage equals the Average
Annualized Total Return............................. (2.11)%
=========
</TABLE>
- --------
* Does not include sales charge for the period.
<PAGE>
MERRILL LYNCH NEW JERSEY LIMITED MATURITY MUNICIPAL BOND FUND--CLASS A
30 DAYS STANDARDIZED YIELD FOR THE PERIOD ENDED FEBRUARY 28, 1994
<TABLE>
<S> <C>
Long term income generally based on yield to maturity times market
value of each security........................................... $ 11,565
Plus short term income accrued for the past thirty days........... 2,451
-----------
Equals Total Income............................................... 14,016
Less expenses for the past thirty days............................ 0
-----------
Equals net monthly income for yield calculation................... 14,016
-----------
Average shares outstanding for 30 days............................ 530,302
Times the Maximum Offering Price.................................. 10.06
-----------
Equals total dollars.............................................. $ 5,334,843
===========
Net monthly income divided by total dollars equals................ 0.002627292
Add 1............................................................. 1.002627292
Raise to the power of 6........................................... 1.015867655
Subtract 1........................................................ 0.015867655
Times 2........................................................... 0.031735310
Expressed as a percentage equals the Standardized Yield for 30 day
period........................................................... 3.17%
===========
Tax Rate.......................................................... 28.00%
X = 1 minus Tax Rate.............................................. 72.00%
Standardized Yield divided by X equals Tax Equivalent Yield for 30
day period....................................................... 4.40%
===========
</TABLE>
<PAGE>
MERRILL LYNCH NEW YORK LIMITED MATURITY MUNICIPAL BOND FUND--CLASS A
AVERAGE ANNUAL AND TOTAL RETURNS
(11/26/93-2/28/94)
<TABLE>
<CAPTION>
SINCE SINCE
INCEPTION INCEPTION
AVERAGE ANNUAL TOTAL
RETURN RETURN*
-------------- ---------
<S> <C> <C>
Initial Investment................................... $1,000.00 $1,000.00
Divided by Initial Maximum Offering Price............ 10.10
---------
Divided by Net Asset Value........................... 10.00
---------
Equals Shares Purchased.............................. 99.01 100.00
Plus Shares Acquired through Dividend Reinvestment... 0.82 0.83
--------- ---------
Equals Shares Held at 2/28/94........................ 99.83 100.83
Multiplied by Net Asset Value at 2/28/94............. 9.97 9.97
--------- ---------
Equals Ending Redeemable Value at $1,000 Investment
(ERV) at 2/28/94.................................... $ 995.30 $1,005.25
Divided by $1,000 (P)................................ 0.9953 1.0053
Subtract 1........................................... (0.0047) 0.0053
Expressed as a percentage equals the Aggregate Total
Return for the Period (T)........................... (0.47)%
=========
Expressed as a percentage equals the Aggregate Total
Return for the Period............................... 0.53%
=========
ERV divided by P..................................... 0.9953
Raise to the power of................................ 3.8830
Equals............................................... 0.9819
Subtract 1........................................... (0.0181)
Expressed as a percentage equals the Average
Annualized Total Return............................. (1.81)%
=========
</TABLE>
- --------
* Does not include sales charge for the period.
<PAGE>
MERRILL LYNCH NEW YORK LIMITED MATURITY MUNICIPAL BOND FUND--CLASS A
30 DAYS STANDARDIZED YIELD FOR THE PERIOD ENDED FEBRUARY 28, 1994
<TABLE>
<S> <C>
Long term income generally based on yield to maturity times market
value of each security........................................... $ 9,478
Plus short term income accrued for the past thirty days........... 2,063
-----------
Equals Total Income............................................... 11,541
Less expenses for the past thirty days............................ 11
-----------
Equals net monthly income for yield calculation................... 11,552
-----------
Average shares outstanding for 30 days............................ 430,299
Times the Maximum Offering Price.................................. 10.06
-----------
Equals total dollars.............................................. $ 4,328,805
===========
Net monthly income divided by total dollars equals................ 0.002668624
Add 1............................................................. 1.002668624
Raise to the power of 6........................................... 1.016118946
Subtract 1........................................................ 0.016118946
Times 2........................................................... 0.032237892
Expressed as a percentage equals the Standardized Yield for 30 day
period........................................................... 3.22%
===========
Tax Rate.......................................................... 28.00%
X = 1 minus Tax Rate.............................................. 72.00%
Standardized Yield divided by X equals Tax Equivalent Yield for 30
day period....................................................... 4.47%
===========
</TABLE>
<PAGE>
MERRILL LYNCH PENNSYLVANIA LIMITED MATURITY MUNICIPAL BOND FUND--CLASS A
AVERAGE ANNUAL AND TOTAL RETURNS
(11/26/93-2/28/94)
<TABLE>
<CAPTION>
SINCE SINCE
INCEPTION INCEPTION
AVERAGE ANNUAL TOTAL
RETURN RETURN*
-------------- ---------
<S> <C> <C>
Initial Investment................................... $1,000.00 $1,000.00
Divided by Initial Maximum Offering Price............ 10.10
---------
Divided by Net Asset Value........................... 10.00
---------
Equals Shares Purchased.............................. 99.01 100.00
Plus Shares Acquired through Dividend Reinvestment... 0.73 0.74
--------- ---------
Equals Shares Held at 2/28/94........................ 99.74 100.74
Multiplied by Net Asset Value at 2/28/94............. 9.98 9.98
--------- ---------
Equals Ending Redeemable Value at $1,000 Investment
(ERV) at 2/28/94.................................... $ 995.44 $1,005.40
Divided by $1,000 (P)................................ 0.9954 1.0054
Subtract 1........................................... (0.0046) 0.0054
Expressed as a percentage equals the Aggregate Total
Return for the Period (T)........................... (0.46)%
=========
Expressed as a percentage equals the Aggregate Total
Return for the Period............................... 0.54%
=========
ERV divided by P..................................... 0.9954
Raise to the power of................................ 3.8830
Equals............................................... 0.9824
Subtract 1........................................... (0.0176)
Expressed as a percentage equals the Average
Annualized Total Return............................. (1.76)%
=========
</TABLE>
- --------
* Does not include sales charge for the period.
<PAGE>
MERRILL LYNCH PENNSYLVANIA LIMITED MATURITY MUNICIPAL BOND FUND--CLASS A
30 DAYS STANDARDIZED YIELD FOR THE PERIOD ENDED FEBRUARY 28, 1994
<TABLE>
<S> <C>
Long term income generally based on yield to maturity times market
value of each security........................................... $ 1,683
Plus short term income accrued for the past thirty days........... 523
-----------
Equals Total Income............................................... 2,206
Less expenses for the past thirty days............................ 0
-----------
Equals net monthly income for yield calculation................... 2,206
-----------
Average shares outstanding for 30 days............................ 90,100
Times the Maximum Offering Price.................................. 10.07
-----------
Equals total dollars.............................................. $ 907,311
===========
Net monthly income divided by total dollars equals................ 0.002431526
Add 1............................................................. 1.002431526
Raise to the power of 6........................................... 1.014678131
Subtract 1........................................................ 0.014678131
Times 2........................................................... 0.029356263
Expressed as a percentage equals the Standardized Yield for 30 day
period........................................................... 2.94%
===========
</TABLE>
<PAGE>
MERRILL LYNCH ARIZONA LIMITED MATURITY MUNICIPAL BOND FUND--CLASS B
AVERAGE ANNUAL AND TOTAL RETURNS
(11/26/93-2/28/94)
<TABLE>
<CAPTION>
SINCE SINCE
INCEPTION INCEPTION
AVERAGE ANNUAL TOTAL
RETURN RETURN*
-------------- ---------
<S> <C> <C>
Initial Investment................................... $1,000.00 $1,000.00
Divided by Net Asset Value........................... 10.00 10.00
--------- ---------
Equals Shares Purchased.............................. 100.00 100.00
Plus Shares Acquired through Dividend Reinvestment... 0.68 0.68
--------- ---------
Equals Shares Held at 2/28/94........................ 100.68 100.68
Multiplied by Net Asset Value at 2/28/94............. 9.99 9.99
--------- ---------
Equals Ending Value before deduction for contingent
deferred sales charge............................... 1,005.81 1,005.81
Less deferred sales charge........................... (10.00) 0.00
--------- ---------
Equals Ending Redeemable Value at $1,000 Investment
(ERV) at 2/28/94.................................... $ 995.81 $1,005.81
--------- ---------
Divided by $1,000 (P)................................ 0.9958 1.0058
Subtract 1........................................... (0.0042) 0.0058
Expressed as a percentage equals the Aggregate Total
Return for the Period (T)........................... (0.42)%
=========
Expressed as a percentage equals the Aggregate Total
Return for the Period............................... 0.58%
=========
ERV divided by P..................................... 0.9958
Raise to the power of................................ 3.8830
Equals............................................... 0.9838
Subtract 1........................................... (0.0162)
Expressed as a percentage equals the Average
Annualized Total Return............................. (1.62)%
=========
</TABLE>
- --------
* Does not include sales charge for the period.
<PAGE>
MERRILL LYNCH ARIZONA LIMITED MATURITY MUNICIPAL BOND FUND--CLASS B
30 DAYS STANDARDIZED YIELD FOR THE PERIOD ENDED FEBRUARY 28, 1994
<TABLE>
<S> <C>
Long term income generally based on yield to maturity times market
value of each security........................................... $ 7,348
Plus short term income accrued for the past thirty days........... 3,477
-----------
Equals Total Income............................................... 10,825
Less expenses for the past thirty days............................ (1,293)
-----------
Equals net monthly income for yield calculation................... 9,532
-----------
Average shares outstanding for 30 days............................ 448,169
Times the Net Asset Value......................................... 9.99
-----------
Equals total dollars.............................................. $ 4,477,211
===========
Net monthly income divided by total dollars equals................ 0.002128988
Add 1............................................................. 1.002128988
Raise to the power of 6........................................... 1.012842112
Subtract 1........................................................ 0.012842112
Times 2........................................................... 0.025684224
Expressed as a percentage equals the Standardized Yield for the 30
day period....................................................... 2.57%
===========
Tax Rate.......................................................... 28.00%
X = 1 minus Tax Rate.............................................. 72.00%
Standardized Yield divided by X equals Tax Equivalent Yield for 30
day period....................................................... 3.57%
===========
</TABLE>
<PAGE>
MERRILL LYNCH CALIFORNIA LIMITED MATURITY MUNICIPAL BOND FUND--CLASS B
AVERAGE ANNUAL AND TOTAL RETURNS
(11/26/93-2/28/94)
<TABLE>
<CAPTION>
SINCE SINCE
INCEPTION INCEPTION
AVERAGE ANNUAL TOTAL
RETURN RETURN*
-------------- ---------
<S> <C> <C>
Initial Investment................................... $1,000.00 $1,000.00
Divided by Net Asset Value........................... 10.00 10.00
--------- ---------
Equals Shares Purchased.............................. 100.00 100.00
Plus Shares Acquired through Dividend Reinvestment... 0.68 0.68
--------- ---------
Equals Shares Held at 2/28/94........................ 100.68 100.68
Multiplied by Net Asset Value at 2/28/94............. 9.97 9.97
--------- ---------
Equals Ending Value before deduction for contingent
deferred sales charge............................... 1,003.81 1,003.80
Less deferred sales charge........................... (10.00) 0.00
--------- ---------
Equals Ending Redeemable Value at $1,000 Investment
(ERV) at 2/28/94.................................... $ 993.81 $1,003.80
--------- ---------
Divided by $1,000 (P)................................ 0.9938 1.0038
Subtract 1........................................... (0.0062) 0.0038
Expressed as a percentage equals the Aggregate Total
Return for the Period (T)........................... (0.62)%
=========
Expressed as a percentage equals the Aggregate Total
Return for the Period............................... 0.38%
=========
ERV divided by P..................................... 0.9938
Raise to the power of................................ 3.8830
Equals............................................... 0.9762
Subtract 1........................................... (0.0238)
Expressed as a percentage equals the Average
Annualized Total Return............................. (2.38)%
=========
</TABLE>
- --------
* Does not include sales charge for the period.
<PAGE>
MERRILL LYNCH CALIFORNIA LIMITED MATURITY MUNICIPAL BOND FUND--CLASS B
30 DAYS STANDARDIZED YIELD FOR THE PERIOD ENDED FEBRUARY 28, 1994
<TABLE>
<S> <C>
Long term income generally based on yield to maturity times market
value of each security........................................... $ 22,820
Plus short term income accrued for the past thirty days........... 5,975
-----------
Equals Total Income............................................... 28,795
Less expenses for the past thirty days............................ 2,991
-----------
Equals net monthly income for yield calculation................... 31,786
-----------
Average shares outstanding for 30 days............................ 1,102,142
Times the Net Asset Value......................................... 9.97
-----------
Equals total dollars.............................................. $10,988,352
===========
Net monthly income divided by total dollars equals................ 0.002892739
Add 1............................................................. 1.002892739
Raise to the power of 6........................................... 1.017482436
Subtract 1........................................................ 0.017482436
Times 2........................................................... 0.034964872
Expressed as a percentage equals the Standardized Yield for the 30
day period....................................................... 3.50%
===========
Tax Rate.......................................................... 28.00%
X = 1 minus Tax Rate.............................................. 72.00%
Standardized Yield divided by X equals Tax Equivalent Yield for 30
day period....................................................... 4.86%
===========
</TABLE>
<PAGE>
MERRILL LYNCH FLORIDA LIMITED MATURITY MUNICIPAL BOND FUND--CLASS B
AVERAGE ANNUAL AND TOTAL RETURNS
(11/26/93-2/28/94)
<TABLE>
<CAPTION>
SINCE SINCE
INCEPTION INCEPTION
AVERAGE ANNUAL TOTAL
RETURN RETURN*
-------------- ---------
<S> <C> <C>
Initial Investment................................... $1,000.00 $1,000.00
Divided by Net Asset Value........................... 10.00 10.00
--------- ---------
Equals Shares Purchased.............................. 100.00 100.00
Plus Shares Acquired through Dividend Reinvestment... 0.67 0.67
--------- ---------
Equals Shares Held at 2/28/94........................ 100.67 100.67
Multiplied by Net Asset Value at 2/28/94............. 9.94 9.94
--------- ---------
Equals Ending Value before deduction for contingent
deferred sales charge............................... 1,000.67 1,000.67
Less deferred sales charge........................... (10.00) 0.00
--------- ---------
Equals Ending Redeemable Value at $1,000 Investment
(ERV) at 2/28/94.................................... $ 990.67 $1,000.67
--------- ---------
Divided by $1,000 (P)................................ 0.9907 1.0007
Subtract 1........................................... (0.0093) 0.0007
Expressed as a percentage equals the Aggregate Total
Return for the Period (T)........................... (0.93)%
=========
Expressed as a percentage equals the Aggregate Total
Return for the Period............................... 0.07%
=========
ERV divided by P..................................... 0.9907
Raise to the power of................................ 3.8830
Equals............................................... 0.9643
Subtract 1........................................... (0.0357)
Expressed as a percentage equals the Average
Annualized Total Return............................. (3.57)%
=========
</TABLE>
- --------
* Does not include sales charge for the period.
<PAGE>
MERRILL LYNCH FLORIDA LIMITED MATURITY MUNICIPAL BOND FUND--CLASS B
30 DAYS STANDARDIZED YIELD FOR THE PERIOD ENDED FEBRUARY 28, 1994
<TABLE>
<S> <C>
Long term income generally based on yield to maturity times market
value of each security........................................... $ 40,082
Plus short term income accrued for the past thirty days........... 9,001
-----------
Equals Total Income............................................... 49,083
Less expenses for the past thirty days............................ (5,120)
-----------
Equals net monthly income for yield calculation................... 43,963
-----------
Average shares outstanding for 30 days............................ 1,778,974
Times the Net Asset Value......................................... 9.93
-----------
Equals total dollars.............................................. $17,665,212
===========
Net monthly income divided by total dollars equals................ 0.002488656
Add 1............................................................. 1.002488656
Raise to the power of 6........................................... 1.015025148
Subtract 1........................................................ 0.015025148
Times 2........................................................... 0.030050295
Expressed as a percentage equals the Standardized Yield for the 30
day period....................................................... 3.01%
===========
Tax Rate.......................................................... 28.00%
X = 1 minus Tax Rate.............................................. 72.00%
Standardized Yield divided by X equals Tax Equivalent Yield for 30
day period....................................................... 4.18%
===========
</TABLE>
<PAGE>
MERRILL LYNCH MASSACHUSETTS LIMITED MATURITY MUNICIPAL BOND FUND--CLASS B
AVERAGE ANNUAL AND TOTAL RETURNS
(11/26/93-2/28/94)
<TABLE>
<CAPTION>
SINCE SINCE
INCEPTION INCEPTION
AVERAGE ANNUAL TOTAL
RETURN RETURN*
-------------- ---------
<S> <C> <C>
Initial Investment................................... $1,000.00 $1,000.00
Divided by Net Asset Value........................... 10.00 10.00
--------- ---------
Equals Shares Purchased.............................. 100.00 100.00
Plus Shares Acquired through Dividend Reinvestment... 0.76 0.76
--------- ---------
Equals Shares Held at 2/28/94........................ 100.76 100.76
Multiplied by Net Asset Value at 2/28/94............. 9.97 9.97
--------- ---------
Equals Ending Value before deduction for contingent
deferred sales charge............................... 1,004.54 1,004.54
Less deferred sales charge........................... (10.00) 0.00
--------- ---------
Equals Ending Redeemable Value at $1,000 Investment
(ERV) at 2/28/94.................................... $ 994.54 $1,004.54
--------- ---------
Divided by $1,000 (P)................................ 0.9945 1.0045
Subtract 1........................................... (0.0055) 0.0045
Expressed as a percentage equals the Aggregate Total
Return for the Period (T)........................... (0.55)%
=========
Expressed as a percentage equals the Aggregate Total
Return for the Period............................... 0.45%
=========
ERV divided by P..................................... 0.9945
Raise to the power of................................ 3.8830
Equals............................................... 0.9790
Subtract 1........................................... (0.0210)
Expressed as a percentage equals the Average
Annualized Total Return............................. (2.10)%
=========
</TABLE>
- --------
* Does not include sales charge for the period.
<PAGE>
MERRILL LYNCH MASSACHUSETTS LIMITED MATURITY MUNICIPAL BOND FUND--CLASS B
30 DAYS STANDARDIZED YIELD FOR THE PERIOD ENDED FEBRUARY 28, 1994
<TABLE>
<S> <C>
Long term income generally based on yield to maturity times market
value of each security........................................... $ 20,947
Plus short term income accrued for the past thirty days........... 2,392
-----------
Equals Total Income............................................... 23,339
Less expenses for the past thirty days............................ (2,203)
-----------
Equals net monthly income for yield calculation................... 21,136
-----------
Average shares outstanding for 30 days............................ 765,865
Times the Net Asset Value......................................... 9.96
-----------
Equals total dollars.............................................. $ 7,628,013
===========
Net monthly income divided by total dollars equals................ 0.002770839
Add 1............................................................. 1.002770839
Raise to the power of 6........................................... 1.016740627
Subtract 1........................................................ 0.016740627
Times 2........................................................... 0.033481253
Expressed as a percentage equals the Standardized Yield for the 30
day period....................................................... 3.35%
===========
Tax Rate.......................................................... 28.00%
X = 1 minus Tax Rate.............................................. 72.00%
Standardized Yield divided by X equals Tax Equivalent Yield for 30
day period....................................................... 4.65%
===========
</TABLE>
<PAGE>
MERRILL LYNCH MICHIGAN LIMITED MATURITY MUNICIPAL BOND FUND--CLASS B
AVERAGE ANNUAL AND TOTAL RETURNS
(11/26/93-2/28/94)
<TABLE>
<CAPTION>
SINCE SINCE
INCEPTION INCEPTION
AVERAGE ANNUAL TOTAL
RETURN RETURN*
-------------- ---------
<S> <C> <C>
Initial Investment................................... $1,000.00 $1,000.00
Divided by Net Asset Value........................... 10.00 10.00
--------- ---------
Equals Shares Purchased.............................. 100.00 100.00
Plus Shares Acquired through Dividend Reinvestment... 0.71 0.71
--------- ---------
Equals Shares Held at 2/28/94........................ 100.71 100.71
Multiplied by Net Asset Value at 2/28/94............. 9.97 9.97
--------- ---------
Equals Ending Value before deduction for contingent
deferred sales charge............................... 1,004.12 1,004.12
Less deferred sales charge........................... (10.00) 0.00
--------- ---------
Equals Ending Redeemable Value at $1,000 Investment
(ERV) at 2/28/94.................................... $ 994.12 $1,004.12
--------- ---------
Divided by $1,000 (P)................................ 0.9941 1.0041
Subtract 1........................................... (0.0059) 0.0041
Expressed as a percentage equals the Aggregate Total
Return for the Period (T)........................... (0.59)%
=========
Expressed as a percentage equals the Aggregate Total
Return for the Period............................... 0.41%
=========
ERV divided by P..................................... 0.9941
Raise to the power of................................ 3.8830
Equals............................................... 0.9774
Subtract 1........................................... (0.0226)
Expressed as a percentage equals the Average
Annualized Total Return............................. (2.26)%
=========
</TABLE>
- --------
* Does not include sales charge for the period.
<PAGE>
MERRILL LYNCH MICHIGAN LIMITED MATURITY MUNICIPAL BOND FUND--CLASS B
30 DAYS STANDARDIZED YIELD FOR THE PERIOD ENDED FEBRUARY 28, 1994
<TABLE>
<S> <C>
Long term income generally based on yield to maturity times market
value of each security........................................... $ 5,342
Plus short term income accrued for the past thirty days........... 1,506
-----------
Equals Total Income............................................... 6,848
Less expenses for the past thirty days............................ (727)
-----------
Equals net monthly income for yield calculation................... 6,121
-----------
Average shares outstanding for 30 days............................ 249,237
Times the Net Asset Value......................................... 9.97
-----------
Equals total dollars.............................................. $ 2,484,893
===========
Net monthly income divided by total dollars equals................ 0.002463281
Add 1............................................................. 1.002463281
Raise to the power of 6........................................... 1.014871004
Subtract 1........................................................ 0.014871004
Times 2........................................................... 0.029742009
Expressed as a percentage equals the Standardized Yield for the 30
day period....................................................... 2.97%
===========
Tax Rate.......................................................... 28.00%
X = 1 minus Tax Rate.............................................. 72.00%
Standardized Yield divided by X equals Tax Equivalent Yield for 30
day period....................................................... 4.13%
===========
</TABLE>
<PAGE>
MERRILL LYNCH NEW JERSEY LIMITED MATURITY MUNICIPAL BOND FUND--CLASS B
AVERAGE ANNUAL AND TOTAL RETURNS
(11/26/93-2/28/94)
<TABLE>
<CAPTION>
SINCE SINCE
INCEPTION INCEPTION
AVERAGE ANNUAL TOTAL
RETURN RETURN*
-------------- ---------
<S> <C> <C>
Initial Investment................................... $1,000.00 $1,000.00
Divided by Net Asset Value........................... 10.00 10.00
--------- ---------
Equals Shares Purchased.............................. 100.00 100.00
Plus Shares Acquired through Dividend Reinvestment... 0.66 0.66
--------- ---------
Equals Shares Held at 2/28/94........................ 100.66 100.66
Multiplied by Net Asset Value at 2/28/94............. 9.96 9.96
--------- ---------
Equals Ending Value before deduction for contingent
deferred sales charge............................... 1,002.59 1,002.59
Less deferred sales charge........................... (10.00) 0.00
--------- ---------
Equals Ending Redeemable Value at $1,000 Investment
(ERV) at 2/28/94.................................... $ 992.59 $1,002.59
--------- ---------
Divided by $1,000 (P)................................ 0.9926 1.0026
Subtract 1........................................... (0.0074) 0.0026
Expressed as a percentage equals the Aggregate Total
Return for the Period (T)........................... (0.74)%
=========
Expressed as a percentage equals the Aggregate Total
Return for the Period............................... 0.26%
=========
ERV divided by P..................................... 0.9926
Raise to the power of................................ 3.8830
Equals............................................... 0.9715
Subtract 1........................................... (0.0285)
Expressed as a percentage equals the Average
Annualized Total Return............................. (2.85)%
=========
</TABLE>
- --------
* Does not include sales charge for the period.
<PAGE>
MERRILL LYNCH NEW JERSEY LIMITED MATURITY MUNICIPAL BOND FUND--CLASS B
30 DAYS STANDARDIZED YIELD FOR THE PERIOD ENDED FEBRUARY 28, 1994
<TABLE>
<S> <C>
Long term income generally based on yield to maturity times market
value of each security........................................... $ 15,744
Plus short term income accrued for the past thirty days........... 3,337
-----------
Equals Total Income............................................... 19,081
Less expenses for the past thirty days............................ (2,070)
-----------
Equals net monthly income for yield calculation................... 17,011
-----------
Average shares outstanding for 30 days............................ 718,864
Times the Net Asset Value......................................... 9.96
-----------
Equals total dollars.............................................. $ 7,159,883
===========
Net monthly income divided by total dollars equals................ 0.002375895
Add 1............................................................. 1.002375895
Raise to the power of 6........................................... 1.014340312
Subtract 1........................................................ 0.014340312
Times 2........................................................... 0.028680624
Expressed as a percentage equals the Standardized Yield for the 30
day period....................................................... 2.87%
===========
Tax Rate.......................................................... 28.00%
X = 1 minus Tax Rate.............................................. 72.00%
Standardized Yield divided by X equals Tax Equivalent Yield for 30
day period....................................................... 3.99%
===========
</TABLE>
<PAGE>
MERRILL LYNCH NEW YORK LIMITED MATURITY MUNICIPAL BOND FUND--CLASS B
AVERAGE ANNUAL AND TOTAL RETURNS
(11/26/93-2/28/94)
<TABLE>
<CAPTION>
SINCE SINCE
INCEPTION INCEPTION
AVERAGE ANNUAL TOTAL
RETURN RETURN*
-------------- ---------
<S> <C> <C>
Initial Investment................................... $1,000.00 $1,000.00
Divided by Net Asset Value........................... 10.00 10.00
--------- ---------
Equals Shares Purchased.............................. 100.00 100.00
Plus Shares Acquired through Dividend Reinvestment... 0.74 0.74
--------- ---------
Equals Shares Held at 2/28/94........................ 100.74 100.74
Multiplied by Net Asset Value at 2/28/94............. 9.96 9.96
--------- ---------
Equals Ending Value before deduction for contingent
deferred sales charge............................... 1,003.38 1,003.38
Less deferred sales charge........................... (10.00) 0.00
--------- ---------
Equals Ending Redeemable Value at $1,000 Investment
(ERV) at 2/28/94.................................... $ 993.38 $1,003.38
--------- ---------
Divided by $1,000 (P)................................ 0.9934 1.0034
Subtract 1........................................... (0.0066) 0.0034
Expressed as a percentage equals the Aggregate Total
Return for the Period (T)........................... (0.66)%
=========
Expressed as a percentage equals the Aggregate Total
Return for the Period............................... 0.34%
=========
ERV divided by P..................................... 0.9934
Raise to the power of................................ 3.8830
Equals............................................... 0.9745
Subtract 1........................................... (0.0255)
Expressed as a percentage equals the Average
Annualized Total Return............................. (2.55)%
=========
</TABLE>
- --------
* Does not include sales charge for the period.
<PAGE>
MERRILL LYNCH NEW YORK LIMITED MATURITY MUNICIPAL BOND FUND--CLASS B
30 DAYS STANDARDIZED YIELD FOR THE PERIOD ENDED FEBRUARY 28, 1994
<TABLE>
<S> <C>
Long term income generally based on yield to maturity times market
value of each security........................................... $ 18,849
Plus short term income accrued for the past thirty days........... 4,102
-----------
Equals Total Income............................................... 22,952
Less expenses for the past thirty days............................ (2,476)
-----------
Equals net monthly income for yield calculation................... 20,476
-----------
Average shares outstanding for 30 days............................ 854,514
Times the Net Asset Value......................................... 9.96
-----------
Equals total dollars.............................................. $ 8,510,964
===========
Net monthly income divided by total dollars equals................ 0.002405817
Add 1............................................................. 1.002405817
Raise to the power of 6........................................... 1.014521999
Subtract 1........................................................ 0.014521999
Times 2........................................................... 0.029043998
Expressed as a percentage equals the Standardized Yield for the 30
day period....................................................... 2.90%
===========
Tax Rate.......................................................... 28.00%
X = 1 minus Tax Rate.............................................. 72.00%
Standardized Yield divided by X equals Tax Equivalent Yield for 30
day period....................................................... 4.03%
===========
</TABLE>
<PAGE>
MERRILL LYNCH PENNSYLVANIA LIMITED MATURITY MUNICIPAL BOND FUND--CLASS B
AVERAGE ANNUAL AND TOTAL RETURNS
(11/26/93-2/28/94)
<TABLE>
<CAPTION>
SINCE SINCE
INCEPTION INCEPTION
AVERAGE ANNUAL TOTAL
RETURN RETURN*
-------------- ---------
<S> <C> <C>
Initial Investment................................... $1,000.00 $1,000.00
Divided by Net Asset Value........................... 10.00 10.00
--------- ---------
Equals Shares Purchased.............................. 100.00 100.00
Plus Shares Acquired through Dividend Reinvestment... 0.65 0.65
--------- ---------
Equals Shares Held at 2/28/94........................ 100.65 100.65
Multiplied by Net Asset Value at 2/28/94............. 9.97 9.97
--------- ---------
Equals Ending Value before deduction for contingent
deferred sales charge............................... 1,003.53 1,003.53
Less deferred sales charge........................... (10.00) 0.00
--------- ---------
Equals Ending Redeemable Value at $1,000 Investment
(ERV) at 2/28/94.................................... $ 993.53 $1,003.53
--------- ---------
Divided by $1,000 (P)................................ 0.9935 1.0035
Subtract 1........................................... (0.0065) 0.0035
Expressed as a percentage equals the Aggregate Total
Return for the Period (T)........................... (0.65)%
=========
Expressed as a percentage equals the Aggregate Total
Return for the Period............................... 0.35%
=========
ERV divided by P..................................... 0.9935
Raise to the power of................................ 3.8830
Equals............................................... 0.9751
Subtract 1........................................... (0.0249)
Expressed as a percentage equals the Average
Annualized Total Return............................. (2.49)%
=========
</TABLE>
- --------
* Does not include sales charge for the period.
<PAGE>
MERRILL LYNCH PENNSYLVANIA LIMITED MATURITY MUNICIPAL BOND FUND--CLASS B
30 DAYS STANDARDIZED YIELD FOR THE PERIOD ENDED FEBRUARY 28, 1994
<TABLE>
<S> <C>
Long term income generally based on yield to maturity times market
value of each security........................................... $ 18,845
Plus short term income accrued for the past thirty days........... 5,858
-----------
Equals Total Income............................................... 24,703
Less expenses for the past thirty days............................ (2,906)
-----------
Equals net monthly income for yield calculation................... 21,797
-----------
Average shares outstanding for 30 days............................ 1,008,666
Times the Net Asset Value......................................... 9.97
-----------
Equals total dollars.............................................. $10,056,397
===========
Net monthly income divided by total dollars equals................ 0.002167447
Add 1............................................................. 1.002167447
Raise to the power of 6........................................... 1.013075355
Subtract 1........................................................ 0.013075355
Times 2........................................................... 0.026150710
Expressed as a percentage equals the Standardized Yield for the 30
day period....................................................... 2.62%
===========
Tax Rate.......................................................... 28.00%
X = 1 minus Tax Rate.............................................. 72.00%
Standardized Yield divided by X equals Tax Equivalent Yield for 30
day period....................................................... 3.64%
===========
</TABLE>
