<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON NOVEMBER 27, 1996
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
PRE-EFFECTIVE AMENDMENT NO.
POST-EFFECTIVE AMENDMENT NO. 4
AND/OR
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940
AMENDMENT NO. 12
(CHECK APPROPRIATE BOX OR BOXES)
------------------------
MERRILL LYNCH MULTI-STATE LIMITED MATURITY MUNICIPAL SERIES TRUST
(EXACT NAME OF REGISTRANT AS SPECIFIED IN CHARTER)
800 SCUDDERS MILL ROAD
PLAINSBORO, NEW JERSEY 08536
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICE) (ZIP CODE)
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: P.O. BOX 9011, PRINCETON, NEW JERSEY 08543-9011
(NAME AND ADDRESS OF AGENT FOR SERVICE)
------------------------
Copies to:
THOMAS R. SMITH, JR., ESQ. PHILIP L. KIRSTEIN, ESQ.
BROWN & WOOD LLP FUND ASSET MANAGEMENT
ONE WORLD TRADE CENTER P.O. BOX 9011
NEW YORK, NEW YORK 10048-0557 PRINCETON, NEW JERSEY 08543-9011
------------------------
IT IS PROPOSED THAT THIS FILING WILL BECOME EFFECTIVE
(CHECK APPROPRIATE BOX)
/x/ immediately upon filing pursuant to paragraph (b)
/ / on (date) pursuant to paragraph (b)
/ / 60 days after filing pursuant to paragraph (a)(1)
/ / on (date) pursuant to paragraph (a)(1)
/ / 75 days after filing pursuant to paragraph (a)(2)
/ / on (date) pursuant to paragraph (a)(2) of Rule 485.
IF APPROPRIATE, CHECK THE FOLLOWING BOX:
/ / this post-effective amendment designates a new effective
date for a previously filed post-effective amendment.
------------------------
THE REGISTRANT HAS REGISTERED AN INDEFINITE NUMBER OF ITS SHARES OF
BENEFICIAL INTEREST UNDER THE SECURITIES ACT OF 1933 PURSUANT TO RULE 24F-2
UNDER THE INVESTMENT COMPANY ACT OF 1940. THE NOTICE REQUIRED BY SUCH RULE FOR
THE REGISTRANT'S MOST RECENT FISCAL YEAR WAS FILED SEPTEMBER 25, 1996. PURSUANT
TO RULE 24F-2(B)(2), THE REGISTRANT HAS NOT FILED A NOTICE WITH RESPECT TO THE
MERRILL LYNCH OHIO LIMITED MATURITY MUNICIPAL BOND FUND, A SERIES OF THE
REGISTRANT, BECAUSE NO SECURITIES OF SUCH SERIES WERE SOLD DURING THE MOST
RECENT FISCAL YEAR.
------------------------
CALCULATION OF REGISTRATION FEE UNDER THE SECURITIES ACT OF 1933
<TABLE>
<CAPTION>
PROPOSED MAXIMUM PROPOSED
TITLE OF SECURITIES AMOUNT OF SHARES OFFERING PRICE MAXIMUM AGGREGATE AMOUNT OF
BEING REGISTERED BEING REGISTERED PER UNIT OFFERING PRICE* REGISTRATION FEE
<S> <C> <C> <C> <C>
Shares of Beneficial Interest
(par value $.10 per share)
Arizona Fund............................ 384,348 $10.20 $329,991 $100
California Fund......................... 81,094 10.18 329,995 100
Florida Fund............................ 658,839 10.08 329,999 100
Massachusetts Fund...................... 593,743 10.10 329,998 100
Michigan Fund........................... 248,783 10.09 329,994 100
New Jersey Fund......................... 513,061 10.24 329,995 100
Pennsylvania Fund....................... 262,306 10.26 329,993 100
</TABLE>
*(1) The calculation of the maximum aggregate offering price for the Arizona,
California, Florida, Massachusetts, Michigan, New Jersey and Pennsylvania
Funds is made pursuant to Rule 24e-2(b) under the Investment Company Act of
1940.
(2) The total amount of securities redeemed or repurchased by each of the
Arizona, California, Florida, Massachusetts, Michigan, New Jersey and
Pennsylvania Funds during the Registrant's previous fiscal year was
351,996, 393,262, 1,341,442, 561,070, 216,078, 480,835 and 262,948 shares,
respectively.
(3) 0, 344,584, 715,341, 0, 0, 0 and 32,805 of the shares of the Arizona,
California, Florida, Massachusetts, Michigan, New Jersey and Pennsylvania
Funds, respectively, described in (2) above have been used for reduction
pursuant to Rule 24e-2(a) or Rule 24f-2(c) under the Investment Company
Act of 1940 in previous filings during the Registrant's current fiscal
year.
(4) 351,996, 48,678, 626,101, 561,070, 216,078, 480,835 and 230,143 shares of
the Arizona, California, Florida, Massachusetts, Michigan, New Jersey and
Pennsylvania Funds, respectively, redeemed during the Registrant's previous
fiscal year are being used for the reduction of the registration fee in
this amendment to the Registration Statement.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<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
- ------------- ------------------------------
<S> <C> <C>
PART A
Item 1. Cover Page.................... Cover Page
Item 2. Synopsis...................... Fee Table
Item 3. Condensed Financial
Information................. Financial Highlights;
Performance Data
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 Performance............ Not Applicable
Item 6. Capital Stock and Other
Securities.................. Cover Page; Merrill Lynch
Select Pricing(SM) System;
Additional Information
Item 7. Purchase of Securities Being
Offered..................... Cover Page; Fee Table; Merrill
Lynch Select Pricing(SM) System;
Purchase of Shares;
Shareholder Services;
Additional Information;
Inside Back Cover Page
Item 8. Redemption or Repurchase...... Fee Table; Merrill Lynch
Select Pricing(SM) System;
Purchase of Shares;
Redemption of Shares
Item 9. Pending Legal Proceedings..... Not Applicable
PART B
Item 10. Cover Page.................... Cover Page
Item 11. Table of Contents............. Back Cover Page
Item 12. General Information and
History..................... Additional Information
Item 13. Investment Objectives and
Policies.................... Investment Objectives and
Policies; Investment
Restrictions
Item 14. Management of the Fund........ Management of the Trust
Item 15. Control Persons and Principal
Holders of Securities....... Management of the Trust;
General Information
Item 16. Investment Advisory and Other
Services.................... Management of the Trust;
Purchase of Shares; General
Information
Item 17. Brokerage Allocation and Other
Practices................... Portfolio Transactions and
Brokerage
Item 18. Capital Stock and Other
Securities.................. General
Information--Description of
Series and Shares
Item 19. Purchase, Redemption and
Pricing of Securities Being
Offered..................... Purchase of Shares; Redemption
of Shares; Determination of
Net Asset Value; Shareholder
Services
Item 20. Tax Status.................... Distributions and Taxes
Item 21. Underwriters.................. Purchase of Shares
Item 22. Calculation of Performance
Data........................ Performance Data
Item 23. Financial Statements.......... Financial Statements
</TABLE>
PART C
Information required to be included in Part C is set forth under the
appropriate Item, so numbered, in Part C to this Registration Statement.
<PAGE>
PROSPECTUS
NOVEMBER 27, 1996
MERRILL LYNCH MULTI-STATE LIMITED MATURITY MUNICIPAL SERIES TRUST
<TABLE>
<S> <C>
MERRILL LYNCH ARIZONA LIMITED MATURITY MERRILL LYNCH MICHIGAN LIMITED MATURITY
MUNICIPAL BOND FUND MUNICIPAL BOND FUND
MERRILL LYNCH CALIFORNIA LIMITED MATURITY MERRILL LYNCH NEW JERSEY LIMITED MATURITY
MUNICIPAL BOND FUND MUNICIPAL BOND FUND
MERRILL LYNCH FLORIDA LIMITED MATURITY MERRILL LYNCH NEW YORK LIMITED MATURITY
MUNICIPAL BOND FUND MUNICIPAL BOND FUND
MERRILL LYNCH MASSACHUSETTS LIMITED MATURITY MERRILL LYNCH PENNSYLVANIA LIMITED MATURITY
MUNICIPAL BOND FUND MUNICIPAL BOND FUND
</TABLE>
P.O. BOX 9011, PRINCETON, NEW JERSEY 08543-9011 o PHONE NO. (609) 282-2800
Merrill Lynch Multi-State Limited Maturity Municipal Series Trust (the
'Trust') consists of eight separate series: Merrill Lynch Arizona Limited
Maturity Municipal Bond Fund (the 'Arizona Fund'), Merrill Lynch California
Limited Maturity Municipal Bond Fund (the 'California Fund'), Merrill Lynch
Florida Limited Maturity Municipal Bond Fund (the 'Florida Fund'), Merrill Lynch
Massachusetts Limited Maturity Municipal Bond Fund (the 'Massachusetts Fund'),
Merrill Lynch Michigan Limited Maturity Municipal Bond Fund (the 'Michigan
Fund'), Merrill Lynch New Jersey Limited Maturity Municipal Bond Fund (the 'New
Jersey Fund'), Merrill Lynch New York Limited Maturity Municipal Bond Fund (the
'New York Fund') and Merrill Lynch Pennsylvania Limited Maturity Municipal Bond
Fund (the 'Pennsylvania Fund'). Each series of the Trust is referred to herein
as a 'Fund'. Each Fund seeks to provide shareholders with as high a level of
income exempt from Federal income taxes and personal income taxes imposed by the
designated state (and, in certain instances, state intangible personal property
taxes and local personal income taxes) as is consistent with prudent investment
management. Under normal market conditions, each Fund invests primarily in a
portfolio of intermediate-term investment grade obligations of the designated
state or its political subdivisions, agencies or instrumentalities, or certain
other jurisdictions, that pay interest exempt, in the opinion of bond counsel to
the issuer, from Federal income taxes and personal income taxes of the
designated state and, where applicable, local personal income taxes in the
designated state. The obligations in which the Funds invest have remaining
maturities of between one and ten years, and it is anticipated that, depending
on market conditions, the dollar weighted average maturity of each Fund's
portfolio will not exceed five years. The Funds may invest in certain tax-exempt
securities classified as 'private activity bonds' that may subject certain
investors in the Funds to an alternative minimum tax. At times, a Fund may seek
to hedge its portfolio through the use of futures and options transactions.
There can be no assurance that the investment objective of any Fund will be
realized. For more information on each Fund's investment objectives and
policies, please see 'Investment Objectives and Policies' on page 19.
(continued on following page)
------------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION NOR HAS THE SECURITIES AND EXCHANGE COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
------------------------
This Prospectus is a concise statement of information about the Trust and
each Fund that is relevant to making an investment in a Fund. This Prospectus
should be retained for future reference. A statement containing additional
information about the Trust and each Fund, dated November 27, 1996 (the
'Statement of Additional Information'), has been filed with the Securities and
Exchange Commission (the 'Commission') and is available, without charge, by
calling or by writing the Trust at the above telephone number or address. The
Statement of Additional Information is hereby incorporated by reference into
this Prospectus.
------------------------
FUND ASSET MANAGEMENT -- MANAGER
MERRILL LYNCH FUNDS DISTRIBUTOR, INC. -- DISTRIBUTOR
<PAGE>
(continued from prior page)
Pursuant to the Merrill Lynch Select Pricing(Service Mark) System, each
Fund offers four classes of shares, each with a different combination of sales
charges, ongoing fees and other features. The Merrill Lynch Select
Pricing(Service Mark) System permits an investor to choose the method of
purchasing shares that the investor believes is most beneficial given the amount
of the purchase, the length of time the investor expects to hold the shares and
other relevant circumstances. See 'Merrill Lynch Select Pricing(Service Mark)
System' on page 7.
Shares may be purchased directly from Merrill Lynch Funds Distributor, Inc.
(the 'Distributor'), P.O. Box 9081, Princeton, New Jersey 08543-9081 [(609)
282-2800], or from securities dealers which have entered into selected dealer
agreements with the Distributor, including Merrill Lynch, Pierce, Fenner & Smith
Incorporated ('Merrill Lynch'). The minimum initial purchase is $1,000 and the
minimum subsequent purchase is $50. Merrill Lynch may charge its customers a
processing fee (presently $4.85) for confirming purchases and repurchases.
Purchases and redemptions directly through the Trust's Transfer Agent are not
subject to the processing fee. See 'Purchase of Shares' and 'Redemption of
Shares'.
Unless otherwise indicated, the information set forth in this Prospectus is
applicable to each Fund. Management of the Trust has considered the possibility
that the use of a combined prospectus may subject a Fund or Funds to liability
for an alleged misstatement relating to another Fund or Funds. Management
believes this possibility is remote.
Each Fund has qualified its shares for sale under the securities laws of
certain states, and shares of a Fund may be purchased only in jurisdictions in
which such shares are qualified for purchase. This Prospectus does not
constitute an offering of shares of any Fund in any state or jurisdiction in
which such offering may not lawfully be made. An investor considering purchasing
shares of a Fund should consult his or her Merrill Lynch Financial Consultant to
determine whether shares of such Fund are available for purchase in his or her
state.
2
<PAGE>
FEE TABLE
A general comparison of the sales arrangements and other nonrecurring and
recurring expenses applicable to shares of the Funds follows:
<TABLE>
<CAPTION>
ALL FUNDS
----------------------------------------------------------------------
CLASS A(A) CLASS B(B) CLASS C CLASS D
---------- ----------------------- ----------------------- --------
<S> <C> <C> <C> <C>
SHAREHOLDER TRANSACTION EXPENSES:
Maximum Sales Charge Imposed on Purchases
(as a percentage of offering price)..... 1.0%(c) None None 1.0%(c)
Sales Charge Imposed on Dividend
Reinvestments........................... None None None None
Deferred Sales Charge (as a percentage of
original purchase price or redemption
proceeds, whichever is lower)........... None(d) 1.0% during the first 1.0% during the first None(d)
year, year,
decreasing to 0.0% decreasing to 0.0%
after after
the first year(e) the first year(f)
Exchange Fee.............................. None None None None
</TABLE>
- ------------
(a) Class A shares are sold to a limited group of investors including existing
Class A shareholders and certain participants in fee-based programs. See
'Purchase of Shares--Initial Sales Charge Alternatives--Class A and Class D
Shares'--page 36 and 'Shareholder Services--Fee-Based Programs'--page 48.
(b) Class B shares convert to Class D shares automatically approximately ten
years after initial purchase. See 'Purchase of Shares--Deferred Sales Charge
Alternatives--Class B and Class C Shares'--page 38.
(c) Reduced for purchases of $100,000 and over and waived for purchases of Class
A shares in connection with certain fee-based programs. Class A or Class D
purchases of $1,000,000 or more may not be subject to an initial sales
charge. See 'Purchase of Shares--Initial Sales Charge Alternatives--Class A
and Class D Shares'--page 36.
(d) Class A and Class D shares are not subject to a contingent deferred sales
charge ('CDSC'), except that certain purchases of $1,000,000 or more which
are not subject to an initial sales charge may instead be subject to a CDSC
of 0.20% of amounts redeemed within the first year after purchase. Such CDSC
may be waived in connection with redemptions to fund participation in
certain fee-based programs. See 'Shareholder Services--Fee-Based
Programs'--page 48.
(e) The CDSC may be modified in connection with redemptions to fund
participation in certain fee-based programs. See 'Shareholder
Services--Fee-Based Programs'--page 48.
(f) The CDSC may be waived in connection with redemptions to fund participation
in certain fee-based programs. See 'Shareholder Services--Fee-Based
Programs'--page 48.
(continued on next page)
3
<PAGE>
<TABLE>
<CAPTION>
ARIZONA FUND CALIFORNIA FUND
------------------------------------------- -------------------------------------------
CLASS A CLASS B CLASS C CLASS D CLASS A CLASS B CLASS C CLASS D
------- ------- ------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
ANNUAL FUND OPERATING
EXPENSES (AS A
PERCENTAGE OF
AVERAGE
NET ASSETS):
Management Fees(g).... 0.35% 0.35% 0.35% 0.35% 0.35% 0.35% 0.35% 0.35%
Rule 12b-1 Fees(h)
Account Mainte-
nance Fees........ None 0.15% 0.15% 0.10% None 0.15% 0.15% 0.10%
Distribution
Fees(i)........... None 0.20%* 0.20% None None 0.20%* 0.20% None
Other Expenses........ 1.92% 1.91% 2.10% 1.97% 0.95% 0.96% 0.80% 0.95%
------- ------- ------- ------- ------- ------- ------- -------
Total Fund Operating
Expenses**.......... 2.27% 2.61% 2.80% 2.42% 1.30% 1.66% 1.50% 1.40%
------- ------- ------- ------- ------- ------- ------- -------
------- ------- ------- ------- ------- ------- ------- -------
<CAPTION>
FLORIDA FUND MASSACHUSETTS FUND
--------------------------------------------- -------------------------------------------
CLASS A CLASS B CLASS C CLASS D CLASS A CLASS B CLASS C CLASS D
---------- ------- ------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
ANNUAL FUND OPERATING
EXPENSES (AS A
PERCENTAGE OF
AVERAGE
NET ASSETS):
Management Fees(g).... 0.35 % 0.35% 0.35% 0.35% 0.35% 0.35% 0.35% 0.35%
Rule 12b-1 Fees(h)
Account Mainte-
nance Fees........ None 0.15% 0.15% 0.10% None 0.15% 0.15% 0.10%
Distribution
Fees(i)........... None 0.20%* 0.20% None None 0.20%* 0.20% None
Other Expenses........ 0.62 % 0.62% 0.53% 0.62% 1.80% 1.91% 1.67% 1.97%
----- ------- ------- ------- ------- ------- ------- -------
Total Fund Operating
Expenses**.......... 0.97 % 1.32% 1.23% 1.07% 2.15% 2.61% 2.37% 2.42%
----- ------- ------- ------- ------- ------- ------- -------
----- ------- ------- ------- ------- ------- ------- -------
</TABLE>
- ------------
(g) See 'Management of the Trust--Management and Advisory Arrangements'--page
32.
(h) See 'Purchase of Shares--Distribution Plans'--page 41.
(i) Distribution Fees reflect the maximum amount a Fund would be subject to pay
under its Distribution Plans. See 'Purchase of Shares--Distribution
Plans'--page 41. Such amount, however, is subject to certain limitations.
See 'Purchase of Shares--Limitations on the Payment of Deferred Sales
Charges'--page 44.
* Class B shares convert to Class D shares automatically after approximately
ten years and cease being subject to distribution fees.
** For the fiscal year ended July 31, 1996, Fund Asset Management, L.P. (the
'Manager') voluntarily waived all of the management fees due from each of
the Funds and voluntarily reimbursed each of the Funds for a portion of
other expenses (excluding Rule 12b-1 fees), except for the Florida Fund,
for which the Manager voluntarily waived $24,123 of the management fees
due from such Fund and did not reimburse any portion of other expenses
(excluding Rule 12b-1 fees). The Total Fund Operating Expenses in the fee
table above have been restated to assume the absence of any such waiver
or reimbursement because the Manager may discontinue or reduce such waiver
of fees and/or assumption of expenses at any time without notice. The
actual Total Fund Operating Expenses, net of the waiver, is provided below
for the fiscal year ended July 31, 1996.
<TABLE>
<CAPTION>
MANAGEMENT FEES TOTAL OPERATING
WAIVED AND EXPENSES AFTER
EXPENSES WAIVER AND
REIMBURSED REIMBURSEMENT
---------------------------------------- ----------------------------------------
CLASS A CLASS B CLASS C CLASS D CLASS A CLASS B CLASS C CLASS D
------- ------- ------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Arizona Fund........................... 1.53% 1.52% 1.77% 1.52% 0.74% 1.09% 1.03% 0.90%
California Fund........................ 0.36% 0.36% 0.36% 0.34% 0.94% 1.30% 1.14% 1.06%
Florida Fund........................... 0.08% 0.08% 0.02% 0.08% 0.89% 1.24% 1.21% 0.99%
Massachusetts Fund..................... 1.38% 1.45% 1.43% 1.49% 0.77% 1.16% 0.94% 0.93%
Michigan Fund.......................... 2.04% 2.04% 2.07% 2.19% 0.74% 1.10% 1.24% 0.87%
New Jersey Fund........................ 1.02% 1.02% 1.04% 1.02% 0.76% 1.10% 1.00% 0.84%
New York Fund.......................... 0.88% 0.88% 0.88% 0.87% 0.50% 0.87% 0.71% 0.62%
Pennsylvania Fund...................... 0.83% 0.84% 0.86% 0.75% 0.80% 1.15% 0.97% 0.96%
</TABLE>
4
<PAGE>
<TABLE>
<CAPTION>
MICHIGAN FUND NEW JERSEY FUND
------------------------------------------- -------------------------------------------
CLASS A CLASS B CLASS C CLASS D CLASS A CLASS B CLASS C CLASS D
------- ------- ------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
ANNUAL FUND OPERATING
EXPENSES (AS A
PERCENTAGE OF
AVERAGE
NET ASSETS):
Management Fees(g).... 0.35% 0.35% 0.35% 0.35% 0.35% 0.35% 0.35% 0.35%
Rule 12b-1 Fees(h)
Account Mainte-
nance Fees........ None 0.15% 0.15% 0.10% None 0.15% 0.15% 0.10%
Distribution
Fees(i)........... None 0.20%* 0.20% None None 0.20%* 0.20% None
Other Expenses........ 2.43% 2.44% 2.61% 2.61% 1.43% 1.42% 1.34% 1.41%
------- ------- ------- ------- ------- ------- ------- -------
Total Fund Operating
Expenses**.......... 2.78% 3.14% 3.31% 3.06% 1.78% 2.12% 2.04% 1.86%
------- ------- ------- ------- ------- ------- ------- -------
------- ------- ------- ------- ------- ------- ------- -------
<CAPTION>
NEW YORK FUND PENNSYLVANIA FUND
--------------------------------------------- -------------------------------------------
CLASS A CLASS B CLASS C CLASS D CLASS A CLASS B CLASS C CLASS D
------- ------- ------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
ANNUAL FUND OPERATING
EXPENSES (AS A
PERCENTAGE OF
AVERAGE
NET ASSETS):
Management Fees(g).... 0.35% 0.35% 0.35% 0.35% 0.35% 0.35% 0.35% 0.35%
Rule 12b-1 Fees(h)
Account Mainte-
nance Fees........ None 0.15% 0.15% 0.10% None 0.15% 0.15% 0.10%
Distribution
Fees(i)........... None 0.20%* 0.20% None None 0.20%* 0.20% None
Other Expenses........ 1.03% 1.05% 0.89% 1.04% 1.28% 1.29% 1.13% 1.26%
------- ------- ------- ------- ------- ------- ------- -------
Total Fund Operating
Expenses**.......... 1.38% 1.75% 1.59% 1.49% 1.63% 1.99% 1.83% 1.71%
------- ------- ------- ------- ------- ------- ------- -------
------- ------- ------- ------- ------- ------- ------- -------
</TABLE>
5
<PAGE>
EXAMPLE:
<TABLE>
<CAPTION>
CUMULATIVE EXPENSES PAID FOR THE PERIOD INDICATED
------------------------------------------------------------------------------
ARIZONA FUND CALIFORNIA FUND
------------------------------------- --------------------------------------
1 YEAR 3 YEARS 5 YEARS 10 YEARS 1 YEAR 3 YEARS 5 YEARS 10 YEARS
------ ------- ------- -------- ------- ------- ------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
An investor in each Fund would pay
the following expenses on a $1,000
investment including the maximum
$10.00 initial sales charge (Class
A and Class D shares only) and
assuming (1) the Total Fund
Operating Expenses for each class
set forth on pages 4 and 5, (2) a
5% annual return throughout the
period, and (3) redemption at the
end of the period:
Class A.......................... $ 33 $ 80 $ 130 $268 $ 23 $ 51 $ 81 $165
Class B.......................... $ 36 $ 81 $ 139 $294 $ 27 $ 52 $ 90 $197
Class C.......................... $ 38 $ 87 $ 148 $313 $ 25 $ 47 $ 82 $179
Class D.......................... $ 34 $ 85 $ 138 $283 $ 24 $ 54 $ 86 $176
An investor would pay the following
expenses on the same $1,000
investment assuming no redemption
at the end of the period:
Class A.......................... $ 33 $ 80 $ 130 $268 $ 23 $ 51 $ 81 $165
Class B.......................... $ 26 $ 81 $ 139 $294 $ 17 $ 52 $ 90 $197
Class C.......................... $ 28 $ 87 $ 148 $313 $ 15 $ 47 $ 82 $179
Class D.......................... $ 34 $ 85 $ 138 $283 $ 24 $ 54 $ 86 $176
<CAPTION>
FLORIDA FUND MASSACHUSETTS FUND
---------------------------------------- --------------------------------------
1 YEAR 3 YEARS 5 YEARS 10 YEARS 1 YEAR 3 YEARS 5 YEARS 10 YEARS
---------- ------- ------- -------- ------- ------- ------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
An investor in each Fund would pay
the following expenses on a $1,000
investment including the maximum
$10.00 initial sales charge (Class
A and Class D shares only) and
assuming (1) the Total Fund
Operating Expenses for each class
set forth on pages 4 and 5, (2) a
5% annual return throughout the
period, and (3) redemption at the
end of the period:
Class A.......................... $20 $41 $63 $128 $32 $77 $124 $256
Class B.......................... $23 $42 $72 $159 $36 $81 $139 $294
Class C.......................... $23 $39 $68 $149 $34 $74 $127 $271
Class D.......................... $21 $44 $68 $139 $34 $85 $138 $283
An investor would pay the following
expenses on the same $1,000
investment assuming no redemption
at the end of the period:
Class A.......................... $20 $41 $63 $128 $32 $77 $124 $256
Class B.......................... $13 $42 $72 $159 $26 $81 $139 $294
Class C.......................... $13 $39 $68 $149 $24 $74 $127 $271
Class D.......................... $21 $44 $68 $139 $34 $85 $138 $283
</TABLE>
<TABLE>
<CAPTION>
MICHIGAN FUND NEW JERSEY FUND
------------------------------------- --------------------------------------
1 YEAR 3 YEARS 5 YEARS 10 YEARS 1 YEAR 3 YEARS 5 YEARS 10 YEARS
------ ------- ------- -------- ------- ------- ------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
An investor in each Fund would pay
the following expenses on a $1,000
investment including the maximum
$10.00 initial sales charge (Class
A and Class D shares only) and
assuming (1) the Total Fund
Operating Expenses for each class
set forth on pages 4 and 5, (2) a
5% annual return throughout the
period, and (3) redemption at the
end of the period:
Class A.......................... $ 38 $ 95 $ 155 $318 $ 28 $ 65 $ 105 $217
Class B.......................... $ 42 $ 97 $ 164 $345 $ 32 $ 66 $ 114 $245
Class C.......................... $ 43 $ 102 $ 173 $360 $ 31 $ 64 $ 110 $237
Class D.......................... $ 41 $ 104 $ 169 $344 $ 29 $ 68 $ 110 $226
An investor would pay the following
expenses on the same $1,000
investment assuming no redemption
at the end of the period:
Class A.......................... $ 38 $ 95 $ 155 $318 $ 28 $ 65 $ 105 $217
Class B.......................... $ 32 $ 97 $ 164 $345 $ 22 $ 66 $ 114 $245
Class C.......................... $ 33 $ 102 $ 173 $360 $ 21 $ 64 $ 110 $237
Class D.......................... $ 41 $ 104 $ 169 $344 $ 29 $ 68 $ 110 $226
<CAPTION>
NEW YORK FUND PENNSYLVANIA FUND
---------------------------------------- --------------------------------------
1 YEAR 3 YEARS 5 YEARS 10 YEARS 1 YEAR 3 YEARS 5 YEARS 10 YEARS
---------- ------- ------- -------- ------- ------- ------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
An investor in each Fund would pay
the following expenses on a $1,000
investment including the maximum
$10.00 initial sales charge (Class
A and Class D shares only) and
assuming (1) the Total Fund
Operating Expenses for each class
set forth on pages 4 and 5, (2) a
5% annual return throughout the
period, and (3) redemption at the
end of the period:
Class A.......................... $24 $53 $85 $174 $26 $61 $ 98 $201
Class B.......................... $28 $55 $95 $206 $30 $62 $107 $232
Class C.......................... $26 $50 $87 $189 $29 $58 $ 99 $215
Class D.......................... $25 $57 $91 $186 $27 $63 $102 $210
An investor would pay the following
expenses on the same $1,000
investment assuming no redemption
at the end of the period:
Class A.......................... $24 $53 $85 $174 $26 $61 $ 98 $201
Class B.......................... $18 $55 $95 $206 $20 $62 $107 $232
Class C.......................... $16 $50 $87 $189 $19 $58 $ 99 $215
Class D.......................... $25 $57 $91 $186 $27 $63 $102 $210
</TABLE>
6
<PAGE>
The foregoing Fee Table is intended to assist investors in understanding
the costs and expenses that shareholders in the Funds will bear directly or
indirectly. The example set forth above assumes reinvestment of all dividends
and distributions and utilizes a 5% annual rate of return as mandated by
Commission regulations. THE EXAMPLE SHOULD NOT BE CONSIDERED A REPRESENTATION OF
PAST OR FUTURE EXPENSES OR ANNUAL RATES OF RETURN, AND ACTUAL EXPENSES OR ANNUAL
RATES OF RETURN MAY BE MORE OR LESS THAN THOSE ASSUMED FOR PURPOSES OF THE
EXAMPLE. Class B and Class C shareholders of any Fund who hold their shares for
an extended period of time may pay more in Rule 12b-1 distribution fees than the
economic equivalent of the maximum front-end sales charges permitted under the
Conduct Rules of the National Association of Securities Dealers, Inc. (the
'NASD'). Merrill Lynch may charge its customers a processing fee (presently
$4.85) for confirming purchases and repurchases. Purchases and redemptions
directly through the Trust's Transfer Agent are not subject to the processing
fee. See 'Purchase of Shares' and 'Redemption of Shares'.
MERRILL LYNCH SELECT PRICING(SERVICE MARK) SYSTEM
Each of the Funds offers four classes of shares under the Merrill Lynch
Select Pricing(Service Mark) System. Class A, Class B and Class D shares may be
purchased at a price equal to the next determined net asset value per share
subject to the sales charges and ongoing fee arrangements described below.
Shares of Class A and Class D are sold to investors choosing the initial sales
charge alternatives, and shares of Class B are sold to investors choosing the
deferred sales charge alternative. Class C shares are not offered for sale by
the Funds but are available for exchange with Class C shares of other
MLAM-advised mutual funds. The Merrill Lynch Select Pricing(Service Mark) System
is used by more than 50 registered investment companies advised by Merrill Lynch
Asset Management, L.P. ('MLAM') or FAM, an affiliate of MLAM. Funds advised by
MLAM or FAM which utilize the Merrill Lynch Select Pricing(Service Mark) System
are referred to herein as 'MLAM-advised mutual funds'.
Each Class A, Class B, Class C or Class D share of each of the Funds
represents an identical interest in the investment portfolio of that Fund and
has the same rights, except that Class B, Class C and Class D shares bear the
expenses of the ongoing account maintenance fees and Class B and Class C shares
bear the expenses of the ongoing distribution fees and the additional
incremental transfer agency costs resulting from the deferred sales charge
arrangements. The CDSCs and distribution and account maintenance fees that are
imposed on Class B and Class C shares, as well as the account maintenance fees
that are imposed on Class D shares, are imposed directly against those classes
and not against all assets of the Fund issuing the shares and, accordingly, such
charges will not affect the net asset value of any other class or have any
impact on investors choosing another sales charge option. Dividends paid by a
Fund for each class of shares will be calculated in the same manner at the same
time and will differ only to the extent that account maintenance and
distribution fees and any incremental transfer agency costs relating to a
particular class are borne exclusively by that class. Each class has different
exchange privileges. See 'Shareholder Services--Exchange Privilege'.
Investors should understand that the purpose and function of the initial
sales charges with respect to the Class A and Class D shares are the same as
those of the deferred sales charges with respect to the Class B and Class C
shares in that the sales charges applicable to each class provide for the
financing of the distribution of the shares of that Fund. The
distribution-related revenues paid with respect to a class will not be used to
finance the distribution expenditures of another class. Sales personnel may
receive different compensation for selling different classes of shares.
7
<PAGE>
The following table sets forth a summary of the distribution arrangements
for each class of shares under the Merrill Lynch Select Pricing(Service Mark)
System, followed by a more detailed description of each class and a discussion
of the factors that investors should consider in determining the method of
purchasing shares under the Merrill Lynch Select Pricing(Service Mark) System
that the investor believes is most beneficial under his particular
circumstances. More detailed information as to each class of shares is set forth
under 'Purchase of Shares'.
<TABLE>
<CAPTION>
ACCOUNT
MAINTENANCE DISTRIBUTION
CLASS SALES CHARGE(1) FEE FEE CONVERSION FEATURE
<S> <C> <C> <C> <C>
A Maximum 1.0% initial sales No No No
charge(2)(3)
B 1.0% CDSC for one year(4) 0.15% 0.20% B shares convert to D shares
automatically after approximately
ten years(5)
C(7) 1.0% CDSC for one year(6) 0.15% 0.20% No
D Maximum 1.0% initial sales 0.10% No No
charge(3)
</TABLE>
- ------------
(1) Initial sales charges are imposed at the time of purchase as a percentage of
the offering price. CDSCs are imposed if the redemption occurs within the
applicable CDSC time period. The charge will be assessed on an amount equal
to the lesser of the proceeds of redemption or the cost of the shares being
redeemed.
(2) Offered only to eligible investors. See 'Purchase of Shares--Initial Sales
Charge Alternatives--Class A and Class D Shares--Eligible Class A
Investors'.
(3) Reduced for purchases of $100,000 or more and waived for purchases of Class
A shares in connection with certain fee-based programs. Class A and Class D
share purchases of $1,000,000 or more may not be subject to an initial sales
charge but instead may be subject to a 0.20% CDSC for one year. Such CDSC
may be waived in connection with redemptions to fund participation in
certain fee-based programs. See 'Class A' and 'Class D' below.
(4) The CDSC may be modified in connection with redemptions to fund
participation in certain fee-based programs.
(5) The conversion period for dividend reinvestment shares and certain fee-based
programs may be modified. Also, Class B shares of certain other MLAM-advised
mutual funds into which exchanges may be made have an eight year conversion
period. If Class B shares of a Fund are exchanged for Class B shares of
another MLAM-advised mutual fund, the conversion period applicable to the
Class B shares acquired in the exchange will apply, and the holding period
for the shares exchanged will be tacked onto the holding period for the
shares acquired.
(6) The CDSC may be waived in connection with redemptions to fund participation
in certain fee-based programs.
(7) Class C shares will be issued only upon exchange for Class C shares of
another MLAM-advised mutual fund. See 'Shareholder Services--Exchange
Privilege'.
Class A: Class A shares incur an initial sales charge when they are purchased
and bear no ongoing distribution or account maintenance fees. Class A
shares are offered to a limited group of investors and also will be
issued upon reinvestment of dividends on outstanding Class A shares.
Investors that currently own Class A shares of a Fund in a shareholder
account are entitled to purchase additional Class A shares of such Fund
in that account. Other eligible investors include participants in
certain fee-based programs. In addition, Class A shares will be offered
at net asset value to Merrill Lynch & Co., Inc. ('ML&Co.') and its
subsidiaries (the term 'subsidiaries' when used herein with respect to
ML&Co. includes MLAM, FAM and certain other entities directly or
indirectly wholly owned and controlled by ML&Co.) and their directors
and employees, and to members of the Boards of MLAM-advised mutual
funds. The maximum initial sales charge is 1.00%, which is reduced for
purchases of $100,000 and
8
<PAGE>
over and waived for purchases of Class A shares in connection with
certain fee-based programs. Purchases of $1,000,000 or more may not be
subject to an initial sales charge but if the initial sales charge is
waived, such purchases may be subject to a 0.20% CDSC if the shares are
redeemed within one year after purchase. Such CDSC may be waived in
connection with redemptions to fund participation in certain fee-based
programs. Sales charges also are reduced under a right of accumulation
which takes into account the investor's holdings of all classes of all
MLAM-advised mutual funds. See 'Purchase of Shares--Initial Sales
Charge Alternatives--Class A and Class D Shares'.
Class B: Class B shares do not incur a sales charge when they are purchased, but
they are subject to an ongoing account maintenance fee of 0.15% and an
ongoing distribution fee of 0.20%, of the Fund's average net assets
attributable to the Class B shares, as well as a CDSC if they are
redeemed within one year of purchase. Such CDSC may be modified in
connection with redemptions to fund participation in certain fee-based
programs. Approximately ten years after issuance, Class B shares of a
Fund will convert automatically into Class D shares of that Fund, which
are subject to a lower account maintenance fee than Class B shares and
no distribution fee; Class B shares of certain other MLAM-advised
mutual funds into which exchanges may be made convert into Class D
shares automatically after approximately eight years. If Class B shares
of a Fund are exchanged for Class B shares of another MLAM-advised
mutual fund, the conversion period applicable to the Class B shares
acquired in the exchange will apply, and the holding period for the
shares exchanged will be tacked onto the holding period for the shares
acquired. Automatic conversion of Class B shares into Class D shares
will occur at least once each month on the basis of the relative net
asset values of the shares of the two classes on the conversion date,
without the imposition of any sales load, fee or other charge.
Conversion of Class B shares to Class D shares will not be deemed a
purchase or sale of the shares for Federal income tax purposes. Shares
purchased through reinvestment of dividends on Class B shares also will
convert automatically to Class D shares. The conversion period for
dividend reinvestment shares is modified as described under 'Purchase
of Shares--Deferred Sales Charge Alternatives--Class B and Class C
Shares--Conversion of Class B Shares to Class D Shares'.
Class C: Class C shares of the Funds are not available for purchase but will be
issued only pursuant to the exchange privilege to holders of Class C
shares of other MLAM-advised mutual funds who elect to exchange Class C
shares of such other MLAM-advised mutual fund for Class C shares of one
of the Funds. Class C shares are subject to an ongoing account
maintenance fee of 0.15% and an ongoing distribution fee of 0.20% of
the Fund's average net assets attributable to Class C shares. Although,
like Class B shares, Class C shares are subject to a 1.0% CDSC for one
year, Class C shares have no conversion feature and, accordingly, an
investor that acquires Class C shares will be subject to distribution
fees and higher account maintenance fees that will be imposed on Class
C shares for an indefinite period subject to annual approval by the
Trust's Board of Trustees and regulatory limitations. Such CDSC may be
waived in connection with redemptions to fund participation in certain
fee-based programs.
Class D: Class D shares incur an initial sales charge when they are purchased
and are subject to an ongoing account maintenance fee of 0.10% of the
Fund's average net assets attributable to Class D shares. Class D
shares are not subject to an ongoing distribution fee or any CDSC when
they are redeemed. Purchases of $1,000,000 or more may not be subject
to an initial sales charge but if the initial sales charge is waived,
such purchase may be subject to a CDSC of 0.20% if the shares are
redeemed within one year after purchase. Such CDSC may be waived in
connection with redemptions to fund participation in certain fee-based
programs. The schedule of initial sales charges and reductions for
9
<PAGE>
Class D shares is the same as the schedule for Class A shares, except
that there is no waiver for purchases of Class D shares in connection
with certain fee-based programs. Class D shares also will be issued
upon conversion of Class B shares as described above under 'Class B'.
See 'Purchase of Shares--Initial Sales Charge Alternatives--Class A
and Class D Shares'.
The following is a discussion of the factors that investors should consider
in determining the method of purchasing shares under the Merrill Lynch Select
Pricing(Service Mark) System that the investor believes is most beneficial
under his particular circumstances.
Initial Sales Charge Alternatives. Investors who prefer an initial sales
charge alternative may elect to purchase Class D shares or, if an eligible
investor, Class A shares. Investors choosing the initial sales charge
alternative who are eligible to purchase Class A shares should purchase Class A
shares rather than Class D shares because there is an account maintenance fee
imposed on Class D shares. Investors qualifying for significantly reduced
initial sales charges may find the initial sales charge alternative particularly
attractive because similar sales charge reductions are not available with
respect to the CDSCs imposed in connection with purchases of Class B shares.
Investors not qualifying for reduced initial sales charges who expect to
maintain their investment for an extended period of time also may elect to
purchase Class A or Class D shares, because over time the accumulated ongoing
account maintenance and distribution fees on Class B or Class C shares may
exceed the initial sales charge and, in the case of Class D shares, the account
maintenance fee. Although some investors that previously purchased Class A
shares may no longer be eligible to purchase Class A shares of other MLAM-
advised mutual funds, those previously purchased Class A shares, together with
Class B, Class C and Class D share holdings, will count toward a right of
accumulation which may qualify the investor for reduced initial sales charges on
new initial sales charge purchases. In addition, the ongoing Class B and Class C
account maintenance and distribution fees will cause Class B and Class C shares
to have higher expense ratios, pay lower dividends and have lower total returns
than the initial sales charge shares. The ongoing Class D account maintenance
fees will cause Class D shares to have a higher expense ratio, pay lower
dividends and have a lower total return than Class A shares.
Deferred Sales Charge Alternative. Because no initial sales charges are
deducted at the time of purchase, Class B shares provide the benefit of putting
all of the investor's dollars to work from the time the investment is made. The
deferred sales charge alternative may be particularly appealing to investors who
do not qualify for a reduction in initial sales charges. Both Class B and Class
C shares are subject to ongoing account maintenance fees and distribution fees;
however, the ongoing account maintenance and distribution fees potentially may
be offset to the extent any return is realized on the additional funds initially
invested in Class B or Class C shares. In addition, Class B shares of a Fund
will be converted into Class D shares of that Fund after a conversion period of
approximately ten years, and thereafter investors will be subject to lower
ongoing fees.
Certain investors may elect to purchase Class B shares if they determine it
to be most advantageous to have all their funds invested initially and intend to
hold their shares for an extended period of time. Investors in Class B shares
should take into account whether they intend to redeem their shares within the
CDSC period and, if not, whether they intend to remain invested until the end of
the conversion period and thereby take advantage of the reduction in ongoing
fees resulting from the conversion into Class D shares. Although Class C
shareholders are subject to the same CDSC period and rate as Class B
shareholders, Class C shares have no conversion feature, and therefore are
subject to account maintenance and distribution fees for an indefinite period of
time. In addition, while both Class B and Class C distribution fees are subject
to the limitations on asset-based sales charges imposed by the NASD, the Class B
distribution fees are further limited under a voluntary waiver of asset-based
sales charges. See 'Purchase of Shares--Limitations on the Payment of Deferred
Sales Charges'.
10
<PAGE>
FINANCIAL HIGHLIGHTS
The financial information in the tables below has been audited in
connection with the annual audits of the financial statements of the Trust by
Deloitte & Touche LLP, independent auditors. Financial statements for the year
ended July 31, 1996 and the independent auditors' report thereon are included in
the Statement of Additional Information. The following per share data and ratios
have been derived from information provided in such audited financial
statements. Further information about the performance of the Funds is contained
in the Trust's most recent annual report to shareholders which may be obtained,
without charge, by calling or writing the Trust at the telephone number or
address on the front cover of this Prospectus.
<TABLE>
<CAPTION>
ARIZONA FUND
--------------------------------------------------------------------------------------
CLASS A CLASS B CLASS C
------------------------------- ------------------------------- --------------------
FOR THE FOR THE FOR THE
PERIOD PERIOD FOR THE PERIOD
FOR THE YEAR ENDED NOV. 26, FOR THE YEAR ENDED NOV. 26, YEAR OCT. 21,
JULY 31, 1993+ TO JULY 31, 1993+ TO ENDED 1994+ TO
-------------------- JULY 31, -------------------- JULY 31, JULY 31, JULY 31,
1996 1995 1994 1996 1995 1994 1996 1995
--------- --------- --------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
INCREASE (DECREASE) IN NET ASSET VALUE:
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period.... $ 10.17 $ 9.97 $ 10.00 $ 10.16 $ 9.97 $ 10.00 $ 10.17 $ 9.89
--------- --------- --------- --------- --------- --------- --------- ---------
Investment income--net................. .41 .43 .23 .37 .39 .20 .37 .29
Realized and unrealized gain (loss) on
investments--net..................... (.09) .20 (.03) (.08) .19 (.03) (.09) .28
--------- --------- --------- --------- --------- --------- --------- ---------
Total from investment operations........ .32 .63 .20 .29 .58 .17 .28 .57
--------- --------- --------- --------- --------- --------- --------- ---------
Less dividends from investment
income--net............................ (.41) (.43) (.23) (.37) (.39) (.20) (.37) (.29)
--------- --------- --------- --------- --------- --------- --------- ---------
Net asset value, end of period.......... $ 10.08 $ 10.17 $ 9.97 $ 10.08 $ 10.16 $ 9.97 $ 10.08 $ 10.17
--------- --------- --------- --------- --------- --------- --------- ---------
--------- --------- --------- --------- --------- --------- --------- ---------
TOTAL INVESTMENT RETURN:**
Based on net asset value per share...... 3.16% 6.47% 2.02%# 2.88% 5.99% 1.78%# 2.78% 5.90%#
--------- --------- --------- --------- --------- --------- --------- ---------
--------- --------- --------- --------- --------- --------- --------- ---------
RATIOS TO AVERAGE NET ASSETS:
Expenses, net of reimbursement.......... .74% .35% .02%* 1.09% .72% .38%* 1.03% 1.05%*
--------- --------- --------- --------- --------- --------- --------- ---------
--------- --------- --------- --------- --------- --------- --------- ---------
Expenses................................ 2.27% 2.05% 1.82%* 2.61% 2.44% 2.18%* 2.80% 2.79%*
--------- --------- --------- --------- --------- --------- --------- ---------
--------- --------- --------- --------- --------- --------- --------- ---------
Investment income--net.................. 4.01% 4.31% 3.37%* 3.65% 3.95% 3.02%* 3.86% 3.80%*
--------- --------- --------- --------- --------- --------- --------- ---------
--------- --------- --------- --------- --------- --------- --------- ---------
SUPPLEMENTAL DATA:
Net assets, end of period (in
thousands)............................. $ 813 $ 1,054 $ 2,103 $ 2,885 $ 5,191 $ 5,575 $ 135 $ 1
--------- --------- --------- --------- --------- --------- --------- ---------
--------- --------- --------- --------- --------- --------- --------- ---------
Portfolio turnover...................... 43.53% 182.58% 142.37% 43.53% 182.58% 142.37% 43.53% 182.58%
--------- --------- --------- --------- --------- --------- --------- ---------
--------- --------- --------- --------- --------- --------- --------- ---------
<CAPTION>
ARIZONA FUND
--------------------
CLASS D
--------------------
FOR THE
FOR THE PERIOD
YEAR OCT. 21,
ENDED 1994+ TO
JULY 31, JULY 31,
1996 1995
--------- ---------
<S> <C> <C>
INCREASE (DECREASE) IN NET ASSET VALUE:
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period.... $ 10.17 $ 9.89
--------- ---------
Investment income--net................. .40 .33
Realized and unrealized gain (loss) on
investments--net..................... (.09) .28
--------- ---------
Total from investment operations........ .31 .61
--------- ---------
Less dividends from investment
income--net............................ (.40) (.33)
--------- ---------
Net asset value, end of period.......... $ 10.08 $ 10.17
--------- ---------
--------- ---------
TOTAL INVESTMENT RETURN:**
Based on net asset value per share...... 3.05% 6.34%#
--------- ---------
--------- ---------
RATIOS TO AVERAGE NET ASSETS:
Expenses, net of reimbursement.......... .90% .55%*
--------- ---------
--------- ---------
Expenses................................ 2.42% 2.39%*
--------- ---------
--------- ---------
Investment income--net.................. 3.88% 4.31%*
--------- ---------
--------- ---------
SUPPLEMENTAL DATA:
Net assets, end of period (in
thousands)............................. $ 619 $ 19
--------- ---------
--------- ---------
Portfolio turnover...................... 43.53% 182.58%
--------- ---------
--------- ---------
</TABLE>
- ------------
* Annualized.
** Total investment returns exclude the effects of sales loads.
+ Commencement of operations.
# Aggregate total investment return.
11
<PAGE>
<TABLE>
<CAPTION>
CALIFORNIA FUND
--------------------------------------------------------------------------------------
CLASS A CLASS B CLASS C
------------------------------- ------------------------------- --------------------
FOR THE FOR THE FOR THE
PERIOD PERIOD FOR THE PERIOD
FOR THE YEAR ENDED NOV. 26, FOR THE YEAR ENDED NOV. 26, YEAR OCT. 21,
JULY 31, 1993+ TO JULY 31, 1993+ TO ENDED 1994+ TO
-------------------- JULY 31, -------------------- JULY 31, JULY 31, JULY 31,
1996 1995 1994 1996 1995 1994 1996 1995
--------- --------- --------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
INCREASE (DECREASE) IN NET ASSET VALUE:
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period.... $ 9.99 $ 9.88 $ 10.00 $ 9.99 $ 9.88 $ 10.00 $ 9.99 $ 9.76
--------- --------- --------- --------- --------- --------- --------- ---------
Investment income--net................. .39 .42 .24 .36 .39 .21 .37 .31
Realized and unrealized gain (loss) on
investments--net..................... .06 .11 (.12) .05 .11 (.12) .06 .23
--------- --------- --------- --------- --------- --------- --------- ---------
Total from investment operations........ .45 .53 .12 .41 .50 .09 .43 .54
--------- --------- --------- --------- --------- --------- --------- ---------
Less dividends from investment
income--net............................. (.39) (.42) (.24) (.36) (.39) (.21) (.37) (.31)
--------- --------- --------- --------- --------- --------- --------- ---------
Net asset value, end of period.......... $ 10.05 $ 9.99 $ 9.88 $ 10.04 $ 9.99 $ 9.88 $ 10.05 $ 9.99
--------- --------- --------- --------- --------- --------- --------- ---------
--------- --------- --------- --------- --------- --------- --------- ---------
TOTAL INVESTMENT RETURN:**
Based on net asset value per share...... 4.56% 5.60% 1.23%# 4.08% 5.23% .99%# 4.35% 5.60%#
--------- --------- --------- --------- --------- --------- --------- ---------
--------- --------- --------- --------- --------- --------- --------- ---------
RATIOS TO AVERAGE NET ASSETS:
Expenses, net of reimbursement.......... .94% .40% .02%* 1.30% .76% .38%* 1.14% .82%*
--------- --------- --------- --------- --------- --------- --------- ---------
--------- --------- --------- --------- --------- --------- --------- ---------
Expenses................................ 1.30% 1.44% 1.16%* 1.66% 1.80% 1.52%* 1.50% 1.98%*
--------- --------- --------- --------- --------- --------- --------- ---------
--------- --------- --------- --------- --------- --------- --------- ---------
Investment income--net.................. 3.89% 4.36% 3.54%* 3.53% 4.00% 3.19%* 3.69% 4.04%*
--------- --------- --------- --------- --------- --------- --------- ---------
--------- --------- --------- --------- --------- --------- --------- ---------
SUPPLEMENTAL DATA:
Net assets, end of period (in
thousands).............................. $ 3,162 $ 3,527 $ 3,804 $ 9,919 $ 10,363 $ 11,430 $ 55 $ 64
--------- --------- --------- --------- --------- --------- --------- ---------
--------- --------- --------- --------- --------- --------- --------- ---------
Portfolio turnover...................... 11.09% 124.72% 130.10% 11.09% 124.72% 130.10% 11.09% 124.72%
--------- --------- --------- --------- --------- --------- --------- ---------
--------- --------- --------- --------- --------- --------- --------- ---------
<CAPTION>
CALIFORNIA FUND
--------------------
CLASS D
--------------------
FOR THE
FOR THE PERIOD
YEAR OCT. 21,
ENDED 1994+ TO
JULY 31, JULY 31,
1996 1995
--------- ---------
<S> <C> <C>
INCREASE (DECREASE) IN NET ASSET VALUE:
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period.... $ 9.99 $ 9.76
--------- ---------
Investment income--net................. .38 .33
Realized and unrealized gain (loss) on
investments--net..................... .06 .23
--------- ---------
Total from investment operations........ .44 .56
--------- ---------
Less dividends from investment
income--net............................. (.38) (.33)
--------- ---------
Net asset value, end of period.......... $ 10.05 $ 9.99
--------- ---------
--------- ---------
TOTAL INVESTMENT RETURN:**
Based on net asset value per share...... 4.46% 5.85%#
--------- ---------
--------- ---------
RATIOS TO AVERAGE NET ASSETS:
Expenses, net of reimbursement.......... 1.06% .66%*
--------- ---------
--------- ---------
Expenses................................ 1.40% 1.81%*
--------- ---------
--------- ---------
Investment income--net.................. 3.77% 4.28%*
--------- ---------
--------- ---------
SUPPLEMENTAL DATA:
Net assets, end of period (in
thousands).............................. $ 2,185 $ 1,771
--------- ---------
--------- ---------
Portfolio turnover...................... 11.09% 124.72%
--------- ---------
--------- ---------
</TABLE>
- ------------
* Annualized.
** Total investment returns exclude the effects of sales loads.
+ Commencement of operations.
# Aggregate total investment return.
12
<PAGE>
<TABLE>
<CAPTION>
FLORIDA FUND
--------------------------------------------------------------------------------------
CLASS A CLASS B CLASS C
------------------------------- ------------------------------- --------------------
FOR THE FOR THE FOR THE
PERIOD PERIOD FOR THE PERIOD
FOR THE YEAR ENDED NOV. 26, FOR THE YEAR ENDED NOV. 26, YEAR OCT. 21,
JULY 31, 1993+ TO JULY 31, 1993+ TO ENDED 1994+ TO
-------------------- JULY 31, -------------------- JULY 31, JULY 31, JULY 31,
1996 1995 1994 1996 1995 1994 1996 1995
--------- --------- --------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
INCREASE (DECREASE) IN NET ASSET VALUE:
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period.... $ 10.02 $ 9.87 $ 10.00 $ 10.02 $ 9.88 $ 10.00 $ 10.01 $ 9.76
--------- --------- --------- --------- --------- --------- --------- ---------
Investment income--net................. .40 .43 .24 .37 .40 .21 .36 .29
Realized and unrealized gain (loss) on
investments--net..................... (.06) .15 (.13) (.06) .14 (.12) (.11) .25
--------- --------- --------- --------- --------- --------- --------- ---------
Total from investment operations........ .34 .58 .11 .31 .54 .09 .25 .54
--------- --------- --------- --------- --------- --------- --------- ---------
Less dividends from investment
income--net............................ (.40) (.43) (.24) (.37) (.40) (.21) (.36) (.29)
--------- --------- --------- --------- --------- --------- --------- ---------
Net asset value, end of period.......... $ 9.96 $ 10.02 $ 9.87 $ 9.96 $ 10.02 $ 9.88 $ 9.90 $ 10.01
--------- --------- --------- --------- --------- --------- --------- ---------
--------- --------- --------- --------- --------- --------- --------- ---------
TOTAL INVESTMENT RETURN:**
Based on net asset value per share...... 3.45% 6.05% 1.12%# 3.08% 5.57% .99%# 2.48% 5.65%#
--------- --------- --------- --------- --------- --------- --------- ---------
--------- --------- --------- --------- --------- --------- --------- ---------
RATIOS TO AVERAGE NET ASSETS:
Expenses, net of reimbursement.......... .89% .39% .02%* 1.24% .75% .38%* 1.21% 1.09%*
--------- --------- --------- --------- --------- --------- --------- ---------
--------- --------- --------- --------- --------- --------- --------- ---------
Expenses................................ .97% 1.03% .86%* 1.32% 1.38% 1.23%* 1.23% 1.67%*
--------- --------- --------- --------- --------- --------- --------- ---------
--------- --------- --------- --------- --------- --------- --------- ---------
Investment income--net.................. 4.01% 4.39% 3.54%* 3.66% 4.05% 3.19%* 3.75% 3.83%*
--------- --------- --------- --------- --------- --------- --------- ---------
--------- --------- --------- --------- --------- --------- --------- ---------
SUPPLEMENTAL DATA:
Net assets, end of period (in
thousands)............................. $ 7,874 $ 9,849 $ 14,868 $ 13,690 $ 16,213 $ 18,179 $ 52 $ 1
--------- --------- --------- --------- --------- --------- --------- ---------
--------- --------- --------- --------- --------- --------- --------- ---------
Portfolio turnover...................... 39.90% 138.97% 136.71% 39.90% 138.97% 136.71% 39.90% 138.97%
--------- --------- --------- --------- --------- --------- --------- ---------
--------- --------- --------- --------- --------- --------- --------- ---------
<CAPTION>
FLORIDA FUND
--------------------
CLASS D
--------------------
FOR THE
FOR THE PERIOD
YEAR OCT. 21,
ENDED 1994+ TO
JULY 31, JULY 31,
1996 1995
--------- ---------
<S> <C> <C>
INCREASE (DECREASE) IN NET ASSET VALUE:
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period.... $ 10.01 $ 9.76
--------- ---------
Investment income--net................. .39 .33
Realized and unrealized gain (loss) on
investments--net..................... (.06) .25
--------- ---------
Total from investment operations........ .33 .58
--------- ---------
Less dividends from investment
income--net............................ (.39) (.33)
--------- ---------
Net asset value, end of period.......... $ 9.95 $ 10.01
--------- ---------
--------- ---------
TOTAL INVESTMENT RETURN:**
Based on net asset value per share...... 3.35% 6.07%#
--------- ---------
--------- ---------
RATIOS TO AVERAGE NET ASSETS:
Expenses, net of reimbursement.......... .99% .67%*
--------- ---------
--------- ---------
Expenses................................ 1.07% 1.19%*
--------- ---------
--------- ---------
Investment income--net.................. 3.91% 4.23%*
--------- ---------
--------- ---------
SUPPLEMENTAL DATA:
Net assets, end of period (in
thousands)............................. $ 6,406 $ 7,210
--------- ---------
--------- ---------
Portfolio turnover...................... 39.90% 138.97%
--------- ---------
--------- ---------
</TABLE>
- ------------
* Annualized.
** Total investment returns exclude the effects of sales loads.
+ Commencement of operations.
# Aggregate total investment return.
13
<PAGE>
<TABLE>
<CAPTION>
MASSACHUSETTS FUND
--------------------------------------------------------------------------------------
CLASS A CLASS B CLASS C
------------------------------- ------------------------------- --------------------
FOR THE FOR THE FOR THE
PERIOD PERIOD FOR THE PERIOD
FOR THE YEAR ENDED NOV. 26, FOR THE YEAR ENDED NOV. 26, YEAR OCT. 21,
JULY 31, 1993+ TO JULY 31, 1993+ TO ENDED 1994+ TO
-------------------- JULY 31, -------------------- JULY 31, JULY 31, JULY 31,
1996 1995 1994 1996 1995 1994 1996 1995
--------- --------- --------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
INCREASE (DECREASE) IN NET ASSET VALUE:
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period.... $ 9.96 $ 9.95 $ 10.00 $ 9.96 $ 9.95 $ 10.00 $ 9.96 $ 9.82
--------- --------- --------- --------- --------- --------- --------- ---------
Investment income--net................. .40 .44 .25 .37 .40 .22 .39 .33
Realized and unrealized gain (loss) on
investments--net..................... -- .02 (.05) -- .02 (.05) (.01) .15
--------- --------- --------- --------- --------- --------- --------- ---------
Total from investment operations........ .40 .46 .20 .37 .42 .17 .38 .48
--------- --------- --------- --------- --------- --------- --------- ---------
Less dividends and distributions:
Investment income--net................. (.40) (.44) (.25) (.37) (.40) (.22) (.39) (.33)
Realized gain on investments--net...... -- (.01) -- -- (.01) -- -- (.01)
--------- --------- --------- --------- --------- --------- --------- ---------
Total dividends and distributions....... (.40) (.45) (.25) (.37) (.41) (.22) (.39) (.34)
--------- --------- --------- --------- --------- --------- --------- ---------
Net asset value, end of period.......... $ 9.96 $ 9.96 $ 9.95 $ 9.96 $ 9.96 $ 9.95 $ 9.95 $ 9.96
--------- --------- --------- --------- --------- --------- --------- ---------
--------- --------- --------- --------- --------- --------- --------- ---------
TOTAL INVESTMENT RETURN:**
Based on net asset value per share...... 4.08% 4.79% 2.01%# 3.70% 4.41% 1.77%# 3.81% 5.00%#
--------- --------- --------- --------- --------- --------- --------- ---------
--------- --------- --------- --------- --------- --------- --------- ---------
RATIOS TO AVERAGE NET ASSETS:
Expenses, net of reimbursement.......... .77% .37% .03%* 1.16% .74% .38%* .94% .67%*
--------- --------- --------- --------- --------- --------- --------- ---------
--------- --------- --------- --------- --------- --------- --------- ---------
Expenses................................ 2.15% 1.71% 1.17%* 2.61% 2.08% 1.54%* 2.37% 2.23%*
--------- --------- --------- --------- --------- --------- --------- ---------
--------- --------- --------- --------- --------- --------- --------- ---------
Investment income--net.................. 4.04% 4.45% 3.69%* 3.66% 4.08% 3.28%* 3.88% 4.32%*
--------- --------- --------- --------- --------- --------- --------- ---------
--------- --------- --------- --------- --------- --------- --------- ---------
SUPPLEMENTAL DATA:
Net assets, end of period (in
thousands).............................. $ 1,719 $ 4,453 $ 8,097 $ 4,577 $ 4,800 $ 8,046 $ 210 $ 413
--------- --------- --------- --------- --------- --------- --------- ---------
--------- --------- --------- --------- --------- --------- --------- ---------
Portfolio turnover...................... 22.71% 89.96% 57.80% 22.71% 89.96% 57.80% 22.71% 89.96%
--------- --------- --------- --------- --------- --------- --------- ---------
--------- --------- --------- --------- --------- --------- --------- ---------
<CAPTION>
MASSACHUSETTS FUND
--------------------
CLASS D
--------------------
FOR THE
FOR THE PERIOD
YEAR OCT. 21,
ENDED 1994+ TO
JULY 31, JULY 31,
1996 1995
--------- ---------
<S> <C> <C>
INCREASE (DECREASE) IN NET ASSET VALUE:
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period.... $ 9.96 $ 9.82
--------- ---------
Investment income--net................. .39 .34
Realized and unrealized gain (loss) on
investments--net..................... -- .15
--------- ---------
Total from investment operations........ .39 .49
--------- ---------
Less dividends and distributions:
Investment income--net................. (.39) (.34)
Realized gain on investments--net...... -- (.01)
--------- ---------
Total dividends and distributions....... (.39) (.35)
--------- ---------
Net asset value, end of period.......... $ 9.96 $ 9.96
--------- ---------
--------- ---------
TOTAL INVESTMENT RETURN:**
Based on net asset value per share...... 3.97% 5.09%#
--------- ---------
--------- ---------
RATIOS TO AVERAGE NET ASSETS:
Expenses, net of reimbursement.......... .93% .70%*
--------- ---------
--------- ---------
Expenses................................ 2.42% 2.31%*
--------- ---------
--------- ---------
Investment income--net.................. 3.89% 4.21%*
--------- ---------
--------- ---------
SUPPLEMENTAL DATA:
Net assets, end of period (in
thousands).............................. $ 890 $ 253
--------- ---------
--------- ---------
Portfolio turnover...................... 22.71% 89.96%
--------- ---------
--------- ---------
</TABLE>
- ------------
* Annualized.
** Total investment returns exclude the effects of sales loads.
+ Commencement of operations.
# Aggregate total investment return.
14
<PAGE>
<TABLE>
<CAPTION>
MICHIGAN FUND
--------------------------------------------------------------------------------------
CLASS A CLASS B CLASS C
------------------------------- ------------------------------- --------------------
FOR THE FOR THE FOR THE
PERIOD PERIOD FOR THE PERIOD
FOR THE YEAR ENDED NOV. 26, FOR THE YEAR ENDED NOV. 26, YEAR OCT. 21,
JULY 31, 1993+ TO JULY 31, 1993+ TO ENDED 1994+ TO
-------------------- JULY 31, -------------------- JULY 31, JULY 31, JULY 31,
1996 1995 1994 1996 1995 1994 1996 1995
--------- --------- --------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
INCREASE (DECREASE) IN NET ASSET VALUE:
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period.... $ 9.98 $ 9.92 $ 10.00 $ 9.98 $ 9.92 $ 10.00 $ 9.98 $ 9.76
--------- --------- --------- --------- --------- --------- --------- ---------
Investment income--net................. .41 .44 .24 .37 .40 .22 .36 .30
Realized and unrealized gain (loss) on
investments--net..................... (.04) .06 (.08) (.04) .06 (.08) (.04) .22
--------- --------- --------- --------- --------- --------- --------- ---------
Total from investment operations........ .37 .50 .16 .33 .46 .14 .32 .52
--------- --------- --------- --------- --------- --------- --------- ---------
Less dividends from investment
income--net............................ (.41) (.44) (.24) (.37) (.40) (.22) (.36) (.30)
--------- --------- --------- --------- --------- --------- --------- ---------
Net asset value, end of period.......... $ 9.94 $ 9.98 $ 9.92 $ 9.94 $ 9.98 $ 9.92 $ 9.94 $ 9.98
--------- --------- --------- --------- --------- --------- --------- ---------
--------- --------- --------- --------- --------- --------- --------- ---------
TOTAL INVESTMENT RETURN:**
Based on net asset value per share...... 3.71% 5.16% 1.66%# 3.32% 4.78% 1.42%# 3.20% 5.40%#
--------- --------- --------- --------- --------- --------- --------- ---------
--------- --------- --------- --------- --------- --------- --------- ---------
RATIOS TO AVERAGE NET ASSETS:
Expenses, net of reimbursement.......... .74% .27% .02%* 1.10% .65% .38%* 1.24% .96%*
--------- --------- --------- --------- --------- --------- --------- ---------
--------- --------- --------- --------- --------- --------- --------- ---------
Expenses................................ 2.78% 2.18% 2.01%* 3.14% 2.56% 2.38%* 3.31% 2.90%*
--------- --------- --------- --------- --------- --------- --------- ---------
--------- --------- --------- --------- --------- --------- --------- ---------
Investment income--net.................. 4.06% 4.42% 3.59%* 3.70% 4.09% 3.21%* 3.57% 3.80%*
--------- --------- --------- --------- --------- --------- --------- ---------
--------- --------- --------- --------- --------- --------- --------- ---------
SUPPLEMENTAL DATA:
Net assets, end of period (in
thousands)............................. $ 1,641 $ 2,302 $ 3,435 $ 1,842 $ 2,494 $ 2,411 $ 1 $ 1
--------- --------- --------- --------- --------- --------- --------- ---------
--------- --------- --------- --------- --------- --------- --------- ---------
Portfolio turnover...................... 32.92% 93.08% 204.15% 32.92% 93.08% 204.15% 32.92% 93.08%
--------- --------- --------- --------- --------- --------- --------- ---------
--------- --------- --------- --------- --------- --------- --------- ---------
<CAPTION>
CLASS D
--------------------
FOR THE
FOR THE PERIOD
YEAR OCT. 21,
ENDED 1994+ TO
JULY 31, JULY 31,
1996 1995
--------- ---------
<S> <C> <C>
INCREASE (DECREASE) IN NET ASSET VALUE:
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period.... $ 9.97 $ 9.76
--------- ---------
Investment income--net................. .40 .34
Realized and unrealized gain (loss) on
investments--net..................... (.03) .21
--------- ---------
Total from investment operations........ .37 .55
--------- ---------
Less dividends from investment
income--net............................ (.40) (.34)
--------- ---------
Net asset value, end of period.......... $ 9.94 $ 9.97
--------- ---------
--------- ---------
TOTAL INVESTMENT RETURN:**
Based on net asset value per share...... 3.71% 5.72%#
--------- ---------
--------- ---------
RATIOS TO AVERAGE NET ASSETS:
Expenses, net of reimbursement.......... .87% .44%*
--------- ---------
--------- ---------
Expenses................................ 3.06% 2.38%*
--------- ---------
--------- ---------
Investment income--net.................. 3.94% 4.47%*
--------- ---------
--------- ---------
SUPPLEMENTAL DATA:
Net assets, end of period (in
thousands)............................. $ 541 $ 254
--------- ---------
--------- ---------
Portfolio turnover...................... 32.92% 93.08%
--------- ---------
--------- ---------
</TABLE>
- ------------
* Annualized.
** Total investment returns exclude the effects of sales loads.
+ Commencement of operations.
# Aggregate total investment return.
15
<PAGE>
<TABLE>
<CAPTION>
NEW JERSEY FUND
--------------------------------------------------------------------------------------
CLASS A CLASS B CLASS C
------------------------------- ------------------------------- --------------------
FOR THE FOR THE FOR THE
PERIOD PERIOD FOR THE PERIOD
FOR THE YEAR ENDED NOV. 26, FOR THE YEAR ENDED NOV. 26, YEAR OCT. 21,
JULY 31, 1993+ TO JULY 31, 1993+ TO ENDED 1994+ TO
-------------------- JULY 31, -------------------- JULY 31, JULY 31, JULY 31,
1996 1995 1994 1996 1995 1994 1996 1995
--------- --------- --------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
INCREASE (DECREASE) IN NET ASSET VALUE:
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period.... $ 10.15 $ 9.94 $ 10.00 $ 10.16 $ 9.95 $ 10.00 $ 9.20 $ 9.86
--------- --------- --------- --------- --------- --------- --------- ---------
Investment income--net................. .41 .42 .23 .37 .38 .20 .34 .26
Realized and unrealized gain (loss) on
investments--net..................... (.04) .21 (.06) (.05) .21 (.05) (.04) (.66)
--------- --------- --------- --------- --------- --------- --------- ---------
Total from investment operations........ .37 .63 .17 .32 .59 .15 .30 (.40)
--------- --------- --------- --------- --------- --------- --------- ---------
Less dividends from investment
income--net............................. (.41) (.42) (.23) (.37) (.38) (.20) (.34) (.26)
--------- --------- --------- --------- --------- --------- --------- ---------
Net asset value, end of period.......... $ 10.11 $ 10.15 $ 9.94 $ 10.11 $ 10.16 $ 9.95 $ 9.16 $ 9.20
--------- --------- --------- --------- --------- --------- --------- ---------
--------- --------- --------- --------- --------- --------- --------- ---------
TOTAL INVESTMENT RETURN:**
Based on net asset value per share...... 3.68% 6.45% 1.73%# 3.21% 6.07% 1.59%# 3.24% (4.01)%#
--------- --------- --------- --------- --------- --------- --------- ---------
--------- --------- --------- --------- --------- --------- --------- ---------
RATIOS TO AVERAGE NET ASSETS:
Expenses, net of reimbursement.......... .76% .34% .03%* 1.10% .73% .38%* 1.00% .55%*
--------- --------- --------- --------- --------- --------- --------- ---------
--------- --------- --------- --------- --------- --------- --------- ---------
Expenses................................ 1.78% 1.69% 1.14%* 2.12% 2.15% 1.52%* 2.04% 2.22%*
--------- --------- --------- --------- --------- --------- --------- ---------
--------- --------- --------- --------- --------- --------- --------- ---------
Investment income--net.................. 4.02% 4.10% 3.45%* 3.67% 3.80% 3.04%* 3.82% 4.06%*
--------- --------- --------- --------- --------- --------- --------- ---------
--------- --------- --------- --------- --------- --------- --------- ---------
SUPPLEMENTAL DATA:
Net assets, end of period (in
thousands).............................. $ 2,663 $ 2,401 $ 5,933 $ 5,152 $ 7,593 $ 7,885 $ 272 $ 1
--------- --------- --------- --------- --------- --------- --------- ---------
--------- --------- --------- --------- --------- --------- --------- ---------
Portfolio turnover...................... 6.57% 131.56% 205.04% 6.57% 131.56% 205.04% 6.57% 131.56%
--------- --------- --------- --------- --------- --------- --------- ---------
--------- --------- --------- --------- --------- --------- --------- ---------
<CAPTION>
CLASS D
--------------------
FOR THE
FOR THE PERIOD
YEAR OCT. 21,
ENDED 1994+ TO
JULY 31, JULY 31,
1996 1995
--------- ---------
<S> <C> <C>
INCREASE (DECREASE) IN NET ASSET VALUE:
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period.... $ 10.16 $ 9.85
--------- ---------
Investment income--net................. .40 .32
Realized and unrealized gain (loss) on
investments--net..................... (.05) .31
--------- ---------
Total from investment operations........ .35 .63
--------- ---------
Less dividends from investment
income--net............................. (.40) (.32)
--------- ---------
Net asset value, end of period.......... $ 10.11 $ 10.16
--------- ---------
--------- ---------
TOTAL INVESTMENT RETURN:**
Based on net asset value per share...... 3.48% 6.51%#
--------- ---------
--------- ---------
RATIOS TO AVERAGE NET ASSETS:
Expenses, net of reimbursement.......... .84% .62%*
--------- ---------
--------- ---------
Expenses................................ 1.86% 2.07%*
--------- ---------
--------- ---------
Investment income--net.................. 3.93% 4.17%*
--------- ---------
--------- ---------
SUPPLEMENTAL DATA:
Net assets, end of period (in
thousands).............................. $ 540 $ 437
--------- ---------
--------- ---------
Portfolio turnover...................... 6.57% 131.56%
--------- ---------
--------- ---------
</TABLE>
- ------------
* Annualized.
** Total investment returns exclude the effects of sales loads.
+ Commencement of operations.
# Aggregate total investment return.
16
<PAGE>
<TABLE>
<CAPTION>
NEW YORK FUND
--------------------------------------------------------------------------------------
CLASS A CLASS B CLASS C
------------------------------- ------------------------------- --------------------
FOR THE FOR THE FOR THE
PERIOD PERIOD FOR THE PERIOD
FOR THE YEAR ENDED NOV. 26, FOR THE YEAR ENDED NOV. 26, YEAR OCT. 21,
JULY 31, 1993+ TO JULY 31, 1993+ TO ENDED 1994+ TO
-------------------- JULY 31, -------------------- JULY 31, JULY 31, JULY 31,
1996 1995 1994 1996 1995 1994 1996 1995
--------- --------- --------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
INCREASE (DECREASE) IN NET ASSET VALUE:
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period.... $ 10.05 $ 9.91 $ 10.00 $ 10.05 $ 9.91 $ 10.00 $ 10.05 $ 9.78
--------- --------- --------- --------- --------- --------- --------- ---------
Investment income--net................. .43 .44 .25 .40 .41 .22 .42 .30
Realized and unrealized gain (loss) on
investments--net..................... .01 .14 (.09) .01 .14 (.09) .01 .27
--------- --------- --------- --------- --------- --------- --------- ---------
Total from investment operations........ .44 .58 .16 .41 .55 .13 .43 .57
--------- --------- --------- --------- --------- --------- --------- ---------
Less dividends from investment
income--net............................ (.43) (.44) (.25) (.40) (.41) (.22) (.42) (.30)
--------- --------- --------- --------- --------- --------- --------- ---------
Net asset value, end of period.......... $ 10.06 $ 10.05 $ 9.91 $ 10.06 $ 10.05 $ 9.91 $ 10.06 $ 10.05
--------- --------- --------- --------- --------- --------- --------- ---------
--------- --------- --------- --------- --------- --------- --------- ---------
TOTAL INVESTMENT RETURN:**
Based on net asset value per share...... 4.46% 6.03% 1.61%# 4.08% 5.66% 1.37%# 4.28% 5.97%#
--------- --------- --------- --------- --------- --------- --------- ---------
--------- --------- --------- --------- --------- --------- --------- ---------
RATIOS TO AVERAGE NET ASSETS:
Expenses, net of reimbursement.......... .50% .33% .03%* .87% .69% .38%* .71% .63%*
--------- --------- --------- --------- --------- --------- --------- ---------
--------- --------- --------- --------- --------- --------- --------- ---------
Expenses................................ 1.38% 1.30% 1.24%* 1.75% 1.65% 1.60%* 1.59% 1.63%*
--------- --------- --------- --------- --------- --------- --------- ---------
--------- --------- --------- --------- --------- --------- --------- ---------
Investment income--net.................. 4.28% 4.49% 3.68%* 3.91% 4.11% 3.31%* 4.06% 4.21%*
--------- --------- --------- --------- --------- --------- --------- ---------
--------- --------- --------- --------- --------- --------- --------- ---------
SUPPLEMENTAL DATA:
Net assets, end of period (in
thousands)............................. $ 3,723 $ 4,811 $ 5,290 $ 10,071 $ 8,822 $ 9,743 $ 214 $ 38
--------- --------- --------- --------- --------- --------- --------- ---------
--------- --------- --------- --------- --------- --------- --------- ---------
Portfolio turnover...................... 51.47% 139.16% 152.73% 51.47% 139.16% 152.73% 51.47% 139.16%
--------- --------- --------- --------- --------- --------- --------- ---------
--------- --------- --------- --------- --------- --------- --------- ---------
<CAPTION>
CLASS D
--------------------
FOR THE
FOR THE PERIOD
YEAR OCT. 21,
ENDED 1994+ TO
JULY 31, JULY 31,
1996 1995
--------- ---------
<S> <C> <C>
INCREASE (DECREASE) IN NET ASSET VALUE:
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period.... $ 10.05 $ 9.78
--------- ---------
Investment income--net................. .42 .34
Realized and unrealized gain (loss) on
investments--net..................... .01 .27
--------- ---------
Total from investment operations........ .43 .61
--------- ---------
Less dividends from investment
income--net............................ (.42) (.34)
--------- ---------
Net asset value, end of period.......... $ 10.06 $ 10.05
--------- ---------
--------- ---------
TOTAL INVESTMENT RETURN:**
Based on net asset value per share...... 4.35% 6.37%#
--------- ---------
--------- ---------
RATIOS TO AVERAGE NET ASSETS:
Expenses, net of reimbursement.......... .62% .48%*
--------- ---------
--------- ---------
Expenses................................ 1.49% 1.48%*
--------- ---------
--------- ---------
Investment income--net.................. 4.16% 4.47%*
--------- ---------
--------- ---------
SUPPLEMENTAL DATA:
Net assets, end of period (in
thousands)............................. $ 3,912 $ 2,306
--------- ---------
--------- ---------
Portfolio turnover...................... 51.47% 139.16%
--------- ---------
--------- ---------
</TABLE>
- ------------
* Annualized.
** Total investment returns exclude the effects of sales loads.
+ Commencement of operations.
# Aggregate total investment return.
17
<PAGE>
<TABLE>
<CAPTION>
PENNSYLVANIA FUND
--------------------------------------------------------------------------------------
CLASS A CLASS B CLASS C
------------------------------- ------------------------------- --------------------
FOR THE FOR THE FOR THE
PERIOD PERIOD FOR THE PERIOD
FOR THE YEAR ENDED NOV. 26, FOR THE YEAR ENDED NOV. 26, YEAR OCT. 21,
JULY 31, 1993+ TO JULY 31, 1993+ TO ENDED 1994+ TO
-------------------- JULY 31, -------------------- JULY 31, JULY 31, JULY 31,
1996 1995 1994 1996 1995 1994 1996 1995
--------- --------- --------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
INCREASE (DECREASE) IN NET ASSET VALUE:
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period.... $ 10.10 $ 9.95 $ 10.00 $ 10.10 $ 9.95 $ 10.00 $ 10.10 $ 9.84
--------- --------- --------- --------- --------- --------- --------- ---------
Investment income--net................. .41 .42 .23 .37 .39 .21 .38 .29
Realized and unrealized gain (loss) on
investments--net..................... .01 .15 (.05) .01 .15 (.05) .05 .26
--------- --------- --------- --------- --------- --------- --------- ---------
Total from investment operations........ .42 .57 .18 .38 .54 .16 .43 .55
--------- --------- --------- --------- --------- --------- --------- ---------
Less dividends from investment
income--net............................. (.41) (.42) (.23) (.37) (.39) (.21) (.38) (.29)
--------- --------- --------- --------- --------- --------- --------- ---------
Net asset value, end of period.......... $ 10.11 $ 10.10 $ 9.95 $ 10.11 $ 10.10 $ 9.95 $ 10.15 $ 10.10
--------- --------- --------- --------- --------- --------- --------- ---------
--------- --------- --------- --------- --------- --------- --------- ---------
TOTAL INVESTMENT RETURN:**
Based on net asset value per share...... 4.18% 5.89% 1.85%# 3.80% 5.51% 1.61%# 4.28% 5.68%#
--------- --------- --------- --------- --------- --------- --------- ---------
--------- --------- --------- --------- --------- --------- --------- ---------
RATIOS TO AVERAGE NET ASSETS:
Expenses, net of reimbursement.......... .80% .38% .02%* 1.15% .73% .38%* .97% 1.05%*
--------- --------- --------- --------- --------- --------- --------- ---------
--------- --------- --------- --------- --------- --------- --------- ---------
Expenses................................ 1.63% 1.90% 1.48%* 1.99% 2.25% 1.83%* 1.83% 2.55%*
--------- --------- --------- --------- --------- --------- --------- ---------
--------- --------- --------- --------- --------- --------- --------- ---------
Investment income--net.................. 4.01% 4.25% 3.46%* 3.65% 3.87% 3.05%* 3.84% 3.77%*
--------- --------- --------- --------- --------- --------- --------- ---------
--------- --------- --------- --------- --------- --------- --------- ---------
SUPPLEMENTAL DATA:
Net assets, end of period (in
thousands).............................. $ 833 $ 943 $ 990 $ 6,264 $ 7,414 $ 9,532 $ 1 $ 1
--------- --------- --------- --------- --------- --------- --------- ---------
--------- --------- --------- --------- --------- --------- --------- ---------
Portfolio turnover...................... 30.90% 141.52% 237.47% 30.90% 141.52% 237.47% 30.90% 141.52%
--------- --------- --------- --------- --------- --------- --------- ---------
--------- --------- --------- --------- --------- --------- --------- ---------
<CAPTION>
CLASS D
--------------------
FOR THE
FOR THE PERIOD
YEAR OCT. 21,
ENDED 1994+ TO
JULY 31, JULY 31,
1996 1995
--------- ---------
<S> <C> <C>
INCREASE (DECREASE) IN NET ASSET VALUE:
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period.... $ 10.10 $ 9.84
--------- ---------
Investment income--net................. .40 .33
Realized and unrealized gain (loss) on
investments--net..................... .01 .26
--------- ---------
Total from investment operations........ .41 .59
--------- ---------
Less dividends from investment
income--net............................. (.40) (.33)
--------- ---------
Net asset value, end of period.......... $ 10.11 $ 10.10
--------- ---------
--------- ---------
TOTAL INVESTMENT RETURN:**
Based on net asset value per share...... 4.07% 6.10%#
--------- ---------
--------- ---------
RATIOS TO AVERAGE NET ASSETS:
Expenses, net of reimbursement.......... .96% .57%*
--------- ---------
--------- ---------
Expenses................................ 1.71% 2.08%*
--------- ---------
--------- ---------
Investment income--net.................. 3.84% 4.30%*
--------- ---------
--------- ---------
SUPPLEMENTAL DATA:
Net assets, end of period (in
thousands).............................. $ 1,807 $ 382
--------- ---------
--------- ---------
Portfolio turnover...................... 30.90% 141.52%
--------- ---------
--------- ---------
</TABLE>
- ------------
* Annualized.
** Total investment returns exclude the effects of sales loads.
+ Commencement of operations.
# Aggregate total investment return.
18
<PAGE>
INVESTMENT OBJECTIVES AND POLICIES
The investment objective of each Fund is to provide shareholders with as
high a level of income exempt from Federal income taxes, the designated state's
personal income taxes and, where applicable, local personal income taxes, as is
consistent with prudent investment management. Each Fund seeks to achieve its
objective while providing investors with the opportunity to invest in a
portfolio of securities consisting primarily of intermediate-term investment
grade obligations issued by or on behalf of the designated state or its
political subdivisions, agencies or instrumentalities, and obligations of other
qualifying issuers, such as issuers located in Puerto Rico, the Virgin Islands
and Guam. Such obligations pay interest exempt, in the opinion of bond counsel
to the issuer, from Federal income taxes, the designated state's personal income
taxes and, in certain instances, local personal income taxes. Obligations that
pay interest exempt from Federal income taxes are referred to herein as
'Municipal Bonds'. Obligations that pay interest exempt from Federal income
taxes, the designated state's personal income taxes and, where applicable, local
personal income taxes, and obligations that would not subject shareholders to
intangible personal property taxes in the designated state are referred to
herein as 'State Municipal Bonds'. Unless otherwise indicated, references to
Municipal Bonds shall be deemed to include State Municipal Bonds. Each Fund will
maintain at all times, except during temporary defensive periods, at least 65%
of its total assets invested in its respective State Municipal Bonds; the New
Jersey Fund will maintain at least 80% of its total assets invested in New
Jersey State Municipal Bonds. The investment objective of each Fund as set forth
in this paragraph is a fundamental policy of that Fund and may not be changed
without shareholder approval. At times, a Fund may seek to hedge its portfolio
through the use of futures transactions to reduce volatility in the net asset
value of Fund shares.
Each Fund will invest primarily in Municipal Bonds with remaining
maturities of between one and ten years, and may not invest in Municipal Bonds
with remaining maturities of greater than ten years. For cash management and
temporary defensive purposes, each Fund may invest in Municipal Bonds with
remaining maturities of less than one year. It is anticipated that, depending on
market conditions, the dollar weighted average maturity of each Fund's portfolio
will not exceed five years. For purposes of these investment policies, a bond
will be treated as having a maturity earlier than its stated maturity date if
such bond has technical features which, in the judgment of the Manager will
result in the bond being valued in the market as though it has such earlier
maturity. Interest rates on shorter-term Municipal Bonds may fluctuate more
widely from time to time than interest rates on longer-term Municipal Bonds.
However, because of their limited maturities, the market value of the Municipal
Bonds held by each Fund can be expected to fluctuate less as a result of changes
in interest rates.
Municipal Bonds may include several types of bonds. The interest on
Municipal Bonds may bear a fixed rate or be payable at a variable or floating
rate. The Funds also may invest in variable rate demand obligations ('VRDOs')
and participations therein, described below, and short-term tax-exempt municipal
obligations such as tax anticipation notes. The Municipal Bonds purchased by the
Funds primarily will be what are commonly referred to as 'investment grade'
securities, which are obligations rated at the time of purchase within the four
highest quality ratings as determined by either Moody's Investors Service, Inc.
('Moody's') (currently Aaa, Aa, A and Baa), Standard & Poor's Ratings Services
('Standard & Poor's') (currently AAA, AA, A and BBB) or Fitch Investors Service,
Inc. ('Fitch') (currently AAA, AA, A and BBB). If Municipal Bonds are unrated,
such securities will possess creditworthiness comparable, in the opinion of the
Manager, to investment grade obligations. Municipal Bonds rated in the fourth
highest rating category, while considered investment grade, have certain
speculative characteristics and are more likely to be downgraded to
non-investment grade than obligations rated in one of the top three rating
categories. See Appendix I--'Ratings of Municipal Bonds' in the Statement of
Additional Information for more information regarding ratings of debt
securities. An issue of rated Municipal
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Bonds may cease to be rated or its rating may be reduced below investment grade
subsequent to its purchase by a Fund. If an obligation is downgraded below
investment grade, the Manager will consider factors such as price, credit risk,
market conditions, financial condition of the issuer, interest rates and any
state or local tax limitations to determine whether to continue to hold the
obligation in a Fund's portfolio.
Each Fund may invest up to 20% of its total assets in Municipal Bonds that
are rated below Baa by Moody's or below BBB by Standard & Poor's or Fitch. Such
securities, sometimes referred to as 'high yield' or 'junk' bonds, are
predominantly speculative with respect to the capacity to pay interest and repay
principal in accordance with the terms of the security and generally involve a
greater volatility of price than securities in higher rating categories. The
market prices of high-yielding, lower-rated securities may fluctuate more than
higher-rated securities and may decline significantly in periods of general
economic difficulty, which may follow periods of rising interest rates. In
purchasing such securities, a Fund will rely on the Manager's judgment, analysis
and experience in evaluating the creditworthiness of the issuer of such
securities. The Manager will take into consideration, among other things, the
issuer's financial resources, its sensitivity to economic conditions and trends,
its operating history, the quality of its management and regulatory matters. See
'Investment Objectives and Policies' in the Statement of Additional Information
for a more detailed discussion of the pertinent risk factors involved in
investing in 'high yield' or 'junk' bonds and Appendix I--'Ratings of Municipal
Bonds' in the Statement of Additional Information for additional information
regarding ratings of debt securities. None of the Funds intends to purchase debt
securities that are in default or which the Manager believes will be in default.
Certain Municipal Bonds may be entitled to the benefits of letters of
credit or similar credit enhancements issued by financial institutions. In such
instances, the Trustees and the Manager will take into account in assessing the
quality of such bonds not only the creditworthiness of the issuer of such bonds
but also the creditworthiness of the financial institution.
Each Fund's investments also may include VRDOs and VRDOs in the form of
participation interests ('Participating VRDOs') in variable rate tax-exempt
obligations held by a financial institution. The VRDOs in which the Funds will
invest are tax-exempt obligations which contain a floating or variable interest
rate adjustment formula and an unconditional right of demand on the part of the
holder thereof to receive payment of the unpaid principal balance plus accrued
interest on a short notice period not to exceed seven days. Participating VRDOs
provide the Funds with a specified undivided interest (up to 100%) of the
underlying obligation and the right to demand payment of the unpaid principal
balance plus accrued interest on the Participating VRDOs from the financial
institution on a specified number of days' notice, not to exceed seven days.
There is, however, the possibility that because of a default or insolvency, the
demand feature of VRDOs or Participating VRDOs may not be honored. The Trust has
been advised by its counsel that the Funds should be entitled to treat the
income received on Participating VRDOs as interest from tax-exempt obligations.
VRDOs that contain an unconditional right of demand to receive payment of
the unpaid principal balance plus accrued interest on a notice period exceeding
seven days may be deemed illiquid securities. A VRDO with a demand notice period
exceeding seven days therefore will be subject to each Fund's restriction on
illiquid investments unless, in the judgment of the Trustees, such VRDO is
liquid. The Trustees may adopt guidelines and delegate to the Manager the daily
function of determining and monitoring liquidity of such VRDOs. The Trustees,
however, will retain sufficient oversight and be ultimately responsible for such
determinations.
The Funds ordinarily do not intend to realize investment income not exempt
from Federal income taxes, state personal income taxes and, where applicable,
local personal income taxes, or to hold investments that would subject
shareholders to intangible personal property taxes in the designated state.
However, to the extent that
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suitable Municipal Bonds of a designated state are not available for investment
by the Fund in that state, the Fund may purchase Municipal Bonds issued by other
states or their agencies or instrumentalities, the interest on which is exempt,
in the opinion of bond counsel to the issuer, from Federal, but not state,
taxation. The Funds also may invest in securities not issued by or on behalf of
a state or territory or by an agency or instrumentality thereof, if the Manager
nevertheless believes such securities to be exempt from Federal income taxation
('Non-Municipal Tax-Exempt Securities'). Non-Municipal Tax-Exempt Securities may
include securities issued by other investment companies that invest in municipal
bonds, to the extent such investments are permitted by the Investment Company
Act of 1940, as amended (the '1940 Act'). Other Non-Municipal Tax-Exempt
Securities could include trust certificates or other derivative instruments
evidencing interests in one or more intermediate-term municipal securities.
Under normal circumstances, except when acceptable securities are
unavailable as determined by the Manager, each Fund will invest at least 65% of
its total assets in State Municipal Bonds; except that under normal
circumstances the New Jersey Fund will invest at least 80% of its total assets
in New Jersey State Municipal Bonds. For temporary defensive purposes or to
provide liquidity, each Fund has the authority to invest in taxable or
tax-exempt money market obligations with maturities of one year or less (such
short-term obligations being referred to herein as 'Temporary Investments'),
except that taxable Temporary Investments shall not exceed 20% of a Fund's net
assets. The Temporary Investments, VRDOs and Participating VRDOs in which the
Funds may invest also will be in the following rating categories at the time of
purchase: MIG-1/VMIG-1 through MIG-4/VMIG-4 for notes and VRDOs and Prime-1
through Prime-3 for commercial paper (as determined by Moody's), SP-1+ through
SP-2 for notes and A-1+ through A-3 for VRDOs and commercial paper (as
determined by Standard & Poor's), or F-1 through F-3 for notes, VRDOs and
commercial paper (as determined by Fitch) or, if unrated, of comparable quality
in the opinion of the Manager. Each Fund at all times will have at least 80% of
its net assets invested in securities the interest on which is exempt from
Federal taxation. However, interest received on certain otherwise tax-exempt
securities which are classified as 'private activity bonds' (in general, bonds
that benefit non-governmental entities), may be subject to a Federal alternative
minimum tax. See 'Distributions and Taxes'. The percentage of each Fund's net
assets invested in 'private activity bonds' will vary during the year. In
addition, each Fund reserves the right to invest temporarily a greater portion
of its assets in Temporary Investments for defensive purposes when, in the
judgment of the Manager, market conditions warrant. The investment objective of
each Fund is a fundamental policy of that Fund which may not be changed without
a vote of a majority of the outstanding shares of the Fund, as defined in the
1940 Act. Each Fund's hedging strategies, which are described in more detail
under 'Financial Futures Contracts and Options Thereon', are not fundamental
policies and may be modified by the Trustees of the Trust without the approval
of the Fund's shareholders.
POTENTIAL BENEFITS
Investment in shares of a Fund offers several benefits. Each Fund offers
investors the opportunity to receive income exempt from Federal income taxes,
the designated state's personal income taxes and, where applicable, local
personal income taxes, by investing in a professionally managed portfolio
consisting primarily of intermediate-term State Municipal Bonds. Shares of
certain Funds also may be exempt from intangible personal property taxes in the
designated state. Each Fund also provides liquidity because of its redemption
features and relieves the investor of the burdensome administrative details
involved in managing a portfolio of tax-exempt securities. The benefits of
investing in each Fund are at least partially offset by the expenses involved in
operating an investment company. Such expenses primarily consist of the
management fee and operational costs, and in the case of Class B, Class C and
Class D shares of a Fund, the account maintenance costs for that Fund
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relating to that class of shares and in the case of Class B and Class C shares,
the distribution costs of that Fund relating to that class of shares.
RISK FACTORS AND SPECIAL CONSIDERATIONS
The risks and special considerations involved in investments in Municipal
Bonds vary with the types of instruments being acquired. Investments in
Non-Municipal Tax-Exempt Securities, as defined herein, may present similar
risks, depending on the particular product. See 'Description of Municipal
Bonds'. Certain instruments in which the Funds may invest may be characterized
as derivative instruments. See 'Indexed and Inverse Floating Obligations',
'Synthetic Short-Term Municipal Bonds' and 'Financial Futures Contracts and
Options Thereon'.
Moreover, each Fund ordinarily will invest at least 65% (80% in the case of
the New Jersey Fund) of its total assets in its respective State Municipal Bonds
and, therefore, it is more susceptible to factors adversely affecting issuers of
Municipal Bonds in such state than is a tax-exempt mutual fund that is not
concentrated in issuers of State Municipal Bonds to this degree. Because each
Fund's portfolio will be comprised primarily of intermediate-term, investment
grade securities, each Fund is expected to be less subject to market and credit
risks than a fund that invests in longer-term or lower quality State Municipal
Bonds. Set forth below are special considerations and risk factors specific to
each Fund. The Manager does not believe that the current economic conditions
described below for each state will have a significant adverse effect on the
related Fund's ability to invest in investment grade State Municipal Bonds.
The Arizona Fund. Over the past several decades, the State's economy has
grown faster than most other regions of the country, as measured by nearly every
major indicator of economic growth, including population, employment and
aggregate personal income. Although the rate of growth slowed considerably
during the late 1980s and early 1990s, the State's efforts to diversify its
economy have enabled it to realize, and then sustain, increasing growth rates in
more recent years. The State continues to search for a new method to finance its
public school system following the Arizona Supreme Court's 1994 ruling that the
current system is unconstitutional. Because the Fund's portfolio will consist
primarily of investment grade securities, the Fund is expected to be less
subject to market and credit risks than a fund that invests in lower quality
Municipal Bonds. See Appendix A, 'Economic and Financial Conditions in Arizona',
in the Statement of Additional Information.
The California Fund. Since the start of the 1990-91 fiscal year, the State
of California has faced the worst economic, fiscal and budget conditions since
the 1930's. On July 5, 1994, all three of the rating agencies rating the State
of California's long-term debt lowered their ratings of the State of
California's general obligation bonds. Moody's lowered its rating from 'Aa' to
'A1'. Standard & Poor's lowered its rating from 'A+' to 'A' and termed its
outlook as 'stable', and Fitch lowered its rating from 'AA' to 'A'. No assurance
can be given that such ratings will not be lowered in the future. Although a
steady upturn has been underway since 1994, pre-recession job levels are not
expected to be reached until later in the decade. See Appendix B, 'Economic and
Financial Conditions in California', in the Statement of Additional Information.
The Florida Fund. Many different social, environmental and economic
factors may affect the financial condition of Florida and its political
subdivisions. From time to time Florida and its political subdivisions have
encountered financial difficulties. Florida is highly dependent upon sales and
use taxes which account for the majority of its General Fund revenues. The
Florida Constitution does not permit a state or local personal income tax. The
structure of personal income in Florida is also different from the rest of the
nation in that it has a proportionally greater retirement age population which
is dependent upon transfer payments (social security, pension benefits, etc.).
Such transfer payments can be affected by Federal legislation. Florida's
economic growth
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is also highly dependent upon other factors such as changes in population
growth, tourism, interest rates and hurricane activity. Finally, two recent
amendments to the Florida Constitution may limit the State's ability to raise
revenues. In combination, the two amendments may have an adverse effect on the
finances of Florida and its political subdivisions. See 'Distributions and
Taxes--State' herein and Appendix C, 'Economic and Financial Conditions in
Florida', in the Statement of Additional Information for important information
regarding the State of Florida.
The Massachusetts Fund. The Commonwealth of Massachusetts is experiencing
a moderate economic recovery. The budgeted operating funds of the Commonwealth
ended fiscal 1993 with a surplus of revenues and other sources over expenditures
and other uses, and with aggregate ending fund balances of approximately $562.5
million. Massachusetts ended fiscal 1994 and fiscal 1995 with positive closing
fund balances of $589.3 million and $726.0 million, respectively. According to
the Comptroller's preliminary financial report for fiscal year 1996, fiscal year
1996 ended with positive budgetary fund balances of approximately $1.152
billion. Currently, Massachusetts' general obligation bonds are rated by
Standard & Poor's, Fitch and Moody's as A+, A+ and A1, respectively. From time
to time, the rating agencies may further change their ratings in response to
budgetary matters or other economic indicators. See Appendix D, 'Economic and
Financial Conditions in Massachusetts', in the Statement of Additional
Information.
The Michigan Fund. In recent years, the State of Michigan has reported its
financial results in accordance with generally accepted accounting principles.
For the fiscal years ended September 30, 1990 and 1991, the State reported
negative year-end General Fund balances of $310.3 million and $169.4 million,
respectively, but ended the 1992, 1993, 1994 and 1995 fiscal years with its
General Fund in balance after transfers in 1993, 1994 and 1995 from the General
Fund to the Budget Stabilization Fund of $283 million, $464 million and $67.4
million, respectively. Those and certain other transfers into and out of the
Budget Stabilization Fund raised the balance in the Budget Stabilization Fund to
$987.9 million as of September 30, 1995. A positive cash balance in the combined
General Fund/School Aid Fund was recorded at September 30, 1990. In each of the
three prior fiscal years, the State had undertaken mid-year actions to address
projected year-end budget deficits, including expenditure cuts and deferrals and
one time expenditures or revenue recognition adjustments. From 1991 to 1993, the
State experienced deteriorating cash balances which necessitated short-term
borrowings and the deferral of certain scheduled cash payments to local units of
government. The State borrowed between $500 and $900 million for cash flow
purposes in the 1992 and 1993 fiscal years, $500 million in the 1995 fiscal year
and $900 million in the 1996 fiscal year. The State did not have to borrow for
short-term cash flow purposes in the 1993-94 fiscal year due to improved cash
balances. Currently, the State's general obligation bonds are rated Aa by
Moody's, AA by Standard & Poor's and Aa by Fitch. The State's economy could
continue to be affected by changes in the auto industry, notably consolidations
and plant closings resulting from competitive pressures and overcapacity. See
Appendix E, 'Economic and Financial Conditions in Michigan', in the Statement of
Additional Information.
The New Jersey Fund. New Jersey has benefited from the national economic
recovery. The State is in its fifth year of economic recovery. New Jersey is
reliant on Federal assistance and ranks high among the states in the amount of
Federal aid received. Currently, the State's general obligation bonds are rated
AA+ by Standard & Poor's, Aa1 by Moody's and AA+ by Fitch. See Appendix F,
'Economic and Financial Conditions in New Jersey', in the Statement of
Additional Information.
The New York Fund. In recent years, New York State, some of its agencies,
instrumentalities and public authorities and certain of its municipalities have
faced serious financial difficulties that could have an adverse effect on the
sources of payment for, or the market value of, New York State municipal
securities in which the New York Fund invests. Currently, Moody's, Standard &
Poor's and Fitch rate New York City's general
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obligation bonds Baa1, BBB+ and A-, respectively, and Moody's, Standard & Poor's
and Fitch rate New York State's general obligation bonds A, A- and A+,
respectively. See Appendix G, 'Economic and Financial Conditions in New York',
in the Statement of Additional Information.
The Pennsylvania Fund. Many different social, environmental and economic
factors may affect the financial condition of Pennsylvania and its political
subdivisions. From time to time Pennsylvania and certain of its political
subdivisions have encountered financial difficulties which have adversely
affected their respective credit standings. For example, the financial condition
of the City of Philadelphia had impaired its ability to borrow and resulted in
its obligations generally being downgraded by the major rating services to below
investment grade. Other factors which may negatively affect economic conditions
in Pennsylvania include adverse changes in employment rates, Federal revenue
sharing or laws with respect to tax-exempt financing. For the 1995 fiscal year,
the Commonwealth of Pennsylvania General Fund recorded a $49.8 million deficit
(determined on a 'GAAP' basis). Some of the deficit was attributable to changes
in the methodology used to compute certain liabilities. Financial results for
fiscal 1996, determined on a budgetary basis, reflected an ending unappropriated
surplus (prior to transfers) of $183.8 million, $65.5 million above estimate.
For the fiscal year, net expenditures and encumbrances from Commonwealth
revenues (including supplemental appropriations but excluding pooled financing
expenditures), totalled $16,162.9 million. Expenditures exceeded available
revenues and lapses by $253.2 million. The difference was funded from a planned
partial drawdown of the $437.0 million fiscal year adjusted beginning
unappropriated surplus. Commonwealth revenues (prior to tax refunds) increased
by $113.9 million over the prior fiscal year to $16,338.5 million. Currently,
Pennsylvania's general obligation bonds are rated AA- by Standard & Poor's and
Fitch and A1 by Moody's. See Appendix H, 'Economic and Financial Conditions in
Pennsylvania', in the Statement of Additional Information.
DESCRIPTION OF MUNICIPAL BONDS
Municipal Bonds include debt obligations issued by or on behalf of a state
or its agencies, instrumentalities, municipalities or political subdivisions to
obtain funds for various public purposes, including construction and equipping
of a wide range of public facilities (including water, sewer, gas, electricity,
solid waste disposal, health care, transportation, education and housing
facilities), refunding of outstanding obligations and obtaining of funds for
general operating expenses and loans to other public institutions and
facilities. In addition, certain types of industrial development bonds or
private activity bonds are issued by or on behalf of public authorities to
finance or refinance various privately operated facilities, including certain
facilities for the local furnishing of electric energy or gas, sewage
facilities, solid waste disposal facilities and other specialized facilities.
For purposes of this Prospectus, such obligations are referred to as Municipal
Bonds if the interest paid thereon is, in the opinion of bond counsel to the
issuer, excluded from gross income for Federal income tax purposes ('exempt from
Federal income tax'). Such obligations are referred to herein as State Municipal
Bonds if such obligations pay interest exempt, in the opinion of bond counsel to
the issuer, from Federal income taxes, the designated state's personal income
taxes and, where applicable, local personal income taxes, and would not subject
shareholders to intangible personal property taxes in the designated state. Such
bonds may be 'private activity bonds' as discussed below.
The two principal classifications of Municipal Bonds are 'general
obligation' bonds and 'revenue' bonds, which latter category includes industrial
development bonds ('IDBs') and, for bonds issued after August 15, 1986, private
activity bonds. General obligation bonds are secured by the issuer's pledge of
its faith, credit and taxing power for the repayment of principal and the
payment of interest. The taxing power of any governmental entity may be limited,
however, by provisions of its state constitution or laws. An entity's
creditworthiness and its capacity to make timely payment of interest and
repayment of principal on a general obligation bond when
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due will depend on many factors, including potential erosion of the tax base due
to population declines, natural disasters, declines in the state's industrial
base or inability to attract new industries, economic limits on the ability to
tax without eroding the tax base, state legislative proposals or voter
initiatives to limit ad valorem real property taxes and the extent to which the
entity relies on Federal or state aid, access to capital markets or other
factors beyond the state or entity's control.
Revenue bonds are payable only from the revenues derived from a particular
facility or class of facilities or, in some cases, from the proceeds of a
special excise tax or other specific revenue source such as payments from the
user of the facility being financed; accordingly, the timely payment of interest
and the repayment of principal in accordance with the terms of the revenue or
special obligation bond is a function of the economic viability of such facility
or such revenue source. A Fund will not invest in revenue bonds where the entity
supplying the revenues from which the issuer is paid, including predecessors,
has a record of less than three years of continuous business operations if such
investments, together with investments in other unseasoned issuers, would exceed
5% of its total assets (taken at market value at the time of each investment).
Investments involving entities with less than three years of continuous business
operations may pose somewhat greater risks due to the lack of a substantial
operating history for such entities. The Manager believes, however, that such
investments will not adversely affect the Funds, particularly given each Fund's
limitations on such investments.
The Funds may purchase IDBs or private activity bonds. IDBs or private
activity bonds are, in most cases, tax-exempt securities issued by states,
municipalities or public authorities to provide funds, usually through a loan or
lease arrangement, to a private entity for the purpose of financing construction
or improvement of a facility to be used by the entity. Such bonds are secured
primarily by revenues derived from loan repayments or lease payments due from
the entity which may or may not be guaranteed by a parent company or otherwise
secured. IDBs and private activity bonds are generally not secured by a pledge
of the taxing power of the issuer of such bonds. Therefore, an investor should
be aware that repayment of such bonds generally depends on the revenues of a
private entity and should be aware of the risks that such an investment may
entail. Continued ability of an entity to generate sufficient revenues for the
repayment of principal and the payment of interest on such bonds will be
affected by many factors including the size of the entity, its capital
structure, demand for its products or services, competition, general economic
conditions, governmental regulation and the entity's dependence on revenues for
the operation of the particular facility being financed. Each Fund also may
invest in so-called 'moral obligation' bonds, which are normally issued by
special purpose authorities. If an issuer of moral obligation bonds is unable to
meet its obligations, repayment of such bonds becomes a moral commitment, but
not a legal obligation, of the state or municipality in question. Each Fund may
purchase obligations of state and local housing authorities the proceeds of
which are used to purchase single-family mortgage loans or to finance the
construction of multi-family housing projects. Economic developments, including
fluctuations in interest rates, increasing construction and operating costs, and
reductions in Federal housing subsidy programs may adversely affect the revenues
of housing authorities. Furthermore, adverse economic conditions may result in
an increasing rate of default of mortgagors on the underlying mortgage loans.
Single-family mortgage revenue bonds also are subject to extraordinary mandatory
redemption at par at any time, in whole or in part, from the proceeds derived
from prepayments of underlying mortgage loans and from the unused proceeds of
the issue within a stated period which may be within one year of the date of
issue.
Municipal Lease Obligations. Also included within the general category of
Municipal Bonds are participation certificates issued by government authorities
or entities to finance the acquisition or construction of equipment, land and/or
facilities. The certificates represent participations in a lease, an installment
purchase contract or a conditional sales contract (hereinafter collectively
called 'lease obligations') relating to such equipment, land or facilities.
Although lease obligations do not constitute general obligations of the issuer
for
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which the issuer's unlimited taxing power is pledged, a lease obligation
frequently is backed by the issuer's covenant to budget for, appropriate and
make the payments due under the lease obligation. However, certain lease
obligations contain 'non-appropriation' clauses which provide that the issuer
has no obligation to make lease or installment purchase payments in future years
unless money is appropriated for such purpose on a yearly basis. Although
'non-appropriation' lease obligations are secured by the leased property,
disposition of the property in the event of repossession might prove difficult.
These securities represent a type of financing that has not yet developed the
depth of marketability associated with more conventional securities. Certain
investments in lease obligations may be illiquid. A Fund may not invest in
illiquid lease obligations if such investments, together with other illiquid
investments, would exceed 15% of the Fund's total assets. A Fund, however, may
invest without regard to such limitation in lease obligations which the Manager,
pursuant to guidelines which have been adopted by the Board of Trustees and
subject to the supervision of the Board, determines to be liquid. The Manager
will deem lease obligations liquid if they are publicly offered and have
received an investment grade rating of Baa or better by Moody's, or BBB or
better by Standard & Poor's or Fitch. Unrated lease obligations, or those rated
below investment grade, will be considered liquid if the obligations come to the
market through an underwritten public offering and at least two dealers are
willing to give competitive bids. In reference to obligations rated below
investment grade, the Manager, among other things, also must review the
creditworthiness of the municipality obligated to make payment under the lease
obligation and make certain specified determinations based on such factors as
the existence of a rating or credit enhancement such as insurance, the frequency
of trades or quotes for the obligation and the willingness of dealers to make a
market in the obligation.
Federal tax legislation has limited the types and volume of bonds the
interest on which qualifies for a Federal income tax exemption. As a result,
this legislation and legislation which may be enacted in the future may affect
the availability of Municipal Bonds for investment by the Funds.
WHEN-ISSUED SECURITIES AND DELAYED DELIVERY TRANSACTIONS
The Funds may purchase or sell Municipal Bonds on a delayed delivery basis
or on a when-issued basis at fixed purchase terms. These transactions arise when
securities are purchased or sold by a Fund with payment and delivery taking
place in the future. The purchase will be recorded on the date a Fund enters
into the commitment and the value of the obligation thereafter will be reflected
in the calculation of the Fund's net asset value. The value of the obligation on
the delivery date may be more or less than its purchase price. A separate
account of each Fund will be established with its respective custodian
consisting of cash, cash equivalents or liquid securities having a market value
at all times at least equal to the amount of the forward commitment.
INDEXED AND INVERSE FLOATING OBLIGATIONS
The Funds may invest in Municipal Bonds the return on which is based on a
particular index of value or interest rates. For example, a Fund may invest in
Municipal Bonds that pay interest based on an index of Municipal Bond interest
rates or based on the value of gold or some other product. The principal amount
payable upon maturity of certain Municipal Bonds also may be based on the value
of an index. To the extent a Fund invests in these types of Municipal Bonds, the
Fund's return on such Municipal Bonds will be subject to risk with respect to
the value of the particular index. Interest and principal payable on the
Municipal Bonds may also be based on relative changes among particular indices.
Also, a Fund may invest in so-called 'inverse floating obligations' or 'residual
interest bonds' on which the interest rates typically vary inversely with a
short-term floating rate (which may be reset periodically by a dutch auction, a
remarketing agent, or by reference to a short-term tax-exempt interest rate
index). The Funds may purchase original issue inverse floating rate bonds in
both
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the primary and secondary markets and also may purchase in the secondary market
synthetically-created inverse floating rate bonds evidenced by custodial or
trust receipts. Generally, interest rates on inverse floating rate bonds will
decrease when short-term rates increase, and will increase when short-term rates
decrease. Such securities have the effect of providing a degree of investment
leverage, since they may increase or decrease in value in response to changes,
as an illustration, in market interest rates at a rate which is a multiple
(typically two) of the rate at which fixed-rate, long-term, tax-exempt
securities increase or decrease in response to such changes. As a result, the
market values of such securities generally will be more volatile than the market
values of fixed-rate, tax-exempt securities. To seek to limit the volatility of
these securities, a Fund may purchase inverse floating obligations with
shorter-term maturities or which contain limitations on the extent to which the
interest rate may vary. The Manager believes that indexed and inverse floating
obligations represent a flexible portfolio management instrument for a Fund
which allows the Manager to vary the degree of investment leverage relatively
efficiently under different market conditions. Certain investments in such
obligations may be illiquid. A Fund may not invest in such illiquid obligations
if such investments, together with other illiquid investments, would exceed 15%
of that Fund's total assets.
SYNTHETIC SHORT-TERM MUNICIPAL BONDS
Each Fund may invest in a variety of synthetic short-term municipal bonds
('Synthetic Bonds'). Synthetic Bonds are typically structured by a bank,
broker-dealer or other financial institution, and generally consist of a trust
or partnership through which the Fund holds an interest in one or more long-term
municipal bonds which are assets of the applicable entity ('Underlying Bonds')
coupled with a conditional right to sell ('put') the Fund's interest in the
Underlying Bonds at par plus accrued interest to a financial institution (a
'Liquidity Provider'). Typically, a Synthetic Bond is structured as a trust or
partnership which provides for pass-through tax-exempt income. There are
currently three principal types of Synthetic Bond structures: (1) 'Tender Option
Bonds', which are instruments that grant the holder thereof the right to put an
Underlying Bond at par plus accrued interest at specified intervals to a
Liquidity Provider; (2) 'Swap Products', in which the trust or partnership swaps
the payments due on an Underlying Bond with a swap counterparty who agrees to
pay a floating municipal money market interest rate; and (3) 'Partnerships',
which allocate to the partners income, expenses, capital gains and losses in
accordance with a governing partnership agreement. Each of the Funds may also
invest in other forms of Synthetic Bonds.
Investments in Synthetic Bonds raise certain tax, legal, regulatory and
accounting issues which may not be presented by investments in other Municipal
Bonds. There is some risk that certain issues could be resolved in a manner
which could adversely impact the performance of the Funds. For example, the
tax-exempt treatment of the interest paid to holders of Synthetic Bonds is
premised on the legal conclusion that the holders of such Synthetic Bonds have
an ownership interest in the Underlying Bonds. While the Fund receives an
opinion of legal counsel to the effect that the income from each Synthetic Bond
is tax-exempt to the same extent as the Underlying Bond, the Internal Revenue
Service (the 'IRS') has not issued a ruling on this subject. Were the IRS to
issue an adverse ruling, there is a risk that the interest paid on such
Synthetic Bonds would be deemed taxable. A Synthetic Bond with a put notice
period exceeding seven days will be subject to each Fund's restriction on
illiquid investments unless, in the judgment of the Trustees, such Synthetic
Bond is liquid.
CALL RIGHTS
Each Fund may purchase, either directly from the issuer or from a third
party, a Municipal Bond issuer's contractual right to call all or a portion of
such Municipal Bond for mandatory tender for purchase (a 'Call Right'). A Fund
purchasing a Call Right may or may not own the related Municipal Bond. A holder
of a Call
27
<PAGE>
Right may exercise such right to require a mandatory tender for the purchase of
related Municipal Bonds, subject to certain conditions. A Call Right that is not
exercised prior to the maturity of the related Municipal Bond will expire
without value. The economic effect of holding both the Call Right and the
related Municipal Bond is identical to that of holding a Municipal Bond as a
non-callable security. Certain investments in such obligations may be illiquid.
A Fund may not invest in such illiquid obligations if such investments, together
with other illiquid investments, would exceed 15% of that Fund's total assets.
FINANCIAL FUTURES CONTRACTS AND OPTIONS THEREON
Each Fund is authorized to purchase and sell certain exchange-traded
financial futures contracts ('financial futures contracts') and options thereon.
The purchase or sale of an option on a financial futures contract is analogous
to the purchase or sale of an option on an individual security. Financial
futures contracts and options thereon are used solely for the purposes of
hedging a Fund's investments in Municipal Bonds against declines in value and
hedging against increases in the cost of securities it intends to purchase.
However, a Fund's transactions involving financial futures contracts or options
thereon (which options may include both puts and calls) will be in accordance
with its investment policies and limitations. A financial futures contract
obligates the seller of a contract to deliver and the purchaser of a contract to
take delivery of the type of financial instrument covered by the contract, or in
the case of index-based financial futures contracts, to make and accept a cash
settlement at a specific future time for a specified price. A sale of financial
futures contracts or options thereon may provide a hedge against a decline in
the value of portfolio securities because such depreciation may be offset, in
whole or in part, by an increase in the value of the position in the financial
futures contracts. A purchase of financial futures contracts or options thereon
may provide a hedge against an increase in the cost of securities intended to be
purchased, because such appreciation may be offset, in whole or in part, by an
increase in the value of the position in the financial futures contracts or
options thereon. Distributions, if any, of net long-term capital gains from
certain transactions in futures or options are taxable at long-term capital
gains rates for Federal income tax purposes, regardless of the length of time
the shareholder has owned Fund shares. See 'Distributions and Taxes--Taxes'.
Each Fund may deal in financial futures contracts traded on the Chicago
Board of Trade based on The Bond Buyer Municipal Bond Index, a price-weighted
measure of the market value of 40 large, recently issued tax-exempt bonds. There
can be no assurance, however, that a liquid secondary market will exist to
terminate any particular financial futures contract or option thereon at any
specific time. If it is not possible to close a financial futures position or
the related option entered into by a Fund, the Fund would continue to be
required to make daily cash payments of variation margin in the event of adverse
price movements. In such a situation, if the Fund has insufficient cash, it may
have to sell portfolio securities to meet daily variation margin requirements at
a time when it may be disadvantageous to do so. The inability to close financial
futures contracts or related option positions also could have an adverse impact
on a Fund's ability to hedge effectively. There is also the risk of loss by a
Fund of margin deposits in the event of bankruptcy of a broker with whom the
Fund has an open position in a financial futures contract or option thereon.
Each Fund may purchase and sell financial futures contracts on U.S.
Government securities and write and purchase put and call options on such
financial futures contracts as a hedge against adverse changes in interest rates
as described more fully in the Statement of Additional Information. With respect
to U.S. Government securities, currently there are financial futures contracts
based on long-term U.S. Treasury bonds, U.S. Treasury notes, Government National
Mortgage Association ('GNMA') Certificates and three-month U.S. Treasury bills.
Subject to policies adopted by the Trustees, the Funds also may enter into
other financial futures transactions, such as financial futures contracts or
options on other municipal bond indices which may become
28
<PAGE>
available, if the Manager of the Funds and the Trustees of the Trust should
determine that there is normally a sufficient correlation between the prices of
such financial futures contracts or options thereon and the Municipal Bonds in
which a Fund invests to make such hedging appropriate.
Utilization of financial futures contracts and options thereon involves the
risk of imperfect correlation in movements in the price of financial futures
contracts or options thereon and movements in the price of the security which is
the subject of the hedge. If the price of the financial futures contract or
option thereon moves more or less than the price of the security that is the
subject of the hedge, a Fund will experience a gain or loss which will not be
completely offset by movements in the price of such security. There is a risk of
imperfect correlation where the securities underlying financial futures
contracts or options thereon have different maturities, ratings or geographic
mixes than the security being hedged. In addition, the correlation may be
affected by additions to or deletions from the index which serves as a basis for
a financial futures contract or option thereon. Finally, in the case of
financial futures contracts on U.S. Government securities and options on such
financial futures contracts, the anticipated correlation of price movements
between the U.S. Government securities underlying the financial futures or
options, and Municipal Bonds may be adversely affected by economic, political,
legislative or other developments which have a disparate impact on the
respective markets for such securities.
Under regulations of the Commodity Futures Trading Commission, the futures
trading activities described herein will not result in a Fund being deemed to be
a 'commodity pool', as defined under such regulations, provided that the Fund
adheres to certain restrictions. In particular, a Fund may purchase and sell
financial futures contracts and options thereon (i) for bona fide hedging
purposes, and (ii) for non-hedging purposes, if the aggregate initial margin and
premiums required to establish positions in such contracts and options does not
exceed 5% of the liquidation value of the Fund's portfolio assets after taking
into account unrealized profits and unrealized losses on any such contracts and
options. As stated above, each Fund intends to engage in options and futures
transactions only for hedging purposes. Margin deposits may consist of cash or
securities acceptable to the broker and the relevant contract market.
When a Fund purchases a financial futures contract, or writes a put option
or purchases a call option thereon, it will maintain an amount of cash, cash
equivalents (e.g., high grade commercial paper and daily tender adjustable
notes) or liquid securities in a segregated account with the Fund's custodian,
so that the amount so segregated plus the amount of initial and variation margin
held in the account of its broker equals the market value of the financial
futures contract or option thereon, thereby ensuring that the use of such
financial futures contract or option is unleveraged. It is not anticipated that
transactions in financial futures contracts or options thereon will have the
effect of increasing portfolio turnover.
Although certain risks are involved in options and futures transactions,
the Manager believes that, because the Funds will engage in financial futures
transactions only for hedging purposes, the futures portfolio strategies of the
Funds will not subject the Funds to certain risks frequently associated with
speculation in futures transactions. The Funds must meet certain Federal income
tax requirements under the Internal Revenue Code of 1986, as amended (the
'Code'), in order to qualify for the special tax treatment afforded regulated
investment companies, including a requirement that less than 30% of its gross
income be derived from the sale or other disposition of securities held for less
than three months. Additionally, each Fund is required to meet certain
diversification requirements under the Code.
The liquidity of a secondary market in a financial futures contract or
related option may be adversely affected by 'daily price fluctuation limits'
established by commodity exchanges which limit the amount of fluctuation in a
financial futures contract price during a single trading day. Once the daily
limit has been reached
29
<PAGE>
in the contract, no trades may be entered into at a price beyond the limit, thus
preventing the liquidation of open futures positions. Prices in the past have
reached or exceeded the daily limit on a number of consecutive trading days.
The successful use of financial futures contracts and options thereon also
depends on the ability of the Manager to forecast correctly the direction and
extent of interest rate movements within a given time frame. To the extent these
rates remain stable during the period in which a financial futures contract or
related option is held by a Fund or move in a direction opposite to that
anticipated, the Fund may realize a loss on the hedging transaction which is not
fully or partially offset by an increase in the value of portfolio securities.
As a result, a Fund's total return for such period may be less than if it had
not engaged in the hedging transaction. Furthermore, each Fund only will engage
in hedging transactions from time to time and may not necessarily be engaging in
hedging transactions when movements in interest rates occur.
Reference is made to the Statement of Additional Information for further
information on financial futures contracts and certain options thereon.
REPURCHASE AGREEMENTS
As Temporary Investments, the Funds may invest in securities pursuant to
repurchase agreements. Repurchase agreements may be entered into only with a
member bank of the Federal Reserve System or a primary dealer in U.S. Government
securities or an affiliate thereof. Under such agreements, the seller agrees,
upon entering into the contract, to repurchase the security from the Fund at a
mutually agreed upon time and price, thereby determining the yield during the
term of the agreement. This results in a fixed rate of return insulated from
market fluctuations during such period. A Fund may not invest in repurchase
agreements maturing in more than seven days if such investments, together with
the Fund's other illiquid investments, would exceed 15% of that Fund's total
assets. In the event of a default by the seller under a repurchase agreement, a
Fund may suffer time delays and incur costs or possible losses in connection
with the disposition of the underlying securities.
Certain Funds may be subject to state and local restrictions which prohibit
certain types of investments and investment strategies, including some of the
investments and investment strategies discussed herein.
INVESTMENT RESTRICTIONS
Each Fund has adopted a number of restrictions and policies relating to the
investment of the Fund's assets and its activities, which are fundamental
policies of the Fund and may not be changed without the approval of the holders
of a majority of the Fund's outstanding voting securities, as defined in the
1940 Act, which means the lesser of (i) 67% of the shares represented at a
meeting at which more than 50% of the outstanding shares are represented or (ii)
more than 50% of the outstanding shares. As a fundamental policy, no Fund may
invest more than 25% of its total assets (taken at market value at the time of
each investment) in securities of issuers in any particular industry (other than
U.S. Government securities or Government agency securities, Municipal Bonds and
Non-Municipal Tax-Exempt Securities). Investment restrictions and policies that
are non-fundamental policies may be changed by the Board of Trustees without
shareholder approval. As a non-fundamental policy, no Fund may borrow amounts in
excess of 20% of its total assets taken at market value (including the amount
borrowed), and then only from banks as a temporary measure for extraordinary or
emergency purposes. In addition, no Fund will purchase securities while
borrowings are outstanding.
As a non-fundamental policy, no Fund will invest in securities which cannot
be readily resold because of legal or contractual restrictions or which are not
readily marketable, including individually negotiated loans that
30
<PAGE>
constitute illiquid investments and illiquid lease obligations, and in
repurchase agreements maturing in more than seven days, if, regarding all such
securities taken together, more than 15% of its total assets (taken at market
value at the time of each investment) would be invested in such securities. In
addition, no Fund may invest more than 10% of its total assets (taken at market
value at the time of each investment) in revenue bonds where the entity
supplying the revenues from which the issue is to be paid, and the guarantor of
the obligation, including predecessors, each has a record of less than three
years' continuous business operation.
Each Fund is classified as non-diversified within the meaning of the 1940
Act, which means that the Fund is not limited by the 1940 Act in the proportion
of its assets that it may invest in obligations of a single issuer. However,
each Fund's investments will be limited so as to qualify as a 'regulated
investment company' for purposes of the Code. See 'Distributions and
Taxes--Taxes'. To qualify, among other requirements, the Trust will limit each
Fund's investments so that, at the close of each quarter of the taxable year,
(i) not more than 25% of the market value of the Fund's total assets will be
invested in the securities of a single issuer, and (ii) with respect to 50% of
the market value of its total assets, not more than 5% of the market value of
its total assets will be invested in the securities of a single issuer and the
Fund will not own more than 10% of the outstanding voting securities of a single
issuer. For purposes of this restriction, each Fund will regard each state and
each political subdivision, agency or instrumentality of such state and each
multi-state agency of which such state is a member and each public authority
which issues securities on behalf of a private entity, as a separate issuer,
except that if the security is backed only by the assets and revenues of a
non-government entity then the entity with the ultimate responsibility for the
payment of interest and principal may be regarded as the sole issuer. These tax-
related limitations may be changed by the Trustees of the Trust to the extent
necessary to comply with changes to the Federal tax requirements. A Fund which
elects to be classified as 'diversified' under the 1940 Act must satisfy the
foregoing 5% and 10% requirements with respect to 75% of its total assets. To
the extent that a Fund assumes large positions in the obligations of a small
number of issuers, that Fund's total return may fluctuate to a greater extent
than that of a diversified company as a result of changes in the financial
condition or in the market's assessment of the issuers.
Investors are referred to the Statement of Additional Information for a
complete description of each Fund's investment restrictions.
31
<PAGE>
MANAGEMENT OF THE TRUST
TRUSTEES
The Trustees of the Trust consist of six individuals, five of whom are not
'interested persons' of the Trust as defined in the 1940 Act. The Trustees are
responsible for the overall supervision of the operations of the Trust and the
Funds and perform the various duties imposed on the directors or trustees of
investment companies by the 1940 Act.
The Trustees are:
ARTHUR ZEIKEL*--President of the Manager and its affiliate, MLAM; President
and Director of Princeton Services, Inc. ('Princeton Services'); Executive Vice
President of ML&Co.; and Director of the Distributor.
JAMES H. BODURTHA--Director and Executive Vice President, The China
Business Group, Inc.
HERBERT I. LONDON--John M. Olin Professor of Humanities, New York
University.
ROBERT R. MARTIN--Former Chairman, Kinnard Investments, Inc.
JOSEPH L. MAY--Attorney in private practice.
ANDRE F. PEROLD--Professor, Harvard Business School.
- ------------
* Interested person, as defined in the 1940 Act, of the Trust.
MANAGEMENT AND ADVISORY ARRANGEMENTS
The Manager, which is an affiliate of MLAM and is owned and controlled by
ML&Co., a financial services holding company and the parent of Merrill Lynch,
acts as the manager for the Trust and provides each Fund with management
services. The Manager or MLAM acts as the investment adviser for over 130
registered investment companies. MLAM also offers portfolio management and
portfolio analysis services to individuals and institutions. As of October 31,
1996, the Manager and MLAM had a total of approximately $217.6 billion in
investment company and other portfolio assets under management, including
accounts of certain affiliates of the Manager.
Subject to the direction of the Trustees, the Manager is responsible for
the actual management of each Fund's portfolio and constantly reviews each
Fund's holdings in light of its own research analysis and that from other
relevant sources. The responsibility for making decisions to buy, sell or hold a
particular security rests with the Manager. The Manager performs certain of the
other administrative services and provides all the office space, facilities,
equipment and necessary personnel for management of the Funds.
Edward J. Andrews, Peter J. Hayes and Helen M. Sheehan are the Portfolio
Managers for each Fund and are responsible for the day-to-day management of each
Fund's investment portfolio. Edward J. Andrews has been a Portfolio Manager and
Vice President of the Manager and of MLAM since 1991. Peter J. Hayes has been a
Portfolio Manager and Vice President of the Manager and of MLAM since 1989.
Helen M. Sheehan has been a Portfolio Manager and Vice President of the Manager
and of MLAM since 1991.
Pursuant to separate management agreements between the Manager and the
Trust on behalf of each Fund (each a 'Management Agreement'), the Manager is
entitled to receive from each Fund a monthly fee based upon the average daily
net assets of that Fund at the annual rate of 0.35% of the average daily net
assets of that Fund. Information about fees paid by each Fund is contained in
the table below.
32
<PAGE>
Each Management Agreement obligates the related Fund to pay certain
expenses incurred in that Fund's operations, including, among other things, the
management fee, legal and audit fees, unaffiliated Trustees' fees and expenses,
registration fees, custodian and transfer agency fees, accounting and pricing
costs, and certain of the costs of printing proxies, shareholder reports,
prospectuses and statements of additional information. Accounting services are
provided to the Trust by the Manager, and each Fund reimburses the Manager for
its proportionate costs in connection with such services. The Manager may waive
all or a portion of its management fee for any Fund and may assume voluntarily
all or a portion of each Fund's expenses. Information about the amounts
reimbursed by each Fund is contained in the table below.
Set forth in the table below is information for each Fund pertaining to the
Fund's investment advisory arrangements for the fiscal year ended July 31, 1996:
<TABLE>
<CAPTION>
REIMBURSEMENT
BASED ON OF MANAGER RATIO OF TOTAL EXPENSES
MANAGEMENT AVERAGE NET FOR TO AVERAGE NET ASSETS
FEE VOLUNTARY ASSETS OF ACCOUNTING ----------------------------------------
FUND ($) WAIVER($) APPROX. ($) SERVICES ($) CLASS A CLASS B CLASS C CLASS D
- -------------------- ---------- --------- ------------ ------------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Arizona Fund......... 21,459 21,459 6.1 million 30,172 2.27% 2.61% 2.80% 2.42%
California Fund...... 54,033 54,033 15.4 million 38,245 1.30% 1.66% 1.50% 1.40%
Florida Fund......... 108,720 24,123 31.1 million 34,053 0.97% 1.32% 1.23% 1.07%
Massachusetts Fund... 30,736 30,736 8.8 million 53,983 2.15% 2.61% 2.37% 2.42%
Michigan Fund........ 16,413 16,413 4.7 million 47,178 2.78% 3.14% 3.31% 3.06%
New Jersey Fund...... 33,770 33,770 9.6 million 43,508 1.78% 2.12% 2.04% 1.86%
New York Fund........ 57,995 57,995 16.6 million 62,140 1.38% 1.75% 1.59% 1.49%
Pennsylvania Fund.... 30,196 30,196 8.6 million 43,426 1.63% 1.99% 1.83% 1.71%
</TABLE>
CODE OF ETHICS
The Board of Trustees of the Trust has adopted a Code of Ethics under Rule
17j-1 of the Act which incorporates the Code of Ethics of the Manager (together,
the 'Codes'). The Codes significantly restrict the personal investing activities
of all employees of the Manager and, as described below, impose additional, more
onerous, restrictions on fund investment personnel.
The Codes require that all employees of the Manager preclear any personal
securities investment (with limited exceptions, such as government securities).
The preclearance requirement and associated procedures are designed to identify
any substantive prohibition or limitation applicable to the proposed investment.
The substantive restrictions applicable to all employees of the Manager include
a ban on acquiring any securities in a 'hot' initial public offering and a
prohibition from profiting on short-term trading in securities. In addition, no
employee may purchase or sell any security which at the time is being purchased
or sold (as the case may be), or to the knowledge of the employee is being
considered for purchase or sale, by any fund advised by the Manager.
Furthermore, the Codes provide for trading 'blackout periods' which prohibit
trading by investment personnel of the Funds within periods of trading by the
Funds in the same (or equivalent) security (15 or 30 days depending upon the
transaction).
TRANSFER AGENCY SERVICES
Merrill Lynch Financial Data Services, Inc. (the 'Transfer Agent'), which
is a wholly-owned subsidiary of ML&Co., acts as the Trust's transfer agent
pursuant to a transfer agency, dividend disbursing agency and shareholder
servicing agency agreement (the 'Transfer Agency Agreement'). Pursuant to the
Transfer Agency
33
<PAGE>
Agreement, the Transfer Agent is responsible for the issuance, transfer and
redemption of shares of each Fund and the opening and maintenance of shareholder
accounts. Pursuant to the Transfer Agency Agreement, each Fund pays the Transfer
Agent an annual fee of $11.00 per Class A or Class D shareholder account, and
$14.00 per Class B or Class C shareholder account, and the Transfer Agent is
entitled to reimbursement from the Fund for out-of-pocket expenses incurred by
the Transfer Agent on behalf of such Fund under the Transfer Agency Agreement.
The table below sets forth information about the fees paid by each Fund for
transfer agency services for the fiscal year ended July 31, 1996 and the
transfer agency fees which would be payable based on the number of shareholder
accounts at October 31, 1996.
<TABLE>
<CAPTION>
AT OCTOBER 31, 1996
------------------------------------------------------
NUMBER OF
SHAREHOLDER
TRANSFER ACCOUNTS TRANSFER
AGENCY FEE ---------------------------------------- AGENCY FEE
FUND PAID CLASS A CLASS B CLASS C CLASS D PAYABLE
- -------------------------------------------------- ---------- ------- ------- ------- ------- ----------
<S> <C> <C> <C> <C> <C> <C>
Arizona Fund...................................... $ 3,271 24 87 5 13 $1,695
California Fund................................... $ 4,477 40 181 4 26 $3,316
Florida Fund...................................... $ 7,997 65 271 4 29 $4,884
Massachusetts Fund................................ $ 4,426 26 148 6 13 $2,585
Michigan Fund..................................... $ 3,510 32 81 3 13 $1,671
New Jersey Fund................................... $ 4,054 46 129 5 13 $2,525
New York Fund..................................... $ 6,172 53 253 11 29 $4,598
Pennsylvania Fund................................. $ 4,261 26 187 3 18 $3,144
</TABLE>
PURCHASE OF SHARES
The Distributor, an affiliate of both the Manager and Merrill Lynch, acts
as the Distributor of the shares of each Fund. Shares of each Fund are offered
continuously for sale by the Distributor and other eligible securities dealers
(including Merrill Lynch). Class A, Class B and Class D shares of the Funds may
be purchased from securities dealers or by mailing a purchase order directly to
the Transfer Agent. Class C shares of the Funds are not available for purchase
but will be issued only pursuant to the exchange privilege to holders of Class C
shares of other MLAM-advised mutual funds who elect to exchange Class C shares
of such other MLAM-advised mutual fund for Class C shares of one of the Funds.
The minimum initial purchase for shares of each Fund is $1,000 and the minimum
subsequent purchase is $50.
Each Fund offers its Class A, Class B, Class C and Class D shares at a
public offering price equal to the next determined net asset value per share
plus sales charges imposed either at the time of purchase or on a deferred basis
depending upon the class of shares selected by the investor under the Merrill
Lynch Select Pricing(Service Mark) System, as described below. The applicable
offering price for purchase orders is based upon the net asset value of the
respective Fund next determined after receipt of the purchase orders by the
Distributor. As to purchase orders received by securities dealers prior to the
close of business on the New York Stock Exchange (the 'NYSE') (generally, 4:00
p.m., New York time) which includes orders received after the close of business
on the previous day, the applicable offering price will be based on the net
asset value determined as of 15 minutes after the close of business on the NYSE
on that day, provided the Distributor in turn receives the order from the
securities dealer prior to 30 minutes after the close of business on the NYSE on
that day. If the purchase orders are not received by the Distributor prior to 30
minutes after the close of business on the NYSE, such orders shall be deemed
received on the next business day. The Trust or the Distributor may suspend the
continuous offering of a Fund's shares of any class at any time in response to
conditions in the securities markets or otherwise and may thereafter resume such
offering from time to time. Any order may be rejected by the Distributor or the
Trust. Neither the
34
<PAGE>
Distributor nor the dealers are permitted to withhold placing orders to benefit
themselves by a price change. Merrill Lynch may charge its customers a
processing fee (presently $4.85) to confirm a sale of shares to such customers.
Purchases directly through the Trust's Transfer Agent are not subject to the
processing fee.
Each of the Funds issues four classes of shares under the Merrill Lynch
Select Pricing(Service Mark) System, which permits each investor to choose the
method of purchasing shares that the investor believes is most beneficial given
the amount of the purchase, the length of time the investor expects to hold the
shares and other relevant circumstances. Shares of Class A and Class D are sold
to investors choosing the initial sales charge alternatives and shares of Class
B are sold to investors choosing the deferred sales charge alternative.
Investors should determine whether under their particular circumstances it is
more advantageous to incur an initial sales charge or to have the entire initial
purchase price invested in the Fund with the investment thereafter being subject
to a CDSC, ongoing distribution fees and higher account maintenance fees. A
discussion of the factors that investors should consider in determining the
method of purchasing shares under the Merrill Lynch Select Pricing(Service Mark)
System is set forth under 'Merrill Lynch Select Pricing(Service Mark) System' on
page 7.
Each Class A, Class B, Class C and Class D share of each of the Funds
represents identical interests in the investment portfolio of that Fund and has
the same rights, except that Class B, Class C and Class D shares bear the
expenses of the ongoing account maintenance fees, and Class B and Class C shares
bear the expenses of the ongoing distribution fees and the additional
incremental transfer agency costs resulting from the deferred sales charge
arrangements. The CDSCs and distribution and account maintenance fees that are
imposed on Class B and Class C shares, as well as the account maintenance fees
that are imposed on Class D shares, will be imposed directly against those
classes and not against all assets of the Fund and, accordingly, such charges
will not affect the net asset value of any other class or have any impact on
investors choosing another sales charge option. Dividends paid by the Funds for
each class of shares will be calculated in the same manner at the same time and
will differ only to the extent that account maintenance and distribution fees
and any incremental transfer agency costs relating to a particular class are
borne exclusively by that class. Class B, Class C and Class D shares each have
exclusive voting rights with respect to the Rule 12b-1 distribution plan adopted
with respect to such class pursuant to which account maintenance and/or
distribution fees are paid. See 'Distribution Plans' below. Each class has
different exchange privileges. See 'Shareholder Services--Exchange Privilege'.
Investors should understand that the purpose and function of the initial
sales charges with respect to Class A and Class D shares are the same as those
of the deferred sales charges with respect to Class B and Class C shares in that
the sales charges applicable to each class provide for the financing of the
distribution of the shares of the Funds. The distribution-related revenues paid
with respect to a class will not be used to finance the distribution
expenditures of another class. Sales personnel may receive different
compensation for selling different classes of shares. Investors are advised that
only Class A and Class D shares may be available for purchase through securities
dealers, other than Merrill Lynch, which are eligible to sell shares.
35
<PAGE>
The following table sets forth a summary of the distribution arrangements
for each class of shares under the Merrill Lynch Select Pricing(Service Mark)
System.
<TABLE>
<CAPTION>
ACCOUNT
MAINTENANCE DISTRIBUTION
CLASS SALES CHARGE(1) FEE FEE CONVERSION FEATURE
<S> <C> <C> <C> <C>
A Maximum 1.0% initial sales No No No
charge(2)(3)
B 1.0% CDSC for one year(4) 0.15% 0.20% B shares convert to D shares
automatically after approximately
ten years(5)
C(7) 1.0% CDSC for one year(6) 0.15% 0.20% No
D Maximum 1.0% initial sales 0.10% No No
charge(3)
</TABLE>
- ------------
(1) Initial sales charges are imposed at the time of purchase as a percentage of
the offering price. CDSCs are imposed if the redemption occurs within the
applicable CDSC time period. The charge will be assessed on an amount equal
to the lesser of the proceeds of redemption or the cost of the shares being
redeemed.
(2) Offered only to eligible investors. See 'Initial Sales Charge
Alternatives--Class A and Class D Shares--Eligible Class A Investors'.
(3) Reduced for purchases of $100,000 or more and waived for purchases of Class
A shares in connection with certain fee-based programs. Class A and Class D
share purchases of $1,000,000 or more may not be subject to an initial sales
charge but instead may be subject to a 0.20% CDSC if redeemed within one
year. Such CDSC may be waived in connection with redemptions to fund
participation in certain fee-based programs.
(4) The CDSC may be modified in connection with redemptions to fund
participation in certain fee-based programs.
(5) The conversion period for dividend reinvestment shares and certain fee-based
programs may be modified. Also, Class B shares of certain other MLAM-advised
mutual funds into which exchanges may be made have an eight year conversion
period. If Class B shares of a Fund are exchanged for Class B shares of
another MLAM-advised mutual fund, the conversion period applicable to the
Class B shares acquired in the exchange will apply, and the holding period
for the shares exchanged will be tacked onto the holding period for the
shares acquired.
(6) The CDSC may be waived in connection with redemptions to fund participation
in certain fee-based programs.
(7) Class C shares will be issued only upon exchange for Class C shares of
another MLAM-advised mutual fund. See 'Shareholder Services--Exchange
Privilege'.
INITIAL SALES CHARGE ALTERNATIVES--CLASS A AND CLASS D SHARES
Investors choosing the initial sales charge alternatives who are eligible
to purchase Class A shares should purchase Class A shares rather than Class D
shares because there is an account maintenance fee imposed on Class D shares.
36
<PAGE>
The public offering price of Class A and Class D shares of each Fund for
purchasers choosing the initial sales charge alternatives is the next determined
net asset value plus varying sales charges (i.e., sales loads), as set forth
below.
<TABLE>
<CAPTION>
SALES LOAD SALES LOAD DISCOUNT TO SELECTED
AS PERCENTAGE* AS PERCENTAGE* DEALERS AS
OF OFFERING OF THE NET PERCENTAGE* OF THE
AMOUNT OF PURCHASE PRICE AMOUNT INVESTED OFFERING PRICE
- ------------------------------------------------------------ -------------- --------------- --------------------
<S> <C> <C> <C>
Less than $100,000.......................................... 1.00% 1.01% .95%
$100,000 but less than $250,000............................. .75 .76 .70
$250,000 but less than $500,000............................. .50 .50 .45
$500,000 but less than $1,000,000........................... .30 .30 .27
$1,000,000 and over**....................................... .00 .00 .00
</TABLE>
- ------------
* Rounded to the nearest one-hundredth percent.
** Class A and Class D purchases of $1 million or more may be subject to a CDSC
of 0.20% if the shares are redeemed within one year after purchase. Such CDSC
may be waived in connection with redemptions to fund participation in certain
fee-based programs. The charge will be assessed on an amount equal to the
lesser of the proceeds of redemption or the cost of the shares being
redeemed.
The Distributor may reallow discounts to selected dealers and retain the
balance over such discounts. At times the Distributor may reallow the entire
sales charge to such dealers. Since securities dealers selling Class A and Class
D shares of a Fund will receive a concession equal to most of the sales charge,
they may be deemed to be underwriters under the Securities Act of 1933, as
amended.
The following table sets forth information about the number of Class A
shares and Class D shares sold by each Fund for the fiscal year ended July 31,
1996, the aggregate net proceeds from such sales, the gross sales charges and
the amounts of such charges received by the Distributor and Merrill Lynch for
Class A shares and Class D shares. No CDSCs were received by the Distributor
with respect to redemptions within one year after purchase of Class A or Class D
shares purchased subject to a front-end sales charge waiver.
<TABLE>
<CAPTION>
NO. OF AGGREGATE
SHARES NET GROSS SALES PAID TO
SOLD PROCEEDS ($) CHARGES ($) DISTRIBUTOR ($)
----------------- --------------------- ----------------- -----------------
CLASS A CLASS D CLASS A CLASS D CLASS A CLASS D CLASS A CLASS D
------- ------- --------- --------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Arizona Fund.............................. 5,200 104,371 52,303 1,066,013 463 241 17 14
California Fund........................... 8,087 105,834 80,919 1,060,270 580 3,148 67 299
Florida Fund.............................. 91,796 316,584 926,979 3,192,506 497 2,943 22 373
Massachusetts Fund........................ 22,851 101,394 226,189 1,009,332 964 3,387 93 298
Michigan Fund............................. 40,664 29,731 405,188 298,909 102 479 4 59
New Jersey Fund........................... 102,101 47,184 1,042,636 477,087 239 1,128 2 31
New York Fund............................. 44,189 162,557 446,602 1,636,956 34 4,790 1 476
Pennsylvania Fund......................... 5,556 155,680 56,865 1,569,272 5 533 -- 14
<CAPTION>
PAID TO
MERRILL
LYNCH ($)
-----------------
CLASS A CLASS D
------- -------
<S> <C> <C>
Arizona Fund.............................. 446 227
California Fund........................... 513 2,849
Florida Fund.............................. 475 2,570
Massachusetts Fund........................ 871 3,089
Michigan Fund............................. 98 420
New Jersey Fund........................... 237 1,097
New York Fund............................. 33 4,314
Pennsylvania Fund......................... 5 519
</TABLE>
Eligible Class A Investors. Class A shares are offered to a limited group
of investors and also will be issued upon reinvestment of dividends on
outstanding Class A shares. Investors that currently own Class A shares of a
Fund in a shareholder account are entitled to purchase additional Class A shares
of that Fund in that account. Class A shares are available at net asset value to
corporate warranty insurance reserve fund programs provided that the program has
$3 million or more initially invested in MLAM-advised mutual funds. Also
eligible to purchase Class A shares at net asset value are participants in
certain investment programs including TMA(Service Mark) Managed Trusts to which
Merrill Lynch Trust Company provides discretionary trustee services, collective
investment trusts for which Merrill Lynch Trust Company serves as trustee and
purchases made in connection with certain fee-based programs. In addition, Class
A shares are offered at net asset value to ML & Co. and its
37
<PAGE>
subsidiaries and their directors and employees and to members of the Boards of
MLAM-advised investment companies, including the Trust. Certain persons who
acquired shares of certain MLAM-advised closed-end funds in their initial
offerings who wish to reinvest the net proceeds from a sale of their closed-end
fund shares of common stock in shares of the Funds also may purchase Class A
shares of the Funds if certain conditions set forth in the Statement of
Additional Information are met. In addition, Class A shares of the Funds and
certain other MLAM-advised mutual funds are offered at net asset value to
shareholders of Merrill Lynch Senior Floating Rate Fund, Inc. and, if certain
conditions set forth in the Statement of Additional Information are met, to
shareholders of Merrill Lynch Municipal Strategy Fund, Inc. and Merrill Lynch
High Income Municipal Bond Fund, Inc. who wish to reinvest the net proceeds from
a sale of certain of their shares of common stock pursuant to a tender offer
conducted by such funds in shares of any of the Funds and certain other
MLAM-advised mutual funds.
Reduced Initial Sales Charges. No initial sales charges are imposed upon
Class A and Class D shares issued as a result of the automatic reinvestment of
dividends or capital gains distributions. Class A and Class D sales charges also
may be reduced under a Right of Accumulation and a Letter of Intention. Class A
shares are offered at net asset value to certain eligible Class A investors as
set forth above under 'Eligible Class A Investors'. See 'Shareholder
Services--Fee-Based Programs'. Class A and Class D shares are offered at net
asset value to Employee Access Accounts(Service Mark) available through
qualified employers which provide employer-sponsored retirement and savings
plans that are eligible to purchase such shares at net asset value. Class A and
Class D shares of each of the Funds are offered at net asset value to
shareholders of Merrill Lynch Municipal Strategy Fund, Inc. and Merrill Lynch
High Income Municipal Bond Fund, Inc. who wish to reinvest in shares of any of
the Funds the net proceeds from a sale of certain of their shares of common
stock pursuant to tender offers conducted by those funds.
Class D shares are offered at net asset value, without sales charge, to an
investor who has a business relationship with a Merrill Lynch Financial
Consultant, if certain conditions set forth in the Statement of Additional
Information are met. Class D shares may be offered at net asset value in
connection with the acquisition of assets of other investment companies.
Additional information concerning these reduced initial sales charges is
set forth in the Statement of Additional Information.
DEFERRED SALES CHARGE ALTERNATIVES--CLASS B AND CLASS C SHARES
The public offering price of Class B shares for investors choosing the
deferred sales charge alternative is the next determined net asset value per
share without the imposition of a sales charge at the time of purchase. Class C
shares of the Funds are not available for purchase but will be issued only
pursuant to the exchange privilege to holders of Class C shares of other
MLAM-advised mutual funds who elect to exchange Class C shares of such other
MLAM-advised mutual funds for Class C shares of one of the Funds. See
'Shareholder Services-- Exchange Privilege'. As discussed below, Class B and
Class C shares are subject to a one-year 1.0% CDSC. Approximately ten years
after Class B shares of a Fund are issued, such Class B shares, together with
shares issued upon dividend reinvestment with respect to those shares, are
automatically converted into Class D shares of that Fund and thereafter will be
subject to lower continuing fees. See 'Conversion of Class B Shares to Class D
Shares' below. Both Class B and Class C shares are subject to an account
maintenance fee of 0.15% of net assets and a distribution fee of 0.20% of net
assets as discussed below under 'Distribution Plans'. The proceeds from the
ongoing account maintenance fees are used to compensate Merrill Lynch for
providing continuing account maintenance activities.
38
<PAGE>
Class B and Class C shares are not subject to an initial sales charge;
therefore, Merrill Lynch compensates its financial consultants for selling Class
B and Class C shares of MLAM-advised mutual funds at the time of purchase from
its own funds. See 'Distribution Plans'.
Proceeds from the CDSCs and the distribution fee of a Fund are paid to the
Distributor and are used in whole or in part by the Distributor to defray the
expenses of dealers (including Merrill Lynch) related to providing
distribution-related services to that Fund in connection with the sale of its
Class B shares, such as the payment of compensation to financial consultants for
selling Class B shares of that Fund from its own funds. The combination of the
CDSC and the ongoing distribution fee facilitates the ability of a Fund to sell
its Class B shares without a sales charge being deducted at the time of
purchase.
Approximately ten years after issuance, Class B shares of each of the Funds
will convert automatically into Class D shares of the same Fund, which are
subject to a lower account maintenance fee and no distribution fee; Class B
shares of certain other MLAM-advised mutual funds into which exchanges may be
made convert into Class D shares automatically after approximately eight years.
If Class B shares of one of the Funds are exchanged for Class B shares of
another MLAM-advised mutual fund, the conversion period applicable to the Class
B shares acquired in the exchange will apply, and the holding period for the
shares exchanged will be tacked on to the holding period for the shares
acquired.
Imposition of the CDSC and the distribution fee on Class B shares is
limited by the NASD asset-based sales charge rule. See 'Limitations on the
Payment of Deferred Sales Charges' below. Class B shareholders of a Fund
exercising the exchange privilege described under 'Shareholder
Services--Exchange Privilege' will continue to be subject to that Fund's CDSC
schedule if such schedule is higher than the CDSC schedule relating to the Class
B shares acquired as a result of the exchange.
Contingent Deferred Sales Charges--Class B and Class C Shares. Class B and
Class C shares of a Fund which are redeemed within one year after acquisition
may be subject to a CDSC at the rates set forth below charged as a percentage of
the dollar amount subject thereto. The charge will be assessed on an amount
equal to the lesser of the proceeds of redemption or the cost of the shares
being redeemed. Accordingly, no CDSC will be imposed on increases in net asset
value above the initial purchase price. In addition, no CDSC will be assessed on
shares derived from reinvestment of dividends or capital gains distributions.
The following table sets forth the rates of the Class B and Class C CDSCs
for all Funds:
<TABLE>
<CAPTION>
CDSC AS
PERCENTAGE OF
DOLLAR AMOUNT
SUBJECT TO
YEARS SINCE PURCHASE PAYMENT MADE CHARGE
- ---------------------------------------------------------------------------------------- -------------
<S> <C>
0-1..................................................................................... 1.0%
1 and thereafter........................................................................ None
</TABLE>
39
<PAGE>
For the fiscal year ended July 31, 1996, the Distributor received CDSCs
from the Funds with respect to redemptions of Class B shares, all of which were
paid to Merrill Lynch, as follows:
<TABLE>
<CAPTION>
CDSCS RECEIVED
FUND BY DISTRIBUTOR
- --------------------------------------------------------------------------------------- --------------
<S> <C>
Arizona Fund........................................................................... $ 10,222
California Fund........................................................................ $ 3,456
Florida Fund........................................................................... $ 18,456
Massachusetts Fund..................................................................... $ 4,849
Michigan Fund.......................................................................... $ 6,724
New Jersey Fund........................................................................ $ 8,141
New York Fund.......................................................................... $ 6,475
Pennsylvania Fund...................................................................... $ 3,775
</TABLE>
For the fiscal year ended July 31, 1996, the Distributor received no CDSCs
with respect to redemptions of Class C shares. No Class C CDSC will be assessed
in connection with redemptions to fund participation in certain fee-based
programs. See 'Shareholder Services--Fee-Based Programs'.
In determining whether a CDSC is applicable to a redemption of Class B or
Class C shares, the calculation will be made in the manner that results in the
lowest applicable rate being charged. Therefore, it will be assumed that the
redemption is first of shares held for over one year or shares acquired pursuant
to reinvestment of dividends or distributions and then of shares held longest
during the one-year period. The charge will not be applied to dollar amounts
representing an increase in the net asset value since the time of purchase. A
transfer of shares from a shareholder's account to another account will be
assumed to be made in the same order as a redemption.
The Class B CDSC is waived on redemptions of shares following the death or
disability (as defined in the Code) of a shareholder. Additional information
concerning the waiver of the Class B CDSC is set forth in the Statement of
Additional Information. The terms of the CDSC may be modified in connection with
redemptions to fund participation in certain fee-based programs. See
'Shareholder Services--Fee-Based Programs'.
Conversion of Class B Shares to Class D Shares. After approximately ten
years (the 'Conversion Period'), Class B shares of a Fund will be converted
automatically into Class D shares of the same Fund. Class D shares are subject
to an ongoing account maintenance fee of 0.10% of net assets which is lower than
the account maintenance fee borne by the Class B shares, and Class D shares are
not subject to the distribution fee that is borne by Class B shares. Automatic
conversion of Class B shares into Class D shares will occur at least once each
month (on the 'Conversion Date') on the basis of the relative net asset values
of the shares of the two classes on the Conversion Date, without the imposition
of any sales load, fee or other charge. Conversion of Class B shares to Class D
shares will not be deemed a purchase or sale of the shares for Federal income
tax purposes.
In addition, shares purchased through reinvestment of dividends on Class B
shares also will convert automatically to Class D shares. The Conversion Date
for dividend reinvestment shares will be calculated taking into account the
length of time the shares underlying such dividend reinvestment shares were
outstanding. If at a Conversion Date the conversion of Class B shares to Class D
shares of a Fund in a single account will result in less than $50 worth of Class
B shares being left in the account, all of the Class B shares of that Fund held
in the account on the Conversion Date will be converted to Class D shares of
that Fund.
40
<PAGE>
Share certificates for Class B shares of the Fund to be converted must be
delivered to the Transfer Agent at least one week prior to the Conversion Date
applicable to those shares. In the event such certificates are not received by
the Transfer Agent at least one week prior to the Conversion Date, the related
Class B shares will convert to Class D shares on the next scheduled Conversion
Date after such certificates are delivered.
In general, Class B shares of equity MLAM-advised mutual funds will convert
approximately eight years after initial purchase, and Class B shares of taxable
and tax-exempt fixed income MLAM-advised mutual funds will convert approximately
ten years after initial purchase. If, during the Conversion Period, a
shareholder exchanges Class B shares with an eight-year Conversion Period for
Class B shares with a ten-year Conversion Period, or vice versa, the Conversion
Period applicable to the Class B shares acquired in the exchange will apply, and
the holding period for the shares exchanged will be tacked on to the holding
period for the shares acquired.
The Conversion Period may be modified for certain fee-based programs. See
'Shareholder Services--Fee-Based Programs'.
DISTRIBUTION PLANS
The Trust has adopted a separate distribution plan on behalf of each of the
Funds for Class B, Class C and Class D shares pursuant to Rule 12b-1 under the
1940 Act (each a 'Distribution Plan') with respect to the account maintenance
and/or distribution fees paid by the Funds to the Distributor with respect to
such classes. The Class B and Class C Distribution Plans provide for the payment
of account maintenance fees and distribution fees, and the Class D Distribution
Plan provides for the payment of account maintenance fees.
The Distribution Plans for Class B, Class C and Class D shares each provide
that the Fund pays the Distributor an account maintenance fee relating to the
shares of the relevant class, accrued daily and paid monthly, at the annual rate
of 0.15% (in the case of Class B and Class C shares) or 0.10% (in the case of
Class D shares) of the average daily net assets of the Fund attributable to
shares of the relevant class in order to compensate the Distributor and Merrill
Lynch (pursuant to a sub-agreement) in connection with account maintenance
activities.
The Distribution Plans for Class B and Class C shares each provide that the
Fund also pays the Distributor a distribution fee relating to the shares of the
relevant class, accrued daily and paid monthly, at the annual rate of 0.20% of
the average daily net assets of the Fund attributable to the shares of the
relevant class in order to compensate the Distributor and Merrill Lynch
(pursuant to a sub-agreement) for providing shareholder and distribution
services, and bearing certain distribution-related expenses of the Fund,
including payments to financial consultants for selling Class B and Class C
shares of the Fund. The Distribution Plans relating to Class B and Class C
shares are designed to permit an investor to purchase Class B and Class C shares
through dealers without the assessment of an initial sales charge and at the
same time permit the dealer to compensate its financial consultants in
connection with the sale of the Class B and Class C shares. In this regard, the
purpose and function of the ongoing distribution fees and the CDSC are the same
as those of the initial sales charge with respect to the Class A and Class D
shares of the Funds in that the deferred sales charges provide for the financing
of the distribution of the Funds' Class B and Class C shares.
41
<PAGE>
Set forth in the table below is information for each Fund pertaining to the
Fund's Distribution Plans for Class B, Class C and Class D shares for the fiscal
year ended July 31, 1996 and information with respect to the annual fee payable
pursuant to such Distribution Plans based on the net assets of each Fund as of
October 31, 1996.
<TABLE>
<CAPTION>
PAYMENT TO THE
DISTRIBUTOR, ALL OF WHICH
WAS PAID TO MERRILL LYNCH BASED ON AVERAGE NET NET ASSETS
($) ASSETS AS OF JULY 31, 1996($) AS OF OCTOBER 31, 1996($)
----------------------------- -------------------------------- ---------------------------------
CLASS B CLASS C CLASS D CLASS B CLASS C CLASS D CLASS B CLASS C CLASS D
------- ------- ------- -------- ------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Arizona ....... 15,724 68 655 4.5 45,456 655,171 2.8 136,461 412,372
Fund million million
California .... 35,889 103 1,776 10.3 58,005 1.8 9.2 55,254 2.1
Fund million million million million
Florida ....... 53,229 20 6,850 15.2 13,882 6.8 12.8 51,595 5.9
Fund million million million million
Massachusetts .... 17,257 558 565 4.9 372,041 564,924 4.5 267,506 739,074
Fund million million
Michigan ...... 7,629 1 415 2.2 1,153 414,649 1.7 1,183 485,048
Fund million million
New Jersey .... 22,973 174 310 6.6 115,966 310,391 4.7 272,937 558,023
Fund million million
New York ...... 34,048 206 2,638 9.7 137,248 2.6 9.7 206,236 4.9
Fund million million million million
Pennsylvania .... 24,307 41 725 6.9 27,261 725,614 6.1 1,207 1.8
Fund million million million
<CAPTION>
FEE PAYABLE TO
THE DISTRIBUTOR($)
----------------------------------
CLASS B CLASS C CLASS D
-------- -------- --------
<S> <C> <C> <C>
Arizona ....... 9,762 478 412
Fund
California .... 32,098 193 2,146
Fund
Florida ....... 44,649 181 5,873
Fund
Massachusetts . 15,872 936 739
Fund
Michigan ...... 6,058 4 485
Fund
New Jersey .... 16,350 955 558
Fund
New York ...... 34,022 722 4,937
Fund
Pennsylvania .. 21,265 4 1,828
Fund
</TABLE>
The payments under each of the Distribution Plans are based on a percentage
of average daily net assets attributable to the shares of the related Fund
regardless of the amount of expenses incurred, and, accordingly,
distribution-related revenues from the Distribution Plans may be more or less
than distribution-related expenses. Information with respect to the
distribution-related revenues and expenses of each Fund is presented to the
Trustees for their consideration in connection with their deliberations as to
the continuance of each of the Class B and Class C Distribution Plans. This
information is presented separately for each Fund annually as of December 31 of
each year on a 'fully allocated accrual' basis and quarterly on a 'direct
expense and revenue/cash' basis. On the fully allocated accrual basis, a Fund's
revenues consist of the account maintenance fees, distribution fees, the CDSCs
and certain other related revenues of that Fund, and expenses consist of
financial consultant compensation, branch office and regional operation center
selling and transaction processing expenses, advertising, sales promotion and
market expenses, corporate overhead and interest expense of that Fund. On the
direct expense and revenue/cash basis, revenues consist of the account
maintenance fees, distribution fees and CDSCs of that Fund, and the expenses
consist of financial consultant compensation of that Fund.
42
<PAGE>
The table below sets forth information with respect to Class B shares of
the Funds concerning direct cash revenues and expenses for the period November
26, 1993 (commencement of operations) to July 31, 1996 and fully allocated
accrual revenues and expenses incurred by the Distributor and Merrill Lynch for
the period November 26, 1993 (commencement of operations) to December 31, 1995.
<TABLE>
<CAPTION>
AMOUNT BY WHICH APPROXIMATE AMOUNT BY
DIRECT CASH REVENUES % OF CLASS B WHICH FULLY ALLOCATED ACCRUAL % OF CLASS B
EXCEEDED DIRECT CASH NET ASSETS EXPENSES EXCEEDED FULLY NET ASSETS
EXPENSES AS OF AT ALLOCATED ACCRUAL REVENUES AS OF AT
FUND 7/31/96($) 7/31/96 12/31/95($) 12/31/95
- -------------------------- ------------------------- ------------ -------------------------------- ------------
<S> <C> <C> <C> <C>
Arizona Fund.............. 29,410 1.02% 35,000 0.69%
California Fund........... 18,581 0.19% 97,000 0.94%
Florida Fund.............. 253,004 1.85% (53,000)* 0.33%
Massachusetts Fund........ 5,507 0.12% 73,000 1.49%
Michigan Fund............. 14,792 0.80% 12,000 0.55%
New Jersey Fund........... 20,242 0.39% 69,000 1.02%
New York Fund............. 22,736 2.26% 84,000 0.86%
Pennsylvania Fund......... 21,161 0.34% 74,000 1.07%
</TABLE>
- ------------
* Accrual revenues exceeded accrual expenses.
The table below sets forth information with respect to Class C shares of
the Funds concerning direct cash revenues and expenses for the period October
21, 1994 (commencement of operations) to July 31, 1996. Fully allocated accrual
data for Class C shares for the period October 21, 1994 (commencement of
operations) to December 31, 1995 is not presented because such revenues and
expenses are de minimis.
<TABLE>
<CAPTION>
AMOUNT BY WHICH
DIRECT CASH
REVENUES EXCEEDED % OF CLASS
DIRECT CASH C NET
EXPENSES AS OF ASSETS AT
FUND 7/31/96($) 7/31/96
- -------------------------------- ----------------- ----------
<S> <C> <C>
Arizona Fund.................... 68 0.05%
California Fund................. 118 0.21%
Florida Fund.................... 21 0.04%
Massachusetts Fund.............. 763 0.36%
Michigan Fund................... 2 0.17%
New Jersey Fund................. 198 0.07%
New York Fund................... 214 0.10%
Pennsylvania Fund............... 31 2.60%
</TABLE>
The Funds have no obligation with respect to distribution and/or account
maintenance-related expenses incurred by the Distributor and Merrill Lynch in
connection with Class B, Class C and Class D shares, and there is no assurance
that the Trustees of the Trust will approve the continuance of the Distribution
Plans from year to year. However, the Distributor intends to seek annual
continuation of the Distribution Plans. In their review of the Distribution
Plans, the Trustees will be asked to take into consideration expenses incurred
in connection with the account maintenance and/or distribution of each class of
shares separately. The initial sales charges, the account maintenance fee, the
distribution fee and/or the CDSCs received with respect to one class will not be
used to subsidize the sale of shares of another class. Payments of the
distribution fee on Class B shares will
43
<PAGE>
terminate upon conversion of those Class B shares into Class D shares as set
forth under 'Purchase of Shares-- Deferred Sales Charge Alternatives--Class B
and Class C Shares--Conversion of Class B Shares to Class D Shares'.
LIMITATIONS ON THE PAYMENT OF DEFERRED SALES CHARGES
The maximum sales charge rule in the Conduct Rules of the NASD imposes a
limitation on certain asset-based sales charges such as the distribution fee and
the CDSC borne by the Class B shares of each of the Funds, but not the account
maintenance fee. The maximum sales charge rule is applied separately to each
class. As applicable to each Fund, the maximum sales charge rule limits the
aggregate of distribution fee payments and CDSCs payable by each Fund to (1)
6.25% of eligible gross sales of Class B shares of that Fund (defined to exclude
shares issued pursuant to dividend reinvestments and exchanges) plus (2)
interest on the unpaid balance for the respective class, computed separately, at
the prime rate plus 1% (the unpaid balance being the maximum amount payable
minus amounts received from the payment of the distribution fee and the CDSC of
that Fund). In connection with the Class B shares, the Distributor has
voluntarily agreed to waive interest charges on the unpaid balance in excess of
0.50% of eligible gross sales. Consequently, the maximum amount payable to the
Distributor in connection with each Fund (referred to as the 'voluntary
maximum') in connection with the Class B shares is 6.75% of eligible gross sales
of that Fund. The Distributor retains the right to stop waiving the interest
charges at any time. To the extent a Fund's payments would exceed the voluntary
maximum, such Fund will not make further payments of the distribution fee with
respect to Class B shares and any CDSCs will be paid to the Fund rather than to
the Distributor; however, such Fund will continue to make payments of the
account maintenance fee. In certain circumstances the amount payable pursuant to
the voluntary maximum may exceed the amount payable under the NASD formula. In
such circumstances payments in excess of the amount payable under the NASD
formula will not be made.
REDEMPTION OF SHARES
The Trust is required to redeem for cash all shares of the Funds upon
receipt of a written request in proper form. The redemption price is the net
asset value per share next determined after the initial receipt of proper notice
of redemption. Except for any CDSC which may be applicable, there will be no
charge for redemption if the redemption request is sent directly to the Transfer
Agent. Shareholders liquidating their holdings will receive upon redemption all
dividends reinvested through the date of redemption. The value of shares at the
time of redemption may be more or less than the shareholder's cost, depending on
the market value of the securities held by a Fund at such time.
REDEMPTION
A shareholder wishing to redeem shares of a Fund may do so by tendering the
shares directly to the Transfer Agent, Merrill Lynch Financial Data Services,
Inc., P.O. Box 45289, Jacksonville, Florida 32232-5289. Redemption requests
delivered other than by mail should be delivered to Merrill Lynch Financial Data
Services, Inc., 4800 Deer Lake Drive East, Jacksonville, Florida 32246-6484.
Proper notice of redemption in the case of shares deposited with the Transfer
Agent may be accomplished by a written letter requesting redemption. Proper
notice of redemption in the case of shares of a Fund for which certificates have
been issued may be accomplished by a written letter as noted above accompanied
by certificates for the shares to be redeemed. Redemption requests should not be
sent to the Trust or any Fund. The notice in either event requires the
signature(s) of all persons in whose name(s) the shares are registered, signed
exactly as such name(s) appear(s) on the Transfer Agent's register. The
signature(s) on the redemption request must be guaranteed by an 'eligible
guarantor institution' as
44
<PAGE>
such term is defined in Rule 17Ad-15 under the Securities Exchange Act of 1934,
as amended, the existence and validity of which may be verified by the Transfer
Agent through the use of industry publications. Notarized signatures are not
sufficient. In certain instances, the Transfer Agent may require additional
documents such as, but not limited to, trust instruments, death certificates,
appointments as executor or administrator, or certificates of corporate
authority. For shareholders redeeming directly with the Transfer Agent, payments
will be mailed within seven days of receipt of a proper notice of redemption.
At various times the Trust may be requested to redeem shares of a Fund for
which it has not yet received good payment (e.g., cash, Federal funds or
certified check drawn on a United States bank). The Trust may delay or cause to
be delayed the mailing of a redemption check until such time as it has assured
itself that good payment has been collected for the purchase of such Fund
shares, which may take up to 10 days.
REPURCHASE
The Trust also will repurchase shares of a Fund through a shareholder's
listed securities dealer. The Trust normally will accept orders to repurchase
Fund shares by wire or telephone from dealers for their customers at the net
asset value next computed after receipt of the order by the dealer, provided
that the request for repurchase is received by the dealer prior to the close of
business on the NYSE (generally, 4:00 p.m., New York time) on the day received
and is received by a Fund from such dealer not later than 30 minutes after the
close of business on the NYSE on the same day. Dealers have the responsibility
of submitting such repurchase requests to the Trust not later than 30 minutes
after the close of business on the NYSE in order to obtain that day's closing
price.
The foregoing repurchase arrangements are for the convenience of
shareholders and do not involve a charge by the Trust (other than any applicable
CDSC); securities firms which do not have selected dealer agreements with the
Distributor, however, may impose a charge on the shareholder for transmitting
the notice of repurchase to the Trust. Merrill Lynch may charge its customers a
processing fee (presently $4.85) to confirm a repurchase of shares of such
customers. Repurchases directly through a Fund's Transfer Agent are not subject
to the processing fee. The Trust reserves the right to reject any order for
repurchase, which right of rejection might adversely affect shareholders seeking
redemption through the repurchase procedure. However, a shareholder whose order
for repurchase is rejected by the Trust may redeem Fund shares as set forth
above.
Redemption payments will be made within seven days of the proper tender of
the certificates, if any, and stock power or letter requesting redemption, in
each instance with signatures guaranteed as noted above.
REINSTATEMENT PRIVILEGE--CLASS A AND CLASS D SHARES
Shareholders who have redeemed their Class A or Class D shares of a Fund
have a privilege to reinstate their accounts by purchasing Class A or Class D
shares of that Fund at net asset value without a sales charge up to the dollar
amount redeemed. The reinstatement privilege may be exercised by sending a
notice of exercise along with a check for the amount to be reinstated to the
Transfer Agent within 30 days after the date the request for redemption was
accepted by the Transfer Agent or the Distributor. Alternatively, the
reinstatement privilege may be exercised through the investor's Merrill Lynch
Financial Consultant within 30 days after the date the request for redemption
was accepted by the Transfer Agent or the Distributor. The reinstatement will be
made at the net asset value per share next determined after the notice of
reinstatement is received and cannot exceed the amount of the redemption
proceeds.
45
<PAGE>
SHAREHOLDER SERVICES
The Trust offers a number of shareholder services and investment plans
designed to facilitate investment in shares of the Funds. Full details as to
each of such services, copies of the various plans described below, and
instructions as to how to participate in the various services or plans, or to
change options with respect thereto can be obtained from the Trust by calling
the telephone number on the cover page hereof or from the Distributor or Merrill
Lynch. Included in such services are the following:
INVESTMENT ACCOUNT
Each shareholder whose account is maintained at the Transfer Agent has an
Investment Account and will receive statements, at least quarterly, from the
Transfer Agent. These statements will serve as transaction confirmations for
automatic investment purchases and the reinvestment of ordinary income
dividends, and long-term capital gains distributions. The statements will also
show any other activity in the account since the preceding statement.
Shareholders will receive separate transaction confirmations for each purchase
or sale transaction other than automatic investment purchases and the
reinvestment of ordinary income dividends and long-term capital gains
distributions. A shareholder may make additions to his or her Investment Account
at any time by mailing a check directly to the Transfer Agent. Shareholders also
may maintain their accounts through Merrill Lynch. Upon the transfer of shares
out of a Merrill Lynch brokerage account, an Investment Account in the
transferring shareholder's name will be opened automatically at the Transfer
Agent. Shareholders considering transferring their Class A or Class D shares of
a Fund from Merrill Lynch to another brokerage firm or financial institution
should be aware that, if the firm to which the Class A or Class D shares are to
be transferred will not take delivery of shares of the Fund, a shareholder
either must redeem the Class A or Class D shares (paying any applicable CDSC) so
that the cash proceeds can be transferred to the account at the new firm or such
shareholder must continue to maintain an Investment Account at the Transfer
Agent for those Class A or Class D shares. Shareholders interested in
transferring their Class B or Class C shares of a Fund from Merrill Lynch and
who do not wish to have an Investment Account maintained for such shares at the
Transfer Agent may request their new brokerage firm to maintain such shares in
an account registered in the name of the brokerage firm for the benefit of the
shareholder at the Transfer Agent.
EXCHANGE PRIVILEGE
U.S. shareholders of each class of shares of each of the Funds have an
exchange privilege with certain other MLAM-advised mutual funds. There is
currently no limitation on the number of times a shareholder may exercise the
exchange privilege. The exchange privilege may be modified or terminated in
accordance with the rules of the Commission.
Under the Merrill Lynch Select Pricing(Service Mark) System, Class A
shareholders may exchange Class A shares of a Fund for Class A shares of a
second MLAM-advised mutual fund if the shareholder holds any Class A shares of
the second fund in his or her account in which the exchange is made at the time
of the exchange or is otherwise eligible to purchase Class A shares of the
second fund. If the Class A shareholder wants to exchange Class A shares for
shares of a second MLAM-advised mutual fund, and the shareholder does not hold
Class A shares of the second fund in his or her account at the time of the
exchange and is not otherwise eligible to acquire Class A shares of the second
fund, the shareholder will receive Class D shares of the second fund as a result
of the exchange. Class D shares also may be exchanged for Class A shares of a
second MLAM-advised mutual fund at any time as long as, at the time of the
exchange, the shareholder holds Class A shares of the second fund in the account
in which the exchange is made or is otherwise eligible to purchase Class A
shares of the second fund.
46
<PAGE>
Exchanges of Class A and Class D shares are made on the basis of the
relative net asset values per Class A or Class D share, respectively, plus an
amount equal to the difference, if any, between the sales charge previously paid
on the Class A or Class D shares being exchanged and the sales charge payable at
the time of the exchange on the shares being acquired.
Class B, Class C and Class D shares are exchangeable with shares of the
same class of other MLAM-advised mutual funds.
Shares of the Funds which are subject to a CDSC are exchangeable on the
basis of relative net asset value per share without the payment of any CDSC that
might otherwise be due upon redemption of the shares of that Fund. For purposes
of computing the CDSC that may be payable upon a disposition of the shares
acquired in the exchange, the holding period for the previously owned shares of
the Fund is tacked onto the holding period for the newly acquired shares of the
other fund.
Class A, Class B, Class C and Class D shares also are exchangeable for
shares of certain MLAM-advised money market funds specifically designated as
available for exchange by holders of Class A, Class B, Class C or Class D
shares. The period of time that Class A, Class B, Class C or Class D shares are
held in a money market fund, however, will not count toward satisfaction of the
holding period requirement for reduction of any CDSC imposed on such shares, if
any, and, with respect to Class B shares, toward satisfaction of the Conversion
Period.
Class B shareholders of a Fund exercising the exchange privilege will
continue to be subject to that Fund's CDSC schedule if such schedule is higher
than the CDSC schedule relating to the new Class B shares. In addition, Class B
shares of a Fund acquired through use of the exchange privilege will be subject
to the Fund's CDSC schedule if such schedule is higher than the CDSC schedule
relating to the Class B shares of the MLAM-advised mutual fund from which the
exchange has been made.
Exercise of the exchange privilege is treated as a sale for Federal income
tax purposes. For further information, see 'Shareholder Services--Exchange
Privilege' in the Statement of Additional Information.
AUTOMATIC REINVESTMENT OF DIVIDENDS AND CAPITAL GAINS DISTRIBUTIONS
All dividends and capital gains distributions are reinvested automatically
in full and fractional shares of a Fund, without a sales charge, at the net
asset value per share of that Fund at the close of business on the monthly
payment date for such dividends and distributions. A shareholder, at any time,
by written notification or by telephone (1-800-MER-FUND) to the Transfer Agent,
may elect to have subsequent dividends or both dividends and capital gains
distributions paid in cash, rather than reinvested, in which event payment will
be mailed on or about the payment date. Cash payments also can be directly
deposited to the shareholder's bank account. No CDSC will be imposed upon
redemption of shares issued as a result of the automatic reinvestment of
dividends or capital gains distributions.
SYSTEMATIC WITHDRAWAL PLANS
A Class A or Class D shareholder of a Fund may elect to receive systematic
withdrawal payments from his or her Investment Account through automatic payment
by check or through automatic payment by direct deposit to his or her bank
account on either a monthly or quarterly basis. Alternatively, a Class A or
Class D shareholder whose shares are held within a CMA(Registered) or
CBA(Registered) Account may elect to have shares redeemed on a monthly,
bimonthly, quarterly, semiannual or annual basis through the
CMA(Registered)/CBA(Registered) Systematic Redemption Program, subject to
certain conditions.
47
<PAGE>
AUTOMATIC INVESTMENT PLANS
Regular additions of Class A, Class B, Class C and Class D shares may be
made to an investor's Investment Account by prearranged charges of $50 or more
to his or her regular bank account. Alternatively, an investor who maintains a
CMA(Registered) or CBA(Registered) account may arrange to have periodic
investments made in a Fund in that CMA(Registered) or CBA(Registered) account or
in certain related accounts in amounts of $100 or more through the
CMA(Registered) or CBA(Registered) Automated Investment Program.
FEE-BASED PROGRAMS
Certain Merrill Lynch fee-based programs, including pricing alternatives
for securities transactions, (each referred to in this paragraph as a 'Program')
may permit the purchase of Class A shares at net asset value. Under specified
circumstances, participants in certain Programs may deposit other classes of
shares which will be exchanged for Class A shares. Initial or deferred sales
charges otherwise due in connection with such exchanges may be waived or
modifed, as may the Conversion Period applicable to the deposited shares.
Termination of participation in a Program may result in the redemption of shares
held therein or the automatic exchange thereof to another class at net asset
value, which may be shares of a money market fund. In addition, upon termination
of participation in a Program, shares that have been held for less than
specified periods within such Program may be subject to a fee based upon the
current value of such shares. These Programs also generally prohibit such shares
from being transferred to another account at Merrill Lynch, to another
broker-dealer or to the Transfer Agent. Except in limited circumstances (which
may also involve an exchange as described above), such shares must be redeemed
and another class of shares purchased (which may involve the imposition of
initial or deferred sales charges and distribution and account maintenance fees)
in order for the investment not to be subject to Program fees. Additional
information regarding a specific Program (including charges and limitations on
transferability applicable to shares that may be held in such Program) is
available in such Program's client agreement and from Merrill Lynch Investor
Services at (800) MER-FUND (637-3863).
PORTFOLIO TRANSACTIONS
Subject to the policies established by the Trustees of the Trust, the
Manager is primarily responsible for the execution of the Fund's portfolio
transactions. Municipal Bonds and other securities in which the Funds invest are
traded primarily in the over-the-counter market. Where possible, the Trust deals
directly with the dealers who make a market in the securities involved except in
those circumstances where better prices and execution are available elsewhere.
It is the policy of the Trust to obtain the best net results in conducting
portfolio transactions for the Funds, taking into account such factors as price
(including the applicable dealer spread), the size, type and difficulty of the
transactions involved, the firm's general execution and operations facilities,
and the firm's risk in positioning the securities involved and the provision of
supplemental investment research by the firm. While reasonably competitive
spreads or commissions are sought, the Funds will not necessarily be paying the
lowest spread or commission available. The sale of shares of the Funds may be
taken into consideration as a factor in the selection of brokers or dealers to
execute portfolio transactions for the Funds. The portfolio securities of the
Funds generally are traded on a principal basis and normally do not involve
either brokerage commissions or transfer taxes. The cost of portfolio securities
transactions of the Funds primarily consists of dealer or underwriter spreads.
Under the 1940 Act, persons affiliated with the Trust, including Merrill Lynch,
are prohibited from dealing with the Trust or any Fund as principals in the
purchase and sale of securities unless such trading is permitted by an exemptive
order issued by the Commission. The Trust has obtained an exemptive order
permitting it and each Fund to engage in certain principal transactions with
Merrill Lynch involving high quality short-term municipal securities, subject to
certain conditions. In addition, the Trust may not purchase securities,
48
<PAGE>
including Municipal Bonds, for the Funds during the existence of any
underwriting syndicate of which Merrill Lynch is a member except pursuant to
procedures approved by the Trustees of the Trust which comply with rules adopted
by the Commission. The Trust has applied for an exemptive order permitting it
to, among other things, (i) purchase high quality tax-exempt securities from
Merrill Lynch when Merrill Lynch is a member of an underwriting syndicate and
(ii) purchase tax-exempt securities from and sell tax-exempt securities to
Merrill Lynch in secondary market transactions. An affiliated person of the
Trust may serve as its broker in over-the-counter transactions conducted for the
Funds on an agency basis only.
Portfolio Turnover. Generally, the Funds do not purchase securities for
short-term trading profits. However, a Fund may dispose of securities without
regard to the time they have been held when such action, for defensive or other
reasons, appears advisable to the Manager. As a result of the investment
policies of the Funds, each Fund's portfolio turnover may be higher than that of
other investment companies; however, it is extremely difficult to predict
portfolio turnover rates with any degree of accuracy. Higher portfolio turnover
may contribute to higher transactional costs and negative tax consequences, such
as an increase in capital gain dividends or in ordinary income dividends of
accrued market discount, as well as greater difficulty meeting the requirement
for qualification as a regulated investment company that less than 30% of its
gross income be derived from the sale or other disposition of securities held
for less than three months. See 'Distributions and Taxes.' (The portfolio
turnover rate for a Fund is calculated by dividing the lesser of purchases or
sales of portfolio securities for the particular fiscal year by the monthly
average of the value of the portfolio securities owned by the Fund during the
particular fiscal year. For purposes of determining this rate, all securities
whose maturities at the time of acquisition are one year or less are excluded.)
For the fiscal years ended July 31, 1996 and 1995, the portfolio turnover
rates for each of the Funds were as follows:
<TABLE>
<CAPTION>
FOR THE YEAR ENDED
JULY 31,
----------------------------------------
FUND 1996 1995
- ----------------------------------------------------------------------- ------------------ ------------------
<S> <C> <C>
Arizona Fund........................................................... 43.53% 182.58%
California Fund........................................................ 11.09 124.72
Florida Fund........................................................... 39.90 138.97
Massachusetts Fund..................................................... 22.71 89.96
Michigan Fund.......................................................... 32.92 93.08
New Jersey Fund........................................................ 6.57 131.56
New York Fund.......................................................... 51.47 139.16
Pennsylvania Fund...................................................... 30.90 141.52
</TABLE>
For each of the Funds, the yield volatility exhibited by the municipal bond
market during the fiscal year ended July 31, 1995 contributed to recent
portfolio turnover. Each Fund's shift to a more defensive posture necessitated a
significant portfolio restructuring which led to increased trading activity for
the fiscal year ended July 31, 1995.
49
<PAGE>
DISTRIBUTIONS AND TAXES
DISTRIBUTIONS
The net investment income of each Fund is declared as dividends, prior to
the determination of the net asset value which is calculated 15 minutes after
the close of business on the NYSE (generally 4:00 p.m., New York time) on that
day. The net investment income of each Fund for dividend purposes consists of
interest earned on portfolio securities, less expenses, in each case computed
since the most recent determination of the net asset value. Expenses of each
Fund, including the management fees and account maintenance fees and
distribution fees with respect to Class B and Class C shares of that Fund and
account maintenance fees with respect to Class D shares of that Fund, are
accrued daily. Dividends of net investment income of a Fund are declared daily
and reinvested monthly in the form of additional full and fractional shares of
that Fund at net asset value unless the shareholder elects to receive such
dividends in cash. Shares will accrue dividends as long as they are issued and
outstanding. Shares are issued and outstanding from the settlement date of a
purchase order to the day prior to the settlement date of a redemption order.
All net realized long- or short-term capital gains of a Fund, if any, are
declared and distributed to that Fund's shareholders at least annually. Capital
gains distributions will be reinvested automatically in shares of a Fund unless
the shareholder elects to receive such distributions in cash.
The per share dividends and distributions on each class of shares of a Fund
will be reduced as a result of any account maintenance, distribution and
transfer agency fees applicable to that class. See 'Additional
Information--Determination of Net Asset Value'.
See 'Shareholder Services' for information as to how to elect either
dividend reinvestment or cash payments. Portions of dividends and distributions
which are taxable to shareholders as described below are subject to income tax
whether they are reinvested in shares of a Fund or received in cash.
TAXES
Federal. The Trust intends to continue to qualify each Fund for the
special tax treatment afforded regulated investment companies ('RICs') under the
Code. If a Fund so qualifies, the Fund (but not its shareholders) will not be
subject to Federal income tax to the extent that it distributes its net
investment income and net realized capital gains. The Trust intends to cause
each Fund to distribute substantially all of such income.
To the extent that the dividends distributed to a Fund's Class A, Class B,
Class C and Class D shareholders (together, the 'shareholders') are derived from
interest income exempt from Federal income tax under Code Section 103(a) and are
properly designated as 'exempt-interest dividends' by the Trust, they will be
excludable from a shareholder's gross income for Federal income tax purposes.
Exempt-interest dividends are included, however, in determining the portion, if
any, of a person's social security benefits and railroad retirement benefits
subject to Federal income taxes. The Trust will inform shareholders annually as
to the portion of each Fund's distributions which constitutes exempt-interest
dividends and which is exempt from Federal income tax. Interest on indebtedness
incurred or continued to purchase or carry Fund shares is not deductible for
Federal income tax purposes to the extent attributable to exempt-interest
dividends. Persons who may be 'substantial users' (or 'related persons' of
substantial users) of facilities financed by industrial development bonds or
private activity bonds held by a Fund should consult their tax advisors before
purchasing Fund shares.
To the extent that a Fund's distributions are derived from interest on its
taxable investments or from an excess of net short-term capital gains over net
long-term capital losses ('ordinary income dividends'), such
50
<PAGE>
distributions are considered ordinary income for Federal income tax purposes.
Distributions, if any, from an excess of net long-term capital gains over net
short-term capital losses derived from the sale of securities or from certain
transactions in futures or options ('capital gain dividends') are taxable as
long-term capital gains for Federal income tax purposes, regardless of the
length of time the shareholder has owned Fund shares. Distributions by the Fund,
whether from exempt-interest income, ordinary income or capital gains, will not
be eligible for the dividends received deduction allowed to corporations under
the Code.
All or a portion of each Fund's gain from the sale or redemption of
tax-exempt obligations purchased at a market discount will be treated as
ordinary income rather than capital gain. This rule may increase the amount of
ordinary income dividends received by shareholders. Distributions in excess of
the Fund's earnings and profits will first reduce the adjusted tax basis of a
holder's shares and, after such adjusted tax basis is reduced to zero, will
constitute capital gains to such holder (assuming the shares are held as a
capital asset). Any loss upon the sale or exchange of shares held for six months
or less will be disallowed to the extent of any exempt-interest dividends
received by the shareholder. In addition, any such loss that is not disallowed
under the rule stated above will be treated as long-term capital loss to the
extent of any capital gain dividends received by the shareholder. If a Fund pays
a dividend in January which was declared in the previous October, November or
December to shareholders of record on a specified date in one of such months,
then such dividend will be treated for tax purposes as being paid by the Fund
and received by its shareholders on December 31 of the year in which such
dividend was declared.
The Code subjects interest received on certain otherwise tax-exempt
securities to an alternative minimum tax. The alternative minimum tax applies to
interest received on certain 'private activity bonds' issued after August 7,
1986. Private activity bonds are bonds which, although tax-exempt, are used for
purposes other than those generally performed by governmental units and which
benefit non-governmental entities (e.g., bonds used for industrial development
or housing purposes). Income received on such bonds is classified as an item of
'tax preference', which could subject certain investors in such bonds, including
shareholders of a Fund, to an alternative minimum tax. Each Fund will purchase
such 'private activity bonds' and the Trust will report to shareholders within
60 days after each Fund's taxable year-end the portion of its dividends declared
during the year which constitutes an item of tax preference for alternative
minimum tax purposes. The Code further provides that corporations are subject to
an alternative minimum tax based, in part, on certain differences between
taxable income as adjusted for other tax preferences and the corporation's
'adjusted current earnings', which more closely reflect a corporation's economic
income. Because an exempt-interest dividend paid by a Fund will be included in
adjusted current earnings, a corporate shareholder may be required to pay
alternative minimum tax on exempt-interest dividends paid by such Fund.
No gain or loss will be recognized by Class B shareholders on the
conversion of their Class B shares into Class D shares. A shareholder's basis in
the Class D shares acquired will be the same as such shareholder's basis in the
Class B shares converted, and the holding period of the acquired Class D shares
will include the holding period for the converted Class B shares.
If a shareholder exercises an exchange privilege within 90 days of
acquiring the shares, then the loss the shareholder can recognize on the
exchange will be reduced (or the gain increased) to the extent any sales charge
paid to the Fund on the exchanged shares reduces any sales charge the
shareholder would have owed upon purchase of the new shares in the absence of
the exchange privilege. Instead, such sales charge will be treated as an amount
paid for the new shares.
A loss realized on a sale or exchange of shares of a Fund will be
disallowed if other Fund shares are acquired (whether through the automatic
reinvestment of dividends or otherwise) within a 61-day period
51
<PAGE>
beginning 30 days before and ending 30 days after the date that the shares are
disposed of. In such a case, the basis of the shares acquired will be adjusted
to reflect the disallowed loss.
Under certain Code provisions, some shareholders may be subject to a 31%
withholding tax on certain ordinary income dividends and on capital gain
dividends and redemption payments ('backup withholding'). Generally,
shareholders subject to backup withholding will be those for whom no certified
taxpayer identification number is on file with the Trust or who, to the Trust's
knowledge, have furnished an incorrect number. When establishing an account, an
investor must certify under penalty of perjury that such number is correct and
that such investor is not otherwise subject to backup withholding.
The Code provides that every person required to file a tax return must
include for information purposes on such return the amount of exempt-interest
dividends received from all sources (including each Fund), during the taxable
year.
The foregoing is a general and abbreviated summary of the applicable
provisions of the Code and Treasury regulations presently in effect. For the
complete provisions, reference should be made to the pertinent Code sections and
the Treasury regulations promulgated thereunder. The Code and the Treasury
regulations are subject to change by legislative, judicial or administrative
action either prospectively or retroactively.
Shareholders are urged to consult their tax advisors regarding specific
questions as to Federal, foreign, state or local taxes.
State. The State Municipal Bonds in which each Fund will invest consist of
obligations with remaining maturities of between one and ten years which are
issued by or on behalf of the designated state or its political subdivisions,
agencies or instrumentalities, and obligations of other qualifying issuers, such
as issuers located in Puerto Rico, the Virgin Islands and Guam. State Municipal
Bonds pay interest which is exempt, in the opinion of bond counsel to the
issuer, from Federal income taxes, personal income taxes in the designated state
and, in certain instances, franchise and local personal income taxes. In certain
states, State Municipal Bonds are exempt from intangible personal property taxes
in the designated state.
Exempt-interest dividends paid by a Fund and attributable to interest
income from State Municipal Bonds of a designated state generally will be exempt
from income taxation to shareholders otherwise subject to personal income
taxation by such designated state or in some cases, franchise or local personal
income taxes. Shareholders subject to income taxation by states other than the
Fund's designated state will realize a lower after-tax rate of return than
shareholders in that state since the dividends distributed by a Fund generally
will not be exempt, to any significant degree, from income taxation by any state
other than that Fund's designated state. The Trust will inform shareholders
annually as to the portion of a Fund's distributions which constitutes
exempt-interest dividends and the portion which is not subject to state and, if
applicable, city income or franchise taxes. Interest on indebtedness incurred or
continued to purchase or carry Fund shares generally will not be deductible for
state personal income tax purposes to the extent attributable to interest income
exempt from personal income taxation by the designated state.
The foregoing description relates generally to state personal income tax
issues; investors should consult with their tax advisors with respect to such
taxes as well as state corporate income or franchise taxes and any state or
local income taxes not described above, as well as to the availability of any
exemptions from state or local income taxes. Additional considerations relating
to income taxation in the various states is set forth under 'Distributions and
Taxes' in the Statement of Additional Information.
52
<PAGE>
PERFORMANCE DATA
From time to time each Fund may include its average annual total return,
yield and tax-equivalent yield for various specified time periods in
advertisements or information furnished to present or prospective shareholders.
Average annual total return, yield and tax-equivalent yield are computed in
accordance with formulas specified by the Commission.
Average annual total return quotations for the specified periods will be
computed by finding the average annual compounded rates of return (based on net
investment income and any realized and unrealized capital gains or losses on
portfolio investments over such periods) that would equate the initial amount
invested to the redeemable value of such investment at the end of each period.
Average annual total return is computed assuming all dividends and distributions
are reinvested and taking into account all applicable recurring and nonrecurring
expenses, including any CDSC that would be applicable to a complete redemption
of the investment at the end of the specified period such as in the case of
Class B and Class C shares of that Fund and the maximum sales charge in the case
of Class A and Class D shares of that Fund. Dividends paid by each Fund with
respect to all shares, to the extent any dividends are paid, will be calculated
in the same manner at the same time on the same day and will be in the same
amount, except that account maintenance fees and distribution charges and any
incremental transfer agency costs relating to each class of shares will be borne
exclusively by that class. Each Fund will include performance data for all
classes of shares of that Fund in any advertisement or information including
performance data of that Fund.
The Funds also may quote total return and aggregate total return
performance data for various specified time periods. Such data will be
calculated substantially as described above, except that (1) the rates of return
calculated will not be average annual rates, but rather, actual annual,
annualized or aggregate rates of return and (2) the maximum applicable sales
charges will not be included with respect to annual or annualized rates of
return calculations. Aside from the impact on the performance data calculations
of including or excluding the maximum applicable sales charges, actual annual or
annualized total return data generally will be lower than average annual total
return data since the average annual rates of return reflect compounding and
aggregate total return data generally will be higher than average annual total
return data since the aggregate rates of return reflect compounding over a
longer period of time. In advertisements distributed to investors whose
purchases are subject to waiver of the CDSC in the case of Class B and Class C
shares or to reduced sales charges in the case of Class A and Class D shares,
performance data may take into account the reduced, and not the maximum, sales
charge or may not take into account the CDSC and therefore may reflect greater
total return since, due to the reduced sales charges or waiver of the CDSC, a
lower amount of expenses is deducted. See 'Purchase of Shares'. A Fund's total
return may be expressed either as a percentage or as a dollar amount in order to
illustrate such total return on a hypothetical $1,000 investment in the Fund at
the beginning of each specified period.
Yield quotations will be computed based on a 30-day period by dividing (a)
the net income based on the yield of each security earned during the period by
(b) the average daily number of shares outstanding during the period that were
entitled to receive dividends multiplied by (c) the maximum offering price per
share on the last day of the period. Tax-equivalent yield quotations will be
computed by dividing (a) the part of the Fund's yield that is tax-exempt by (b)
one minus a stated tax rate and (c) adding the result to that part, if any, of
the Fund's yield that is not tax-exempt.
The following sets forth the yield for the Class A, Class B, Class C and
Class D shares of each of the Funds for the 30-day period ended July 31, 1996.
The table also sets forth the tax-equivalent yield (based on a Federal
53
<PAGE>
income tax rate of 28%) for the Class A, Class B, Class C and Class D shares of
each of the Funds for the same period.
<TABLE>
<CAPTION>
CLASS A CLASS B CLASS C CLASS D
---------------------- ---------------------- ---------------------- ----------------------
30-DAY TAX-EQUIVALENT 30-DAY TAX-EQUIVALENT 30-DAY TAX-EQUIVALENT 30-DAY TAX-EQUIVALENT
YIELD YIELD YIELD YIELD YIELD YIELD YIELD YIELD
------ -------------- ------ -------------- ------ -------------- ------ --------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Arizona Fund.......... 3.63% 5.04% 3.31% 4.60% 3.51% 4.88% 3.53% 4.90%
California Fund....... 3.26% 4.53% 2.94% 4.08% 3.21% 4.46% 3.16% 4.39%
Florida Fund.......... 3.61% 5.01% 3.29% 4.57% 3.47% 4.82% 3.51% 4.88%
Massachusetts
Fund................ 3.63% 5.04% 3.31% 4.60% 3.51% 4.88% 3.53% 4.90%
Michigan Fund......... 3.68% 5.11% 3.35% 4.65% 3.35% 4.65% 3.58% 4.97%
New Jersey Fund....... 3.54% 4.92% 3.23% 4.49% 3.43% 4.76% 3.45% 4.79%
New York Fund......... 3.92% 5.44% 3.61% 5.01% 3.80% 5.28% 3.83% 5.32%
Pennsylvania
Fund................ 3.54% 4.92% 3.22% 4.47% 3.38% 4.69% 3.44% 4.78%
</TABLE>
Total return, yield and tax-equivalent yield figures are based on a Fund's
historical performance and are not intended to indicate future performance. A
Fund's total return, yield and tax-equivalent yield will vary depending on
market conditions, the securities comprising the Fund's portfolio, the Fund's
operating expenses and the amount of realized and unrealized net capital gain or
losses during the period. The value of an investment in a Fund will fluctuate
and an investor's shares, when redeemed, may be worth more or less than their
original cost. Investors' tax-equivalent yields may differ from those listed
above because of the application of state and local income and intangibles taxes
and Federal income tax rates which are higher or lower than 28%.
On occasion, a Fund may compare its performance to performance data
published by Lipper Analytical Services, Inc., Morningstar Publications, Inc.
('Morningstar') and CDA Investment Technology, Inc., or to data contained in
publications such as Money Magazine, U.S. News & World Report, Business Week,
Forbes Magazine and Fortune Magazine. From time to time, a Fund may include its
Morningstar risk-adjusted performance ratings in advertisements or supplemental
sales literature. As with other performance data, performance comparisons should
not be considered indicative of a Fund's relative performance for any future
period.
54
<PAGE>
ADDITIONAL INFORMATION
DETERMINATION OF NET ASSET VALUE
The net asset value of all of the classes of shares of each Fund is
determined by the Manager once daily 15 minutes after the close of business on
the NYSE (generally, 4:00 p.m., New York time), on each day during which the
NYSE is open for trading. The net asset value per share is computed by dividing
the sum of the value of the securities held by a Fund plus any cash or other
assets minus all liabilities by the total number of shares outstanding at such
time, rounded to the nearest cent. Expenses, including the fees payable to the
Manager and the Distributor, are accrued daily.
The net asset value per share of the shares of all classes of a Fund are
expected to be equivalent. Under certain circumstances, however, the per share
net asset value of Class A shares of that Fund will be higher than the per share
net asset value of shares of the other classes, reflecting the daily expense
accruals of the account maintenance, distribution and higher transfer agency
fees applicable with respect to Class B and Class C shares and the daily expense
accruals of the account maintenance fees applicable with respect to Class D
shares; moreover, the per share net asset value of Class D shares generally will
be higher than the per share net asset value of Class B and Class C shares,
reflecting the daily expense accruals of the distribution fees and the higher
account maintenance and transfer agency fees applicable with respect to Class B
and Class C shares. It is expected, however, that the per share net asset value
of the classes will tend to converge (although not necessarily meet) immediately
after the payment of dividends or distributions, which will differ by
approximately the amount of the expense accrual differentials between the
classes.
ORGANIZATION OF THE TRUST
The Trust is an unincorporated business trust organized on February 14,
1991 under the laws of Massachusetts. The Trust is an open-end management
investment company comprised of separate series ('Series'), each of which is a
separate portfolio offering shares to selected groups of purchasers. Each of the
Series is managed independently in order to provide to shareholders who are
residents of the state to which such Series relates as high a level of income
exempt from Federal and, in certain cases, state and local personal income taxes
as is consistent with prudent investment management. The Trustees are authorized
to create an unlimited number of Series and, with respect to each Series, to
issue an unlimited number of full and fractional shares of beneficial interest
of $.10 par value of different classes. Shareholder approval is not required for
the authorization of additional Series or classes of a Series of the Trust. At
the date of this Prospectus, the shares of each Fund are divided into four
classes designated Class A, Class B, Class C and Class D shares. Each share of
Class A, Class B, Class C and Class D represents an interest in the same assets
of a Fund and have identical voting, dividend, liquidation and other rights and
the same terms and conditions except that Class B, Class C and Class D shares
bear certain expenses related to the account maintenance associated with such
shares, and Class B and Class C shares bear certain expenses related to the
distribution of such shares. Each class has exclusive voting rights with respect
to matters relating to such expenditures, as applicable. See 'Purchase of
Shares'. The Trustees of the Trust may classify and reclassify the shares of any
Series into additional classes at a future date.
Shareholders are entitled to one vote for each full share and to fractional
votes for fractional shares held in the election of Trustees (to the extent
hereinafter provided) and on other matters submitted to the vote of
shareholders. All shares of the Trust have equal voting rights, except that only
shares of the respective Series are entitled to vote on matters concerning only
that Series and, as noted above, only Class B, Class C and Class D shares of a
Series will have exclusive voting rights with respect to matters relating to the
account maintenance and distribution expenditures being borne solely by such
class. There normally will be no meeting of
55
<PAGE>
shareholders for the purpose of electing Trustees unless and until such time as
less than a majority of the Trustees holding office have been elected by
shareholders, at which time the Trustees then in office will call a
shareholders' meeting for the election of Trustees. Shareholders, in accordance
with the terms of the Declaration of Trust, may cause a meeting of shareholders
to be held for the purpose of voting on the removal of Trustees. Also, the Trust
will be required to call a special meeting of shareholders of a Series in
accordance with the requirements of the 1940 Act to seek approval of new
management and advisory arrangements, of a material increase in distribution
fees or of a change in the fundamental policies, objectives or restrictions of a
Series. Except as set forth above, the Trustees shall continue to hold office
and appoint successor Trustees. Each issued and outstanding share is entitled to
participate equally in dividends and distributions declared by the respective
Series and in net assets of such Series upon liquidation or dissolution
remaining after satisfaction of outstanding liabilities except that, as noted
above, the Class B, Class C and Class D shares of a Series bear certain
additional expenses. The obligations and liabilities of a particular Series are
restricted to the assets of that Series and do not extend to the assets of the
Trust generally. The shares of each Series, when issued, will be fully-paid and
non-assessable by the Trust.
SHAREHOLDER REPORTS
Only one copy of each shareholder report and certain shareholder
communications will be mailed to each identified shareholder regardless of the
number of accounts such shareholder has. If a shareholder wishes to receive
separate copies of each report and communication for each of the shareholder's
related accounts, the shareholder should notify in writing:
Merrill Lynch Financial Data Services, Inc.
P.O. Box 45289
Jacksonville, FL 32232-5289
The written notification should include the shareholder's name, address,
tax identification number and Merrill Lynch, Pierce, Fenner & Smith Incorporated
and/or mutual fund account numbers. Shareholders having any questions regarding
this matter should call their Merrill Lynch Financial Consultant or Merrill
Lynch Financial Data Services, Inc. at 800-637-3863.
SHAREHOLDER INQUIRIES
Shareholder inquiries may be addressed to the Trust at the address or
telephone number set forth on the cover page of this Prospectus.
The Declaration of Trust establishing the Trust, dated February 14, 1991, a
copy of which together with all amendments thereto (the 'Declaration') is on
file in the office of the Secretary of the Commonwealth of Massachusetts,
provides that the name 'Merrill Lynch Multi-State Limited Maturity Municipal
Series Trust' refers to the Trustees under the Declaration collectively as
Trustees, but not as individuals or personally; and no Trustee, shareholder,
officer, employee or agent of the Trust shall be held to any personal liability,
nor shall resort be had to such person's private property for the satisfaction
of any obligation or claim of the Trust, but the 'Trust Property' (as defined in
the Declaration) only shall be liable.
56
<PAGE>
MERRILL LYNCH MULTI-STATE LIMITED MATURITY
MUNICIPAL SERIES TRUST -- AUTHORIZATION FORM (PART 1)
- --------------------------------------------------------------------------------
1. SHARE PURCHASE APPLICATION
I, being of legal age, wish to purchase: (choose one)*
/ / Class A shares / / Class B shares / / Class D shares
of
<TABLE>
<S> <C>
/ / Merrill Lynch Arizona Limited Maturity Municipal Bond / / Merrill Lynch Michigan Limited Maturity Municipal Bond
Fund Fund
/ / Merrill Lynch California Limited Maturity Municipal Bond / / Merrill Lynch New Jersey Limited Maturity Municipal Bond
Fund Fund
/ / Merrill Lynch Florida Limited Maturity Municipal Bond / / Merrill Lynch New York Limited Maturity Municipal Bond
Fund Fund
/ / Merrill Lynch Massachusetts Limited Maturity Municipal / / Merrill Lynch Pennsylvania Limited Maturity Municipal
Bond Fund Bond Fund
(THE FUND SELECTED ABOVE IS HEREIN REFERRED TO AS THE 'FUND')
and establish an Investment Account as described in the Prospectus. In the event that I am not eligible to purchase Class
A shares, I understand that Class D shares will be purchased.
</TABLE>
Basis for establishing an Investment Account:
A. I enclose a check for $.......payable to Merrill Lynch Financial Data
Services, Inc. as an initial investment (minimum $1,000).
I understand that this purchase will be executed at the applicable offering
price next to be determined after this Application is received by you.
B. I already own shares of the following Merrill Lynch mutual funds that
would qualify for the Right of Accumulation as outlined in the Statement of
Additional Information: (Please list all funds. Use a separate sheet of
paper if necessary.)
<TABLE>
<S> <C>
1. ........................................................ 4. ........................................................
2. ........................................................ 5. ........................................................
3. ........................................................ 6. ........................................................
(PLEASE PRINT)
</TABLE>
<TABLE>
<S> <C> <C>
Name......................................................................................................................
First Name Initial Last
Name
Name of Co-Owner (if any).................................................................................................
First Name Initial Last
Name
Address......................................................................... Date......................, 19.........
..........................................................................................................................
(Zip Code)
Occupation................................................ Name and Address of Employer..............................
..........................................................
..........................................................
.......................................................... ..........................................................
Signature of Owner Signature of Co-Owner (if any)
(In the case of co-owners, a joint tenancy with right of survivorship will be presumed unless otherwise specified.)
</TABLE>
- --------------------------------------------------------------------------------
2. DIVIDEND AND CAPITAL GAIN DISTRIBUTION OPTION
<TABLE>
<S> <C>
Ordinary Income Dividends Long-Term Capital Gains
SELECT / / Reinvest SELECT / / Reinvest
ONE: / / Cash ONE: / / Cash
</TABLE>
If no election is made, dividends and capital gains will be automatically
reinvested at net asset value without a sales charge.
IF CASH, SPECIFY HOW YOU WOULD LIKE YOUR DISTRIBUTIONS PAID TO YOU: / / Check
or / / Direct Deposit to bank account
IF DIRECT DEPOSIT TO BANK ACCOUNT IS SELECTED, PLEASE COMPLETE BELOW:
I hereby authorize payment of dividend and capital gain distributions by direct
deposit to my bank account and, if necessary, debit entries and adjustments for
any credit entries made to my account in accordance with the terms I have
selected on the Merrill Lynch Multi-State Limited Maturity Municipal Series
Trust Authorization Form.
Specify type of account (check one): / / checking / / savings
Name on your Account ...........................................................
Bank Name ......................................................................
Bank Number ......................... Account Number .........................
Bank Address ...................................................................
I AGREE THAT THIS AUTHORIZATION WILL REMAIN IN EFFECT UNTIL I PROVIDE WRITTEN
NOTIFICATION TO MERRILL LYNCH FINANCIAL DATA SERVICES, INC. AMENDING OR
TERMINATING THIS SERVICE.
Signature of Depositor .........................................................
Signature of Depositor ......................... Date ........................
(if joint account, both must sign)
NOTE: IF DIRECT DEPOSIT TO BANK ACCOUNT IS SELECTED, YOUR BLANK, UNSIGNED CHECK
MARKED 'VOID' OR A DEPOSIT SLIP FROM YOUR SAVINGS ACCOUNT SHOULD ACCOMPANY THIS
APPLICATION.
57
<PAGE>
MERRILL LYNCH MULTI-STATE LIMITED MATURITY
MUNICIPAL SERIES TRUST -- AUTHORIZATION FORM (PART 1) -- (CONTINUED)
- --------------------------------------------------------------------------------
3. SOCIAL SECURITY NUMBER OR TAXPAYER IDENTIFICATION NUMBER
[ ]
Social Security Number or Taxpayer Identification Number
Under penalty of perjury, I certify (1) that the number set forth above is
my correct Social Security Number or Taxpayer Identification Number and (2) that
I am not subject to backup withholding (as discussed in the Prospectus under
'Distributions and Taxes--Taxes') either because I have not been notified that I
am subject thereto as a result of a failure to report all interest or dividends,
or the Internal Revenue Service ('IRS') has notified me that I am no longer
subject thereto.
INSTRUCTION: YOU MUST STRIKE OUT THE LANGUAGE IN (2) ABOVE IF YOU HAVE BEEN
NOTIFIED THAT YOU ARE SUBJECT TO BACKUP WITHHOLDING DUE TO UNDERREPORTING AND IF
YOU HAVE NOT RECEIVED A NOTICE FROM THE IRS THAT BACKUP WITHHOLDING HAS BEEN
TERMINATED. THE UNDERSIGNED AUTHORIZES THE FURNISHING OF THIS CERTIFICATION TO
OTHER MERRILL LYNCH SPONSORED MUTUAL FUNDS.
<TABLE>
<S> <C>
...................................... .......................................
Signature of Owner Signature of Co-Owner (if any)
</TABLE>
- --------------------------------------------------------------------------------
4. LETTER OF INTENTION--CLASS A AND CLASS D SHARES ONLY (SEE TERMS AND
CONDITIONS IN THE STATEMENT OF ADDITIONAL INFORMATION)
.................. , 19 ......
Date of Initial Purchase
Dear Sir/Madam:
Although I am not obligated to do so, I intend to purchase shares of the
Fund or any other investment company with an initial sales charge or
deferred sales charge for which the Merrill Lynch Funds Distributor, Inc. acts
as distributor over the next 13 month period which will equal or exceed:
/ / $100,000 / / $250,000 / / $500,000 / / $1,000,000
Each purchase will be made at the then reduced offering price applicable to
the amount checked above, as described in the Merrill Lynch Multi-State Limited
Maturity Municipal Series Trust Prospectus.
I agree to the terms and conditions of this Letter of Intention. I hereby
irrevocably constitute and appoint Merrill Lynch Funds Distributor, Inc. my
attorney, with full power of substitution, to surrender for redemption any or
all shares of Merrill Lynch Multi-State Limited Maturity Municipal Series Trust
held as security.
<TABLE>
<S> <C>
By: ................................... .......................................
Signature of Owner Signature of Co-Owner
(If registered in joint names, both
must sign)
</TABLE>
In making purchases under this letter, the following are the related
accounts on which reduced offering prices are to apply:
<TABLE>
<S> <C>
(1) Name .............................. (2) Name ..............................
Account Number ........................ Account Number ........................
</TABLE>
- --------------------------------------------------------------------------------
5. FOR DEALER ONLY
Branch Office, Address, Stamp
<TABLE>
<S> <C> <C>
</TABLE>
This form, when completed, should be mailed to:
Merrill Lynch Multi-State Limited Maturity Municipal Series Trust
c/o Merrill Lynch Financial Data Services, Inc.
P.O. Box 45289
Jacksonville, Florida 32232-5289
We hereby authorize Merrill Lynch Funds Distributor, Inc. to act as our agent in
connection with transactions under this authorization form and agree to notify
the Distributor of any purchases or sales made under a Letter of Intention,
Automatic Investment Plan or Systematic Withdrawal Plan. We guarantee the
Shareholder's signature.
...............................................................................
Dealer Name and Address
By:.............................................................................
Authorized Signature of Dealer
<TABLE>
<S> <C>
[ ][ ][ ] [ ][ ][ ][ ] .......................................
Branch Code F/C No. F/C Last Name
[ ][ ][ ] [ ][ ][ ][ ][ ]
Dealer's Customer Account No.
</TABLE>
58
<PAGE>
MERRILL LYNCH MULTI-STATE LIMITED MATURITY
MUNICIPAL SERIES TRUST -- AUTHORIZATION FORM (PART 2)
- --------------------------------------------------------------------------------
NOTE: THIS FORM IS REQUIRED TO APPLY FOR THE SYSTEMATIC WITHDRAWAL OR AUTOMATIC
INVESTMENT PLANS ONLY.
- --------------------------------------------------------------------------------
---------------------------------------
1. ACCOUNT |______________________________________|
REGISTRATION Social Security No.
(Please Print) or Taxpayer Identification Number
Name of Owner .............................................
First Name Initial Last Name
Name of Co-Owner (if any) .................................
First Name Initial Last Name
Account Number .............................................
(if existing account)
Address ....................................
...........................................
(Zip Code)
- ----------------------------------------------------------------------------
2. SYSTEMATIC WITHDRAWAL PLAN--CLASS A AND D SHARES ONLY (SEE TERMS AND
CONDITIONS IN THE STATEMENT OF ADDITIONAL INFORMATION)
MINIMUM REQUIREMENTS: $10,000 for monthly disbursements, $5,000 for quarterly,
of / / Class A or / / Class D shares in (choose one)
<TABLE>
<S> <C>
/ / Merrill Lynch Arizona Limited Maturity Municipal Bond / / Merrill Lynch Michigan Limited Maturity Municipal Bond
Fund Fund
/ / Merrill Lynch California Limited Maturity Municipal Bond / / Merrill Lynch New Jersey Limited Maturity Municipal Bond
Fund Fund
/ / Merrill Lynch Florida Limited Maturity Municipal Bond / / Merrill Lynch New York Limited Maturity Municipal Bond
Fund Fund
/ / Merrill Lynch Massachusetts Limited Maturity Municipal / / Merrill Lynch Pennsylvania Limited Maturity Municipal
Bond Fund Bond Fund
</TABLE>
(THE FUND SELECTED ABOVE IS HEREIN REFERRED TO AS THE 'FUND')
at cost or current offering price. Withdrawals to be made either (check one) / /
Monthly on the 24th day of each month, or / / Quarterly on the 24th day of
March, June, September and December. If the 24th falls on a weekend or holiday,
the next succeeding business day will be utilized. Begin systematic withdrawal
on ________ or as soon as possible thereafter.
(month)
SPECIFY HOW YOU WOULD LIKE YOUR WITHDRAWAL PAID TO YOU (CHECK ONE): / /
$_________ or / /_________% of the current value of / / Class A or / / Class D
shares in the account.
SPECIFY WITHDRAWAL METHOD: / / check or / / direct deposit to bank account
(check one and complete part (a) or (b) below):
DRAW CHECKS PAYABLE (CHECK ONE)
(a) I hereby authorize payment by check
/ / as indicated in Item 1.
/ / to the order of .......................................................
Mail to (check one)
/ / the address indicated in Item 1.
/ / Name (please print) ...................................................
Address .......................................................................
........................................
Signature of Owner ....................... Date .......................
Signature of Co-Owner (if any) ..........................................
(B) I HEREBY AUTHORIZE PAYMENT BY DIRECT DEPOSIT TO BANK ACCOUNT AND, IF
NECESSARY, DEBIT ENTRIES AND ADJUSTMENTS FOR ANY CREDIT ENTRIES MADE TO MY
ACCOUNT. I AGREE THAT THIS AUTHORIZATION WILL REMAIN IN EFFECT UNTIL I PROVIDE
WRITTEN NOTIFICATION TO MERRILL LYNCH FINANCIAL DATA SERVICES, INC. AMENDING OR
TERMINATING THIS SERVICE.
Specify type of account (check one): / / checking / / savings
Name on your Account ..........................................................
Bank Name .....................................................................
Bank Number ......................... Account Number ........................
Bank Address ..................................................................
........................................
Signature of Depositor ........................ Date ........................
Signature of Depositor ........................................................
(If joint account, both must sign)
NOTE: IF DIRECT DEPOSIT IS ELECTED, YOUR BLANK, UNSIGNED CHECK MARKED 'VOID' OR
A DEPOSIT SLIP FROM YOUR SAVINGS ACCOUNT SHOULD ACCOMPANY THIS APPLICATION.
59
<PAGE>
MERRILL LYNCH MULTI-STATE LIMITED MATURITY
MUNICIPAL SERIES TRUST -- AUTHORIZATION FORM (PART 2) -- (CONTINUED)
- --------------------------------------------------------------------------------
3. APPLICATION FOR AUTOMATIC INVESTMENT PLAN
I hereby request that Merrill Lynch Financial Data Services, Inc. draw an
automated clearing house ('ACH') debit on my checking account as described below
each month to purchase: (choose one)
/ / Class A shares / / Class B shares / / Class D shares
of the Fund subject to the terms set forth below. In the event that I am not
eligible to purchase Class A shares, I understand that Class D shares will be
purchased.
MERRILL LYNCH FINANCIAL DATA SERVICES, INC.
You are hereby authorized to draw an ACH debit each month on my bank account for
investment in the Fund as indicated below:
Amount of each ACH debit $ ................................................
Account No. ...............................................................
Please date and invest ACH debits on the 20th of each month
beginning ___________________________________ or as soon thereafter as possible.
(Month)
I agree that you are drawing these ACH debits voluntarily at my request and
that you shall not be liable for any loss arising from any delay in preparing or
failure to prepare any such debit. If I change banks or desire to terminate or
suspend this program, I agree to notify you promptly in writing. I hereby
authorize you to take any action to correct erroneous ACH debits of my bank
account or purchases of Fund shares including liquidating shares of the Fund and
credit my bank account. I further agree that if a debit is not honored upon
presentation, Merrill Lynch Financial Data Services, Inc. is authorized to
discontinue immediately the Automatic Investment Plan and to liquidate
sufficient shares held in my account to offset the purchase made with the
dishonored debit.
<TABLE>
<S> <C>
...................................... .......................................
Date Signature of Depositor
.......................................
Signature of Depositor
(If joint account, both must sign)
</TABLE>
AUTHORIZATION TO HONOR ACH DEBITS
DRAWN BY MERRILL LYNCH FINANCIAL DATA
SERVICES, INC.
To ....................................................................... Bank
(Investor's Bank)
Bank Address ..................................................................
City ............ State ............ Zip Code ...............................
As a convenience to me, I hereby request and authorize you to pay and charge to
my account ACH debits drawn on my account by and payable to Merrill Lynch
Financial Data Services, Inc. I agree that your rights in respect to each such
debit shall be the same as if it were a check drawn on you and signed personally
by me. This authority is to remain in effect until revoked by me in writing.
Until you receive such notice, you shall be fully protected in honoring any such
debit. I further agree that if any such debit be dishonored, whether with or
without cause and whether intentionally or inadvertently, you shall be under no
liability.
<TABLE>
<S> <C>
...................................... .......................................
Date Signature of Depositor
...................................... .......................................
Bank Account Number Signature of Depositor
(If joint account, both must sign)
</TABLE>
NOTE: IF AUTOMATIC INVESTMENT PLAN IS ELECTED, YOUR BLANK, UNSIGNED CHECK MARKED
'VOID' SHOULD ACCOMPANY THIS APPLICATION.
60
<PAGE>
MANAGER
Fund Asset Management
Administrative Offices:
800 Scudders Mill Road
Plainsboro, New Jersey 08536
Mailing Address:
P.O. Box 9011
Princeton, New Jersey 08543-9011
DISTRIBUTOR
Merrill Lynch Funds Distributor, Inc.
Administrative Offices:
800 Scudders Mill Road
Plainsboro, New Jersey 08536
Mailing Address:
P.O. Box 9081
Princeton, New Jersey 08543-9081
CUSTODIAN
The Bank of New York
90 Washington Street
12th Floor
New York, New York 10005
TRANSFER AGENT
Merrill Lynch Financial Data Services, Inc.
Administrative Offices:
4800 Deer Lake Drive East
Jacksonville, Florida 32246-6484
Mailing Address:
P.O. Box 45289
Jacksonville, Florida 32232-5289
INDEPENDENT AUDITORS
Deloitte & Touche LLP
117 Campus Drive
Princeton, New Jersey 08540-6400
COUNSEL
Brown & Wood LLP
One World Trade Center
New York, New York 10048-0557
<PAGE>
NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATIONS, OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS, IN CONNECTION
WITH THE OFFER CONTAINED IN THIS PROSPECTUS, AND, IF GIVEN OR MADE, SUCH OTHER
INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED
BY THE TRUST, THE MANAGER OR THE DISTRIBUTOR. THIS PROSPECTUS DOES NOT
CONSTITUTE AN OFFERING IN ANY STATE IN WHICH SUCH OFFERING MAY NOT LAWFULLY BE
MADE.
------------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Fee Table................................... 3
Merrill Lynch Select Pricing(SM) System..... 7
Financial Highlights........................ 11
Investment Objectives and Policies.......... 19
Potential Benefits........................ 21
Risk Factors and Special Considerations... 22
Description of Municipal Bonds............ 24
When-Issued Securities and Delayed
Delivery Transactions................... 26
Indexed and Inverse Floating
Obligations............................. 26
Synthetic Short-Term Municipal Bonds...... 27
Call Rights............................... 27
Financial Futures Contracts and Options
Thereon................................. 28
Repurchase Agreements..................... 30
Investment Restrictions................... 30
Management of the Trust..................... 32
Trustees.................................. 32
Management and Advisory Arrangements...... 32
Code of Ethics............................ 33
Transfer Agency Services.................. 33
Purchase of Shares.......................... 34
Initial Sales Charge Alternatives--Class A
and Class D Shares...................... 36
Deferred Sales Charge Alternatives--Class
B and Class C Shares.................... 38
Distribution Plans........................ 41
Limitations on the Payment of Deferred
Sales Charges........................... 44
Redemption of Shares........................ 44
Redemption................................ 44
Repurchase................................ 45
Reinstatement Privilege--Class A and Class
D Shares................................ 45
Shareholder Services........................ 46
Investment Account........................ 46
Exchange Privilege........................ 46
Automatic Reinvestment of Dividends and
Capital Gains Distributions............. 47
Systematic Withdrawal Plans............... 47
Automatic Investment Plans................ 48
Fee-Based Programs........................ 48
Portfolio Transactions...................... 48
Distributions and Taxes..................... 50
Distributions............................. 50
Taxes..................................... 50
Performance Data............................ 53
Additional Information...................... 55
Determination of Net Asset Value.......... 55
Organization of the Trust................. 55
Shareholder Reports....................... 56
Shareholder Inquiries..................... 56
Authorization Form.......................... 57
</TABLE>
Code # 16925-1196
Merrill Lynch Multi-
State Limited Maturity
Municipal Series Trust
Merrill Lynch Arizona Limited
Maturity Municipal Bond Fund
Merrill Lynch California Limited
Maturity Municipal Bond Fund
Merrill Lynch Florida Limited
Maturity Municipal Bond Fund
Merrill Lynch Massachusetts Limited
Maturity Municipal Bond Fund
Merrill Lynch Michigan Limited
Maturity Municipal Bond Fund
Merrill Lynch New Jersey Limited
Maturity Municipal Bond Fund
Merrill Lynch New York Limited
Maturity Municipal Bond Fund
Merrill Lynch Pennsylvania Limited
Maturity Municipal Bond Fund
PROSPECTUS
November 27, 1996
Distributor:
Merrill Lynch
Funds Distributor, Inc.
This Prospectus should be
retained for future reference.
<PAGE>
STATEMENT OF ADDITIONAL INFORMATION
MERRILL LYNCH MULTI-STATE LIMITED MATURITY MUNICIPAL SERIES TRUST
<TABLE>
<S> <C>
MERRILL LYNCH ARIZONA LIMITED MATURITY MERRILL LYNCH MICHIGAN LIMITED MATURITY
MUNICIPAL BOND FUND MUNICIPAL BOND FUND
MERRILL LYNCH CALIFORNIA LIMITED MATURITY MERRILL LYNCH NEW JERSEY LIMITED MATURITY
MUNICIPAL BOND FUND MUNICIPAL BOND FUND
MERRILL LYNCH FLORIDA LIMITED MATURITY MERRILL LYNCH NEW YORK LIMITED MATURITY
MUNICIPAL BOND FUND MUNICIPAL BOND FUND
MERRILL LYNCH MASSACHUSETTS LIMITED MATURITY MERRILL LYNCH PENNSYLVANIA LIMITED MATURITY
MUNICIPAL BOND FUND MUNICIPAL BOND FUND
</TABLE>
P.O. BOX 9011, PRINCETON, NEW JERSEY 08543-9011 o PHONE NO. (609) 282-2800
Merrill Lynch Multi-State Limited Maturity Municipal Series Trust (the
'Trust'), an open-end management investment company organized as a Massachusetts
business trust, consists of eight separate series: Merrill Lynch Arizona Limited
Maturity Municipal Bond Fund (the 'Arizona Fund'), Merrill Lynch California
Limited Maturity Municipal Bond Fund (the 'California Fund'), Merrill Lynch
Florida Limited Maturity Municipal Bond Fund (the 'Florida Fund'), Merrill Lynch
Massachusetts Limited Maturity Municipal Bond Fund (the 'Massachusetts Fund'),
Merrill Lynch Michigan Limited Maturity Municipal Bond Fund (the 'Michigan
Fund'), Merrill Lynch New Jersey Limited Maturity Municipal Bond Fund (the 'New
Jersey Fund'), Merrill Lynch New York Limited Maturity Municipal Bond Fund (the
'New York Fund') and Merrill Lynch Pennsylvania Limited Maturity Municipal Bond
Fund (the 'Pennsylvania Fund') (together, the 'Funds'). The investment objective
of each Fund is to provide shareholders with as high a level of income exempt
from Federal income taxes and personal income taxes imposed by the designated
state (and, in certain instances, local personal income taxes) as is consistent
with prudent investment management. Under normal market conditions, each Fund
invests primarily in a portfolio of intermediate-term investment grade
obligations of the designated state or its political subdivisions, agencies or
instrumentalities, or certain other jurisdictions, that pay interest exempt, in
the opinion of bond counsel to the issuer, from Federal income taxes and
personal income taxes of the designated state and, where applicable, local
personal income taxes. There can be no assurance that the investment objective
of any Fund will be realized.
Pursuant to the Merrill Lynch Select Pricing(Service Mark) System, each
Fund offers four classes of shares, each with a different combination of sales
charges, ongoing fees and other features. The Merrill Lynch Select
Pricing(Service Mark) System permits an investor to choose the method of
purchasing shares that the investor believes is most beneficial given the amount
of the purchase, the length of time the investor expects to hold the shares and
other relevant circumstances.
------------------------
The Statement of Additional Information of the Trust and each Fund is not a
prospectus and should be read in conjunction with the prospectus of the Trust
and each Fund, dated November 27, 1996 (the 'Prospectus'), which has been filed
with the Securities and Exchange Commission (the 'Commission') and can be
obtained, without charge, by calling or by writing the Trust at the above
telephone number or address. This Statement of Additional Information has been
incorporated by reference into the Prospectus. Capitalized terms used but not
defined herein have the same meanings as in the Prospectus.
------------------------
FUND ASSET MANAGEMENT -- MANAGER
MERRILL LYNCH FUNDS DISTRIBUTOR, INC. -- DISTRIBUTOR
------------------------
THE DATE OF THIS STATEMENT OF ADDITIONAL INFORMATION IS NOVEMBER 27, 1996
<PAGE>
INVESTMENT OBJECTIVES AND POLICIES
The investment objective of each Fund is to provide shareholders with as
high a level of income exempt from Federal income taxes, the designated state's
personal income taxes and, where applicable, local personal income taxes, as is
consistent with prudent investment management. Each Fund seeks to achieve its
objective by investing primarily in a portfolio of intermediate-term investment
grade obligations issued by or on behalf of the designated state or its
political subdivisions, agencies or instrumentalities, and obligations of other
qualifying issuers, such as issuers located in Puerto Rico, the Virgin Islands
and Guam. Such obligations pay interest exempt, in the opinion of bond counsel
to the issuer, from Federal income taxes, the designated state's personal income
taxes and, in certain instances, local personal income taxes. Obligations that
pay interest exempt from Federal income taxes are referred to herein as
'Municipal Bonds'. Obligations that pay interest exempt from Federal income
taxes, the designated state's personal income taxes and, where applicable, local
personal income taxes, and obligations that would not subject shareholders to
intangible personal property taxes in the designated state, are referred to
herein as 'State Municipal Bonds'. Unless otherwise indicated, references to
Municipal Bonds shall be deemed to include State Municipal Bonds. Each Fund
anticipates that at all times, except during temporary defensive periods, it
will maintain at least 65% of its total assets invested in its respective State
Municipal Bonds; the New Jersey Fund will maintain at least 80% of its total
assets invested in New Jersey State Municipal Bonds. At times, a Fund may seek
to hedge its portfolio through the use of futures transactions to reduce
volatility in the net asset value of Fund shares. Reference is made to
'Investment Objectives and Policies' in the Prospectus for a discussion of the
investment objective and policies of each Fund.
Each Fund will invest primarily in Municipal Bonds with remaining
maturities of between one and ten years. It is anticipated that, depending on
market conditions, the dollar weighted average maturity of each Fund's portfolio
will not exceed five years. For purposes of these investment policies, an
obligation will be treated as having a maturity earlier than its stated maturity
date if such obligation has technical features which, in the judgment of Fund
Asset Management, L.P. (the 'Manager'), will result in the obligation being
valued in the market as though it has such earlier maturity. Interest rates on
shorter-term Municipal Bonds may fluctuate more widely from time to time than
interest rates on longer-term Municipal Bonds. However, because of their limited
maturities, the market value of the Municipal Bonds held by each Fund can be
expected to fluctuate less as a result of changes in interest rates.
Municipal Bonds may include general obligation bonds of a state and its
political subdivisions, revenue bonds to finance utility systems, highways,
bridges, port and airport facilities, colleges, hospitals, housing facilities,
etc., and industrial development bonds or private activity bonds. The interest
on such obligations may bear a fixed rate or be payable at a variable or
floating rate. The Municipal Bonds purchased by each Fund will be primarily what
are commonly referred to as 'investment grade' securities, which are obligations
rated at the time of purchase within the four highest quality ratings as
determined by either Moody's Investors Service, Inc. ('Moody's') (currently Aaa,
Aa, A and Baa), Standard & Poor's Ratings Services ('Standard & Poor's')
(currently AAA, AA, A and BBB) or Fitch Investors Service, Inc. ('Fitch')
(currently AAA, AA, A and BBB). If unrated, such securities will possess
creditworthiness comparable, in the opinion of the Manager, to investment grade
obligations.
Certain Municipal Bonds may be entitled to the benefits of letters of
credit or similar credit enhancements issued by financial institutions. In such
instances, the Trustees and the Manager will take into account in assessing the
quality of such obligations not only the creditworthiness of the issuer of such
obligations but also the creditworthiness of the financial institution. In
evaluating the creditworthiness of the financial institution, the Trustees and
the Manager will consider factors such as whether the letter of credit or
similar credit enhancement being issued is conditional or unconditional.
The Funds ordinarily do not intend to realize investment income not exempt
from Federal income taxes, the designated state's personal income taxes and,
where applicable, local personal income taxes, or to hold investments that would
subject shareholders to intangible personal property taxes in the designated
state. However, to the extent that suitable State Municipal Bonds are not
available for investment by a Fund, a Fund may purchase Municipal Bonds issued
by other states or their agencies or instrumentalities, the interest income
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on which is exempt, in the opinion of bond counsel to the issuer, from Federal
but not the designated state's taxation. Each Fund also may invest in securities
not issued by or on behalf of a state or territory or by an agency or
instrumentality thereof, if the Fund nevertheless believes such securities to be
exempt from Federal income taxation ('Non-Municipal Tax-Exempt Securities').
Non-Municipal Tax-Exempt Securities may include securities issued by other
investment companies that invest in municipal bonds, to the extent permitted by
applicable law. Other Non-Municipal Tax-Exempt Securities could include trust
certificates or other instruments evidencing interests in one or more long-term
municipal securities.
Except when acceptable securities are unavailable as determined by the
Manager, each Fund, under normal circumstances, will invest at least 65% (80% in
the case of the New Jersey Fund) of its total assets in its respective State
Municipal Bonds. For temporary defensive purposes or to provide liquidity, each
Fund has the authority to invest in tax-exempt or taxable money market
obligations with maturities of one year or less (such short-term obligations
being referred to herein as 'Temporary Investments'), except that taxable
Temporary Investments shall not exceed 20% of a Fund's net assets. Each Fund at
all times will have at least 80% of its net assets invested in securities exempt
from Federal income taxation. However, interest received on certain otherwise
tax-exempt securities which are classified as 'private activity bonds' (in
general, bonds that benefit non-governmental entities) may be subject to an
alternative minimum tax. Each Fund may purchase such private activity bonds. See
'Distributions and Taxes'. In addition, each Fund reserves the right to invest
temporarily a greater portion of its assets in Temporary Investments for
defensive purposes, when, in the judgment of the Manager, market conditions
warrant. The investment objective of each Fund set forth in this paragraph is a
fundamental policy of the Fund which may not be changed without a vote of a
majority of the outstanding shares of the Fund. A Fund's hedging strategies are
not fundamental policies and may be modified by the Trustees of the Trust
without the approval of the Fund's shareholders.
Municipal Bonds at times may be purchased or sold on a delayed delivery
basis or on a when-issued basis. These transactions arise when securities are
purchased or sold by a Fund with payment and delivery taking place in the
future, often a month or more after the purchase. The payment obligation and the
interest rate are each fixed at the time the buyer enters into the commitment. A
Fund only will make commitments to purchase such securities with the intention
of actually acquiring the securities, but a Fund (subject to any state or local
personal income tax limitations) may sell these securities prior to the
settlement date if it is deemed advisable. Purchasing Municipal Bonds on a
when-issued basis involves the risk that the yields available in the market when
the delivery takes place actually may be higher than those obtained in the
transaction itself; if yields so increase, the value of the when-issued
obligations generally will decrease. Each Fund will maintain a separate account
at its custodian bank consisting of cash, cash equivalents or liquid securities
or Temporary Investments (valued on a daily basis) equal at all times to the
amount of the when-issued commitment.
The Funds may invest in Municipal Bonds (and Non-Municipal Tax-Exempt
Securities) the return on which is based on a particular index of value or
interest rates. For example, the Funds may invest in Municipal Bonds that pay
interest based on an index of Municipal Bond interest rates or based on the
value of gold or some other commodity. The principal amount payable upon
maturity of certain Municipal Bonds also may be based on the value of an index.
To the extent the Funds invest in these types of Municipal Bonds, their return
on such Municipal Bonds will be subject to risk with respect to the value of the
particular index, which may include reduced or eliminated interest payments and
losses of invested principal. Also, the Funds may invest in so-called 'inverse
floating obligations' or 'residual interest bonds' on which the interest rates
typically vary inversely with a short-term floating rate (which may be reset
periodically by a dutch auction, by a remarketing agent or by reference to a
short-term tax-exempt interest rate index). The Funds may purchase original
issue inverse floating rate bonds in both the primary and secondary markets and
also may purchase in the secondary market synthetically-created inverse floating
rate bonds evidenced by custodial or trust receipts. Generally, interest rates
on inverse floating rate bonds will decrease when short-term rates increase and
increase when short-term rates decrease. Such securities have the effect of
providing a degree of investment leverage, since they may increase or decrease
in value in response to changes, as an illustration, in market interest rates at
a rate which is a multiple (typically two) of the rate at which fixed-rate,
long-term, tax-exempt securities increase or decrease in response to such
changes. As a result, the market values of such securities generally will be
more volatile than the market
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values of fixed-rate, tax-exempt securities. To seek to limit the volatility of
these securities, the Funds may purchase inverse floating obligations with
shorter term maturities or which contain limitations on the extent to which the
interest rate may vary. The Manager believes that indexed and inverse floating
obligations represent flexible portfolio management instruments for the Funds
which allow the Funds to seek potential investment rewards, hedge other
portfolio positions or vary the degree of investment leverage relatively
efficiently under different market conditions. Certain investments in such
obligations may be illiquid. A Fund may not invest in such illiquid obligations
if such investments, together with other illiquid investments, would exceed 15%
of that Fund's total assets.
The Funds may purchase a Municipal Bond issuer's right to call all or a
portion of such Municipal Bond for mandatory tender for purchase (a 'Call
Right'). A holder of a Call Right may exercise such right to require a mandatory
tender for the purchase of related Municipal Bonds, subject to certain
conditions. A Call Right that is not exercised prior to the maturity of the
related Municipal Bond will expire without value. The economic effect of holding
both the Call Right and the related Municipal Bond is identical to holding a
Municipal Bond as a non-callable security. Certain investments in such
obligations may be illiquid. A Fund may not invest in such illiquid obligations
if such investments, together with other illiquid investments, would exceed 15%
of that Fund's total assets.
A Fund may invest up to 20% of its total assets in Municipal Bonds which
are rated below Baa by Moody's or below BBB by Standard & Poor's or Fitch or
which, in the Manager's judgment, possess similar credit characteristics ('high
yield securities'). See Appendix I--'Ratings of Municipal Bonds' for additional
information regarding ratings of debt securities. The Manager considers the
ratings assigned by Standard & Poor's, Moody's or Fitch as one of several
factors in its independent credit analysis of issuers.
High yield securities are considered by Standard & Poor's, Moody's and
Fitch to have varying degrees of speculative characteristics. Consequently,
although high yield securities can be expected to provide higher yields, such
securities may be subject to greater market price fluctuations and risk of loss
of principal than lower yielding, higher rated debt securities. Investments in
high yield securities will be made only when, in the judgment of the Manager,
such securities provide attractive total return potential relative to the risk
of such securities, as compared to higher quality debt securities. The Funds
generally will not invest in debt securities in the lowest rating categories
(those rated CC or lower by Standard & Poor's or Fitch or Ca or lower by
Moody's) unless the Manager believes that the financial condition of the issuer
or the protection afforded the particular securities is stronger than otherwise
would be indicated by such low ratings.
Issuers or obligors of high yield securities may be highly leveraged and
may not have available to them more traditional methods of financing. Therefore,
the risks associated with acquiring the securities of such issuers or obligors
generally are greater than is the case with higher rated securities. For
example, during an economic downturn or a sustained period of rising interest
rates, issuers or obligors of high yield securities may be more likely to
experience financial stress, especially if such issuers or obligors are highly
leveraged. In addition, the market for high yield municipal securities is
relatively new and has not weathered a major economic recession, and it is
unknown what effects such a recession might have on such securities. During such
periods, such issuers may not have sufficient revenues to meet their interest
payment obligations. The issuer's ability to service its debt obligations also
may be adversely affected by specific issuer developments, or the issuer's
inability to meet specific projected business forecasts, or the unavailability
of additional financing. The risk of loss due to default by the issuer is
significantly greater for the holders of high yield securities because such
securities may be unsecured and may be subordinated to other creditors of the
issuer.
High yield securities frequently have call or redemption features that
would permit an issuer to repurchase the security from a Fund. If a call were
exercised by the issuer during a period of declining interest rates, a Fund
likely would have to replace such called security with a lower yielding
security, thus decreasing the net investment income to the Fund and dividends to
shareholders.
The Funds may have difficulty disposing of certain high yield securities
because there may be a thin trading market for such securities. Because not all
dealers maintain markets in all high yield securities, there is no established
secondary market for many of these securities, and the Funds anticipate that
such securities could be
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<PAGE>
sold only to a limited number of dealers or institutional investors. To the
extent that a secondary trading market for high yield securities does exist, it
generally is not as liquid as the secondary market for higher rated securities.
Reduced secondary market liquidity may have an adverse impact on market price
and a Fund's ability to dispose of particular issues when necessary to meet the
Fund's liquidity needs or in response to a specific economic event such as a
deterioration in the creditworthiness of the issuer. Reduced secondary market
liquidity for certain securities also may make it more difficult for a Fund to
obtain accurate market quotations for purposes of valuing the Fund's portfolio.
Market quotations generally are available on many high yield securities only
from a limited number of dealers and may not necessarily represent firm bids of
such dealers or prices for actual sales.
It is expected that a significant portion of the high yield securities
acquired by a Fund will be purchased upon issuance, which may involve special
risks because the securities so acquired are new issues. In such instances the
Fund may be a substantial purchaser of the issue and therefore have the
opportunity to participate in structuring the terms of the offering. Although
this may enable a Fund to seek to protect itself against certain of such risks,
the considerations discussed herein would nevertheless remain applicable.
Adverse publicity and investor perceptions, which may not be based on
fundamental analysis, also may decrease the value and liquidity of high yield
securities, particularly in a thinly traded market. Factors adversely affecting
the market value of high yield securities are likely to affect adversely a
Fund's net asset value. In addition, a Fund may incur additional expenses to the
extent that it is required to seek recovery upon a default on a portfolio
holding or participate in the restructuring of the obligation.
DESCRIPTION OF MUNICIPAL BONDS AND TEMPORARY INVESTMENTS
Set forth below is a description of the Municipal Bonds and Temporary
Investments in which each Fund may invest. A more complete discussion concerning
futures and options transactions and Municipal Bonds is set forth under
'Investment Objectives and Policies' in the Prospectus. Information with respect
to ratings assigned to tax-exempt obligations which the Funds may purchase is
set forth in Appendix I to this Statement of Additional Information.
DESCRIPTION OF MUNICIPAL BONDS
Municipal Bonds include debt obligations issued to obtain funds for various
public purposes, including construction of a wide range of public facilities,
refunding outstanding obligations and obtaining funds for general operating
expenses and loans to other public institutions and facilities. In addition,
certain types of industrial development bonds or private activity bonds are
issued by or on behalf of public authorities to finance various privately owned
or operated facilities. Such obligations are included within the term Municipal
Bonds if the interest paid thereon, in the opinion of bond counsel, is excluded
from gross income for Federal income tax purposes ('exempt from Federal income
tax'). Such obligations are referred to herein as State Municipal Bonds if the
interest paid thereon is exempt, in the opinion of bond counsel, from Federal
income taxes, the designated state's personal income taxes and, where
applicable, local personal income taxes, and if the Fund's investment in such
obligations would not subject Fund shareholders to intangible personal property
taxes in the designated state. Other types of industrial development bonds or
private activity bonds, the proceeds of which are used for the construction,
equipment or improvement of privately operated industrial or commercial
facilities, may constitute Municipal Bonds, although the current Federal tax
laws place substantial limitations on the size of such issues.
The two principal classifications of Municipal Bonds are 'general
obligation' bonds and 'revenue' bonds, which latter category includes industrial
development bonds ('IDBs') and, for bonds issued after August 15, 1986, private
activity bonds. General obligation bonds are secured by the issuer's pledge of
its faith, credit and taxing power for the payment of principal and interest.
Revenue bonds are payable only from the revenues derived from a particular
facility or class of facilities or, in some cases, from the proceeds of a
special or limited tax or other specific revenue source such as payments from
the user of the facility being financed. IDBs and, in the case of bonds issued
after August 15, 1986, private activity bonds are in most cases revenue bonds
and generally do not constitute the pledge of the credit or taxing power of the
issuer of such bonds. Generally, the
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payment of the principal of and interest on such bonds depends solely on the
ability of the user of the facility financed by the bonds to meet its financial
obligations and the pledge, if any, of real and personal property so financed as
security for such payment, unless a line of credit, bond insurance or other
security is furnished. The Funds may invest in Municipal Bonds that are
so-called 'moral obligation' bonds, which normally are issued by special purpose
public authorities. If an issuer of moral obligation bonds is unable to meet its
obligations, the repayment of such bonds becomes a moral commitment, but not a
legal obligation, of the state or municipality in question.
Also included within the general category of Municipal Bonds are
participation certificates issued by government authorities or entities to
finance the acquisition or construction of equipment, land and/or facilities.
The certificates represent participations in a lease, an installment purchase
contract or a conditional sales contract (hereinafter collectively called 'lease
obligations') relating to such equipment, land or facilities. Although lease
obligations do not constitute general obligations of the issuer for which the
issuer's unlimited taxing power is pledged, a lease obligation frequently is
backed by the issuer's covenant to budget for, appropriate and make the payments
due under the lease obligation. Certain investments in lease obligations may be
illiquid. A Fund may not invest in illiquid lease obligations if such
investments, together with all other illiquid investments, would exceed 15% of
the Fund's total assets. A Fund, however, may invest without regard to such
limitation in lease obligations which the Manager, pursuant to the guidelines
which have been adopted by the Board of Trustees and subject to the supervision
of the Board of Trustees, determines to be liquid. The Manager will deem lease
obligations liquid if they are publicly offered and have received an investment
grade rating of Baa or better by Moody's, or BBB or better by Standard & Poor's
or Fitch. Unrated lease obligations, or those rated below investment grade, will
be considered liquid if the obligations come to the market through an
underwritten public offering and at least two dealers are willing to give
competitive bids. In reference to the latter, the Manager, among other things,
also must review the creditworthiness of the municipality obligated to make
payment under the lease obligation and make certain specified determinations
based on such factors as the existence of a rating or credit enhancement such as
insurance, the frequency of trades or quotes for the obligation and the
willingness of dealers to make a market in the obligation.
Yields on Municipal Bonds are dependent on a variety of factors, including
the general condition of the money market and of the municipal bond market, the
size of a particular offering, the financial condition of the issuer, the
general conditions of the Municipal Bond market, the maturity of the obligation
and the rating of the issue. The ability of a Fund to achieve its investment
objective also is dependent on the continuing ability of the issuers of the
bonds in which the Fund invests to meet their obligations for the payment of
interest and principal when due. There are variations in the risks involved in
holding Municipal Bonds, both within a particular classification and between
classifications, depending on numerous factors. Furthermore, the rights of
owners of Municipal Bonds and the obligations of the issuer of such Municipal
Bonds may be subject to applicable bankruptcy, insolvency and similar laws and
court decisions affecting the rights of creditors generally and to general
equitable principles, which may limit the enforcement of certain remedies.
DESCRIPTION OF TEMPORARY INVESTMENTS AND VARIABLE RATE DEMAND OBLIGATIONS
The Funds may invest in short-term tax-free and taxable securities subject
to the limitations set forth under 'Investment Objectives and Policies'. The
tax-exempt money market securities may include municipal notes, municipal
commercial paper, municipal bonds with a remaining maturity of less than one
year, variable rate demand notes and participations therein. Municipal notes
include tax anticipation notes, bond anticipation notes and grant anticipation
notes. Anticipation notes are sold as interim financing in anticipation of tax
collection, bond sales, government grants or revenue receipts. Municipal
commercial paper refers to short-term unsecured promissory notes generally
issued to finance short-term credit needs. The taxable money market securities
in which the Funds may invest as Temporary Investments consist of U.S.
Government securities, U.S. Government agency securities, domestic bank or
savings institution certificates of deposit and bankers' acceptances, short-term
corporate debt securities such as commercial paper, and repurchase agreements.
These Temporary Investments must have a stated maturity not in excess of one
year from the date of purchase.
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Variable rate demand obligations ('VRDOs') are tax-exempt obligations which
contain a floating or variable interest rate adjustment formula and an
unconditional right of demand on the part of the holder thereof to receive
payment of the unpaid principal balance plus accrued interest upon a short
notice period not to exceed seven days. There is, however, the possibility that
because of default or insolvency the demand feature of VRDOs and Participating
VRDOs, described below, may not be honored. The interest rates are adjustable at
intervals (ranging from daily to up to one year) to some prevailing market rate
for similar investments, such adjustment formula being calculated to maintain
the market value of the VRDOs at approximately the par value of the VRDOs on the
adjustment date. The adjustments typically are set at a rate determined by the
remarketing agent or based upon the Public Securities Association Index or some
other appropriate interest rate adjustment index. The Funds may invest in all
types of tax-exempt instruments currently outstanding or to be issued in the
future which satisfy the short-term maturity and quality standards of the Funds.
The Funds also may invest in VRDOs in the form of participation interests
('Participating VRDOs') in variable rate tax-exempt obligations held by a
financial institution, typically a commercial bank. Participating VRDOs provide
the Funds with a specified undivided interest (up to 100%) of the underlying
obligation and the right to demand payment of the unpaid principal balance plus
accrued interest on the Participating VRDOs from the financial institution upon
a specified number of days' notice, not to exceed seven days. In addition, a
Participating VRDO is backed by an irrevocable letter of credit or guaranty of
the financial institution. The Funds would have an undivided interest in the
underlying obligation and thus participate on the same basis as the financial
institution in such obligation except that the financial institution typically
retains fees out of the interest paid on the obligation for servicing the
obligation, providing the letter of credit and issuing the repurchase
commitment. The Trust has been advised by its counsel that the Funds should be
entitled to treat the income received on Participating VRDOs as interest from
tax-exempt obligations.
VRDOs that contain an unconditional right of demand to receive payment of
the unpaid principal balance plus accrued interest on a notice period exceeding
seven days may be deemed to be illiquid securities. A VRDO with a demand notice
period exceeding seven days therefore will be subject to a Fund's restriction on
illiquid investments unless, in the judgment of the Trustees, such VRDO is
liquid. The Trustees may adopt guidelines and delegate to the Manager the daily
function of determining and monitoring liquidity of such VRDOs. The Trustees,
however, will retain sufficient oversight and will be ultimately responsible for
such determination.
The Trust has established the following standards with respect to money
market securities and VRDOs in which the Funds invest. Commercial paper
investments at the time of purchase must be rated A-1 through A-3 by Standard &
Poor's, Prime-1 through Prime-3 by Moody's or F-1 through F-3 by Fitch or, if
not rated, issued by companies having an outstanding debt issue rated at least A
by Standard & Poor's, Fitch or Moody's. Investments in corporate bonds and
debentures (which must have maturities at the date of purchase of one year or
less) must be rated at the time of purchase at least A by Standard & Poor's,
Moody's or Fitch. Notes and VRDOs at the time of purchase must be rated
SP-1+/A-1+ through SP-2/A-3 by Standard & Poor's, MIG-l/VMIG-1 through
MIG-4/VMIG-4 by Moody's or F-1 through F-3 by Fitch. Temporary Investments, if
not rated, must be of comparable quality to securities rated in the above rating
categories in the opinion of the Manager. A Fund may not invest in any security
issued by a commercial bank or a savings institution unless the bank or
institution is organized and operating in the United States, has total assets of
at least one billion dollars and is a member of the Federal Deposit Insurance
Corporation (the 'FDIC'), except that up to 10% of a Fund's total assets may be
invested in certificates of deposit of small institutions if such certificates
are insured fully by the FDIC.
REPURCHASE AGREEMENTS
The Funds may invest in securities pursuant to repurchase agreements.
Repurchase agreements may be entered into only with a member bank of the Federal
Reserve System or a primary dealer in U.S. Government securities or an affiliate
thereof. Under such agreements, the seller agrees, upon entering into the
contract, to repurchase the security at a mutually agreed upon time and price,
thereby determining the yield during the term of the agreement. This results in
a fixed rate of return insulated from market fluctuations during such period. In
repurchase agreements, the prices at which the trades are conducted do not
reflect accrued interest on the underlying obligations. Such agreements usually
cover short periods, such as under one week. Repurchase
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agreements may be construed to be collateralized loans by the purchaser to the
seller secured by the securities transferred to the purchaser. In a repurchase
agreement, a Fund will require the seller to provide additional collateral if
the market value of the securities falls below the repurchase price at any time
during the term of the repurchase agreement. In the event of default by the
seller under a repurchase agreement construed to be a collateralized loan, the
underlying securities are not owned by a Fund but only constitute collateral for
the seller's obligation to pay the repurchase price. Therefore, a Fund may
suffer time delays and incur costs or possible losses in connection with the
disposition of the collateral. In the event of a default under such a repurchase
agreement, instead of the contractual fixed rate of return, the rate of return
to a Fund will depend on intervening fluctuations of the market value of such
security and the accrued interest on the security. In such event, a Fund would
have rights against the seller for breach of contract with respect to any losses
arising from market fluctuations following the failure of the seller to perform.
A Fund may not invest in repurchase agreements maturing in more than seven days
if such investments, together with all other illiquid investments, would exceed
15% of the Fund's total assets.
In general, for Federal income tax purposes, repurchase agreements are
treated as collateralized loans secured by the securities 'sold'. Therefore,
amounts earned under such agreements will not be considered tax-exempt interest.
FINANCIAL FUTURES TRANSACTIONS AND OPTIONS
Reference is made to the discussion concerning futures and options
transactions under 'Investment Objectives and Policies' in the Prospectus. Set
forth below is additional information concerning these transactions.
As described in the Prospectus, each Fund may purchase and sell
exchange-traded financial futures contracts ('financial futures contracts') and
options thereon to hedge its portfolio of Municipal Bonds against declines in
the value of such securities and to hedge against increases in the cost of
securities a Fund intends to purchase. However, any transactions involving
financial futures or options will be in accordance with a Fund's investment
policies and limitations. To hedge its portfolio, a Fund may take an investment
position in a financial futures contract or option thereon which will move in
the opposite direction from the portfolio position being hedged. While a Fund's
use of hedging strategies is intended to moderate capital changes in portfolio
holdings and thereby reduce the volatility of the net asset value of Fund
shares, each Fund anticipates that its net asset value will fluctuate. Set forth
below is information concerning financial futures contracts and options thereon.
Description of Financial Futures Contracts. A financial futures contract
is an agreement between two parties to buy and sell a security or, in the case
of an index-based futures contract, to make and accept a cash settlement for a
set price on a future date. A majority of transactions in financial futures
contracts, however, do not result in the actual delivery of the underlying
instrument or cash settlement, but are settled through liquidation, i.e., by
entering into an offsetting transaction. Financial futures contracts have been
designed by boards of trade which have been designated 'contracts markets' by
the Commodity Futures Trading Commission (the 'CFTC').
The purchase or sale of a financial futures contract differs from the
purchase or sale of a security in that no price or premium is paid or received.
Instead, an amount of cash or securities acceptable to the broker and the
relevant contract market, which varies, but is generally about 5% of the
contract amount, must be deposited with the broker. This amount is known as
'initial margin' and represents a 'good faith' deposit assuring the performance
of both the purchaser and seller under the financial futures contract.
Subsequent payments to and from the broker, called 'variation margin', are
required to be made on a daily basis as the price of the financial futures
contract fluctuates making the long and short positions in the financial futures
contract more or less valuable, a process known as 'mark to the market'. At any
time prior to the settlement date of the financial futures contract, the
position may be closed out by taking an opposite position which will operate to
terminate the position in the financial futures contract. A final determination
of variation margin is then made, additional cash is required to be paid to or
released by the broker, and the purchaser realizes a loss or gain. In addition,
a nominal commission is paid on each completed sale transaction.
8
<PAGE>
The Funds may enter into financial futures contracts based on a long-term
municipal bond index developed by the Chicago Board of Trade (the 'CBT') and The
Bond Buyer (the 'Municipal Bond Index'). The Municipal Bond Index is comprised
of 40 tax-exempt municipal revenue and general obligation bonds. Each bond
included in the Municipal Bond Index must be rated A or higher by Moody's or
Standard & Poor's and must have a remaining maturity of 19 years or more. Twice
a month new issues satisfying the eligibility requirements are added to, and an
equal number of old issues are deleted from, the Municipal Bond Index. The value
of the Municipal Bond Index is computed daily according to a formula based on
the price of each bond in the Municipal Bond Index, as evaluated by six
dealer-to-dealer brokers.
The Municipal Bond Index financial futures contract is traded only on the
CBT. Like other contract markets, the CBT assures performance under financial
futures contracts through a clearing corporation, a nonprofit organization
managed by the exchange membership which also is responsible for handling daily
accounting of deposits or withdrawals of margin.
As described in the Prospectus, the Funds may purchase and sell financial
futures contracts on U.S. Government securities as a hedge against adverse
changes in interest rates as described below. With respect to U.S. Government
securities, currently there are financial futures contracts based on long-term
U.S. Treasury bonds, U.S. Treasury notes, Government National Mortgage
Association ('GNMA') Certificates and three-month U.S. Treasury bills. The Funds
may purchase and write call and put options on financial futures contracts on
U.S. Government securities in connection with their hedging strategies.
Subject to policies adopted by the Trustees, the Funds also may enter into
other financial futures contracts and options thereon, such as financial futures
contracts or options on other municipal bond or interest rate indices which may
become available if the Manager and the Trustees should determine that there is
normally a sufficient correlation between the prices of such financial futures
contracts or options thereon and the Municipal Bonds in which the Funds invest
to make such hedging appropriate.
Financial Futures Strategies. A Fund may sell a financial futures contract
(i.e., assume a short position) in anticipation of a decline in the value of its
investments in Municipal Bonds resulting from an increase in interest rates or
otherwise. The risk of decline could be reduced without employing futures as a
hedge by selling such Municipal Bonds and either reinvesting the proceeds in
securities with shorter maturities or by holding assets in cash. This strategy,
however, entails increased transaction costs in the form of dealer spreads and
typically would reduce the average yield of a Fund's portfolio securities as a
result of the shortening of maturities. The sale of financial futures contracts
provides an alternative means of hedging against declines in the value of a
Fund's investments in Municipal Bonds. As such values decline, the value of a
Fund's positions in the financial futures contracts will tend to increase, thus
offsetting all or a portion of the depreciation in the market value of the
Fund's Municipal Bond investments which are being hedged. While a Fund will
incur commission expenses in selling and closing out financial futures
positions, commissions on financial futures contracts are lower than transaction
costs incurred in the purchase and sale of Municipal Bonds. In addition, the
ability of a Fund to trade in the standardized contracts available in the
financial futures contract markets may offer a more effective defensive position
than a program to reduce the average maturity of the portfolio securities due to
the unique and varied credit and technical characteristics of the municipal debt
instruments available to a Fund. Employing financial futures contracts as a
hedge also may permit a Fund to assume a defensive posture without reducing the
yield on its investments beyond any amounts required to engage in financial
futures contract trading.
When the Funds intend to purchase Municipal Bonds, the Funds may purchase
financial futures contracts as a hedge against any increase in the cost of such
Municipal Bonds, resulting from a decrease in interest rates or otherwise, that
may occur before such purchases can be effected. Subject to the degree of
correlation between the Municipal Bonds and the financial futures contracts,
subsequent increases in the cost of Municipal Bonds should be reflected in the
value of the financial futures contracts held by the Funds. As such purchases
are made, an equivalent amount of financial futures contracts will be closed
out. Due to changing market conditions and interest rate forecasts, however, a
financial futures contract position may be terminated without a corresponding
purchase of portfolio securities.
9
<PAGE>
Call Options on Financial Futures Contracts. The Funds also may purchase
and sell exchange-traded call and put options on financial futures contracts on
U.S. Government securities. The purchase of a call option on a financial futures
contract is analogous to the purchase of a call option on an individual
security. Depending on the pricing of the option compared to either the futures
contract on which it is based or the price of the underlying debt securities, it
may or may not be less risky than ownership of the financial futures contract or
underlying debt securities. Like the purchase of a financial futures contract, a
Fund will purchase a call option on financial futures contracts to hedge against
a market advance when such Fund is not fully invested.
The writing of a call option on a financial futures contract constitutes a
partial hedge against declining prices of the securities which are deliverable
upon exercise of the financial futures contract. If the futures price at
expiration is below the exercise price, a Fund will retain the full amount of
the option premium which provides a partial hedge against any decline that may
have occurred in such Fund's portfolio holdings.
Put Options on Financial Futures Contracts. The purchase of a put option
on a financial futures contract is analogous to the purchase of a protective put
option on portfolio securities. A Fund will purchase put options on financial
futures contracts to hedge such Fund's portfolio against the risk of rising
interest rates.
The writing of a put option on a financial futures contract constitutes a
partial hedge against increasing prices of the securities which are deliverable
upon exercise of the financial futures contract. If the futures price at
expiration is higher than the exercise price, a Fund will retain the full amount
of the option premium which provides a partial hedge against any increase in the
price of Municipal Bonds which such Fund intends to purchase.
The writer of an option on a financial futures contract is required to
deposit initial and variation margin pursuant to requirements similar to those
applicable to financial futures contracts. Premiums received from the writing of
an option will be included in initial margin. The writing of an option on a
financial futures contract involves risks similar to those relating to financial
futures contracts.
The Trust has received an order from the Commission exempting it from the
provisions of Section 17(f) and Section 18(f) of the Investment Company Act of
1940, as amended (the '1940 Act') in connection with its strategy of investing
in financial futures contracts. Section 17(f) relates to the custody of
securities and other assets of an investment company and may be deemed to
prohibit certain arrangements between the Trust and commodities brokers with
respect to initial and variation margin. Section 18(f) of the 1940 Act prohibits
an open-end investment company such as the Trust from issuing a 'senior
security' other than a borrowing from a bank. The staff of the Commission in the
past has indicated that a financial futures contract may be a 'senior security'
under the 1940 Act.
Restrictions on Use of Financial Futures Transactions. Regulations of the
CFTC applicable to each Fund require that all of a Fund's financial futures
transactions constitute bona fide hedging transactions and that a Fund purchase
and sell futures contracts and options thereon (i) for bona fide hedging
purposes, and (ii) for non-hedging purposes, if the aggregate initial margin and
premiums required to establish positions in such contracts and options does not
exceed 5% of the liquidation value of the Fund's portfolio assets after taking
into account unrealized profits and unrealized losses on any such contracts and
options. (However, each Fund intends to engage in options and futures
transactions only for hedging purposes.) Margin deposits may consist of cash or
securities acceptable to the broker and the relevant contract market.
When a Fund purchases a financial futures contract or a call option with
respect thereto or writes a put option on a futures contract, an amount of cash,
cash equivalents or liquid securities will be deposited in a segregated account
with the Fund's custodian so that the amount so segregated, plus the amount of
initial and variation margin held in the account of its broker, equals the
market value of the financial futures contract or related option, thereby
ensuring that the use of such futures is unleveraged.
Risk Factors in Financial Futures Contracts and Options
Thereon. Investment in financial futures contracts and options thereon involves
the risk of imperfect correlation between movements in the price of the
financial futures contract and the price of the security being hedged. The hedge
will not be fully effective when there is imperfect correlation between the
movements in the prices of two financial instruments. For example, if
10
<PAGE>
the price of a financial futures contract moves more than the price of the
hedged security, a Fund will experience either a loss or gain on the financial
futures contract which is not offset completely by movements in the price of the
hedged securities. To compensate for imperfect correlations, a Fund may purchase
or sell financial futures contracts or options thereon in a greater dollar
amount than the hedged securities if the volatility of the hedged securities is
historically greater than the volatility of the futures transaction. Conversely,
a Fund may purchase or sell fewer financial futures contracts or options thereon
if the volatility of the price of the hedged securities is historically less
than that of the futures transaction.
The particular municipal bonds comprising the index underlying the
Municipal Bond Index financial futures contracts may vary from the Municipal
Bonds held by a Fund. As a result, a Fund's ability to hedge effectively all or
a portion of the value of its Municipal Bonds through the use of such financial
futures contracts or options thereon will depend in part on the degree to which
price movements in the index underlying the financial futures contract correlate
with the price movements of the Municipal Bonds held by a Fund. The correlation
may be affected by disparities in the average maturity, ratings, geographical
mix or structure of a Fund's investments as compared to those comprising the
Municipal Bond Index, and general economic or political factors. In addition,
the correlation between movements in the value of the Municipal Bond Index may
be subject to change over time as additions to and deletions from the Municipal
Bond Index alter its structure. The correlation between financial futures
contracts on U.S. Government securities or options thereon and the Municipal
Bonds held by a Fund may be affected adversely by similar factors, and the risk
of imperfect correlation between movements in the prices of financial futures
contracts or options thereon and the prices of the Municipal Bonds held by a
Fund may be greater.
Each Fund expects to liquidate a majority of the financial futures
contracts it enters into through offsetting transactions on the applicable
contract market. There can be no assurance, however, that a liquid secondary
market will exist for any particular financial futures contract at any specific
time. Thus, it may not be possible to close out a futures position. In the event
of adverse price movements, a Fund would continue to be required to make daily
cash payments of variation margin. In such situations, if a Fund has
insufficient cash, it may be required to sell portfolio securities to meet daily
variation margin requirements at a time when it may be disadvantageous to do so.
The inability to close out financial futures positions also could have an
adverse impact on a Fund's ability to hedge effectively its investments in
Municipal Bonds. A Fund will enter into a financial futures position only if, in
the judgment of the Manager, there appears to be an actively traded secondary
market for such financial futures contracts or options thereon.
The successful use of transactions in financial futures and related options
also depends on the ability of the Manager to forecast correctly the direction
and extent of interest rate movements within a given time frame. To the extent
interest rates remain stable during the period in which a financial futures
contract or option is held by a Fund or such rates move in a direction opposite
to that anticipated, a Fund may realize a loss on the hedging transaction which
is not fully or partially offset by an increase in the value of portfolio
securities. As a result, a Fund's total return for such period may be less than
if it had not engaged in the hedging transaction.
Because of low initial margin deposits made on the opening of a financial
futures position, financial futures transactions involve substantial leverage.
As a result, relatively small movements in the price of the financial futures
contracts or related options can result in substantial unrealized gains or
losses. Because a Fund will engage in the purchase and sale of financial futures
contracts or related options solely for hedging purposes, however, any losses
incurred in connection therewith should, if the hedging strategy is successful,
be offset in whole or in part by increases in the value of securities held by a
Fund or decreases in the price of securities a Fund intends to acquire.
The amount of risk a Fund assumes when it purchases an option on a
financial futures contract is the premium paid for the option plus related
transaction costs. In addition to the correlation risks discussed above, the
purchase of an option on a financial futures contract also entails the risk that
changes in the value of the underlying financial futures contract will not be
reflected fully in the value of the option purchased.
Municipal Bond Index financial futures contracts were approved for trading
in 1986. Trading in such financial futures contracts may tend to be less liquid
than that in other futures contracts. The trading of financial
11
<PAGE>
futures contracts also is subject to certain market risks, such as inadequate
trading activity, which could at times make it difficult or impossible to
liquidate existing positions.
INVESTMENT RESTRICTIONS
The Trust has adopted a number of restrictions and policies relating to the
investment of the assets of each Fund and its activities, which are fundamental
policies of each Fund and may not be changed without the approval of the holders
of a majority of such Fund's outstanding voting securities (which for this
purpose and under the 1940 Act means the lesser of (i) 67% of a Fund's shares
present at a meeting at which more than 50% of the outstanding shares of that
Fund are represented or (ii) more than 50% of such Fund's outstanding shares).
Under the fundamental investment restrictions, each Fund may not:
1. Invest more than 25% of its assets, taken at market value at the time of
each investment, in the securities of issuers in any particular industry
(excluding the U.S. Government and its agencies and instrumentalities). For
purposes of this restriction, states, municipalities and their political
subdivisions are not considered part of any industry.
2. Make investments for the purpose of exercising control or management.
3. Purchase or sell real estate, except that to the extent permitted by
applicable law, a Fund may invest in securities directly or indirectly secured
by real estate or interests therein or issued by companies which invest in real
estate or interests therein.
4. Make loans to other persons, except that the acquisition of bonds,
debentures or other corporate debt securities and investment in government
obligations, commercial paper, pass-through instruments, certificates of
deposit, bankers' acceptances, repurchase agreements or any similar instruments
shall not be deemed to be the making of a loan, and except further that a Fund
may lend its portfolio securities, provided that the lending of portfolio
securities may be made only in accordance with applicable law and the guidelines
set forth in the Trust's Prospectus and Statement of Additional Information, as
they may be amended from time to time.
5. Issue senior securities to the extent such issuance would violate
applicable law.
6. Borrow money, except that (i) a Fund may borrow from banks (as defined
in the 1940 Act) in amounts up to 33 1/3% of its total assets (including the
amount borrowed), (ii) a Fund may, to the extent permitted by applicable law,
borrow up to an additional 5% of its total assets for temporary purposes, (iii)
a Fund may obtain such short-term credit as may be necessary for the clearance
of purchases and sales of portfolio securities and (iv) a Fund may purchase
securities on margin to the extent permitted by applicable law. A Fund may not
pledge its assets other than to secure such borrowings or, to the extent
permitted by the Trust's investment policies as set forth in its Prospectus and
Statement of Additional Information, as they may be amended from time to time,
in connection with hedging transactions, short sales, when-issued and forward
commitment transactions and similar investment strategies.
7. Underwrite securities of other issuers, except insofar as a Fund
technically may be deemed an underwriter under the Securities Act of 1933, as
amended (the 'Securities Act'), in selling portfolio securities.
8. Purchase or sell commodities or contracts on commodities, except to the
extent that a Fund may do so in accordance with applicable law and the Trust's
Prospectus and Statement of Additional Information, as they may be amended from
time to time, and without registering as a commodity pool operator under the
Commodity Exchange Act.
Under the non-fundamental investment restrictions, a Fund may not:
a. Purchase securities of other investment companies, except to the extent
such purchases are permitted by applicable law.
b. Make short sales of securities or maintain a short position, except to
the extent permitted by applicable law. None of the Funds currently intends to
engage in short sales, except short sales 'against the box'.
12
<PAGE>
c. Invest in securities which cannot be readily resold because of legal or
contractual restrictions or which cannot otherwise be marketed, redeemed or put
to the issuer or a third party, if at the time of acquisition more than 15% of
its total assets would be invested in such securities. This restriction shall
not apply to securities which mature within seven days or securities which the
Board of Trustees of the Trust has otherwise determined to be liquid pursuant to
applicable law.
d. Invest in warrants if, at the time of acquisition, its investments in
warrants, valued at the lower of cost or market value, would exceed 5% of that
Fund's net assets; included within such limitation, but not to exceed 2% of that
Fund's net assets, are warrants which are not listed on the New York Stock
Exchange (the NYSE) or the American Stock Exchange or a major foreign exchange.
For purposes of this restriction, warrants acquired by a Fund in units or
attached to securities may be deemed to be without value.
e. Invest in securities of companies having a record, together with
predecessors, of less than three years of continuous operation, if more than 5%
of that Fund's total assets would be invested in such securities. This
restriction shall not apply to mortgage-backed securities, asset-backed
securities or obligations issued or guaranteed by the U.S. Government, its
agencies or instrumentalities.
f. Purchase or retain the securities of any issuer, if those individual
officers and Trustees of the Trust, the officers and general partner of the
Manager, the directors of such general partner or the officers and directors of
any subsidiary thereof each owning beneficially more than one-half of one
percent of the securities of such issuer own in the aggregate more than 5% of
the securities of such issuer.
g. Invest in real estate limited partnership interests or interests in oil,
gas or other mineral leases, or exploration or development programs, except that
a Fund may invest in securities issued by companies that engage in oil, gas or
other mineral exploration or development activities.
h. Write, purchase or sell puts, calls, straddles, spreads or combinations
thereof, except to the extent permitted in the Trust's Prospectus and Statement
of Additional Information, as they may be amended from time to time.
i. Notwithstanding fundamental investment restriction (6) above, borrow
amounts in excess of 20% of its total assets, taken at market value (including
the amount borrowed), and then only from banks as a temporary measure for
extraordinary or emergency purposes. [Usually only 'leveraged' investment
companies may borrow in excess of 5% of their assets; however, each Fund will
not borrow to increase income but only to meet redemption requests which might
otherwise require untimely disposition of portfolio securities, such as the
redemption of Fund shares. No Fund will purchase securities while borrowings are
outstanding. Interest paid on such borrowings will reduce net income.]
Because of the affiliation of Merrill Lynch, Pierce, Fenner & Smith
Incorporated ('Merrill Lynch') with the Trust, each Fund is prohibited from
engaging in certain transactions involving such firm or its affiliates except
for brokerage transactions permitted under the 1940 Act involving only usual and
customary commissions or transactions pursuant to an exemptive order under the
1940 Act. Included among such restricted transactions will be purchases from or
sales to Merrill Lynch of securities in transactions in which it acts as a
principal and purchases of securities from underwriting syndicates of which
Merrill Lynch is a member. See 'Portfolio Transactions'. An exemptive order has
been obtained which permits the Trust to effect principal transactions with
Merrill Lynch in high quality, short-term, tax-exempt securities subject to
conditions set forth in such order.
13
<PAGE>
MANAGEMENT OF THE TRUST
TRUSTEES AND OFFICERS
Information about the Trustees, executive officers and the portfolio
managers of the Trust, including their ages and their principal occupations for
at least the last five years, is set forth below. Unless otherwise noted, the
address of each Trustee and executive officer is P.O. Box 9011, Princeton, New
Jersey 08543-9011.
ARTHUR ZEIKEL (64)--President and Trustee(1)(2)--President of the Manager
(which term, as used herein, includes the Manager's corporate predecessors)
since 1977; President of Merrill Lynch Asset Management, L.P. ('MLAM', which
term as used herein includes MLAM's corporate predecessors) since 1977;
President and Director of Princeton Services, Inc. ('Princeton Services') since
1993; Executive Vice President of Merrill Lynch & Co., Inc. ('ML&Co.') since
1990; Director of Merrill Lynch Funds Distributor, Inc. ('MLFD' or the
'Distributor') since 1977.
JAMES H. BODURTHA (52)--Trustee(2)--36 Popponesset Road, Cotuit,
Massachusetts 02635. Director and Executive Vice President, The China Business
Group, Inc. since 1996; Chairman and Chief Executive Officer, China Enterprise
Management Corporation from 1993 to 1996; Chairman, Berkshire Corporation since
1980; Partner, Squire, Sanders & Dempsey from 1980 to 1993.
HERBERT I. LONDON (57)--Trustee(2)--113-115 University Place, New York, New
York 10003. John M. Olin Professor of Humanities, New York University since 1993
and Professor thereof since 1980; Dean, Gallatin Division of New York University
from 1978 to 1993; Distinguished Fellow, Herman Kahn Chair, Hudson Institute
from 1984 to 1985; Trustee, Hudson Institute since 1980; Director, Damon
Corporation since 1991; Overseer, Center for Naval Analyses from 1983 to 1993;
Limited Partner, Hypertech L.P. since 1996.
ROBERT R. MARTIN (69)--Trustee(2)--513 Grand Hill, St. Paul, Minnesota
55102. Chairman and Chief Executive Officer, Kinnard Investments, Inc. from 1990
to 1993; Executive Vice President, Dain Bosworth from 1974 to 1989; Director,
Carnegie Capital Management from 1977 to 1985 and Chairman thereof in 1979;
Director, Securities Industry Association from 1981 to 1982 and Public
Securities Association from 1979 to 1980; Chairman of the Board, WTC Industries,
Inc. in 1994; Trustee, Northland College since 1992.
JOSEPH L. MAY (67)--Trustee(2)--424 Church Street, Suite 2000, Nashville,
Tennessee 37219. Attorney in private practice since 1984; President, May and
Athens Hosiery Mills Division, Wayne-Gossard Corporation from 1954 to 1983; Vice
President, Wayne-Gossard Corporation from 1972 to 1983; Chairman, The May
Corporation (personal holding company) from 1972 to 1983; Director, Signal
Apparel Co. from 1972 to 1989.
ANDRE F. PEROLD (44)--Trustee(2)--Morgan Hall, Soldiers Field, Boston,
Massachusetts 02163. Professor, Harvard Business School since 1989 and Associate
Professor from 1983 to 1989; Trustee, The Common Fund, since 1989; Director,
Quantec Limited since 1991.
TERRY K. GLENN (56)--Executive Vice President(1)(2)--Executive Vice
President of the Manager and of MLAM since 1983; Executive Vice President and
Director of Princeton Services since 1993; President of MLFD since 1986 and
Director thereof since 1991; President of Princeton Administrators, L.P. since
1988.
VINCENT R. GIORDANO (52)--Senior Vice President(1)(2)--Portfolio Manager of
the Manager and MLAM since 1977 and Senior Vice President of the Manager and
MLAM since 1984; Vice President of MLAM from 1980 to 1984; Senior Vice President
of Princeton Services since 1993.
EDWARD J. ANDREWS (36)--Vice President and Portfolio Manager(1)(2)--Vice
President of the Manager and of MLAM since 1991.
PETER J. HAYES (37)--Vice President and Portfolio Manager(1)(2)--Vice
President of the Manager and of MLAM since 1989 and Assistant Vice President
of MLAM from 1987 to 1989.
HELEN M. SHEEHAN (36)--Vice President and Portfolio Manager(1)(2)--Vice
President of the Manager and of MLAM since 1991.
14
<PAGE>
DONALD C. BURKE (36)--Vice President(1)(2)--Vice President and Director of
Taxation of MLAM since 1990; Employee of Deloitte & Touche LLP from 1982 to
1990.
GERALD M. RICHARD (47)--Treasurer(1)(2)--Senior Vice President and
Treasurer of the Manager and MLAM since 1984; Senior Vice President and
Treasurer of Princeton Services since 1993; Treasurer of the Distributor since
1984 and Vice President thereof since 1981.
ROBERT HARRIS (44)--Secretary(1)(2)--Vice President of MLAM since 1984;
Secretary of MLFD since 1982.
- ------------
(1) Interested person, as defined in the 1940 Act, of the Trust.
(2) Such Trustee or officer is a director, trustee or officer of certain other
investment companies for which the Manager or MLAM acts as investment
adviser or manager.
At November 1, 1996, the Trustees and officers of the Trust as a group (14
persons) owned an aggregate of less than 1% of the outstanding shares of Common
Stock of ML&Co. and owned an aggregate of less than 1% of the outstanding shares
of any Fund, except that Vincent R. Giordano owns Class A shares representing
approximately 12.8% of the New Jersey Fund Class A shares (3.5% of the aggregate
outstanding shares of the New Jersey Fund).
COMPENSATION OF TRUSTEES
The Trust pays each Trustee not affiliated with the Manager (each a
'non-affiliated Trustee') a fee of $5,000 per year plus $500 per meeting
attended, together with such Trustee's actual out-of-pocket expenses relating to
attendance at meetings. The Trust also compensates members of its Audit and
Nominating Committee (the 'Committee'), which consists of all of the
non-affiliated Trustees, an additional fee of $1,000 per year plus $250 per
meeting attended. The Trust reimburses each non-affiliated Trustee for his
out-of-pocket expenses relating to attendance at Board and Committee meetings.
Fees and expenses paid to non-affiliated Trustees aggregated $42,132 for the
fiscal year ended July 31, 1996, and were allocated to each Fund on the basis of
the relative asset size of each Fund: Arizona Fund, $3,015; California Fund,
$7,114; Florida Fund, $13,676; Massachusetts Fund, $4,419; Michigan Fund,
$2,243; New Jersey Fund, $4,589; New York Fund, $6,879 and Pennsylvania Fund,
$197.
The following table sets forth for the fiscal year ended July 31, 1996,
compensation paid by the Trust to the non-affiliated Trustees and, for the
calendar year ended December 31, 1995, the aggregate compensation paid by all
registered investment companies (including the Trust) advised by the Manager and
its affiliate, MLAM ('FAM/MLAM Advised Funds') to the non-affiliated Trustees:
<TABLE>
<CAPTION>
AGGREGATE
PENSION OR COMPENSATION
RETIREMENT FROM TRUST AND
BENEFITS OTHER
ACCRUED AS FAM/MLAM
PART OF ADIVSED FUNDS
COMPENSATION TRUST'S PAID TO
NAME OF TRUSTEE FROM TRUST EXPENSES TRUSTEE(1)
- ------------------------------------------------------------------ ------------ -------------- --------------
<S> <C> <C> <C>
James H. Bodurtha................................................. $ 9,000 None $157,500*
Herbert I. London................................................. $ 9,000 None $157,500
Robert R. Martin.................................................. $ 9,000 None $157,500
Joseph L. May..................................................... $ 9,000 None $157,500
Andre F. Perold................................................... $ 9,000 None $157,500
</TABLE>
- ------------
(1) The Trustees serve on the boards of FAM/MLAM Advised Funds as follows: Mr.
Bodurtha (22 registered investment companies consisting of 46 portfolios);
Mr. London (22 registered investment companies consisting of 46 portfolios);
Mr. Martin (22 registered investment companies consisting of 46 portfolios);
Mr. May (22 registered investment companies consisting of 46 portfolios);
and Mr. Perold (22 registered investment companies consisting of 46
portfolios).
* $157,500 represents the amount Mr. Bodurtha would have received if he had
been a Trustee for the entire calendar year ended December 31, 1995. Mr.
Bodurtha was elected to the Trust's Board of Trustees effective June 23,
1995.
15
<PAGE>
MANAGEMENT AND ADVISORY ARRANGEMENTS
Reference is made to 'Management of the Trust--Management and Advisory
Arrangements' in the Prospectus for certain information concerning the
management and advisory arrangements of the Funds.
Securities held by the Funds also may be held by, or be appropriate
investments for, other funds or investment advisory clients of the Manager or
its affiliates (collectively, the 'clients'). Because of different objectives or
other factors, a particular security may be bought for one or more clients when
one or more clients are selling the same security. If the Manager or its
affiliates purchase or sell securities for the Funds or other funds for which
they act as manager or for their advisory clients and such sales or purchases
arise for consideration at or about the same time, transactions in such
securities will be made, insofar as feasible, for the respective funds and
clients in a manner deemed equitable to all. To the extent that transactions on
behalf of more than one client of the Manager or its affiliates during the same
period may increase the demand for securities being purchased or the supply of
securities being sold, there may be an adverse effect on price.
Pursuant to separate management agreements between the Trust on behalf of
each Fund and the Manager (each a 'Management Agreement'), the Manager receives
for its services to each Fund monthly compensation based upon the average daily
net assets of that Fund at the annual rate of 0.35% of the average daily net
assets of that Fund.
The table below sets forth for the fiscal years ended July 31, 1996 and
1995, and for the period November 26, 1993 (commencement of operations) to July
31, 1994, the total advisory fee payable by each Fund to the Manager:
<TABLE>
<CAPTION>
FOR THE YEAR
ENDED JULY 31, FOR THE PERIOD
-------------------- NOVEMBER 26, 1993+
FUND 1996 1995 TO JULY 31, 1994
- ----------------------------------------------------------- -------- -------- ------------------
<S> <C> <C> <C>
Arizona Fund............................................... $ 21,459 $ 26,468 $ 16,109
California Fund............................................ $ 54,033 $ 52,287 $ 34,377
Florida Fund............................................... $108,720 $112,421 $ 83,640
Massachusetts Fund......................................... $ 30,736 $ 41,496 $ 33,156
Michigan Fund.............................................. $ 16,413 $ 19,277 $ 13,621
New Jersey Fund............................................ $ 33,770 $ 39,629 $ 30,851
New York Fund.............................................. $ 57,995 $ 52,164 $ 32,105
Pennsylvania Fund.......................................... $ 30,196 $ 34,403 $ 25,192
</TABLE>
- ------------
+ Commencement of Operations.
For the fiscal year ended July 31, 1996, the total advisory fee payable to the
Manager by each Fund (other than the Florida Fund) was voluntarily waived. Of
the $108,720 advisory fee payable during the year by the Florida Fund, $24,123
was voluntarily waived. For the fiscal year ended July 31, 1995, and for the
period from November 26, 1993 (commencement of operations) to July 31, 1994, the
total advisory fee payable to the Manager by each Fund was voluntarily waived.
Each Management Agreement obligates the Manager to provide investment
advisory services to the related Fund and to pay all compensation of and furnish
office space for officers and employees of the Trust connected with investment
and economic research, trading and investment management of the Trust, as well
as the fees of all Trustees of the Trust who are affiliated persons of ML&Co. or
any of its affiliates. Each Fund pays all other expenses incurred in its
operation and a portion of the Trust's general administrative expenses allocated
pro rata on the basis of the asset size of the respective series of the Trust
('Series'), including the Funds and any additional Series added in the future.
Expenses that will be borne directly by the Series include, among other things,
redemption expenses, expenses of portfolio transactions, expenses of registering
the shares under Federal and state securities laws, pricing costs (including the
daily calculation of net asset value), expenses of printing shareholder reports,
prospectuses and statements of additional information (except to the extent paid
by the Distributor as described below), fees for legal and auditing services,
Commission fees, interest, certain taxes and other expenses attributable to a
particular Series. Expenses which will be allocated on the basis of asset size
of
16
<PAGE>
the respective Series include fees and expenses of unaffiliated Trustees, state
franchise taxes, costs of printing proxies and other expenses related to
shareholder meetings, and other expenses properly payable by the Trust. The
organizational expenses of the Trust were paid by the Trust, and as additional
Series are added to the Trust, the organizational expenses are allocated among
the Series in a manner deemed equitable by the Trustees. Depending upon the
nature of a lawsuit, litigation costs may be assessed to the specific Series to
which the lawsuit relates or allocated on the basis of the asset size of the
respective Series. The Trustees have determined that this is an appropriate
method of allocation of expenses. Accounting services are provided to the Funds
by the Manager, and each Fund reimburses the Manager for the Manager's costs in
connection with such services. The table below sets forth for the fiscal years
ended July 31, 1996 and 1995, and for the period November 26, 1993 (commencement
of operations) to July 31, 1994, the amount reimbursed by each Fund to the
Manager for accounting services:
<TABLE>
<CAPTION>
FOR THE YEAR
ENDED JULY 31, FOR THE PERIOD
------------------ NOVEMBER 26, 1993+
FUND 1996 1995 TO JULY 31, 1994
- ------------------------------------------------------------- ------- ------- ------------------
<S> <C> <C> <C>
Arizona Fund................................................. $30,172 $36,140 $ 20,900
California Fund.............................................. $38,245 $50,033 $ 19,998
Florida Fund................................................. $34,053 $32,012 $ 24,625
Massachusetts Fund........................................... $53,983 $49,502 $ 14,821
Michigan Fund................................................ $47,178 $19,568 $ 22,555
New Jersey Fund.............................................. $43,508 $36,998 $ 18,734
New York Fund................................................ $62,140 $ 3,623 $ 22,165
Pennsylvania Fund............................................ $43,426 $15,577 $ 22,273
</TABLE>
- ------------
+ Commencement of Operations.
As required by the Funds' distribution agreements, the Distributor will pay
the promotional expenses of the Funds incurred in connection with the offering
of shares of the Funds. Certain expenses in connection with account maintenance
and the distribution of Class B, Class C and Class D shares will be financed by
the Funds pursuant to Distribution Plans in compliance with Rule 12b-1 under the
1940 Act. See 'Purchase of Shares-- Distribution Plans'.
The Manager is a limited partnership, the partners of which are ML&Co. and
Princeton Services. ML&Co. and Princeton Services are 'controlling persons' of
the Manager as defined under the 1940 Act because of their ownership of its
voting securities or their power to exercise a controlling influence over its
management or policies.
Duration and Termination. Unless earlier terminated as described below,
the Management Agreements will remain in effect from year to year if approved
annually (a) by the Trustees of the Trust or by a majority of the outstanding
shares of the Funds and (b) by a majority of the Trustees who are not parties to
such contract or interested persons (as defined in the 1940 Act) of any such
party. Such contracts are not assignable and may be terminated without penalty
on 60 days' written notice at the option of either party thereto or by vote of
the shareholders of the Funds.
PURCHASE OF SHARES
Reference is made to 'Purchase of Shares' in the Prospectus for certain
information as to the purchase of shares of each Fund.
Each Fund issues four classes of shares under the Merrill Lynch Select
Pricing(Service Mark) System: shares of Class A and Class D are sold to
investors choosing the initial sales charge alternatives, and shares of Class B
are sold to investors choosing the deferred sales charge alternative. Class C
shares of the Funds are not available for purchase but will be issued only
pursuant to the exchange privilege to holders of Class C shares of other
MLAM-advised mutual funds who elect to exchange Class C shares of such other
MLAM-advised mutual fund for Class C shares of one of the Funds. Each Class A,
Class B, Class C and Class D share of each Fund represents an identical interest
in the investment portfolio of that Fund and has the same rights, except that
Class B, Class C
17
<PAGE>
and Class D shares of a Fund bear the expenses of the ongoing account
maintenance fees, and Class B and Class C shares bear the expenses of the
ongoing distribution fees of that Fund and the additional incremental transfer
agency costs resulting from the deferred sales charge arrangements. Class B,
Class C and Class D shares each have exclusive voting rights with respect to the
Rule 12b-1 distribution plan adopted with respect to such class pursuant to
which account maintenance and/or distribution fees are paid. Each class has
different exchange privileges. See 'Shareholder Services--Exchange Privilege'.
The Merrill Lynch Select Pricing(Service Mark) System is used by more than
50 registered investment companies advised by MLAM or its affiliate, the
Manager. Funds advised by MLAM or the Manager which utilize the Merrill Lynch
Select Pricing(Service Mark) System are referred to herein as 'MLAM-advised
mutual funds'.
On behalf of each Fund, the Trust has entered into a separate distribution
agreement with the Distributor in connection with the continuous offering of
each class of shares of such Fund (each a 'Distribution Agreement'). Each
Distribution Agreement obligates the Distributor to pay certain expenses in
connection with the offering of each class of shares of the related Fund. After
the prospectuses, statements of additional information and periodic reports have
been prepared, set in type and mailed to shareholders, the Distributor pays for
the printing and distribution of copies thereof used in connection with the
offering to dealers and prospective investors. The Distributor also pays for
other supplementary sales literature and advertising costs. The Distribution
Agreements are subject to the same renewal requirements and termination
provisions as the Management Agreements described above.
INITIAL SALES CHARGE ALTERNATIVES--CLASS A AND CLASS D SHARES
The gross sales charges, the amounts of such charges received by the
Distributor and Merrill Lynch for the sale of Class A shares, and the CDSCs paid
with respect to redemption within one year after purchase of Class A shares
purchased subject to a front-end sales charge waiver for each of the Funds for
the periods indicated are set forth below:
<TABLE>
<CAPTION>
FOR THE YEAR ENDED JULY 31, 1996
----------------------------------------------------------
CLASS A AMOUNT AMOUNT CDSCS
GROSS SALES PAID TO PAID TO PAID TO
FUND CHARGES DISTRIBUTOR MERRILL LYNCH DISTRIBUTOR
- ------------------------------------------------------------- ----------- ----------- ------------- -----------
<S> <C> <C> <C> <C>
Arizona Fund................................................. $ 463 $ 17 $ 446 --
California Fund.............................................. $ 580 $ 67 $ 513 --
Florida Fund................................................. $ 497 $ 22 $ 475 --
Massachusetts Fund........................................... $ 964 $ 93 $ 871 --
Michigan Fund................................................ $ 102 $ 4 $ 98 --
New Jersey Fund.............................................. $ 239 $ 2 $ 237 --
New York Fund................................................ $ 34 $ 1 $ 33 --
Pennsylvania Fund............................................ $ 5 -- $ 5 --
</TABLE>
<TABLE>
<CAPTION>
FOR THE YEAR ENDED JULY 31, 1995
----------------------------------------------------------
CLASS A AMOUNT AMOUNT CDSCS
GROSS SALES PAID TO PAID TO PAID TO
FUND CHARGES DISTRIBUTOR MERRILL LYNCH DISTRIBUTOR
- ------------------------------------------------------------- ----------- ----------- ------------- -----------
<S> <C> <C> <C> <C>
Arizona Fund................................................. $ 1,026 $ 101 $ 925 --
California Fund.............................................. $ 754 $ 83 $ 671 --
Florida Fund................................................. $ 2,628 $ 154 $ 2,474 $ 2,894
Massachusetts Fund........................................... $ 1,544 $ 284 $ 1,260 $10,565
Michigan Fund................................................ $ 915 $ 56 $ 859 --
New Jersey Fund.............................................. $ 451 $ 30 $ 421 --
New York Fund................................................ $ 5,190 $ 157 $ 5,033 --
Pennsylvania Fund............................................ $ 79 $ 9 $ 70 --
</TABLE>
18
<PAGE>
<TABLE>
<CAPTION>
FOR THE PERIOD NOVEMBER 26, 1993+ TO JULY 31, 1994
----------------------------------------------------------
CLASS A AMOUNT AMOUNT CDSCS
GROSS SALES PAID TO PAID TO PAID TO
FUND CHARGES DISTRIBUTOR MERRILL LYNCH DISTRIBUTOR
- ------------------------------------------------------------- ----------- ----------- ------------- -----------
<S> <C> <C> <C> <C>
Arizona Fund................................................. $17,369 $ 473 $16,896 --
California Fund.............................................. $25,074 $ 555 $24,519 --
Florida Fund................................................. $67,354 $ 1,464 $65,890 --
Massachusetts Fund........................................... $36,132 $ 2,023 $34,109 --
Michigan Fund................................................ $24,819 $ 550 $24,269 --
New Jersey Fund.............................................. $ 9,444 $ 380 $ 9,064 --
New York Fund................................................ $21,122 $ 811 $20,311 --
Pennsylvania Fund............................................ $ 5,405 $ 127 $ 5,278 --
</TABLE>
- ------------
+ Commencement of Operations.
The gross sales charges and the amounts of such charges received by the
Distributor and Merrill Lynch for the sale of Class D shares for each of the
Funds for the periods indicated are set forth below:
<TABLE>
<CAPTION>
FOR THE YEAR ENDED JULY 31, 1996
-------------------------------------------
CLASS D AMOUNT AMOUNT
GROSS SALES PAID TO PAID TO
FUND CHARGES DISTRIBUTOR MERRILL LYNCH
- ------------------------------------------------------------------------- ----------- ----------- -------------
<S> <C> <C> <C>
Arizona Fund............................................................. $ 241 $ 14 $ 227
California Fund.......................................................... $ 3,148 $ 299 $ 2,849
Florida Fund............................................................. $ 2,943 $ 373 $ 2,570
Massachusetts Fund....................................................... $ 3,387 $ 298 $ 3,089
Michigan Fund............................................................ $ 479 $ 59 $ 420
New Jersey Fund.......................................................... $ 1,128 $ 31 $ 1,097
New York Fund............................................................ $ 4,790 $ 476 $ 4,314
Pennsylvania Fund........................................................ $ 533 $ 14 $ 519
</TABLE>
<TABLE>
<CAPTION>
FOR THE PERIOD OCTOBER 21, 1994+
TO JULY 31, 1995
-------------------------------------------
CLASS D AMOUNT AMOUNT
GROSS SALES PAID TO PAID TO
FUND CHARGES DISTRIBUTOR MERRILL LYNCH
- ------------------------------------------------------------------------- ----------- ----------- -------------
<S> <C> <C> <C>
Arizona Fund............................................................. $ 98 $ 3 $ 95
California Fund.......................................................... $ 2,145 $ 115 $ 2,030
Florida Fund............................................................. $12,063 $ 1,099 $10,964
Massachusetts Fund....................................................... $ 64 $ 33 $ 31
Michigan Fund............................................................ $ 888 $ 91 $ 797
New Jersey Fund.......................................................... $ 2,108 $ 222 $ 1,886
New York Fund............................................................ $ 3,877 $ 232 $ 3,645
Pennsylvania Fund........................................................ $ 1,198 $ 49 $ 1,149
</TABLE>
- ------------
+ Commencement of Operations.
No Fund received CDSCs with respect to redemption within one year after purchase
of Class D shares purchased subject to a front-end sales charge waiver during
the fiscal year ended July 31, 1996 or the period October 21, 1994 (commencment
of operations) to July 31, 1995.
19
<PAGE>
The term 'purchase', as used in the Prospectus and this Statement of
Additional Information in connection with an investment in Class A and Class D
shares of a Fund, refers to a single purchase by an individual, or to concurrent
purchases, which in the aggregate are at least equal to the prescribed amounts,
by an individual, his or her spouse and their children under the age of 21 years
purchasing shares for his or her or their own account and to single purchases by
a trustee or other fiduciary purchasing shares for a single trust estate or
single fiduciary account although more than one beneficiary is involved. The
term 'purchase' also includes purchases by any 'company', as that term is
defined in the 1940 Act, but does not include purchases by any such company
which has not been in existence for at least six months or which has no purpose
other than the purchase of shares of the Fund or shares of other registered
investment companies at a discount; provided, however, that it shall not include
purchases by any group of individuals whose sole organizational nexus is that
the participants therein are credit cardholders of a company, policyholders of
an insurance company, customers of either a bank or broker-dealer or clients of
an investment adviser.
Closed-End Fund Investment Option. Class A shares of each Fund and other
MLAM-advised mutual funds ('Eligible Class A shares') are offered at net asset
value to shareholders of certain closed-end funds advised by the Manager or MLAM
who purchased such closed-end fund shares prior to October 21, 1994, the date
the Merrill Lynch Select Pricing(Service Mark) System commenced operations, and
wish to reinvest the net proceeds of a sale of their closed-end fund shares of
common stock in Eligible Class A shares, if the conditions set forth below are
satisfied. Alternatively, closed-end fund shareholders who purchased such shares
on or after October 21, 1994 and wish to reinvest the net proceeds from a sale
of their closed-end fund shares are offered Class A shares (if eligible to
purchase Class A shares) or Class D shares of each Fund and other MLAM-advised
mutual funds ('Eligible Class D shares'), if the following conditions are met.
First, the sale of closed-end fund shares must be made through Merrill Lynch,
and the net proceeds therefrom must be reinvested immediately in Eligible Class
A or Class D shares. Second, the closed-end fund shares must either have been
acquired in the initial public offering or be shares representing dividends from
shares of common stock acquired in such offering. Third, the closed-end fund
shares must have been maintained continuously in a Merrill Lynch securities
account. Fourth, there must be a minimum purchase of $250 to be eligible for the
investment option.
Shareholders of certain MLAM-advised continuously offered closed-end funds
may reinvest at net asset value the net proceeds from a sale of certain shares
of common stock of such funds in shares of a Fund. Upon exercise of this
investment option, shareholders of Merrill Lynch Senior Floating Rate Fund, Inc.
will receive Class A shares of the Fund and shareholders of Merrill Lynch
Municipal Strategy Fund, Inc. and Merrill Lynch High Income Municipal Bond Fund,
Inc. will receive Class D shares of the Fund, except that shareholders already
owning Class A shares of the Fund will be eligible to purchase additional Class
A shares pursuant to this option, if such additional Class A shares will be held
in the same account as the existing Class A shares and the other requirements
pertaining to the reinvestment privilege are met. In order to exercise this
investment option, a shareholder of one of the above-referenced continuously
offered closed-end funds (an 'eligible fund') must sell his or her shares of
common stock of the eligible fund (the 'eligible shares') back to the eligible
fund in connection with a tender offer conducted by the eligible fund and
reinvest the proceeds immediately in the designated class of shares of the Fund.
This investment option is available only with respect to eligible shares as to
which no Early Withdrawal Charge or CDSC (each as defined in the eligible fund's
prospectus) is applicable. Purchase orders from eligible fund shareholders
wishing to exercise this investment option will be accepted only on the day that
the related tender offer terminates and will be effected at the net asset value
of the designated class of the Fund on such day.
REDUCED INITIAL SALES CHARGES
Right of Accumulation. Reduced sales charges are applicable through a
right of accumulation under which eligible investors are permitted to purchase
shares of a Fund subject to an initial sales charge at the offering price
applicable to the total of (a) the public offering price of the shares then
being purchased plus (b) an amount equal to the then current net asset value or
cost, whichever is higher, of the purchaser's combined holdings of all classes
of shares of a Fund and of other MLAM-advised mutual funds. For any such right
of accumulation to be made available, the Distributor must be provided at the
time of purchase, by the purchaser or the purchaser's securities dealer, with
sufficient information to permit confirmation of qualification. Acceptance of
the purchase
20
<PAGE>
order is subject to such confirmation. The right of accumulation may be amended
or terminated at any time. Shares held in the name of a nominee or custodian
under pension, profit-sharing or other employee benefit plans may not be
combined with other shares to qualify for the right of accumulation.
Letter of Intention. Reduced sales charges are applicable to purchases
aggregating $100,000 or more of the Class A or Class D shares of a Fund or any
other MLAM-advised mutual funds within a 13-month period starting with the first
purchase pursuant to a Letter of Intention in the form provided in the
Prospectus. The Letter of Intention is available only to investors whose
accounts are maintained at the Trust's Transfer Agent. The Letter of Intention
is not available to employee benefit plans for which Merrill Lynch provides plan
participant record-keeping services. The Letter of Intention is not a binding
obligation to purchase any amount of Class A or Class D shares of any Fund;
however, its execution will result in the purchaser paying a lower sales charge
at the appropriate quantity purchase level. A purchase not originally made
pursuant to a Letter of Intention may be included under a subsequent Letter of
Intention executed within 90 days of such purchase if the Distributor is
informed in writing of this intent within such 90-day period. The value of Class
A and Class D shares of a Fund and of other MLAM-advised mutual funds presently
held, at cost or maximum offering price (whichever is higher), on the date of
the first purchase under the Letter of Intention, may be included as a credit
toward the completion of such Letter, but the reduced sales charge applicable to
the amount covered by such Letter will be applied only to new purchases. If the
total amount of shares does not equal the amount stated in the Letter of
Intention (minimum of $100,000), the investor will be notified and must pay,
within 20 days of the expiration of such Letter, the difference between the
sales charge on the Class A or Class D shares of the Fund purchased at the
reduced rate and the sales charge applicable to the shares of the Fund actually
purchased through the Letter. Class A or Class D shares of the Fund equal to at
least five percent of the intended amount will be held in escrow during the
13-month period (while remaining registered in the name of the purchaser) for
this purpose. The first purchase under the Letter of Intention must be at least
five percent of the dollar amount of such Letter. If during the term of such
Letter, a purchase brings the total amount invested to an amount equal to or in
excess of the amount indicated in the Letter, the purchaser will be entitled on
that purchase and subsequent purchases to the reduced percentage sales charge
which would be applicable to a single purchase equal to the total dollar value
of the Class A or Class D shares then being purchased under such Letter, but
there will be no retroactive reduction of the sales charges on any previous
purchase. The value of any shares redeemed or otherwise disposed of by the
purchaser prior to termination or completion of the Letter of Intention will be
deducted from the total purchases made under such Letter. An exchange from a
MLAM-advised money market fund into a Fund that creates a sales charge will
count toward completing a new or existing Letter of Intention to the Fund.
Employee Access Accounts(Service Mark). Class A or Class D shares are
offered at net asset value to Employee Access Accounts(Service Mark) available
through qualified employers that provide employer-sponsored retirement or
savings plans that are eligible to purchase such shares at net asset value. The
initial minimum for such accounts is $500, except that the initial minimum for
shares purchased for such accounts pursuant to the Automatic Investment Program
is $50.
TMA(Service Mark) Managed Trusts. Class A shares are offered to
TMA(Service Mark) Managed Trusts to which Merrill Lynch Trust Company provides
discretionary trustee services at net asset value.
Purchase Privilege of Certain Persons. Trustees of the Trust, members of
the Boards of other MLAM-advised investment companies, ML&Co. and its
subsidiaries (the term 'subsidiaries,' when used herein with respect to ML&Co.,
includes MLAM, the Manager and certain other entities directly or indirectly
wholly owned or controlled by ML&Co.), and their directors and employees, and
any trust, pension, profit-sharing or other benefit plan for such persons, may
purchase Class A shares of a Fund at net asset value.
Class D shares of each Fund are offered at net asset value, without a sales
charge, to an investor who has a business relationship with a financial
consultant who joined Merrill Lynch from another investment firm within six
months prior to the date of purchase by such investor, if the following
conditions are satisfied: first, the investor must advise Merrill Lynch that it
will purchase Class D shares of the Fund with proceeds from a redemption of a
mutual fund that was sponsored by the financial consultant's previous firm and
was subject to a sales charge either at the time of purchase or on a deferred
basis; and second, the investor also must establish that
21
<PAGE>
such redemption had been made within 60 days prior to the investment in the
Fund, and the proceeds from the redemption had been maintained in the interim in
cash or a money market fund.
Class D shares of the Fund are also offered at net asset value, without a
sales charge, to an investor who has a business relationship with a Merrill
Lynch Financial Consultant and who has invested in a mutual fund for which
Merrill Lynch has not served as a selected dealer if the following conditions
are satisfied: first, the investor must advise Merrill Lynch that it will
purchase Class D shares of the Fund with proceeds from the redemption of shares
of such other mutual fund and that such shares have been outstanding for a
period of no less than six months; and second, such purchase of Class D shares
must be made within 60 days after the redemption and the proceeds from the
redemption must be maintained in the interim in cash or a money market fund.
Class D shares of the Fund are also offered at net asset value, without a
sales charge, to an investor who has a business relationship with a Merrill
Lynch Financial Consultant and who has invested in a mutual fund sponsored by a
non-Merrill Lynch company for which Merrill Lynch has served as a selected
dealer and where Merrill Lynch has either received or given notice that such
arrangement will be terminated ('notice'), if the following conditions are
satisfied: first, the investor must purchase Class D shares of the Fund with
proceeds from a redemption of shares of such other mutual fund and the shares of
such other fund were subject to a sales charge either at the time of purchase or
on a deferred basis; and second, such purchase of Class D shares must be made
within 90 days after such notice.
Acquisition of Certain Investment Companies. The public offering price of
Class D shares of a Fund may be reduced to the net asset value per Class D share
of that Fund in connection with the acquisition of the assets of or merger or
consolidation with a personal holding company or a public or private investment
company. The value of the assets or company acquired in a tax-free transaction
may be adjusted in appropriate cases to reduce possible adverse tax consequences
to each Fund which might result from an acquisition of assets having net
unrealized appreciation which is disproportionately higher at the time of
acquisition than the realized or unrealized appreciation of each Fund. The
issuance of Class D shares for consideration other than cash is limited to bona
fide reorganizations, statutory mergers or other acquisitions of portfolio
securities which (i) meet the investment objectives and policies of the related
Fund; (ii) are acquired for investment and not for resale (subject to the
understanding that the disposition of a Fund's portfolio securities shall at all
times remain within its control); and (iii) are liquid securities, the value of
which is readily ascertainable, which are not restricted as to transfer either
by law or liquidity of market (except that a Fund may acquire through such
transactions restricted or illiquid securities to the extent the Fund does not
exceed the applicable limits for that Fund on acquisition of such securities set
forth under 'Investment Objectives and Policies' herein).
Reductions in or exemptions from the imposition of a sales load are due to
the nature of the investors and/or the reduced sales efforts that will be needed
in obtaining such investments.
DISTRIBUTION PLANS
Reference is made to 'Purchase of Shares--Distribution Plans' in the
Prospectus for certain information with respect to the separate distribution
plans of each Fund for Class B, Class C and Class D shares pursuant to Rule
12b-1 under the 1940 Act (each a 'Distribution Plan') with respect to the
account maintenance and/or distribution fees paid by the Funds to the
Distributor with respect to such classes.
Payments of the account maintenance fees and/or distribution fees are
subject to the provisions of Rule 12b-1 under the 1940 Act. Among other things,
each Distribution Plan provides that the Distributor shall provide and the
Trustees shall review quarterly reports of the disbursement of the account
maintenance and/or distribution fees paid by each Fund to the Distributor. In
their consideration of each of the Distribution Plans, the Trustees must
consider all factors they deem relevant, including information as to the
benefits of each Distribution Plan to its Fund and its related class of
shareholders. Each Distribution Plan further provides that, so long as the
Distribution Plan remains in effect, the selection and nomination of Trustees
who are not 'interested persons' of the Trust, as defined in the 1940 Act (the
'Independent Trustees'), shall be committed to the discretion of the Independent
Trustees then in office. In separately approving each Distribution Plan in
accordance with Rule 12b-1, the Independent Trustees concluded that there is a
reasonable likelihood that such Distribution Plan will benefit the related Fund
and its related class of shareholders. Any Distribution Plan can be
22
<PAGE>
terminated at any time, without penalty, by the vote of a majority of the
Independent Trustees or by the vote of the holders of a majority of the
outstanding related class of voting securities of the related Fund. No
Distribution Plan can be amended to increase materially the amount to be spent
by the related Fund without approval by the related class of shareholders of
that Fund, and all material amendments are required to be approved by the vote
of Trustees, including a majority of the Independent Trustees who have no direct
or indirect financial interest in the Distribution Plan, cast in person at a
meeting called for that purpose. Rule 12b-1 further requires that the Trust
preserve copies of each Distribution Plan and any report made pursuant to such
plan for a period of not less than six years from the date of such Distribution
Plan or such report, the first two years in an easily accessible place.
LIMITATIONS ON THE PAYMENT OF DEFERRED SALES CHARGES
The maximum sales charge rule in the Conduct Rules of the National
Association of Securities Dealers, Inc. ('NASD') imposes a limitation on certain
asset-based sales charges such as the distribution fee and the CDSC borne by the
Class B shares of each Fund, but not the account maintenance fee. The maximum
sales charge rule is applied separately to each class. As applicable to each
Fund, the maximum sales charge rule limits the aggregate of distribution fee
payments and CDSCs payable by each Fund to (1) 6.25% of eligible gross sales of
Class B shares of that Fund, computed separately (defined to exclude shares
issued pursuant to dividend reinvestments and exchanges) plus (2) interest on
the unpaid balance for the respective class, computed separately, at the prime
rate plus 1% (the unpaid balance being the maximum amount payable minus amounts
received from the payment of the distribution fee and the CDSC of that Fund). In
connection with the Class B shares, the Distributor has voluntarily agreed to
waive interest charges on the unpaid balance in excess of 0.50% of eligible
gross sales. Consequently, the maximum amount payable to the Distributor in
connection with each Fund (referred to as the 'voluntary maximum') in connection
with the Class B shares is 6.75% of eligible gross sales of that Fund. The
Distributor retains the right to stop waiving the interest charges at any time.
To the extent a Fund's payments would exceed the voluntary maximum, such Fund
will not make further payments of the distribution fee with respect to Class B
shares, and any CDSCs will be paid to the Fund rather than to the Distributor;
however, such Fund will continue to make payments of the account maintenance
fee. In certain circumstances the amount payable pursuant to the voluntary
maximum may exceed the amount payable under the NASD formula. In such
circumstances payment in excess of the amount payable under the NASD formula
will not be made.
The following table sets forth comparative information for the period
November 26, 1993 (commencement of operations) to July 31, 1996 with respect to
the Class B shares of each of the Funds, indicating the maximum allowable
payments that can be made under the NASD maximum sales charge rule and the
Distributor's voluntary maximum. No information is presented for the Class C
shares of the Funds because Class C shares are not available for purchase but
will be issued only pursuant to the exchange privilege to holders of Class C
shares of other MLAM-advised mutual funds who elect to exchange Class C shares
of such other MLAM-advised mutual fund for Class C shares of one of the Funds.
23
<PAGE>
<TABLE>
<CAPTION>
DATA CALCULATED AS OF JULY 31, 1996
------------------------------------------------------------------------------------------
(IN THOUSANDS)
ANNUAL
ALLOWABLE ALLOWABLE AMOUNTS DISTRIBUTION
ELIGIBLE AGGREGATE INTEREST ON MAXIMUM PREVIOUSLY AGGREGATE FEE AT
GROSS SALES UNPAID AMOUNT PAID TO UNPAID CURRENT NET
SALES(1) CHARGES BALANCE(2) PAYABLE DISTRIBUTOR(3) BALANCE ASSET LEVEL(4)
-------- --------- ----------- ------- -------------- --------- --------------
<S> <C> <C> <C> <C> <C> <C> <C>
Arizona Fund
Under NASD Rule as Adopted........... $ 6,624 $ 414 $ 92 $ 506 $ 52 $ 454 $ 6
Under Distributor's Voluntary
Waiver............................. $ 6,624 $ 414 $ 33 $ 447 $ 52 $ 395 $ 6
California Fund
Under NASD Rule as Adopted........... $ 12,777 $ 798 $ 173 $ 971 $ 71 $ 900 $ 20
Under Distributor's Voluntary
Waiver............................. $ 12,777 $ 798 $ 64 $ 862 $ 71 $ 791 $ 20
Florida Fund
Under NASD Rule as Adopted........... $ 22,409 $ 1,400 $ 284 $1,684 $330 $ 1,354 $ 27
Under Distributor's Voluntary
Waiver............................. $ 22,409 $ 1,400 $ 112 $1,512 $330 $ 1,182 $ 27
Massachusetts Fund
Under NASD Rule as Adopted........... $ 10,460 $ 654 $ 137 $ 791 $ 60 $ 731 $ 9
Under Distributor's Voluntary
Waiver............................. $ 10,460 $ 654 $ 52 $ 706 $ 60 $ 646 $ 9
Michigan Fund
Under NASD Rule as Adopted........... $ 3,216 $ 201 $ 45 $ 246 $ 27 $ 219 $ 4
Under Distributor's Voluntary
Waiver............................. $ 3,216 $ 201 $ 16 $ 217 $ 27 $ 190 $ 4
New Jersey Fund
Under NASD Rule as Adopted........... $ 10,628 $ 664 $ 144 $ 808 $ 59 $ 749 $ 10
Under Distributor's Voluntary
Waiver............................. $ 10,628 $ 664 $ 53 $ 717 $ 59 $ 658 $ 10
New York Fund
Under NASD Rule as Adopted........... $ 13,525 $ 845 $ 163 $1,008 $ 73 $ 935 $ 20
Under Distributor's Voluntary
Waiver............................. $ 13,525 $ 845 $ 68 $ 913 $ 73 $ 840 $ 20
Pennsylvania Fund
Under NASD Rule as Adopted........... $ 10,547 $ 659 $ 150 $ 809 $ 63 $ 746 $ 13
Under Distributor's Voluntary
Waiver............................. $ 10,547 $ 659 $ 53 $ 712 $ 63 $ 649 $ 13
</TABLE>
- ------------
(1) Purchase price of all eligible Class B shares sold since November 26, 1993
(commencement of operations) other than shares acquired through dividend
reinvestment and the exchange privilege.
(2) Interest is computed on a monthly basis based upon the prime rate, as
reported in The Wall Street Journal, plus 1.0%, as permitted under the NASD
Rule.
(3) Consists of CDSC payments, distribution fee payments and accruals. See
'Purchase of Shares--Distribution Plans' in the Prospectus.
(4) Provided to illustrate the extent to which the current level of distribution
fee payments (not including any CDSC payments) is amortizing the unpaid
balance. No assurance can be given that payments of the distribution fee
will reach either the voluntary maximum or the NASD maximum.
24
<PAGE>
REDEMPTION OF SHARES
Reference is made to 'Redemption of Shares' in the Prospectus for certain
information as to the redemption and repurchase of shares of each Fund.
The right to redeem shares of any Fund or to receive payment with respect
to any such redemption may be suspended only for any period during which trading
on the NYSE is restricted as determined by the Commission or the NYSE is closed
(other than customary weekend and holiday closings), for any period during which
an emergency exists, as defined by the Commission, as a result of which disposal
of portfolio securities or determination of the net asset value of a Fund is not
reasonably practicable, and for such other periods as the Commission may by
order permit for the protection of shareholders of the Funds.
DEFERRED SALES CHARGES--CLASS B AND CLASS C SHARES
As discussed in the Prospectus under 'Purchase of Shares--Deferred Sales
Charge Alternatives--Class B and Class C Shares', while Class B shares redeemed
within one year of purchase are subject to a CDSC under most circumstances, the
charge is waived on redemptions of Class B shares following the death or
disability of a Class B shareholder. Redemptions for which the waiver applies
are any partial or complete redemption following the death or disability (as
defined in the Internal Revenue Code of 1986, as amended (the 'Code')) of a
Class B shareholder (including one who owns the Class B shares as joint tenant
with his or her spouse), provided the redemption is requested within one year of
the death or initial determination of disability.
For the fiscal years ended July 31, 1996 and 1995, and for the period
November 26, 1993 (commencement of operations) to July 31, 1994, the Distributor
received CDSCs from the Funds with respect to redemptions of Class B shares as
follows, all of which were paid to Merrill Lynch:
<TABLE>
<CAPTION>
FOR THE YEAR
ENDED JULY 31, FOR THE PERIOD
------------------- NOVEMBER 26, 1993+
FUND 1996 1995 TO JULY 31, 1994
- ----------------------------------------------------------------- ------- -------- ------------------------
<S> <C> <C> <C>
Arizona Fund..................................................... $10,222 $ 13,587 $ 1,505
California Fund.................................................. $ 3,459 $ 5,805 $ 5,716
Florida Fund..................................................... $18,456 $202,558 $ 17,622
Massachusetts Fund............................................... $ 4,849 $ 10,430 $ 11,965
Michigan Fund.................................................... $ 6,724 $ 3,977 $ 3,454
New Jersey Fund.................................................. $ 8,141 $ 6,305 $ 6,854
New York Fund.................................................... $ 6,475 $ 6,435 $ 9,833
Pennsylvania Fund................................................ $ 3,775 $ 7,971 $ 6,500
</TABLE>
- ------------------
+ Commencement of Operations.
For the fiscal year ended July 31, 1996 and for the period October 21, 1994
(commencement of operations) to July 31, 1995, the Distributor received no CDSCs
with respect to redemptions of Class C shares.
25
<PAGE>
PORTFOLIO TRANSACTIONS
Reference is made to 'Investment Objectives and Policies' and 'Portfolio
Transactions' in the Prospectus.
Under the 1940 Act, persons affiliated with the Trust are prohibited from
dealing with the Trust or any Fund as principals in the purchase and sale of
securities unless such trading is permitted by an exemptive order issued by the
Commission. Since over-the-counter transactions are usually principal
transactions, affiliated persons of the Trust, including Merrill Lynch, may not
serve as dealers in connection with transactions with the Funds absent an
exemptive order from the Commission. The Trust has obtained an exemptive order
permitting it to engage in certain principal transactions with Merrill Lynch
involving high quality short-term municipal bonds subject to certain conditions.
The table below sets forth for the fiscal years ended July 31, 1996 and 1995,
and for the period November 26, 1993 (commencement of operations) to July 31,
1994, information about the transactions engaged in by the Funds pursuant to
this order.
<TABLE>
<CAPTION>
FOR THE PERIOD
FOR THE YEAR ENDED FOR THE YEAR ENDED NOVEMBER 26, 1993+
JULY 31, 1996 JULY 31, 1995 TO JULY 31, 1994
----------------------------- ----------------------------- -----------------------------
NUMBER OF AGGREGATE NUMBER OF AGGREGATE NUMBER OF AGGREGATE
FUND TRANSACTIONS DOLLAR AMOUNT TRANSACTIONS DOLLAR AMOUNT TRANSACTIONS DOLLAR AMOUNT
- ------------------------ ------------ ------------- ------------ ------------- ------------ -------------
<S> <C> <C> <C> <C> <C> <C>
Arizona Fund............ 3 $ 300,000 2 $ 600,000 0 --
California Fund......... 0 -- 5 $ 1,800,000 8 $ 4,704,660
Florida Fund............ 2 $ 1,000,000 0 -- 1 $ 1,102,552
Massachusetts Fund...... 3 $ 600,000 1 $ 200,000 0 --
Michigan Fund........... 1 $ 200,000 0 -- 2 $ 400,464
New Jersey Fund......... 5 $ 800,000 4 $ 1,100,000 1 $ 401,652
New York Fund........... 0 -- 0 -- 3 $ 1,601,675
Pennsylvania Fund....... 1 $ 401,836 3 $ 1,300,000 1 $ 322,314
</TABLE>
- ------------------
+ Commencement of Operations.
The Trust has applied for an exemptive order permitting it to, among other
things, (i) purchase high quality tax-exempt securities from Merrill Lynch when
Merrill Lynch is a member of an underwriting syndicate and (ii) purchase
tax-exempt securities from and sell tax-exempt securities to Merrill Lynch in
secondary market transactions. Affiliated persons of the Trust may serve as its
broker in over-the-counter transactions conducted on an agency basis. Certain
court decisions have raised questions as to the extent to which investment
companies should seek exemptions under the 1940 Act in order to seek to
recapture underwriting and dealer spreads from affiliated entities. The Trustees
have considered all factors deemed relevant and have made a determination not to
seek such recapture at this time. The Trustees will reconsider this matter from
time to time.
As a non-fundamental restriction, the Trust will prohibit the purchase or
retention by any Fund of the securities of any issuer if the officers and
Trustees of the Trust, the officers and general partner of the Manager, the
directors of such general partner or the officers and directors of any
subsidiary thereof each owning beneficially more than one-half of one per cent
of the securities of an issuer own in the aggregate more than five per cent of
the securities of such issuer. In addition, under the 1940 Act, the Funds may
not purchase securities from any underwriting syndicate of which Merrill Lynch
is a member except pursuant to an exemptive order or rules adopted by the
Commission. Rule 10f-3 under the 1940 Act sets forth conditions under which a
Fund may purchase municipal bonds in such transactions. The rule sets forth
requirements relating to, among other things, the terms of an issue of municipal
bonds purchased by a Fund, the amount of municipal bonds which may be purchased
in any one issue and the assets of a Fund which may be invested in a particular
issue.
The Funds do not expect to use any particular dealer in the execution of
transactions but, subject to obtaining the best net results, dealers who provide
supplemental investment research (such as information concerning tax-exempt
securities, economic data and market forecasts) to the Manager may receive
orders for transactions by the Funds. Information so received will be in
addition to and not in lieu of the services required to be performed by the
Manager under its Management Agreement, and the expenses of the Manager will not
necessarily be reduced as a result of the receipt of such supplemental
information.
26
<PAGE>
The Funds have no obligation to deal with any broker in the execution of
transactions for their portfolio securities. In addition, consistent with the
Conduct Rules of the NASD and policies established by the Trustees of the Trust,
the Manager may consider sales of shares of the Funds as a factor in the
selection of brokers or dealers to execute portfolio transactions for the Funds.
DETERMINATION OF NET ASSET VALUE
The net asset value of the shares of all classes of each Fund is determined
by the Manager once daily, Monday through Friday, as of 15 minutes after the
close of business on the NYSE (generally, 4:00 p.m., New York time) on each day
during which the NYSE is open for trading. The NYSE is not open on New Year's
Day, Presidents' Day, Good Friday, Memorial Day, Independence Day, Labor Day,
Thanksgiving Day and Christmas Day. Net asset value per share of a Fund is
computed by dividing the sum of the value of the securities held by the Fund
plus any cash or other assets minus all liabilities by the total number of
shares outstanding at such time, rounded to the nearest cent. Expenses,
including the fees payable to the Manager and Distributor, are accrued daily.
The net asset value per share of each class of shares of a Fund are expected to
be equivalent. The per share net asset value of a Fund's Class B, Class C and
Class D shares generally will be lower than the per share net asset value of its
Class A shares, reflecting the daily expense accruals of the account
maintenance, distribution and higher transfer agency fees applicable with
respect to Class B and Class C shares of the Fund and the daily expense accruals
of the account maintenance fees applicable with respect to Class D shares; in
addition, the per share net asset value of Class B and Class C shares generally
will be lower than the per share net asset value of its Class D shares,
reflecting the daily expense accruals of the distribution fees, higher account
maintenance fees and higher transfer agency fees applicable with respect to
Class B and Class C shares of the Fund. It is expected, however, that the per
share net asset value of the four classes will tend to converge (although not
necessarily meet) immediately after the payment of dividends, which will differ
by approximately the amount of the expense accrual differentials between the
classes.
The Municipal Bonds and other portfolio securities in which the Funds
invest are traded primarily in over-the-counter municipal bond and money markets
and are valued at the last available bid price in the over-the-counter market or
on the basis of yield equivalents as obtained from one or more dealers that make
markets in the securities. One bond is the 'yield equivalent' of another bond
when, taking into account market price, maturity, coupon rate, credit rating and
ultimate return of principal, both bonds theoretically will produce an
equivalent return to the bondholder. Financial futures contracts and options
thereon, which are traded on exchanges, are valued at their settlement prices as
of the close of such exchanges. Short-term investments with a remaining maturity
of 60 days or less are valued on an amortized cost basis, which approximates
market value. Securities and assets for which market quotations are not readily
available are valued at fair value as determined in good faith by or under the
direction of the Trustees of the Trust, including valuations furnished by a
pricing service retained by the Trust, which may utilize a matrix system for
valuations. The procedures of the pricing service and its valuations are
reviewed by the officers of the Trust under the general supervision of the
Trustees.
27
<PAGE>
SHAREHOLDER SERVICES
The Trust offers a number of shareholder services described below which are
designed to facilitate investment in shares of the Funds. Full details as to
each of such services and copies of the various plans described below can be
obtained from the Trust, the Distributor or Merrill Lynch.
INVESTMENT ACCOUNT
Each shareholder whose account is maintained at the Transfer Agent has an
Investment Account and will receive statements, at least quarterly, from the
Transfer Agent. These statements will serve as transaction confirmations for
automatic investment purchases and the reinvestment of ordinary income dividends
and long-term capital gains distributions. The statements will also show any
other activity in the account since the previous statement. Shareholders also
will receive separate confirmations for each purchase or sale transaction other
than automatic investment purchases and the reinvestment of ordinary income
dividends and long-term capital gains distributions. A shareholder may make
additions to his or her Investment Account at any time by mailing a check
directly to the Transfer Agent.
Share certificates are issued only for full shares and only upon the
specific request of the shareholder who has an Investment Account. Issuance of
certificates representing all or only part of the full shares in an Investment
Account may be requested by a shareholder directly from the Transfer Agent.
Shareholders considering transferring their Class A or Class D shares from
Merrill Lynch to another brokerage firm or financial institution should be aware
that, if the firm to which the Class A or Class D shares are to be transferred
will not take delivery of shares of the relevant Fund, a shareholder either must
redeem the Class A or Class D shares (paying any applicable CDSC) so that the
cash proceeds can be transferred to the account at the new firm, or such
shareholder must continue to maintain an Investment Account at the Transfer
Agent for those Class A or Class D shares. Shareholders interested in
transferring their Class B or Class C shares from Merrill Lynch and who do not
wish to have an Investment Account maintained for such shares at the Transfer
Agent may request their new brokerage firm to maintain such shares in an account
registered in the name of the brokerage firm for the benefit of the shareholder
at the Transfer Agent. If the new brokerage firm is willing to accommodate the
shareholder in this manner, the shareholder must request that he or she be
issued certificates for his or her shares, and then must turn the certificates
over to the new firm for re-registration as described in the preceding sentence.
AUTOMATIC INVESTMENT PLANS
A shareholder of a Fund may make additions to an Investment Account at any
time by purchasing Class A shares (if he or she is an eligible Class A investor
as described in the Prospectus) or Class B or Class D shares at the applicable
public offering price either through the shareholder's securities dealer or by
mail directly to the Transfer Agent, acting as agent for such securities
dealers. Voluntary accumulation also can be made through a service known as a
Fund's Automatic Investment Plan whereby each Fund is authorized through
pre-authorized checks or automated clearing house debits of $50 or more to
charge the regular bank account of the shareholder on a regular basis to provide
systematic additions to the Investment Account of such shareholder.
Alternatively, an investor who maintains a CMA(Registered) or CBA(Registered)
account may arrange to have periodic investments made in a Fund in such
CMA(Registered) or CBA(Registered) account or in certain related accounts in
amounts of $100 or more through the CMA(Registered) or CBA(Registered) Automated
Investment Program.
AUTOMATIC REINVESTMENT OF DIVIDENDS AND CAPITAL GAINS DISTRIBUTIONS
Unless specific instructions are given as to the method of payment of
dividends and capital gains distributions, dividends and distributions will be
automatically reinvested in additional shares of the respective Fund. Such
reinvestment will be at the net asset value of shares of the respective Fund as
of the close of business on the monthly payment date for such dividends and
distributions. Shareholders may elect in writing to receive either their income
dividends or capital gains distributions, or both, in cash, in which event
payment will be mailed on or about the payment date.
28
<PAGE>
Shareholders, at any time, may notify the Transfer Agent in writing or by
telephone (1-800-MER-FUND) that they no longer wish to have their dividends
and/or capital gains distributions reinvested in shares of the respective Fund
or vice versa and, commencing ten days after the receipt by the Transfer Agent
of such notice, such instructions will be effected.
SYSTEMATIC WITHDRAWAL PLANS--CLASS A AND CLASS D SHARES
A Class A or Class D shareholder may elect to make systematic withdrawals
from an Investment Account on either a monthly or quarterly basis as provided
below. Quarterly withdrawals are available for shareholders who have acquired
Class A or Class D shares of a Fund having a value, based on cost or the current
offering price, of $5,000 or more, and monthly withdrawals are available for
shareholders with Class A or Class D shares with such a value of $10,000 or
more.
At the time of each withdrawal payment, sufficient Class A or Class D
shares are redeemed from those on deposit in the shareholder's account to
provide the withdrawal payment specified by the shareholder. The shareholder may
specify either a dollar amount or a percentage of the value of his or her Class
A or Class D shares. Redemptions will be made at net asset value as determined
15 minutes after the close of business on the NYSE (generally 4:00 p.m., New
York time) on the 24th day of each month or the 24th day of the last month of
each quarter, whichever is applicable. If the NYSE is not open for business on
such date, the Class A or Class D shares will be redeemed at the close of
business on the following business day. The check for the withdrawal payment
will be mailed, or the direct deposit for the withdrawal payment will be made,
on the next business day following redemption. When a shareholder is making
systematic withdrawals, dividends and distributions on all Class A or Class D
shares in the Investment Account are reinvested automatically in the respective
Fund's Class A or Class D shares, respectively. A shareholder's Systematic
Withdrawal Plan may be terminated at any time, without charge or penalty, by
either the shareholder, the Trust, the Transfer Agent or the Distributor.
Withdrawal payments should not be considered as dividends, yield or income. Each
withdrawal is a taxable event. If periodic withdrawals continuously exceed
reinvested dividends, the shareholder's original investment may be reduced
correspondingly. Purchases of additional Class A or Class D shares concurrent
with withdrawals are ordinarily disadvantageous to the shareholder because of
sales charges and tax liabilities. The Trust will not knowingly accept purchase
orders for Class A or Class D shares of a Fund from investors who maintain a
Systematic Withdrawal Plan unless such purchase is equal to at least one year's
scheduled withdrawals or $1,200, whichever is greater. Periodic investments may
not be made into an Investment Account in which the shareholder has elected to
make systematic withdrawals.
Alternatively, a Class A or Class D shareholder whose shares are held
within a CMA(Registered) or CBA(Registered) Account may elect to have shares
redeemed on a monthly, bimonthly, quarterly, semiannual or annual basis through
the CMA(Registered) or CBA(Registered) Systematic Redemption Program. The
minimum fixed dollar amount redeemable is $25. The proceeds of systematic
redemptions will be posted to the shareholder's account three business days
after the date the shares are redeemed. Monthly systematic redemptions will be
made at net asset value on the first Monday of each month, bimonthly systematic
redemptions will be made at net asset value on the first Monday of every other
month, and quarterly, semiannual or annual redemptions are made at net asset
value on the first Monday of months selected at the shareholder's option. If the
first Monday of the month is a holiday, the redemption will be processed at net
asset value on the next business day. The Systematic Redemption Program is not
available if Fund shares are being purchased within the account pursuant to the
Automatic Investment Program. For more information on the CMA(Registered) or
CBA(Registered) Systematic Redemption Program, eligible shareholders should
contact their Financial Consultant.
EXCHANGE PRIVILEGE
Shareholders of each class of shares of each of the Funds have an exchange
privilege with certain other MLAM-advised mutual funds. Under the Merrill Lynch
Select Pricing(Service Mark) System, Class A shareholders may exchange Class A
shares of a Fund for Class A shares of a second MLAM-advised mutual fund if the
shareholder holds any Class A shares of the second fund in his account in which
the exchange is made at the time of the exchange or is otherwise eligible to
purchase Class A shares of the second fund. If the Class A shareholder wants
29
<PAGE>
to exchange Class A shares for shares of a second MLAM-advised mutual fund, and
the shareholder does not hold Class A shares of the second fund in his account
at the time of the exchange and is not otherwise eligible to acquire Class A
shares of the second fund, the shareholder will receive Class D shares of the
second fund as a result of the exchange. Class D shares also may be exchanged
for Class A shares of a second MLAM-advised mutual fund at any time as long as,
at the time of the exchange, the shareholder holds Class A shares of the second
fund in the account in which the exchange is made or is otherwise eligible to
purchase Class A shares of the second fund. Class B, Class C and Class D shares
are exchangeable with shares of the same class of other MLAM-advised mutual
funds. For purposes of computing the CDSC that may be payable upon a disposition
of the shares acquired in the exchange, the holding period for the previously
owned shares of a Fund is 'tacked' to the holding period for the newly acquired
shares of the other fund as more fully described below. Class A, Class B, Class
C and Class D shares also are exchangeable for shares of certain MLAM-advised
money market funds as follows: Class A shares may be exchanged for shares of
Merrill Lynch Ready Assets Trust, Merrill Lynch Retirement Reserves Money Fund
(available only for exchanges with certain retirement plans), Merrill Lynch
U.S.A. Government Reserves and Merrill Lynch U.S. Treasury Money Fund; Class B,
Class C and Class D shares may be exchanged for shares of Merrill Lynch
Government Fund, Merrill Lynch Institutional Fund, Merrill Lynch Institutional
Tax-Exempt Fund and Merrill Lynch Treasury Fund. Shares with a net asset value
of at least $100 are required to qualify for the exchange privilege, and any
shares utilized in an exchange must have been held by the shareholder for 15
days. It is contemplated that the exchange privilege may be applicable to other
new mutual funds whose shares may be distributed by the Distributor.
Exchanges of Class A or Class D shares outstanding of each of the Funds
('outstanding Class A or Class D shares') for Class A or Class D shares of
another MLAM-advised mutual fund ('new Class A or Class D shares') are
transacted on the basis of relative net asset value per Class A or Class D
share, respectively, plus an amount equal to the difference, if any, between the
sales charge previously paid on the outstanding Class A or Class D shares and
the sales charge payable at the time of the exchange on the new Class A or Class
D shares. With respect to outstanding Class A or Class D shares as to which
previous exchanges have taken place, the 'sales charge previously paid' shall
include the aggregate of the sales charges paid with respect to such Class A or
Class D shares in the initial purchase and any subsequent exchange. Class A or
Class D shares issued pursuant to dividend reinvestment are sold on a no-load
basis in each of the funds offering Class A or Class D shares. For purposes of
the exchange privilege, Class A or Class D shares acquired through dividend
reinvestment shall be deemed to have been sold with a sales charge equal to the
sales charge previously paid on the Class A or Class D shares on which the
dividend was paid. Based on this formula, Class A or Class D shares generally
may be exchanged into the Class A or Class D shares of the other funds or into
shares of certain money market funds without or with a reduced sales charge.
In addition, each of the Funds with Class B or Class C shares outstanding
('outstanding Class B or Class C shares') offers to exchange its Class B or
Class C shares for Class B or Class C shares, respectively, of another
MLAM-advised mutual fund ('new Class B or Class C shares') on the basis of
relative net asset value per Class B or Class C share, without the payment of
any CDSC that might otherwise be due on redemption of the outstanding shares.
Class B shareholders of each Fund exercising the exchange privilege will
continue to be subject to the Fund's CDSC schedule if such schedule is higher
than the CDSC schedule relating to the Class B shares acquired through use of
the exchange privilege. In addition, Class B shares of each Fund acquired
through use of the exchange privilege will be subject to that Fund's CDSC
schedule if such schedule is higher than the CDSC schedule relating to the Class
B shares of the fund from which the exchange has been made. For purposes of
computing the sales charge that may be payable on a disposition of the new Class
B or Class C shares, the holding period for the outstanding Class B or Class C
shares is 'tacked' to the holding period of the new Class B or Class C shares.
For example, an investor may exchange Class B shares of a Fund for those of
Merrill Lynch Special Value Fund, Inc. ('Special Value Fund') after having held
the Fund's Class B shares for six months. The 1% CDSC that generally would apply
to a redemption would not apply to the exchange. Three and a half years later
the investor may decide to redeem the Class B shares of Special Value Fund and
receive cash. There will be no CDSC due on this redemption, since by tacking the
six month holding period of the Fund's Class B shares onto the three and a half
year holding period for the Special Value Fund Class B shares, the investor will
be deemed to have held the new Class B shares for four years.
30
<PAGE>
Shareholders also may exchange shares from any of the Funds into shares of
certain money market funds advised by the Manager or its affiliates, but the
period of time that Class B or Class C shares are held in a money market fund
will not count towards satisfaction of the holding period requirement for
purposes of reducing the CDSC or, with respect to Class B shares, towards
satisfaction of the conversion period. However, shares of a money market fund
which were acquired as a result of an exchange for Class B or Class C shares of
a Fund may, in turn, be exchanged back into Class B or Class C shares,
respectively, of any fund offering such shares, in which event the holding
period for Class B or Class C shares of the newly-acquired fund will be
aggregated with previous holding periods for purposes of reducing the CDSC.
Thus, for example, an investor may exchange Class B shares of a Fund for shares
of Merrill Lynch Institutional Fund ('Institutional Fund') after having held the
Fund's Class B shares for six months and three years later decide to redeem the
shares of Institutional Fund for cash. At the time of this redemption, the 1%
CDSC that would have been due had the Class B shares of the Fund been redeemed
for cash rather than exchanged for shares of Institutional Fund will be payable.
If, instead of such redemption, the shareholder exchanged such shares for Class
B shares of a fund with a four-year CDSC period which the shareholder continued
to hold for an additional three and a half years, any subsequent redemption
would not incur a CDSC.
Before effecting an exchange, shareholders of a Fund should obtain a
currently effective prospectus of the fund into which the exchange is to be
made.
To exercise the exchange privilege, a shareholder should contact his or her
Merrill Lynch Financial Consultant, who will advise the relevant Fund of the
exchange. Shareholders of the Funds, and shareholders of the other funds
described above with shares for which certificates have not been issued, may
exercise the exchange privilege by wire through their securities dealers. Each
Fund reserves the right to require a properly completed Exchange Application.
This exchange privilege may be modified or terminated at any time in accordance
with the rules of the Commission. Each Fund reserves the right to limit the
number of times an investor may exercise the exchange privilege. Certain funds
may suspend the continuous offering of their shares at any time and thereafter
may resume such offering from time to time. The exchange privilege is available
only to U.S. shareholders in states where the exchange legally may be made.
31
<PAGE>
DISTRIBUTIONS AND TAXES
FEDERAL
The Trust intends to continue to qualify each Fund for the special tax
treatment afforded regulated investment companies ('RICs') under the Internal
Revenue Code of 1986, as amended (the 'Code'). If a Fund so qualifies, the Fund
(but not its shareholders) will not be subject to Federal income tax to the
extent that it distributes its net investment income and net realized capital
gains. The Trust intends to cause each Fund to distribute substantially all of
such income.
As discussed in the Prospectus for the Trust, the Trust has established a
number of series, each referred to herein as a 'Fund'. Each Fund is treated as a
separate corporation for Federal income tax purposes. Each Fund, therefore, is
considered to be a separate entity in determining its treatment under the rules
for RICs described in the Prospectus. Losses in one Fund do not offset gains in
another Fund, and the requirements (other than certain organizational
requirements) for qualifying for RIC status are determined at the Fund level
rather than at the Trust level.
The Code requires a RIC to pay a nondeductible 4% excise tax to the extent
the RIC does not distribute, during each calendar year, 98% of its ordinary
income, determined on a calendar year basis, and 98% of its capital gains,
determined, in general, on an October 31 year-end, plus certain undistributed
amounts from previous years. The required distributions, however, are based only
on the taxable income of a RIC. The excise tax, therefore, generally will not
apply to the tax-exempt income of RICs, such as the Funds, that pay exempt-
interest dividends.
The Trust intends to qualify each Fund to pay 'exempt-interest dividends'
as defined in Section 852(b)(5) of the Code. Under such section if, at the close
of each quarter of a Fund's taxable year, at least 50% of the value of its total
assets consists of obligations exempt from Federal income tax ('tax-exempt
obligations') under Section 103(a) of the Code (relating generally to
obligations of a state or local governmental unit), a Fund shall be qualified to
pay exempt-interest dividends to its Class A, Class B, Class C and Class D
shareholders (together, the 'shareholders'). Exempt-interest dividends are
dividends or any part thereof paid by a Fund which are attributable to interest
on tax-exempt obligations and designated by the Trust as exempt-interest
dividends in a written notice mailed to each Fund's shareholders within 60 days
after the close of such Fund's taxable year. For this purpose, the Funds will
allocate interest from tax-exempt obligations (as well as ordinary income,
capital gains and tax preference items, discussed below) among the Class A,
Class B, Class C and Class D shareholders according to a method (which it
believes is consistent with the Commission rule permitting the issuance and sale
of multiple classes of shares) that is based on the gross income allocable to
Class A, Class B, Class C and Class D shareholders during the taxable year, or
such other method as the Internal Revenue Service may prescribe. The Fund will
allocate exempt-interest dividends among shareholders for state income tax
purposes in a similar manner. To the extent that the dividends distributed to a
Fund's shareholders are derived from interest income exempt from Federal income
tax under Code Section 103(a) and are properly designated as exempt-interest
dividends, they will be excludable from a shareholder's gross income for Federal
income tax purposes, subject to the possible application of the Federal
alternative minimum tax as described below. Exempt-interest dividends are
included, however, in determining the portion, if any, of a person's social
security and railroad retirement benefits subject to Federal income taxes. The
Trust will inform shareholders annually regarding the portion of each Fund's
distributions which constitutes exempt-interest dividends. Interest on
indebtedness incurred or continued to purchase or carry shares of RICs paying
exempt-interest dividends, such as the Funds, will not be deductible by the
investor for Federal income tax purposes to the extent attributable to
exempt-interest dividends. Shareholders are advised to consult their tax
advisers with respect to whether exempt-interest dividends retain the exclusion
under Code Section 103(a) if a shareholder would be treated as a 'substantial
user' or 'related person' under Code Section 147(a) with respect to property
financed with the proceeds of an issue of 'industrial development bonds' or
'private activity bonds', if any, held by a Fund.
To the extent that a Fund's distributions are derived from interest on its
taxable investments or from an excess of net short-term capital gains over net
long-term capital losses ('ordinary income dividends'), such
32
<PAGE>
distributions are considered ordinary income for Federal income tax purposes.
Distributions, if any, from an excess of net long-term capital gains over net
short-term capital losses derived from the sale of securities or from certain
transactions in futures or options ('capital gain dividends') are taxable as
long-term capital gains for Federal income tax purposes, regardless of the
length of time the shareholder has owned Fund shares. Distributions by the Fund,
whether from exempt-interest income, ordinary income or capital gains, will not
be eligible for the dividends received deduction allowed to corporations under
the Code.
All or a portion of a Fund's gain from the sale or redemption of tax-exempt
obligations purchased at a market discount will be treated as ordinary income
rather than capital gain. This rule may increase the amount of ordinary income
dividends received by shareholders. Any loss upon the sale or exchange of shares
held for six months or less will be disallowed to the extent of any
exempt-interest dividends received by the shareholder. In addition, any such
loss that is not disallowed under the rule stated above will be treated as
long-term capital loss to the extent of any capital gain dividends received by
the shareholder. Distributions in excess of a Fund's earnings and profits will
first reduce the adjusted tax basis of a holder's shares and, after such
adjusted tax basis is reduced to zero, will constitute capital gains to such
holder (assuming the shares are held as a capital asset). If a Fund pays a
dividend in January which was declared in the previous October, November or
December to shareholders of record on a specified date in one of such months,
then such dividend will be treated for tax purposes as being paid by the Fund
and received by its shareholders on December 31 of the year in which such
dividend was declared.
The Code subjects interest received on certain otherwise tax-exempt
securities to an alternative minimum tax. The alternative minimum tax applies to
interest received on 'private activity bonds' issued after August 7, 1986.
Private activity bonds are bonds which, although tax-exempt, are used for
purposes other than those generally performed by governmental units and which
benefit non-governmental entities (e.g., bonds used for industrial development
or housing purposes). Income received on such bonds is classified as an item of
'tax preference', which could subject certain investors in such bonds, including
shareholders of a Fund, to an alternative minimum tax. Each Fund will purchase
such 'private activity bonds', and the Trust will report to shareholders within
60 days after such Fund's taxable year-end the portion of the Fund's dividends
declared during the year which constitutes an item of tax preference for
alternative minimum tax purposes. The Code further provides that corporations
are subject to an alternative minimum tax based, in part, on certain differences
between taxable income as adjusted for other tax preferences and the
corporation's 'adjusted current earnings', which more closely reflect a
corporation's economic income. Because an exempt-interest dividend paid by a
Fund will be included in adjusted current earnings, a corporate shareholder may
be required to pay alternative minimum tax on exempt-interest dividends paid by
a Fund.
The Funds may invest in high yield securities as described in the
Prospectus. Furthermore, the Funds may also invest in instruments the return on
which includes nontraditional features such as indexed principal or interest
payments ('nontraditional instruments'). These instruments may be subject to
special tax rules under which the Funds may be required to accrue and distribute
income before amounts due under the obligations are paid. In addition, it is
possible that all or a portion of the interest payments on such high yield
securities and/or nontraditional instruments could be recharacterized as taxable
ordinary income.
No gain or loss will be recognized by Class B shareholders on the
conversion of their Class B shares into Class D shares. A shareholder's basis in
the Class D shares acquired will be the same as such shareholder's basis in the
Class B shares converted, and the holding period of the acquired Class D shares
will include the holding period for the converted Class B shares.
If a shareholder exercises an exchange privilege within 90 days of
acquiring the shares, then the loss the shareholder can recognize on the
exchange will be reduced (or the gain increased) to the extent any sales charge
paid to the Fund on the exchanged shares reduces any sales charge the
shareholder would have owed upon purchase of the new shares in the absence of
the exchange privilege. Instead, such sales charge will be treated as an amount
paid for the new shares.
A loss realized on a sale or exchange of shares of a Fund will be
disallowed if other Fund shares are acquired (whether through the automatic
reinvestment of dividends or otherwise) within a 61-day period
33
<PAGE>
beginning 30 days before and ending 30 days after the date that the shares are
disposed of. In such a case, the basis of the shares acquired will be adjusted
to reflect the disallowed loss.
Ordinary income dividends paid to shareholders who are nonresident aliens
or foreign entities will be subject to a 30% United States withholding tax under
existing provisions of the Code applicable to foreign individuals and entities
unless a reduced rate of withholding or a withholding exemption is provided
under applicable treaty law. Nonresident shareholders are urged to consult their
own tax advisers concerning the applicability of the United States withholding
tax.
Under certain Code provisions, some shareholders may be subject to a 31%
withholding tax on certain ordinary income dividends and on capital gain
dividends and redemption payments ('backup withholding'). Generally,
shareholders subject to backup withholding will be those for whom no certified
taxpayer identification number is on file with the Trust or who, to the Trust's
knowledge, have furnished an incorrect number. When establishing an account, an
investor must certify under penalty of perjury that such number is correct and
that such investor is not otherwise subject to backup withholding.
The Code provides that every person required to file a tax return must
include for information purposes on such return the amount of exempt-interest
dividends received from all sources (including the Funds) during the taxable
year.
ENVIRONMENTAL TAX
The Code previously imposed a deductible tax (the 'Environmental Tax') on a
corporation's modified alternative minimum taxable income (computed without
regard to the alternative tax net operating loss deduction and the deduction for
the Environmental Tax) at a rate of $12 per $10,000 (0.12%) of alternative
minimum taxable income in excess of $2,000,000. The Environmental Tax has
expired for tax years beginning after December 31, 1995, but may be reinstated
in the future. The Environmental Tax was imposed even if the corporation was not
required to pay an alternative minimum tax because the corporation's regular
income tax liability exceeded its minimum tax liability. The Code provides,
however, that RICs, such as the Funds, would not be subject to the Environmental
Tax. However, exempt-interest dividends paid by the Funds that create
alternative minimum taxable income for corporate shareholders (as described
above) could subject corporate shareholders of such Funds to the Environmental
Tax.
TAX TREATMENT OF FINANCIAL FUTURES CONTRACTS AND OPTIONS THEREON
Each Fund may purchase or sell municipal bond index futures contracts and
interest rate futures contracts on U.S. Government securities ('financial
futures contracts'). Each Fund also may purchase and write call and put options
on such financial futures contracts. In general, unless an election is available
to a Fund or an exception applies, such options and financial futures contracts
that are 'Section 1256 contracts' will be 'marked-to-market' for Federal income
tax purposes at the end of each taxable year, i.e., each such option or
financial futures contract will be treated as sold for its fair market value on
the last day of the taxable year, and any gain or loss attributable to such
Section 1256 contracts will be 60% long-term and 40% short-term capital gain or
loss. Application of these rules to Section 1256 contracts held by a Fund may
alter the timing and character of distributions to shareholders. The
mark-to-market rules outlined above, however, will not apply to certain
transactions entered into by the Fund solely to reduce the risk of changes in
price or interest rates with respect to its investments.
Code Section 1092, which applies to certain 'straddles', may affect the
taxation of a Fund's sales of securities and transactions in financial futures
contracts and related options. Under Section 1092, a Fund may be required to
postpone recognition for tax purposes of losses incurred in certain sales of
securities and certain closing transactions in financial futures contracts or
the related options.
One of the requirements for qualification as a RIC is that less than 30% of
a Fund's gross income be derived from gains from the sale or other disposition
of securities held for less than three months. Accordingly, the Funds
34
<PAGE>
may be restricted in effecting closing transactions within three months after
entering into an option or financial futures contract.
------------------------
The foregoing is a general and abbreviated summary of the applicable
provisions of the Code and Treasury regulations presently in effect. For the
complete provisions, reference should be made to the pertinent Code sections and
the Treasury regulations promulgated thereunder. The Code and the Treasury
regulations are subject to change by legislative, judicial or administrative
action either prospectively or retroactively.
Shareholders are urged to consult their tax advisors regarding specific
questions as to Federal, foreign, state or local taxes.
STATE
Arizona. Exempt-interest dividends from the Arizona Fund will not be
subject to Arizona income tax for shareholders who are Arizona residents to the
extent that the dividends are attributable to interest earned on Arizona State
Municipal Bonds. To the extent that the Arizona Fund's distributions are derived
from interest on its taxable investments or from an excess of net short-term
capital gains over net long-term capital losses, such distributions are
considered ordinary income for Arizona income tax purposes. Such distributions
are not eligible for the dividends received deduction for corporations.
Distributions, if any, of net long-term capital gains from the sale of
securities or from certain transactions in futures or options are taxable as
ordinary income for Arizona purposes. Inasmuch and for so long as the Arizona
Fund is registered as a diversified management company under the 1940 Act, the
Arizona Fund will not be subject to Arizona corporate income taxes, except to
the extent of its 'unrelated business income', as defined in Section 512 of the
Code, if any, which would be taxed to the Fund (but not its shareholders) at the
Arizona corporate income tax rate (currently 9.0%) or $50, whichever is greater.
California. Exempt-interest dividends from the California Fund will not be
subject to California personal income taxes for California resident individuals
to the extent attributable to interest from California State Municipal Bonds,
and such exempt-interest dividends will also be excludable from the income base
used in calculating the California corporate income tax to the extent
attributable to interest from California State Municipal Bonds. However,
exempt-interest dividends paid to a corporate shareholder subject to California
state corporate franchise tax will be taxable as ordinary income. Distributions
of long-term capital gains will be treated as capital gains which are taxed at
ordinary income rates for California state income tax purposes.
Florida. The Florida Fund has received a ruling from the Florida
Department of Revenue that if on the last business day of any calendar year the
Florida Fund's assets consist solely of assets exempt from Florida intangible
personal property tax, shares of the Florida Fund will be exempt from Florida
intangible personal property tax in the following year. The Florida Department
of Revenue has the authority to revoke or modify a previously issued ruling;
however, if a ruling is revoked or modified, the revocation or modification is
prospective only. Thus, if the ruling is not revoked or modified and if 100% of
the Florida Fund's assets on the last business day of each calendar year
consists of assets exempt from Florida intangible personal property tax, shares
of the Florida Fund owned by Florida residents will be exempt from Florida
intangible personal property tax. Assets exempt from Florida intangible personal
property tax include obligations of the State of Florida and its political
subdivisions; obligations of the United States Government or its agencies; and
cash. If shares of the Florida Fund are subject to Florida intangible personal
property tax because less than 100% of the Florida Fund's assets on the last
business day of the previous calendar year consisted of assets exempt from
Florida intangible personal property tax, only the portion of the net asset
value of the Florida Fund that is attributable to obligations of the U.S.
Government will be exempt from taxation. The Florida Fund anticipates that on
the last business day of each calendar year the Florida Fund's assets will
consist solely of assets exempt from Florida intangible personal property tax.
Dividends paid by the Florida Fund to individuals who are Florida residents
are not subject to personal income taxation by Florida, because Florida does not
impose a personal income tax. Distributions of investment income and capital
gains by the Florida Fund will be subject to Florida corporate income tax, state
taxes in states
35
<PAGE>
other than Florida and local taxes in cities other than those in Florida.
Shareholders subject to taxation by states other than Florida may realize a
lower after-tax rate of return than Florida shareholders since the dividends
distributed by the Florida Fund may not be exempt, to any significant degree,
from income taxation by such other states.
If the Florida Fund does not have a taxable nexus to Florida, such as
through the location within the state of the Trust's or the Florida Fund's
activities or those of the Manager, under present Florida law, the Florida Fund
is not subject to Florida corporate income taxation. Additionally, if the
Florida Fund's assets do not have a taxable situs in Florida as of January 1 of
each calendar year, the Florida Fund will not be subject to Florida intangible
personal property tax. If the Florida Fund has a taxable nexus to Florida or the
Florida Fund's assets have a taxable situs in Florida, the Florida Fund will be
subject to Florida taxation.
Massachusetts. Under existing Massachusetts law, as long as the
Massachusetts Fund qualifies as a separate 'regulated investment company' under
the Code, (i) the Massachusetts Fund will not be liable for any personal income
or any corporate excise tax in the Commonwealth of Massachusetts and (ii)
shareholders of the Massachusetts Fund who are subject to Massachusetts personal
income taxation will not be required to include in their Massachusetts taxable
income (a) that portion of their 'exempt-interest dividends' (as defined in
Section 852(b)(5) of the Code) from the Massachusetts Fund which the
Massachusetts Fund clearly identifies as directly attributable to interest
received by the Massachusetts Fund on Massachusetts State Municipal Bonds or (b)
that portion of their dividends which is identified as attributable to interest
received by the Massachusetts Fund on obligations of the United States or its
agencies or possessions that are exempt from state taxation (collectively,
'Massachusetts-exempt dividends').
Any capital gains distributed by the Massachusetts Fund to a shareholder
otherwise subject to Massachusetts personal income taxation (except for capital
gains on certain Massachusetts State Municipal Bonds which are specifically
exempt by statute), or gains realized by such a shareholder on a redemption or
sale of shares of the Massachusetts Fund, will be subject to Massachusetts
personal income taxation. The portion of any deduction (e.g., an interest
deduction) otherwise available to a shareholder subject to Massachusetts
personal income taxation which relates or is allocable to Massachusetts-exempt
dividends will not be deductible for Massachusetts personal income tax purposes.
In the case of any corporate shareholder otherwise subject to the
Massachusetts corporate excise tax, distributions received from the
Massachusetts Fund, and any gain on the sale or other disposition of
Massachusetts Fund shares, will be includable in the corporation's Massachusetts
gross income and taxed accordingly. Similarly, the value of shares held in the
Massachusetts Fund will be taken into account in calculating the property
component of the Massachusetts corporate excise tax. Interest on indebtedness
incurred or continued to purchase or carry Fund shares will not be deductible in
calculating the income component of the Massachusetts corporate excise tax.
Michigan. Shareholders who are subject to the Michigan income tax or
single business tax will not be subject to the Michigan income tax or single
business tax on exempt-interest dividends from the Michigan Fund to the extent
they are attributable to interest from Michigan State Municipal Bonds or on
dividends that are attributable to interest from obligations of the United
States or its possessions. To the extent the distributions from the Michigan
Fund are attributable to sources other than Michigan State Municipal Bonds or
obligations of the United States or its possessions, they will not be exempt
from Michigan income tax or the single business tax. Distributions that are
attributable to long- or short-term capital gains from both Michigan State and
non-Michigan State Municipal Bonds will not be exempt from Michigan income tax
or the single business tax, while those attributable to long- or short-term
capital gains from obligations of the United States or its possessions will be
exempt from Michigan income tax and the single business tax. For purposes of
Michigan income tax laws, shareholders will have a taxable event upon redemption
or sale of their shares of the Michigan Fund to the extent the transaction
constitutes a taxable event for Federal income tax purposes.
In 1986, the Michigan Department of Treasury issued a Bulletin stating that
holders of interests in regulated investment companies who are subject to the
Michigan intangibles tax will be exempt from the tax to the extent that the
company's investment portfolio consists of items such as Michigan State
Municipal Bonds. In addition,
36
<PAGE>
shares owned by certain financial institutions or by certain other persons
subject to the Michigan single business tax are not subject to the Michigan
intangibles tax. The Intangibles Tax is being phased-out, with reductions of
twenty-five percent (25%) in 1994 and 1995, fifty percent (50%) in 1996, and
seventy-five percent (75%) in 1997, with total repeal effective January 1, 1988.
New Jersey. To the extent distributions from the New Jersey Fund are
derived from interest or gains on New Jersey State Municipal Bonds, such
distributions will be exempt from New Jersey personal income tax. In order to
pass through tax-exempt interest for New Jersey personal income tax purposes,
the New Jersey Fund, among other requirements, must have not less than 80% of
the aggregate principal amount of its investments invested in New Jersey State
Municipal Bonds at the close of each quarter of the tax year (the '80% Test').
For purposes of calculating whether the 80% Test is satisfied, financial
options, futures, forward contracts and similar financial instruments relating
to interest-bearing obligations are excluded from the principal amount of the
New Jersey Fund's investments. The New Jersey Fund intends to comply with this
requirement so as to enable it to pass through tax-exempt interest. In the event
the New Jersey Fund does not so comply, distributions by the New Jersey Fund
will be taxable to shareholders for New Jersey personal income tax purposes.
Interest on indebtedness incurred or continued to purchase or carry New Jersey
Fund shares is not deductible either for Federal income tax purposes or New
Jersey personal income tax purposes to the extent attributable to exempt-
interest dividends. Exempt-interest dividends and gains paid to a corporate
shareholder will be subject to the New Jersey corporation business (franchise)
tax or, if applicable, the New Jersey corporation income tax.
Under present New Jersey law, a RIC, such as the New Jersey Fund, pays a
flat tax of $250 per year. The New Jersey Fund might be subject to the New
Jersey corporation business (franchise) tax for any taxable year in which it
does not qualify as a RIC.
New York. The portion of the exempt-interest dividends equal to the
proportion which the New York Fund's interest on New York State Municipal Bonds
bears to all of the New York Fund's tax-exempt interest (whether or not
distributed) will be exempt from New York State and New York City personal
income taxes. To the extent the New York Fund's distributions are derived from
interest on taxable investments, from gain from the sale of investments or from
tax-exempt interest that is not attributable to New York State Municipal Bonds,
they will constitute taxable income for New York State and New York City
personal income tax purposes. Distributions from investment income and capital
gains of the New York Fund, including exempt-interest dividends paid to a
corporate shareholder, will be subject to New York State corporate franchise and
New York City corporation income tax.
Pennsylvania. To the extent distributions from the Pennsylvania Fund are
derived from interest received by the Pennsylvania Fund from Pennsylvania State
Municipal Bonds, such distributions will be exempt from the Pennsylvania
personal income tax. However, distributions attributable to capital gains
derived by the Pennsylvania Fund as well as distributions derived from income
from investments other than Pennsylvania State Municipal Bonds will be taxable
for purposes of the Pennsylvania personal income tax. In the case of residents
of the City of Philadelphia, distributions which are derived from interest
received by the Pennsylvania Fund from Pennsylvania State Municipal Bonds or
which are designated as capital gain dividends for Federal income tax purposes
will be exempt from the Philadelphia School District investment income tax.
Shares of the Pennsylvania Fund will be exempt from Pennsylvania county
personal property taxes to the extent the Pennsylvania Fund's portfolio
securities consist of Pennsylvania State Municipal Bonds on the annual
assessment date.
At present it is unclear whether an investment in the Pennsylvania Fund by
a corporate shareholder will qualify as an exempt asset for purposes of
apportionment of the Pennsylvania capital stock/foreign franchise tax. To the
extent exempt-interest dividends are excluded from taxable income for Federal
corporate income tax purposes (determined before net operating loss carryovers
and special deductions), they will not be subject to the Pennsylvania corporate
net income tax.
37
<PAGE>
The above discussion is a general and abbreviated summary of the relevant
state and local tax provisions presently in effect. Shareholders are urged to
consult their tax advisors regarding specific questions as to state or local
taxes.
PERFORMANCE DATA
From time to time each Fund may include its average annual total return and
other total return data, as well as yield and tax-equivalent yield, in
advertisements or information furnished to present or prospective shareholders.
From time to time, the Fund may include the Fund's Morningstar risk-adjusted
ratings in advertisements or supplemental sales literature. Total return, yield
and tax-equivalent yield figures are based on a Fund's historical performance
and are not intended to indicate future performance. Average annual total
return, yield and tax-equivalent yield are determined separately for Class A,
Class B, Class C and Class D shares of each Fund in accordance with formulas
specified by the Commission.
Average annual total return quotations for the specified periods are
computed by finding the average annual compounded rates of return (based on net
investment income and any realized and unrealized capital gains or losses on
portfolio investments over such periods) that would equate the initial amount
invested to the redeemable value of such investment at the end of each period.
Average annual total return is computed assuming all dividends and distributions
are reinvested and taking into account all applicable recurring and nonrecurring
expenses, including the maximum sales charge in the case of Class A and Class D
shares of a Fund and the CDSC that would be applicable to a complete redemption
of the investment at the end of the specified period in the case of Class B and
Class C shares of that Fund.
The Funds also may quote annual, average annual and annualized total return
and aggregate total return performance data, both as a percentage and as a
dollar amount based on a hypothetical $1,000 investment, for various periods
other than those noted below. Such data will be computed as described above,
except that (1) as required by the periods of the quotations, actual annual,
annualized or aggregate data, rather than average annual data, may be quoted and
(2) the maximum applicable sales charges will not be included with respect to
annual or annualized rates of return calculations. Aside from the impact on the
performance data calculations of including or excluding the maximum applicable
sales charges, actual annual or annualized total return data generally will be
lower than average annual total return data since the average rates of return
reflect compounding of return; aggregate total return data generally will be
higher than average annual total return data since the aggregate rates of return
reflect compounding over a longer period of time.
38
<PAGE>
Set forth below is the total return, yield and tax-equivalent yield
information for the Class A, Class B, Class C and Class D shares of each of the
Funds for the periods indicated.
<TABLE>
<CAPTION>
ARIZONA FUND
- ------------------------------------------------------------------------------------------------------------------------------------
CLASS A SHARES CLASS B SHARES CLASS C SHARES
------------------------------------ ------------------------------------ -----------------
REDEEMABLE VALUE REDEEMABLE VALUE
OF A OF A
EXPRESSED AS HYPOTHETICAL EXPRESSED AS HYPOTHETICAL EXPRESSED AS
A PERCENTAGE $1,000 A PERCENTAGE $1,000 A PERCENTAGE
BASED ON A INVESTMENT BASED ON A INVESTMENT BASED ON A
HYPOTHETICAL AT THE END OF HYPOTHETICAL AT THE END OF HYPOTHETICAL
PERIOD $1,000 INVESTMENT THE PERIOD $1,000 INVESTMENT THE PERIOD $1,000 INVESTMENT
- ----------------------------------- ----------------- ---------------- ----------------- ---------------- -----------------
<S> <C> <C> <C> <C> <C>
AVERAGE ANNUAL TOTAL RETURN
(INCLUDING MAXIMUM APPLICABLE SALES CHARGE)
One year ended July 31, 1996....... 2.12% $ 1,021.20 1.89% $ 1,018.90 1.79%
Inception (November 26, 1993) to
July 31, 1996.................... 3.95% $ 1,109.30 3.97% $ 1,109.90
Inception (October 21, 1994) to
July 31, 1996.................... 4.88%
ANNUAL TOTAL RETURN
(EXCLUDING MAXIMUM APPLICABLE SALES CHARGE)
Year ended July 31, 1996........... 3.16% $ 1,031.60 2.88% $ 1,028.80 2.78%
Year ended July 31, 1995........... 6.47% $ 1,064.70 5.99% $ 1,059.90
Inception (October 21, 1994) to
July 31, 1995.................... 5.90%
Inception (November 26, 1993) to
July 31, 1994.................... 2.02% $ 1,020.20 1.78% $ 1,017.80
AGGREGATE TOTAL RETURN
(INCLUDING MAXIMUM APPLICABLE SALES CHARGE)
Inception (November 26, 1993) to
July 31, 1996.................... 10.93% $ 1,109.30 10.99% $ 1,109.90
Inception (October 21, 1994) to
July 31, 1996.................... 8.85%
YIELD
30 days ended July 31, 1996........ 3.63% 3.31% 3.51%
TAX EQUIVALENT YIELD*
30 days ended July 31, 1996........ 5.04% 4.60% 4.88%
<CAPTION>
ARIZONA FUND
- -----------------------------------
CLASS D SHARES
------------------------------------
REDEEMABLE VALUE REDEEMABLE VALUE
OF A OF A
HYPOTHETICAL EXPRESSED AS HYPOTHETICAL
$1,000 A PERCENTAGE $1,000
INVESTMENT BASED ON A INVESTMENT
AT THE END OF HYPOTHETICAL AT THE END OF
PERIOD THE PERIOD $1,000 INVESTMENT THE PERIOD
- ----------------------------------- ---------------- ----------------- ----------------
<S> <C> <C> <C>
AVERAGE ANNUAL TOTAL RETURN
(INCLUDING MAXIMUM APPLICABLE SALES CHARGE)
One year ended July 31, 1996....... $ 1,017.90 2.02% $ 1,020.20
Inception (November 26, 1993) to
July 31, 1996....................
Inception (October 21, 1994) to
July 31, 1996.................... $ 1,088.50 4.69% $ 1,084.90
ANNUAL TOTAL RETURN
(EXCLUDING MAXIMUM APPLICABLE SALES CHARGE)
Year ended July 31, 1996........... $ 1,027.80 3.05% $ 1,030.50
Year ended July 31, 1995...........
Inception (October 21, 1994) to
July 31, 1995.................... $ 1,059.00 6.34% $ 1,063.40
Inception (November 26, 1993) to
July 31, 1994....................
AGGREGATE TOTAL RETURN
(INCLUDING MAXIMUM APPLICABLE SALES CHARGE)
Inception (November 26, 1993) to
July 31, 1996....................
Inception (October 21, 1994) to
July 31, 1996.................... $ 1,088.50 8.49% $ 1,084.90
YIELD
30 days ended July 31, 1996........ 3.53%
TAX EQUIVALENT YIELD*
30 days ended July 31, 1996........ 4.90%
</TABLE>
- ------------
* Based on a Federal income tax rate of 28%.
39
<PAGE>
<TABLE>
<CAPTION>
CALIFORNIA FUND
- ------------------------------------------------------------------------------------------------------------------------------------
CLASS A SHARES CLASS B SHARES CLASS C SHARES
------------------------------------ ------------------------------------ -----------------
REDEEMABLE VALUE REDEEMABLE VALUE
OF A OF A
EXPRESSED AS HYPOTHETICAL EXPRESSED AS HYPOTHETICAL EXPRESSED AS
A PERCENTAGE $1,000 A PERCENTAGE $1,000 A PERCENTAGE
BASED ON A INVESTMENT BASED ON A INVESTMENT BASED ON A
HYPOTHETICAL AT THE END OF HYPOTHETICAL AT THE END OF HYPOTHETICAL
PERIOD $1,000 INVESTMENT THE PERIOD $1,000 INVESTMENT THE PERIOD $1,000 INVESTMENT
- ----------------------------------- ----------------- ---------------- ----------------- ---------------- -----------------
<S> <C> <C> <C> <C> <C>
AVERAGE ANNUAL TOTAL RETURN
(INCLUDING MAXIMUM APPLICABLE SALES CHARGE)
One year ended July 31, 1996....... 3.52% $ 1,035.20 3.08% $ 1,030.80 3.35%
Inception (November 26, 1993) to
July 31, 1996.................... 3.85% $ 1,106.60 3.84% $ 1,106.10
Inception (October 21, 1994) to
July 31, 1996.................... 5.61%
ANNUAL TOTAL RETURN
(EXCLUDING MAXIMUM APPLICABLE SALES CHARGE)
Year ended July 31, 1996........... 4.56% $ 1,045.60 4.08% $ 1,040.80 4.35%
Year ended July 31, 1995........... 5.60% $ 1,056.00 5.23% $ 1,052.30
Inception (October 21, 1994) to
July 31, 1995.................... 5.60%
Inception (November 26, 1993) to
July 31, 1994.................... 1.23% $ 1,012.30 0.99% $ 1,009.90
AGGREGATE TOTAL RETURN
(INCLUDING MAXIMUM APPLICABLE SALES CHARGE)
Inception (November 26, 1993) to
July 31, 1996.................... 10.66% $ 1,106.60 10.61% $ 1,106.10
Inception (October 21, 1994) to
July 31, 1996.................... 10.20%
YIELD
30 days ended July 31, 1996........ 3.26% 2.94% 3.21%
TAX EQUIVALENT YIELD*
30 days ended July 31, 1996........ 4.53% 4.08% 4.46%
<CAPTION>
CALIFORNIA FUND
- -----------------------------------
CLASS D SHARES
------------------------------------
REDEEMABLE VALUE REDEEMABLE VALUE
OF A OF A
HYPOTHETICAL EXPRESSED AS HYPOTHETICAL
$1,000 A PERCENTAGE $1,000
INVESTMENT BASED ON A INVESTMENT
AT THE END OF HYPOTHETICAL AT THE END OF
PERIOD THE PERIOD $1,000 INVESTMENT THE PERIOD
- ----------------------------------- ---------------- ----------------- ----------------
<S> <C> <C> <C>
AVERAGE ANNUAL TOTAL RETURN
(INCLUDING MAXIMUM APPLICABLE SALES CHARGE)
One year ended July 31, 1996....... $ 1,033.50 3.41% $ 1,034.10
Inception (November 26, 1993) to
July 31, 1996....................
Inception (October 21, 1994) to
July 31, 1996.................... $ 1,102.00 5.22% $ 1,094.70
ANNUAL TOTAL RETURN
(EXCLUDING MAXIMUM APPLICABLE SALES CHARGE)
Year ended July 31, 1996........... $ 1,043.50 4.46% $ 1,044.60
Year ended July 31, 1995...........
Inception (October 21, 1994) to
July 31, 1995.................... $ 1,056.00 5.85% $ 1,058.50
Inception (November 26, 1993) to
July 31, 1994....................
AGGREGATE TOTAL RETURN
(INCLUDING MAXIMUM APPLICABLE SALES CHARGE)
Inception (November 26, 1993) to
July 31, 1996....................
Inception (October 21, 1994) to
July 31, 1996.................... $ 1,102.00 9.47% $ 1,094.70
YIELD
30 days ended July 31, 1996........ 3.16%
TAX EQUIVALENT YIELD*
30 days ended July 31, 1996........ 4.39%
</TABLE>
- ------------
* Based on a Federal income tax rate of 28%.
40
<PAGE>
<TABLE>
<CAPTION>
FLORIDA FUND
- ------------------------------------------------------------------------------------------------------------------------------------
CLASS A SHARES CLASS B SHARES CLASS C SHARES
------------------------------------ ------------------------------------ -----------------
REDEEMABLE VALUE REDEEMABLE VALUE
OF A OF A
EXPRESSED AS HYPOTHETICAL EXPRESSED AS HYPOTHETICAL EXPRESSED AS
A PERCENTAGE $1,000 A PERCENTAGE $1,000 A PERCENTAGE
BASED ON A INVESTMENT BASED ON A INVESTMENT BASED ON A
HYPOTHETICAL AT THE END OF HYPOTHETICAL AT THE END OF HYPOTHETICAL
PERIOD $1,000 INVESTMENT THE PERIOD $1,000 INVESTMENT THE PERIOD $1,000 INVESTMENT
- ----------------------------------- ----------------- ---------------- ----------------- ---------------- -----------------
<S> <C> <C> <C> <C> <C>
AVERAGE ANNUAL TOTAL RETURN
(INCLUDING MAXIMUM APPLICABLE SALES CHARGE)
One year ended July 31, 1996....... 2.42% $ 1,024.20 2.09% $ 1,020.90 1.49%
Inception (November 26, 1993) to
July 31, 1996.................... 3.56% $ 1,098.40 3.58% $ 1,099.00
Inception (October 21, 1994) to
July 31, 1996.................... 4.57%
ANNUAL TOTAL RETURN
(EXCLUDING MAXIMUM APPLICABLE SALES CHARGE)
Year ended July 31, 1996........... 3.45% $ 1,034.50 3.08% $ 1,030.80 2.48%
Year ended July 31, 1995........... 6.05% $ 1,060.50 5.57% $ 1,055.70
Inception (October 21, 1994) to
July 31, 1995.................... 5.65%
Inception (November 26, 1993) to
July 31, 1994.................... 1.12% $ 1,011.20 0.99% $ 1,009.90
AGGREGATE TOTAL RETURN
(INCLUDING MAXIMUM APPLICABLE SALES CHARGE)
Inception (November 26, 1993) to
July 31, 1996.................... 9.84% $ 1,098.40 9.90% $ 1,099.00
Inception (October 21, 1994) to
July 31, 1996.................... 8.27%
YIELD
30 days ended July 31, 1996........ 3.61% 3.29% 3.47%
TAX EQUIVALENT YIELD*
30 days ended July 31, 1996........ 5.01% 4.57% 4.82%
<CAPTION>
FLORIDA FUND
- -----------------------------------
CLASS D SHARES
------------------------------------
REDEEMABLE VALUE REDEEMABLE VALUE
OF A OF A
HYPOTHETICAL EXPRESSED AS HYPOTHETICAL
$1,000 A PERCENTAGE $1,000
INVESTMENT BASED ON A INVESTMENT
AT THE END OF HYPOTHETICAL AT THE END OF
PERIOD THE PERIOD $1,000 INVESTMENT THE PERIOD
- ----------------------------------- ---------------- ----------------- ----------------
<S> <C> <C> <C>
AVERAGE ANNUAL TOTAL RETURN
(INCLUDING MAXIMUM APPLICABLE SALES CHARGE)
One year ended July 31, 1996....... $ 1,014.90 2.31% $ 1,023.10
Inception (November 26, 1993) to
July 31, 1996....................
Inception (October 21, 1994) to
July 31, 1996.................... $ 1,082.70 4.71% $ 1,085.30
ANNUAL TOTAL RETURN
(EXCLUDING MAXIMUM APPLICABLE SALES CHARGE)
Year ended July 31, 1996........... $ 1,024.80 3.35% $ 1,033.50
Year ended July 31, 1995...........
Inception (October 21, 1994) to
July 31, 1995.................... $ 1,056.50 6.07% $ 1,060.70
Inception (November 26, 1993) to
July 31, 1994....................
AGGREGATE TOTAL RETURN
(INCLUDING MAXIMUM APPLICABLE SALES CHARGE)
Inception (November 26, 1993) to
July 31, 1996....................
Inception (October 21, 1994) to
July 31, 1996.................... $ 1,082.70 8.53% $ 1,085.30
YIELD
30 days ended July 31, 1996........ 3.51%
TAX EQUIVALENT YIELD*
30 days ended July 31, 1996........ 4.88%
</TABLE>
- ------------
* Based on a Federal income tax rate of 28%.
41
<PAGE>
<TABLE>
<CAPTION>
MASSACHUSETTS FUND
- ------------------------------------------------------------------------------------------------------------------------------------
CLASS A SHARES CLASS B SHARES CLASS C SHARES
------------------------------------ ------------------------------------ -----------------
REDEEMABLE VALUE REDEEMABLE VALUE
OF A OF A
EXPRESSED AS HYPOTHETICAL EXPRESSED AS HYPOTHETICAL EXPRESSED AS
A PERCENTAGE $1,000 A PERCENTAGE $1,000 A PERCENTAGE
BASED ON A INVESTMENT BASED ON A INVESTMENT BASED ON A
HYPOTHETICAL AT THE END OF HYPOTHETICAL AT THE END OF HYPOTHETICAL
PERIOD $1,000 INVESTMENT THE PERIOD $1,000 INVESTMENT THE PERIOD $1,000 INVESTMENT
- ----------------------------------- ----------------- ---------------- ----------------- ---------------- -----------------
<S> <C> <C> <C> <C> <C>
AVERAGE ANNUAL TOTAL RETURN
(INCLUDING MAXIMUM APPLICABLE SALES CHARGE)
One year ended July 31, 1996....... 3.04% $ 1,030.40 2.70% $ 1,027.00 2.81%
Inception (November 26, 1993) to
July 31, 1996.................... 3.67% $ 1,101.40 3.69% $ 1,101.90
Inception (October 21, 1994) to
July 31, 1996.................... 4.97%
ANNUAL TOTAL RETURN
(EXCLUDING MAXIMUM APPLICABLE SALES CHARGE)
Year ended July 31, 1996........... 4.08% $ 1,040.80 3.70% $ 1,037.00 3.81%
Year ended July 31, 1995........... 4.79% $ 1,047.90 4.41% $ 1,044.10
Inception (October 21, 1994) to
July 31, 1995.................... 5.00%
Inception (November 26, 1993) to
July 31, 1994.................... 2.01% $ 1,020.10 1.77% $ 1,017.70
AGGREGATE TOTAL RETURN
(INCLUDING MAXIMUM APPLICABLE SALES CHARGE)
Inception (November 26, 1993) to
July 31, 1996.................... 10.14% $ 1,101.40 10.19% $ 1,101.90
Inception (October 21, 1994) to
July 31, 1996.................... 9.00%
YIELD
30 days ended July 31, 1996........ 3.63% 3.31% 3.51%
TAX EQUIVALENT YIELD*
30 days ended July 31, 1996........ 5.04% 4.60% 4.88%
<CAPTION>
MASSACHUSETTS FUND
- -----------------------------------
CLASS D SHARES
------------------------------------
REDEEMABLE VALUE REDEEMABLE VALUE
OF A OF A
HYPOTHETICAL EXPRESSED AS HYPOTHETICAL
$1,000 A PERCENTAGE $1,000
INVESTMENT BASED ON A INVESTMENT
AT THE END OF HYPOTHETICAL AT THE END OF
PERIOD THE PERIOD $1,000 INVESTMENT THE PERIOD
- ----------------------------------- ---------------- ----------------- ----------------
<S> <C> <C> <C>
AVERAGE ANNUAL TOTAL RETURN
(INCLUDING MAXIMUM APPLICABLE SALES CHARGE)
One year ended July 31, 1996....... $ 1,028.10 2.93% $ 1,029.30
Inception (November 26, 1993) to
July 31, 1996....................
Inception (October 21, 1994) to
July 31, 1996.................... $ 1,090.00 4.52% $ 1,081.70
ANNUAL TOTAL RETURN
(EXCLUDING MAXIMUM APPLICABLE SALES CHARGE)
Year ended July 31, 1996........... $ 1,038.10 3.97% $ 1,039.70
Year ended July 31, 1995...........
Inception (October 21, 1994) to
July 31, 1995.................... $ 1,050.00 5.09% $ 1,050.90
Inception (November 26, 1993) to
July 31, 1994....................
AGGREGATE TOTAL RETURN
(INCLUDING MAXIMUM APPLICABLE SALES CHARGE)
Inception (November 26, 1993) to
July 31, 1996....................
Inception (October 21, 1994) to
July 31, 1996.................... $ 1,090.00 8.17% $ 1,081.70
YIELD
30 days ended July 31, 1996........ 3.53%
TAX EQUIVALENT YIELD*
30 days ended July 31, 1996........ 4.90%
</TABLE>
- ------------
* Based on a Federal income tax rate of 28%.
42
<PAGE>
<TABLE>
<CAPTION>
MICHIGAN FUND
- ------------------------------------------------------------------------------------------------------------------------------------
CLASS A SHARES CLASS B SHARES CLASS C SHARES
------------------------------------ ------------------------------------ -----------------
REDEEMABLE VALUE REDEEMABLE VALUE
OF A OF A
EXPRESSED AS HYPOTHETICAL EXPRESSED AS HYPOTHETICAL EXPRESSED AS
A PERCENTAGE $1,000 A PERCENTAGE $1,000 A PERCENTAGE
BASED ON A INVESTMENT BASED ON A INVESTMENT BASED ON A
HYPOTHETICAL AT THE END OF HYPOTHETICAL AT THE END OF HYPOTHETICAL
PERIOD $1,000 INVESTMENT THE PERIOD $1,000 INVESTMENT THE PERIOD $1,000 INVESTMENT
- ----------------------------------- ----------------- ---------------- ----------------- ---------------- -----------------
<S> <C> <C> <C> <C> <C>
AVERAGE ANNUAL TOTAL RETURN
(INCLUDING MAXIMUM APPLICABLE SALES CHARGE)
One year ended July 31, 1996....... 2.67% $ 1,026.70 2.33% $ 1,023.30 2.20%
Inception (November 26, 1993) to
July 31, 1996.................... 3.53% $ 1,097.50 3.55% $ 1,098.00
Inception (October 21, 1994) to
July 31, 1996.................... 4.84%
ANNUAL TOTAL RETURN
(EXCLUDING MAXIMUM APPLICABLE SALES CHARGE)
Year ended July 31, 1996........... 3.71% $ 1,037.10 3.32% $ 1,033.20 3.20%
Year ended July 31, 1995........... 5.16% $ 1,051.60 4.78% $ 1,047.80
Inception (October 21, 1994) to
July 31, 1995.................... 5.40%
Inception (November 26, 1993) to
July 31, 1994.................... 1.66% $ 1,016.60 1.42% $ 1,014.20
AGGREGATE TOTAL RETURN
(INCLUDING MAXIMUM APPLICABLE SALES CHARGE)
Inception (November 26, 1993) to
July 31, 1996.................... 9.75% $ 1,097.50 9.80% $ 1,098.00
Inception (October 21, 1994) to
July 31, 1996.................... 8.77%
YIELD
30 days ended July 31, 1996........ 3.68% 3.35% 3.35%
TAX EQUIVALENT YIELD*
30 days ended July 31, 1996........ 5.11% 4.65% 4.65%
<CAPTION>
MICHIGAN FUND
- -----------------------------------
CLASS D SHARES
------------------------------------
REDEEMABLE VALUE REDEEMABLE VALUE
OF A OF A
HYPOTHETICAL EXPRESSED AS HYPOTHETICAL
$1,000 A PERCENTAGE $1,000
INVESTMENT BASED ON A INVESTMENT
AT THE END OF HYPOTHETICAL AT THE END OF
PERIOD THE PERIOD $1,000 INVESTMENT THE PERIOD
- ----------------------------------- ---------------- ----------------- ----------------
<S> <C> <C> <C>
AVERAGE ANNUAL TOTAL RETURN
(INCLUDING MAXIMUM APPLICABLE SALES CHARGE)
One year ended July 31, 1996....... $ 1,022.00 2.67% $ 1,026.70
Inception (November 26, 1993) to
July 31, 1996....................
Inception (October 21, 1994) to
July 31, 1996.................... $ 1,087.70 4.72% $ 1,085.40
ANNUAL TOTAL RETURN
(EXCLUDING MAXIMUM APPLICABLE SALES CHARGE)
Year ended July 31, 1996........... $ 1,032.00 3.71% $ 1,037.10
Year ended July 31, 1995...........
Inception (October 21, 1994) to
July 31, 1995.................... $ 1,054.00 5.72% $ 1,057.20
Inception (November 26, 1993) to
July 31, 1994....................
AGGREGATE TOTAL RETURN
(INCLUDING MAXIMUM APPLICABLE SALES CHARGE)
Inception (November 26, 1993) to
July 31, 1996....................
Inception (October 21, 1994) to
July 31, 1996.................... $ 1,087.70 8.54% $ 1,085.40
YIELD
30 days ended July 31, 1996........ 3.58%
TAX EQUIVALENT YIELD*
30 days ended July 31, 1996........ 4.97%
</TABLE>
- ------------
* Based on a Federal income tax rate of 28%.
43
<PAGE>
<TABLE>
<CAPTION>
NEW JERSEY FUND
- ------------------------------------------------------------------------------------------------------------------------------------
CLASS A SHARES CLASS B SHARES CLASS C SHARES
------------------------------------ ------------------------------------ -----------------
REDEEMABLE VALUE REDEEMABLE VALUE
OF A OF A
EXPRESSED AS HYPOTHETICAL EXPRESSED AS HYPOTHETICAL EXPRESSED AS
A PERCENTAGE $1,000 A PERCENTAGE $1,000 A PERCENTAGE
BASED ON A INVESTMENT BASED ON A INVESTMENT BASED ON A
HYPOTHETICAL AT THE END OF HYPOTHETICAL AT THE END OF HYPOTHETICAL
PERIOD $1,000 INVESTMENT THE PERIOD $1,000 INVESTMENT THE PERIOD $1,000 INVESTMENT
- ----------------------------------- ----------------- ---------------- ----------------- ---------------- -----------------
<S> <C> <C> <C> <C> <C>
AVERAGE ANNUAL TOTAL RETURN
(INCLUDING MAXIMUM APPLICABLE SALES CHARGE)
One year ended July 31, 1996....... 2.65% $ 1,026.50 2.21% $ 1,022.10 2.25%
Inception (November 26, 1993) to
July 31, 1996.................... 4.02% $ 1,111.50 4.04% $ 1,112.10
Inception (October 21, 1994) to
July 31, 1996.................... (0.50)%
ANNUAL TOTAL RETURN
(EXCLUDING MAXIMUM APPLICABLE SALES CHARGE)
Year ended July 31, 1996........... 3.68% $ 1,036.80 3.21% $ 1,032.10 3.24%
Year ended July 31, 1995........... 6.45% $ 1,064.50 6.07% $ 1,060.70
Inception (October 21, 1994) to
July 31, 1995.................... (4.01)%
Inception (November 26, 1993) to
July 31, 1994.................... 1.73% $ 1,017.30 1.59% $ 1,015.90
AGGREGATE TOTAL RETURN
(INCLUDING MAXIMUM APPLICABLE SALES CHARGE)
Inception (November 26, 1993) to
July 31, 1996.................... 11.15% $ 1,111.50 11.21% $ 1,112.10
Inception (October 21, 1994) to
July 31, 1996.................... (0.89)%
YIELD
30 days ended July 31, 1996........ 3.54% 3.23% 3.43%
TAX EQUIVALENT YIELD*
30 days ended July 31, 1996........ 4.92% 4.49% 4.76%
<CAPTION>
NEW JERSEY FUND
- -----------------------------------
CLASS D SHARES
------------------------------------
REDEEMABLE VALUE REDEEMABLE VALUE
OF A OF A
HYPOTHETICAL EXPRESSED AS HYPOTHETICAL
$1,000 A PERCENTAGE $1,000
INVESTMENT BASED ON A INVESTMENT
AT THE END OF HYPOTHETICAL AT THE END OF
PERIOD THE PERIOD $1,000 INVESTMENT THE PERIOD
- ----------------------------------- ---------------- ----------------- ----------------
<S> <C> <C> <C>
AVERAGE ANNUAL TOTAL RETURN
(INCLUDING MAXIMUM APPLICABLE SALES CHARGE)
One year ended July 31, 1996....... $ 1,022.50 2.44% $ 1,024.40
Inception (November 26, 1993) to
July 31, 1996....................
Inception (October 21, 1994) to
July 31, 1996.................... $ 991.10 5.03% $ 1,091.10
ANNUAL TOTAL RETURN
(EXCLUDING MAXIMUM APPLICABLE SALES CHARGE)
Year ended July 31, 1996........... $ 1,032.40 3.48% $ 1,034.80
Year ended July 31, 1995...........
Inception (October 21, 1994) to
July 31, 1995.................... $ 959.90 6.51% $ 1,065.10
Inception (November 26, 1993) to
July 31, 1994....................
AGGREGATE TOTAL RETURN
(INCLUDING MAXIMUM APPLICABLE SALES CHARGE)
Inception (November 26, 1993) to
July 31, 1996....................
Inception (October 21, 1994) to
July 31, 1996.................... $ 991.10 9.11% $ 1,091.10
YIELD
30 days ended July 31, 1996........ 3.45%
TAX EQUIVALENT YIELD*
30 days ended July 31, 1996........ 4.79%
</TABLE>
- ------------
* Based on a Federal income tax rate of 28%.
44
<PAGE>
<TABLE>
<CAPTION>
NEW YORK FUND
- ------------------------------------------------------------------------------------------------------------------------------------
CLASS A SHARES CLASS B SHARES CLASS C SHARES
------------------------------------ ------------------------------------ -----------------
REDEEMABLE VALUE REDEEMABLE VALUE
OF A OF A
EXPRESSED AS HYPOTHETICAL EXPRESSED AS HYPOTHETICAL EXPRESSED AS
A PERCENTAGE $1,000 A PERCENTAGE $1,000 A PERCENTAGE
BASED ON A INVESTMENT BASED ON A INVESTMENT BASED ON A
HYPOTHETICAL AT THE END OF HYPOTHETICAL AT THE END OF HYPOTHETICAL
PERIOD $1,000 INVESTMENT THE PERIOD $1,000 INVESTMENT THE PERIOD $1,000 INVESTMENT
- ----------------------------------- ----------------- ---------------- ----------------- ---------------- -----------------
<S> <C> <C> <C> <C> <C>
AVERAGE ANNUAL TOTAL RETURN
(INCLUDING MAXIMUM APPLICABLE SALES CHARGE)
One year ended July 31, 1996....... 3.41% $ 1,034.10 3.08% $ 1,030.80 3.28%
Inception (November 26, 1993) to
July 31, 1996.................... 4.12% $ 1,114.20 4.14% $ 1,114.70
Inception (October 21, 1994) to
July 31, 1996.................... 5.78%
ANNUAL TOTAL RETURN
(EXCLUDING MAXIMUM APPLICABLE SALES CHARGE)
Year ended July 31, 1996........... 4.46% $ 1,044.60 4.08% $ 1,040.80 4.28%
Year ended July 31, 1995........... 6.03% $ 1,060.30 5.66% $ 1,056.60
Inception (October 21, 1994) to
July 31, 1995.................... 5.97%
Inception (November 26, 1993) to
July 31, 1994.................... 1.61% $ 1,016.10 1.37% $ 1,013.70
AGGREGATE TOTAL RETURN
(INCLUDING MAXIMUM APPLICABLE SALES CHARGE)
Inception (November 26, 1993) to
July 31, 1996.................... 11.42% $ 1,114.20 11.47% $ 1,114.70
Inception (October 21, 1994) to
July 31, 1996.................... 10.50%
YIELD
30 days ended July 31, 1996........ 3.92% 3.61% 3.80%
TAX EQUIVALENT YIELD*
30 days ended July 31, 1996........ 5.44% 5.01% 5.28%
<CAPTION>
NEW YORK FUND
- -----------------------------------
CLASS D SHARES
------------------------------------
REDEEMABLE VALUE REDEEMABLE VALUE
OF A OF A
HYPOTHETICAL EXPRESSED AS HYPOTHETICAL
$1,000 A PERCENTAGE $1,000
INVESTMENT BASED ON A INVESTMENT
AT THE END OF HYPOTHETICAL AT THE END OF
PERIOD THE PERIOD $1,000 INVESTMENT THE PERIOD
- ----------------------------------- ---------------- ----------------- ----------------
<S> <C> <C> <C>
AVERAGE ANNUAL TOTAL RETURN
(INCLUDING MAXIMUM APPLICABLE SALES CHARGE)
One year ended July 31, 1996....... $ 1,032.80 3.31% $ 1,033.10
Inception (November 26, 1993) to
July 31, 1996....................
Inception (October 21, 1994) to
July 31, 1996.................... $ 1,105.00 5.45% $ 1,098.90
ANNUAL TOTAL RETURN
(EXCLUDING MAXIMUM APPLICABLE SALES CHARGE)
Year ended July 31, 1996........... $ 1,042.80 4.35% $ 1,043.50
Year ended July 31, 1995...........
Inception (October 21, 1994) to
July 31, 1995.................... $ 1,059.70 6.37% $ 1,063.70
Inception (November 26, 1993) to
July 31, 1994....................
AGGREGATE TOTAL RETURN
(INCLUDING MAXIMUM APPLICABLE SALES CHARGE)
Inception (November 26, 1993) to
July 31, 1996....................
Inception (October 21, 1994) to
July 31, 1996.................... $ 1,105.00 9.89% $ 1,098.90
YIELD
30 days ended July 31, 1996........ 3.83%
TAX EQUIVALENT YIELD*
30 days ended July 31, 1996........ 5.32%
</TABLE>
- ------------
* Based on a Federal income tax rate of 28%.
45
<PAGE>
<TABLE>
<CAPTION>
PENNSYLVANIA FUND
- ------------------------------------------------------------------------------------------------------------------------------------
CLASS A SHARES CLASS B SHARES CLASS C SHARES
------------------------------------ ------------------------------------ -----------------
REDEEMABLE VALUE REDEEMABLE VALUE
OF A OF A
EXPRESSED AS HYPOTHETICAL EXPRESSED AS HYPOTHETICAL EXPRESSED AS
A PERCENTAGE $1,000 A PERCENTAGE $1,000 A PERCENTAGE
BASED ON A INVESTMENT BASED ON A INVESTMENT BASED ON A
HYPOTHETICAL AT THE END OF HYPOTHETICAL AT THE END OF HYPOTHETICAL
PERIOD $1,000 INVESTMENT THE PERIOD $1,000 INVESTMENT THE PERIOD $1,000 INVESTMENT
- ----------------------------------- ----------------- ---------------- ----------------- ---------------- -----------------
<S> <C> <C> <C> <C> <C>
AVERAGE ANNUAL TOTAL RETURN
(INCLUDING MAXIMUM APPLICABLE SALES CHARGE)
One year ended July 31, 1996....... 3.14% $ 1,031.40 2.80% $ 1,028.00 3.28%
Inception (November 26, 1993) to
July 31, 1996.................... 4.05% $ 1,112.30 4.07% $ 1,112.90
Inception (October 21, 1994) to
July 31, 1996.................... 5.62%
ANNUAL TOTAL RETURN
(EXCLUDING MAXIMUM APPLICABLE SALES CHARGE)
Year ended July 31, 1996........... 4.18% $ 1,041.80 3.80% $ 1,038.00 4.28%
Year ended July 31, 1995........... 5.89% $ 1,058.90 5.51% $ 1,055.10
Inception (October 21, 1994) to
July 31, 1995.................... 5.68%
Inception (November 26, 1993) to
July 31, 1994.................... 1.85% $ 1,018.50 1.61% $ 1,016.10
AGGREGATE TOTAL RETURN
(INCLUDING MAXIMUM APPLICABLE SALES CHARGE)
Inception (November 26, 1993) to
July 31, 1996.................... 11.23% $ 1,112.30 11.29% $ 1,112.90
Inception (October 21, 1994) to
July 31, 1996.................... 10.20%
YIELD
30 days ended July 31, 1996........ 3.54% 3.22% 3.38%
TAX EQUIVALENT YIELD*
30 days ended July 31, 1996........ 4.92% 4.47% 4.69%
<CAPTION>
PENNSYLVANIA FUND
- -----------------------------------
CLASS D SHARES
------------------------------------
REDEEMABLE VALUE REDEEMABLE VALUE
OF A OF A
HYPOTHETICAL EXPRESSED AS HYPOTHETICAL
$1,000 A PERCENTAGE $1,000
INVESTMENT BASED ON A INVESTMENT
AT THE END OF HYPOTHETICAL AT THE END OF
PERIOD THE PERIOD $1,000 INVESTMENT THE PERIOD
- ----------------------------------- ---------------- ----------------- ----------------
<S> <C> <C> <C>
AVERAGE ANNUAL TOTAL RETURN
(INCLUDING MAXIMUM APPLICABLE SALES CHARGE)
One year ended July 31, 1996....... $ 1,032.80 3.03% $ 1,030.30
Inception (November 26, 1993) to
July 31, 1996....................
Inception (October 21, 1994) to
July 31, 1996.................... $ 1,102.00 5.13% $ 1,093.10
ANNUAL TOTAL RETURN
(EXCLUDING MAXIMUM APPLICABLE SALES CHARGE)
Year ended July 31, 1996........... $ 1,042.80 4.07% $ 1,040.70
Year ended July 31, 1995...........
Inception (October 21, 1994) to
July 31, 1995.................... $ 1,056.80 6.10% $ 1,061.00
Inception (November 26, 1993) to
July 31, 1994....................
AGGREGATE TOTAL RETURN
(INCLUDING MAXIMUM APPLICABLE SALES CHARGE)
Inception (November 26, 1993) to
July 31, 1996....................
Inception (October 21, 1994) to
July 31, 1996.................... $ 1,102.00 9.31% $ 1,093.10
YIELD
30 days ended July 31, 1996........ 3.44%
TAX EQUIVALENT YIELD*
30 days ended July 31, 1996........ 4.78%
</TABLE>
- ------------
* Based on a Federal income tax rate of 28%.
46
<PAGE>
In order to reflect the reduced sales charges in the case of Class A or
Class D shares or the waiver of the CDSC in the case of Class B or Class C
shares applicable to certain investors, as described under 'Purchase of Shares'
and 'Redemption of Shares', respectively, the total return data quoted by a Fund
in advertisements directed to such investors may take into account the reduced,
and not the maximum, sales charge or may take into account the CDSC and
therefore may reflect greater total return since, due to the reduced sales
charge or the waiver of sales charges, a lower amount of expenses is deducted.
GENERAL INFORMATION
DESCRIPTION OF SHARES
The Declaration of Trust, dated February 14, 1991, of the Trust, as amended
(the 'Declaration'), provides that the Trust shall be comprised of separate
Series, each of which will consist of a separate portfolio which will issue
separate shares. The Trust is presently comprised of the Arizona Fund, the
California Fund, the Florida Fund, the Massachusetts Fund, the Michigan Fund,
the New Jersey Fund, the New York Fund and the Pennsylvania Fund. The Trustees
are authorized to create an unlimited number of Series and, with respect to each
Series, to issue an unlimited number of full and fractional shares of beneficial
interest, par value $.10 per share, of different classes and to divide or
combine the shares into a greater or lesser number of shares without thereby
changing the proportionate beneficial interests in the Series. Shareholder
approval is not necessary for the authorization of additional Series or classes
of a Series of the Trust. At the date of this Statement of Additional
Information, the shares of each Fund are divided into Class A, Class B, Class C
and Class D shares. Class A, Class B, Class C and Class D shares represent
interests in the same assets of the relevant Fund and have identical voting,
dividend, liquidation and other rights and the same terms and conditions, except
that Class B, Class C and Class D shares bear certain expenses related to the
account maintenance and/or distribution expenditures. The Board of Trustees may
classify and reclassify the shares of any Series into additional classes at a
future date.
All shares of the Trust have equal voting rights, except that only shares
of the respective Series are entitled to vote on matters concerning only that
Series and, as noted above, Class B, Class C and Class D shares have exclusive
voting rights with respect to matters relating to the account maintenance andor
distribution expenses being borne solely by such class. Each issued and
outstanding share is entitled to one vote and to participate equally in
dividends and distributions declared by a Series and in the net assets of such
Series upon liquidation or dissolution remaining after satisfaction of
outstanding liabilities, except that, as noted above, expenses related to the
account maintenance andor distribution of the Class B, Class C and Class D
shares are borne solely by such class. There normally will be no meeting of
shareholders for the purpose of electing Trustees unless and until such time as
less than a majority of the Trustees holding office have been elected by
shareholders, at which time the Trustees then in office will call a
shareholders' meeting for the election of Trustees. Shareholders, in accordance
with the terms of the Declaration, may cause a meeting of shareholders to be
held for the purpose of voting on the removal of Trustees. Also, the Trust will
be required to call a special meeting of shareholders in accordance with the
requirements of the 1940 Act to seek approval of new management and advisory
arrangements, of a material increase in distribution fees or of a change in the
fundamental policies, objectives or restrictions of a Series.
The obligations and liabilities of a particular Series are restricted to
the assets of that Series and do not extend to the assets of the Trust
generally. The shares of each Series, when issued, will be fully paid and non-
assessable, have no preference, preemptive, conversion, exchange or similar
rights, and will be freely transferable. Holders of shares of any Series are
entitled to redeem their shares as set forth elsewhere herein and in the
Prospectus. Shares do not have cumulative voting rights and the holders of more
than 50% of the shares of the Trust voting for the election of Trustees can
elect all of the Trustees if they choose to do so and in such event the holders
of the remaining shares would not be able to elect any Trustees. No amendments
may be made to the Declaration without the affirmative vote of a majority of the
outstanding shares of the Trust.
47
<PAGE>
COMPUTATION OF OFFERING PRICE PER SHARE
An illustration of the computation of the offering price for Class A, Class
B, Class C and Class D shares of each Fund based on the Funds' net assets and
number of shares outstanding on July 31, 1996 is set forth below.
<TABLE>
<CAPTION>
CLASS A CLASS B CLASS C CLASS D
---------- ----------- -------- ----------
<S> <C> <C> <C> <C>
ARIZONA FUND
Net Assets....................................................... $ 813,180 $ 2,884,780 $135,060 $ 619,008
---------- ----------- -------- ----------
---------- ----------- -------- ----------
Number of Shares Outstanding..................................... 80,693 286,287 13,395 61,417
---------- ----------- -------- ----------
---------- ----------- -------- ----------
Net Asset Value Per Share (net assets divided by number of shares
outstanding)................................................... $ 10.08 $ 10.08 $ 10.08 $ 10.08
Sales Charge (for Class A and Class D shares: 1.00% of offering
price; 1.01% of net asset value per share)*.................... .10 ** ** .10
---------- ----------- -------- ----------
Offering Price................................................... $ 10.18 $ 10.08 $ 10.08 $ 10.18
---------- ----------- -------- ----------
---------- ----------- -------- ----------
CALIFORNIA FUND
Net Assets....................................................... $3,161,461 $ 9,918,998 $ 55,114 $2,185,238
---------- ----------- -------- ----------
---------- ----------- -------- ----------
Number of Shares Outstanding..................................... 314,706 987,501 5,486 217,532
---------- ----------- -------- ----------
---------- ----------- -------- ----------
Net Asset Value Per Share (net assets divided by number of shares
outstanding)................................................... $ 10.05 $ 10.04 $ 10.05 $ 10.05
Sales Charge (for Class A and Class D shares: 1.00% of offering
price; 1.01% of net asset value per share)*.................... .10 ** ** .10
---------- ----------- -------- ----------
Offering Price................................................... $ 10.15 $ 10.04 $ 10.05 $ 10.15
---------- ----------- -------- ----------
---------- ----------- -------- ----------
FLORIDA FUND
Net Assets....................................................... $7,874,368 $13,690,359 $ 51,502 $6,405,856
---------- ----------- -------- ----------
---------- ----------- -------- ----------
Number of Shares Outstanding..................................... 790,910 1,375,127 5,204 643,764
---------- ----------- -------- ----------
---------- ----------- -------- ----------
Net Asset Value Per Share (net assets divided by number of shares
outstanding)................................................... $ 9.96 $ 9.96 $ 9.90 $ 9.95
Sales Charge (for Class A and Class D shares: 1.00% of offering
price; 1.01% of net asset value per share)*.................... .10 ** ** .10
---------- ----------- -------- ----------
Offering Price................................................... $ 10.06 $ 9.96 $ 9.90 $ 10.05
---------- ----------- -------- ----------
---------- ----------- -------- ----------
MASSACHUSETTS FUND
Net Assets....................................................... $1,719,269 $ 4,576,988 $210,323 $ 889,590
---------- ----------- -------- ----------
---------- ----------- -------- ----------
Number of Shares Outstanding..................................... 172,634 459,494 21,134 89,337
---------- ----------- -------- ----------
---------- ----------- -------- ----------
Net Asset Value Per Share (net assets divided by number of shares
outstanding)................................................... $ 9.96 $ 9.96 $ 9.95 $ 9.96
Sales Charge (for Class A and Class D shares: 1.00% of offering
price; 1.01% of net asset value per share)*.................... .10 ** ** .10
---------- ----------- -------- ----------
Offering Price................................................... $ 10.06 $ 9.96 $ 9.95 $ 10.06
---------- ----------- -------- ----------
---------- ----------- -------- ----------
MICHIGAN FUND
Net Assets....................................................... $1,640,666 $ 1,841,924 $ 1,163 $ 541,318
---------- ----------- -------- ----------
---------- ----------- -------- ----------
Number of Shares Outstanding..................................... 164,986 185,219 117 54,464
---------- ----------- -------- ----------
---------- ----------- -------- ----------
Net Asset Value Per Share (net assets divided by number of shares
outstanding)................................................... $ 9.94 $ 9.94 $ 9.94 $ 9.94
Sales Charge (for Class A and Class D shares: 1.00% of offering
price; 1.01% of net asset value per share)*.................... .10 ** ** .10
---------- ----------- -------- ----------
Offering Price................................................... $ 10.04 $ 9.94 $ 9.94 $ 10.04
---------- ----------- -------- ----------
---------- ----------- -------- ----------
</TABLE>
48
<PAGE>
<TABLE>
<CAPTION>
CLASS A CLASS B CLASS C CLASS D
---------- ----------- -------- ----------
NEW JERSEY FUND
<S> <C> <C> <C> <C>
Net Assets....................................................... $2,662,645 $ 5,152,224 $271,989 $ 540,229
---------- ----------- -------- ----------
---------- ----------- -------- ----------
Number of Shares Outstanding..................................... 263,436 509,424 29,696 53,434
---------- ----------- -------- ----------
---------- ----------- -------- ----------
Net Asset Value Per Share (net assets divided by number of shares
outstanding)................................................... $ 10.11 $ 10.11 $ 9.16 $ 10.11
Sales Charge (for Class A and Class D shares: 1.00% of offering
price; 1.01% of net asset value per share)*.................... .10 ** ** .10
---------- ----------- -------- ----------
Offering Price................................................... $ 10.21 $ 10.11 $ 9.16 $ 10.21
---------- ----------- -------- ----------
---------- ----------- -------- ----------
NEW YORK FUND
Net Assets....................................................... $3,723,308 $10,070,519 $214,138 $3,912,159
---------- ----------- -------- ----------
---------- ----------- -------- ----------
Number of Shares Outstanding..................................... 370,162 1,001,114 21,296 388,837
---------- ----------- -------- ----------
---------- ----------- -------- ----------
Net Asset Value Per Share (net assets divided by number of shares
outstanding)................................................... $ 10.06 $ 10.06 $ 10.06 $ 10.06
Sales Charge (for Class A and Class D shares: 1.00% of offering
price; 1.01% of net asset value per share)*.................... .10 ** ** .10
---------- ----------- -------- ----------
Offering Price................................................... $ 10.16 $ 10.06 $ 10.06 $ 10.16
---------- ----------- -------- ----------
---------- ----------- -------- ----------
PENNSYLVANIA FUND
Net Assets....................................................... $ 832,986 $ 6,263,404 $ 1,188 $1,806,923
---------- ----------- -------- ----------
---------- ----------- -------- ----------
Number of Shares Outstanding..................................... 82,402 619,654 117 178,650
---------- ----------- -------- ----------
---------- ----------- -------- ----------
Net Asset Value Per Share (net assets divided by number of shares
outstanding)................................................... $ 10.11 $ 10.11 $ 10.15 $ 10.11
Sales Charge (for Class A and Class D shares: 1.00% of offering
price; 1.01% of net asset value per share)*.................... .10 ** ** .10
---------- ----------- -------- ----------
Offering Price................................................... $ 10.21 $ 10.11 $ 10.15 $ 10.21
---------- ----------- -------- ----------
---------- ----------- -------- ----------
</TABLE>
- ------------
* Rounded to the nearest one-hundredth percent; assumes maximum sales charge is
applicable.
** Class B and Class C shares are not subject to an initial sales charge but may
be subject to a CDSC on redemption of shares within one year of purchase. See
'Purchase of Shares--Deferred Sales Charge Alternatives--Class B and Class C
Shares' in the Prospectus and 'Redemption of Shares--Deferred Sales
Charges--Class B and Class C Shares' herein.
INDEPENDENT AUDITORS
Deloitte & Touche LLP, 117 Campus Drive, Princeton, New Jersey 08540-6400,
has been selected as the independent auditors of the Trust. The independent
auditors are responsible for auditing the annual financial statements of each
Fund.
CUSTODIAN
The Bank of New York, 90 Washington Street, 12th Floor, New York, New York
10005, acts as the custodian of the Trust's assets. The custodian is responsible
for establishing a separate account for each Fund, safeguarding and controlling
each Fund's cash and securities, handling the delivery of securities and
collecting interest on each Fund's investments.
TRANSFER AGENT
Merrill Lynch Financial Data Services, Inc. (the 'Transfer Agent'), 4800
Deer Lake Drive East, Jacksonville, Florida 32246-6484, acts as the Trust's
transfer agent. The Transfer Agent is responsible for the issuance, transfer and
redemption of Fund shares and the opening, maintenance and servicing of Fund
shareholder accounts. See 'Management of the Trust--Transfer Agency Services' in
the Prospectus.
LEGAL COUNSEL
Brown & Wood LLP, One World Trade Center, New York, New York 10048-0557, is
counsel for the Trust.
49
<PAGE>
REPORTS TO SHAREHOLDERS
The fiscal year of each Fund ends on July 31 of each year. The Trust sends
to shareholders of each Fund at least semi-annually reports showing the Fund's
portfolio and other information. An annual report, containing financial
statements audited by independent auditors, is sent to shareholders each year.
After the end of each year shareholders will receive Federal income tax
information regarding dividends and capital gains distributions.
ADDITIONAL INFORMATION
The Prospectus and this Statement of Additional Information do not contain
all the information set forth in the Registration Statement and the exhibits
relating thereto, which the Trust has filed with the Commission, Washington,
D.C., under the Securities Act and the 1940 Act, to which reference is hereby
made.
The Declaration, a copy of which is on file in the office of the Secretary
of the Commonwealth of Massachusetts, provides that the name 'Merrill Lynch
Multi-State Limited Maturity Municipal Series Trust' refers to the Trustees
under the Declaration collectively as Trustees, but not as individuals or
personally; and no Trustee, shareholder, officer, employee or agent of the Trust
shall be held to any personal liability; nor shall resort be had to any such
person's private property for the satisfaction of any obligation or claim of the
Trust but the 'Trust Property' only shall be liable.
To the knowledge of the Trust, the following persons or entities owned
beneficially 5% or more of a class of a Fund's shares on November 1, 1996.
<TABLE>
<CAPTION>
PERCENT OF
NAME ADDRESS CLASS
--------------------------- ---------------------------- ---------------
<S> <C> <C> <C>
California Fund.......................... Bernard Lipinsky and 700 Front St. #2501 10.3% Class A
Dorris Lipinsky San Diego, CA 92101 6.4% Class B
Blush & Co. P.O. Box 976 5.7% Class D
New York, NY 10268
Florida Fund............................. Est. of Edward J. McBride P.O. Box 880 11.4% Class D
Fort Myers, FL 33902
Massachusetts Fund....................... Heatbath Corporation P.O. Box 2978 7.8% Class A
Attn: Mary Simpson Springfield, MA 01101
Williams W. Walen and 129 Overbrook Rd. 10.2% Class B
Donna Walen Long Meadow, MA 01106
Michigan Fund............................ Thomas O. Muller, III 21 S. End Ave. 10.2% Class A
# 1E PH Regatta
New York, NY 10280
Margarete Drettmann 32901 Gratiot Ave. 5.4% Class B
c/o Richard Zimmer Active Roseville, MI 48066
Tool
New York Fund............................ Morris M. Greenberg 601 Stratford Rd. 7.4% Class D
North Baldwin, NY 11510
Karen E. Gitelson 2 Fox Run Rd. 5.5% Class D
Briarcliff, NY 10510
Pennsylvania Fund........................ A.J. Clegg 1400 N. Providence Rd. #3010 12.3% Class B
Rose Tree Corp. Center II Media, PA 19063
Martin and Sylvia Kreithen 900 Roscommon Rd. 16.3% Class D
Bryn Mawr, PA 19010
</TABLE>
50
<PAGE>
APPENDIX A
ECONOMIC AND FINANCIAL CONDITIONS IN ARIZONA
The following information is a brief summary of factors affecting the
economy of the state and does not purport to be a complete description of such
factors. Other factors will affect issuers. The summary is based primarily upon
one or more publicly available offering statements relating to debt offerings of
state issuers; however, it has not been updated nor will it be updated during
the year. The Trust has not independently verified this information.
Over the past several decades, the State's economy has grown faster than
most other regions of the country as measured by nearly every major indicator of
economic growth, including population, employment, and aggregate personal
income. Although the rate of growth slowed considerably during the late 1980s
and early 1990s, the State's efforts to diversify its economy have enabled it to
realize, and then sustain, increasing growth rates in more recent years. While
jobs in industries such as mining and agriculture have diminished in relative
importance to the State's economy over the past two decades, substantial growth
has occurred in the areas of aerospace, high technology, light manufacturing and
the service industry. Other important industries that contributed to the State's
growth in past years, such as construction and real estate, have rebounded from
substantial declines during the late 1980s and early 1990s, and, like the rest
of the State, are experiencing positive growth.
Arizona's strong economy, warm climate, and reasonable cost of living have
encouraged many people to move to the State in recent years. Between 1985 and
1990, the State ranked fifth in the country in population growth, and Maricopa
County, the State's most populous county, had the single largest population
inflow (in absolute terms) of any county in the country during that period.
Since 1991, as a result of both the State's relatively good economy and the
troubles experienced in surrounding areas like California, the State's
population has grown by approximately 392,000, or 10.4%, including an increase
of 105,000, or 2.6%, in 1995 alone. Population growth is expected to continue at
or above 1995 levels for the foreseeable future.
Part of the State's popularity in recent years can be attributed to the
favorable job climate. Following 1994's near record employment rate increase of
6.7%, the State achieved an employment rate increase of 5.4% in 1995, recording
more than 91,000 new jobs. Once again, the service sector of the economy, which
represents more than 29% of all jobs in the State, showed significant growth. A
relatively sound United States economy, a stronger economy in California (which
historically has been a prime market for Arizona goods and services) and
continued growth in high technology, manufacturing and services should enable
the State to realize positive, though more modest, gains in job growth in 1996.
The 1995 unemployment rate was 5.1%.
The State's economic growth in recent times has enabled Arizonans to
realize substantial gains in personal income. While the State's per capita
personal income generally varies between 5% and 15% below the national average
due to such factors as the chronic poverty on the State's Indian reservations,
the State's relatively high numbers of retirees and children, and the State's
below-average wage scale, the State's aggregate personal income grew nearly 8.6%
during 1995 to approximately $84.8 billion, which translated into a gain in real
personal income of 6.1%, or $4.5 billion, over 1994.
The gains in per capita personal income during this period led to continued
strong growth in retail sales. While the 8.9% retail sales growth rate in 1995
was lower than 1994's 12.0% increase, the State's strong employment and personal
income figures should provide for continued growth in future years.
The State government's fiscal situation has improved substantially in
recent years. After experiencing several years of budget shortfalls requiring
mid-year adjustments, the State has had budget surpluses. Although an amendment
to the State's constitution requiring a 2/3 majority vote in both houses of the
Legislature to pass a tax or fee increase constrains the State's ability to
raise additional revenue when needed, the State has placed some of its surplus
revenue in a rainy-day fund.
In July 1994, a sharply divided Arizona Supreme Court ruled that the
State's current system for financing public education itself created substantial
disparities in facilities among school districts and therefore violated the
A-1
<PAGE>
provisions of Article XI, Section 1 of the Arizona Constitution, which requires
the Legislature to establish and maintain 'a general and uniform public school
system.' The Court remanded the case to the Superior Court 'to determine
whether, within a reasonable time, legislative action has been taken [to correct
this situation].' In response to a subsequent motion for clarification, the
Supreme Court ordered that, pending such legislative action or further order of
the Supreme Court, 'which would have prospective application only,' the public
school system 'continue under existing statutes, and the validity and
enforceability of past and future acts, bonded indebtedness and obligations
incurred under applicable statutes, as long as they are in force and effect, are
assured.' In May 1995, a court dismissed a taxpayer's challenge to a school
district bond issue that was authorized at an election subsequent to the Supreme
Court decision on the ground that the Supreme Court decision contemplated and
approved such bond issues pending legislative action or further court order. A
new system of public school financing has not yet been implemented. However, in
November, 1996, a Superior Court judge ruled that all public school funding be
cut off after June 30, 1998 unless legislative action is taken to remedy the
situation. It is unclear what action the legislature will take in light of this
ruling or what effect, if any, the ruling will have on Arizona school district
bonds.
Maricopa County is the State's most populous and prosperous county,
accounting for nearly 60% of the State's population and a substantial majority
of its wage and salary employment and aggregate personal income. Within its
borders lie the City of Phoenix, the State's largest city and the seventh
largest city in the United States, and the Cities of Scottsdale, Tempe, Mesa,
Glendale, Chandler, and Peoria, as well as the Towns of Paradise Valley and
Gilbert. Good transportation facilities, a substantial pool of available labor,
a variety of support industries and a warm climate have helped make Maricopa
County a major business center in the southwestern United States. Once dependent
primarily on agriculture, Maricopa County has substantially diversified its
economic base. Led by the service sector, which includes transportation,
communications, public utilities, hospitality and entertainment, trade, finance,
insurance, real estate, and government, the County achieved an overall
employment growth rate of 6.3% in 1995. In addition, several large,
publicly-traded companies, such as The Dial Corp., Phelps Dodge and MicroAge,
have their headquarters in Maricopa County, while others, such as Motorola,
Intel and Honeywell, conduct major operations there. Already home to a variety
of professional sports teams, including the Phoenix Suns and Arizona Cardinals,
the County was also awarded one of two new major league baseball franchises; the
Arizona Diamondbacks are expected to begin play in 1998 upon completion of a
stadium currently under construction in downtown Phoenix.
Pima County is the State's second most populous county, and includes the
City of Tucson. Traditionally, Pima County's economy has been based primarily
upon manufacturing, mining, government, agriculture, tourism, education, and
finance. Hughes Aircraft, which transferred its Hughes Missile Systems division
to Tucson from Canoga Park, California, several years ago, and several large
mining companies, including Magma Copper, ASARCO, and Phelps Dodge, anchor the
non-public sector of the Tucson economy. During the past decade, the County, and
Tucson in particular, has become a base for hundreds of computer software
companies, as well as a number of companies operating in the areas of
environmental technology, bioindustry, and telecommunications. The County did
experience a significant drop in the rate of job growth from 7.0% in 1994 to
2.3% in 1995, although positive job growth is expected to continue.
In 1994, two special purpose irrigation districts, formed for the purpose
of issuing bonds to finance the purchase of Colorado River water from the
Central Arizona Project ('CAP'), filed for bankruptcy under Chapter 9 of the
United States Bankruptcy Code due to the districts' inability to collect tax
revenue in amounts and at times sufficient to service their bonded debt. The
financial problems that led to the districts' default arose from a combination
of the unexpectedly high cost of constructing the CAP and delivering the water
to the districts, plummeting land values, resulting in a need to increase
property taxes in order to pay the districts' bonds, and the refusal by many
land owners in the districts to shoulder the increased tax burden. In June 1995,
a bankruptcy plan was confirmed for one district which gave back to bondholders
57 cents of their principal and placed an additional 42 cents on the dollar in
new 8 percent bonds maturing in seven years. The proceedings with respect to the
second district are continuing.
A-2
<PAGE>
APPENDIX B
ECONOMIC AND FINANCIAL CONDITIONS IN CALIFORNIA
The following information is a brief summary of factors affecting the
economy of the State and does not purport to be a complete description of such
factors. Other factors will affect issuers. The summary is based primarily upon
one or more publicly available offering statements relating to debt offerings of
state issuers, however, it has not been updated nor will it be updated during
the year. The Trust has not independently verified the information.
ECONOMIC CONDITIONS
The economy of the State of California (sometimes referred to herein as the
'State') is the largest among the 50 states and one of the largest in the world.
This diversified economy has major components in agriculture, manufacturing,
high technology, trade, entertainment, tourism, construction and services. Total
State gross domestic product of about $890 billion in 1995 was larger than all
but six nations in the world.
California's July 1, 1994 population of over 32 million represented over 12
percent of the total United States population. The official 1990 Census
population was 29,760,021 as of April 1, 1990, which represented an increase of
over 6 million persons, or 26 percent, during the decade of the 1980s. As of the
April 1, 1990 Census, the median age of California's population was 31.5 years,
younger than the 1990 U.S. median of 32.9 years.
California's population is concentrated in metropolitan areas. As of the
April 1, 1990 Census, 96 percent resided in the 23 Metropolitan Statistical
Areas in the State. Overall, California's population per square mile was 191 in
1990. As of July 1, 1994, 69 percent of the population of the State was located
in the two consolidated Metropolitan Statistical Areas in California. As of July
1, 1995, the 5-county Los Angeles area accounted for 49 percent, with 15.6
million residents. The 10-county San Francisco Bay Area represented 21 percent,
with a population of 6.6 million.
After suffering through a severe recession, California's economy has been
on a steady recovery since the start of 1994. Employment grew by over 500,000 in
1994 and 1995, and the pre-recession level of total employment is expected to be
matched in 1996. The strongest growth has been in export-related industries,
business services, electronics, entertainment and tourism, all of which have
offset the recession-related losses which were heaviest in aerospace and
defense-related industries (which accounted for two-thirds of the job losses),
finance and insurance. Residential housing construction, with new permits for
under 100,000 annual new units issued in 1994 and 1995, is weaker than in
previous recoveries, but has been growing slowly since 1993.
The State. In the years following enactment of the Federal Tax Reform Act
of 1986, and conforming changes to the State's tax laws, taxpayer behavior
became much more difficult to predict, and the State experienced a series of
fiscal years in which revenue came in significantly higher or lower than
original estimates. The 1989-90 Fiscal Year ended with revenues below estimates,
so that the State's budget reserve (the Special Fund for Economic Uncertainties
or 'SFEU') was fully depleted by June 30, 1990. This date essentially coincided
with the start of the current recession, which severely affected State General
Fund revenues and increased expenditures above initial budget appropriations due
to greater health and welfare costs. The State's budget problems in recent years
have also been caused by a structural imbalance which has been identified by the
current and previous Administrations. The largest General Fund Program--K-14
education, health, welfare and corrections--was increasing faster than the
revenue base, driven by the State's rapid population growth. These pressures
will continue as population trends maintain strong demand for health and welfare
services, as the school-age population continues to grow and as the State's
corrections program responds to a 'Three Strikes' law enacted in 1994, which
requires mandatory life prison terms for certain third-time felony offenders.
Prior Years. As a result of these factors and others, from the late 1980s
until 1992-93, the State had a period of budget imbalance. During this period,
expenditures exceeded revenues in four out of six years, and the State
accumulated and sustained a budget deficit in the SFEU approaching $2.8 billion
at its peak at June 30, 1993. Starting in the 1990-91 Fiscal Year and for each
fiscal year thereafter, each budget required multi-billion dollar actions to
bring projected revenues and expenditures into balance and to close large
'budget gaps' which were identified. Despite budget actions by the Legislature,
the effects of the recession led to large, unanticipated deficits in the budget
reserve, the SFEU, as compared to projected positive balances. By the 1993-94
Fiscal Year,
B-1
<PAGE>
the accumulated deficit was so large that it was impractical to budget to retire
it in one year, so a two-year program was implemented, using the issuance of
revenue anticipation warrants to carry a portion of the deficit over the end of
the fiscal year. When the economy failed to recover sufficiently in 1993-94, a
second two-year plan was implemented in 1994-95.
Another consequence of the accumulated budget deficits, together with other
factors such as disbursement of funds to local school districts 'borrowed' from
future fiscal years and hence not shown in the annual budget, was to
significantly reduce the State's cash resources available to pay its ongoing
obligations. The State's cash condition became so serious in late Spring of 1992
that the State Controller was required to issue revenue anticipation warrants
maturing in the following fiscal year in order to pay the State's continuing
obligations. The State was forced to rely increasingly on external debt markets
to meet its cash needs, as a succession of notes and warrants were issued in the
period from June 1992 to July 1994, often needed to pay previously maturing
notes or warrants. These borrowings were used also in part to spread out the
repayment of the accumulated budget deficit over the end of the fiscal year.
The 1994-95 Fiscal Year represented the fourth consecutive year that the
Governor and the Legislature were faced with a very difficult budget environment
to produce a balanced budget. Many program cuts and budgetary adjustments had
already been made in the last three years. The Governor's budget proposal, as
updated in May and June, 1994, recognized that the accumulated deficit could not
be repaid in one year and proposed a two-year solution.
Pursuant to the Budget Adjustment Law (the 'Law'), the State Controller was
required to make a report by November 15, 1994 on whether the projected cash
resources for the General Fund as of June 30, 1995 would decrease more than $430
million from the amount projected by the State in its Official Statement in July
1994 for the sale of $4,000,000,000 of revenue anticipation warrants. On
November 15, 1994, the State Controller issued the report on the State's cash
position required by the Law. The report indicated that the cash position of the
General Fund on June 30, 1995 would be $581 million better than was estimated in
the July 1994 cash flow projections and therefore, no budget adjustment
procedures would be invoked for the 1994-95 Fiscal Year.
On October 15, 1995, when the State Controller, in conjunction with the
Legislative Analyst's Office, reviewed the estimated cash condition of the
General Fund for the 1995-96 Fiscal Year, the State Controller estimated that
the General Fund would not have negative internal cash resources on June 30,
1996 (i.e., external borrowing would be needed to pay all obligations due). If a
cash shortfall had been identified by the State Controller, the State
Legislature would have been required to enact legislation providing for
sufficient General Fund expenditure reductions, revenue increases, or both.
1995-96. On January 10, 1995, the Governor presented his 1995-96 Fiscal
Year budget proposal (the 'Proposed Budget'). Two of the principal features of
the Proposed Budget were a phased 15% cut in personal income and corporate taxes
and a further expansion of the 'realignment' process to transfer more
responsibility and funding sources for certain health and welfare programs to
local governments. Neither of these proposals was approved by the Legislature.
As a result of the improving economy, with resulting improved revenue and
caseload estimates, the State entered the 1995-96 budget negotiations with the
smallest nominal 'budget gap' to be enclosed in many years.
The 1995-96 Budget Act was signed by the Governor on August 3, 1995. The
Budget Act projects General Fund revenues and transfers of $44.1 billion, a 3.5
percent increase from the prior year. Expenditures are budgeted at $43.4
billion, a 4 percent increase. The Department of Finance projects that, after
repaying the last of the carryover budget deficit, there will be a positive
balance of $28 million in the budget reserve, the SFEU, at June 30, 1996. The
Budget Act also projects Special Fund revenues of $12.7 billion and appropriates
Special Fund expenditures of $13.4 billion.
1996-1997. The following are principal features of the 1996-97 Budget Act:
1. Proposition 98 funding for schools and community college districts
increased by almost $1.6 billion (General Fund) and $1.65 billion total
above revised 1995-96 levels. Almost half of this money was budgeted to
fund class-size reductions in kindergarten and grades 1-3. Also, for the
second year in a row, the full cost of living allowance (3.2 percent) was
funded. The Proposition 98 increases have brought K-12 expenditures to
almost $4,800 per pupil (also called per ADA, or Average Daily Attendance),
an almost
B-2
<PAGE>
15% increase over the level prevailing during the recession years.
Community colleges will receive an increase in funding of $157 million for
1996-97 out of this $1.6 billion total.
Because of the higher than projected revenues in 1995-96, an
additional $1.1 billion ($190 per K-12 ADA and $145 million for community
colleges) was appropriated and retroactively applied towards the 1995-96
Proposition 98 guarantee, bringing K-12 expenditures in that year to over
$4,600 per ADA. These new funds were appropriated for a variety of
purposes, including block grants, allocations for each school site,
facilities for class size reduction, and a reading initiative. Similar
retroactive increases totaling $230 million, based on final figures on
revenues and State population growth, were made to the 1991-92 and the
1994-95 Proposition 98 guarantees, most of which was allocated to each
school site.
2. The Budget Act assumed savings of approximately $660 million in
health and welfare costs which required changes in federal law, including
federal welfare reform. The Budget Act further assumed federal law changes
in August 1996 which would allow welfare cash grant levels to be reduced by
October 1, 1996. These cuts totaled approximately $163 million of the
anticipated $660 million savings.
3. A 4.9 percent increase in funding for the University of California
($130 million General Fund) and the California State University system
($101 million General Fund), with no increases in student fees, maintaining
the second year of the Governor's four-year 'Compact' with the State's
higher education units.
4. The Budget Act assumed the federal government will provide
approximately $700 million in new aid for incarceration and health care
costs of illegal immigrants. These funds reduce appropriations in these
categories that would otherwise have to be paid from the General Fund. (For
purposes of cash flow projections, the Department of Finance expects $540
million of this amount to be received during the 1996-97 fiscal year.)
5. General Fund support for the Department of Corrections was
increased by about 7 percent over the prior year, reflecting estimates of
increased prison population.
6. With respect to aid to local governments, the principal new
programs included in the Budget Act are $100 million in grants to cities
and counties for law enforcement purposes, and budgeted $50 million for
competitive grants to local governments for programs to combat juvenile
crime.
The Budget Act did not contain any tax increases. As noted, there was a
reduction in corporate taxes. In addition, the Legislature approved another
one-year suspension of the Renters Tax Credit, saving $520 million in
expenditures.
Federal Welfare Reform. Following enactment of the 1996-97 Budget Act,
Congress passed and the President signed (on August 22, 1996) the Personal
Responsibility and Work Opportunity Act of 1996 (P.L. 104-193, the 'Law') making
a fundamental reform of the current welfare system. Among many provisions, the
Law includes: (i) conversion of Aid to Families with Dependent Children from an
entitlement program to a block grant titled Temporary Assistance for Needy
Families (TANF), with lifetime time limits on TANF recipients, work requirements
and other changes; (ii) provisions denying certain federal welfare and public
benefits to legal noncitizens, allowing states to elect to deny additional
benefits (including TANF) to legal noncitizens, and generally denying almost all
benefits to illegal immigrants; and (iii) changes in the Food Stamp program,
including reducing maximum benefits and imposing work requirements.
The Law requires states to implement the new TANF program not later than
July 1, 1997 and provides California approximately $3.7 billion in block grant
funds for FY 1996-97 for the provisions of the Law. States are allowed to
implement TANF as soon as possible and will receive a prorated block grant
effective the date of application. The California State Plan is to be submitted
in time to allow grant reductions to be implemented effective January 1, 1997
(allowing $92 million of the $163 million referred to in Paragraph2 above to be
saved) and to allow the State to capture approximately $267 million in
additional federal block grant funds over the currently budgeted level. None of
the other federal changes needed to achieve the balance of the $660 million cost
savings were enacted. Thus, in lieu of the $660 million savings initially
assumed to be saved, it is now projected that savings will total approximately
$360 million.
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A preliminary analysis of the law by the Legislative Analyst's Office
indicates that an overall assessment of how these changes will affect the
State's General Fund will not be known for some time, and will depend on how the
State implements the Law. There are many choices including how quickly the State
implements the Law; the degree to which the State elects to make up for cuts in
federal aid, provide more aid to counties, or cut some of its own existing
programs for noncitizens; and the State's ability to avoid certain penalties
written into the Law.
LOCAL GOVERNMENTS
The primary units of local government in California are the counties,
ranging in population from 1,300 (Alpine) to over 9,000,000 (Los Angeles).
Counties are responsible for the provision of many basic services, including
indigent healthcare, welfare, courts, jails and public safety in unincorporated
areas. There are also about 480 incorporated cities and thousands of other
special districts formed for education, utility and other services. The fiscal
condition of local governments has been constrained since the enactment of
'Proposition 13' in 1978, which reduced and limited the future growth of
property taxes and limited the ability of local governments to impose 'special
taxes' (those devoted to a specific purpose) without two-thirds voter approval.
A recent California Supreme Court decision has upheld the constitutionality of
an initiative statute, previously held invalid by lower courts, which requires
voter approval for 'general' as well as 'special' taxes at the local level.
Counties, in particular, have had fewer options to raise revenues than other
local government entities and have been required to maintain many services.
In the aftermath of Proposition 13, the State provided aid from the General
Fund to make up some of the loss of property tax moneys, including taking over
the principal responsibility for funding local K-12 schools and community
colleges. Under the pressure of the recent recession, the Legislature has
eliminated remnants of this post-Proposition 13 aid to entities other than K-14
education districts, although it has also provided additional funding sources
(such as sales taxes) and reduced mandates for local services. Many counties
continue to be under severe fiscal stress. While such stress has in recent years
most often been experienced by smaller, rural counties, larger urban counties,
such as Los Angeles, have also been affected. Orange county implemented
significant reductions in services and personnel, and continues to face fiscal
constraints in the aftermath of its bankruptcy, which had been caused by large
investment losses in its pooled investment funds.
CONSTITUTIONAL AND STATUTORY LIMITATIONS; RECENT INITIATIVES; PENDING
LEGISLATION
Constitutional and Statutory Limitations. Article XIIIA of the California
Constitution (which resulted from the voter-approved Proposition 13 in 1978)
limits the taxing powers of California public agencies. Article XIIIA provides
that the maximum ad valorem tax on real property cannot exceed 1 percent of the
'full cash value' of the property and effectively prohibits the levying of any
other ad valorem tax on real property for general purposes. However, on May 3,
1986, Proposition 46, an amendment to Article XIIIA, was approved by the voters
of the State of California, creating a new exemption under Article XIIIA
permitting an increase in ad valorem taxes on real property in excess of 1
percent for bonded indebtedness approved by two-thirds of the voters voting on
the proposed indebtedness. 'Full cash value' is defined as 'the County
Assessor's valuation of real property as shown on the 1975-76 tax bill under
'full cash value' or, thereafter, the appraised value of real property when
purchased, newly constructed, or a change in ownership has occurred after the
1975 assessment'. The 'full cash value' is subject to annual adjustment to
reflect increases (not to exceed 2 percent) or decreases in the consumer price
index or comparable local data, or to reflect reductions in property value
caused by damage, destruction or other factors.
Article XIIIB of the California Constitution limits the amount of
appropriations of the State and of the local governments to the amount of
appropriations of the entity for the prior year, adjusted for changes in the
cost of living, population and the services that local government has financial
responsibility for providing. To the extent that the revenues of the State
and/or local government exceed its appropriations, the excess revenues must be
rebated to the public either directly or through a tax decrease. Expenditures
for voter-approved debt services are not included in the appropriations limit.
In 1986, California voters approved an initiative statute known as
Proposition 62. This initiative (i) required that any tax for general
governmental purposes imposed by a local governmental entity be approved by a
majority of the electorate of the governmental entity, (ii) required that any
special tax (defined as taxes levied for
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other than general government purposes) imposed by a local governmental entity
be approved by a two-thirds vote of the voters within that jurisdiction, (iii)
restricted the use of revenues from a special tax to the purposes or for the
services for which the special tax is imposed, (iv) prohibited the imposition of
ad valorem taxes on real property by local governmental entities except as
permitted by Article XIIIA, (v) prohibited the imposition of transaction taxes
and sales taxes on the sale of real property by local governments, (vi) required
that any tax imposed by a local government on or after August 1, 1985 be
ratified by a majority vote of the electorate within two years of the adoption
of the initiative or be terminated by November 15, 1988, (vii) required that, in
the event a local government fails to comply with the provisions of this
measure, a reduction in the amount of property tax revenues allocated to such
local government occurs in an amount equal to the revenues received by such
entity attributable to the tax levied in violation of the initiative, and (viii)
permitted those provisions to be amended exclusively by the voters of the State
of California.
On September 28, 1995 the California Supreme Court upheld the
constitutionality of the provision requiring a two-thirds vote in order for a
local government to impose a 'special tax'. Although the Supreme Court has yet
to rule on the provision requiring a majority vote for a 'general tax', it
appears that the Supreme Court is favorably disposed to uphold that portion of
Proposition 62 as well. In that event, a number of taxes currently being
collected (especially by counties and general law cities) would be invalidated.
Prior collection of such taxes may also be subject to claims for refund unless
the Supreme Court chooses to apply its ruling prospectively. The California
Supreme Court has yet to consider the validity of Proposition 62 with regard to
charter cities.
Recent Initiatives. At the November 9, 1988 general election, California
voters approved an initiative known as Proposition 98. This initiative amends
Article XIIIB to require that (i) the California Legislature establish a prudent
state reserve fund in an amount it shall deem reasonable and necessary and (ii)
revenues in excess of amounts permitted to be spent and which would otherwise be
returned pursuant to Article XIIIB by revision of tax rates or fee schedules be
transferred and allocated (up to a maximum of 40%) to the State School Fund and
be expended solely for purposes of instructional improvement and accountability.
Proposition 98 also amends Article XVI to require that the State of California
provide a minimum level of funding for public schools and community colleges.
Commencing with the 1988-89 Fiscal Year, money to be applied by the State for
the support of school districts and community college districts shall not be
less than the greater of: (i) the amount which, as a percentage of the State
General Fund revenues which may be appropriated pursuant to Article XIIIB,
equals the percentage of such State General Fund revenues appropriated for
school districts and community college districts, respectively, in Fiscal Year
1986-87 or (ii) the amount required to ensure that the total allocations to
school districts and community college districts from the State General Fund
proceeds of taxes appropriated pursuant to Article XIIIB and allocated local
proceeds of taxes shall not be less than the total amount from these sources in
the prior year, adjusted for increases in enrollment and adjusted for changes in
the cost of living pursuant to the provisions of Article XIIIB. The initiative
permits the enactment of legislation, by a two-thirds vote, to suspend the
minimum funding requirements for one year. As a result of Proposition 98, funds
that the State might otherwise make available to its political subdivisions may
be allocated instead to satisfy such minimum funding level.
During the recent recession, General Fund revenues for several years were
less than originally projected, so that the original Proposition 98
appropriations turned out to be higher than the minimum percentage provided in
the law. The Legislature responded to these developments by designating the
'extra' Proposition 98 payments in one year as a 'loan' from future years'
Proposition 98 entitlements and also intended that the 'extra' payments would
not be included in the Proposition 98 'base' for calculating future years'
entitlement. By implementing these actions, per-pupil funding from Proposition
98 sources stayed almost constant at approximately $4,220 from Fiscal Year
1991-92 to Fiscal Year 1993-94.
In 1992, a lawsuit was filed, called California Teachers' Association v.
Gould, which challenged the validity of these off-budget loans. As part of the
negotiations leading to the 1995-96 Budget Act, an oral agreement was reached to
settle this case. The settlement was approved by the court in July 1996.
The settlement provides, among other things, that both the State and K-14
schools share in the repayment of prior years' emergency loans to schools. Of
the total $1.76 billion in loans, the State will repay $935 million by
forgiveness of the amount owed, while schools will repay $825 million. The State
share of the repayment will be
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reflected as expenditures above the current Proposition 98 base calculation. The
schools' share of the repayment will count as appropriations that count toward
satisfying the Proposition 98 guarantee, or from 'below' the current base.
Repayments are spread over the eight-year period of 1994-95 through 2001-02 to
mitigate any adverse fiscal impact. The Director of Finance has certified that a
settlement has occurred, allowing approximately $377 million in appropriations
from the 1995-96 Fiscal Year to schools to be disbursed.
On November 8, 1994, the voters approved Proposition 187, an initiative
statute ('Proposition 187'). Proposition 187 specifically prohibits funding by
the State of social services, health care services and public school education
for the benefit of any person not verified as either a United States citizen or
a person legally admitted to the United States. Among the provisions in
Proposition 187 pertaining to public school education, the measure requires,
commencing January 1, 1995, that every school district in the State verify the
legal status of every child enrolling in the district for the first time. By
January 1, 1996, each school district must also verify the legal status of
children already enrolled in the district and of all parents or guardians of all
students. If the district 'reasonably suspects' that a student, parent or
guardian is not legally in the United States, that district must report the
student to the United States Immigration and Naturalization Service and certain
other parties. The measure also prohibits a school district from providing
education to a student it does not verify as either a United States citizen or a
person legally admitted to the United States. The State Legislative Analyst
estimates that verification costs could be in the tens of millions of dollars on
a statewide level (including verification costs incurred by other local
governments), with first-year costs potentially in excess of $100 million.
The reporting requirements may violate the Family Educational Rights and
Privacy Act ('FERPA'), which generally prohibits schools that receive Federal
funds from disclosing information in student records without parental consent.
Compliance with FERPA is a condition of receiving Federal education funds, which
total $2.3 billion annually to California school districts. The Secretary of the
United States Department of Education has indicated that the reporting
requirements in Proposition 187 could jeopardize the ability of school districts
to receive these funds.
Opponents of Proposition 187 have filed at least eight lawsuits challenging
the constitutionality and validity of the measure. On November 2, 1995, a United
States District Court judge struck down the central provisions of Proposition
187 by ruling that parts of Proposition 187 conflict with Federal power over
immigration. The ruling concluded that states may not enact their own schemes to
'regulate immigration or devise immigration regulations which run parallel or
purport to supplement Federal immigration law'. As a consequence of the ruling,
students may not be denied public education and may not be asked about their
immigration status when enrolling in public schools. Further, the ruling struck
down the requirements of Proposition 187 that teachers and district employees
report information on the immigrant status of students, parents and guardians.
An appeal has been filed.
On November 5, 1996, voters approved Proposition 218, entitled the 'Right
to Vote on Taxes Act,' which incorporates new Articles XIIIC and XIIID into the
California Constitution. These new provisions enact limitations (including the
need to obtain voter approval in many cases) on the ability of local government
agencies to impose or raise various taxes, fees, charges and assessments.
Additionally, certain 'general taxes' imposed after January 1, 1995 must be
approved by voters in order to remain in effect. Moreover, Article XIIIC grants
the right to voters to reduce taxes, fees, assessments or charges through local
initiatives.
There are a number of ambiguities concerning the Proposition and its impact
on local governments and their bonded debt which will require interpretation by
the courts or the State Legislature. The State Legislative Analyst estimated
that enactment of Propositoin 218 would reduce local government revenues
statewide by over $100 million a year, and that over time local government
revenues would be several hundred million dollars a year lower than under
previous law. Proposition 218 does not affect California or its ability to levy
or collect taxes. However, it is unknown what response the State may undertake
to assist local governments in dealing with Proposition 218.
Article XIIIA, Article XIIIB and a number of other propositions were
adopted pursuant to California's constitutional initiative process. From time to
time, other initiative measures could be adopted by California voters. The
adoption of any such initiatives may cause California issuers to receive reduced
revenues, or to increase expenditures, or both.
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Pending Litigation. The State is a party to numerous legal proceedings,
many of which normally occur in governmental operations. Some of the more
significant lawsuits pending against the State are described herein.
The State is a defendant in 12 lawsuits involving the exclusion of small
business stock gains from preference tax and in some cases, also from taxation.
The lead cases are Mervin Morris v. Franchise Tax Board and James Lennane v.
Franchise Tax Board. The majority of the remaining cases had been deferred
pending the outcome of the Morris and Lennane cases. The Supreme Court has ruled
against the State in Lennane but has not yet ruled in Morris. The State has lost
at least $80 million as a result of the Lennane decision.
In Parr v. State of California, a complaint was filed in Federal court
claiming that payment of wages in registered warrants violated the Fair Labor
Standards Act ('FLSA'). The Federal court held that the issuance of registered
warrants does violate the FLSA but subsequently withdrew its order. The parties
have agreed to a settlement which has to be approved by the trial court. Under
the terms of the judgment, a maximum of $1.3 million will be paid to eligible
separated State employees and approximately $1 million will be paid in statutory
attorney's fees and costs. In addition, eligible current State employees will
receive employee leave, in an amount presently not quantified.
The State is involved in a lawsuit seeking reimbursement for alleged
state-mandated costs. In Thomas Hayes v. Commission on State Mandates, the State
Director of Finance is appealing a 1984 decision by the State Board of Control.
The Board of Control decided in favor of local school districts' claims for
reimbursement for special education programs for handicapped students; however,
funds have not been appropriated. The amount of potential liability to the
State, if all potentially eligible school districts pursue timely claims, has
been estimated by the Department of Finance at over $1 billion.
In another case, the State is a defendant in Long Beach Unified School
Districts v. State of California. In this case, the school district seeks
reimbursement for voluntary desegregation costs incurred in the implementation
of California Department of Education guidelines. The years of reimbursement are
from Fiscal Year 1977-78 and each fiscal year thereafter to the present. The
district prevailed in a superior court, and the case has been decided by a State
appellate court against the State. A petition for review was denied and the
superior court judgment has become final, but the court retains jurisdiction to
oversee payment. The State anticipates that the unfavorable outcome will affect
pending claims by other school districts, and the total loss could be in excess
of $300 million.
A Federal Court of Appeals in the case of Deanna Beno et al. v. Donna
Shalala, reversing a trial court ruling in favor of the State, recently
determined that the Secretary of the United States Department of Health and
Human Services violated the Federal Administrative Procedure Act when she
approved California's Assistance Payment Demonstration Project, which in part,
granted California a waiver from complying with requirements for state
participation in the Federal program for medical assistance ('Medicaid'). The
waiver has allowed California to reduce payments under the Aid to Families with
Dependent Children program ('AFDC'), below 1988 payment levels without violating
Medicaid requirements relating to maintenance of AFDC payments levels.
California had relied, in part, on the waiver to reduce state AFDC payments in
1992, 1993 and 1994. The Court of Appeals remanded the case to the trial court
with instructions to remand the Demonstration Project to the Secretary for
additional consideration of objections raised by the plaintiffs. The State
submitted a renewed waiver request to the Secretary, which was granted in early
1996.
One of the features of the 1994-95 Budget Act is a 2.3 percent reduction in
AFDC payments. In Welch v. Anderson, on August 19, 1994, the San Francisco
Superior Court issued a preliminary injunction against the California Director
of Social Services to prevent the 2.3 percent AFDC cuts from becoming effective
September 1, 1994. While September cuts were already in process and could not be
halted, the court ordered the cuts to be restored. The preliminary injunction
has been upheld and the case on the merits remains pending.
The State is involved in two lawsuits related to contamination at the
Stringfellow toxic waste site. In one suit, the State is one of approximately
130 defendants in Penny Newman v. J.B. Stringfellow, et al. in which 3,800
plaintiffs are claiming damages of $850 million arising from contamination at
the Stringfellow toxic waste site. The State is a defendant because it chose the
site and approved the deposit of toxic wastes. Seventeen of the 3,800 plaintiffs
have litigated their claims; in half of these cases plaintiffs' verdicts in the
total amount of $159,000 were received and in the remaining cases verdicts were
entered for the State. The other cases have been settled for $13.5 million. In
the separate suit described in United States, People of the State of California
v. J.B.
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Stringfellow Jr. et al., the State has been found liable by the District Court
on the counterclaim. The amount of liability is still being litigated although
allocation of liability has been determined by the trial court, including an
allocation of liability to the State.
The State is a defendant in a coordinated action involving 3,000 plaintiffs
seeking recovery for damages caused by the Yuba River flood of February 1986.
The appellate court affirmed the trial court finding of liability in inverse
condemnation and awarded damages of $500,000 to 12 sample plaintiffs. Potential
liability to the remaining 300 plaintiffs, from claims filed, ranges from $800
million to $1.5 billion.
The State is involved in a case concerning the default by Triad Healthcare
on a $167 million loan guaranteed by the Cal-Mortgage Loan Insurance Division of
the Office of Statewide Health Planning and Development ('Cal-Mortgage'). Monies
for the loan were raised through the sale of Certificates of Participation and
Cal-Mortgage insured the debt service payments. Since July 1993, Triad has
failed to make its monthly debt service payments; therefore, the reserve account
of the bonds has been used to make the payments. Once the reserve account is
exhausted, additional debt service payments would be made from the Health
Facility Construction Loan Insurance Fund as they become due. However, if there
is any shortfall in this fund, the State's General Fund would be used to make up
the difference.
In Jernigan & Burleson v. State, filed in Federal district court, the
prison inmate plaintiffs claim they are entitled to minimum wages while working
for the Prison Industry Authority. The inmates claim that the State has violated
the FLSA. Plaintiffs are seeking back pay for the period from August 1990
onward, and liquidated damages for a total of approximately $350 million. In
June 1995, the district court rules that the inmates are not employees under the
FLSA. The decision has been appealed to the Ninth Circuit Court of Appeals,
which affirmed the District Court decision holding that the inmates are not
employees under the FLSA. The inmates have filed a Petition for Rehearing and a
Petition for Hearing En Banc with the Ninth Circuit.
Additional lawsuits challenge the transfer of moneys from special fund
accounts within the State Treasury to the State's General Fund pursuant to the
Budget Acts of 1991, 1992, 1993 and 1994. Plaintiffs in the two cases titled
Abramovitz et al. v. Wilson et al., filed in State and Federal courts, seek to
have the transfers reversed and the moneys allegedly totalling approximately
$400 million returned to the special funds. Plaintiffs in the case of Kurt
Hathaway, et al. v. Wilson, filed in State court, seek to reverse transfers of
money from special fund accounts to the State's General Fund authorized in the
1994 and 1995 Budget Acts, allegedly totalling approximately $370 million. The
State disputes both liability and the amount claimed. In the case of
Professional Engineers in California Government v. Wilson, several State
employees' unions have challenged transfers made from special funds to the
General Fund pursuant to the Budget Act of 1993, 1994 and 1995 and seek
reimbursement of over $400 million to these special funds.
In the case of Board of Administration, California Public Employees'
Retirement System, et al. v. Pete Wilson, Governor, et al., plaintiffs
challenged the constitutionality of legislation which deferred payment of the
State's employer contribution to the Public Employees' Retirement System
('PERS') beginning in Fiscal Year 1992-1993. On January 11, 1995, the Sacramento
County Superior Court entered a judgment finding that the legislation
unconstitutionally impaired the vested contract rights of PERS members. The
judgment provides for issuance of a writ of mandate directing State defendants
to disregard the provisions of the legislation, to implement the statute
governing employer contributions that existed before the changes in the
legislation were found to be unconstitutional and to transfer to PERS the
1993-94 and 1994-95 contributions that are unpaid to date. The State defendants
have appealed.
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APPENDIX C
ECONOMIC CONDITIONS IN FLORIDA
The following information is a brief summary of factors affecting the
economy of the state and does not purport to be a complete description of such
factors. Other factors will affect issuers. The summary is based upon one or
more publicly available offering statements relating to debt offerings of the
state of Florida; however, it has not been updated nor will it be updated during
the year. The Trust has not independently verified the information.
Throughout the 1980s, the State's unemployment rate has, generally, tracked
below that of the nation. In recent years, however, as the State's economic
growth has slowed from its previous highs, the State's unemployment rate has
tracked above the national average. The State's unemployment rate is projected
to be 5.9% in both 1995-96. Nevertheless, the average rate of unemployment for
the State since 1986 is 6.2%, while the national average is 6.4%. (The
projections set forth in this Appendix were obtained from a report, prepared by
the Revenue and Economic Analysis Unit of the Executive Office of the Governor
for the State of Florida, contained within a recent official statement, dated
August 7, 1996, for a State of Florida debt offering.)
Personal income in the State has grown at a strong pace and has generally
outperformed both the nation as a whole and the Southeast in particular. From
1985 through 1995, the State's per capita income rose an average 5.0% per year,
while the national per capita income increased an average of 4.9%. Real personal
income in Florida is estimated to increase 4.7% in 1995-96 and increase 3.8% in
1996-97 while real personal income per capita is projected to grow at 2.9% in
1995-96 and 1.9% in 1996-97.
The structure of Florida's income differs from that of the nation and the
Southeast. Because Florida has a proportionally greater retirement age
population, property income (dividends, interest, and rent) and transfer
payments (social security and pension benefits, among other sources of income)
are a relatively more important source of income. For example, Florida's
employment income in 1995 represented 60.6% of total personal income, while the
nation's share of total personal income in the form of wages and salaries and
other labor benefits was 70.8%. Florida's income is dependent upon transfer
payments controlled by the federal government.
The State's strong population growth is one fundamental reason why its
economy has typically performed better than the nation as a whole. In 1980, the
State was ranked seventh among the 50 states with a population of 9.7 million
people. The State has grown dramatically since then and as of April 1, 1995
ranked fourth with an estimated population of 14.1 million. Since 1985, the
State's average annual rate of population increase has been approximately 2.3%
as compared to an approximately 1.0% for the nation as a whole. While annual
growth in the State's population is expected to decline somewhat, it is still
expected to grow close to 230,000 new residents per year throughout the 1990s.
Tourism is one of the State's most important industries. 40.7 million
people visited the State in 1994, according to the Florida Department of
Commerce. Tourist arrivals are expected to decrease by 4.7% this fiscal year and
rebound by 4.5% next year. By the end of the fiscal year, 39.4 million domestic
and international tourists are expected to have visited the State. In 1996-97,
tourist arrivals should approximate 41.2 million. Florida tourism still appears
to be suffering from the effects of negative publicity regarding crime against
tourists in the state. Also, factors such as 'product maturity' of a Florida
vacation package, higher prices, and more aggressive marketing by competing
vacation destinations, could be contributory causes of the tourism slowdown.
Florida's economy has been and currently is dependent on the highly
cyclical construction and construction-related manufacturing sectors. For
example, total contract construction employment as a share of total non-farm
employment was a little over 5% in 1995. Florida, nevertheless, has had a
dynamic construction industry, with single and multi-family housing starts
accounting for approximately 8.5% of total U.S. housing starts in 1995, while
the State's population is 5.4% of the nation's population. Total housing starts
were 115,000 in 1995. A driving force behind Florida's construction industry is
its rapid growth in population. In Florida, single and multi-family housing
starts in 1995-96 are projected to reach a combined level of 117,500 while
dropping to 108,000 next year. Multi-family starts have been slow to recover,
but are expected to maintain a level of nearly 37,400 in
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1995-96 and almost 32,100 in 1996-97. Total construction expenditures are
forecasted to increase 2.4% in this year and increase 1.7% next year. This
represents a slower pace of growth than what was originally projected.
Financial operations of the State covering all receipts and expenditures
are maintained through the use of four funds--the General Revenue Fund, Trust
Funds, the Working Capital Fund, and beginning in fiscal year 1994-95, the
Budget Stabilization Fund. In fiscal year 1994-95, the State derived
approximately 66% of its total direct revenues to these funds from State taxes
and fees. Federal funds and other special revenues accounted for the remaining
revenues. Major sources of tax revenues to the General Revenue Fund are the
sales and use tax, corporate income tax, intangible personal property tax, and
beverage tax, which amounted to 67%, 7%, 4%, and 4%, respectively, of total
General Revenue Funds available. State expenditures are categorized for budget
and appropriation purposes by type of fund and spending unit, which are further
subdivided by line item. In fiscal year 1994-95, expenditures from the General
Revenue Fund for education, health and welfare, and public safety amounted to
approximately 49%, 32% and 11%, respectively, of total General Revenues.
The Sales and Use Tax is the greatest single source of tax receipts in the
State. For the State fiscal year ended June 30, 1995, receipts from this source
were $10,672 million, an increase of 6.0% from fiscal year 1993-94. The second
largest source of State tax receipts is the Motor Fuel Tax. The estimated
collections from this source during the fiscal year ending June 30, 1995, were
$1,924.6 million. Alcoholic beverage tax revenues totalled $437.3 million for
the State fiscal year ending June 30, 1995, down by $4.9 million from the
previous year. The receipts of corporate income tax for the fiscal year ended
June 30, 1995 were $1,063.5 million, an increase of 1.5% from fiscal year
1993-94. Gross Receipt tax collections for fiscal year 1994-95 totalled $508.4
million, an increase of 10.4% over the previous fiscal year. Documentary stamp
tax collections totalled $695.3 million during fiscal year 1994-95, posting an
11.4% decrease from the previous fiscal year. The intangible personal property
tax is a tax on stocks, bonds, notes, governmental leaseholds, certain limited
partnership interests, mortgages and other obligations secured by liens on
Florida realty, and other intangible personal property. Total collections from
intangible personal property taxes were $818.0 million during the fiscal year
ending June 30, 1995, down 2.1% from the previous fiscal year. Severance taxes
totalled $61.2 million during fiscal year 1994-95, up 1.1% from the previous
fiscal year. In November 1986, the voters of the State approved a constitutional
amendment to allow the State to operate a lottery. Fiscal year 1994-95 produced
ticket sales of $2.19 billion of which education received approximately $853.2
million.
For fiscal year 1995-96 the estimated General Revenue plus Working Capital
and Budget Stabilization funds available total $15,311.3 million, a 3.3%
increase over 1994-95. The $14,538.8 million in estimated revenues represent a
6.5% increase over the analagous figure in 1994-95. With combined General
Revenue, Working Capital Fund, and Budget Stabilization Fund appropriations at
$14,808.6 million, unencumbered reserves at the end of 1995-96 are estimated at
$502.7 million.
Estimated fiscal year 1996-97 General Revenue plus Working Capital and
Budget Stabilization funds available are expected to total $16,094.7 million, a
5.1% increase over fiscal year 1995-96.
The State Constitution does not permit a state or local personal income
tax. An amendment to the State Constitution by the electors of the State would
be required in order to impose a personal income tax in the State.
Property valuations for homestead property are subject to a growth cap.
Growth in the just (market) value of property qualifying for the homestead
exemption is limited to 3% or the change in the Consumer Price Index, whichever
is less. If the property changes ownership or homestead status, it is to be
re-valued at full just value on the next tax roll. Although the impact of the
growth cap cannot be determined, it may have the effect of causing local
government units in the State to rely more on non-ad valorem tax revenues to
meet operating expenses and other requirements normally funded with ad valorem
tax revenues.
An amendment to the State Constitution was approved by statewide ballot in
the November 8, 1994 general election which is commonly referred to as the
'Limitation on State Revenues Amendment.' This amendment provides that State
revenues collected for any fiscal year shall be limited to State revenues
allowed under the amendment for the prior fiscal year plus an adjustment for
growth. Growth is defined as an amount equal to the average annual rate of
growth in State personal income over the most recent twenty quarters times the
State revenues allowed under the amendment for the prior fiscal year. State
revenues collected for any fiscal year in
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excess of this limitation are required to be transferred to the Budget
Stabilization Fund until the fund reaches the maximum balance specified in
Section 19(g) of Article III of the State Constitution, and thereafter is
required to be refunded to taxpayers as provided by general law. The limitation
on State revenues imposed by the amendment may be increased by the Legislature,
by a two-thirds vote of each house.
The term 'State revenues,' as used in the amendment, means taxes, fees,
licenses, and charges for services imposed by the Legislature on individuals,
businesses, or agencies outside State government. However, the term 'State
revenues' does not include: (i) revenues that are necessary to meet the
requirements set forth in documents authorizing the issuance of bonds by the
State; (ii) revenues that are used to provide matching funds for the federal
Medicaid program with the exception of the revenues used to support the Public
Medical Assistance Trust Fund or its successor program and with the exception of
State matching funds used to fund elective expansions made after July 1, 1994;
(iii) proceeds from the State lottery returned as prizes; (iv) receipts of the
Florida Hurricane Catastrophe Fund; (v) balances carried forward from prior
fiscal years; (vi) taxes, licenses, fees and charges for services imposed by
local, regional, or school district governing bodies; or (vii) revenue from
taxes, licenses, fees and charges for services required to be imposed by any
amendment or revision to the State Constitution after July 1, 1994. The
amendment took effect on January 1, 1995 and is applicable to State fiscal year
1995-96.
It should be noted that many of the provisions of the amendment are
ambiguous, and likely will not be clarified until State courts have ruled on
their meanings. Further, it is unclear how the Legislature will implement the
language of the amendment and whether such implementing legislation will itself
be the subject of further court interpretation.
The Fund cannot predict the impact of the amendment on State finances. To
the extent local governments traditionally receive revenues from the State which
are subject to, and limited by, the amendment, the future distribution of such
State revenues may be adversely affected by the amendment.
Hurricanes continue to endanger the coastal and interior portions of
Florida. Substantial damage resulted from Hurricane Andrew in 1992. The 1995
hurricane season has experienced a record number of tropical storms and
hurricanes which caused substantial damage. During the 1996 hurricane season the
State has suffered considerably less damage than in 1995.
According to the Florida General Purposes Financial Statements for fiscal
year ended June 30, 1994, reported as of June 30, 1995, the State had a high
bond rating from Moody's Investors Service, Inc. (Aa), Standard & Poor's Rating
Services (AA) and Fitch Investors Service, Inc. (AA) on all of its general
obligation bonds. Outstanding general obligation bonds at June 30, 1995 totalled
almost $6.8 billion and were issued to finance capital outlay for educational
projects of both local school districts, community colleges and state
universities, environmental protection and highway construction. The State has
issued just over $1.13 billion of general obligation bonds since July 1, 1995.
Due to investments in certain derivatives, Escambia County, Florida in 1994
sustained notable losses which may in the future affect their operations. As
reported in the local press, several lawsuits have resulted regarding such
investments.
In late October, 1996, the Florida Auditor General notified the Governor's
office that seventeen municipalities or special districts are in a state of
financial emergency (including the Orlando-Orange County Expressway Authority
and the Pinellas Suncoast Transit Authority) and that another twenty-five
municipalities or special districts might be in a state of financial emergency
(including the City of Miami). For these purposes, a state of emergency is
considered two consecutive years of budget deficits. Municipalities or special
districts that may be in a state of financial emergency are those that the
Auditor General was unable to conclude had sufficient revenues to cover their
deficits. The operations of all of these entities mentioned in the Auditor
General's communication may be adversely affected by their financial condition.
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APPENDIX D
ECONOMIC AND FINANCIAL CONDITIONS IN MASSACHUSETTS
The following information is a brief summary of factors affecting the
economy of the state and does not purport to be a complete description of such
factors. Other factors will affect issuers. The summary is based primarily upon
one or more publicly available offering statements relating to debt offerings of
state issuers; however, it has not been updated nor will it be updated during
the year. The Trust has not independently verified the information.
Economic growth in the Commonwealth of Massachusetts (sometimes referred to
as the 'Commonwealth') has slowed since 1988, particularly in the construction,
real estate, financial and manufacturing sectors, including certain high
technology areas. Economic conditions have improved somewhat since 1993. The
unemployment rate in Massachusetts averaged 6.9% during 1993, after rising
steadily during the previous three years, from 3.4% at the beginning of 1989. As
of September, 1996, however, the Commonwealth's unemployment rate was 4.2% as
compared to a national average of 5.2%. Per capita personal income in the
Commonwealth is currently higher than the national average.
Ending fund balances in the budgeted operating funds for fiscal 1991 were
$237.1 million. Fiscal 1992 ended with positive fund balances of $549.4 million
after carrying forward the fund balances from fiscal 1991. Fiscal 1993 ended
with positive fund balances of $562.5 million.
In fiscal 1994, the total revenues of the budgeted operating funds of the
Commonwealth during such fiscal year increased by approximately 5.7% over the
prior fiscal year, to $15.550 billion. Expenditures increased by 5.6% over the
prior year, to $15.523 billion. As a result, the Commonwealth ended fiscal 1994
with a positive closing fund balance of $589.3 million. In fiscal 1995, the
total revenues of the budgeted operating funds of the Commonwealth during such
fiscal year increased by approximately 5.4% over the prior fiscal year, to
$16.387 billion. Expenditures increased by 4.7% over the prior fiscal year, to
$16.251 billion. As a result, the Commonwealth ended fiscal 1995 with a positive
closing fund balance of $726.0 million. On September 16, 1996, the Comptroller
released his preliminary financial report for fiscal year 1996. According to
such report budgeted revenues and other sources in fiscal 1996, which ended June
30, 1996, were approximately $17.323 billion, including tax revenues of
approximately $12.049 billion. Fiscal 1996 budgeted expenditures totalled
approximately $16.896 billion.
Standard & Poor's and Moody's have rated the Commonwealth's general
obligation bonds as A+ and A1, respectively. Fitch Investors Service, Inc. has
recently rated the Commonwealth's bonds as A+. From time to time, the rating
agencies may change their ratings.
Growth of tax revenues in the Commonwealth is limited by law. Tax revenues
in fiscal years 1988 through 1995 were lower than the limits set by law, and the
Comptroller's report indicates that state tax revenues in fiscal 1996 were lower
than the limits imposed by law. In addition, effective July 1, 1990, limitations
were placed on the amount of direct bonds the Commonwealth may have outstanding
in a fiscal year, and the amount of the total appropriation in any fiscal year
that may be expended for repayment of principal of and payment of interest on
general obligation debt of the Commonwealth was limited to 10% of such
appropriation. Bonds in the aggregate principal amount of $1.416 billion issued
in October and December 1990, under Chapter 151 of the Acts of 1990 to meet the
fiscal 1990 deficit are excluded from the computation of these limitations, and
principal of and interest on such bonds are to be paid from up to 15% of the
Commonwealth's income tax receipts in each year that such principal or interest
is payable.
Furthermore, certain of the Commonwealth's cities and towns have at times
experienced serious financial difficulties which have adversely affected their
credit standing. The recurrence of such financial difficulties, or financial
difficulties of the Commonwealth, could adversely affect the market values and
marketability of outstanding obligations issued by the Commonwealth or its
public authorities or municipalities. In addition, the Massachusetts statutes
which limit the taxing authority of the Commonwealth or certain Massachusetts
governmental entities may impair the ability of issuers of some Massachusetts
obligations to pay debt service on their obligations.
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In Massachusetts, the tax on personal property and real estate is virtually
the only source of tax revenues available to cities and towns to meet local
costs. 'Proposition 2 1/2,' an initiative petition adopted by the voters of the
Commonwealth of Massachusetts on November 4, 1980, limits the power of
Massachusetts cities and towns and certain tax-supported districts and public
agencies to raise revenue from property taxes to support their operations,
including the payment of certain debt service. Proposition 2 1/2 required many
cities and towns to reduce their property tax levels to a stated percentage of
the full and fair cash value of their taxable real estate and personal property
and limited the amount by which the total property taxes assessed by a city or
town might increase from year to year. Although the limitations of Proposition
2 1/2 on tax increases may be overridden and amounts for debt service and
capital expenditures excluded from such limitation by the voters of the relevant
municipality, Proposition 2 1/2 will continue to restrain significantly the
ability of cities and towns to pay for local services, especially in light of
cost increases due to an inflation rate generally exceeding 2.5%.
To offset shortfalls experienced by local governments as a result of the
implementation of Proposition 2 1/2, the government of the Commonwealth
increased direct local aid from the 1981 level of $1.632 billion to the fiscal
1991 level of $2.608 billion. Direct local aid decreased from fiscal 1991 to
$2.359 billion in fiscal 1992, increased to $2.547 billion in fiscal 1993 and
increased to $2.727 billion in fiscal 1994. Fiscal 1995 expenditures for direct
local aid were $2.976 billion, which is an increase of approximately 9.1% above
the 1994 level. It is estimated that fiscal 1996 expenditures for direct local
aid will be $3.246 billion, which is an increase of approximately 9.1% above the
fiscal 1995 level.
The aggregate unfunded actuarial liabilities of the pension systems of the
Commonwealth and the unfunded liability of the Commonwealth related to local
retirement systems are significant-estimated to be approximately $8.227 billion
as of January 1, 1995 (the last date that such liability was calculated) on the
basis of certain actuarial assumptions regarding, among other things, future
investment earnings, annual inflation rates, wage increases and cost of living
increases. No assurance can be given that these assumptions will be realized.
The legislature adopted a comprehensive pension bill addressing the issue in
January 1988, which requires the Commonwealth, beginning in fiscal year 1989, to
fund future pension liabilities currently and amortize the Commonwealth's
unfunded liabilities over 40 years in accordance with funding schedules prepared
by the Secretary for Administration and Finance and approved by the legislature.
The amounts required for funding of current pension liabilities in fiscal years
1996, 1997 and 1998 are estimated to be $1.007 billion, $1.061 billion and
$1.128 billion, respectively.
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APPENDIX E
ECONOMIC AND FINANCIAL CONDITIONS IN MICHIGAN
The following information is a brief summary of factors affecting the
economy of the state and does not purport to be a complete description of such
factors. Other factors will affect issuers. The summary is based primarily upon
one or more publicly available offering statements relating to debt offerings of
state issuers, however, it has not been updated nor will it be updated during
the year. The Trust has not independently verified the information.
Due primarily to the fact that the leading sector of the economy of the
State of Michigan (sometimes referred to as the 'State') is the manufacturing of
durable goods, economic activity in the State has tended to be more cyclical
than in the nation as a whole. While the State's efforts to diversify its
economy have proven successful, as reflected by the fact that the share of
employment in the State in the durable goods sector has fallen from 33.1% in
1960 to 15.8% in 1994, durable goods manufacturing still represents a sizable
portion of the State's economy. As a result, any substantial national economic
downturn is likely to have an adverse effect on the economy of the State and on
the revenues of the State and some of its local governmental units.
Historically, the average monthly unemployment rate in the State has been higher
than the average figures for the United States. More recently, the unemployment
rate in the State has been at or below the national average. During 1995, the
average monthly unemployment rate in the State was 5.3% compared to a national
average of 5.6%.
The State's economy could continue to be affected by changes in the auto
industry, notably consolidation and plant closings resulting from competitive
pressures and overcapacity. Such actions could adversely affect State revenues
and the financial impact on the local units of government in the areas in which
plants are closed could be more severe. The impact on the financial condition of
the municipalities in which the plants are located may be more severe than the
impact on the State itself.
The Michigan Constitution limits the amount of total revenues of the State
raised from taxes and certain other sources to a level for each fiscal year
equal to a percentage of the State's personal income for the prior calendar
year. In the event the State's total revenues exceed the limit by 1% or more,
the Constitution requires that the excess be refunded to taxpayers. To avoid
exceeding the revenue limit in the State's 1994-95 fiscal year, the State is
refunding approximately $113 million through income tax credits for the 1995
calendar year. The State Constitution does not prohibit the increasing of taxes
so long as revenues are expected to amount to less than the revenue limit and
authorizes exceeding the limit for emergencies. The State Constitution further
provides that the proportion of State spending paid to all local units' total
spending may not be reduced below the proportion in effect for the 1978-79
fiscal year. The Constitution requires that if spending does not meet the
required level in a given year an additional appropriation for local units is
required for the following fiscal year. The State Constitution also requires the
State to finance any new or expanded activity of local units mandated by State
law. Any expenditures required by this provision would be counted as State
spending for local units for purposes of determining compliance with the
provisions stated above.
The State Constitution limits the purposes for which State general
obligation debt may be issued. Such debt is limited to short-term debt for State
operating purposes, short- and long-term debt for the purposes of making loans
to school districts and long-term debt for voter approved purposes. In addition
to the foregoing, the State authorizes special purpose agencies and authorities
to issue revenue bonds payable from designated revenues and fees. Revenue bonds
are not obligations of the State and in the event of shortfalls in
self-supporting revenues, the State has no legal obligation to appropriate money
to these debt service payments. The State's Constitution also directs or
restricts the use of certain revenues.
The State finances its operations through the State's General Fund and
Special Revenue Funds. The General Fund receives revenues of the State that are
not specifically required to be included in the Special Revenue Fund. General
Fund revenues are obtained approximately 58% from the payment of State taxes and
42% from federal and non-tax revenue sources. The majority of the revenues from
State taxes are from the State's personal income tax, single business tax, use
tax, sales tax and various other taxes. Approximately 59% of total General Fund
expenditures are for State support of public education and for social services
programs. Other significant expenditures from the General Fund provide funds for
law enforcement, general State government, debt service
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and capital outlay. The State Constitution requires that any prior year's
surplus or deficit in any fund must be included in the next succeeding year's
budget for that fund.
In recent years, the State of Michigan has reported its financial results
in accordance with generally accepted accounting principles. For the fiscal
years ended September 30, 1990 and 1991, the State reported negative year-end
General Fund balances of $310.3 million and $169.4 million, respectively, but
ended the 1992, 1993, 1994 and 1995 fiscal years with its General Fund in
balance after transfers in 1993, 1994 and 1995 from the General Fund to the
Budget Stabilization Fund of $283 million, $464 million and $67.4 million,
respectively. Those and certain other transfers into and out of the Budget
Stabilization Fund raised the balance in the Budget Stabilization Fund to $987.9
million as of September 30, 1995. A positive cash balance in the combined
General Fund/School Aid Fund was recorded at September 30, 1990. In each of the
three prior fiscal years, the State undertook mid-year actions to address
projected year-end budget deficits including expenditure costs and deferrals and
one time expenditures or revenue recognition adjustments. From 1991 through
1993, the State experienced deteriorating cash balances which necessitated
short-term borrowings and the deferral of certain scheduled cash payments of
local units of government. The State borrowed between $500 million and $900
million for cash flow purposes in the 1992 and 1993 fiscal years, $500 million
in the 1995 fiscal year and $900 million in the 1996 fiscal year. The State did
not have to borrow for short-term cash flow purposes in the 1993-94 fiscal year
due to improved cash balances.
Amendments to the Michigan Constitution which placed limitations on
increases in State taxes and local ad valorem taxes (including taxes used to
meet debt service commitments on obligations of taxing units) were approved by
the voters of the State of Michigan in November, 1978 and became effective on
December 23, 1978. To the extent that obligations in the Fund are tax supported
and are for local units and have not been voted by the taxing unit's electors,
the ability of the local units to levy debt service taxes might be affected.
State law provides for distributions of certain State collected taxes or
portions thereof to local units based in part on population as shown by census
figures and authorizes levy of certain local taxes by local units having a
certain level of population as determined by census figures. Reductions in
population in local units resulting from periodic census could result in a
reduction in the amount of State collected taxes returned to those local units
and in reductions in levels of local tax collections for such local units unless
the impact of the census is changed by State law. No assurance can be given that
any such State law will be enacted. In the 1991 fiscal year, the State deferred
certain scheduled payments to municipalities, school districts, universities and
community colleges. While such deferrals were made up at later dates, similar
future deferrals could have an adverse impact on the cash position of some local
units. Additionally, the State has reduced revenue sharing payments to
municipalities below the level provided under formulas by increasing amounts in
each of the last five fiscal years and has budgeted a reduction of $81.26
million in the fiscal year which ended on September 30, 1996.
On March 15, 1994, the electors of the State voted to amend the State's
Constitution to increase the State sales tax rate from 4% to 6% and to place an
annual cap on property assessment increases for all property taxes. Companion
legislation also cut the State's income tax rate from 4.6% to 4.4%, reduced some
property taxes and shifted the balance of school funding sources among property
taxes and State revenues, some of which are being provided from new or increased
State taxes. The legislation also contains other provisions that may reduce or
alter the revenues of local units of government and tax increment bonds could be
particularly affected. While the ultimate impact of the constitutional amendment
and related legislation cannot yet be accurately predicted, investors should be
alert to the potential effect of such measures upon the operations and revenues
of Michigan local units of government.
The State is a party to various legal proceedings seeking damages or
injunctive or other relief. In addition to routine litigation, certain of these
proceedings could, if unfavorably resolved from the point of view of the State,
substantially affect State or local programs or finances. These lawsuits involve
programs generally in the areas of corrections, highway maintenance, social
services, tax collection, commerce and budgetary reductions to school districts
and governmental units and court funding.
Currently, the State's general obligation bonds are rated Aa by Moody's
Investors Service, Inc., AA by Standard & Poor's Ratings Services and Aa by
Fitch Investors Service, Inc.
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APPENDIX F
ECONOMIC AND FINANCIAL CONDITIONS IN NEW JERSEY
The following information is a brief summary of factors affecting the
economy of New Jersey and does not purport to be a complete description of such
factors. Other factors will affect issuers. The summary is based primarily upon
one or more publicly available offering statements relating to debt offerings of
state issuers, however, it has not been updated nor will it be updated during
the year. The Trust has not independently verified the information.
Effective January 1, 1994, personal income tax rates in the State of New
Jersey (the 'State') were cut by 5% for all taxpayers. Effective January 1,
1995, the State's personal income tax rates were cut by an additional 10% for
most taxpayers. By a bill signed into law on July 4, 1995, New Jersey personal
income tax rates have been further reduced so that coupled with the prior rate
reductions, beginning with tax year 1996, personal income tax rates will be,
depending upon a taxpayer's level of income and filing status, 30%, 15% or 9%
lower than 1993 rates. At this time the effect of the tax reduction cannot be
evaluated.
The State operates on a fiscal year beginning July 1 and ending June 30.
For example, 'fiscal year 1997' refers to the State's fiscal year beginning July
1, 1996 and ending June 30, 1997.
The General Fund is the fund into which all State revenues not otherwise
restricted by statute are deposited and from which appropriations are made. The
largest part of the total financial operations of the State is accounted for in
the General Fund. Revenues received from taxes and unrestricted by statute, most
federal revenue and certain miscellaneous revenue items are recorded in the
General Fund.
The State's undesignated General Fund balance was $937 million for fiscal
year 1993, $926 million for fiscal year 1994, $569 million for fiscal year 1995
and $471 million (estimated) for fiscal year 1996. For fiscal year 1997, the
balance in the undesignated General Fund is estimated to be $255 million.
The State finances capital projects primarily through the sale of the
general obligation bonds of the State. These bonds are backed by the full faith
and credit of the State. State tax revenues and certain other fees are pledged
to meet the principal, interest payments and if provided, redemption premium
payments, if any, required to pay the debt fully. No general obligation debt can
be issued by the State without prior voter approval, except that no voter
approval is required for any law authorizing the creation of a debt for the
purpose of refinancing all or a portion of outstanding debt of the State, so
long as such law requires that the refinancing provide a debt service savings.
All appropriations for capital projects and all proposals for State bond
authorizations are subject to the review and recommendation of the New Jersey
Commission on Capital Budgeting and Planning.
The State has extensive control over school districts, cities, counties and
local financing authorities. State laws impose specific limitations on local
appropriations, with exemptions subject to state approval. The State shares the
proceeds of a number of taxes, with funds going primarily for local education
programs, homestead rebates, medicaid and welfare programs. Certain bonds are
issued by localities, but supported by direct State payments. In addition, the
State participates in local wastewater treatment programs.
The State's economic base is diversified, consisting of a variety of
manufacturing, construction and service industries, supplemented by rural areas
with selective commercial agriculture. After enjoying an extraordinary boom
during the mid-1980s, New Jersey, as well as the rest of the Northeast, slipped
into a slowdown well before the onset of the national recession which officially
began in July 1990 (according to the National Bureau of Economic Research). By
the beginning of the national recession, construction activity had already been
declining in New Jersey for nearly two years, growth had tapered off markedly in
the service sectors and the long-term downward trend of factory employment had
accelerated, partly because of a leveling off of industrial demand nationally.
The onset of recession caused an acceleration of New Jersey's job losses in
construction and manufacturing, as well as an employment downturn in such
previously growing sectors as wholesale trade, retail trade, finance, utilities
and trucking and warehousing. The net effect was a decline in the State's total
non-farm wage and salary employment from a peak of 3,689,800 in March 1989 to a
low of 3,445,000 in March 1992. This loss was followed by an employment gain of
200,700 from May 1992 to August 1996; a recovery of 77% of the jobs lost during
the recession. Almost two-thirds of this number, nearly 138,000 jobs, were
recovered in the 31 month period from January 1994 to August 1996.
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Reflecting the downturn, the rate of unemployment in the State rose from a
low of 3.6% during the first quarter of 1989 to a recessionary peak of 8.5%
during 1992 (according to the U.S. Bureau of Labor Statistics and the New Jersey
Department of Labor, Division of Labor Market and Demographic Research). Since
then, the unemployment rate fell to an average of 6.4% in 1995 and 6.1% for the
four month period from May 1996 through August 1996.
For the recovery period as a whole, May 1992 to August 1996,
service-producing employment in New Jersey has expanded by 228,500 jobs. Hiring
has been reported by food stores, auto dealers, wholesale distributors, trucking
and warehousing firms, utilities, business and engineering/management service
firms, hotels/hotel-casinos, social service agencies and health care providers
other than hospitals. Employment growth was particularly strong in business
services and its personnel supply component with increases of 17,500 and 8,100,
respectively, in the 12-month period ended August 1996.
In the manufacturing sector, employment losses slowed between 1992 and
1994. After an average annual job loss of 33,500 from 1989 through 1992, New
Jersey's factory job losses fell to 13,300 during 1993 and 7,300 during 1994.
During 1995, however, manufacturing job losses increased slightly to 9,100,
reflecting a slowdown in national manufacturing production activity. While
experiencing growth in the number of production workers in 1994, the number
declined in 1995 at the same time that managerial and office staff were also
reduced as part of nationwide downsizing. Through August 1996, layoffs of white
collar workers and corporate downsizing appear to be abating.
Conditions have slowly improved in the construction industry, where
employment has risen by 15,600 since its low in May 1992. Between 1992 and 1995,
this sector's hiring rebound was driven primarily by increased homebuilding and
nonresidential projects. During 1996, public works projects and homebuilding
became the growth segments while nonresidential construction lessened.
Residential construction contracts through August 1996, despite monthly
fluctuations, increased by 1.4% for the first eight months of 1996 as compared
to the first eight months of 1995 ($1,502 million and $1,481 million,
respectively). Nonbuilding or infrastructure construction rose robustly by 17.8%
during this period. Despite these increases, total construction contracts
declined by 3.9% when comparing the first eight months of 1995 and 1996.
Improvements in overall employment opportunities and the economy in general
have led to increased consumer spending during the recovery. While overall
retail sales in New Jersey grew by only 1.6% during 1993, they performed much
better in 1994, advancing by 7.8% which exceeded the 7.5% growth registered
nationwide. During 1995, especially in the winter months, consumer confidence
and actual consumer spending moderated both nationally and in the State. For the
year 1995, retail sales in New Jersey grew by 2.3%. Retail sales regained
momentum in 1996 and have been on a moderately upward trend, rising to an annual
rate of $76.5 billion through June. The State's pickup in growth, after a
blizzard-related January decline, resulted in sales growth of 4.2% when
comparing the first six months of 1995 with those of 1996. The rising trend in
retail sales has translated into steady increases in retail trade jobs (both
full- and part-time) with a rise in retail employment from December 1995 to
August 1996 of 6,900 jobs.
Total new vehicle registrations (new passenger cars and light trucks and
vans) rose robustly in 1993 by more than 18% and in 1994 by 5.8%, but declined
by 4.4% in 1995. Through July 1996 however, total new vehicle registrations rose
by 3.5% compared to the same period in 1995.
Unemployment in the State through August 1996 has been receding. According
to the U.S. Bureau of Labor Statistics, the jobless rate dropped from 7.5% in
1993 to 6.8% in 1994 and to 6.4% in 1995. Subsequently, it has dropped to 6.1%
for the four-month period from May 1996 through August 1996.
The insured unemployment rate, i.e., the number of individuals claiming
benefits as a percentage of the number of workers covered by unemployment
insurance, declined from 3.9% during calendar years 1991 and 1992 to 3.3% during
1993 and then averaged 3.2% throughout 1994, 1995 and the first six months of
1996. As of August 1, 1996, the State's unemployment insurance trust fund
balance stood at $2.1 billion.
The State has benefited from the national recovery. New Jersey's recovery
is in its fifth year and appears to be sustainable now that the national economy
has 'soft landed.' The U.S. economy is in a period of steady, moderate growth,
having slowed enough during the fourth quarter of 1995 and the first quarter of
1996 to avoid
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inflation, but not enough to slip into a recession. While the latest national
indicators show that economic growth accelerated during the second quarter of
this year, the inflation rate remained low.
Business investment expenditures and consumer spending have increased
substantially in the nation as well as in the State. Capital and consumer
spending may very well continue to rise due to the sustained character of the
recovery, although the interest-sensitive homebuilding industry may provide only
a moderate amount of stimulus both nationally and in New Jersey. It is expected
that the employment and income growth that has and is taking place will lead to
further growth in consumer outlays. Reasons for cautious optimism in New Jersey
include increasing employment levels, a declining jobless rate, and a
higher-than-national level of per capita personal income.
If the nation's economic growth rate slows from the robust 4.7% growth in
the second quarter of 1996, business expansion could become somewhat more
subdued in New Jersey as the rest of 1996 unfolds. However, the State's economy
should have enough momentum to keep its trend line pointing upwards. Its growth
potential is not yet limited by the labor supply constraints beginning to affect
some other parts of the country.
Looking further ahead, prospects for New Jersey appear favorable. While
growth is likely to be slower than in the nation, the locational advantages that
have served New Jersey well for many years will still be there. Structural
changes that have been going on for years can be expected to continue, with job
creation concentrated most heavily in the service industries.
New Jersey Education Association, et al. v. State of New Jersey, et
al. represents a challenge to amendments to the pension laws enacted on June
30, 1994 (P.L. 1994, Chapter 62), which concerned the funding of the Teachers
Pension and Annuity Fund (TPAF), the Public Employee's Retirement System (PERS),
the Police and Fireman's Retirement System (PFRS), the State Police Retirement
System (SPRS) and the Judicial Retirement System (JRS). The complaint was filed
in the United States District Court of New Jersey on October 17, 1994. The
statute, as enacted, made several changes affecting these retirement systems
including changing the actuarial funding method to projected unit credit;
continuing the prefunding of post-retirement medical benefits but at a reduced
level for TPAF and PERS; revising the employee member contribution rate to a
flat 5% for TPAF and PERS; extending the phase-in period for the revised TPAF
actuarial assumptions; changing the phase-in period for funding of
cost-of-living adjustments and reducing the inflation assumption for the Cost of
Living Adjustment for all retirement systems; and decreasing the average salary
increase assumption for all retirement systems. Plaintiffs allege that the
changes resulted in lower employer contributions in order to reduce a general
budget deficit. The complaint further alleges that certain provisions of Chapter
62 violate the contract, due process, and taking clauses of the United States
and New Jersey Constitutions, and further constitute a breach of the State's
fiduciary duty to participants in TPAF and PERS. Plaintiffs seek to permanently
enjoin the State from administering, enforcing or otherwise implementing Chapter
62. An adverse determination against the State would have a significant impact
upon the fiscal year 1997 budget. The State filed a motion to dismiss and a
motion for summary judgment.
On October 6, 1995, the Court issued its opinion in which it dismissed the
State as a party to the action. The only defendant is Treasurer Clymer. The
claims surviving the motion are: (1) breach of trust and fiduciary duty (against
the Treasurer in both his individual and official capacities); (2) violation of
Due Process (against the Treasurer in both his individual and official
capacities); and (3) a 42 U.S.C. Section1983 claim (against the Treasurer in his
individual capacity).
The forms of relief sought related to these surviving claims are: (1) a
declaration that certain provisions of Chapter 62 violate Due Process of law
under the Fifth and Fourteenth Amendments to the U.S. Constitution; (2) a
declaration that the enactment and implementation of certain provisions of
Chapter 62 constitute a breach of the fiduciary obligations owed to contributing
participants, vested participants and retirees of the TPAF and PERS; (3) a
declaration that Chapter 62 contravenes the statutory and common law duties to
administer and fund the plans in an actuarially sound and fiscally responsible
manner; (4) a permanent injunction against administering, enforcing or otherwise
implementing certain provisions of Chapter 62; (5) directing payment of
plaintiff's attorneys' fees, disbursements and costs pursuant to 42 U.S.C
Section1988.
The State filed a motion for reconsideration or, in the alternative, for
certification to the Third Circuit Court of Appeals, of the remaining claims. By
order dated December 19, 1995, the District Court denied the motion in
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all respects. On January 29, 1996, the State, on behalf of Treasurer Clymer,
filed a Petition for a Writ of Mandamus and a Motion for a Stay of the
Proceedings below, pending consideration and disposition of the petition, with
the Third Circuit Court of Appeals. In the petition, Treasurer Clymer asked the
Court of Appeals to direct the District Court to dismiss the complaint or enter
summary judgment in his favor. Alternatively, the Treasurer asked the Court of
Appeals to order the District Court to vacate its order denying summary judgment
and resolve that motion as a matter of law without discovery or fact finding or
to certify the issues for interlocutory appeal. The Third Circuit Court of
Appeals denied the motion and petition on February 20, 1996. Discovery is
proceeding in this matter. The State intends to vigorously defend this action.
Beth Israel Hospital, et al. v. Essential Health Services Commission. This
case represents a challenge by eleven New Jersey hospitals to the .53% hospital
assessment authorized by the Health Care Reform Act of 1992, specifically
N.J.S.A. 26:2H-18.62. Amounts collected pursuant to the assessment are paid into
the hospital and other health care initiatives account of the Health Care
Subsidy Fund, to be used for various health care programs. Specifically, the
funds are currently used for those programs previously established pursuant to
N.J.S.A. 26:2H-18.47. In this appeal of the assessment, filed with the Appellate
Division on December 6, 1993, appellants argue that collection of the assessment
is invalid in the absence of Hospital Rate Setting Commission approval of the
approved revenue base used in the calculation. At the same time, appellants
filed an application for injunctive relief, seeking to stay any collection,
which application was denied. In a decision dated July 10, 1995, the Appellate
Division rejected appellants' contention that the respondents were prohibited
from collecting the assessment. However, the court also found that the hospitals
had not been afforded an opportunity to be heard on the assessment, and thus
remanded the case to the Essential Health Services Commission for a hearing.
Because the Commission has been abolished by L. 1995, c. 133, and its
responsibilities assigned to the Department of Health, the Department of Health
held the hearing on August 30, 1995. By letters dated March 26, 1996, the
Department of Health affirmed the prior assessments. The hospitals filed a
notice of appeal challenging that decision on May 10, 1996. The State intends to
vigorously defend this action.
Tort, Contract and Other Claims. At any given time, there are various
numbers of claims and cases pending against the State, State agencies and
employees, seeking recovery of monetary damages that are primarily paid out of
the fund created pursuant to the New Jersey Tort Claims Act (N.J.S.A. 59:1-1, et
seq.). The State does not formally estimate its reserve representing potential
exposure for these claims and cases. The State is unable to estimate its
exposure for these claims and cases.
The State routinely receives notices of claim seeking substantial sums of
money. The majority of those claims have historically proven to be of
substantially less value than the amount originally claimed. Under the New
Jersey Tort Claims Act, any tort litigation against the State must be preceded
by a notice of claim, which affords the State the opportunity for a six-month
investigation prior to the filing of any suit against it.
In addition, at any given time, there are various numbers of contract and
other claims against the State and State agencies, including environmental
claims asserted against the State, among other parties, arising from the alleged
disposal of hazardous waste. Claimants in such matters are seeking recovery of
monetary damages or other relief which, if granted, would require the
expenditure of funds. The State is unable to estimate its exposure for these
claims.
At any given time, there are various numbers of claims and cases pending
against the University of Medicine and Dentistry and its employees, seeking
recovery of monetary damages that are primarily paid out of the Self Insurance
Reserve Fund created pursuant to the New Jersey Tort Claims Act (N.J.S.A.
59:1-1, et seq.). An independent study estimated an aggregate potential exposure
of $86,795,000 for tort and medical malpractice claims pending as of June 30,
1996. In addition, at any given time, there are various numbers of contract and
other claims against the University of Medicine and Dentistry, seeking recovery
of monetary damages or other relief which, if granted, would require the
expenditure of funds. The State is unable to estimate its exposure for these
claims.
Currently, the State's general obligation bonds are rated AA+ by Standard &
Poor's, Aa1 by Moody's, and AA+ by Fitch. From time to time agencies may change
their ratings.
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APPENDIX G
ECONOMIC AND FINANCIAL CONDITIONS IN NEW YORK
The following information is a brief summary of factors affecting the
economy of the state and does not purport to be a complete description of such
factors. Other factors will affect specific issuers. The summary is based
primarily upon one or more publicly available offering statements relating to
debt offerings of state issuers; however, it has not been updated nor will it be
updated during the year. The Trust has not independently verified the
information.
In recent years, New York State (sometimes referred to herein as the
'State' or 'New York'), some of its agencies, instrumentalities and public
authorities and certain of its municipalities have faced serious financial
difficulties that could have an adverse effect on the sources of payment for, or
the market value of, the New York State Municipal Securities in which each Fund
invests.
NEW YORK STATE
Current Economic Outlook. The national economy has resumed a more robust
rate of growth after a 'soft landing' in 1995, with over 11 million jobs added
nationally since early 1992. The State economy has continued to expand, but
growth remains somewhat slower than in the nation. Although the State has added
approximately 240,000 jobs since late 1992, employment growth in the State has
been hindered during recent years by significant cutbacks in the computer and
instrument manufacturing, utility, defense and banking industries. Government
downsizing has also moderated these job gains.
The State expects modest economic growth in New York's economy during the
first half of the 1996 calendar year, but some slowdown is projected during the
second half of the year due to government cutbacks and tight fiscal constraints
on health and social services. On an average annual basis, the State's
employment growth is expected to be up slightly and personal income is expected
to record moderate gains from the 1995 rate. Overall employment growth is
projected to be 0.8 percent in 1996 and 0.6 percent in 1997 while personal
income growth is projected to be 5.2 percent in 1996 and 4.7 percent in 1997.
State Financial Plan for the 1996-1997 Fiscal Year. The State's budget for
the 1996-1997 fiscal year (April 1, 1996-March 31, 1997) was enacted by the
Legislature on July 13, 1996, more than three months after the start of the
fiscal year. Prior to adoption of the budget, the Legislature enacted
appropriations for disbursements considered to be necessary for State operations
and other purposes, including necessary appropriations for all State-supported
debt service. The State Financial Plan for the 1996-1997 fiscal year (the 'State
Financial Plan') is based on the State's budget as enacted by the Legislature
and signed into law by the Governor, as well as actual results through the
second quarter of the 1996-1997 fiscal year.
The State Financial Plan projects a General Fund balanced on a cash basis
with total projected receipts of $33.573 billion and total disbursements of
$33.243 billion, representing increases of $765 million and $564 million,
respectively, from the prior fiscal year. The State Financial Plan includes gap
closing actions to offset a previously projected budget gap of $3.9 billion for
the 1996-1997 fiscal year. Such gap closing actions include reductions in the
State workforce, spending reductions in health care and education programs,
projected increases in tax collections, pension and debt service savings and the
use of certain reserve funds. There can be no assurance that additional gap
closing measures will not be required and there is no assurance that any such
measures will enable the State to achieve a balanced budget for its 1996-1997
fiscal year.
The State Financial Plan is based upon forecasts of national and State
economic activity. Economic forecasts have frequently failed to predict
accurately the timing and magnitude of changes in the national and State
economies. Many uncertainties exist in forecasts of both the national and State
economies, including consumer attitudes toward spending, Federal financial and
monetary policies, the availability of credit and the condition of the world
economy, which could have an adverse effect on the State. There can be no
assurance that the State economy will not experience worse-than-predicted
results in the 1996-1997 and subsequent fiscal years, with corresponding
material and adverse effects on the State's projections of receipts and
disbursements.
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Special Considerations for Future Fiscal Years. Owing to uncertainties in
the forecasts of both national and State economics, the State could face
substantial potential budget gaps in future years resulting from a significant
disparity between tax revenues from a lower recurring receipts base and the
spending required to maintain State programs at mandated levels. Any such
recurring imbalance would be exacerbated by the use by the State of nonrecurring
resources to achieve budgetary balance in a particular fiscal year. To correct
any recurring budgetary imbalance, the State would need to take significant
actions to align recurring receipts and disbursements in future fiscal years.
The State Financial Plan contains actions that provide nonrecurring
resources or savings as well as actions that impose baseline losses of receipts.
The Division of the Budget estimates the net amount of nonrecurring resources
used in the State Financial Plan to be at least $1.3 billion. In addition to
these nonrecurring actions, the adoption of a three-year 20% reduction in the
State's personal income tax in 1995 in combination with business tax reductions
enacted in 1994 will reduce State tax receipts by as much as $4.5 billion by the
1997-1998 fiscal year.
On August 13, 1996, the State Comptroller released a report in which he
estimated that the State faces a potential imbalance in receipts and
disbursements of approximately $3 billion for the State's 1997-98 fiscal year
and approximately $3.2 billion for the State's 1998-99 fiscal year. The Governor
is required to submit a balanced budget to the State Legislature and has
indicated he will close any potential imbalance in the 1997-98 Financial Plan
primarily through General Fund expenditure reductions and without increases in
taxes or deferrals of scheduled tax reductions. It is expected that the State's
1997-98 Financial Plan will reflect a continuing strategy of substantially
reduced State spending, including agency consolidations, reductions in the State
workforce, and efficiency and productivity initiatives. There can be no
assurance, however, that the State's actions will be sufficient to preserve
budget balances in the then-current or future fiscal years.
On August 22, 1996, the President signed into law the Personal
Responsibility and Work Opportunity Reconciliation Act of 1996. The new law
abolishes the federal Aid to Families with Dependent Children program (AFDC),
and creates a new Temporary Assistance to Needy Families program (TANF) funded
with a fixed federal block grant to states. The new law also imposes (with
certain exceptions) a five-year durational limit on TANF recipients, requires
that virtually all recipients be engaged in work or community service activities
within two years of receiving benefits, and limits assistance provided to
certain immigrants and other classes of individuals. States are required to
comply with the new federal welfare reform law no later than July 1, 1997.
States who fail to meet these federally mandated job participation rates, or who
fail to conform with certain other federal standards, face potential sanctions
in the form of a reduced federal block grant.
On October 16, 1996, the Governor submitted the State's TANF implementation
plan to the federal government as required under the new federal welfare law.
Submission of this plan to the federal government requires New York State to
begin compliance with certain time limits on welfare benefits and permits the
State to become eligible for approximately $2.36 billion in federal block grant
funding. The Governor has indicated that he plans to introduce legislation
necessary to conform with federal law for consideration by the Legislature
either before the end of calendar 1996 or in the 1997 legislative session. Given
the size and scope of the changes required under federal law, it is likely that
these proposals will produce extensive public discussions. There can be no
assurances that the State legislature will enact welfare reform proposals as
submitted by the Governor and as required under federal law.
It is expected that funding levels provided under the federal TANF block
grant will be higher than currently anticipated in the State Financial Plan.
However, the net fiscal impact of any changes to the State's welfare programs
that are necessary to conform with federal law will be dependent upon such
factors as the ability of the State to avoid any federal fiscal penalties, the
level of additional resources required to comply with any new State and/or
federal requirements, and the division of non-federal welfare costs between the
State and its localities.
Prior Fiscal Years. The State ended its 1995-1996 fiscal year in balance,
with a reported 1995-1996 General Fund cash surplus of $445 million. Prior to
adoption of the State's 1995-1996 fiscal year budget, the State had projected a
potential budget gap of approximately $5 billion, which was closed primarily
through spending reductions, cost containment measures, State agency actions and
local assistance reforms.
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In July, 1995, the State Comptroller issued its audit of the State's
1994-1995 fiscal year prepared in accordance with generally accepted auditing
standards. The State completed its 1994-1995 fiscal year with a General Fund
operating deficit of $1.426 billion, as compared with an operating surplus of
$914 million for the previous fiscal year. The 1994-1995 fiscal year deficit was
caused by several factors, including the use of $1.026 billion of the 1993-1994
fiscal year surplus in the 1994-1995 fiscal year and the adoption of changes in
accounting methodologies by the State Comptroller.
Local Government Assistance Corporation. In 1990, as part of a state
fiscal reform program, legislation was enacted creating the Local Government
Assistance Corporation ('LGAC'), a public benefit corporation empowered to issue
long-term obligations to fund certain payments to local governments
traditionally funded through the State's annual seasonal borrowing. As of June,
1995, LGAC has issued bonds to provide net proceeds of $4.7 billion completing
the program. The impact of LGAC's borrowing is that the State is able to meet
its cash flow needs without relying on short-term seasonal borrowing.
Financing Activities. State financing activities include general
obligation debt of the State and State-guaranteed debt, to which the full faith
and credit of the State has been pledged, as well as lease-purchase and
contractual-obligation financings, moral obligation financings and other
financings through public authorities and municipalities, where the State's
obligation to make payments for debt service is generally subject to annual
appropriation by the State Legislature.
As of March 31, 1996, the total amount of outstanding general obligation
debt was approximately $5.047 billion, including $293 million in Bond
Anticipation Notes; the total amount of moral obligation debt was approximately
$7.269 billion and $20.343 billion of bonds issued primarily in connection with
lease-purchase and contractual-obligation financing of State capital programs
were outstanding.
Public Authorities. The fiscal stability of the State is related, in part,
to the fiscal stability of its public authorities. The State anticipates that
its capital programs will be financed, in part, by borrowings of State and
public authorities in the 1996-1997 fiscal year. Public authorities are not
subject to the constitutional restrictions on the incurrence of debt which apply
to the State itself, and may issue bonds and notes within the amounts of, and as
otherwise restricted by, their legislative authorization. As of September 30,
1995, the latest data available, there were 17 public authorities that had
outstanding debt of $100 million or more and the aggregate outstanding debt,
including refunding bonds, of these 17 public authorities was $73.45 billion.
The State's access to the public credit markets could be impaired and the market
price of its outstanding debt may be adversely affected, if any of its public
authorities were to default on their respective obligations.
Ratings. Currently, Moody's Investors Service, Inc. ('Moody's'), Standard
& Poor's Rating Services ('Standard & Poor's') and Fitch Investors Services,
Inc. ('Fitch') rate New York State's outstanding general obligation bonds 'A',
'A-' and 'A+', respectively. Ratings reflect only the respective views of such
organizations, and explanation of the significance of such ratings must be
obtained from the rating agency furnishing the same. There is no assurance that
a particular rating will continue for any given period of time or that any such
rating will not be revised downward or withdrawn entirely if, in the judgment of
the agency originally establishing the rating, circumstances so warrant. A
downward revision or withdrawal of such ratings may have an effect on the market
price of the New York Municipal Bonds in which each Fund invests.
Litigation. The State is a defendant in numerous legal proceedings
including, but not limited to, claims asserted against the State arising from
alleged torts, alleged breaches of contracts, condemnation proceedings and other
alleged violations of State and Federal laws. State programs are frequently
challenged on State and Federal constitutional grounds. Adverse developments in
legal proceedings or the initiation of new proceedings could affect the ability
of the State to maintain a balanced State Financial Plan in any given fiscal
year. The State believes that the State Financial Plan includes sufficient
reserves for the payment of judgments that may be required during the 1996-1997
fiscal year. There can be no assurance, however, that an adverse decision in one
or more legal proceedings would not exceed the amount of such reserves for the
payment of judgments or materially impair the State's financial operations.
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Other Localities. Certain localities in addition to the City could have
financial problems leading to requests for additional State assistance during
the State's 1996-1997 fiscal year and thereafter. The potential impact on the
State of such actions by localities is not included in the projections of the
State receipts and disbursements in the State's 1996-1997 fiscal year.
Fiscal difficulties experienced by the City of Yonkers ('Yonkers') resulted
in the creation of the Financial Control Board for Yonkers (the 'Yonkers Board')
by the State in 1984. The Yonkers Board is charged with oversight of the fiscal
affairs of Yonkers. Future actions taken by the Governor or the State
Legislature to assist Yonkers could result in the allocation of State resources
in amounts that cannot yet be determined.
NEW YORK CITY
General. More than any other municipality, the fiscal health of New York
City (sometimes referred to as the 'City') has a significant effect on the
fiscal health of the State. The national economic downturn which began in July
1990 adversely affected the local economy, which had been declining since late
1989. As a result, the City experienced job losses in 1990 and 1991 and real
Gross City Product ('GCP') fell in those two years. Beginning in calendar year
1992, the improvement in the national economy helped stabilize conditions in the
City. Employment losses moderated toward year-end and real GCP increased,
boosted by strong wage gains. However, after noticeable improvements in the
City's economy during the calendar year 1994, economic growth slowed in calendar
year 1995, and the City's current four-year financial plan assumes that moderate
economic growth will continue through calendar year 2000.
For each of the 1981 through 1996 fiscal years, the City achieved balanced
operating results as reported in accordance with generally accepted accounting
principles ('GAAP'). The City was required to close substantial budget gaps in
recent fiscal years in order to maintain balanced operating results. There can
be no assurance that the City will continue to maintain a balanced budget as
required by State law without additional reductions in City services or
entitlement programs or tax or other revenue increases which could adversely
affect the City's economic base.
Pursuant to the laws of the State, the Mayor is responsible for preparing
the City's four-year financial plan, including the City's current financial plan
for the 1997 through 2000 fiscal years (the '1997-2000 Financial Plan' or the
'City Financial Plan'). The City's projections set forth in the City Financial
Plan are based on various assumptions and contingencies which are uncertain and
which may not materialize. Changes in major assumptions could significantly
affect the City's ability to balance its budget as required by State law and to
meet its annual cash flow and financing requirements.
Implementation of the City Financial Plan is also dependent upon the City's
ability to market its securities successfully in the public credit markets. The
City's financing program for fiscal years 1997 through 2000 contemplates the
issuance of $7.7 billion of general obligation bonds and $5.0 billion of bonds
to be issued by the proposed New York City Infrastructure Finance Authority to
finance education and transportation capital projects. The creation of the
Infrastructure Finance Authority, which is subject to the enactment of
legislation by the State, is being proposed by the City as part of the City's
effort to avoid certain State constitutional limitations on the amount of
general obligation debt the City is authorized to issue. The City's projections
indicate that projected issuance of City debt may exceed its general debt limit
by the end of the 1997 fiscal year unless legislation is enacted creating the
Infrastructure Finance Authority or other legislative initiatives are identified
and implemented. Without the Infrastructure Finance Authority or other
legislative relief, the City's general obligation financed capital program with
respect to new capital projects would be virtually brought to a halt through the
fiscal year 2000. In addition, the City issues revenue notes and tax
anticipation notes to finance its seasonal working capital requirements. The
success of projected public sales of City bonds and notes and Infrastructure
Finance Authority bonds, if and when authorized, will be subject to prevailing
market conditions, and no assurance can be given that such sales will be
completed. If the City were unable to sell its general obligation bonds and
notes or the proposed Infrastructure Finance Authority were unable to sell its
bonds, the City would be prevented from meeting its planned operating and
capital expenditures.
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1997-2000 Financial Plan. The City Financial Plan for the 1997 through
2000 fiscal years projects revenues and expenditures for the 1997 fiscal year
(July 1, 1996-June 30, 1997) for the City balanced in accordance with GAAP and
reflects proposed actions to close a previously projected budget gap of
approximately $2.6 billion. Such gap-closing actions primarily include spending
reductions for Medicaid and welfare programs, City agency spending reductions,
additional State aid, pension and debt service savings and the sale of certain
City assets. The City Financial Plan also sets forth projections for the 1998
through 2000 fiscal years and outlines a proposed gap-closing program to close
projected budget gaps of $1.7 billion, $2.7 billion and $3.4 billion for the
1998 through 2000 fiscal years, respectively, after successful implementation of
the gap-closing program for the 1997 fiscal year.
The City's projections set forth in the City Financial Plan are based on
various assumptions and contingencies which are uncertain and which may not
materialize. Changes in major assumptions could significantly affect the City's
ability to balance its budget as required by State law and to meet its annual
cash flow and financing requirements. Such assumptions and contingencies include
the condition of the regional and local economies, the impact on real estate tax
revenues of the real estate market, employment growth, wage increases for City
employees consistent with those assumed in the City Financial Plan, continuation
of interest earnings assumptions for pension fund assets, the ability of the
City's hospital and education entities to maintain balanced budgets, provision
of State and federal aid, the impact of Federal welfare reforms on City revenues
and adoption of the budget by the City Council in substantially the form
submitted by the Mayor. The City Financial Plan also assumes the timely
extension by the State Legislature of the current rate structures for personal
income, corporation and sales taxes imposed by the City.
The City Financial Plan is also subject to the ability of the City to
implement the expenditure reductions, sell the assets and obtain the debt
service savings outlined in the City Financial Plan. In addition, the City may
incur expenditures which exceed those projected in the City Financial Plan.
There can be no assurance that additional gap-closing measures will not be
required to enable the City to achieve a balanced budget in a particular fiscal
year. Certain of the proposed actions are subject to negotiation with the City's
municipal unions. Various other actions proposed for the 1998 through 2000
fiscal years are subject to approval by the Governor and the State legislature.
The City depends on the State for State aid both to enable the City to
balance its budget and to meet its cash requirements. If the State experiences
revenue shortfalls or spending increases beyond its projections during the
current or subsequent fiscal years, such developments could result in reductions
in anticipated State aid to the City. In addition, there can be no assurance
that the State budget in any given State fiscal year will be adopted by the
April 1 statutory deadline and that there will not be adverse effects on the
City's cash flow and additional City expenditures as a result of such reductions
or delays.
The City's financial plans have been the subject of extensive public
comment and criticim. On July 16, 1996, the City Comptroller issued a report on
the City Financial Plan which identified budget risks of up to $941 million,
$2.58 billion, $3.53 billion and $4.31 billion for the City's 1997, 1998, 1999
and 2000 fiscal years, respectively. On July 18, 1996, the New York State
Financial Control Board issued a report on the City Financial Plan which
identified budget risks of $594 million, $1.08 billion, $851 million and $813
million for the City's 1997, 1998, 1999 and 2000 fiscal years, respectively. On
July 18, 1996, the Office of the State Deputy Comptroller of New York issued a
report on the City Financial Plan which identified budget risks of up to $848
million, $1.39 billion, $1.09 billion and $1.12 billion for the City's 1997,
1998, 1999 and 2000 fiscal years, respectively. Each of the reports noted that
the City Financial Plan achieves budget balance for the 1997 fiscal year only
with the inclusion of approximately $1.5 billion in non-recurring resources. On
October 31, 1996, the City's Independent Budget Office ('IBO') released a report
assessing the costs that could be incurred by the City as a result of recent
federal welfare reforms. Assuming continued moderate economic performance, the
IBO report projects that the City's cost of providing welfare could increase by
$33 million in 1999, growing to $269 million by 2002. Moreover, if the
requirement that all recipients work after two years of receiving benefits is
enforced, these additional costs could total $723 million in 1999 and
approximately $1 billion annually through 2002, reflecting substantial costs for
worker training and supervision of new workers and increased child care costs.
The report further noted that, if economic performance weakened, resulting in an
increased number of
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public assistance cases, potential costs to the City could substantially
increase. It is reasonable to expect that such reports will continue to be
issued and to engender public comment.
Ratings. As of November 21, 1996, Moody's rated the City's general
obligation bonds 'Baa1', Standard & Poor's rated such bonds 'BBB+' and Fitch
rated such bonds 'A-'. On February 28, 1996, Fitch placed the City's general
obligation bonds on FitchAlert with negative implications. On November 5, 1996,
Fitch removed the City's general obligation bonds from FitchAlert, although
Fitch stated that the outlook remains negative. On July 10, 1995, Standard &
Poor's revised downward its ratings on outstanding general obligation bonds of
the City from 'A-' to 'BBB+'. Such ratings reflect only the view of Moody's,
Standard & Poor's and Fitch, from which an explanation of the significance of
such ratings may be obtained. There is no assurance that such ratings will
continue for any given period of time or that they will not be revised downward
or withdrawn entirely. Any such downward revision or withdrawal could have an
adverse effect on the market prices of City bonds.
Outstanding Indebtedness. As of September 30, 1996, the City had
approximately $25.1 billion of long-term debt and as of October 1, 1996, the New
York City Municipal Water Finance Authority (the 'Water Authority') had
approximately $6.6 billion of net long-term debt.
Debt service on Water Authority obligations is secured by fees and charges
collected from the users of the City's water and sewer system. State and federal
regulations require the City's water supply to meet certain standards to avoid
filtration. The City's water supply now meets all technical standards and the
City's current efforts are directed toward protection of the watershed area. The
City has taken the position that increased regulatory, enforcement and other
efforts to protect its water supply, relating to such matters as land use and
sewage treatment, will preserve the high quality of water in the upstate water
supply system and prevent the need for filtration. The U.S. Environmental
Protection Agency has granted the City a waiver of filtration regulations
through 1996 and has stated it will issue a waiver through April, 2002 if the
City and State implement certain protective actions estimated to cost
approximately $400 million. If filtration of the City's water supply is
ultimately required, the capital expenditure required could be between $4
billion and $5 billion. Such an expenditure could cause significant increases in
City water and sewer charges.
Litigation. The City is a defendant in a significant number of lawsuits.
Such litigation includes, but is not limited to, routine litigation incidental
to the performance of its governmental and other functions, actions commenced
and claims asserted against the City arising out of alleged constitutional
violations, alleged torts, alleged breaches of contracts and other alleged
violations of law and condemnation proceedings and other tax and miscellaneous
actions. While the ultimate outcome and fiscal impact, if any, on the
proceedings and claims are not currently predictable, adverse determination in
certain of them might have a material adverse effect upon the City's ability to
carry out the City Financial Plan. As of June 30, 1996, the City estimated its
potential future liability on account of all outstanding claims to be
approximately $2.8 billion.
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APPENDIX H
ECONOMIC AND FINANCIAL CONDITIONS IN PENNSYLVANIA
The following information is a brief summary of factors affecting the
economy of the State and does not purport to be a complete description of such
factors. Other factors will affect issuers. The summary is based primarily upon
one or more publicly available offering statements relating to debt offerings of
state issuers, however, it has not been updated nor will it be updated during
the year. The Trust has not independently verified the information.
Many factors affect the financial condition of the Commonwealth of
Pennsylvania (also referred to as the 'Commonwealth') and its political
subdivisions, such as social, environmental and economic conditions, many of
which are not within the control of such entities. Pennsylvania and certain of
its counties, cities and school districts and public bodies, most notably the
City of Philadelphia, have from time to time in the past encountered financial
difficulties which have adversely affected their respective credit standings.
Such difficulties could affect outstanding obligations of such entities,
including obligations held by the Fund. Further, the Washington-based Center on
Budget and Policy Priorities issued a report in the spring of 1996 stating that
recent and proposed state tax cuts, combined with structural problems in the
state's revenue system, will lead to a $600 million annual deficit within five
years. Governor Ridge's administration has challenged that report.
The General Fund, the Commonwealth's largest fund, receives all tax
revenues, non-tax revenues and Federal grants and entitlements that are not
specified by law to be deposited elsewhere. The majority of the Commonwealth's
operating and administrative expenses are payable from the General Fund. Debt
service on all bonded indebtedness of the Commonwealth, except that issued for
highway purposes or for the benefit of other special revenue funds, is payable
from the General Fund.
For the five year period fiscal 1991 through fiscal 1995, total revenues
and other sources rose at a 9.1% average annual rate while expenditures and
other uses grew by 7.4% annually. Over two-thirds of the increase in total
revenues and other sources during this period occurred during fiscal 1992 when a
$2.7 billion tax increase was enacted to address a fiscal 1991 budget deficit
and to fund increased expenditures for fiscal 1992. For the four year period
from fiscal 1992 through fiscal 1995, total revenues and other sources increased
at an annual average of 3.3%, less than one-half the rate of increase for the
five year period beginning with fiscal 1991. This slower rate of growth was due,
in part, to tax reductions and other tax law revisions that restrained the
growth of tax receipts for the fiscal years 1993, 1994 and 1995.
Expenditures and other uses followed a pattern similar to that for
revenues, although with smaller growth rates, during the fiscal years 1991
through 1995. Program areas having the largest increase in costs for the fiscal
years 1991 through 1995 were for protection of persons and property, due to an
expansion of state prisons, and for public health and welfare, due to rising
caseloads, program utilization and increased prices. Recent efforts to restrain
the rapid expansion of public health and welfare program costs have resulted in
expenditure increases at or below the total rate of increase for total
expenditures in each fiscal year.
Fiscal 1995 was the fourth consecutive fiscal year the Commonwealth
reported an increase in the fiscal year-end unappropriated balance. The fiscal
1995 unappropriated surplus (prior to reserves for transfer to the Tax
Stabilization Fund) was $540 million, an increase of $204.2 million over the
fiscal 1994 unappropriated surplus (prior to transfers). Commonwealth revenues
were $459.4 million (2.9%) above the estimate of revenues used at the time the
budget was enacted. The higher than estimated revenues from tax sources were due
to faster economic growth in the national and state economy than had been
projected when the budget was adopted. Expenditures from Commonwealth revenues
(excluding pooled financing expenditures), including $65.5 million of
supplemental appropriations enacted at the close of the 1995 fiscal year,
totaled $15,674 million, representing an increase of 5% over spending during
fiscal 1994.
For GAAP purposes, the General Fund recorded a $49.8 million deficit for
fiscal 1995, leading to a decline in the fund balance to $688.3 million at June
30, 1995. The two items which predominately contributed to the decline in the
fund balance were (i) the use of a more comprehensive procedure to compute the
liabilities for certain public welfare programs, leading to an increase for the
year-end accruals, and (ii) a change in the
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methodology used to calculate the year-end accrual for corporate tax payables
which increased the tax refund liability by $72 million for the 1995 fiscal year
when compared to the previous fiscal year.
The fiscal 1996 unappropriated surplus (prior to transfer to the Tax
Stabilization Reserve Fund) was $183.8 million, $65.5 million above estimate.
Net expenditures and encumbrances from Commonwealth revenues, including $113
million of supplemental appropriations (but excluding pooled financing
expenditures) totalled $16,162.9 million. Expenditures exceeded available
revenues and lapses by $253.2 million. The difference was funded from a planned
partial drawdown of the $437 million fiscal year adjusted beginning
unappropriated surplus.
Commonwealth revenues (prior to tax refunds) for fiscal 1996 increased by
$113.9 million over the prior year to $16,338.5 million (representing a growth
rate of .7%). Tax rate reductions and other tax law changes substantially
reduced the amount and rate of revenue growth for the fiscal year. It is
estimated the tax changes enacted for the fiscal year reduced Commonwealth
revenues by $283.4 million. The most significant tax changes enacted for the
fiscal year were (i) acceleration of the reduction of the corporate net income
tax rate to 9.99%; (ii) double weighing of the sales factor of the corporate net
income apportionment calculation; (iii) an increase in the maximum annual
allowance for a net operating loss deduction from .5 million to $1 million; (iv)
an increase in the basic exemption amount for the capital stock and franchise
tax; (v) the repeal of the tax on annuities; and (vi) the elimination of
inheritance tax on transfers of certain property to surviving spouses.
The enacted fiscal 1997 budget provides for expenditures from Commonwealth
revenues of $16,375.8 million, an increase of .6% over appropriated amounts from
Commonwealth revenues for fiscal 1996. The fiscal 1997 budget is based on
anticipated Commonwealth revenues (before refunds) of $16,744.5 million, an
increase over actual fiscal 1996 revenues of 2.5%. The revenue estimate includes
provision for a $15 million tax credit program enacted with the fiscal 1997
budget for businesses creating new jobs. Staggered corporation tax years will
cause fiscal 1997 revenues to continue to be affected by the business tax
reductions enacted during the two prior completed fiscal years. Those
reductions, together with the new jobs creation tax credit, cause revenue growth
comparisons between fiscal 1996 and 1997 to be understated. When these tax
changes are taken into account, revenues in the fiscal 1997 budget are
anticipated to increase at the rate of 3%. The fiscal 1997 revenue estimate is
based on a forecast of the national economy for real gross domestic product to
slow to a growth rate of 2% for 1996 and below 1.5% for 1997. This is based on
the assumption that the Federal Reserve Board does not cut interest rates and
that foreign economic growth is weak. The consequence of this economic scenario
is a U.S. economy with very low growth, slow gains in consumer spending,
declining inflation rates, but increasing unemployment.
Increased authorized spending for fiscal 1997 is driven largely by
increased costs of the corrections and probation and payroll programs. The
fiscal 1997 budget contains an appropriation increase in excess of $110 million
for these programs. The fiscal 1997 budget also contains some departmental
restructurings.
Providing funding for certain program increases required reductions and
savings in other programs funded from the General Fund. A major reform of the
current welfare system was enacted in May, 1996 to encourage recipients toward
self-sufficiency through work requirements, to provide temporary support for
families showing personal responsibility and to maintain safeguards for those
who cannot help themselves.
The fiscal 1997 budget anticipates receiving $60 million of proceeds from
the securitization of $151.7 million of loans held by the Sunny Day Fund. This
fund was created to finance large-scale economic development loans to attract
significant employment opportunities to the Commonwealth. Its funding was
generally obtained from General Fund appropriations. The fund has been abolished
and its loans have been transferred to the Pennsylvania Industrial Development
Fund, which will issue bonds secured by its loan reserves (including the Sunny
Day Fund). These bond proceeds will be used to refund outstanding debt of the
Commonwealth. The effect of this transaction on the fiscal 1997 budget is to
reduce the amount of debt service needed to be appropriated from the General
Fund by at least $60 million.
The fiscal 1997 budget is based on the presumption that federally enacted
reforms to Medicaid will raise the federal reimbursement percentage for those
costs to 57% from an approximate 53% rate for fiscal 1996. The
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higher reimbursement rate was anticipated to provide an additional $260 million
of federal funds during fiscal 1997 and enable the Commonwealth to reduce its
appropriations for the medical assistance program by a like amount for fiscal
1997. However, the U.S. Congress has not approved the legislation making these
changes and current expectations are that additional federal funds will not be
available at the time and in the amount as anticipated in the approved fiscal
1997 budget. The Commonwealth expects to use intergovernmental transfer funds
obtained through a pooling transaction to help make up the loss of this funding.
The fiscal 1997 budget assumes a drawdown of the $153.3 million fiscal year
beginning unappropriated surplus to fund the enacted level of appropriations
within the current estimate of revenues.
A disaster emergency was declared by the Governor and a federal major
disaster declaration was made by the President of the United States for certain
counties in the Commonwealth for a blizzard and subsequent flooding in January,
1996. Substantial damage to public and private facilities occurred and many
municipalities' financial resources have been strained by the costs of
responding to these weather-related conditions. A special session of the General
Assembly was convened by the Governor to consider legislation to respond to
these needs. Legislation was enacted that authorized $110 million of general
obligation debt to provide for the state's share of the required match for
federal public assistance and disaster mitigation funds. The legislation also
appropriated $13 million from tax amnesty receipts to fund the state match for
the federal individual assistance program, and authorized the use of current
Motor License Fund revenues for capital projects to repair flood damaged state
highways and bridges.
Pennsylvania has historically been identified as a heavy industry state
although that reputation has changed over the last thirty years as the coal,
steel and railroad industries declined and the Commonwealth's business
environment readjusted to reflect a more diversified industrial base. This
economic readjustment was a direct result of a long-term shift in jobs,
investment and workers away from the northeast part of the nation. Currently,
the major sources of growth in Pennsylvania are in the service sector, including
trade, medical and the health services, education and financial institutions.
Nonagricultural employment in Pennsylvania over the last ten years
increased at an annual rate of 1.02%. This compares to a .36% rate for the
Middle Atlantic region and 1.8% rate for the United States as a whole during the
period 1986 through 1995. For the last three years, employment in the
Commonwealth has increased 3.4%, as compared to 2.9% growth in the Middle
Atlantic region. The unemployment rate in Pennsylvania for August, 1996, stood
at a seasonably adjusted rate of 5.3%. The seasonably adjusted national
unemployment rate for August, 1996, was 5.1%.
The current Constitutional provisions pertaining to Commonwealth debt
permit the issuance of the following types of debt: (i) debt to suppress
insurrection or rehabilitate areas affected by disaster, (ii) electorate
approved debt, (iii) debt for capital projects subject to an aggregate debt
limit of 1.75 times the annual average tax revenues of the preceding five fiscal
years and (iv) tax anticipation notes payable in the fiscal year of issuance.
All debt except tax anticipation notes must be amortized in substantial and
regular amounts.
Debt service on all bonded indebtedness of Pennsylvania, except that issued
for highway purposes or the benefit of other special revenue funds, is payable
from Pennsylvania's General Fund, which receives all Commonwealth revenues that
are not specified by law to be deposited elsewhere. As of June 30, 1996, the
Commonwealth had $5,054.5 million of general obligation debt outstanding.
Other state-related obligations include 'moral obligations'. Moral
obligation indebtedness may be issued by the Pennsylvania Housing Finance Agency
('PHFA'), a state agency which provides financing for housing for lower and
moderate income families, and The Hospitals and Higher Education Facilities
Authority of Philadelphia, a municipal authority organized by the City of
Philadelphia to, among other things, acquire and prepare various sites for use
as intermediate care facilities for the mentally retarded. PHFA's bonds, but not
its notes, are partially secured by a capital reserve fund required to be
maintained by PHFA in an amount equal to the maximum annual debt service on its
outstanding bonds in any succeeding calendar year. PHFA is not permitted to
borrow additional funds as long as any deficiency exists in the capital reserve
fund.
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The Commonwealth, through several of its departments and agencies, has
entered into various agreements to lease, as lessee, certain real property and
equipment, and to make lease payments for the use of such property and
equipment. Some of those leases and their respective lease payments are, with
the Commonwealth approval, pledged as security for debt obligations issued by
certain public authorities or other entities within the state. All lease
payments due from Commonwealth departments and agencies are subject to and
dependent upon an annual spending authorization approved through the
Commonwealth's annual budget process. The Commonwealth is not required by law to
appropriate or otherwise provide monies from which the lease payments are to be
made. The obligations to be paid from such lease payments are not bonded debt of
the Commonwealth.
Certain state-created agencies have statutory authorization to incur debt
for which state appropriations to pay debt service thereon is not required. The
debt of these agencies is funded by assets of, or revenues derived from the
various projects financed and is not an obligation of the Commonwealth. Some of
these agencies, however, are indirectly dependent on Commonwealth operating
appropriations. In addition, the Commonwealth maintains pension plans covering
all state employees, public school employees and employees of certain state-
related organizations. For the fiscal year ended in 1995, the State Employees'
Retirement System had a $443 million surplus and the Public School Employees'
Retirement System had a total unfunded actuarial accrued liability of $3,102
million.
The City of Philadelphia is the largest city in the Commonwealth with an
estimated population of 1,585,577 according to the 1990 Census. Legislation
providing for the establishment of Pennsylvania Intergovernmental Cooperation
Authority ('PICA') to assist Philadelphia in remedying fiscal emergencies was
enacted by the Pennsylvania General Assembly and approved by the Governor in
June, 1991. PICA is designed to provide assistance through the issuance of
funding debt and to make factual findings and recommendations to Philadelphia
concerning its budgetary and fiscal affairs. At this time, Philadelphia is
operating under a five year fiscal plan approved by PICA on April 30, 1996.
PICA has issued $1.76 billion of its Special Tax Revenue Bonds. This
financial assistance has included the refunding of certain city general
obligation bonds, funding of capital projects and the liquidation of the
Cumulative General Fund balance deficit as of June 30, 1992 of $224.9 million.
The audited General Fund balance of Philadelphia as of June 30, 1995 shows a
surplus of approximately $80.5 million, up from approximately $15.4 million as
of June 30, 1994.
No further bonds are to be issued by PICA for the purpose of financing a
capital project or deficit as the authority for such bond sales expired December
31, 1994. PICA's authority to issue debt for the purpose of financing a cash
flow deficit expires on December 31, 1996. Its ability to refund existing
outstanding debt is unrestricted. PICA had $1,146,175,000 in special revenue
bonds outstanding as of June 30, 1996.
There is various litigation pending against the Commonwealth, its officers
and employees. In 1978, the Pennsylvania General Assembly approved a limited
waiver of sovereign immunity. Damages for any loss are limited to $250,000 for
each person and $1 million for each accident. The Supreme Court held that this
limitation is constitutional. Approximately 3,500 suits against the Commonwealth
are pending.
The following are among the cases with respect to which the Office of
Attorney General and the Office of General Counsel have determined that an
adverse decision may have a material effect on government operations of the
Commonwealth:
Baby Neal v. Commonwealth, et al.
In 1990, the American Civil Liberties Union and other various named
plaintiffs filed an action against the Commonwealth in Federal court seeking an
order that would require the Commonwealth to provide additional funding for
child welfare services. No figures for the amount of funding sought are
available. However, a similar lawsuit filed in the Commonwealth Court of
Pennsylvania was resolved through a court approved settlement which provides,
among other things, for Commonwealth funding for such services in fiscal year
1991 and a commitment to pay Pennsylvania counties $30 million over five years.
In December 1994, the Third Circuit Court of Appeals reversed the District
Court's denial of the plaintiff's motion for class certification with respect
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to the interests of 16 minor plaintiffs. As a result, the District Court has
recently certified the class and the parties have resumed discovery.
County of Allegheny v. Commonwealth of Pennsylvania
On December 7, 1987, the Supreme Court of Pennsylvania held that the
statutory scheme for county funding of the judicial system is in conflict with
the Pennsylvania Constitution. However, judgment was stayed in order to afford
the General Assembly an opportunity to enact appropriate funding legislation
consistent with its opinion. Since that time, the Supreme Court has denied
various actions and motions by several Pennsylvania municipalities to compel the
Commonwealth to comply with the Supreme Court's 1987 decision or to restore
funding for local courts and district justices to levels existing in 1987. On
December 7, 1992, the State Association of County Commissioners filed a new
action in mandamus seeking to compel the Commonwealth to comply with the Supreme
Court's decision in County of Allegheny. The Commonwealth has filed a response
in opposition to the new action. The Court issued the writ on July 26, 1996, and
appointed a special master to devise and submit a plan for implementation.
Recently, the President of the Senate and the Speaker of the House filed a
petition seeking reconsideration from the Court. The General Assembly has yet to
consider legislation implementing the Pennsylvania Supreme Court's judgment.
Fidelity Bank v. Commonwealth of Pennsylvania
On November 30, 1989, Fidelity Bank, N.A. ('Fidelity') filed an action
challenging the constitutional validity of a 1989 amendment increasing the bank
shares tax and related legislation. The Commonwealth Court ruled in favor of the
Commonwealth finding no constitutional deficiencies in the tax increase, but
invalidating one element of the legislation which provided a credit to new banks
(the 'new bank tax credit'). Fidelity, the Commonwealth and certain intervener
banks appealed to the Pennsylvania Supreme Court. However, pursuant to a
Settlement Agreement dated as of April 21, 1995, the Commonwealth agreed to
enter a credit in favor of Fidelity in the amount of $4,100,000 in settlement of
the constitutional and non-constitutional issues. The credit represents
approximately 5% of the potential claim of Fidelity, had the constitutional
issues been resolved in its favor.
Pursuant to a separate Settlement Agreement dated as of April 21, 1995, the
Commonwealth also settled with the intervening banks with respect to issues
concerning the new bank tax credit.
Notwithstanding the foregoing settlements, other banks have filed
protective petitions which are currently pending at the various administrative
agencies challenging the validity of the 1989 tax increase. Depending on the
outcome of those administrative appeals, one or more of these banks may seek to
raise the issues which were adjudicated by Fidelity, although not brought to
resolution by the Pennsylvania Supreme Court.
Pennsylvania Association of Rural and Small Schools (PARSS) v. Casey
In January 1991, an association of rural and small schools and several
other parties filed a lawsuit against then Governor Robert P. Casey and former
Secretary of Education, Donald M. Carroll challenging the constitutionality of
the Commonwealth system for funding local school districts. The litigation
consists of two parallel cases, one in the Commonwealth Court of Pennsylvania
and one in the United States District Court for the Middle District of
Pennsylvania. The federal court case has been indefinitely stayed pending
resolution of the state court case. The Judge in the state court case has issued
an order scheduling trial to commence January 6, 1997. Because of the number of
witnesses identified by the petitioners and the interviews that had not been
previously disclosed, the Court has authorized the Commonwealth respondents to
conduct additional discovery depositions.
Austin v. Department of Corrections, et al.
In November 1990, the American Civil Liberties Union filed a class action
lawsuit in the United States District Court for the Eastern District of
Pennsylvania on behalf of inmate populations in various Pennsylvania
correctional institutions, challenging the conditions of confinement and seeking
injunctive relief. On January 17,
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1995, the Court approved a Settlement Agreement between the parties, pursuant to
which the Commonwealth paid $1.3 million in attorneys' fees to the plaintiffs'
attorneys, with an additional $100,000 to be paid upon dismissal of a
preliminary injunction relating to certain health issues. The parties are
presently complying with monitoring provisions outlined in the Settlement
Agreement. The monitoring phase will expire on January 8, 1998. The attorneys'
fees for the 3-year monitoring period will not exceed $60,000 in any one year.
Envirotest/Synterra Partners
On December 15, 1995, Envirotest Systems Corporation, Envirotest Partners
('Envirotest') and the Commonwealth of Pennsylvania entered into a Settlement
Agreement pursuant to which the parties settled all claims which Envirotest
might have against the Commonwealth arising from the suspension of an emissions
testing program. Under the Settlement Agreement, Envirotest is to receive $145
million, with interest at 6% per annum, in payments of $25 million in 1995, and
$40 million each in 1996, 1997 and 1998. An additional $15 million may be
required to be paid in 1998 depending on the results of property liquidations by
Envirotest.
Pennsylvania Human Relations Commission v. School District of Philadelphia, et
al. v. Commonwealth of Pennsylvania, et al.
On November 3, 1995, the Commonwealth of Pennsylvania and the Governor of
Pennsylvania, along with the City of Philadelphia and the Mayor of Philadelphia,
were joined as additional respondents in an enforcement action commenced in
Commonwealth Court in 1973 by the Pennsylvania Human Relations Commission
against the School District of Philadelphia pursuant to the Pennsylvania Human
Relations Act. The enforcement action was pursued to remedy unintentional
conditions of segregation in the public schools of Philadelphia. The
Commonwealth and the City were joined in the 'remedial phase' of the proceeding
'to determine their liability, if any, to pay additional costs necessary to
remedy the unlawful conditions found to exist in the Philadelphia public
schools.'
On February 28, 1996, the School District of Philadelphia filed a
third-party complaint against the Commonwealth of Pennsylvania asking
Commonwealth Court to require the Commonwealth to 'supply such funding as is
necessary for full compliance with the November 28, 1994 and other remedial
orders of the Commonwealth Court.' In addition, a group of interveners on March
4, 1996 filed a third-party complaint against the Commonwealth of Pennsylvania
and the City of Philadelphia requesting Commonwealth Court to declare that 'it
is the obligation of the Commonwealth and the City to supply the additional
funds identified as necessary for the District to fully comply with the orders
of the Commonwealth Court,' and to require the Commonwealth and the City to
supply such additional funding as is necessary for the District to comply with
the orders.
On April 30, 1996, Commonwealth Court Judge Doris A. Smith overruled the
Commonwealth's and City's preliminary objections seeking dismissal of the claims
against them. The Commonwealth and the City thereafter filed answers to the
complaints, asserting numerous defenses. The Commonwealth also asserted a
cross-claim against the City of Philadelphia claiming that if any party is
liable, sole liability rests with the City; in the alternative, the Commonwealth
argued that if it is held to be liable, it has a right of indemnity of
contribution against the City.
Trial commenced on May 30, 1996. During the course of the trial, upon
motion of the Commonwealth, the Pennsylvania Supreme Court on July 3, 1996
assumed extraordinary plenary jurisdiction and directed Judge Smith to conclude
the proceedings within 60 days and to file with the Supreme Court findings of
fact, conclusions of law and a final opinion.
On August 20, 1996, Judge Smith issued an Opinion and Order pursuant to
which judgment was entered in favor of the School District of Philadelphia and
the interveners and against the Commonwealth of Pennsylvania and the Governor of
Pennsylvania. Judgment was also entered in favor of the City of Philadelphia and
the Mayor of Philadelphia with respect to the intervener's claim and on the
cross-claim filed by the Commonwealth and Governor. The Judge ordered the
Commonwealth and Governor to submit a plan to the Court within thirty days
detailing the means by which the Commonwealth will effectuate the transfer of
additional funds payable to the
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School District of Philadelphia to enable it to comply with the remedial order
during fiscal year 1996-1997 and any future years during which the School
District establishes its fiscal incapacity to fund the remedial programs. Judge
Smith specifically found that '[b]ecause of the lack of adequate funds to comply
with the remedial order, the School District is entitled to additional resources
for 1996-1997 of $45.1 million.'
On August 30, 1996, the Commonwealth filed exceptions to the Findings of
Fact, Conclusions of Law and Opinion and Order of Judge Smith along with a
Motion to Vacate the purported Order and a Notice of Appeal and Jurisdictional
Statement.
On September 10, 1996, the Pennsylvania Supreme Court issued an order
granting the Commonwealth's Motion to Vacate and directed its Prothonotary to
establish a briefing schedule and date for oral argument. It also issued a
further order limiting the issues to be addressed and stated that the
Commonwealth Court is divested of jurisdiction of the matter and all further
proceedings in the Commonwealth Court are stayed pending further order of the
Supreme Court. The Supreme Court retained jurisdiction in the matter.
Currently, Pennsylvania general obligation bonds are rated AA- by Standard
& Poor's and Fitch, and A1 by Moody's. There can be no assurance that the
economic conditions on which these ratings are based will continue or that
particular bond issues will not be adversely affected by changes in economic or
political conditions.
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APPENDIX I
RATINGS OF MUNICIPAL BONDS
DESCRIPTION OF MOODY'S INVESTORS SERVICE, INC.'S ('MOODY'S') MUNICIPAL BOND
RATINGS
<TABLE>
<S> <C>
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.
</TABLE>
Note: Those bonds in the Aa, A, Baa, Ba and B groups which Moody's
believes possess the strongest investment attributes are designated by the
symbols Aa1, A1, Baa1, Ba1 and B1.
Short-term Notes: The four ratings of Moody's for short-term notes are
MIG1/VMIG1, MIG2/VMIG2, MIG3/VMIG3 and MIG4/VMIG4; MIG1/VMIG1 denotes 'best
quality . . . strong protection by established cash flows'; MIG2/VMIG2 denotes
'high quality' with ample margins of protection; MIG3/VMIG3 notes are of
'favorable quality . . . but . . . lacking the undeniable strength of the
preceding grades'; MIG4/VMIG4 notes are of 'adequate quality . . . protection
commonly regarded as required of an investment security is present . . . there
is specific risk.'
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DESCRIPTION OF MOODY'S CORPORATE BOND RATINGS
Excerpts from Moody's description of its corporate bond ratings:
Aaa--judged to be the best quality, carry the smallest degree of investment
risk; Aa--judged to be of high quality by all standards; A--possess many
favorable investment attributes and are to be considered as upper-medium-grade
obligations; Baa--considered as medium grade obligations, i.e, they are neither
highly protected nor poorly secured.
DESCRIPTION OF MOODY'S COMMERCIAL PAPER RATINGS
Moody's Commercial Paper ratings are opinions of the ability of issuers to
repay punctually promissory obligations not having an original maturity in
excess of nine months. Moody's employs the following three designations, all
judged to be investment grade, to indicate the relative repayment capacity of
rated issuers:
Issuers rated Prime-1 (or related supporting institutions) have a superior
capacity for repayment of short-term promissory obligations. Prime-1 repayment
capacity will normally be evidenced by the following characteristics: leading
market positions in well established industries; high rates of return on funds
employed; conservative capitalization structures with moderate reliance on debt
and ample asset protection; broad margins in earnings coverage of fixed
financial charges and high internal cash generation; and well established access
to a range of financial markets and assured sources of alternate liquidity.
Issuers rated Prime-2 (or related supporting institutions) have a strong
capacity for repayment of short-term promissory obligations. This will normally
be evidenced by many of the characteristics cited above but to a lesser degree.
Earnings trends and coverage ratios, while sound, will be more subject to
variation. Capitalization characteristics, while still appropriate, may be more
affected by external conditions. Ample alternate liquidity is maintained.
Issuers rated Prime-3 (or related supporting institutions) have an
acceptable capacity for repayment of short-term promissory obligations. The
effects of industry characteristics and market composition may be more
pronounced. Variability in earnings and profitability may result in changes in
the level of debt protection measurements and the requirement for relatively
high financial leverage. Adequate alternate liquidity is maintained.
Issuers rated Not Prime do not fall within any of the Prime rating
categories.
DESCRIPTION OF STANDARD & POOR'S RATINGS SERVICES' ('STANDARD & POOR'S')
MUNICIPAL DEBT RATINGS
A Standard & Poor's municipal debt rating is a current assessment of the
creditworthiness of an obligor with respect to a specific obligation. This
assessment may take into consideration obligors such as guarantors, insurers or
lessees.
The debt rating is not a recommendation to purchase, sell or hold a
security, inasmuch as it does not comment as to market price or suitability for
a particular investor.
The ratings are based on current information furnished by the issuer or
obtained by Standard & Poor's from other sources Standard & Poor's considers
reliable. Standard & Poor's does not perform an audit in connection with any
rating and may, on occasion, rely on unaudited financial information. The
ratings may be changed, suspended or withdrawn as a result of changes in, or
unavailability of, such information, or for other circumstances.
The ratings are based, in varying degrees, on the following considerations:
I. Likelihood of default--capacity and willingness of the obligor as
to the timely payment of interest and repayment of principal in accordance
with the terms of the obligation;
II. Nature of and provisions of the obligation;
I-2
<PAGE>
III. Protection afforded by, and relative position of, the obligation
in the event of bankruptcy, reorganization or other arrangement under the
laws of bankruptcy and other laws affecting creditors' rights.
<TABLE>
<S> <C>
AAA Debt rated 'AAA' has the highest rating assigned by Standard & Poor's. Capacity to pay interest and repay
principal is extremely strong.
AA Debt rated 'AA' has a very strong capacity to pay interest and repay principal and differs from the
higher-rated issues only in small degree.
A Debt rated 'A' has a strong capacity to pay interest and repay principal although it is somewhat more
susceptible to the adverse effects of changes in circumstances and economic conditions than debt in
higher-rated categories.
BBB Debt rated 'BBB' is regarded as having an adequate capacity to pay interest and repay principal. Whereas
it normally exhibits adequate protection parameters, adverse economic conditions or changing
circumstances are more likely to lead to a weakened capacity to pay interest and repay principal for debt
in this category than for debt in higher-rated categories.
BB Debt rated 'BB', 'B', 'CCC', 'CC' and 'C' is regarded, on balance, as predominately speculative with
B respect to capacity to pay interest and repay principal in accordance with the terms of the obligation.
CCC 'BB' indicates the lowest degree of speculation and 'C' the highest degree of speculation. While such
CC debt will likely have some quality and protective characteristics, these are outweighed by large
C uncertainties or major exposures to adverse conditions.
C1 The rating 'CI' is reserved for income bonds on which no interest is being paid.
D Debt rated 'D' is in payment default. The 'D' rating category is used when interest payments or principal
payments are not made on the date due even if the applicable grace period has not expired, unless
Standard & Poor's believes that such payments will be made during such grace period. The 'D' rating also
will be used upon the filing of a bankruptcy petition if debt service payments are jeopardized.
</TABLE>
Plus (+) or Minus (-): The ratings from 'AA' to 'CCC' may be modified by
the addition of a plus or minus sign to show relative standing within the major
rating categories.
DESCRIPTION OF STANDARD & POOR'S CORPORATE BOND RATINGS
A Standard & Poor's corporate debt rating is a current assessment of the
creditworthiness of an obligor with respect to a specific obligation. Debt rated
'AAA' has the highest rating assigned by Standard & Poor's. Capacity to pay
interest and repay principal is extremely strong. Debt rated 'AA' has a very
strong capacity to pay interest and to repay principal and differs from the
highest rated issues only in small degree. Debt rated 'A' has a strong capacity
to pay interest and repay principal although it is somewhat more susceptible to
the adverse effects of changes in circumstances and economic conditions than
debt of a higher-rated category. Debt rated 'BBB' is regarded as having an
adequate capacity to pay interest and repay principal. Whereas it normally
exhibits adequate protection parameters, adverse economic conditions or changing
circumstances are more likely to lead to a weakened capacity to pay interest and
repay principal for debt in this category than in higher-rated categories.
The ratings from 'AA' to 'BBB' may be modified by the addition of a plus or
minus sign to show relative standing within the major rating categories.
DESCRIPTION OF STANDARD & POOR'S COMMERCIAL PAPER RATINGS
A Standard & Poor's Commercial Paper Rating is a current assessment of the
likelihood of timely payment of debt having an original maturity of no more than
365 days. Ratings are graded into four categories, ranging from 'A' for the
highest quality obligations to 'D' for the lowest. Ratings are applicable to
both taxable and tax-exempt commercial paper. Issues assigned the highest rating
are regarded as having the greatest capacity for
I-3
<PAGE>
timely payment. Issues in this category are further refined with the designation
1, 2 or 3 to indicate the relative degree of safety. These categories are as
follows:
<TABLE>
<S> <C>
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.
</TABLE>
A Commercial Paper Rating is not a recommendation to purchase or sell a
security. The ratings are based on current information furnished to Standard &
Poor's by the issuer and obtained by Standard & Poor's from other sources it
considers reliable. The ratings may be changed, suspended or withdrawn as a
result of changes in, or unavailability of, such information.
A Standard & Poor's note rating reflects the liquidity concerns and market
access risks unique to notes. Notes due in 3 years or less will likely receive a
note rating. Notes maturing beyond 3 years will most likely receive a long-term
debt rating. The following criteria will be used in making that assessment.
-- Amortization schedule (the larger the final maturity relative to other
maturities, the more likely it will be treated as a note).
-- Source of payment (the more dependent the issue is on the market for its
refinancing, the more likely it will be treated as a note).
Note rating symbols are as follows:
SP-1 A very strong or strong capacity to pay principal and interest. Those
issues determined to possess overwhelming safety characteristics will
be given a '+' designation.
SP-2 A satisfactory capacity to pay principal and interest.
SP-3 A speculative capacity to pay principal and interest.
Standard & Poor's may continue to rate note issues with a maturity greater
than three years in accordance with the same rating scale currently employed for
municipal bond ratings.
Unrated: Where no rating has been assigned or where a rating has been
suspended or withdrawn, it may be for reasons unrelated to the quality of the
issue.
Should no rating be assigned, the reason may be one of the following:
1. An application for rating was not received or accepted.
2. The issue or issuers belongs to a group of securities that are not
rated as a matter of policy.
3. There is a lack of essential data pertaining to the issue or
issuer.
4. The issue was privately placed, in which case the rating is not
published in Standard & Poor's publications.
Suspension or withdrawal may occur if new and material circumstances arise,
the effects of which preclude satisfactory analysis; if there is no longer
available reasonable up-to-date information to permit a judgment to be formed;
if a bond is called for redemption; or for other reasons.
I-4
<PAGE>
DESCRIPTION OF FITCH INVESTORS SERVICE, INC.'S ('FITCH') INVESTMENT GRADE BOND
RATINGS
Fitch investment grade bond ratings provide a guide to investors in
determining the credit risk associated with a particular security. The ratings
represent Fitch's assessment of the issuer's ability to meet the obligations of
a specific debt issue or class of debt in a timely manner.
The rating takes into consideration special features of the issue, its
relationship to other obligations of the issuer, the current and prospective
financial condition and operating performance of the issuer and of any
guarantor, as well as the economic and political environment that might affect
the issuer's future financial strength and credit quality.
Fitch ratings do not reflect any credit enhancement that may be provided by
insurance policies or financial guaranties unless otherwise indicated.
Bonds that have the same rating are of similar but not necessarily
identical credit quality since the rating categories do not fully reflect small
differences in the degrees of credit risk.
Fitch ratings are not recommendations to buy, sell or hold any security.
Ratings do not comment on the adequacy of market price, the suitability of any
security for a particular investor, or the tax-exempt nature or taxability of
payments made in respect of any security.
Fitch ratings are based on information obtained from issuers, other
obligors, underwriters, their experts, and other sources Fitch believes to be
reliable. Fitch does not audit or verify the truth or accuracy of such
information. Ratings may be changed, suspended or withdrawn as a result of
changes in, or the unavailability of, information or for other reasons.
<TABLE>
<S> <C>
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.
</TABLE>
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:
<TABLE>
<S> <C>
Improving (Up Arrow)
Stable (Left Arrow Right Arrow)
Declining (Down Arrow)
Uncertain (Up Arrow Down Arrow)
</TABLE>
I-5
<PAGE>
Credit trend indicators are not predictions that any rating change will
occur, and have a longer-term time frame than issues placed on FitchAlert.
<TABLE>
<S> <C>
NR Indicates that Fitch does not rate the specific issue.
Conditional A conditional rating is premised on the successful completion of a project or the occurrence of a
specific event.
Suspended A rating is suspended when Fitch deems the amount of information available from the issuer to be
inadequate for rating purposes.
Withdrawn A rating will be withdrawn when an issue matures or is called or refinanced and, at Fitch's
discretion, when an issuer fails to furnish proper and timely information.
FitchAlert Ratings are placed on FitchAlert to notify investors of an occurrence that is likely to result in
a rating change and the likely direction of such change. These are designated as 'Positive,'
indicating a potential upgrade, 'Negative,' for potential downgrade, or 'Evolving,' where ratings
may be raised or lowered. FitchAlert is relatively short-term, and should be resolved within 12
months.
</TABLE>
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.
<TABLE>
<S> <C>
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.
</TABLE>
I-6
<PAGE>
Plus (+) or Minus (-): Plus or minus signs are used with a rating symbol to
indicate the relative position of a credit within the rating category. Plus and
minus signs, however, are not used in the 'DDD', 'DD', or 'D' categories.
DESCRIPTION OF FITCH INVESTMENT GRADE SHORT-TERM RATINGS
Fitch's short-term ratings apply to debt obligations that are payable on
demand or have original maturities of generally up to three years, including
commercial paper, certificates of deposit, medium-term notes, and municipal and
investment notes.
The short-term rating places greater emphasis than a long-term rating on
the existence of liquidity necessary to meet the issuer's obligations in a
timely manner.
Fitch short-term ratings are as follows:
<TABLE>
<S> <C>
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.
</TABLE>
I-7
<PAGE>
[This Page Intentionally Left Blank]
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Trustees and Shareholders,
Merrill Lynch Multi-State Limited Maturity
Municipal Series Trust:
We have audited the accompanying statements of assets and liabilities, including
the schedules of investments, of Merrill Lynch Limited Maturity Municipal Bond
Funds for Arizona, California, Florida, Massachusetts, Michigan, New Jersey, New
York, and Pennsylvania of the Merrill Lynch Multi-State Limited Maturity
Municipal Series Trust (the 'Trust') as of July 31, 1996, the related statements
of operations for the year then ended and changes in net assets for each of the
years in the two-year period then ended and the financial highlights for each of
the years in the two-year period then ended and for the period November 26, 1993
(commencement of operations) to July 31, 1994. These financial statements and
the financial highlights are the responsibility of the Trust's management. Our
responsibility is to express an opinion on these financial statements and the
financial highlights based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements and the financial
highlights are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. Our procedures included confirmation of securities owned at July 31,
1996 by correspondence with the custodian and brokers. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such financial statements and financial highlights present
fairly, in all material respects, the financial position of Merrill Lynch
Limited Maturity Municipal Bond Funds for Arizona, California, Florida,
Massachusetts, Michigan, New Jersey, New York, and Pennsylvania of the Merrill
Lynch Multi-State Limited Maturity Municipal Series Trust as of July 31, 1996,
the results of their operations, the changes in their net assets, and the
financial highlights for the respective stated periods in conformity with
generally accepted accounting principles.
Deloitte & Touche LLP
Princeton, New Jersey
September 6, 1996
J-1
<PAGE>
MERRILL LYNCH MULTI-STATE LIMITED MATURITY MUNICIPAL TRUST, JULY 31, 1996
<TABLE>
SCHEDULE OF INVESTMENTS (in Thousands)
<CAPTION>
Arizona Limited Maturity Municipal Bond Fund
S&P Moody's Face Value
STATE Ratings Ratings Amount Issue (Note 1a)
<S> <C> <C> <C> <C> <C>
Arizona--92.9% NR* Aa $ 200 Arizona Educational Loan Marketing Corp.,
Educational Loan Revenue Bonds, AMT, Senior Series,
5.875% due 9/01/2000 $ 206
A1+ VMIG1++ 200 Arizona Health Facilities Authority Revenue Bonds
(Arizona Volunteer Hospital Federation), VRDN, Series B,
3.55% due 10/01/2015 (a)(c) 200
AAA Aaa 200 Arizona State Transportation Board Excise Tax Revenue
Bonds (Maricopa County Regional Area Road), Series A,
5.75% due 7/01/2004 (b) 211
AA- A1 200 Central Arizona Water Conservation District,
Contract Revenue Bonds (Central Arizona Project), Series B,
6.50% due 5/01/2001 (e) 219
SP1 MIG1++ 200 Maricopa County, Arizona, Pollution Control Corporation,
PCR, Refunding (Arizona Public Service Co.),
VRDN, Series E, 3.60% due 5/01/2029 (a) 200
Phoenix, Arizona, Airport Revenue Refunding Bonds, AMT, Series C (d):
AAA Aaa 465 5.60% due 7/01/2002 483
AAA Aaa 480 5.70% due 7/01/2003 501
AA+ Aa1 1,000 Phoenix, Arizona, Refunding, UT, Series C, 6.375% due 7/01/2002 1,089
A1+ NR* 200 Pima County, Arizona, IDA, Revenue Refunding Bonds,
VRDN, 3.85% due 6/30/2021 (a) 200
A+ Aa 200 Pima County, Arizona, Refunding, Series A, 5.60% due 7/01/1999 207
AAA Aaa 200 Pima County, Arizona, Sewer Revenue Bonds, 6.20%
due 7/01/2002 (b)(e) 217
A1+ NR* 200 Pinal County, Arizona, IDA, PCR (Magma Copper/Newmont
Mining Corporation), VRDN,
3.75% due 12/01/2009 (a) 200
AAA Aaa 200 Tucson, Arizona, Refunding, 5.10% due 7/01/1999 (c) 204
Total Investments (Cost--$3,992)--92.9% 4,137
Other Assets Less Liabilities--7.1% 315
-------
Net Assets--100.0% $ 4,452
=======
<FN>
(a)The interest rate is subject to change periodically based upon
prevailing market rates. The interest rate shown is the rate in
effect at July 31, 1996.
(b)AMBAC Insured.
(c)FGIC Insured.
(d)MBIA Insured.
(e)Prerefunded.
*Not Rated.
++Highest short-term rating by Moody's Investors Service, Inc.
Ratings of issues shown have not been audited by Deloitte & Touche LLP.
</FN>
</TABLE>
See Notes to Financial Statements.
<TABLE>
California Limited Maturity Municipal Bond Fund
<CAPTION>
S&P Moody's Face Value
STATE Ratings Ratings Amount Issue (Note 1a)
<S> <C> <C> <C> <C> <C>
California--97.2% California Educational Facilities Authority,
Revenue Refunding Bonds:
NR* A1 $ 500 (Loyola Marymount University), 5.70% due 10/01/2002 $ 528
NR* A 685 (Saint Mary's College), 4.90% due 10/01/2003 688
AAA Aaa 500 California Health Facilities Financing Authority,
Revenue Refunding Bonds (Catholic Healthcare West),
Series A, 5.30% due 7/01/2003 (d) 516
California Pollution Control Financing Authority,
PCR, Refunding, VRDN (a):
A-1 NR* 600 (Pacific Gas and Electric Co.), AMT, Series G, 3.50% due 2/01/2016 600
A1+ VMIG1++ 400 (Shell Oil Company Project), Series C, 3.30% due 11/01/2000 400
California Pollution Control Financing Authority,
Resource Recovery Revenue Bonds, VRDN, AMT (a):
NR P1 500 (Delano Project), Series 1991, 3.65% due 8/01/2019 500
NR P1 200 Refunding (Ultra Power Malaga Project), Series A, 3.70%
due 4/01/2017 200
California State, GO, UT:
A+ A1 750 6.75% due 10/01/2003 840
</TABLE>
J-2
<PAGE>
<TABLE>
<S> <C> <C> <C> <C> <C>
A+ A1 1,000 6.10% due 9/01/2004 1,083
AAA Aaa 750 6.35% due 11/01/2004 (b) 829
AAA Aaa 600 California State Public Works Board, Lease Revenue Bonds
(Department of Corrections--State Prison/Central
California Women's Facility, Madera County), Series A, 7%
due 9/01/2000 (e) 669
AAA Aaa 500 California Statewide Communities Development Authority,
Lease Revenue Refunding Bonds
(Oakland Convention Center Project), 5.70% due 10/01/2002 (d) 527
A+ NR* 700 East Bay, California, Municipal Utility District, Water System
Revenue Bonds, Sub-Series, 7.40% due 6/01/2000 (e) 785
AAA Aaa 200 Los Angeles, California, Department of Airports, Airport Revenue
Refunding Bonds, Series A, 6% due 5/15/2005 (b) 215
AA- Aa 650 Los Angeles, California, Department of Water and Power, Electric
Plant Revenue Bonds, 6% due 4/01/2002 694
Los Angeles, California, Harbor Department Revenue Bonds, AMT,
Series B:
AA Aa 275 6% due 8/01/2000 289
AA Aa 295 6% due 8/01/2001 312
AA Aa 500 6% due 8/01/2004 535
Los Angeles County, California, Metropolitan Transportation
Authority, Sales Tax Revenue Bonds (Proposition C-Second Senior):
A1+ VMIG1++ 200 Refunding, VRDN, Series A, 3.25% due 7/01/2020 (a)(c) 200
AAA Aaa 400 Series B, 8% due 7/01/2003 (d) 474
AA- Aa1 1,000 Los Angeles County, California, Public Works Financing Authority,
Revenue Refunding Bonds (Capital Construction), 4.80% due 3/01/2004 990
A1+ NR* 400 Moor Park, California, M/F Mortgage Revenue Refunding Bonds
(Le Club Apartments Project), VRDN, Series A,
3.25% due 11/01/2015 (a) 400
AAA Aaa 750 San Diego County, California, Regional Transportation Commission,
Sales Tax Revenue Bonds (Second Senior Sales Tax), Series A,
4% due 4/01/1997 (b) 752
AAA Aaa 700 San Francisco, California, City and County Sewer Revenue Bonds,
Series A, 5.375% due 10/01/1999 (b) 723
AAA Aaa 500 Santa Clara County, California, Financing Authority, Lease Revenue
Bonds (VMC Facility Replacement
Project), Series A, 5.80% due 11/15/2000 (d) 527
AAA Aaa 500 University of California, Revenue Refunding Bonds (Multi-Purpose
Projects), Series C, 10% due 9/01/2001 (d) 620
Puerto Rico--1.3% A1+ VMIG1++ 200 Puerto Rico Commonwealth, Government Development Bank,
Refunding, VRDN, 3.20% due 12/01/2015 (a) 200
Total Investments (Cost--$14,538)--98.5% 15,096
Other Assets Less Liabilities--1.5% 225
-------
Net Assets--100.0% $15,321
=======
<FN>
(a)The interest rate is subject to change periodically based upon
prevailing market rates. The interest rate shown is the rate in
effect at July 31, 1996.
(b)FGIC Insured.
(c)MBIA Insured.
(d)AMBAC Insured.
(e)Prerefunded.
*Not Rated.
++Highest short-term rating by Moody's Investors Service, Inc.
Ratings of issues shown have not been audited by Deloitte & Touche LLP.
</FN>
</TABLE>
See Notes to Financial Statements.
Portfolio
Abbreviations
To simplify the listings of Merrill
Lynch Multi-State Limited Maturity
Municipal Series Trust's portfolio
holdings in the Schedule of
Investments, we have abbreviated
the names of many of the securities
according to the list at right.
AMT Alternative Minimum Tax (subject to)
COP Certificates of Participation
DATES Daily Adjustable Tax-Exempt Securities
EDA Economic Development Authority
GO General Obligation Bonds
HFA Housing Finance Agency
IDA Industrial Development Authority
IDR Industrial Development Revenue Bonds
M/F Multi-Family
PCR Pollution Control Revenue Bonds
TAN Tax Anticipation Notes
TRAN Tax Revenue AnticipationNotes
UPDATES Unit Priced Demand Adjustable
Tax-Exempt Securities
UT Unlimited Tax
VRDN Variable Rate Demand Notes
J-3
<PAGE>
MERRILL LYNCH MULTI-STATE LIMITED MATURITY MUNICIPAL TRUST, JULY 31, 1996
<TABLE>
SCHEDULE OF INVESTMENTS (continued) (in Thousands)
<CAPTION>
Florida Limited Maturity Municipal Bond Fund
S&P Moody's Face Value
STATE Ratings Ratings Amount Issue (Note 1a)
<S> <C> <C> <C> <C> <C>
Florida--92.0% AAA Aaa $ 1,000 Broward County, Florida, School District, UT, 7.125%
due 2/15/1999 (e) $ 1,088
Dade County, Florida, Aviation Revenue Refunding Bonds,
Series A (b):
AAA Aaa 300 5.60% due 10/01/2004 315
AAA Aaa 1,000 AMT, 5.25% due 10/01/1997 1,014
A1+ VMIG1++ 1,200 Dade County, Florida, IDA, IDR (Dolphins Stadium Project),
VRDN, Series D, 3.55% due 1/01/2016 (a) 1,200
AAA Aaa 800 Dade County, Florida, Special Obligation, Refunding, Series B,
4.80% due 10/01/2002 (b) 807
AAA Aaa 1,185 Dunedin, Florida, Hospital Revenue Bonds (Mease Health Care),
6.75% due 11/15/2001 (d)(e) 1,325
Florida State Board of Education, Capital Outlay (Public Education):
AA Aa 850 Refunding, 5.50% due 6/01/2001 884
AAA Aaa 1,000 Refunding, Series A, 7.25% due 6/01/2000 (e) 1,114
AA Aa 1,000 Series B, 5.625% due 6/01/2005 1,047
Florida State Division, Bond Finance Department, General Services
Revenue Bonds (Department of Natural Resources Preservation):
AAA Aaa 1,730 Refunding (Save Our Coast), Series A, 6.30% due 7/01/2004 (d) 1,853
AAA Aaa 1,000 Series 2000-A, 5.75% due 7/01/2000 (d) 1,047
AAA Aaa 1,900 Series 2000-A, 6.40% due 7/01/2002 (b) 2,072
A A 100 Hillsborough County, Florida, Capital Improvement Revenue Bonds
(County Center Project), Second Series,
6.75% due 7/01/2002 (e) 112
Jacksonville, Florida, Electric Authority, Revenue Refunding
Bonds (Saint John's), Issue 2:
AA Aa1 1,000 Series 6-C, 6.50% due 10/01/2001 1,082
AA Aa1 1,000 (Special Obligation) Series 6-B, 6.65% due 10/01/2002 1,081
NR VMIG1++ 300 Jacksonville, Florida, Health Facilities Authority, Hospital
Revenue Refunding Bonds (Genesis Rehabilitation Hospital), VRDN,
3.65% due 5/01/2021 (a) 300
AAA Aaa 1,000 Kissimmee, Florida, Water and Sewer Revenue Refunding Bonds,
5.50% due 10/01/2003 (b) 1,042
AA- Aa 800 Lakeland, Florida, Electric and Water Revenue Bonds, 6.70%
due 10/01/1999 856
AAA Aaa 500 Lee County, Florida, Capital Improvement Revenue Bonds,
Sub-Series 2, 6.75% due 10/01/1997 (d)(e) 526
AAA Aaa 1,200 North Miami, Florida, Health Facilities Authority, Health Facility
Revenue Bonds (Bon Secours Health System Project), 6% due
8/15/2002 (e)(f) 1,303
AAA Aaa 1,300 Okaloosa County, Florida, School Board Sales Tax Revenue Bonds,
5% due 9/01/1997 (c) 1,316
AAA Aaa 1,000 Palm Bay, Florida, Utility Revenue Bonds (Palm Bay Utility Corp.
Project), Series B, 6.20% due 10/01/2002 (d)(e) 1,099
SP1+ NR* 250 Palm Beach County, Florida, School District, TAN, 4.50% due 9/27/1996 250
NR* Baa1 1,440 Pembroke Pines, Florida, Special Assessment No. 94-1, 4.80% due
11/01/1998 1,448
A1 VMIG1++ 200 Pinellas County, Florida, Health Facilities Authority, Revenue
Refunding Bonds (Pooled Hospital Loan Program),
DATES, 3.70% due 12/01/2015 (a) 200
AAA Aaa 1,235 Saint Lucie County, Florida, School Board, COP, Series A,
7.25% due 7/01/2000 (b)(e) 1,378
Puerto Rico--5.4% A Baa1 500 Puerto Rico Commonwealth, GO, UT, 5.55% due 7/01/2001 517
A Baa1 1,000 Puerto Rico Commonwealth, Refunding, Improvement Bonds,
UT, 5.30% due 7/01/2004 1,013
Total Investments (Cost--$26,691)--97.4% 27,289
Other Assets Less Liabilities--2.6% 733
-------
Net Assets--100.0% $28,022
=======
<FN>
(a)The interest rate is subject to change periodically based upon
prevailing market rates. The interest rate shown is the rate in
effect at July 31, 1996.
(b)AMBAC Insured.
(c)FSA Insured.
(d)MBIA Insured.
(e)Prerefunded.
*Not Rated.
++Highest short-term rating by Moody's Investors Service, Inc.
Ratings of issues shown have not been audited by Deloitte & Touche LLP.
</FN>
</TABLE>
See Notes to Financial Statements.
J-4
<PAGE>
<TABLE>
Massachusetts Limited Maturity Municipal Bond Fund
<CAPTION>
S&P Moody's Face Value
STATE Ratings Ratings Amount Issue (Note 1a)
<S> <C> <C> <C> <C> <C>
Massachusetts-- NR* A1 $ 295 Boston, Massachusetts, Economic Development and Industrial Corp.,
97.2% Public Parking Facility, Series 1990,
5% due 7/01/2000 $ 291
AAA Aaa 300 Chelsea, Massachusetts, School Project Loan Act of 1948, UT, 6%
due 6/15/2002 (c) 319
AAA Aaa 215 Fall River, Massachusetts, GO, 6.30% due 6/01/1998 (b) 223
A1+ NR* 200 Holyoke, Massachusetts, PCR, Refunding (Holyoke Water Power
Project), VRDN, 3.25% due 11/01/2013 (a) 200
AAA Aaa 400 Lynn, Massachusetts, Water and Sewer Commission, Refunding,
4.95% due 12/01/2002 (e) 405
A+ A1 100 Massachusetts Bay Transportation Authority, Massachusetts General
Transportation System, Series A, 4.90% due 3/01/2004 100
AAA Aaa 250 Massachusetts Educational Loan Authority, EducationalLoan
Revenue Bonds, AMT, Issue E, Series B, 5.50% due 7/01/2001 (c) 258
BBB+ A 500 Massachusetts Municipal Wholesale Electric Company, Power Supply
System, Revenue Refunding Bonds, Series B, 6.375% due 7/01/2001 533
A+ A1 750 Massachusetts State, GO, Refunding, Series B, 6.25% due 8/01/2001 802
Massachusetts State Health and Educational Facilities Authority
Revenue Bonds:
A1+ VMIG1++ 200 (Capital Assets Program), VRDN, Series D, 3.45% due 1/01/2035 (a)(b) 200
A1+ VMIG1++ 300 (Harvard University), VRDN, Series I, 3.50% due 8/01/2017 (a) 300
AAA Aaa 200 Refunding (Baystate Medical Center), Series D, 4.60% due 7/01/2002 (e) 197
AAA Aaa 540 Massachusetts State HFA, Housing Revenue Refunding Bonds
(Insured-Rental), AMT, Series A, 5.90% due 7/01/2003 (c) 553
NR* MIG1++ 100 Massachusetts State Industrial Finance Agency, Health Care
Facility Revenue Bonds (Beverly Enterprises, Inc.), VRDN, 3.40%
due 10/01/2022 (a) 100
NR* VMIG1++ 300 Massachusetts State Industrial Finance Agency, PCR, Refunding
(North East Power Company), VRDN, 3.55% due 8/01/1996 (a) 300
AAA Aaa 320 Massachusetts State Industrial Finance Agency, Revenue Bonds
(Babson College), Series A, 5.40% due 10/01/2003 (b) 331
Massachusetts State Port Authority, Revenue Refunding Bonds, VRDN (a):
A1+ P1 100 AMT, Series B, 2.65% due 7/01/2018 100
A1+ P1 200 Series A, 3.45% due 7/01/2015 200
AA A1 300 Massachusetts State Special Obligation Revenue Bonds (Highway
Improvement Loan), Series A, 5.90% due 6/01/2001 316
AAA Aaa 500 Massachusetts State Water Resource Authority, Series A, 6.75%
due 7/15/2002 (d) 561
NR* A1 500 New England Educational Loan Marketing Corp., Massachusetts Student
Loan Revenue Bonds, AMT, Sub-Issue F, 6.60% due 9/01/2002 538
NR* NR* 365 South Hadley, Massachusetts, Industrial Revenue Bonds (South Hadley
Health Care), AMT, Series A, 5% due 12/01/1996 364
Total Investments (Cost--$7,011)--97.2% 7,191
Other Assets Less Liabilities--2.8% 205
-------
Net Assets--100.0% $ 7,396
=======
<FN>
(a)The interest rate is subject to change periodically based upon
prevailing market rates. The interest rate shown is the rate in
effect at July 31, 1996.
(b)MBIA Insured.
(c)AMBAC Insured.
(d)Prerefunded.
(e)FGIC Insured.
*Not Rated.
++Highest short-term rating by Moody's Investors Service, Inc.
Ratings of issues shown have not been audited by Deloitte & Touche LLP.
</FN>
</TABLE>
See Notes to Financial Statements.
J-5
<PAGE>
MERRILL LYNCH MULTI-STATE LIMITED MATURITY MUNICIPAL TRUST, JULY 31, 1996
<TABLE>
SCHEDULE OF INVESTMENTS (continued) (in Thousands)
<CAPTION>
Michigan Limited Maturity Municipal Bond Fund
S&P Moody's Face Value
STATE Ratings Ratings Amount Issue (Note 1a)
<S> <C> <C> <C> <C> <C>
Michigan--90.0% A1+ VMIG1++$ 200 Bruce Township, Michigan, Hospital Finance Authority,
Health Care System Revenue Bonds (Sisters
Charity-Saint Joseph's), VRDN, Series A, 3.45% due 5/01/2018 (a)(d) $ 200
AAA Aaa 250 Dearborn, Michigan, Economic Development Corp., Hospital
Revenue Bonds (Oakwood Obligated Group),
Series A, 6.95% due 8/15/2001 (d)(e) 279
AAA Aaa 200 Detroit, Michigan, Distributable State Aid, Refunding Bonds,
UT, 5.70% due 5/01/2001 (b) 208
AAA Aaa 250 Detroit, Michigan, Water Supply System, Revenue Refunding Bonds,
6.20% due 7/01/2004 (c) 270
AAA Aaa 200 Eastern Michigan University, Revenue Refunding Bonds, 5.40%
due 6/01/1998 (b) 204
Michigan Municipal Bond Authority Revenue Bonds:
AAA Aaa 200 (Local Government Loan Program), Series C, 5.50% due 5/01/2003 (d) 207
AA Aa 500 Refunding (Local Government--Qualified School), Series A, 6%
due 5/01/2001 527
AA Aa 200 (State Revolving Fund), 7% due 10/01/2004 226
AA- A1 200 Michigan State Building Authority, Revenue Refunding Bonds,
Series I, 6.40% due 10/01/2004 216
AA- A1 200 Michigan State Comprehensive Transportation, Revenue Refunding Bonds,
Series B, 5.625% due 5/15/2003 209
A1+ NR* 200 Michigan State Housing Development Authority, Rental Housing Revenue
Refunding Bonds, VRDN, Series C, 3.50% due 4/01/2019 (a) 200
AA Aa 200 Michigan State Recreation Program, GO, 6% due 11/01/2004 215
AAA Aaa 150 Michigan State South Central Power Agency, Power Supply System
Revenue Refunding Bonds, 7% due 11/01/1996 (b)(e) 154
A1+ VMIG1++ 100 Michigan State Strategic Fund, Limited Obligation Revenue Bonds
(United Waste Systems, Inc. Project), VRDN, AMT, 3.65% due
4/01/2010 (a) 100
AAA Aaa 160 Michigan State Underground Storage Tank, Financial Assurance
Authority, Revenue Refunding Bonds, Series I, 6% due 5/01/2004 (b) 171
AAA Aaa 235 Royal Oak, Michigan, Refunding, UT, 4% due 10/01/1997 (b) 235
Puerto Rico--6.8% A Baa1 265 Puerto Rico Commonwealth, GO, UT, 5.55% due 7/01/2001 274
Total Investments (Cost--$3,771)--96.8% 3,895
Other Assets Less Liabilities--3.2% 130
-------
Net Assets--100.0% $ 4,025
=======
<FN>
(a)The interest rate is subject to change periodically based upon
prevailing market rates. The interest rate shown is the rate in
effect at July 31, 1996.
(b)AMBAC Insured.
(c)FGIC Insured.
(d)MBIA Insured.
(e)Prerefunded.
*Not Rated.
++Highest short-term rating by Moody's Investor's Service, Inc.
Ratings of issues shown have not been audited by Deloitte & Touche LLP.
</FN>
</TABLE>
See Notes to Financial Statements.
J-6
<PAGE>
<TABLE>
New Jersey Limited Maturity Municipal Bond Fund
<CAPTION>
S&P Moody's Face Value
STATE Ratings Ratings Amount Issue (Note 1a)
<S> <C> <C> <C> <C> <C>
New Jersey--99.8% AAA Aaa $ 600 Elizabeth, New Jersey, General Improvement and Sewer Utility
Refunding Bonds, GO, UT, 6% due 8/15/2004 (b) $ 643
SP1+ VMIG1++ 400 Mercer County, New Jersey, Improvement Authority Revenue
Bonds, VRDN, 3.25% due 11/01/1998 (a) 400
AA+ Aa1 400 Monmouth County, New Jersey, General Improvement Bonds, GO,
UT, 6.625% due 8/01/2000 425
NR* Aa1 400 New Jersey EDA, Economic Development Revenue Bonds (400
International Drive Partners), VRDN, 3.20% due 9/01/2005 (a) 400
New Jersey, EDA, Industrial and Economic Development Revenue Bonds (a):
NR* NR* 100 (Burmah Castrol Inc.), VRDN, 3.30% due 8/01/2005 100
A-1 NR* 100 (Toys `R' Us, Inc.), DATES, 3.05% due 4/01/2019 100
AAA Aaa 1,000 New Jersey, EDA, Market Transition Facility Revenue Bonds,
Senior Lien, Series A, 7% due 7/01/2004 (c) 1,132
New Jersey, EDA, Natural Gas Facilities Revenue Bonds, VRDN,
Series A (a)(b):
A-1 VMIG1++ 100 (NUI Corp. Project), AMT, 3.75% due 7/01/2005 100
A1+ VMIG1++ 300 Refunding (New Jersey Natural Gas Co.), 3.40% due 8/01/2030 300
NR* Aaa 300 New Jersey EDA, Revenue Bonds (Hoffman-La Roche Incorporated
Project), VRDN, AMT, 3.55% due 11/01/2011 (a) 300
AAA Aaa 100 New Jersey Health Care Facilities Financing Authority Revenue
Bonds (Carrier Foundation), VRDN, Series C, 3.60% due 7/01/2005 (a)(d) 100
A1+ VMIG1++ 400 New Jersey Sports and Exposition Authority Revenue Bonds
(State Contract), VRDN, Series C, 3.30% due 9/01/2024 (a)(c) 400
A+ Aa 1,000 New Jersey State Transportation Trust Fund Authority, Transportation
System Revenue Bonds, Series A, 6% due 6/15/2000 (e) 1,050
BBB+ Baa1 400 New Jersey State Turnpike Authority, Turnpike Revenue Bonds,
Series A, 5.70% due 1/01/2001 412
AA Aa 400 North Brunswick Township, New Jersey, Board of Education Refunding
Bonds, GO, UT, 6.25% due 2/01/2004 434
NR* Aa 400 Ocean County, New Jersey, Utilities Authority, Wastewater Revenue
Bonds, UT, Series A, 6.125% due 1/01/2003 429
AAA Aaa 1,310 Port Authority of New York and New Jersey, Consolidated Refunding
Bonds, AMT, UT, 97th Series, 7.10% due 7/15/2004 (d) 1,485
AA+ Aaa 400 Union County, New Jersey (General Improvement and County
Collection), UT, 4.40% due 9/01/1998 403
Total Investments (Cost--$8,322)--99.8% 8,613
Other Assets Less Liabilities--0.2% 14
-------
Net Assets--100.0% $ 8,627
=======
<FN>
(a)The interest rate is subject to change periodically based upon
prevailing market rates. The interest rate shown is the rate in
effect at July 31, 1996.
(b)AMBAC Insured.
(c)MBIA Insured.
(d)FGIC Insured.
(e)Prerefunded.
*Not Rated.
++Highest short-term rating by Moody's Investors Service, Inc.
Ratings of issues shown have not been audited by Deloitte & Touche LLP.
</FN>
</TABLE>
See Notes to Financial Statements.
J-7
<PAGE>
MERRILL LYNCH MULTI-STATE LIMITED MATURITY MUNICIPAL TRUST, JULY 31, 1996
<TABLE>
SCHEDULE OF INVESTMENTS (concluded) (in Thousands)
<CAPTION>
New York Limited Maturity Municipal Bond Fund
S&P Moody's Face Value
STATE Ratings Ratings Amount Issue (Note 1a)
<S> <C> <C> <C> <C> <C>
New York--100.4% Nassau County, New York, General Improvement Bonds, UT (c):
AAA Aaa $ 400 Series O, 5.625% due 8/01/2004 $ 421
AAA Aaa 700 Series Q, 5.10% due 8/01/2003 714
A1+ VMIG1++ 100 New York City, New York, GO, VRDN, UT, Series B,
Sub-Series B-10, 3.35% due 8/15/2024 (a) 100
AAA Aaa 750 New York City, New York, IDA, Civic Facilities Revenue Bonds
(USTA National Tennis Center Project), 6% due 11/15/2003 (d) 802
A1+ NR* 1,400 New York City, New York, IDA, IDR (Japan Airlines Company Ltd.
Project), VRDN, AMT, 3.65% due 11/01/2015 (a) 1,400
AA- Aa 800 New York City, New York, Municipal Assistance Corporation,
Series 68, 7.10% due 7/01/2000 869
New York City, New York, Municipal Water Finance Authority,
Water and Sewer System Revenue Bonds, VRDN (a)(c):
A1+ VMIG1++ 500 Series C, 3.55% due 6/15/2023 500
A1+ VMIG1++ 300 Series G, 3.55% due 6/15/2024 300
BBB+ Baa1 610 New York City, New York, Refunding, UT, Series A, 6% due 8/01/2000 630
New York State Dormitory Authority Revenue Bonds:
AAA Aaa 500 (College and University Educational Loan), AMT, 6.30% due
7/01/2002 (e) 541
BBB Aaa 750 (Department of Health-Issue), 7.70% due 7/01/2000 (b) 849
AAA Aaa 670 (Rensselaer Polytechnic Institute), 4.90% due 7/01/2004 (e) 672
NR* VMIG1++ 400 New York State Energy Research and Development Authority, Electric
Facilities Revenue Bonds (Long Island Lighting Co.), VRDN, AMT,
Series B, 3.35% due 11/01/2023 (a) 400
A- Aa 400 New York State Environmental Facilities Corporation, PCR (State
Water--Revolving Fund), Series E, 5.60% due 6/15/1999 414
A1+ NR* 200 New York State Environmental Facilities Corporation, Resource
Recovery Revenue Bonds (OFS Equity Huntington Project), VRDN,
AMT, 3.65% due 11/01/2014 (a) 200
A- A 600 New York State Environmental Quality, GO, 6% due 12/01/2004 643
A- A 735 New York State, GO, Refunding, Series B, 6.25% due 8/15/2004 798
A1+ VMIG1++ 400 New York State HFA, Revenue Bonds (Normandie Court--I Project),
VRDN, 2.20% due 8/01/2016 (a) 400
New York State Local Government Assistance Corporation Revenue Bonds:
A A 625 Series A, 7% due 4/01/2005 692
AAA Aaa 600 Series D, 7% due 4/01/2002 (b) 679
New York State Medical Care Facilities, Finance Agency Revenue
Bonds, Series A:
AA Aa 655 (Adult Day Care), 6% due 11/15/2003 690
AAA Aaa 725 (Mental Health Services Facilities), 7.75% due 2/15/2001 (b) 832
NR* Aa3 500 (Saratoga Hospital Project), 5.25% due 11/01/2004 505
AA NR* 675 New York State Tax Exempt Revenue Bonds (Rochester Museum &
Science), 5.60% due 12/01/2015 688
BBB Baa1 450 New York State Urban Development Corporation, Revenue Refunding
Bonds (Center for Industrial Innovation), 4.60% due 1/01/1998 451
AAA Aaa 760 Port Authority of New York and New Jersey, Refunding (Construction),
AMT, UT, 97th Series, 7.10% due 7/15/2003 (c) 855
AA A1 700 Rockland County, New York, Sewer District, UT, 7.70% due 6/01/1997 (b) 736
AA A1 800 Syracuse, New York, GO, 5.70% due 6/15/2002 843
A+ Aa 340 Triborough Bridge and Tunnel Authority, New York, Revenue Bonds,
Series R, 6.90% due 1/01/2000 366
Total Investments (Cost--$17,666)--100.4% 17,990
Liabilities in Excess of Other Assets--(0.4%) (70)
-------
Net Assets--100.0% $17,920
=======
<FN>
(a)The interest rate is subject to change periodically based upon
prevailing market rates. The interest rate shown is the rate in
effect at July 31, 1996.
(b)Prerefunded.
(e)MBIA Insured.
*Not Rated.
++Highest short-term rating by Moody's Investors Service, Inc.
J-8
<PAGE>
(c)FGIC Insured.
(d)FSA Insured.
Ratings of issues shown have not been audited by Deloitte & Touche LLP.
</FN>
</TABLE>
See Notes to Financial Statements.
<TABLE>
Pennsylvania Limited Maturity Municipal Bond Fund
<CAPTION>
S&P Moody's Face Value
STATE Ratings Ratings Amount Issue (Note 1a)
<S> <C> <C> <C> <C> <C>
Pennsylvania-- NR* A1 $ 200 Allegheny County, Pennsylvania, IDA, Revenue Refunding Bonds
82.6% (Commercial Development Parkway Center Mall Project), VRDN,
Series A, 3.75% due 5/01/2009 (d) $ 200
AAA Aaa 400 Beaver County, Pennsylvania, Hospital Authority, Revenue
Refunding Bonds (Beaver County Medical Center
Inc.), 5.70% due 7/01/1999 (c) 413
A1+ P1 100 Beaver County, Pennsylvania, IDA, PCR, Refunding (Duquesne
Light Project--Beaver Valley), VRDN, Series A,
3.45% due 8/01/2020 (d) 100
A1+ P1 200 Delaware County, Pennsylvania, IDA, PCR (BP Oil Inc. Project),
UPDATES, 3.60% due 12/01/2009 (d) 200
AA Aa 250 Delaware County, Pennsylvania, Refunding Bonds, GO, UT, 4.80%
due 10/01/2004 248
A1+ Aaa 250 Lehigh County, Pennsylvania, Authority Water Revenue Bonds,
VRDN, 3.60% due 11/01/2004 (b)(d) 250
NR* VMIG1++ 400 Pennsylvania Energy Development Authority, Energy Development
Revenue Bonds (B&W Ebensburg Project),
VRDN, AMT, 3.70% due 12/01/2011 (d) 400
Pennsylvania State Higher Educational Facilities Authority,
College and University Revenue Refunding Bonds, Series A:
A+ Aa 380 (Thomas Jefferson University), 5.75% due 8/15/1998 392
AA Aa 275 (University of Pennsylvania), 4.70% due 9/01/1997 277
AAA Aaa 300 Pennsylvania State, Refunding (Projects--First), UT, Series A,
6.60% due 1/01/2001 (c) 324
AA- A1 1,100 Pennsylvania State University, Refunding, 5.85% due 3/01/2002 1,158
Philadelphia, Pennsylvania, Hospitals and Higher Education
Facilities Authority, Hospital Revenue Bonds:
NR* Aaa 1,000 (Children's Hospital of Philadelphia Project), Series A, 6.50%
due 2/15/2002 (e) 1,101
A- NR* 650 (Children's Seashore House), Series B, 7% due 8/15/2003 705
SP1+ MIG1++ 400 Philadelphia, Pennsylvania, School District, TRAN, 4.50%
due 6/30/1997 402
SP-1 MIG1++ 400 Philadelphia, Pennsylvania, TRAN, Series A, 4.50% due 6/30/1997 402
AAA Aaa 400 Union County, Pennsylvania, Higher Educational Facilities Authority
Revenue Refunding Bonds (Bucknell University), 6% due 4/01/2002 (f) 423
AAA Aaa 325 Washington County, Pennsylvania, Lease Authority, Municipal
Facility (Shadyside Hospital Project), Series C,
Sub-Series C1-A, 7.45% due 6/15/2000 (a)(c)(e) 366
Puerto Rico--11.7% A- Baa1 1,000 Puerto Rico Municipal Finance Agency, GO, UT, Series A, 5.80%
due 7/01/2004 1,037
Total Investments (Cost--$8,237)--94.3% 8,398
Other Assets Less Liabilities--5.7% 507
-------
Net Assets--100.0% $ 8,905
=======
<FN>
(a)Escrowed to maturity.
(b)Secured by escrow.
(c)AMBAC Insured.
(d)The interest rate is subject to change periodically based on
prevailing market rates. The rates shown are those in effect at
July 31, 1996.
(e)Prerefunded.
(f)MBIA Insured.
*Not Rated.
++Highest short-term rating by Moody's Investors Service, Inc.
Ratings of issues shown have not been audited by Deloitte & Touche LLP.
</FN>
</TABLE>
See Notes to Financial Statements.
J-9
<PAGE>
MERRILL LYNCH MULTI-STATE LIMITED MATURITY MUNICIPAL TRUST, JULY 31, 1996
<TABLE>
STATEMENTS OF ASSETS AND LIABILITIES
<CAPTION>
Arizona California Florida Massachusetts
Limited Limited Limited Limited
As of July 31, 1996 Maturity Maturity Maturity Maturity
<S> <C> <C> <C> <C> <C>
Assets: Investments, at value* (Note 1a) $ 4,136,875 $ 15,096,081 $ 27,288,445 $ 7,190,978
Cash 56,502 37,176 76,040 168,110
Receivables:
Interest 25,595 240,691 347,804 73,352
Securities sold 241,346 -- 433,216 --
Investment adviser (Note 2) 19,404 -- -- 24,485
Beneficial interest sold -- 1,708 -- --
Deferred organization expenses
(Note 1e) -- 8,453 28,115 4,599
Prepaid registration fees and
other assets (Note 1e) 16,154 643 11,244 10,162
------------ ------------ ------------ ------------
Total assets 4,495,876 15,384,752 28,184,864 7,471,686
------------ ------------ ------------ ------------
Liabilities: Payables:
Beneficial interest redeemed -- 711 75,095 10,129
Dividends to shareholders
(Note 1f) 4,209 12,435 25,396 6,526
Investment adviser (Note 2) -- 1,933 8,332 --
Distributor (Note 2) 1,000 3,122 4,630 1,472
Accrued expenses and other
liabilities 38,639 45,740 49,326 57,389
------------ ------------ ------------ ------------
Total liabilities 43,848 63,941 162,779 75,516
------------ ------------ ------------ ------------
Net Assets: Net assets $ 4,452,028 $ 15,320,811 $ 28,022,085 $ 7,396,170
============ ============ ============ ============
Net Assets Class A Shares of beneficial
Consist of: interest, $.10 par value,
unlimited shares authorized $ 8,069 $ 31,471 $ 79,091 $ 17,264
Class B Shares of beneficial
interest, $.10 par value,
unlimited shares authorized 28,629 98,750 137,513 45,949
Class C Shares of beneficial
interest, $.10 par value,
unlimited shares authorized 1,339 549 521 2,113
Class D Shares of beneficial
interest, $.10 par value,
unlimited shares authorized 6,142 21,753 64,376 8,934
Paid-in capital in excess
of par 4,334,656 15,140,165 28,023,107 7,494,663
Accumulated realized capital
losses on investments --net
(Note 5) (71,438) (529,724) (879,594) (352,257)
Unrealized appreciation on
investments --net 144,631 557,847 597,071 179,504
------------ ------------ ------------ ------------
Net assets $ 4,452,028 $ 15,320,811 $ 28,022,085 $ 7,396,170
============ ============ ============ ============
Net Asset Value: Class A: Net assets $ 813,180 $ 3,161,461 $ 7,874,368 $ 1,719,269
============ ============ ============ ============
Shares outstanding 80,693 314,706 790,910 172,634
============ ============ ============ ============
Net asset value $ 10.08 $ 10.05 $ 9.96 $ 9.96
============ ============ ============ ============
Class B: Net assets $ 2,884,780 $ 9,918,998 $ 13,690,359 $ 4,576,988
============ ============ ============ ============
Shares outstanding 286,287 987,501 1,375,127 459,494
============ ============ ============ ============
Net asset value $ 10.08 $ 10.04 $ 9.96 $ 9.96
============ ============ ============ ============
Class C: Net assets $ 135,060 $ 55,114 $ 51,502 $ 210,323
============ ============ ============ ============
Shares outstanding 13,395 5,486 5,204 21,134
============ ============ ============ ============
Net asset value $ 10.08 $ 10.05 $ 9.90 $ 9.95
============ ============ ============ ============
Class D: Net assets $ 619,008 $ 2,185,238 $ 6,405,856 $ 889,590
============ ============ ============ ============
Shares outstanding 61,417 217,532 643,764 89,337
============ ============ ============ ============
Net asset value $ 10.08 $ 10.05 $ 9.95 $ 9.96
============ ============ ============ ============
*Identified cost $ 3,992,244 $ 14,538,234 $ 26,691,374 $ 7,011,474
============ ============ ============ ============
J-10
<PAGE>
<CAPTION>
Michigan New Jersey New York Pennsylvania
Limited Limited Limited Limited
As of July 31, 1996 Maturity Maturity Maturity Maturity
<S> <C> <C> <C> <C> <C>
Assets: Investments, at value* (Note 1a) $ 3,895,326 $ 8,613,187 $ 17,990,267 $ 8,398,278
Cash 77,643 56,519 16,531 39,650
Receivables:
Beneficial interest sold -- -- 627,229 --
Securities sold -- 51,148 -- 507,488
Interest 49,221 80,725 206,771 124,471
Investment adviser (Note 2) 24,857 16,407 20,090 7,414
Deferred organization expenses
(Note 1e) 4,045 6,610 7,246 6,183
Prepaid registration fees and
other assets (Note 1e) 7,914 10,280 5,166 8,464
------------ ------------ ------------ ------------
Total assets 4,059,006 8,834,876 18,873,300 9,091,948
------------ ------------ ------------ ------------
Liabilities: Payables:
Securities purchased -- 100,000 845,597 --
Beneficial interest redeemed -- 32,288 26,087 129,736
Dividends to shareholders
(Note 1f) 3,791 7,948 16,817 7,827
Distributor (Note 2) 590 1,674 3,304 2,044
Accrued expenses and other
liabilities 29,554 65,879 61,371 47,840
------------ ------------ ------------ ------------
Total liabilities 33,935 207,789 953,176 187,447
------------ ------------ ------------ ------------
Net Assets: Net assets $ 4,025,071 $ 8,627,087 $ 17,920,124 $ 8,904,501
============ ============ ============ ============
Net Assets Class A Shares of beneficial
Consist of: interest, $.10 par value,
unlimited shares authorized $ 16,499 $ 26,344 $ 37,016 $ 8,240
Class B Shares of beneficial
interest, $.10 par value,
unlimited shares authorized 18,522 50,942 100,111 61,965
Class C Shares of beneficial
interest, $.10 par value,
unlimited shares authorized 12 2,970 2,130 12
Class D Shares of beneficial
interest, $.10 par value,
unlimited shares authorized 5,446 5,343 38,884 17,865
Paid-in capital in excess
of par 4,031,709 8,543,116 17,678,636 8,756,463
Accumulated realized capital
losses on investments--net
(Note 5) (171,774) (293,217) (261,279) (100,866)
Unrealized appreciation on
investments --net 124,657 291,589 324,626 160,822
------------ ------------ ------------ ------------
Net assets $ 4,025,071 $ 8,627,087 $ 17,920,124 $ 8,904,501
============ ============ ============ ============
Net Asset Value: Class A: Net assets $ 1,640,666 $ 2,662,645 $ 3,723,308 $ 832,986
============ ============ ============ ============
Shares outstanding 164,986 263,436 370,162 82,402
============ ============ ============ ============
Net asset value $ 9.94 $ 10.11 $ 10.06 $ 10.11
============ ============ ============ ============
Class B: Net assets $ 1,841,924 $ 5,152,224 $ 10,070,519 $ 6,263,404
============ ============ ============ ============
Shares outstanding 185,219 509,424 1,001,114 619,654
============ ============ ============ ============
Net asset value $ 9.94 $ 10.11 $ 10.06 $ 10.11
============ ============ ============ ============
Class C: Net assets $ 1,163 $ 271,989 $ 214,138 $ 1,188
============ ============ ============ ============
Shares outstanding 117 29,696 21,296 117
============ ============ ============ ============
Net asset value $ 9.94 $ 9.16 $ 10.06 $ 10.15
============ ============ ============ ============
Class D: Net assets $ 541,318 $ 540,229 $ 3,912,159 $ 1,806,923
============ ============ ============ ============
Shares outstanding 54,464 53,434 388,837 178,650
============ ============ ============ ============
Net asset value $ 9.94 $ 10.11 $ 10.06 $ 10.11
============ ============ ============ ============
*Identified cost $ 3,770,669 $ 8,321,598 $ 17,665,641 $ 8,237,456
============ ============ ============ ============
See Notes to Financial Statements.
</TABLE>
J-11
<PAGE>
MERRILL LYNCH MULTI-STATE LIMITED MATURITY MUNICIPAL TRUST, JULY 31, 1996
<TABLE>
STATEMENT OF OPERATIONS
<CAPTION>
Arizona California Florida Massachusetts
Limited Limited Limited Limited
For the Year Ended July 31, 1996 Maturity Maturity Maturity Maturity
<S> <C> <C> <C> <C> <C>
Investment Interest and amortization of
Income (Note 1d): premium and discount earned $ 291,905 $ 748,162 $ 1,527,243 $ 424,149
Expenses: Investment advisory fees (Note 2) 21,459 54,033 108,720 30,736
Professional fees 41,571 48,058 52,985 53,005
Accounting services (Note 2) 30,172 38,245 34,053 53,983
Account maintenance and
distribution fees--Class B (Note 2) 15,724 35,889 53,229 17,257
Printing and shareholder reports 10,156 20,449 47,046 20,077
Registration fees (Note 1e) 24,744 19,983 13,634 18,980
Trustees' fees and expenses 3,015 7,114 13,676 4,419
Amortization of organization
expenses (Note 1e) -- 3,653 12,163 1,990
Custodian fees 2,321 1,167 5,841 2,964
Pricing fees 2,329 4,831 4,015 2,981
Transfer agent fees--Class B
(Note 2) 2,475 3,153 4,405 2,733
Account maintenance fees--Class D
(Note 2) 655 1,776 6,850 565
Transfer agent fees--Class A
(Note 2) 444 846 2,031 1,247
Transfer agent fees--Class D
(Note 2) 319 451 1,551 264
Account maintenance and
distribution fees --Class C
(Note 2) 68 103 20 558
Transfer agent fees--Class C
(Note 2) 33 27 10 182
Other 669 -- 2,049 2,701
------------ ------------ ------------ ------------
Total expenses before
reimbursement 156,154 239,778 362,278 214,642
Reimbursement of expenses (Note 2) (93,656) (54,497) (24,123) (126,014)
------------ ------------ ------------ ------------
Total expenses after reimbursement 62,498 185,281 338,155 88,628
------------ ------------ ------------ ------------
Investment income--net 229,407 562,881 1,189,088 335,521
------------ ------------ ------------ ------------
Realized & Realized gain (loss) on
Unrealized Gain investments--net (691) (14,506) (1,278) 18,219
(Loss) on Change in unrealized appreciation
Investments--Net on investments--net (45,086) 102,333 (174,866) (13,084)
(Notes 1b, 1d & 3): ------------ ------------ ------------ ------------
Net Increase in Net Assets
Resulting from Operations $ 183,630 $ 650,708 $ 1,012,944 $ 340,656
============ ============ ============ ============
<CAPTION>
Michigan New Jersey New York Pennsylvania
Limited Limited Limited Limited
For the Year Ended July 31, 1996 Maturity Maturity Maturity Maturity
<S> <C> <C> <C> <C> <C>
Investment Interest and amortization of
Income (Note 1d): premium and discount earned $ 225,785 $ 462,228 $ 793,554 $ 415,685
Expenses: Accounting services (Note 2) 47,178 43,508 62,140 43,426
Professional fees 44,286 43,780 42,051 40,761
Investment advisory fees (Note 2) 16,413 33,770 57,995 30,196
Account maintenance and
distribution fees--Class B
(Note 2) 7,629 22,973 34,048 24,307
Printing and shareholder reports -- 18,765 20,581 14,335
Registration fees (Note 1e) 11,903 13,375 19,353 --
Trustees' fees and expenses 2,243 4,589 6,879 197
Custodian fees 2,326 3,420 4,702 3,352
Transfer agent fees--Class B
(Note 2) 1,782 2,895 3,938 3,550
Pricing fees 2,119 2,271 4,161 2,169
J-12
<PAGE>
<S> <C> <C> <C> <C> <C>
Amortization of organization
expenses (Note 1e) 1,748 2,860 3,131 2,675
Transfer agent fees--Class A
(Note 2) 1,420 991 1,306 391
Account maintenance fees--
Class D (Note 2) 415 310 2,638 725
Transfer agent fees--Class D
(Note 2) 302 115 858 300
Account maintenance and
distribution fees--Class C
(Note 2) 1 174 206 41
Transfer agent fees--Class C
(Note 2) 6 53 70 20
Other -- 1,275 4,638 --
------------ ------------ ------------ ------------
Total expenses before
reimbursement 139,771 195,124 268,695 166,445
Reimbursement of expenses
(Note 2) (96,532) (98,714) (146,290) (71,504)
------------ ------------ ------------ ------------
Total expenses after
reimbursement 43,239 96,410 122,405 94,941
------------ ------------ ------------ ------------
Investment income--net 182,546 365,818 671,149 320,744
------------ ------------ ------------ ------------
Realized & Realized gain (loss) on
Unrealized investments--net 10,083 (12,586) 27,501 364
Gain (Loss) on Change in unrealized appreciation
Investments--Net on investments--net (23,665) (41,469) (22,206) 12,631
(Notes 1b, 1d & 3): ------------ ------------ ------------ ------------
Net Increase in Net Assets
Resulting from Operations $ 168,964 $ 311,763 $ 676,444 $ 333,739
============ ============ ============ ============
See Notes to Financial Statements.
</TABLE>
<TABLE>
STATEMENTS OF CHANGES IN NET ASSETS
<CAPTION>
Arizona Limited Maturity California Limited Maturity
For the Year Ended For the Year Ended
July 31, July 31,
Increase (Decrease) in Net Assets: 1996 1995 1996 1995
<S> <C> <C> <C> <C> <C>
Operations: Investment income--net $ 229,407 $ 305,477 $ 562,881 $ 612,890
Realized loss on investments
--net (691) (48,045) (14,506) (365,740)
Change in unrealized appreciation/
depreciation on investments--net (45,086) 182,975 102,333 501,542
Investments--Net ------------ ------------ ------------ ------------
Net increase in net assets
resulting from operations 183,630 440,407 650,708 748,692
------------ ------------ ------------ ------------
Dividends to Investment income--net:
Shareholders Class A (37,685) (78,637) (130,650) (159,781)
(Note 1f): Class B (164,444) (226,411) (362,918) (422,409)
Class C (1,762) (33) (2,149) (585)
Class D (25,516) (396) (67,164) (30,115)
------------ ------------ ------------ ------------
Net decrease in net assets
resulting from dividends to
shareholders (229,407) (305,477) (562,881) (612,890)
------------ ------------ ------------ ------------
Beneficial Interest Net increase (decrease) in net
Transactions assets derived from beneficial
(Note 4): interest transactions (1,767,011) (1,547,482) (491,496) 354,485
------------ ------------ ------------ ------------
Net Assets: Total increase (decrease) in
net assets (1,812,788) (1,412,552) (403,669) 490,287
Beginning of year 6,264,816 7,677,368 15,724,480 15,234,193
------------ ------------ ------------ ------------
End of year $ 4,452,028 $ 6,264,816 $ 15,320,811 $ 15,724,480
============ ============ ============ ============
See Notes to Financial Statements.
</TABLE>
J-13
<PAGE>
<TABLE>
STATEMENTS OF CHANGES IN NET ASSETS (concluded)
<CAPTION>
Florida Massachusetts
Limited Maturity Limited Maturity
For the Year Ended For the Year Ended
July 31, July 31,
Increase (Decrease) in Net Assets: 1996 1995 1996 1995
<S> <C> <C> <C> <C> <C>
Operations: Investment income--net $ 1,189,088 $ 1,343,126 $ 335,521 $ 505,228
Realized gain (loss) on
investments --net (1,278) (425,603) 18,219 (370,476)
Change in unrealized appreciation/
depreciation on investments--net (174,866) 839,494 (13,084) 274,970
------------ ------------ ------------ ------------
Net increase in net assets
resulting from operations 1,012,944 1,757,017 340,656 409,722
------------ ------------ ------------ ------------
Dividends & Investment income--net:
Distributions to Class A (361,872) (531,680) (118,129) (252,210)
Shareholders Class B (557,931) (756,233) (180,877) (242,775)
(Note 1f): Class C (522) (32) (14,474) (7,683)
Class D (268,763) (55,181) (22,041) (2,560)
Realized gain on investments
--net
Class A -- -- -- (7,555)
Class B -- -- -- (7,096)
Class C -- -- -- (476)
Class D -- -- -- (8)
------------ ------------ ------------ ------------
Net decrease in net assets
resulting from dividends and
distributions to shareholders (1,189,088) (1,343,126) (335,521) (520,363)
------------ ------------ ------------ ------------
Beneficial Interest Net decrease in net assets
Transactions derived from beneficial
(Note 4): interest transactions (5,075,030) (187,273) (2,526,578) (6,114,591)
------------ ------------ ------------ ------------
Net Assets: Total increase (decrease)
in net assets (5,251,174) 226,618 (2,521,443) (6,225,232)
(1,026,965) (793,586)
Beginning of year 33,273,259 33,046,641 9,917,613 16,142,845
------------ ------------ ------------ ------------
End of year $ 28,022,085 $ 33,273,259 $ 7,396,170 $ 9,917,613
============ ============ ============ ============
<CAPTION>
Michigan
Limited Maturity
For the Year Ended
July 31,
Increase (Decrease) in Net Assets: 1996 1995
<S> <C> <C> <C>
Operations: Investment income--net $ 182,546 $ 235,302
Realized gain (loss) on
investments--net 10,083 (132,641)
Change in unrealized appreciation/
depreciation on investments--net (23,665) 150,310
------------ ------------
Net increase in net assets
resulting from operations 168,964 252,971
------------ ------------
Dividends & Investment income--net:
Distributions to Class A (85,288) (123,016)
Shareholders Class B (80,829) (102,718)
(Note 1f): Class C (41) (33)
Class D (16,388) (9,535)
Realized gain on investments--net
Class A -- --
Class B -- --
Class C -- --
Class D -- --
------------ ------------
Net decrease in net assets
resulting from dividends and
distributions to shareholders (182,546) (235,302)
------------ ------------
Beneficial Interest Net decrease in net assets
Transactions derived from beneficial
(Note 4): interest transactions (1,013,383) (811,255)
------------ ------------
Net Assets: Total increase (decrease)
in net assets (1,026,965) (793,586)
Beginning of year 5,052,036 5,845,622
------------ ------------
End of year $ 4,025,071 $ 5,052,036
============ ============
<CAPTION>
New Jersey New York
Limited Maturity Limited Maturity
For the Year Ended For the Year Ended
July 31, July 31,
Increase (Decrease) in Net Assets: 1996 1995 1996 1995
<S> <C> <C> <C> <C> <C>
Operations: Investment income--net $ 365,818 $ 441,857 $ 671,149 $ 634,544
Realized gain (loss) on
investments--net (12,586) (190,903) 27,501 (166,770)
Change in unrealized appreciation/
depreciation on investments--net (41,469) 328,757 (22,206) 337,132
------------ ------------ ------------ ------------
Net increase in net assets
resulting from operations 311,763 579,711 676,444 804,906
------------ ------------ ------------ ------------
Dividends & Investment income--net:
Distributions to Class A (107,284) (147,854) (174,431) (247,259)
Shareholders Class B (241,855) (287,858) (381,150) (370,411)
(Note 1f): Class C (4,447) (761) (5,588) (219)
Class D (12,232) (5,384) (109,980) (16,655)
------------ ------------ ------------ ------------
Net decrease in net assets
resulting from dividends to
shareholders (365,818) (441,857) (671,149) (634,544)
------------ ------------ ------------ ------------
Beneficial Interest Net increase (decrease) in net
Transactions assets derived from beneficial
(Note 4): interest transactions (1,750,465) (3,524,093) 1,937,339 774,385
------------ ------------ ------------ ------------
Net Assets: Total increase (decrease) in
net assets (1,804,520) (3,386,239) 1,942,634 944,747
Beginning of year 10,431,607 13,817,846 15,977,490 15,032,743
------------ ------------ ------------ ------------
End of year $ 8,627,087 $ 10,431,607 $ 17,920,124 $ 15,977,490
============ ============ ============ ============
<CAPTION>
Pennsylvania
Limited Maturity
For the Year Ended
July 31,
Increase (Decrease) in Net Assets: 1996 1995
<S> <C> <C> <C>
Operations: Investment income--net $ 320,744 $ 385,356
Realized gain (loss) on
investments--net 364 (38,604)
Change in unrealized appreciation/
depreciation on investments--net 12,631 150,668
------------ ------------
Net increase in net assets
resulting from operations 333,739 497,420
------------ ------------
Dividends & Investment income--net:
Distributions to Class A (37,384) (43,161)
Shareholders Class B (254,375) (334,652)
(Note 1f): Class C (1,049) (32)
Class D (27,936) (7,511)
------------ ------------
J-14
<PAGE>
Net decrease in net assets
resulting from dividends to
shareholders. (320,744) (385,356)
------------ ------------
Beneficial Interest Net increase (decrease) in net
Transactions assets derived from beneficial
(Note 4): interest transactions 150,949 (1,893,824)
------------ ------------
Net Assets: Total increase (decrease) in
net assets 163,944 (1,781,760)
Beginning of year 8,740,557 10,522,317
------------ ------------
End of year $ 8,904,501 $ 8,740,557
============ ============
See Notes to Financial Statements.
</TABLE>
<TABLE>
FINANCIAL HIGHLIGHTS
<CAPTION>
Arizona Limited Maturity
Class A Class B
The following per share data For the For the
and ratios have been derived from Period Period
information provided in the For the Nov. 26, For the Nov. 26,
financial statements. Year Ended 1993++ to Year Ended 1993++ to
July 31, July 31, July 31, July 31,
Increase (Decrease) in Net Asset Value: 1996 1995 1994 1996 1995 1994
<S> <C> <C> <C> <C> <C> <C> <C>
Per Share Net asset value, beginning of period $ 10.17 $ 9.97 $ 10.00 $ 10.16 $ 9.97 $ 10.00
Operating ------- ------- ------- ------- ------- -------
Performance: Investment income--net .41 .43 .23 .37 .39 .20
Realized and unrealized gain (loss)
on investments--net (.09) .20 (.03) (.08) .19 (.03)
------- ------- ------- ------- ------- -------
Total from investment operations .32 .63 .20 .29 .58 .17
------- ------- ------- ------- ------- -------
Less dividends from investment
income--net (.41) (.43) (.23) (.37) (.39) (.20)
------- ------- ------- ------- ------- -------
Net asset value, end of period $ 10.08 $ 10.17 $ 9.97 $ 10.08 $ 10.16 $ 9.97
======= ======= ======= ======= ======= =======
Total Investment Based on net asset value per share 3.16% 6.47% 2.02%+++ 2.88% 5.99% 1.78%+++
Return:** ======= ======= ======= ======= ======= =======
Ratios to Average Expenses, net of reimbursement .74% .35% .02%* 1.09% .72% .38%*
Net Assets: ======= ======= ======= ======= ======= =======
Expenses 2.27% 2.05% 1.82%* 2.61% 2.44% 2.18%*
======= ======= ======= ======= ======= =======
Investment income--net 4.01% 4.31% 3.37%* 3.65% 3.95% 3.02%*
======= ======= ======= ======= ======= =======
Supplemental Net assets, end of period
Data: (in thousands) $ 813 $ 1,054 $ 2,103 $ 2,885 $ 5,191 $ 5,575
======= ======= ======= ======= ======= =======
Portfolio turnover 43.53% 182.58% 142.37% 43.53% 182.58% 142.37%
======= ======= ======= ======= ======= =======
<FN>
*Annualized.
**Total investment returns exclude the effects of sales loads.
++Commencement of Operations.
+++Aggregate total investment return.
</FN>
</TABLE>
See Notes to Financial Statements.
J-15
<PAGE>
<TABLE>
FINANCIAL HIGHLIGHTS (continued)
<CAPTION>
Arizona Limited Maturity
Class C Class D
The following per share data and For the For the
ratios have been derived from For the Period For the Period
information provided in the Year Oct. 21, Year Oct. 21,
financial statements. Ended 1994++ to Ended 1994++ to
July 31, July 31, July 31, July 31,
Increase (Decrease) in Net Asset Value: 1996 1995 1996 1995
<S> <C> <C> <C> <C> <C>
Per Share Net asset value, beginning of period $ 10.17 $ 9.89 $ 10.17 $ 9.89
Operating -------- -------- -------- --------
Performance: Investment income--net .37 .29 .40 .33
Realized and unrealized gain (loss)
on investments--net (.09) .28 (.09) .28
-------- -------- -------- --------
Total from investment operations .28 .57 .31 .61
-------- -------- -------- --------
Less dividends from investment
income--net (.37) (.29) (.40) (.33)
-------- -------- -------- --------
Net asset value, end of period $ 10.08 $ 10.17 $ 10.08 $ 10.17
======== ======== ======== ========
Total Investment Based on net asset value per share 2.78% 5.90%+++ 3.05% 6.34%+++
Return:** ======== ======== ======== ========
Ratios to Average Expenses, net of reimbursement 1.03% 1.05%* .90% .55%*
Net Assets: ======== ======== ======== ========
Expenses 2.80% 2.79%* 2.42% 2.39%*
======== ======== ======== ========
Investment income--net 3.86% 3.80%* 3.88% 4.31%*
======== ======== ======== ========
Supplemental Net assets, end of period
Data: (in thousands) $ 135 $ 1 $ 619 $ 19
======== ======== ======== ========
Portfolio turnover 43.53% 182.58% 43.53% 182.58%
======== ======== ======== ========
</TABLE>
<TABLE>
<CAPTION>
California Limited Maturity
Class A Class B
The following per share data and For the For the
ratios have been derived from Period Period
information provided in the For the Nov. 26, For the Nov. 26,
financial statements. Year Ended 1993++ to Year Ended 1993++ to
July 31, July 31, July 31, July 31,
Increase (Decrease) in Net Asset Value: 1996 1995 1994 1996 1995 1994
<S> <C> <C> <C> <C> <C> <C> <C>
Per Share Net asset value, beginning of period $ 9.99 $ 9.88 $ 10.00 $ 9.99 $ 9.88 $ 10.00
Operating ------- ------- ------- ------- ------- -------
Performance: Investment income--net .39 .42 .24 .36 .39 .21
Realized and unrealized gain (loss)
on investments--net .06 .11 (.12) .05 .11 (.12)
------- ------- ------- ------- ------- -------
Total from investment operations .45 .53 .12 .41 .50 .09
------- ------- ------- ------- ------- -------
Less dividends from investment
income--net (.39) (.42) (.24) (.36) (.39) (.21)
------- ------- ------- ------- ------- -------
Net asset value, end of period $ 10.05 $ 9.99 $ 9.88 $ 10.04 $ 9.99 $ 9.88
======= ======= ======= ======= ======= =======
Total Investment Based on net asset value per share 4.56% 5.60% 1.23%+++ 4.08% 5.23% .99%+++
Return:** ======= ======= ======= ======= ======= =======
Ratios to Average Expenses, net of reimbursement .94% .40% .02%* 1.30% .76% .38%*
Net Assets: ======= ======= ======= ======= ======= =======
Expenses 1.30% 1.44% 1.16%* 1.66% 1.80% 1.52%*
======= ======= ======= ======= ======= =======
Investment income--net 3.89% 4.36% 3.54%* 3.53% 4.00% 3.19%*
======= ======= ======= ======= ======= =======
J-16
<PAGE>
Supplemental Net assets, end of period
Data: (in thousands) $ 3,162 $ 3,527 $ 3,804 $ 9,919 $10,363 $11,430
======= ======= ======= ======= ======= =======
Portfolio turnover 11.09% 124.72% 130.10% 11.09% 124.72% 130.10%
======= ======= ======= ======= ======= =======
</TABLE>
<TABLE>
<CAPTION>
California Limited Maturity
Class C Class D
The following per share data For the For the
and ratios have been derived from For the Period For the Period
information provided in the Year Oct. 21, Year Oct. 21,
financial statements. Ended 1994++ to Ended 1994++ to
July 31, July 31, July 31, July 31,
Increase (Decrease) in Net Asset Value: 1996 1995 1996 1995
<S> <C> <C> <C> <C> <C>
Per Share Net asset value, beginning of period $ 9.99 $ 9.76 $ 9.99 $ 9.76
Operating -------- -------- -------- --------
Performance: Investment income--net .37 .31 .38 .33
Realized and unrealized gain on
investments--net .06 .23 .06 .23
-------- -------- -------- --------
Total from investment operations .43 .54 .44 .56
-------- -------- -------- --------
Less dividends from investment
income--net (.37) (.31) (.38) (.33)
-------- -------- -------- --------
Net asset value, end of period $ 10.05 $ 9.99 $ 10.05 $ 9.99
======== ======== ======== ========
Total Investment Based on net asset value per share 4.35% 5.60%+++ 4.46% 5.85%+++
Return:** ======== ======== ======== ========
Ratios to Average Expenses, net of reimbursement 1.14% .82%* 1.06% .66%*
Net Assets: ======== ======== ======== ========
Expenses 1.50% 1.98%* 1.40% 1.81%*
======== ======== ======== ========
Investment income--net 3.69% 4.04%* 3.77% 4.28%*
======== ======== ======== ========
Supplemental Net assets, end of period
Data: (in thousands) $ 55 $ 64 $ 2,185 $ 1,771
======== ======== ======== ========
Portfolio turnover 11.09% 124.72% 11.09% 124.72%
======== ======== ======== ========
<FN>
*Annualized.
**Total investment returns exclude the effects of sales loads.
++Commencement of Operations.
+++Aggregate total investment return.
</FN>
</TABLE>
See Notes to Financial Statements.
J-17
<PAGE>
<TABLE>
FINANCIAL HIGHLIGHTS (continued)
<CAPTION>
Florida Limited Maturity
Class A Class B
The following per share data and For the For the
ratios have been derived from Period Period
information provided in the For the Nov. 26, For the Nov. 26,
financial statements. Year Ended 1993++ to Year Ended 1993++ to
July 31, July 31, July 31, July 31,
Increase (Decrease) in Net Asset Value: 1996 1995 1994 1996 1995 1994
<S> <C> <C> <C> <C> <C> <C> <C>
Per Share Net asset value, beginning of period $ 10.02 $ 9.87 $ 10.00 $ 10.02 $ 9.88 $ 10.00
Operating ------- ------- ------- ------- ------- -------
Performance: Investment income--net .40 .43 .24 .37 .40 .21
Realized and unrealized gain (loss)
on investments--net (.06) .15 (.13) (.06) .14 (.12)
------- ------- ------- ------- ------- -------
Total from investment operations .34 .58 .11 .31 .54 .09
------- ------- ------- ------- ------- -------
Less dividends from investment
income--net (.40) (.43) (.24) (.37) (.40) (.21)
------- ------- ------- ------- ------- -------
Net asset value, end of period $ 9.96 $ 10.02 $ 9.87 $ 9.96 $ 10.02 $ 9.88
======= ======= ======= ======= ======= =======
Total Investment Based on net asset value per share 3.45% 6.05% 1.12%+++ 3.08% 5.57% .99%+++
Return:** ======= ======= ======= ======= ======= =======
Ratios to Average Expenses, net of reimbursement .89% .39% .02%* 1.24% .75% .38%*
Net Assets: ======= ======= ======= ======= ======= =======
Expenses .97% 1.03% .86%* 1.32% 1.38% 1.23%*
======= ======= ======= ======= ======= =======
Investment income--net 4.01% 4.39% 3.54%* 3.66% 4.05% 3.19%*
======= ======= ======= ======= ======= =======
Supplemental Net assets, end of period
Data: (in thousands) $ 7,874 $ 9,849 $14,868 $13,690 $16,213 $18,179
======= ======= ======= ======= ======= =======
Portfolio turnover 39.90% 138.97% 136.71% 39.90% 138.97% 136.71%
======= ======= ======= ======= ======= =======
</TABLE>
<TABLE>
<CAPTION>
Florida Limited Maturity
Class C Class D
The following per share data and For the For the
ratios have been derived from For the Period For the Period
information provided in the Year Oct. 21, Year Oct. 21,
financial statements. Ended 1994++ to Ended 1994++ to
July 31, July 31, July 31, July 31,
Increase (Decrease) in Net Asset Value: 1996 1995 1996 1995
<S> <C> <C> <C> <C> <C>
Per Share Net asset value, beginning of period $ 10.01 $ 9.76 $ 10.01 $ 9.76
Operating -------- -------- -------- --------
Performance: Investment income--net . .36 .29 .39 .33
Realized and unrealized gain (loss)
on investments --net (.11) .25 (.06) .25
-------- -------- -------- --------
Total from investment operations .25 .54 .33 .58
-------- -------- -------- --------
Less dividends from investment
income--net (.36) (.29) (.39) (.33)
-------- -------- -------- --------
Net asset value, end of period $ 9.90 $ 10.01 $ 9.95 $ 10.01
======== ======== ======== ========
Total Investment Based on net asset value per share 2.48% 5.65%+++ 3.35% 6.07%+++
Return:** ======== ======== ======== ========
Ratios to Average Expenses, net of reimbursement 1.21% 1.09%* .99% .67%*
Net Assets: ======== ======== ======== ========
Expenses 1.23% 1.67%* 1.07% 1.19%*
======== ======== ======== ========
Investment income--net 3.75% 3.83%* 3.91% 4.23%*
======== ======== ======== ========
J-18
<PAGE>
Supplemental Net assets, end of period
Data: (in thousands) $ 52 $ 1 $ 6,406 $ 7,210
======== ======== ======== ========
Portfolio turnover 39.90% 138.97% 39.90% 138.97%
======== ======== ======== ========
</TABLE>
<TABLE>
<CAPTION>
Massachusetts Limited Maturity
Class A Class B
The following per share data and For the For the
ratios have been derived from Period Period
information provided in the For the Nov. 26, For the Nov. 26,
financial statements. Year Ended 1993++ to Year Ended 1993++ to
July 31, July 31, July 31, July 31,
Increase (Decrease) in Net Asset Value: 1996 1995 1994 1996 1995 1994
<S> <C> <C> <C> <C> <C> <C> <C>
Per Share Net asset value, beginning of period $ 9.96 $ 9.95 $ 10.00 $ 9.96 $ 9.95 $ 10.00
Operating ------- ------- ------- ------- ------- -------
Performance: Investment income--net .40 .44 .25 .37 .40 .22
Realized and unrealized gain (loss)
on investments--net -- .02 (.05) -- .02 (.05)
------- ------- ------- ------- ------- -------
Total from investment operations .40 .46 .20 .37 .42 .17
------- ------- ------- ------- ------- -------
Less dividends and distributions:
Investment income--net (.40) (.44) (.25) (.37) (.40) (.22)
Realized gain on investments--net -- (.01) -- -- (.01) --
------- ------- ------- ------- ------- -------
Total dividends and distributions (.40) (.45) (.25) (.37) (.41) (.22)
------- ------- ------- ------- ------- -------
Net asset value, end of period $ 9.96 $ 9.96 $ 9.95 $ 9.96 $ 9.96 $ 9.95
======= ======= ======= ======= ======= =======
Total Investment Based on net asset value per share 4.08% 4.79% 2.01%+++ 3.70% 4.41% 1.77%+++
Return:** ======= ======= ======= ======= ======= =======
Ratios to Average Expenses, net of reimbursement .77% .37% .03%* 1.16% .74% .38%*
Net Assets: ======= ======= ======= ======= ======= =======
Expenses 2.15% 1.71% 1.17%* 2.61% 2.08% 1.54%*
======= ======= ======= ======= ======= =======
Investment income--net 4.04% 4.45% 3.69%* 3.66% 4.08% 3.28%*
======= ======= ======= ======= ======= =======
Supplemental Net assets, end of period
Data: (in thousands) $ 1,719 $ 4,453 $ 8,097 $ 4,577 $ 4,800 $ 8,046
======= ======= ======= ======= ======= =======
Portfolio turnover 22.71% 89.96% 57.80% 22.71% 89.96% 57.80%
======= ======= ======= ======= ======= =======
<FN>
*Annualized.
**Total investment returns exclude the effects of sales loads.
++Commencement of Operations.
+++Aggregate total investment return.
</FN>
</TABLE>
See Notes to Financial Statements.
J-19
<PAGE>
MERRILL LYNCH MULTI-STATE LIMITED MATURITY MUNICIPAL TRUST, JULY 31, 1996
<TABLE>
FINANCIAL HIGHLIGHTS (continued)
<CAPTION>
Massachusetts Limited Maturity
Class C Class D
The following per share data and For the For the
ratios have been derived from For the Period For the Period
information provided in the Year Oct. 21, Year Oct. 21,
financial statements. Ended 1994++ to Ended 1994++ to
July 31, July 31, July 31, July 31,
Increase (Decrease) in Net Asset Value: 1996 1995 1996 1995
<S> <C> <C> <C> <C> <C>
Per Share Net asset value, beginning of period $ 9.96 $ 9.82 $ 9.96 $ 9.82
Operating -------- -------- -------- --------
Performance: Investment income--net .39 .33 .39 .34
Realized and unrealized gain (loss)
on investments--net (.01) .15 -- .15
-------- -------- -------- --------
Total from investment operations .38 .48 .39 .49
-------- -------- -------- --------
Less dividends and distributions:
Investment income--net (.39) (.33) (.39) (.34)
Realized gain on investments
--net -- (.01) -- (.01)
-------- -------- -------- --------
Total dividends and distributions (.39) (.34) (.39) (.35)
-------- -------- -------- --------
Net asset value, end of period $ 9.95 $ 9.96 $ 9.96 $ 9.96
======== ======== ======== ========
Total Investment Based on net asset value per
Return:** share 3.81% 5.00%+++ 3.97% 5.09%+++
======== ======== ======== ========
Ratios to Average Expenses, net of reimbursement .94% .67%* .93% .70%*
Net Assets: ======== ======== ======== ========
Expenses 2.37% 2.23%* 2.42% 2.31%*
======== ======== ======== ========
Investment income--net 3.88% 4.32%* 3.89% 4.21%*
======== ======== ======== ========
Supplemental Net assets, end of period
Data: (in thousands) $ 210 $ 413 $ 890 $ 253
======== ======== ======== ========
Portfolio turnover 22.71% 89.96% 22.71% 89.96%
======== ======== ======== ========
</TABLE>
<TABLE>
<CAPTION>
Michigan Limited Maturity
Class A Class B
The following per share data and For the For the
ratios have been derived from Period Period
information provided in the For the Nov. 26, For the Nov. 26,
financial statements. Year Ended 1993++ to Year Ended 1993++ to
July 31, July 31, July 31, July 31,
Increase (Decrease) in Net Asset Value: 1996 1995 1994 1996 1995 1994
<S> <C> <C> <C> <C> <C> <C> <C>
Per Share Net asset value, beginning of period $ 9.98 $ 9.92 $ 10.00 $ 9.98 $ 9.92 $ 10.00
Operating ------- ------- ------- ------- ------- -------
Performance: Investment income--net .41 .44 .24 .37 .40 .22
Realized and unrealized gain (loss)
on investments--net (.04) .06 (.08) (.04) .06 (.08)
------- ------- -------- ------- ------- -------
Total from investment operations .37 .50 .16 .33 .46 .14
------- ------- ------- ------- ------- -------
Less dividends from investment
income--net (.41) (.44) (.24) (.37) (.40) (.22)
------- ------- ------- ------- ------- -------
Net asset value, end of period $ 9.94 $ 9.98 $ 9.92 $ 9.94 $ 9.98 $ 9.92
======= ======= ======= ======= ======= =======
Total Investment Based on net asset value per share 3.71% 5.16% 1.66%+++ 3.32% 4.78% 1.42%+++
Return:** ======= ======= ======= ======= ======= =======
Ratios to Average Expenses, net of reimbursement .74% .27% .02%* 1.10% .65% .38%*
Net Assets ======= ======= ======= ======= ======= =======
Expenses 2.78% 2.18% 2.01%* 3.14% 2.56% 2.38%*
======= ======= ======= ======= ======= =======
J-20
<PAGE>
Investment income--net 4.06% 4.42% 3.59%* 3.70% 4.09% 3.21%*
======= ======= ======= ======= ======= =======
Supplemental Net assets, end of period
Data: (in thousands) $ 1,641 $ 2,302 $ 3,435 $ 1,842 $ 2,494 $ 2,411
======= ======= ======= ======= ======= =======
Portfolio turnover 32.92% 93.08% 204.15% 32.92% 93.08% 204.15%
======= ======= ======= ======= ======= =======
</TABLE>
<TABLE>
<CAPTION>
Michigan Limited Maturity
Class C Class D
For the For the
The following per share data and ratios For the Period For the Period
have been derived from information Year Oct. 21, Year Oct. 21
provided in the financial statements. Ended 1994++ to Ended 1994++ to
July 31, July 31, July 31, July 31,
Increase (Decrease) in Net Asset Value: 1996 1995 1996 1995
<S> <C> <C> <C> <C> <C>
Per Share Net asset value, beginning of period $ 9.98 $ 9.76 $ 9.97 $ 9.76
Operating -------- -------- -------- --------
Performance: Investment income--net . .36 .30 .40 .34
Realized and unrealized gain (loss)
on investments--net (.04) .22 (.03) .21
-------- -------- -------- --------
Total from investment operations .32 .52 .37 .55
-------- -------- -------- --------
Less dividends from investment
income--net (.36) (.30) (.40) (.34)
-------- -------- -------- --------
Net asset value, end of period $ 9.94 $ 9.98 $ 9.94 $ 9.97
======== ======== ======== ========
Total Investment Based on net asset value per share 3.20% 5.40%+++ 3.71% 5.72%+++
Return:** ======== ======== ======== ========
Ratios to Average Expenses, net of reimbursement 1.24% .96%* .87% .44%*
Net Assets: ======== ======== ======== ========
Expenses 3.31% 2.90%* 3.06% 2.38%*
======== ======== ======== ========
Investment income--net 3.57% 3.80%* 3.94% 4.47%*
======== ======== ======== ========
Supplemental Net assets, end of period
Data: (in thousands) $ 1 $ 1 $ 541 $ 254
======== ======== ======== ========
Portfolio turnover 32.92% 93.08% 32.92% 93.08%
======== ======== ======== ========
<FN>
*Annualized.
**Total investment returns exclude the effects of sales loads.
++Commencement of Operations.
+++Aggregate total investment return.
</FN>
</TABLE>
See Notes to Financial Statements.
J-21
<PAGE>
MERRILL LYNCH MULTI-STATE LIMITED MATURITY MUNICIPAL TRUST, JULY 31, 1996
<TABLE>
FINANCIAL HIGHLIGHTS (continued)
<CAPTION>
New Jersey Limited Maturity
Class A Class B
The following per share data and For the For the
ratios have been derived from Period Period
information provided in the For the Nov. 26, For the Nov. 26,
financial statements. Year Ended 1993++ to Year Ended 1993++ to
July 31, July 31, July 31, July 31,
Increase (Decrease) in Net Asset Value: 1996 1995 1994 1996 1995 1994
<S> <C> <C> <C> <C> <C> <C> <C>
Per Share Net asset value, beginning of period $ 10.15 $ 9.94 $ 10.00 $ 10.16 $ 9.95 $ 10.00
Operating ------- ------- ------- ------- ------- -------
Performance: Investment income--net .41 .42 .23 .37 .38 .20
Realized and unrealized gain (loss)
on investments--net (.04) .21 (.06) (.05) .21 (.05)
------- ------- ------- ------- ------- -------
Total from investment operations .37 .63 .17 .32 .59 .15
------- ------- ------- ------- ------- -------
Less dividends from investment
income--net (.41) (.42) (.23) (.37) (.38) (.20)
------- ------- ------- ------- ------- -------
Net asset value, end of period $ 10.11 $ 10.15 $ 9.94 $ 10.11 $ 10.16 $ 9.95
======= ======= ======= ======= ======= =======
Total Investment Based on net asset value per share 3.68% 6.45% 1.73%+++ 3.21% 6.07% 1.59%+++
Return:** ======= ======= ======= ======= ======= =======
Ratios to Average Expenses, net of reimbursement .76% .34% .03%* 1.10% .73% .38%*
Net Assets: ======= ======= ======= ======= ======= =======
Expenses 1.78% 1.69% 1.14%* 2.12% 2.15% 1.52%*
======= ======= ======= ======= ======= =======
Investment income--net 4.02% 4.10% 3.45%* 3.67% 3.80% 3.04%*
======= ======= ======= ======= ======= =======
Supplemental Net assets, end of period
Data: (in thousands) $ 2,663 $ 2,401 $ 5,933 $ 5,152 $ 7,593 $ 7,885
======= ======= ======= ======= ======= =======
Portfolio turnover 6.57% 131.56% 205.04% 6.57% 131.56% 205.04%
======= ======= ======= ======= ======= =======
</TABLE>
<TABLE>
<CAPTION>
New Jersey Limited Maturity
Class C Class D
The following per share data For the For the
and ratios have been derived For the Period For the Period
from information provided in the Year Oct. 21, Year Oct. 21,
financial statements. Ended 1994++ to Ended 1994++ to
July 31, July 31, July 31, July 31,
Increase (Decrease) in Net Asset Value: 1996 1995 1996 1995
<S> <C> <C> <C> <C> <C>
Per Share Net asset value, beginning of period $ 9.20 $ 9.86 $ 10.16 $ 9.85
Operating -------- -------- -------- --------
Performance: Investment income--net . .34 .26 .40 .32
Realized and unrealized gain (loss)
on investments--net (.04) (.66) (.05) .31
-------- -------- -------- --------
Total from investment operations .30 (.40) .35 .63
-------- -------- -------- --------
Less dividends from investment
income--net (.34) (.26) (.40) (.32)
-------- -------- -------- --------
Net asset value, end of period $ 9.16 $ 9.20 $ 10.11 $ 10.16
======== ======== ======== ========
Total Investment Based on net asset value per share 3.24% (4.01%)+++ 3.48% 6.51%+++
Return:** ======== ======== ======== ========
Ratios to Average Expenses, net of reimbursement 1.00% .55%* .84% .62%*
Net Assets: ======== ======== ======== ========
Expenses 2.04% 2.22%* 1.86% 2.07%*
======== ======== ======== ========
Investment income--net 3.82% 4.06%* 3.93% 4.17%*
======== ======== ======== ========
J-22
<PAGE>
Supplemental Net assets, end of period
Data: (in thousands) $ 272 $ 1 $ 540 $ 437
======== ======== ======== ========
Portfolio turnover 6.57% 131.56% 6.57% 131.56%
======== ======== ======== ========
</TABLE>
<TABLE>
<CAPTION>
New York Limited Maturity
Class A Class B
For the For the
The following per share data and ratios Period Period
have been derived from information For the Nov. 26, For the Nov. 26,
provided in the financial statements. Year Ended 1993++ to Year Ended 1993++ to
July 31, July 31, July 31, July 31,
Increase (Decrease) in Net Asset Value: 1996 1995 1994 1996 1995 1994
<S> <C> <C> <C> <C> <C> <C> <C>
Per Share Net asset value, beginning of period $ 10.05 $ 9.91 $ 10.00 $ 10.05 $ 9.91 $ 10.00
Operating ------- ------- ------- ------- ------- -------
Performance: Investment income--net .43 .44 .25 .40 .41 .22
Realized and unrealized gain (loss)
on investments--net .01 .14 (.09) .01 .14 (.09)
------- ------- ------- ------- ------- -------
Total from investment operations .44 .58 .16 .41 .55 .13
------- ------- ------- ------- ------- -------
Less dividends from investment
income--net (.43) (.44) (.25) (.40) (.41) (.22)
------- ------- ------- ------- ------- -------
Net asset value, end of period $ 10.06 $ 10.05 $ 9.91 $ 10.06 $ 10.05 $ 9.91
======= ======= ======= ======= ======= =======
Total Investment Based on net asset value per share 4.46% 6.03% 1.61%+++ 4.08% 5.66% 1.37%+++
Return:** ======= ======= ======= ======= ======= =======
Ratios to Average Expenses, net of reimbursement .50% .33% .03%* .87% .69% .38%*
Net Assets: ======= ======= ======= ======= ======= =======
Expenses 1.38% 1.30% 1.24%* 1.75% 1.65% 1.60%*
======= ======= ======= ======= ======= =======
Investment income--net 4.28% 4.49% 3.68%* 3.91% 4.11% 3.31%*
======= ======= ======= ======= ======= =======
Supplemental Net assets, end of period
Data: (in thousands) $ 3,723 $ 4,811 $ 5,290 $10,071 $ 8,822 $ 9,743
======= ======= ======= ======= ======= =======
Portfolio turnover 51.47% 139.16% 152.73% 51.47% 139.16% 152.73%
======= ======= ======= ======= ======= =======
<FN>
*Annualized.
**Total investment returns exclude the effects of sales loads.
++Commencement of Operations.
+++Aggregate total investment return.
</FN>
</TABLE>
See Notes to Financial Statements.
J-23
<PAGE>
MERRILL LYNCH MULTI-STATE LIMITED MATURITY MUNICIPAL TRUST, JULY 31, 1996
<TABLE>
FINANCIAL HIGHLIGHTS (concluded)
<CAPTION>
New York Limited Maturity
Class C Class D
The following per share data and For the For the
ratios have been derived from For the Period For the Period
information provided in the financial Year Oct. 21, Year Oct. 21,
statements. Ended 1994++ to Ended 1994++ to
July 31, July 31, July 31, July 31,
Increase (Decrease) in Net Asset Value: 1996 1995 1996 1995
<S> <C> <C> <C> <C> <C>
Per Share Net asset value, beginning of period $ 10.05 $ 9.78 $ 10.05 $ 9.78
Operating -------- -------- -------- --------
Performance: Investment income--net . .42 .30 .42 .34
Realized and unrealized gain on
investments--net .01 .27 .01 .27
-------- -------- -------- --------
Total from investment operations .43 .57 .43 .61
-------- -------- -------- --------
Less dividends from investment
income--net (.42) (.30) (.42) (.34)
-------- -------- -------- --------
Net asset value, end of period $ 10.06 $ 10.05 $ 10.06 $ 10.05
======== ======== ======== ========
Total Investment Based on net asset value per share 4.28% 5.97%+++ 4.35% 6.37%+++
Return:** ======== ======== ======== ========
Ratios to Average Expenses, net of reimbursement .71% .63%* .62% .48%*
Net Assets: ======== ======== ======== ========
Expenses 1.59% 1.63%* 1.49% 1.48%*
======== ======== ======== ========
Investment income--net 4.06% 4.21%* 4.16% 4.47%*
======== ======== ======== ========
Supplemental Net assets, end of period
Data: (in thousands) $ 214 $ 38 $ 3,912 $ 2,306
======== ======== ======== ========
Portfolio turnover 51.47% 139.16% 51.47% 139.16%
======== ======== ======== ========
</TABLE>
<TABLE>
Pennsylvania Limited Maturity
<CAPTION>
Class A Class B
The following per share data and For the For the
ratios have been derived from Period Period
information provided in the For the Nov. 26, For the Nov. 26,
financial statements. Year Ended 1993++ to Year Ended 1993++ to
July 31, July 31, July 31, July 31,
Increase (Decrease) in Net Asset Value: 1996 1995 1994 1996 1995 1994
<S> <C> <C> <C> <C> <C> <C> <C>
Per Share Net asset value, beginning of period $ 10.10 $ 9.95 $ 10.00 $ 10.10 $ 9.95 $ 10.00
Operating ------- ------- ------- ------- ------- -------
Performance: Investment income--net .41 .42 .23 .37 .39 .21
Realized and unrealized gain (loss)
on investments--net .01 .15 (.05) .01 .15 (.05)
------- ------- ------- ------- ------- -------
Total from investment operations .42 .57 .18 .38 .54 .16
------- ------- ------- ------- ------- -------
Less dividends from investment
income--net (.41) (.42) (.23) (.37) (.39) (.21)
------- ------- ------- ------- ------- -------
Net asset value, end of period $ 10.11 $ 10.10 $ 9.95 $ 10.11 $ 10.10 $ 9.95
======= ======= ======= ======= ======= =======
Total Investment Based on net asset value per share 4.18% 5.89% 1.85%+++ 3.80% 5.51% 1.61%+++
Return:** ======= ======= ======= ======= ======= =======
Ratios to Average Expenses, net of reimbursement .80% .38% .02%* 1.15% .73% .38%*
Net Assets: ======= ======= ======= ======= ======= =======
Expenses 1.63% 1.90% 1.48%* 1.99% 2.25% 1.83%*
======= ======= ======= ======= ======= =======
Investment income--net 4.01% 4.25% 3.46%* 3.65% 3.87% 3.05%*
======= ======= ======= ======= ======= =======
J-24
<PAGE>
Supplemental Net assets, end of period
Data: (in thousands) $ 833 $ 943 $ 990 $ 6,264 $ 7,414 $ 9,532
======= ======= ======= ======= ======= =======
Portfolio turnover 30.90% 141.52% 237.47% 30.90% 141.52% 237.47%
======= ======= ======= ======= ======= =======
</TABLE>
<TABLE>
<CAPTION>
Pennsylvania Limited Maturity
Class C Class D
For the For the
The following per share data and ratios For the Period For the Period
have been derived from information Year Oct. 21, Year Oct. 21
provided in the financial statements Ended 1994++ to Ended 1994++ to
July 31, July 31, July 31, July 31,
Increase (Decrease) in Net Asset Value: 1996 1995 1996 1995
<S> <C> <C> <C> <C> <C>
Per Share Net asset value, beginning of period $ 10.10 $ 9.84 $ 10.10 $ 9.84
Operating -------- -------- -------- --------
Performance: Investment income--net . .38 .29 .40 .33
Realized and unrealized gain on
investments--net .05 .26 .01 .26
-------- -------- -------- --------
Total from investment operations .43 .55 .41 .59
-------- -------- -------- --------
Less dividends from investment
income--net (.38) (.29) (.40) (.33)
-------- -------- -------- --------
Net asset value, end of period $ 10.15 $ 10.10 $ 10.11 $ 10.10
======== ======== ======== ========
Total Investment Based on net asset value per share 4.28% 5.68%+++ 4.07% 6.10%+++
Return:** ======== ======== ======== ========
Ratios to Average Expenses, net of reimbursement .97% 1.05%* .96% .57%*
Net Assets: ======== ======== ======== ========
Expenses 1.83% 2.55%* 1.71% 2.08%*
======== ======== ======== ========
Investment income--net 3.84% 3.77%* 3.84% 4.30%*
======== ======== ======== ========
Supplemental Net assets, end of period
Data: (in thousands) $ 1 $ 1 $ 1,807 $ 382
======== ======== ======== ========
Portfolio turnover 30.90% 141.52% 30.90% 141.52%
======== ======== ======== ========
<FN>
*Annualized.
**Total investment returns exclude the effects of sales loads.
++Commencement of Operations.
+++Aggregate total investment return.
</FN>
</TABLE>
See Notes to Financial Statements.
J-25
<PAGE>
MERRILL LYNCH MULTI-STATE LIMITED MATURITY MUNICIPAL TRUST, JULY 31, 1996
NOTES TO FINANCIAL STATEMENTS
1. Significant Accounting Policies:
Merrill Lynch Multi-State Limited Maturity Municipal Series Trust (the "Trust")
is registered under the Investment Company Act of 1940 as a non-diversified,
open-end management investment company consisting of eight separate series:
Merrill Lynch Arizona Limited Maturity Municipal Bond Fund, Merrill Lynch
California Limited Maturity Municipal Bond Fund, Merrill Lynch Florida Limited
Maturity Municipal Bond Fund, Merrill Lynch Massachusetts Limited Maturity
Municipal Bond Fund, Merrill Lynch Michigan Limited Maturity Municipal Bond
Fund, Merrill Lynch New Jersey Limited Maturity Municipal Bond Fund, Merrill
Lynch New York Limited Maturity Municipal Bond Fund, and Merrill Lynch
Pennsylvania Limited Maturity Municipal Bond Fund. Each series of the Trust is
referred to herein as a "Fund." The Trust offers four classes of shares under
the Merrill Lynch Select Pricing SM System. Shares of Class A and Class D are
sold with a front-end sales charge. Shares of Class B and Class C may be subject
to a contingent deferred sales charge. All classes of shares have identical
voting, dividend, liquidation and other rights and the same terms and
conditions, except that Class B, Class C and Class D Shares bear certain
expenses related to the account maintenance of such shares, and Class B and
Class C Shares also bear certain expenses related to the distribution of such
shares. Each class has exclusive voting rights with respect to matters relating
to its account maintenance and distribution expenditures. The following is a
summary of significant accounting policies followed by the Trust.
(a) Valuation of investments--Municipal bonds and other portfolio securities in
which the Funds invest are traded primarily in the over-the-counter municipal
bond and money markets and are valued at the last available bid price in the
over-the-counter market or on the basis of yield equivalents as obtained from
one or more dealers that make markets in the securities. Financial futures
contracts and options thereon, which are traded on exchanges, are valued at
their settlement prices as of the close of such exchanges. Short-term
investments with remaining maturities of sixty days or less are valued at
amortized cost, which approximates market value. Securities and assets for which
market quotations are not readily available are valued at fair value as
determined in good faith by or under the direction of the Board of Trustees of
the Trust, including valuations furnished by a pricing service retained by the
Trust, which may utilize a matrix system for valuations. The procedures of the
pricing service and its valuations are reviewed by the officers of the Trust
under the general supervision of the Trustees.
(b) Derivative financial instruments--The Fund may engage in various portfolio
strategies to seek to increase its return by hedging its portfolio against
adverse movements in the debt markets. Losses may arise due to changes in the
value of the contract or if the counterparty does not perform under the
contract.
*Financial futures contracts--The Funds may purchase or sell interest rate
futures contracts and options on such futures contracts for the purpose of
hedging the market risk on existing securities or the intended purchase of
securities. Futures contracts are contracts for delayed delivery of securities
at a specific future date and at a specific price or yield. Upon entering into a
contract, the Fund deposits and maintains as collateral such initial margin as
required by the exchange on which the transaction is effected. Pursuant to the
contract, the Fund agrees to receive from or pay to the broker an amount of cash
equal to the daily fluctuation in value of the contract. Such receipts or
payments are known as variation margin and are recorded by the Fund as
unrealized gains or losses. When the contract is closed, the Fund records a
realized gain or loss equal to the difference between the value of the contract
at the time it was opened and the value at the time it was closed.
(c) Income taxes--It is each Fund's policy to comply with the requirements of
the Internal Revenue Code applicable to regulated investment companies and to
distribute substantially all of its taxable income to its shareholders.
Therefore, no Federal income tax provision is required.
(d) Security transactions and investment income--Security transactions are
recorded on the dates the transactions are entered into (the trade dates).
Interest income is recognized on the accrual basis. Discounts and market
premiums are amortized into interest income. Realized gains and losses on
security transactions are determined on the identified cost basis.
(e) Deferred organization expenses and prepaid registration fees--Deferred
organization expenses are charged to expense on a straight-line basis over a
five-year period beginning with commencement of operations. Prepaid registration
fees are charged to expense as the related shares are issued.
(f) Dividends and distributions--Dividends from net investment income are
declared daily and paid monthly. Distributions of capital gains are recorded on
the ex-dividend dates.
2. Investment Advisory Agreement and Transactions with Affiliates: The Trust has
entered into an Investment Advisory Agreement with Fund Asset Management, L.P.
("FAM"). The general partner of FAM is Princeton Services, Inc. ("PSI"), an
indirect wholly-owned subsidiary of Merrill Lynch & Co., Inc. ("ML & Co."),
which is the limited partner. The Trust has also entered into a Distribution
Agreement and Distribution Plans with Merrill Lynch Funds Distributor, Inc.
("MLFD" or "Distributor"), a wholly-owned subsidiary of Merrill Lynch Group,
Inc.
FAM is responsible for the management of each Fund's portfolio and provides the
necessary personnel, facilities, equipment and certain other services necessary
to the operations of each Fund. For such services, each Fund pays a monthly fee
at the annual rate of 0.35% of each Fund's average daily net assets. The
Investment Advisory Agreement obligates FAM to reimburse each Fund to the extent
each Fund's expenses (excluding interest, taxes, distribution fees, brokerage
fees and commissions, and extraordinary items) exceed 2.5% of the Fund's first
$30 million of average daily net assets, 2.0% of the next $70 million of average
daily net assets and 1.5% of the average daily net assets in excess thereof.
FAM's obligation to reimburse each Fund is limited to the amount of the
management fee. No fee payment will be made during any fiscal year which will
cause such expenses to exceed expense limitations at the time of such payment.
J-26
<PAGE>
For the year ended July 31, 1996, FAM had voluntarily waived management fees
and reimbursed each Fund for additional expenses as follows:
Arizona California Florida
Limited Limited Limited
Maturity Maturity Maturity
Management fee $21,459 $54,033 $24,123
Additional expenses 72,197 464 --
Massachusetts Michigan New Jersey
Limited Limited Limited
Maturity Maturity Maturity
Management fee $30,736 $16,413 $33,770
Additional expenses 95,278 80,119 64,944
New York Pennsylvania
Limited Maturity Limited Maturity
Management fee $57,995 $30,196
Additional expenses 88,295 41,308
Pursuant to the distribution plans (the "Distribution Plans") adopted by the
Trust in accordance with Rule 12b-1 under the Investment Company Act of 1940,
the Fund pays the Distributor ongoing account maintenance and distribution fees.
The Distributor voluntarily did not collect any Class C distribution fees for
the year ended July 31, 1996. The fees are accrued daily and paid monthly at
annual rates based upon the average daily net assets of the shares as follows:
Account Maintenance Fee Distribution Fee
Class B 0.15% 0.20%
Class C 0.15% 0.20%
Class D 0.10% --
Pursuant to a sub-agreement with the Distributor, Merrill Lynch, Pierce, Fenner
& Smith Inc. ("MLPF&S"), a subsidiary of ML & Co., also provides account
maintenance and distribution services to the Trust. The ongoing account
maintenance fee compensates the Distributor and MLPF&S for providing account
maintenance services to Class B, Class C and Class D shareholders. The ongoing
distribution fee compensates the Distributor and MLPF&S for providing
shareholder and distribution-related services to Class B and Class C
shareholders.
For the year ended July 31, 1996, MLFD earned underwriting discounts and MLPF&S
earned dealer concessions on sales of the Fund's Class A and Class D Shares as
follows:
Arizona California Florida Massachusetts
Limited Limited Limited Limited
Maturity Maturity Maturity Maturity
Class A:
MLFD $ 17 $ 67 $ 22 $ 93
MLPF&S 446 513 475 871
Class D:
MLFD $ 14 $ 299 $ 373 $ 298
MLPF&S 227 2,849 2,570 3,089
Michigan New Jersey New York Pennsylvania
Limited Limited Limited Limited
Maturity Maturity Maturity Maturity
Class A:
MLFD $ 4 $ 2 $ 1 --
MLPF&S 98 237 33 $ 5
Class D:
MLFD $ 59 $ 31 $ 476 $ 14
MLPF&S 420 1,097 4,314 519
MLPF&S received contingent deferred sales charges relating to transactions in
Class B Shares of beneficial interest as follows:
Class B
Shares
Arizona Limited Maturity $10,222
California Limited Maturity 3,456
Florida Limited Maturity 18,456
Massachusetts Limited Maturity 4,849
Michigan Limited Maturity 6,724
New Jersey Limited Maturity 8,141
New York Limited Maturity 6,475
Pennsylvania Limited Maturity 3,775
Merrill Lynch Financial Data Services, Inc. ("MLFDS"), a wholly-owned
subsidiary of ML & Co., is the Trust's transfer agent.
Accounting services are provided to the Trust by FAM at cost.
Certain officers and/or trustees of the Trust are officers and/or directors of
FAM, PSI, MLPF&S, MLFD, MLFDS, and/or ML & Co.
3. Investments: Purchases and sales of investments, excluding short-term
securities, for the year ended July 31, 1996 were as follows:
Purchases Sales
Arizona Limited Maturity $ 1,965,889 $ 2,436,738
California Limited Maturity 3,066,927 1,317,493
Florida Limited Maturity 10,307,012 10,835,712
Massachusetts Limited Maturity 1,610,060 3,817,465
Michigan Limited Maturity 1,291,375 1,370,658
New Jersey Limited Maturity 452,439 647,468
New York Limited Maturity 10,824,437 6,698,374
Pennsylvania Limited Maturity 2,033,165 2,014,355
Net realized and unrealized gains (losses) as of July 31, 1996 were
as follows:
Realized Unrealized
Arizona Limited Maturity Gains (Losses) Gains
Long-term investments $ 1,540 $ 144,631
Short-term investments 11 --
Financial futures contracts (2,242) --
--------- ---------
Total $ (691) $ 144,631
========= =========
J-27
<PAGE>
MERRILL LYNCH MULTI-STATE LIMITED MATURITY MUNICIPAL TRUST, JULY 31, 1996
NOTES TO FINANCIAL STATEMENTS (continued)
Realized Unrealized
California Limited Maturity Gains (Losses) Gains
Long-term investments $ (10,233) $ 557,847
Short-term investments 960 --
Financial futures contracts (5,233) --
--------- ---------
Total $ (14,506) $ 557,847
========= =========
Realized Unrealized
Florida Limited Maturity Gains (Losses) Gains
Long-term investments $ 9,277 $ 597,062
Short-term investments 658 9
Financial futures contracts (11,213) --
--------- ---------
Total $ (1,278) $ 597,071
========= =========
Realized Unrealized
Massachusetts Limited Maturity Gains (Losses) Gains
Long-term investments $ 21,469 $ 179,504
Financial futures contracts (3,250) --
--------- ---------
Total $ 18,219 $ 179,504
========= =========
Realized Unrealized
Michigan Limited Maturity Gains (Losses) Gains
Long-term investments $ 9,749 $ 124,657
Short-term investments 1,954 --
Financial futures contracts (1,620) --
--------- ---------
Total $ 10,083 $ 124,657
========= =========
Realized Unrealized
New Jersey Limited Maturity Gains (Losses) Gains
Long-term investments $ (9,159) $ 291,589
Short-term investments 218 --
Financial futures contracts (3,645) --
--------- ---------
Total $ (12,586) $ 291,589
========= =========
Realized Unrealized
New York Limited Maturity Gains (Losses) Gains
Long-term investments $ 33,981 $ 324,626
Financial futures contracts (6,480) --
--------- ---------
Total $ 27,501 $ 324,626
========= =========
Realized Unrealized
Pennsylvania Limited Maturity Gains (Losses) Gains
Long-term investments $ 3,604 $ 160,822
Financial futures contracts (3,240) --
--------- ---------
Total $ 364 $ 160,822
========= =========
As of July 31, 1996, net unrealized appreciation and the aggregate
cost of investments for Federal income tax purposes were as follows:
Limited Gross Gross Net Aggregate
Maturity Unrealized Unrealized Unrealized Cost of
Fund Appreciation Depreciation Appreciation Investments
Arizona $144,631 -- $144,631 $ 3,992,244
California 535,204 -- 535,204 14,560,877
Florida 618,787 $ (21,716) 597,071 26,691,374
Massachusetts 183,699 (4,195) 179,504 7,011,474
Michigan 109,879 (101) 109,778 3,785,548
New Jersey 291,589 -- 291,589 8,321,598
New York 324,626 -- 324,626 17,665,641
Pennsylvania 161,811 (989) 160,822 8,237,456
4. Beneficial Interest Transactions:
Net increase (decrease) in net assets derived from beneficial interest
transactions for the years ended July 31, 1996 and July 31, 1995 were as
follows:
Increase (Decrease) in For the Year Ended July 31,
Beneficial Interest Transactions 1996 1995
Arizona Limited Maturity $ (1,767,011) $ (1,547,482)
California Limited Maturity (491,496) 354,485
Florida Limited Maturity (5,075,030) (187,273)
Massachusetts Limited Maturity (2,526,578) (6,114,591)
Michigan Limited Maturity (1,013,383) (811,255)
New Jersey Limited Maturity (1,750,465) (3,524,093)
New York Limited Maturity 1,937,339 774,385
Pennsylvania Limited Maturity 150,949 (1,893,824)
Transactions in shares of beneficial interest for each class were as follows:
Arizona Limited Maturity
Class A Shares for the Year Dollar
Ended July 31, 1996 Shares Amount
Shares sold 5,200 $ 52,303
Shares issued to shareholders in
reinvestment of dividends 1,441 14,637
----------- -----------
Total issued 6,641 66,940
Shares redeemed (29,641) (304,005)
----------- -----------
Net decrease (23,000) $ (237,065)
=========== ===========
J-28
<PAGE>
Arizona Limited Maturity
Class A Shares for the Year Dollar
Ended July 31, 1995 Shares Amount
Shares sold 34,228 $ 339,577
Shares issued to shareholders in
reinvestment of dividends 3,317 33,017
----------- -----------
Total issued 37,545 372,594
Shares redeemed (144,716) (1,448,887)
----------- -----------
Net decrease (107,171) $(1,076,293)
=========== ===========
Arizona Limited Maturity
Class B Shares for the Year Dollar
Ended July 31, 1996 Shares Amount
Shares sold 43,937 $ 449,980
Shares issued to shareholders in
reinvestment of dividends 7,003 66,184
----------- -----------
Total issued 50,940 516,164
Shares redeemed (275,350) (2,797,058)
----------- -----------
Net decrease (224,410) $(2,280,894)
=========== ===========
Class B Shares for the Year Dollar
Ended July 31, 1995 Shares Amount
Shares sold 327,604 $ 3,257,316
Shares issued to shareholders in
reinvestment of dividends 10,498 104,547
----------- -----------
Total issued 338,102 3,361,863
Shares redeemed (386,410) (3,852,363)
----------- -----------
Net decrease (48,308) $ (490,500)
=========== ===========
Arizona Limited Maturity
Class C Shares for the Year Dollar
Ended July 31, 1996 Shares Amount
Shares sold 13,124 $ 132,973
Shares issued to shareholders in
reinvestment of dividends 162 1,633
----------- -----------
Total issued 13,286 134,606
Shares redeemed (4) (41)
----------- -----------
Net increase 13,282 $ 134,565
=========== ===========
Class C Shares for the Period Dollar
October 21, 1994++ to July 31, 1995 Shares Amount
Shares sold 110 $ 1,091
Shares issued to shareholders in
reinvestment of dividends 3 29
----------- -----------
Net increase 113 $ 1,120
=========== ===========
++Commencement of Operations.
Arizona Limited Maturity
Class D Shares for the Year Dollar
Ended July 31, 1996 Shares Amount
Shares sold 104,371 $ 1,066,013
Shares issued to shareholders in
reinvestment of dividends 2,220 22,565
----------- -----------
Total issued 106,591 1,088,578
Shares redeemed (47,001) (472,195)
----------- -----------
Net increase 59,590 $ 616,383
=========== ===========
Class D Shares for the Period Dollar
October 21, 1994++ to July 31, 1995 Shares Amount
Shares sold 1,801 $ 17,929
Shares issued to shareholders in
reinvestment of dividends 26 262
----------- -----------
Net increase 1,827 $ 18,191
=========== ===========
++Commencement of Operations.
California Limited Maturity
Class A Shares for the Year Dollar
Ended July 31, 1996 Shares Amount
Shares sold 8,087 $ 80,919
Shares issued to shareholders in
reinvestment of dividends 3,445 34,639
----------- -----------
Total issued 11,532 115,558
Shares redeemed (49,796) (500,770)
----------- -----------
Net decrease (38,264) $ (385,212)
=========== ===========
Class A Shares for the Year Dollar
Ended July 31, 1995 Shares Amount
Shares sold 81,782 $ 801,557
Shares issued to shareholders in
reinvestment of dividends 4,844 47,495
----------- -----------
Total issued 86,626 849,052
Shares redeemed (118,656) (1,147,698)
----------- -----------
Net decrease (32,030) $ (298,646)
=========== ===========
California Limited Maturity
Class B Shares for the Year Dollar
Ended July 31, 1996 Shares Amount
Shares sold 210,376 $ 2,110,120
Shares issued to shareholders in
reinvestment of dividends 15,717 158,020
----------- -----------
Total issued 226,093 2,268,140
Automatic conversion of shares (7,895) (80,134)
Shares redeemed (267,935) (2,686,717)
----------- -----------
Net decrease (49,737) $ (498,711)
=========== ===========
J-29
<PAGE>
MERRILL LYNCH MULTI-STATE LIMITED MATURITY MUNICIPAL TRUST, JULY 31, 1996
NOTES TO FINANCIAL STATEMENTS (continued)
California Limited Maturity
Class B Shares for the Year Dollar
Ended July 31, 1995 Shares Amount
Shares sold 275,065 $ 2,701,344
Shares issued to shareholders in
reinvestment of dividends 19,605 192,424
----------- -----------
Total issued 294,670 2,893,768
Shares redeemed (414,211) (4,043,475)
----------- -----------
Net decrease (119,541) $(1,149,707)
=========== ===========
California Limited Maturity
Class C Shares for the Year Dollar
Ended July 31, 1996 Shares Amount
Shares sold 24 $ 250
Shares issued to shareholders in
reinvestment of dividends 8 78
----------- -----------
Total issued 32 328
Shares redeemed (983) (9,913)
----------- -----------
Net decrease (951) $ (9,585)
=========== ===========
Class C Shares for the Period Dollar
October 21, 1994++ to July 31, 1995 Shares Amount
Shares sold 6,910 $ 68,864
Shares issued to shareholders in
reinvestment of dividends 26 260
----------- -----------
Total issued 6,936 69,124
Shares redeemed (499) (4,971)
----------- -----------
Net increase 6,437 $ 64,153
=========== ===========
++Commencement of Operations.
California Limited Maturity
Class D Shares for the Year Dollar
Ended July 31, 1996 Shares Amount
Shares sold 105,834 $ 1,060,270
Automatic conversion of shares 7,895 80,134
Shares issued to shareholders in
reinvestment of dividends 1,093 10,986
----------- -----------
Total issued 114,822 1,151,390
Shares redeemed (74,548) (749,378)
----------- -----------
Net increase 40,274 $ 402,012
=========== ===========
Class D Shares for the Period Dollar
October 21, 1994++ to July 31, 1995 Shares Amount
Shares sold 299,589 $ 2,938,426
Shares issued to shareholders in
reinvestment of dividends 404 4,019
----------- -----------
Total issued 299,993 2,942,445
Shares redeemed (122,736) (1,203,760)
----------- -----------
Net increase 177,257 $ 1,738,685
=========== ===========
++Commencement of Operations.
Florida Limited Maturity
Class A Shares for the Year Dollar
Ended July 31, 1996 Shares Amount
Shares sold 91,796 $ 926,979
Shares issued to shareholders in
reinvestment of dividends 11,780 118,180
----------- -----------
Total issued 103,576 1,045,159
Shares redeemed (296,045) (2,960,805)
----------- -----------
Net decrease (192,469) $(1,915,646)
=========== ===========
Class A Shares for the Year Dollar
Ended July 31, 1995 Shares Amount
Shares sold 189,974 $ 1,875,261
Shares issued to shareholders in
reinvestment of dividends 24,282 237,815
----------- -----------
Total issued 214,256 2,113,076
Shares redeemed (736,537) (7,241,200)
----------- -----------
Net decrease (522,281) $(5,128,124)
=========== ===========
Florida Limited Maturity
Class B Shares for the Year Dollar
Ended July 31, 1996 Shares Amount
Shares sold 374,709 $ 3,773,344
Shares issued to shareholders in
reinvestment of dividends 28,155 282,558
----------- -----------
Total issued 402,864 4,055,902
Shares redeemed (646,498) (6,500,752)
----------- -----------
Net decrease (243,634) $(2,444,850)
=========== ===========
Class B Shares for the Year Dollar
Ended July 31, 1995 Shares Amount
Shares sold 1,210,069 $11,716,749
Shares issued to shareholders in
reinvestment of dividends 40,299 395,075
----------- -----------
Total issued 1,250,368 12,111,824
Shares redeemed (1,472,459) (14,333,879)
----------- -----------
Net decrease (222,091) $(2,222,055)
=========== ===========
Florida Limited Maturity
Class C Shares for the Year Dollar
Ended July 31, 1996 Shares Amount
Shares sold 6,623 $ 65,559
Shares issued to shareholders in
reinvestment of dividends 4 41
----------- -----------
Total issued 6,627 65,600
Shares redeemed (1,536) (15,483)
----------- -----------
Net increase 5,091 $ 50,117
=========== ===========
J-30
<PAGE>
Florida Limited Maturity
Class C Shares for the Period Dollar
October 21, 1994++ to July 31, 1995 Shares Amount
Shares sold 110 $ 1,074
Shares issued to shareholders in
reinvestment of dividends 3 31
----------- -----------
Net increase 113 $ 1,105
=========== ===========
++Commencement of Operations.
Florida Limited Maturity
Class D Shares for the Year Dollar
Ended July 31, 1996 Shares Amount
Shares sold 316,584 $ 3,192,506
Shares issued to shareholders in
reinvestment of dividends 4,342 43,518
----------- -----------
Total issued 320,926 3,236,024
Shares redeemed (397,363) (4,000,675)
----------- -----------
Net decrease (76,437) $ (764,651)
=========== ===========
Class D Shares for the Period Dollar
October 21, 1994++ to July 31, 1995 Shares Amount
Shares sold 835,832 $ 8,301,886
Shares issued to shareholders in
reinvestment of dividends 1,523 15,096
----------- -----------
Total issued 837,355 8,316,982
Shares redeemed (117,154) (1,155,181)
----------- -----------
Net increase 720,201 $ 7,161,801
=========== ===========
++Commencement of Operations.
Massachusetts Limited Maturity
Class A Shares for the Year Dollar
Ended July 31, 1996 Shares Amount
Shares sold 22,851 $ 226,189
Shares issued to shareholders in
reinvestment of dividends 7,410 74,223
----------- -----------
Total issued 30,261 300,412
Shares redeemed (304,602) (3,055,529)
----------- -----------
Net decrease (274,341) $(2,755,117)
=========== ===========
Class A Shares for the Year Dollar
Ended July 31, 1995 Shares Amount
Shares sold 113,925 $ 1,124,479
Shares issued to shareholders in
reinvestment of dividends &
distributions 18,553 182,392
----------- -----------
Total issued 132,478 1,306,871
Shares redeemed (499,178) (4,904,822)
----------- -----------
Net decrease (366,700) $(3,597,951)
=========== ===========
Massachusetts Limited Maturity
Class B Shares for the
Year Ended Dollar
July 31, 1996 Shares Amount
Shares sold 163,902 $ 1,649,909
Shares issued to shareholders in
reinvestment of dividends 9,837 98,401
----------- -----------
Total issued 173,739 1,748,310
Shares redeemed (195,993) (1,955,850)
----------- -----------
Net decrease (22,254) $ (207,540)
=========== ===========
Class B Shares for the
Year Ended Dollar
July 31, 1995 Shares Amount
Shares sold 144,229 $ 1,416,046
Shares issued to shareholders in
reinvestment of dividends &
distributions 12,243 120,528
----------- -----------
Total issued 156,472 1,536,574
Shares redeemed (483,231) (4,711,225)
----------- -----------
Net decrease (326,759) $(3,174,651)
=========== ===========
Massachusetts Limited Maturity
Class C Shares for the
Year Ended Dollar
July 31, 1996 Shares Amount
Shares issued to shareholders in
reinvestment of dividends 1,201 $ 12,027
Shares redeemed (21,496) (212,811)
----------- -----------
Net decrease (20,295) $ (200,784)
=========== ===========
Class C Shares for the
Period October 21, 1994++ to Dollar
July 31, 1995 Shares Amount
Shares sold 61,378 $ 600,360
Shares issued to shareholders in
reinvestment of dividends &
distributions 667 6,580
----------- -----------
Total issued 62,045 606,940
Shares redeemed (20,616) (199,766)
----------- -----------
Net increase 41,429 $ 407,174
=========== ===========
++Commencement of Operations.
Massachusetts Limited Maturity
Class D Shares for the
Year Ended Dollar
July 31, 1996 Shares Amount
Shares sold 101,394 $ 1,009,332
Shares issued to shareholders in
reinvestment of dividends 1,553 15,510
----------- -----------
Total issued 102,947 1,024,842
Shares redeemed (38,979) (387,979)
----------- -----------
Net increase 63,968 $ 636,863
=========== ===========
J-31
<PAGE>
MERRILL LYNCH MULTI-STATE LIMITED MATURITY MUNICIPAL TRUST, JULY 31, 1996
NOTES TO FINANCIAL STATEMENTS (continued)
Massachusetts Limited Maturity
Class D Shares for the Period Dollar
October 21, 1994++ to July 31, 1995 Shares Amount
Shares sold 32,116 $ 317,241
Shares issued to shareholders in
reinvestment of dividends &
distributions 123 1,219
----------- -----------
Total issued 32,239 318,460
Shares redeemed (6,870) (67,623)
----------- -----------
Net increase 25,369 $ 250,837
=========== ===========
++Commencement of Operations.
Michigan Limited Maturity
Class A Shares for the Year Dollar
Ended July 31, 1996 Shares Amount
Shares sold 40,664 $ 405,188
Shares issued to shareholders in
reinvestment of dividends 1,529 15,293
----------- -----------
Total issued 42,193 420,481
Shares redeemed (107,949) (1,077,796)
----------- -----------
Net decrease (65,756) $ (657,315)
=========== ===========
Class A Shares for the Year Dollar
Ended July 31, 1995 Shares Amount
Shares sold 28,337 $ 279,211
Shares issued to shareholders in
reinvestment of dividends 3,430 33,654
----------- -----------
Total issued 31,767 312,865
Shares redeemed (147,187) (1,432,908)
----------- -----------
Net decrease (115,420) $(1,120,043)
=========== ===========
Michigan Limited Maturity
Class B Shares for the Year Dollar
Ended July 31, 1996 Shares Amount
Shares sold 36,451 $ 365,718
Shares issued to shareholders in
reinvestment of dividends 5,013 50,143
----------- -----------
Total issued 41,464 415,861
Shares redeemed (106,251) (1,063,510)
----------- -----------
Net decrease (64,787) $ (647,649)
=========== ===========
Class B Shares for the Year Dollar
Ended July 31, 1995 Shares Amount
Shares sold 116,190 $ 1,105,484
Shares issued to shareholders in
reinvestment of dividends 6,029 83,311
----------- -----------
Total issued 122,219 1,188,795
Shares redeemed (115,161) (1,122,677)
----------- -----------
Net increase 7,058 $ 66,118
=========== ===========
Michigan Limited Maturity
Class C Shares for the
Year Ended Dollar
July 31, 1996 Shares Amount
Shares issued to shareholders in
reinvestment of dividends 4 $ 41
----------- -----------
Net increase 4 $ 41
=========== ===========
Class C Shares for the
Period October 21, 1994++ to Dollar
July 31, 1995 Shares Amount
Shares sold 110 $ 1,073
Shares issued to shareholders in
reinvestment of dividends 3 32
----------- -----------
Net increase 113 $ 1,105
=========== ===========
++Commencement of Operations.
Michigan Limited Maturity
Class D Shares for the
Year Ended Dollar
July 31, 1996 Shares Amount
Shares sold 29,731 $ 298,909
Shares issued to shareholders in
reinvestment of dividends 1,126 11,245
----------- -----------
Total issued 30,857 310,154
Shares redeemed (1,878) (18,614)
----------- -----------
Net increase 28,979 $ 291,540
=========== ===========
Class D Shares for the
Period October 21, 1994++ to Dollar
July 31, 1995 Shares Amount
Shares sold 64,155 $ 622,185
Shares issued to shareholders in
reinvestment of dividends 689 6,780
----------- -----------
Total issued 64,844 628,965
Shares redeemed (39,359) (387,400)
----------- -----------
Net increase 25,485 $ 241,565
=========== ===========
++Commencement of Operations.
New Jersey Limited Maturity
Class A Shares for the
Year Ended Dollar
July 31, 1996 Shares Amount
Shares sold 102,101 $ 1,042,636
Shares issued to shareholders in
reinvestment of dividends 8,892 90,367
----------- -----------
Total issued 110,993 1,133,003
Shares redeemed (83,997) (856,193)
----------- -----------
Net increase 26,996 $ 276,810
=========== ===========
J-32
<PAGE>
New Jersey Limited Maturity
Class A Shares for the Year Dollar
Ended July 31, 1995 Shares Amount
Shares sold 147,003 $ 1,452,568
Shares issued to shareholders in
reinvestment of dividends 6,968 69,363
----------- -----------
Total issued 153,971 1,521,931
Shares redeemed (514,441) (5,055,460)
----------- -----------
Net decrease (360,470) $(3,533,529)
=========== ===========
New Jersey Limited Maturity
Class B Shares for the Year Dollar
Ended July 31, 1996 Shares Amount
Shares sold 107,343 $ 1,095,824
Shares issued to shareholders in
reinvestment of dividends 14,061 143,043
----------- -----------
Total issued 121,404 1,238,867
Shares redeemed (359,338) (3,646,563)
----------- -----------
Net decrease (237,934) $(2,407,696)
=========== ===========
Class B Shares for the Year Dollar
Ended July 31, 1995 Shares Amount
Shares sold 318,885 $ 3,174,748
Shares issued to shareholders in
reinvestment of dividends 18,151 180,493
----------- -----------
Total issued 337,036 3,355,241
Shares redeemed (382,526) (3,775,067)
----------- -----------
Net decrease (45,490) $ (419,826)
=========== ===========
New Jersey Limited Maturity
Class C Shares for the Year Dollar
Ended July 31, 1996 Shares Amount
Shares sold 29,124 $ 272,904
Shares issued to shareholders in
reinvestment of dividends 459 4,199
----------- -----------
Net increase 29,583 $ 277,103
=========== ===========
Class C Shares for the Period Dollar
October 21, 1994++ to July 31, 1995 Shares Amount
Shares sold 65,242 $ 620,177
Shares issued to shareholders in
reinvestment of dividends 67 621
----------- -----------
Total issued 65,309 620,798
Shares redeemed (65,196) (622,061)
----------- -----------
Net increase (decrease) 113 $ (1,263)
=========== ===========
++Commencement of Operations.
New Jersey Limited Maturity
Class D Shares for the Year Dollar
Ended July 31, 1996 Shares Amount
Shares sold 47,184 $ 477,087
Shares issued to shareholders in
reinvestment of dividends 728 7,411
----------- -----------
Total issued 47,912 484,498
Shares redeemed (37,500) (381,180)
----------- -----------
Net increase 10,412 $ 103,318
=========== ===========
Class D Shares for the Period Dollar
October 21, 1994++ to July 31, 1995 Shares Amount
Shares sold 69,049 $ 691,844
Shares issued to shareholders in
reinvestment of dividends 348 3,514
----------- -----------
Total issued 69,397 695,358
Shares redeemed (26,375) (264,833)
----------- -----------
Net increase 43,022 $ 430,525
=========== ===========
++Commencement of Operations.
New York Limited Maturity
Class A Shares for the Year Dollar
Ended July 31, 1996 Shares Amount
Shares sold 44,189 $ 446,602
Shares issued to shareholders in
reinvestment of dividends 11,547 116,691
----------- -----------
Total issued 55,736 563,293
Shares redeemed (164,328) (1,659,912)
----------- -----------
Net decrease (108,592) $(1,096,619)
=========== ===========
Class A Shares for the Year Dollar
Ended July 31, 1995 Shares Amount
Shares sold 189,338 $ 1,861,355
Shares issued to shareholders in
reinvestment of dividends 16,001 157,598
----------- -----------
Total issued 205,339 2,018,953
Shares redeemed (260,265) (2,576,091)
----------- -----------
Net decrease (54,926) $ (557,138)
=========== ===========
New York Limited Maturity
Class B Shares for the Year Dollar
Ended July 31, 1996 Shares Amount
Shares sold 465,594 $ 4,716,623
Shares issued to shareholders in
reinvestment of dividends 17,959 181,459
----------- -----------
Total issued 483,553 4,898,082
Automatic conversion of shares (3,459) (34,832)
Shares redeemed (356,773) (3,612,208)
----------- -----------
Net increase 123,321 $ 1,251,042
=========== ===========
J-33
<PAGE>
MERRILL LYNCH MULTI-STATE LIMITED MATURITY MUNICIPAL TRUST, JULY 31, 1996
NOTES TO FINANCIAL STATEMENTS (concluded)
New York Limited Maturity
Class B Shares for the Year Dollar
Ended July 31, 1995 Shares Amount
Shares sold 331,365 $ 3,261,544
Shares issued to shareholders in
reinvestment of dividends 18,265 180,012
----------- -----------
Total issued 349,630 3,441,556
Shares redeemed (454,750) (4,436,666)
----------- -----------
Net decrease (105,120) $ (995,110)
=========== ===========
New York Limited Maturity
Class C Shares for the Year Dollar
Ended July 31, 1996 Shares Amount
Shares sold 20,376 $ 206,729
Shares issued to shareholders in
reinvestment of dividends 398 4,008
----------- -----------
Total issued 20,774 210,737
Shares redeemed (3,295) (32,843)
----------- -----------
Net increase 17,479 $ 177,894
=========== ===========
Class C Shares for the
Period October 21, 1994++ to Dollar
July 31, 1995 Shares Amount
Shares sold 3,813 $ 38,224
Shares issued to shareholders in
reinvestment of dividends 4 40
----------- -----------
Net increase 3,817 $ 38,264
=========== ===========
++Commencement of Operations.
New York Limited Maturity
Class D Shares for the Year Dollar
Ended July 31, 1996 Shares Amount
Shares sold 162,557 $ 1,636,956
Automatic conversion of shares 3,456 34,832
Shares issued to shareholders in
reinvestment of dividends 6,809 68,734
----------- -----------
Total issued 172,822 1,740,522
Shares redeemed (13,363) (135,500)
----------- -----------
Net increase 159,459 $ 1,605,022
=========== ===========
Class D Shares for the
Period October 21, 1994++ to Dollar
July 31, 1995 Shares Amount
Shares sold 271,406 $ 2,697,692
Shares issued to shareholders in
reinvestment of dividends 754 7,474
----------- -----------
Total issued 272,160 2,705,166
Shares redeemed (42,782) (416,797)
----------- -----------
Net increase 229,378 $ 2,288,369
=========== ===========
++Commencement of Operations.
Pennsylvania Limited Maturity
Class A Shares for the
Year Ended Dollar
July 31, 1996 Shares Amount
Shares sold 5,556 $ 56,865
Shares issued to shareholders in
reinvestment of dividends 1,095 11,133
----------- -----------
Total issued 6,651 67,998
Shares redeemed (17,647) (179,041)
----------- -----------
Net decrease (10,996) $ (111,043)
=========== ===========
Class A Shares for the
Year Ended Dollar
July 31, 1995 Shares Amount
Shares sold 33,049 $ 326,744
Shares issued to shareholders in
reinvestment of dividends 1,339 13,282
----------- -----------
Total issued 34,388 340,026
Shares redeemed (40,535) (402,246)
----------- -----------
Net decrease (6,147) $ (62,220)
=========== ===========
J-34
<PAGE>
Pennsylvania Limited Maturity
Class B Shares for the Year Dollar
Ended July 31, 1996 Shares Amount
Shares sold 89,391 $ 910,583
Shares issued to shareholders in
reinvestment of dividends 17,173 174,586
----------- -----------
Total issued 106,564 1,085,169
Shares redeemed (220,973) (2,241,767)
----------- -----------
Net decrease (114,409) $(1,156,598)
=========== ===========
Class B Shares for the Year Dollar
Ended July 31, 1995 Shares Amount
Shares sold 151,037 $ 1,497,108
Shares issued to shareholders in
reinvestment of dividends 23,340 231,300
----------- -----------
Total issued 174,377 1,728,408
Shares redeemed (398,422) (3,933,111)
----------- -----------
Net decrease (224,045) $(2,204,703)
=========== ===========
Pennsylvania Limited Maturity
Class C Shares for the Year Dollar
Ended July 31, 1996 Shares Amount
Shares sold 7,571 $ 82,082
Shares issued to shareholders in
reinvestment of dividends 83 850
----------- -----------
Total issued 7,654 82,932
Shares redeemed (7,650) (82,673)
----------- -----------
Net increase 4 $ 259
=========== ===========
Class C Shares for the Period Dollar
October 21, 1994++ to July 31, 1995 Shares Amount
Shares sold 110 $ 1,082
Shares issued to shareholders in
reinvestment of dividends 3 31
----------- -----------
Net increase 113 $ 1,113
=========== ===========
++Commencement of Operations.
Pennsylvania Limited Maturity
Class D Shares for the
Year Ended Dollar
July 31, 1996 Shares Amount
Shares sold 155,680 $ 1,569,272
Shares issued to shareholders in
reinvestment of dividends 1,844 18,653
----------- -----------
Total issued 157,524 1,587,925
Shares redeemed (16,678) (169,594)
----------- -----------
Net increase 140,846 $ 1,418,331
=========== ===========
Class D Shares for the Period Dollar
October 21, 1994++ to July 31, 1995 Shares Amount
Shares sold 37,328 $ 367,223
Shares issued to shareholders in
reinvestment of dividends 476 4,763
----------- -----------
Net increase 37,804 $ 371,986
=========== ===========
++Commencement of Operations.
5. Capital Loss Carryforward:
At July 31, 1996, each Fund of the Trust had an approximate net capital loss
carryforward as follows: $69,000 in the Arizona Limited Maturity Fund, of which
$66,000 expires in 2003 and $3,000 expires in 2004; $434,000 in the California
Limited Maturity Fund, of which $156,000 expires in 2003 and $278,000 expires in
2004; $718,000 in the Florida Limited Maturity Fund, of which $518,000 expires
in 2003 and $200,000 expires in 2004; $340,000 in Massachusetts Limited Maturity
Fund, of which $70,000 expires in 2003 and $270,000 expires in 2004; $138,000 in
the Michigan Limited Maturity Fund, of which $53,000 expires in 2003 and $85,000
expires in 2004; $281,000 in the New Jersey Limited Maturity Fund, of which
$98,000 expires in 2003 and $183,000 expires in 2004; $207,000 in the New York
Limited Maturity Fund, of which $122,000 expires in 2002, $2,000 expires in 2003
and $83,000 expires in 2004; and $91,000 in the Pennsylvania Limited Maturity
Fund, all of which expires in 2003. These amounts will be available to offset
like amounts of any future taxable gains.
J-35
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Investment Objectives and Policies............. 2
Description of Municipal Bonds and Temporary
Investments.................................. 5
Description of Municipal Bonds............... 5
Description of Temporary Investments and
Variable Rate Demand Obligations........... 6
Repurchase Agreements........................ 7
Financial Futures Transactions and Options... 8
Investment Restrictions........................ 12
Management of the Trust........................ 14
Trustees and Officers........................ 14
Compensation of Trustees..................... 15
Management and Advisory Arrangements......... 16
Purchase of Shares............................. 17
Initial Sales Charge Alternatives--Class A
and Class D Shares......................... 18
Reduced Initial Sales Charges................ 20
Distribution Plans........................... 22
Limitations on the Payment of Deferred Sales
Charges.................................... 23
Redemption of Shares........................... 25
Deferred Sales Charges--Class B and Class
C Shares................................... 25
Portfolio Transactions......................... 26
Determination of Net Asset Value............... 27
Shareholder Services........................... 28
Investment Account........................... 28
Automatic Investment Plans................... 28
Automatic Reinvestment of Dividends and
Capital Gains Distributions................ 28
Systematic Withdrawal Plans--Class A and
Class D Shares............................. 29
Exchange Privilege........................... 29
Distributions and Taxes........................ 32
Federal...................................... 32
Environmental Tax............................ 34
Tax Treatment of Financial Futures Contracts
and Options Thereon........................ 34
State........................................ 35
Performance Data............................... 38
General Information............................ 47
Description of Shares........................ 47
Computation of Offering Price Per Share...... 48
Independent Auditors......................... 49
Custodian.................................... 49
Transfer Agent............................... 49
Legal Counsel................................ 49
Reports to Shareholders...................... 50
Additional Information....................... 50
Appendices..................................... A-1
Independent Auditors' Report................... J-1
Financial Statements........................... J-2
</TABLE>
Code # 16926--1196
[LOGO]
Merrill Lynch Multi-
State Limited Maturity
Municipal Series Trust
Merrill Lynch Arizona Limited
Maturity Municipal Bond Fund
Merrill Lynch California Limited
Maturity Municipal Bond Fund
Merrill Lynch Florida Limited
Maturity Municipal Bond Fund
Merrill Lynch Massachusetts Limited
Maturity Municipal Bond Fund
Merrill Lynch Michigan Limited
Maturity Municipal Bond Fund
Merrill Lynch New Jersey Limited
Maturity Municipal Bond Fund
Merrill Lynch New York Limited
Maturity Municipal Bond Fund
Merrill Lynch Pennsylvania Limited
Maturity Municipal Bond Fund
STATEMENT OF
ADDITIONAL
INFORMATION
November 27, 1996
Distributor:
Merrill Lynch
Funds Distributor, Inc.
<PAGE>
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 each of the years in the two-year period
ended July 31, 1996 and for the period November 26, 1993 (commencement
of operations) to July 31, 1994.
Contained in Part B (for each of the Funds):
Schedules of Investments as of July 31, 1996.
Statements of Assets and Liabilities as of July 31, 1996.
Statements of Operations for the year ended July 31, 1996.
Statements of Changes in Net Assets for each of the years in the
two-year period ended July 31, 1996.
Financial Highlights for each of the years in the two-year period
ended July 31, 1996 and for the period November 26, 1993 (commencement
of operations) to July 31, 1994.
(B) EXHIBITS:
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------- -------------------------------------------------------------------
<S> <C>
1(a)(1) -- Amended and Restated Declaration of Trust of the Registrant, dated
November 15, 1993.(d)
(a)(2) -- Certificate of Amendment to Declaration of Trust and Establishment
and Designation of Classes, dated October 17, 1994.(g)
(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.(c)
(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)
(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)
</TABLE>
C-1
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------- -------------------------------------------------------------------
<S> <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(a) -- Form of Management Agreement between the Registrant and Fund Asset
Management, L.P. ('FAM').(a)
(b) -- Supplement to Management Agreement between the Registrant and
FAM.(f)
6(a) -- Form of Revised Class A Shares Distribution Agreement between the
Registrant and Merrill Lynch Funds Distributor, Inc. ('MLFD')
(including Form of Selected Dealers Agreement).(f)
(b ) -- Form of Class B Shares Distribution Agreement between the
Registrant and MLFD.(a)
(c) -- Form of Class C Shares Distribution Agreement between the
Registrant and MLFD (including Form of Selected Dealers
Agreement).(f)
(d) -- Form of Class D Shares Distribution Agreement between the
Registrant and MLFD (including Form of Selected Dealers
Agreement).(f)
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 Merrill Lynch
Financial Data Services, Inc.(a)
10 -- Opinion of Brown & Wood LLP, counsel for the Registrant.
11 -- Consent of Deloitte & Touche LLP, independent auditors for the
Registrant.
12 -- None.
13(a) -- Certificate of FAM with respect to the Arizona Fund.(d)
(b) -- Certificate of FAM with respect to the California Fund.(d)
(c) -- Certificate of FAM with respect to the Florida Fund.(d)
(d) -- Certificate of FAM with respect to the Massachusetts Fund.(d)
(e) -- Certificate of FAM with respect to the Michigan Fund.(d)
(f) -- Certificate of FAM with respect to the New Jersey Fund.(d)
(g) -- Certificate of FAM with respect to the New York Fund.(d)
(h) -- Certificate of FAM with respect to the Pennsylvania Fund.(d)
14 -- None.
15(a) -- Form of Class B Shares Distribution Plan and Class B Shares
Distribution Plan Sub-Agreement of the Registrant.(a)
(b) -- Form of Class C Shares Distribution Plan and Class C Shares
Distribution Plan Sub-Agreement of the Registrant.(f)
(c) -- Form of Class D Shares Distribution Plan and Class D Shares
Distribution Plan Sub-Agreement of the Registrant.(f)
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.(e)
(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.(e)
</TABLE>
C-2
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------- -------------------------------------------------------------------
<S> <C>
(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.(e)
(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.(e)
(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.(e)
(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.(e)
(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.(e)
(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.(e)
(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.(e)
(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.(e)
(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.(e)
(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.(e)
(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.(e)
(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.(e)
(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.(e)
(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.(e)
(c)(1) -- Schedule for computation of each performance quotation provided in
the Registration Statement in response to Item 22 relating to Class
C Shares of the Arizona Fund.(g)
(c)(2) -- Schedule for computation of each performance quotation provided in
the Registration Statement in response to Item 22 relating to Class
C Shares of the California Fund.(g)
(c)(3) -- Schedule for computation of each performance quotation provided in
the Registration Statement in response to Item 22 relating to Class
C Shares of the Florida Fund.(g)
(c)(4) -- Schedule for computation of each performance quotation provided in
the Registration Statement in response to Item 22 relating to Class
C Shares of the Massachusetts Fund.(g)
(c)(5) -- Schedule for computation of each performance quotation provided in
the Registration Statement in response to Item 22 relating to Class
C Shares of the Michigan Fund.(g)
(c)(6) -- Schedule for computation of each performance quotation provided in
the Registration Statement in response to Item 22 relating to Class
C Shares of the New Jersey Fund.(g)
(c)(7) -- Schedule for computation of each performance quotation provided in
the Registration Statement in response to Item 22 relating to Class
C Shares of the New York Fund.(g)
(c)(8) -- Schedule for computation of each performance quotation provided in
the Registration Statement in response to Item 22 relating to Class
C Shares of the Pennsylvania Fund.(g)
(d)(1) -- Schedule for computation of each performance quotation provided in
the Registration Statement in response to Item 22 relating to Class
D Shares of the Arizona Fund.(g)
(d)(2) -- Schedule for computation of each performance quotation provided in
the Registration Statement in response to Item 22 relating to Class
D Shares of the California Fund.(g)
(d)(3) -- Schedule for computation of each performance quotation provided in
the Registration Statement in response to Item 22 relating to Class
D Shares of the Florida Fund.(g)
(d)(4) -- Schedule for computation of each performance quotation provided in
the Registration Statement in response to Item 22 relating to Class
D Shares of the Massachusetts Fund.(g)
</TABLE>
C-3
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------- -------------------------------------------------------------------
<S> <C>
(d)(5) -- Schedule for computation of each performance quotation provided in
the Registration Statement in response to Item 22 relating to Class
D Shares of the Michigan Fund.(g)
(d)(6) -- Schedule for computation of each performance quotation provided in
the Registration Statement in response to Item 22 relating to Class
D Shares of the New Jersey Fund.(g)
(d)(7) -- Schedule for computation of each performance quotation provided in
the Registration Statement in response to Item 22 relating to Class
D Shares of the New York Fund.(g)
(d)(8) -- Schedule for computation of each performance quotation provided in
the Registration Statement in response to Item 22 relating to Class
D Shares of the Pennsylvania Fund.(g)
17(a)(1) -- Financial Data Schedule for Class A Shares of the Arizona Fund.
(a)(2) -- Financial Data Schedule for Class A Shares of the California Fund.
(a)(3) -- Financial Data Schedule for Class A Shares of the Florida Fund.
(a)(4) -- Financial Data Schedule for Class A Shares of the Massachusetts
Fund.
(a)(5) -- Financial Data Schedule for Class A Shares of the Michigan Fund.
(a)(6) -- Financial Data Schedule for Class A Shares of the New Jersey Fund.
(a)(7) -- Financial Data Schedule for Class A Shares of the New York Fund.
(a)(8) -- Financial Data Schedule for Class A Shares of the Pennsylvania
Fund.
(b)(1) -- Financial Data Schedule for Class B Shares of the Arizona Fund.
(b)(2) -- Financial Data Schedule for Class B Shares of the California Fund.
(b)(3) -- Financial Data Schedule for Class B Shares of the Florida Fund.
(b)(4) -- Financial Data Schedule for Class B Shares of the Massachusetts
Fund.
(b)(5) -- Financial Data Schedule for Class B Shares of the Michigan Fund.
(b)(6) -- Financial Data Schedule for Class B Shares of the New Jersey Fund.
(b)(7) -- Financial Data Schedule for Class B Shares of the New York Fund.
(b)(8) -- Financial Data Schedule for Class B Shares of the Pennsylvania
Fund.
(c)(1) -- Financial Data Schedule for Class C Shares of the Arizona Fund.
(c)(2) -- Financial Data Schedule for Class C Shares of the California Fund.
(c)(3) -- Financial Data Schedule for Class C Shares of the Florida Fund.
(c)(4) -- Financial Data Schedule for Class C Shares of the Massachusetts
Fund.
(c)(5) -- Financial Data Schedule for Class C Shares of the Michigan Fund.
(c)(6) -- Financial Data Schedule for Class C Shares of the New Jersey Fund.
(c)(7) -- Financial Data Schedule for Class C Shares of the New York Fund.
(c)(8) -- Financial Data Schedule for Class C Shares of the Pennsylvania
Fund.
(d)(1) -- Financial Data Schedule for Class D Shares of the Arizona Fund.
(d)(2) -- Financial Data Schedule for Class D Shares of the California Fund.
(d)(3) -- Financial Data Schedule for Class D Shares of the Florida Fund.
(d)(4) -- Financial Data Schedule for Class D Shares of the Massachusetts
Fund.
(d)(5) -- Financial Data Schedule for Class D Shares of the Michigan Fund.
(d)(6) -- Financial Data Schedule for Class D Shares of the New Jersey Fund.
(d)(7) -- Financial Data Schedule for Class D Shares of the New York Fund.
(d)(8) -- Financial Data Schedule for Class D Shares of the Pennsylvania
Fund.
18 -- Merrill Lynch Select Pricing(Service Mark) System Plan pursuant to
Rule 18f-3.(h)
</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, as amended,
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, as amended, filed as
Exhibit 1(a) to the Registration Statement; 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 as Exhibits 1(b) and 1(c), respectively, to
the Registration Statement; and to Articles I, V and VI of the Registrant's
By-Laws, filed as Exhibit 2 to the Registration Statement.
(c) Filed on October 13, 1993 as an Exhibit to Pre-Effective Amendment No. 1 to
the Registration Statement.
C-4
<PAGE>
(d) Filed on November 17, 1993 as an Exhibit to Pre-Effective Amendment No. 2 to
the Registration Statement.
(e) Filed on May 17, 1994 as an Exhibit to Post-Effective Amendment No. 1 to the
Registration Statement.
(f) Filed on October 14, 1994 as an Exhibit to Post-Effective Amendment No. 2 to
the Registration Statement.
(g) Filed on November 21, 1995 as an Exhibit to Post-Effective Amendment No. 3
to the Registration Statement.
(h) Incorporated by reference to Exhibit 18 to Post-Effective Amendment No. 13
to the Registration Statement on Form N-1A under the Securities Act of 1933,
as amended, filed on January 25, 1996, relating to shares of Merrill Lynch
New York Municipal Bond Fund series of the Registrant (File No. 2-99473).
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
HOLDERS AT
TITLE OF CLASS SEPTEMBER 30, 1996*
- -------------------------------------------------- ---------------------
<S> <C>
Arizona Fund
Class A shares of beneficial interest, par value
$0.10 per share.............................. 26
Class B shares of beneficial interest, par value
$0.10 per share.............................. 89
Class C shares of beneficial interest, par value
$0.10 per share.............................. 6
Class D shares of beneficial interest, par value
$0.10 per share.............................. 13
California Fund
Class A shares of beneficial interest, par value
$0.10 per share.............................. 39
Class B shares of beneficial interest, par value
$0.10 per share.............................. 181
Class C shares of beneficial interest, par value
$0.10 per share.............................. 4
Class D shares of beneficial interest, par value
$0.10 per share.............................. 27
Florida Fund
Class A shares of beneficial interest, par value
$0.10 per share.............................. 65
Class B shares of beneficial interest, par value
$0.10 per share.............................. 279
Class C shares of beneficial interest, par value
$0.10 per share.............................. 4
Class D shares of beneficial interest, par value
$0.10 per share.............................. 31
Massachusetts Fund
Class A shares of beneficial interest, par value
$0.10 per share.............................. 28
Class B shares of beneficial interest, par value
$0.10 per share.............................. 151
Class C shares of beneficial interest, par value
$0.10 per share.............................. 6
Class D shares of beneficial interest, par value
$0.10 per share.............................. 13
Michigan Fund
Class A shares of beneficial interest, par value
$0.10 per share.............................. 33
Class B shares of beneficial interest, par value
$0.10 per share.............................. 83
Class C shares of beneficial interest, par value
$0.10 per share.............................. 3
Class D shares of beneficial interest, par value
$0.10 per share.............................. 13
New Jersey Fund
Class A shares of beneficial interest, par value
$0.10 per share.............................. 47
Class B shares of beneficial interest, par value
$0.10 per share.............................. 130
Class C shares of beneficial interest, par value
$0.10 per share.............................. 5
Class D shares of beneficial interest, par value
$0.10 per share.............................. 13
</TABLE>
C-5
<PAGE>
<TABLE>
<CAPTION>
NUMBER OF
HOLDERS AT
TITLE OF CLASS SEPTEMBER 30, 1996*
- -------------------------------------------------- ---------------------
New York Fund
<S> <C>
Class A shares of beneficial interest, par value
$0.10 per share.............................. 55
Class B shares of beneficial interest, par value
$0.10 per share.............................. 255
Class C shares of beneficial interest, par value
$0.10 per share.............................. 11
Class D shares of beneficial interest, par value
$0.10 per share.............................. 28
Pennsylvania Fund
Class A shares of beneficial interest, par value
$0.10 per share.............................. 27
Class B shares of beneficial interest, par value
$0.10 per share.............................. 190
Class C shares of beneficial interest, par value
$0.10 per share.............................. 3
Class D shares of beneficial interest, par value
$0.10 per share.............................. 18
</TABLE>
- ------------------
*The number of holders shown above includes holders of record plus beneficial
owners, whose shares are held of record by Merrill Lynch, Pierce, Fenner &
Smith Incorporated ('Merrill Lynch').
ITEM 27. INDEMNIFICATION.
Section 5.3 of the Registrant's Declaration of Trust provides as follows:
'The Trust shall indemnify each of its Trustees, officers, employees and
agents (including persons who serve at its request as directors, officers or
trustees of another organization in which it has any interest as a shareholder,
creditor or otherwise) against all liabilities and expenses (including amounts
paid in satisfaction of judgments, in compromise, as fines and penalties and as
counsel fees) reasonably incurred by him in connection with the defense or
disposition of any action, suit or other proceeding, whether civil or criminal,
in which he may be involved or with which he may be threatened, while in office
or thereafter, by reason of his being or having been such a trustee, officer,
employee or agent, except with respect to any matter as to which he shall have
been adjudicated to have acted in bad faith, willful misfeasance, gross
negligence or reckless disregard of his duties; provided, however, that as to
any matter disposed of by a compromise payment by such person, pursuant to a
consent decree or otherwise, no indemnification either for said payment or for
any other expenses shall be provided unless the Trust shall have received a
written opinion from independent legal counsel approved by the Trustees to the
effect that if either the matter of willful misfeasance, gross negligence or
reckless disregard of duty, or the matter of good faith and reasonable belief as
to the best interests of the Trust, had been adjudicated, it would have been
adjudicated in favor of such person. The rights accruing to any Person under
these provisions shall not exclude any other right to which he may be lawfully
entitled; provided that no person may satisfy any right 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 which it is ultimately determined he is
entitled to receive from the Registrant by reason of indemnification; and
(iii)(a) such promise must be secured by a surety bond, other suitable insurance
or an equivalent form of security which assures that any repayments may be
obtained by the Registrant without delay or litigation, which bond, insurance or
other form of security must be provided by the recipient of the advance, or (b)
a majority of a quorum of the Registrant's disinterested, non-party Trustees, or
an independent legal counsel in a written opinion, shall determine, based upon a
review of readily available facts that the recipient of the advance ultimately
will be found entitled to indemnification.
C-6
<PAGE>
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' or 'FAM') acts as the investment
adviser for the following open-end investment companies: CBA Money Fund, CMA
Government Securities Fund, CMA Money Fund, CMA Multi-State Municipal Series
Trust, CMA Tax-Exempt Fund, CMA Treasury Fund, The Corporate Fund Accumulation
Program, Inc., Financial Institutions Series Trust, Merrill Lynch Basic Value
Fund, Inc., Merrill Lynch California Municipal Series Trust, Merrill Lynch
Corporate Bond Fund, Inc., Merrill Lynch Emerging Tigers Fund, Inc., Merrill
Lynch Federal Securities Trust, Merrill Lynch Funds for Institutions Series,
Merrill Lynch Multi-State Limited Maturity Municipal Series Trust, Merrill Lynch
Multi-State Municipal Series Trust, Merrill Lynch Municipal Bond Fund, Inc.,
Merrill Lynch Phoenix Fund, Inc., Merrill Lynch Special Value Fund, Inc.,
Merrill Lynch World Income Fund, Inc. and The Municipal Fund Accumulation
Program, Inc.; and the following closed-end investment companies: Apex Municipal
Fund, Inc., Corporate High Yield Fund, Inc., Corporate High Yield Fund II, Inc.,
Income Opportunities Fund 1999, Inc., Income Opportunities Fund 2000, Inc.,
Merrill Lynch Municipal Strategy Fund, Inc., MuniAssets Fund, 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 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., Taurus MuniCalifornia Holdings, Inc.,
Taurus MuniNewYork Holdings, Inc. and Worldwide DollarVest Fund, Inc.
Merrill Lynch Asset Management, L.P. ('MLAM'), an affiliate of the Manager,
acts as the investment adviser for the following open-end investment companies:
Merrill Lynch Adjustable Rate Securities Fund, Inc., Merrill Lynch Americas
Income Fund, Inc., Merrill Lynch Asset Builder Program, Inc., Merrill Lynch
Asset Growth Fund, Inc., Merrill Lynch Asset Income Fund, Inc., Merrill Lynch
Capital Fund, Inc., Merrill Lynch Developing Capital Markets Fund, Inc., Merrill
Lynch Dragon Fund, Inc., Merrill Lynch EuroFund, Merrill Lynch Fundamental
Growth Fund, Inc., Merrill Lynch Fund For Tomorrow, Inc., Merrill Lynch Global
Allocation Fund, Inc., Merrill Lynch Global Bond Fund for Investment and
Retirement, Merrill Lynch Global Convertible Fund, Inc., Merrill Lynch Global
Holdings, Inc., Merrill Lynch Global Resources Trust, Merrill Lynch Global
SmallCap Fund, Inc., Merrill Lynch Global Utility Fund, Inc., Merrill Lynch
Global Value Fund, Inc., Merrill Lynch Growth Fund, Merrill Lynch Healthcare
Fund, Inc., Merrill Lynch Institutional Intermediate Fund, Merrill Lynch
International Equity Fund, Merrill Lynch Latin America Fund, Inc., Merrill Lynch
Middle/East Africa Fund, Inc., Merrill Lynch Municipal Series Trust, Merrill
Lynch Pacific Fund, Inc., Merrill Lynch Ready Assets 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
C-7
<PAGE>
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.; and the following closed-end investment companies:
Convertible Holdings, Inc., Merrill Lynch High Income Municipal Bond Fund, Inc.
and Merrill Lynch Senior Floating Rate Fund, Inc.
The address of each of these investment companies is P.O. Box 9011,
Princeton, New Jersey 08543-9011 except that the address of Merrill Lynch Funds
for Institutions Series and Merrill Lynch Institutional Intermediate Fund is One
Financial Center, 15th Floor, Boston, Massachusetts 02111-2646. The address of
the Manager, MLAM, Princeton Services, Inc. ('Princeton Services') and Princeton
Administrators, L.P. is also P.O. Box 9011, Princeton, New Jersey 08543-9011.
The address of Merrill Lynch Funds Distributor, Inc. ('MLFD') is P.O. Box 9081,
Princeton, New Jersey 08543-9081. The address of Merrill Lynch, Pierce, Fenner &
Smith Incorporated ('Merrill Lynch') and Merrill Lynch & Co., Inc. ('ML & Co.')
is World Financial Center, North Tower, 250 Vesey Street, New York, New York
10281. The address of the Fund's Transfer Agent, Merrill Lynch Financial Data
Services, Inc. ('MLFDS') is 4800 Deer Lake Drive East, Jacksonville, Florida
32246-6484.
Set forth below is a list of each executive officer and partner of the
Manager indicating each business, profession, vocation or employment of a
substantial nature in which each such person or entity has been engaged since
August 1, 1994, 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 first two
paragraphs of this item and Messrs. Giordano, Harvey, Hewitt, Kirstein and
Monagle are trustees, directors or officers of one or more of such companies.
<TABLE>
<CAPTION>
POSITION(S)
WITH OTHER SUBSTANTIAL BUSINESS,
NAME THE MANAGER PROFESSION, VOCATION OR EMPLOYMENT
- ------------------------- --------------- -----------------------------------
<S> <C> <C>
ML & Co.................. Limited Partner Financial Services Holding Company;
Limited Partner of MLAM
Princeton Services....... General Partner General Partner of MLAM
Arthur Zeikel............ President President of MLAM; President and
Director of Princeton Services;
Director of MLFD; Executive Vice
President of ML & Co.
Terry K. Glenn........... Executive Vice Executive Vice President of MLAM;
President Executive Vice President and
Director of Princeton Services;
President and Director of MLFD;
Director of MLFDS; President of
Princeton Administrators, L.P.
Vincent R. Giordano...... Senior Vice Senior Vice President of MLAM;
President Senior Vice President of Princeton
Services
Elizabeth Griffin........ Senior Vice Senior Vice President of MLAM
President
Norman R. Harvey......... Senior Vice Senior Vice President of MLAM;
President Senior Vice President of Princeton
Services
Michael J. Hennewinkel... Senior Vice Senior Vice President of MLAM;
President Senior Vice President of Princeton
Services
N. John Hewitt........... Senior Vice Senior Vice President of MLAM;
President Senior Vice President of Princeton
Services
Philip L. Kirstein....... Senior Vice Senior Vice President, General
President, Counsel and Secretary of MLAM;
General Senior Vice President, General
Counsel and Counsel, Director and Secretary
Secretary of Princeton Services; Director
of MLFD
Ronald M. Kloss.......... Senior Vice Senior Vice President MLAM; Senior
President and Vice President and Controller of
Controller Princeton Services
Steven M.M. Miller....... Senior Vice Executive Vice President of
President Princeton Administrators, L.P.;
Senior Vice President of
Princeton Services
Joseph T. Monagle, Jr.... Senior Vice Senior Vice President of MLAM;
President Senior Vice President of Princeton
Services
</TABLE>
C-8
<PAGE>
<TABLE>
<CAPTION>
POSITION(S)
WITH OTHER SUBSTANTIAL BUSINESS,
NAME THE MANAGER PROFESSION, VOCATION OR EMPLOYMENT
- ------------------------- --------------- -----------------------------------
Michael L. Quinn......... Senior Vice Senior Vice President of MLAM;
President Senior Vice President of Princeton
Services; Managing Director and
First Vice President of Merrill
Lynch from 1989 to 1995
<S> <C> <C>
Richard L. Reller........ Senior Vice First Vice President of MLAM; First
President Vice President of Princeton
Services
Gerald M. Richard........ Senior Vice Senior Vice President and Treasurer
President and of MLAM; Senior Vice President and
Treasurer Treasurer of Princeton Services;
Vice President and Treasurer of
MLFD
Ronald L. Welburn........ Senior Vice Senior Vice President of MLAM;
President Senior Vice President of Princeton
Services
Anthony Wiseman.......... Senior Vice Senior Vice President of MLAM;
President Senior Vice President of Princeton
Services
</TABLE>
ITEM 29. PRINCIPAL UNDERWRITERS.
(a) MLFD acts as the principal underwriter for the Registrant and, for each
of the open-end investment companies referred to in the first two paragraphs of
Item 28 except 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. and The Municipal Fund
Accumulation Program, Inc., and MLFD also acts as the principal underwriter for
the following closed-end investment companies: Merrill Lynch High Income
Municipal Bond Fund, Inc., Merrill Lynch Municipal Strategy Fund, Inc. and
Merrill Lynch Senior Floating Rate Fund, Inc.
(b) Set forth below is information concerning each director and officer of
MLFD. The principal business address of each such person is P.O. Box 9011,
Princeton, New Jersey 08543-9011, except that the address of Messrs. Aldrich,
Breen, Crook, Fatseas and Wasel is One Financial Center, 23rd Floor, Boston,
Massachusetts 02111-2646.
<TABLE>
<CAPTION>
POSITION(S) AND OFFICES POSITIONS AND OFFICES
NAME WITH MLFD WITH REGISTRANT
- ------------------------------------ ------------------------------------ ------------------------------------
<S> <C> <C>
Terry K. Glenn...................... President and Director Executive Vice President
Arthur Zeikel....................... Director President and Trustee
Philip L. Kirstein.................. Director None
William E. Aldrich.................. Senior Vice President None
Robert W. Crook..................... Senior Vice President None
Kevin P. Boman...................... Vice President None
Michael J. Brady.................... Vice President None
William M. Breen.................... Vice President None
Mark A. DeSario..................... Vice President None
James T. Fatseas.................... Vice President None
Debra W. Landsman-Yaros............. Vice President None
Michelle T. Lau..................... Vice President None
Gerald M. Richard................... Vice President and Treasurer Treasurer
Salvatore Venezia................... Vice President None
William Wasel....................... Vice President None
Robert Harris....................... Secretary None
</TABLE>
(c) Not applicable.
ITEM 30. LOCATION OF ACCOUNTS AND RECORDS.
All accounts, books and other documents required to be maintained by
Section 31(a) of the Investment Company Act of 1940, as amended (the '1940 Act')
and the rules thereunder are maintained at the offices of the Registrant, 800
Scudders Mill Road, Plainsboro, New Jersey 08536, and its transfer agent, MLFDS,
4800 Deer Lake Drive East, Jacksonville, Florida 32246-6484.
C-9
<PAGE>
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.
(a) Not applicable.
(b) Not applicable.
(c) Registrant undertakes to furnish each person to whom a prospectus is
delivered with a copy of the Registrant's latest annual report to shareholders,
upon request and without charge.
C-10
<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 POST-EFFECTIVE AMENDMENT TO THE
REGISTRATION STATEMENT PURSUANT TO RULE 485(B) UNDER THE SECURITIES ACT OF 1933
AND HAS DULY CAUSED THIS AMENDMENT TO THE REGISTRATION STATEMENT TO BE SIGNED ON
ITS BEHALF BY THE UNDERSIGNED, THEREUNTO DULY AUTHORIZED, IN THE TOWNSHIP OF
PLAINSBORO, AND THE STATE OF NEW JERSEY, ON THE 25TH DAY OF NOVEMBER, 1996.
MERRILL LYNCH MULTI-STATE LIMITED
MATURITY MUNICIPAL SERIES TRUST
(Registrant)
By /s/ GERALD M. RICHARD
-----------------------------------
(Gerald M. Richard, Treasurer)
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 DATE INDICATED.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
- ------------------------- ----------------------------------- ---------------
<S> <C> <C>
ARTHUR ZEIKEL* President (Principal Executive
- ------------------------- Officer) and Trustee
(Arthur Zeikel)
/s/ GERALD M. RICHARD Treasurer (Principal Financial and November 25,
- ------------------------- Accounting Officer) 1996
(Gerald M. Richard)
JAMES H. BODURTHA* Trustee
- -------------------------
(James H. Bodurtha)
HERBERT I. LONDON* Trustee
- -------------------------
(Herbert I. London)
ROBERT R. MARTIN* Trustee
- -------------------------
(Robert R. Martin)
JOSEPH L. MAY* Trustee
- -------------------------
(Joseph L. May)
ANDRE F. PEROLD* Trustee
- -------------------------
(Andre F. Perold)
*By: /s/GERALD M. RICHARD November 25,
(Gerald M. Richard, 1996
Attorney-in-Fact)
</TABLE>
C-11
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------------------------------------------------------------------------------------------------
<S> <C> <C>
10 -- Opinion of Brown & Wood LLP, counsel for the Registrant.
11 -- Consent of Deloitte & Touche LLP, independent auditors for the Registrant.
17 (a)(1) -- Financial Data Schedule for Class A Shares of the Arizona Fund.
(a)(2) -- Financial Data Schedule for Class A Shares of the California Fund.
(a)(3) -- Financial Data Schedule for Class A Shares of the Florida Fund.
(a)(4) -- Financial Data Schedule for Class A Shares of the Massachusetts Fund.
(a)(5) -- Financial Data Schedule for Class A Shares of the Michigan Fund.
(a)(6) -- Financial Data Schedule for Class A Shares of the New Jersey Fund.
(a)(7) -- Financial Data Schedule for Class A Shares of the New York Fund.
(a)(8) -- Financial Data Schedule for Class A Shares of the Pennsylvania Fund.
(b)(1) -- Financial Data Schedule for Class B Shares of the Arizona Fund.
(b)(2) -- Financial Data Schedule for Class B Shares of the California Fund.
(b)(3) -- Financial Data Schedule for Class B Shares of the Florida Fund.
(b)(4) -- Financial Data Schedule for Class B Shares of the Massachusetts Fund.
(b)(5) -- Financial Data Schedule for Class B Shares of the Michigan Fund.
(b)(6) -- Financial Data Schedule for Class B Shares of the New Jersey Fund.
(b)(7) -- Financial Data Schedule for Class B Shares of the New York Fund.
(b)(8) -- Financial Data Schedule for Class B Shares of the Pennsylvania Fund.
(c)(1) -- Financial Data Schedule for Class C Shares of the Arizona Fund.
(c)(2) -- Financial Data Schedule for Class C Shares of the California Fund.
(c)(3) -- Financial Data Schedule for Class C Shares of the Florida Fund.
(c)(4) -- Financial Data Schedule for Class C Shares of the Massachusetts Fund.
(c)(5) -- Financial Data Schedule for Class C Shares of the Michigan Fund.
(c)(6) -- Financial Data Schedule for Class C Shares of the New Jersey Fund.
(c)(7) -- Financial Data Schedule for Class C Shares of the New York Fund.
(c)(8) -- Financial Data Schedule for Class C Shares of the Pennsylvania Fund.
(d)(1) -- Financial Data Schedule for Class D Shares of the Arizona Fund.
(d)(2) -- Financial Data Schedule for Class D Shares of the California Fund.
(d)(3) -- Financial Data Schedule for Class D Shares of the Florida Fund.
(d)(4) -- Financial Data Schedule for Class D Shares of the Massachusetts Fund.
(d)(5) -- Financial Data Schedule for Class D Shares of the Michigan Fund.
(d)(6) -- Financial Data Schedule for Class D Shares of the New Jersey Fund.
(d)(7) -- Financial Data Schedule for Class D Shares of the New York Fund.
(d)(8) -- Financial Data Schedule for Class D Shares of the Pennsylvania Fund.
</TABLE>
<PAGE>
APPENDIX FOR GRAPHIC AND IMAGE MATERIAL
Pursuant to Rule 304 of Regulation S-T, the following table presents
fair and accurate narrative descriptions of graphic and image material omitted
from this EDGAR Submission file due to ASCII-incompatibility and
cross-references this material to the location of each occurrence in the text.
DESCRIPTION OF OMITTED LOCATION OF GRAPHIC
GRAPHIC OR IMAGE OR IMAGE IN TEXT
- ---------------------- -------------------
Compass plate, circular Back cover of Prospectus and
graph paper and Merrill Lynch back cover of Statement of
logo including stylized market Additional Informaiton
bull
<PAGE>
BROWN & WOOD LLP
ONE WORLD TRADE CENTER
NEW YORK, NEW YORK 10048-0557
TELEPHONE: 212-839-5300
FACSIMILE: 212-839-5599
November 26, 1996
Merrill Lynch Multi-State Limited Maturity
Municipal Series Trust
P.O. Box 9011
Princeton, New Jersey 08543-9011
Ladies and Gentlemen:
This opinion is furnished in connection with the registration by Merrill
Lynch Multi-State Limited Maturity Municipal Series Trust, a Massachusetts
business trust (the "Trust"), of shares of beneficial interest, par value $0.10
per share (the "Shares"), under the Securities Act of 1933, as amended, pursuant
to a registration statement on Form N-1A (File No. 33- 50417), as amended (the
"Registration Statement"), in the amounts set forth under "Amount of Shares
Being Registered" on the facing page of the Registration Statement. The Shares
being registered consist of the following existing series of Shares of the
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 and Merrill
Lynch Pennsylvania Limited Maturity Municipal Bond Fund.
<PAGE>
As counsel for the Trust, we are familiar with the proceedings taken by it
in connection with the authorization, issuance and sale of the Shares. In
addition, we have examined and are familiar with the Declaration of Trust of the
Trust, as amended, the ByLaws of the Trust and such other documents as we have
deemed relevant to the matters referred to in this opinion.
Based upon the foregoing, we are of the opinion that the Shares, upon
issuance and sale in the manner referred to in the Registration Statement for
consideration not less than the par value thereof, will be legally issued, fully
paid and non-assessable shares of beneficial interest, except that shareholders
of the Trust may under certain circumstances be held personally liable for the
Trust's obligations.
In rendering this opinion, we have relied as to matters of Massachusetts
law upon an opinion of Bingham, Dana & Gould rendered to the Trust.
We hereby consent to the filing of this opinion as an exhibit to the
Registration Statement and to the use of our name in the Prospectus and
Statement of Additional Information constituting parts thereof.
Very truly yours,
/s/ Brown & Wood LLP
2
<PAGE>
INDEPENDENT AUDITORS' CONSENT
Merrill Lynch Multi-State Limited Maturity
Municipal Series Trust:
We consent to the use in Post-Effective Amendment No. 4 to Registration
Statement No. 33-50417 of our report dated September 6, 1996 appearing in the
Statement of Additional Information, which is a part of such Registration
Statement, and to the reference to us under the caption "Financial Highlights"
appearing in the Prospectus, which also is a part of such Registration
Statement.
DELOITTE & TOUCHE LLP
Princeton, New Jersey
November 26, 1996
<TABLE> <S> <C>
<ARTICLE> 6
<SERIES>
<NUMBER> 1
<NAME> ML ARIZONA LIMITED MATURITY MUNICIPAL BOND FUND CLASS A
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> JUL-31-1996
<PERIOD-START> AUG-01-1995
<PERIOD-END> JUL-31-1996
<INVESTMENTS-AT-COST> 3992244
<INVESTMENTS-AT-VALUE> 4136875
<RECEIVABLES> 286345
<ASSETS-OTHER> 72656
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 4495876
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 43848
<TOTAL-LIABILITIES> 43848
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 4378835
<SHARES-COMMON-STOCK> 80693
<SHARES-COMMON-PRIOR> 103693
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> (71438)
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 144631
<NET-ASSETS> 813180
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 291905
<OTHER-INCOME> 0
<EXPENSES-NET> (62498)
<NET-INVESTMENT-INCOME> 229407
<REALIZED-GAINS-CURRENT> (691)
<APPREC-INCREASE-CURRENT> (45086)
<NET-CHANGE-FROM-OPS> 183630
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> (37685)
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 5200
<NUMBER-OF-SHARES-REDEEMED> (29641)
<SHARES-REINVESTED> 1441
<NET-CHANGE-IN-ASSETS> (1812788)
<ACCUMULATED-NII-PRIOR> (70746)
<ACCUMULATED-GAINS-PRIOR> 0
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 21459
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 156154
<AVERAGE-NET-ASSETS> 937988
<PER-SHARE-NAV-BEGIN> 10.17
<PER-SHARE-NII> .41
<PER-SHARE-GAIN-APPREC> (.09)
<PER-SHARE-DIVIDEND> (.41)
<PER-SHARE-DISTRIBUTIONS> 0
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 10.08
<EXPENSE-RATIO> 2.27
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 6
<SERIES>
<NUMBER> 2
<NAME> ML CALIFORNIA LIMITED MATURITY MUNICIPAL BOND FUND CLASS A
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> JUL-31-1996
<PERIOD-START> AUG-01-1995
<PERIOD-END> JUL-31-1996
<INVESTMENTS-AT-COST> 14538234
<INVESTMENTS-AT-VALUE> 15096081
<RECEIVABLES> 242399
<ASSETS-OTHER> 46272
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 15384752
<PAYABLE-FOR-SECURITIES> 0
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<NAME> ML CALIFORNIA LIMITED MATURITY MUNICIPAL BOND FUND CLASS C
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<NAME> ML MICHIGAN LIMITED MATURITY MUNICIPAL BOND FUND CLASS C
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<NAME> ML NEW JERSEY LIMITED MATURITY MUNICIPAL BOND FUND CLASS C
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<NAME> ML NEW YORK LIMITED MATURITY MUNICIPAL BOND FUND CLASS C
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<NAME> ML ARIZONA LIMITED MATURITY MUNICIPAL BOND FUND CLASS D
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<NAME> ML CALIFORNIA LIMITED MATURITY MUNICIPAL BOND FUND CLASS D
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<NAME> ML MICHIGAN LIMITED MATURITY MUNICIPAL BOND FUND CLASS D
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<NAME> ML NEW JERSEY LIMITED MATURITY MUNICIPAL BOND FUND CLASS D
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<NAME> ML NEW YORK LIMITED MATURITY MUNICIPAL BOND FUND CLASS D
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<NAME> ML PENNSYLVANIA LIMITED MATURITY MUNICIPAL BOND FUND CLASS D
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