<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON NOVEMBER 28, 1997
SECURITIES ACT FILE NO. 33-50417
INVESTMENT COMPANY ACT FILE NO. 811-6282
================================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
FORM N-1A
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 [X]
PRE-EFFECTIVE AMENDMENT NO. [ ]
POST-EFFECTIVE AMENDMENT NO. 5 [X]
AND/OR
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940 [X]
AMENDMENT NO. 13 [X]
(CHECK APPROPRIATE BOX OR BOXES)
------------------------
MERRILL LYNCH MULTI-STATE LIMITED MATURITY MUNICIPAL SERIES TRUST
(EXACT NAME OF REGISTRANT AS SPECIFIED IN CHARTER)
<TABLE>
<S> <C>
800 SCUDDERS MILL ROAD
PLAINSBORO, NEW JERSEY 08536
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICE) (ZIP CODE)
</TABLE>
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:
<TABLE>
<S> <C>
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
</TABLE>
------------------------
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.
TITLE OF SECURITIES BEING REGISTERED: Shares of Beneficial Interest, par value
$.10 per share
================================================================================
<PAGE> 2
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
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
PART C
</TABLE>
Information required to be included in Part C is set forth under the
appropriate Item, so numbered, in Part C to this Registration Statement.
<PAGE> 3
PROSPECTUS
NOVEMBER 28, 1997
MERRILL LYNCH MULTI-STATE LIMITED MATURITY MUNICIPAL SERIES TRUST
MERRILL LYNCH CALIFORNIA LIMITED MATURITY MUNICIPAL BOND FUND
MERRILL LYNCH FLORIDA LIMITED MATURITY MUNICIPAL BOND FUND
P.O. BOX 9011, PRINCETON, NEW JERSEY 08543-9011 - PHONE NO. (609) 282-2800
Merrill Lynch Multi-State Limited Maturity Municipal Series Trust (the
"Trust") consists of eight separate series, only two of which, Merrill Lynch
California Limited Maturity Municipal Bond Fund (the "California Fund") and
Merrill Lynch Florida Limited Maturity Municipal Bond Fund (the "Florida Fund")
are currently being publicly offered.* 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, corporate income or local
personal income taxes) as is consistent with prudent investment management and
may also provide exemption of Fund shares from state intangible personal
property taxes. 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, in certain states, corporate income or local personal
income taxes in the designated state and/or may also provide exemption of Fund
shares from state intangible personal property taxes. The obligations in which
the Funds may 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 12.
(continued on following page)
------------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION NOR HAS THE COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY
OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
------------------------
This Prospectus 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 28, 1997 (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
Commission maintains a Web site (http://www.sec.gov) that contains the Statement
of Additional Information, material incorporated by reference and other
information regarding the Funds. The Statement of Additional Information is
hereby incorporated by reference into this Prospectus.
------------------------
FUND ASSET MANAGEMENT--MANAGER
MERRILL LYNCH FUNDS DISTRIBUTOR, INC.--DISTRIBUTOR
<PAGE> 4
(continued from prior page)
Pursuant to the Merrill Lynch Select Pricing(SM) System, the capital stock
of each Fund is designated into four classes of shares, each with a different
combination of sales charges, ongoing fees and other features. The Merrill Lynch
Select Pricing(SM) System permits an investor to choose the method of purchasing
shares that the investor believes is most beneficial given the amount of the
purchase, the length of time the investor expects to hold the shares and other
relevant circumstances. See "Merrill Lynch Select Pricing(SM) System" on page 6.
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 that 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 except that for participants in certain
fee-based programs the minimum initial purchase is $500 and the minimum
subsequent purchase is $50. Merrill Lynch may charge its customers a processing
fee (presently $5.35) for confirming purchases and repurchases. Purchases and
redemptions made directly through Merrill Lynch Financial Data Services, Inc.
(the "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.
- ---------------
* At a shareholder's meeting presently scheduled to be held on January 5, 1998,
a proposal regarding the acquisition of six series of the Trust will be
considered. See "Organization of the Trust" on page 47. Although the Trust is
not currently offering for purchase or sale the shares of Merrill Lynch
Arizona Limited Maturity Municipal Bond Fund (the "Arizona Fund"), Merrill
Lynch Massachusetts Limited Maturity Municipal Bond Fund (the "Massachusetts
Fund"), Merrill Lynch Michigan Limited Maturity Municipal Bond Fund (the
"Michigan Fund"), Merrill Lynch New Jersey Limited Maturity Municipal Bond
Fund (the "New Jersey Fund"), Merrill Lynch New York Limited Maturity
Municipal Bond Fund (the "New York Fund"), or Merrill Lynch Pennsylvania
Limited Maturity Municipal Bond Fund (the "Pennsylvania Fund"), (collectively,
the "Acquired Funds"), certain information with respect to the Acquired Funds
is provided herein and in the Statement of Additional Information.
2
<PAGE> 5
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, decreasing year, decreasing
to 0.0% after to 0.0% 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 participants in certain fee-based programs. See
"Purchase of Shares--Initial Sales Charge Alternatives--Class A and Class D
Shares"--page 28 and "Shareholder Services--Fee-Based Programs"--page 39.
(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 30.
(c) Reduced for purchases of $100,000 and over and waived for purchases of Class
A shares by participants 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 28.
(d) Class A and Class D shares are not subject to a contingent deferred sales
charge ("CDSC"), except that certain purchases of $1,000,000 or more that
are not subject to an initial sales charge may instead be subject to a CDSC
of 0.20% of amounts redeemed within the first year after purchase. Such CDSC
may be waived in connection with certain fee-based programs. See
"Shareholder Services--Fee-Based Programs"--page 39.
(e) The CDSC may be modified in connection with certain fee-based programs. See
"Shareholder Services--Fee-Based Programs"--page 39.
(f) The CDSC may be waived in connection with certain fee-based programs. See
"Shareholder Services--Fee-Based Programs"--page 39.
* Class C shares are available only through the exchange privilege. See
"Shareholder Services--Exchange Privilege"--page 37.
3
<PAGE> 6
<TABLE>
<CAPTION>
CALIFORNIA FUND FLORIDA 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 Maintenance 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........................ 0.93% 0.94% 0.75% 0.90% 0.74% 0.75% 0.56% 0.74%
------- ------- ------- ------- ------- ------- ------- -------
TOTAL FUND OPERATING EXPENSES(J).......... 1.28% 1.64% 1.45% 1.35% 1.09% 1.45% 1.26% 1.19%
======= ======= ======= ======= ======= ======= ======= =======
</TABLE>
- ---------------
(g) See "Management of the Trust--Management and Advisory Arrangements"--page
24.
(h) See "Purchase of Shares--Distribution Plans"--page 33.
(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 33. Such amount, however, is subject to certain limitations.
See "Purchase of Shares--Limitations on the Payment of Deferred Sales
Charges"--page 35.
(j) For the fiscal year ended July 31, 1997, Fund Asset Management, L.P. (the
"Manager") voluntarily waived $29,150 of the management fees due from the
California Fund; the Manager waived none of the management fees due from the
Florida Fund and did not reimburse the Florida Fund for 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 for the California Fund, net of the
waiver, is provided below for the fiscal year ended July 31, 1997.
* Class B shares convert to Class D shares automatically after approximately
ten years and cease being subject to distribution fees.
<TABLE>
<CAPTION>
MANAGEMENT FEES WAIVED AND TOTAL OPERATING EXPENSES AFTER WAIVER
EXPENSES REIMBURSED AND 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>
California Fund....................... .20% .20% .20% .20% 1.08% 1.44% 1.25% 1.15%
</TABLE>
4
<PAGE> 7
EXAMPLE:
<TABLE>
<CAPTION>
CUMULATIVE EXPENSES PAID FOR THE PERIOD INDICATED
------------------------------------------------------------------------------------
CALIFORNIA FUND FLORIDA 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 page 4, (2) a 5%
annual return throughout the period, and
(3) redemption at the end of the period
(including any applicable CDSC for Class
B and Class C shares):
Class A............................... $ 23 $50 $80 $163 $ 21 $44 $69 $142
Class B............................... $ 27 $52 $89 $194 $ 25 $46 $79 $174
Class C............................... $ 25 $46 $79 $174 $ 23 $40 $69 $152
Class D............................... $ 24 $52 $83 $171 $ 22 $47 $75 $153
An investor would pay the following
expenses on the same $1,000 investment
assuming no redemption at the end of the
period:
Class A............................... $ 23 $50 $80 $163 $ 21 $44 $69 $142
Class B............................... $ 17 $52 $89 $194 $ 15 $46 $79 $174
Class C............................... $ 15 $46 $79 $174 $ 13 $40 $69 $152
Class D............................... $ 24 $52 $83 $171 $ 22 $47 $75 $153
</TABLE>
5
<PAGE> 8
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 a 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
$5.35) for confirming purchases and repurchases. Purchases and redemptions made
directly through the Trust's Transfer Agent are not subject to the processing
fee. See "Purchase of Shares" and "Redemption of Shares."
MERRILL LYNCH SELECT PRICING(SM) SYSTEM
The capital stock of each of the Funds is designated into four classes of
shares under the Merrill Lynch Select Pricing(SM) System. Class A, Class B and
Class D shares may be purchased at a price equal to the next determined net
asset value per share subject to the sales charges and ongoing fee arrangements
described below. Shares of Class A and Class D are sold to investors choosing
the initial sales charge alternatives, and shares of Class B are sold to
investors choosing the deferred sales charge alternative. Class C shares are not
offered for sale by the Funds but are available by exchange with Class C shares
of other MLAM-advised mutual funds. The Merrill Lynch Select Pricing(SM) System
is used by more than 50 registered investment companies advised by Merrill Lynch
Asset Management, L.P. ("MLAM") or FAM, an affiliate of MLAM. Funds advised by
MLAM or FAM that use the Merrill Lynch Select Pricing(SM) System are referred to
herein as "MLAM-advised mutual funds."
Each Class A, Class B, Class C or Class D share of each of the Funds
represents an identical interest in the investment portfolio of that Fund and
has the same rights, except that Class B, Class C and Class D shares bear the
expenses of the ongoing account maintenance fees and Class B and Class C shares
bear the expenses of the ongoing distribution fees and the additional
incremental transfer agency costs resulting from the deferred sales charge
arrangements. The CDSCs and distribution and account maintenance fees that are
imposed on Class B and Class C shares, as well as the account maintenance fees
that are imposed on Class D shares, are imposed directly against those classes
and not against all assets of the Fund issuing the shares and, accordingly, such
charges will not affect the net asset value of any other class or have any
impact on investors choosing another sales charge option. Dividends paid by a
Fund for each class of shares will be calculated in the same manner at the same
time and will differ only to the extent that account maintenance and
distribution fees and any incremental transfer agency costs relating to a
particular class are borne exclusively by that class. Each class has different
exchange privileges. See "Shareholder Services--Exchange Privilege."
Investors should understand that the purpose and function of the initial
sales charges with respect to the Class A and Class D shares are the same as
those of the CDSCs and distribution fees with respect to the Class B and Class C
shares in that the sales charges and distribution fees applicable to each class
provide for the financing of the distribution of the shares of 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.
6
<PAGE> 9
The following table sets forth a summary of the distribution arrangements
for each class of shares under the Merrill Lynch Select Pricing(SM) System,
followed by a more detailed description of each class. More detailed information
as to each class of shares is set forth under "Purchase of Shares."
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C>
ACCOUNT
MAINTENANCE DISTRIBUTION
CLASS SALES CHARGE(1) FEE FEE CONVERSION FEATURE
<CAPTION>
<S> <C> <C> <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 charge(3) 0.10% No No
</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 by participants 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 certain fee-based
programs. See "Class A" and "Class D" below.
(4) The CDSC may be modified in connection with certain fee-based programs.
(5) The conversion period for dividend reinvestment shares and certain fee-based
programs was modified. Also, Class B shares of certain other MLAM-advised
mutual funds into which exchanges may be made have an eight year conversion
period. If Class B shares of 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 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 of 1.00% is reduced for
purchases of $100,000 and over and waived for purchases by participants
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
7
<PAGE> 10
redeemed within one year after purchase. Such CDSC may be waived in
connection with certain fee-based programs. Sales charges also are
reduced under a right of accumulation that takes into account the
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 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 who 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 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. The maximum initial sales charge of 1.00% is reduced
for purchases of $100,000 and over. 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 certain fee-based programs. The schedule
of initial sales charges and reductions for Class D shares is the same
as the schedule for Class A shares, except that there is no waiver for
purchases 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
8
<PAGE> 11
described above under "Class B." See "Purchase of Shares--Initial Sales
Charge Alternatives-- Class A and Class D Shares."
The following is a discussion of the factors that investors should consider
in determining the method of purchasing shares under the Merrill Lynch Select
Pricing(SM) System that the investor believes is most beneficial under his or
her particular circumstances.
Initial Sales Charge Alternatives. Investors who prefer an initial sales
charge alternative may elect to purchase Class D shares or, if an eligible
investor, Class A shares. Investors choosing the initial sales charge
alternative who are eligible to purchase Class A shares should purchase Class A
shares rather than Class D shares because 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 that may qualify the investor for reduced initial sales charges on
new initial sales charge purchases. In addition, the ongoing Class B and Class C
account maintenance and distribution fees will cause Class B and Class C shares
to have higher expense ratios, pay lower dividends and have lower total returns
than the initial sales charge shares. The ongoing Class D account maintenance
fees will cause Class D shares to have a higher expense ratio, pay lower
dividends and have a lower total return than Class A shares.
Deferred Sales Charge 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."
9
<PAGE> 12
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, 1997 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>
CALIFORNIA FUND
----------------------------------------------------------------------------------------
CLASS A CLASS B
-------------------------------------- --------------------------------------------
FOR THE FOR THE
FOR THE YEAR PERIOD FOR THE YEAR PERIOD
ENDED NOV. 26, ENDED NOV. 26,
JULY 31, 1993+ TO JULY 31, 1993+ TO
-------------------------- JULY 31, -------------------------------- JULY 31,
1997 1996 1995 1994 1997 1996 1995 1994
------ ------ ------ -------- -------- -------- -------- --------
<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 $ 9.99 $ 9.88 $10.00 $ 10.04 $ 9.99 $ 9.88 $ 10.00
------ ------- ------- ------ ------- ------- ------ -------
Investment income--net.......... .38 .39 .42 .24 .34 .36 .39 .21
Realized and unrealized gain
(loss) on investments--net.... .17 .06 .11 (.12) .17 .05 .11 (.12)
------ ------- ------- ------ ------- ------- ------ -------
Total from investment
operations...................... .55 .45 .53 .12 .51 .41 .50 .09
------ ------- ------- ------ ------- ------- ------ -------
Less dividends from investment
income--net..................... (.38) (.39) (.42) (.24) (.34) (.36) (.39) (.21)
------ ------- ------- ------ ------- ------- ------ -------
Net asset value, end of period... $10.22 $10.05 $ 9.99 $ 9.88 $ 10.21 $ 10.04 $ 9.99 $ 9.88
====== ======= ======= ====== ======= ======= ====== =======
TOTAL INVESTMENT RETURN:**
Based on net asset value per
share........................... 5.57% 4.56% 5.60% 1.23%# 5.20% 4.08% 5.23% .99%#
====== ======= ======= ====== ======= ======= ====== =======
RATIOS TO AVERAGE NET ASSETS:
Expenses, net of reimbursement... 1.08% .94% .40% .02%* 1.44% 1.30% .76% .38%*
====== ======= ======= ====== ======= ======= ====== =======
Expenses......................... 1.28% 1.30% 1.44% 1.16%* 1.64% 1.66% 1.80% 1.52%*
====== ======= ======= ====== ======= ======= ====== =======
Investment income--net........... 3.75% 3.89% 4.36% 3.54%* 3.39% 3.53% 4.00% 3.19%*
====== ======= ======= ====== ======= ======= ====== =======
SUPPLEMENTAL DATA:
Net assets, end of period (in
thousands)...................... $3,152 $3,162 $3,527 $3,804 $ 6,877 $ 9,919 $ 10,363 $11,430
====== ======= ======= ====== ======= ======= ====== =======
Portfolio turnover............... 26.86% 11.09% 124.72% 130.10% 26.86% 11.09% 124.72% 130.10%
====== ======= ======= ====== ======= ======= ====== =======
<CAPTION>
CLASS C CLASS D
-------------------------------- --------------------------------
FOR THE FOR THE
FOR THE YEAR PERIOD FOR THE YEAR PERIOD
ENDED OCT. 21, ENDED OCT. 21,
JULY 31, 1994+ TO JULY 31, 1994+ TO
-------------------- JULY 31, -------------------- JULY 31,
1997 1996 1995 1997 1996 1995
-------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
Increase (Decrease) in Net Asset
Value:
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of
period.......................... $ 10.05 $ 9.99 $ 9.76 $ 10.05 $ 9.99 $ 9.76
------ ------ ------ ------ ----- ------
Investment income--net.......... .36 .37 .31 .37 .38 .33
Realized and unrealized gain
(loss) on investments--net.... .17 .06 .23 .17 .06 .23
------ ------ ------ ------ ----- ------
Total from investment
operations...................... .53 .43 .54 .54 .44 .56
------ ------ ------ ------ ----- ------
Less dividends from investment
income--net..................... (.36) (.37) (.31) (.37) (.38) (.33)
------ ------ ------ ------ ----- ------
Net asset value, end of period... $ 10.22 $ 10.05 $ 9.99 $ 10.22 $ 10.05 $ 9.99
====== ====== ====== ====== ===== ======
TOTAL INVESTMENT RETURN:**
Based on net asset value per
share........................... 5.39% 4.35% 5.60%# 5.47% 4.46% 5.85%#
====== ====== ====== ====== ===== ======
RATIOS TO AVERAGE NET ASSETS:
Expenses, net of reimbursement... 1.25% 1.14% .82%* 1.15% 1.06% .66%*
====== ====== ====== ====== ===== ======
Expenses......................... 1.45% 1.50% 1.98%* 1.35% 1.40% 1.81%*
====== ====== ====== ====== ===== ======
Investment income--net........... 3.58% 3.69% 4.04%* 3.69% 3.77% 4.28%*
====== ====== ====== ====== ===== ======
SUPPLEMENTAL DATA:
Net assets, end of period (in
thousands)...................... $ 57 $ 55 $ 64 $ 4,043 $ 2,185 $1,771
====== ====== ====== ====== ===== ======
Portfolio turnover............... 26.86% 11.09% 124.72% 26.86% 11.09% 124.72%
====== ====== ====== ====== ===== ======
</TABLE>
- ---------------
* Annualized.
** Total investment returns exclude the effects of sales loads.
+ Commencement of operations.
# Aggregate total investment return.
10
<PAGE> 13
FINANCIAL HIGHLIGHTS (CONTINUED)
<TABLE>
<CAPTION>
FLORIDA FUND
---------------------------------------------------------------------------------------
CLASS A CLASS B
-------------------------------------- --------------------------------------------
FOR THE FOR THE
FOR THE YEAR PERIOD FOR THE YEAR PERIOD
ENDED NOV. 26, ENDED NOV. 26,
JULY 31, 1993+ TO JULY 31, 1993+ TO
-------------------------- JULY 31, -------------------------------- JULY 31,
1997 1996 1995 1994 1997 1996 1995 1994
------ ------ ------ -------- -------- -------- -------- --------
<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 $10.02 $ 9.87 $ 10.00 $ 9.96 $ 10.02 $ 9.88 $ 10.00
------ ------- ------- ------ ------- ------- ------ -------
Investment income--net........ .40 .40 .43 .24 .36 .37 .40 .21
Realized and unrealized gain
(loss) on
investments--net............ .11 (.06) .15 (.13) .11 (.06) .14 (.12)
------ ------- ------- ------ ------- ------- ------ -------
Total from investment
operations.................... .51 .34 .58 .11 .47 .31 .54 .09
------ ------- ------- ------ ------- ------- ------ -------
Less dividends from investment
income--net................... (.40) (.40) (.43) (.24) (.36) (.37) (.40) (.21)
------ ------- ------- ------ ------- ------- ------ -------
Net asset value, end of
period........................ $10.07 $ 9.96 $10.02 $ 9.87 $ 10.07 $ 9.96 $ 10.02 $ 9.88
====== ======= ======= ====== ======= ======= ====== =======
TOTAL INVESTMENT RETURN:**
Based on net asset value per
share......................... 5.20% 3.45% 6.05% 1.12%# 4.83% 3.08% 5.57% .99%#
====== ======= ======= ====== ======= ======= ====== =======
RATIOS TO AVERAGE NET ASSETS:
Expenses, net of
reimbursement................. 1.09% .89% .39% .02%* 1.45% 1.24% .75% .38%*
====== ======= ======= ====== ======= ======= ====== =======
Expenses....................... 1.09% .97% 1.03% .86%* 1.45% 1.32% 1.38% 1.23%*
====== ======= ======= ====== ======= ======= ====== =======
Investment income--net......... 3.98% 4.01% 4.39% 3.54%* 3.63% 3.66% 4.05% 3.19%*
====== ======= ======= ====== ======= ======= ====== =======
SUPPLEMENTAL DATA:
Net assets, end of period (in
thousands).................... $6,376 $7,874 $9,849 $14,868 $ 11,461 $ 13,690 $ 16,213 $18,179
====== ======= ======= ====== ======= ======= ====== =======
Portfolio turnover............. 35.67% 39.90% 138.97% 136.71% 35.67% 39.90% 138.97% 136.71%
====== ======= ======= ====== ======= ======= ====== =======
<CAPTION>
CLASS C CLASS D
-------------------------------- --------------------------------
FOR THE FOR THE
FOR THE YEAR PERIOD FOR THE YEAR PERIOD
ENDED OCT. 21, ENDED OCT. 21,
JULY 31, 1994+ TO JULY 31, 1994+ TO
-------------------- JULY 31, -------------------- JULY 31,
1997 1996 1995 1997 1996 1995
-------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
Increase (Decrease) in Net
Asset Value:
PER SHARE OPERATING
PERFORMANCE:
Net asset value, beginning of
period........................ $ 9.90 $ 10.01 $ 9.76 $ 9.95 $ 10.01 $ 9.76
------ ------ ------ ------ ----- ------
Investment income--net........ .38 .36 .29 .39 .39 .33
Realized and unrealized gain
(loss) on
investments--net............ .10 (.11) .25 .11 (.06) .25
------ ------ ------ ------ ----- ------
Total from investment
operations.................... .48 .25 .54 .50 .33 .58
------ ------ ------ ------ ----- ------
Less dividends from investment
income--net................... (.38) (.36) (.29) (.39) (.39) (.33)
------ ------ ------ ------ ----- ------
Net asset value, end of
period........................ $ 10.00 $ 9.90 $10.01 $ 10.06 $ 9.95 $10.01
====== ====== ====== ====== ===== ======
TOTAL INVESTMENT RETURN:**
Based on net asset value per
share......................... 4.93% 2.48% 5.65%# 5.10% 3.35% 6.07%#
====== ====== ====== ====== ===== ======
RATIOS TO AVERAGE NET ASSETS:
Expenses, net of
reimbursement................. 1.26% 1.21% 1.09%* 1.19% .99% .67%*
====== ====== ====== ====== ===== ======
Expenses....................... 1.26% 1.23% 1.67%* 1.19% 1.07% 1.19%*
====== ====== ====== ====== ===== ======
Investment income--net......... 3.83% 3.75% 3.83%* 3.88% 3.91% 4.23%*
====== ====== ====== ====== ===== ======
SUPPLEMENTAL DATA:
Net assets, end of period (in
thousands).................... $ 60 $ 52 $ 1 $ 7,733 $ 6,406 $7,210
====== ====== ====== ====== ===== ======
Portfolio turnover............. 35.67% 39.90% 138.97% 35.67% 39.90% 138.97%
====== ====== ====== ====== ===== ======
</TABLE>
- ---------------
* Annualized.
** Total investment returns exclude the effects of sales loads.
+ Commencement of operations.
# Aggregate total investment return.
11
<PAGE> 14
INVESTMENT OBJECTIVE 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, corporate income or local personal
income taxes and/or provide an exemption for Fund shares from state intangible
personal property 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 U.S. 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 are referred to
herein as "State Municipal Bonds" only if they pay interest exempt from Federal
income taxes, the designated state's personal income taxes and, in certain
states, corporate income or local personal income taxes, and would not subject
shareholders to intangible personal property taxes in the designated state.
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 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 that, 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
("S&P") (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-
12
<PAGE> 15
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 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 S&P or Fitch. Such securities,
sometimes referred to as "high yield" or "junk" bonds, are predominantly
speculative with respect to the capacity to pay interest and repay principal in
accordance with the terms of the security and generally involve a greater
volatility of price than securities in higher rating categories. The market
prices of high-yielding, lower-rated securities may fluctuate more than
higher-rated securities and may decline significantly in periods of general
economic difficulty, which may follow periods of rising interest rates. In
purchasing such securities, a 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 that 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 that 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%) in 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
13
<PAGE> 16
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,
corporate income or local personal income taxes, or to hold investments that
would subject shareholders to intangible personal property taxes in the
designated state. However, to the extent that suitable Municipal Bonds of a
designated state are not available for investment by a 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. 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 S&P), 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 that 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. 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 a 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, corporate
income or 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
14
<PAGE> 17
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 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 investment. See "Description of Municipal
Bonds." Certain instruments in which the Funds may invest may be characterized
as derivative securities. 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% of its total assets
in its respective State Municipal Bonds and, therefore, each Fund is more
susceptible to factors and conditions 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 the California
Fund and the Florida Fund which are currently being offered hereby.
The value of Municipal Bonds generally may be affected by uncertainties in
the municipal bond markets as a result of legislation or litigation changing the
taxation of Municipal Bonds or the rights of Municipal Bond holders in the event
of a bankruptcy. Municipal bankruptcies are rare, and certain provisions of the
U.S. Bankruptcy Code governing such bankruptcies are unclear. Further, the
application of state law to Municipal Bond issuers could produce varying results
among the states or among Municipal Bond issuers within a state. These
uncertainties could have a significant impact on the prices of the Municipal
Bonds in which a Fund invests.
The California Fund. Beginning in the 1990-91 fiscal year, the State of
California 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." S&P
lowered its rating from "A+" to "A" and termed its outlook as "stable," and
Fitch lowered its rating from "AA" to "A." Although a steady upturn has been
underway since 1994, pre-recession job levels are not expected to be reached
until later in the decade. As of the date of this Prospectus, S&P and Fitch have
upgraded their ratings to A+ and AA-, respectively. No assurance can be given
that ratings will not be lowered in the future. See Appendix A--"Economic and
Other 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
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has a proportionally greater retirement age population that is dependent upon
transfer payments (social security, pension benefits, etc.). Such transfer
payments can be affected by Federal legislation. Florida's economic growth 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 B--"Economic Conditions in Florida," in the Statement of
Additional Information for important information regarding the State of Florida.
The Manager does not believe that the current economic conditions in
California and Florida, or other factors described above, will have a
significant adverse effect on the related Fund's ability to invest in investment
grade State Municipal Bonds. See "Description of Municipal Bonds" in the
Statement of Additional Information and see also Appendix A--"Economic and Other
Conditions in California" and Appendix B--"Economic Conditions in Florida" each
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 (such as water, sewer, gas, electricity,
solid waste disposal, health care, transportation, education and housing
facilities), refunding of outstanding obligations and obtaining funds for
general operating expenses and loans to other public institutions and
facilities. In addition, certain types of industrial development bonds 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 from Federal income taxes, the
designated state's personal income taxes and, where applicable, local personal
income taxes, and would not subject Fund 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 a pledge of the faith,
credit and taxing power of a state or a political subdivision 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 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
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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.
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 private 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 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 that the Manager,
pursuant to guidelines that have been adopted by the Board of Trustees and
subject to the supervision of the
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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 S&P 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 entity 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 that 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 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 that contain
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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 that 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 that 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 that may not be presented by investments in other Municipal
Bonds. There is some risk that certain issues could be resolved in a manner that
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 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.
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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. Recent legislation has created new
categories of capital gains taxable at different rates which the Fund may be
able to pass through to shareholders. See "Distributions and Taxes--Taxes."
Each Fund may deal in financial futures contracts traded on the Chicago
Board of Trade based on The Bond Buyer Municipal Bond Index, a price-weighted
measure of the market value of 40 large, recently issued tax-exempt bonds. There
can be no assurance, however, that a liquid secondary market will exist to
terminate any particular financial futures contract or option thereon at any
specific time. If it is not possible to close a financial futures position or
the related option entered into by a Fund, the Fund would continue to be
required to make daily cash payments of variation margin in the event of adverse
price movements. In such a situation, if the Fund has insufficient cash, it may
have to sell portfolio securities to meet daily variation margin requirements at
a time when it may be disadvantageous to do so. The inability to close financial
futures contracts or related option positions also could have an adverse impact
on a Fund's ability to hedge effectively. There is also the risk of loss by a
Fund of margin deposits in the event of bankruptcy of a broker with whom the
Fund has an open position in a financial futures contract or option thereon.
Each Fund may purchase and sell financial futures contracts on U.S.
government securities and write and purchase put and call options on such
financial futures contracts as a hedge against adverse changes in interest rates
as described more fully in the Statement of Additional Information. With respect
to U.S. Government securities, currently there are financial futures contracts
based on long-term U.S. Treasury bonds, U.S. Treasury notes, Government National
Mortgage Association ("GNMA") Certificates and three-month U.S. Treasury bills.
Subject to policies adopted by the Trustees, the Funds also may enter into
other financial futures transactions, such as financial futures contracts or
options on other municipal bond indices which may become available, if the
Manager of the Funds and the Trustees of the Trust should determine that there
is normally a
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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 that will not be
completely offset by movements in the price of such security. There is a risk of
imperfect correlation where the securities underlying financial futures
contracts or options thereon have different maturities, ratings or geographic
mixes than the security being hedged. In addition, the correlation may be
affected by additions to or deletions from the index that serves as a basis for
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 that have a disparate impact on the respective
markets for such securities.
Under regulations of the Commodity Futures Trading Commission, the futures
trading activities described herein will not result in a Fund 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. This requirement will no longer apply to any Fund after its
fiscal year ending July 31, 1998. 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 that limit the amount of
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fluctuation in a financial futures contract price during a single trading day.
Once the daily limit has been reached in the contract, no trades may be entered
into at a price beyond the limit, thus preventing the liquidation of open
futures positions. Prices in the past have reached or exceeded the daily limit
on a number of consecutive trading days.
The successful use of financial futures contracts and options thereon also
depends on the ability of the Manager to forecast correctly the direction and
extent of interest rate movements within a given time frame. To the extent these
rates remain stable during the period in which a financial futures contract or
related option is held by a Fund or move in a direction opposite to that
anticipated, the Fund may realize a loss on the hedging transaction which is not
fully or partially offset by an increase in the value of portfolio securities.
As a result, a Fund's total return for such period may be less than if it had
not engaged in the hedging transaction. Furthermore, each Fund only will engage
in hedging transactions from time to time and may not necessarily be engaging in
hedging transactions when movements in interest rates occur.
Reference is made to the Statement of Additional Information for further
information on financial futures contracts and certain options thereon.
REPURCHASE AGREEMENTS
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.
A Fund may be subject to state and local restrictions that 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.
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As a non-fundamental policy, no Fund will invest in securities that cannot
be readily resold because of legal or contractual restrictions or which are not
readily marketable, including individually negotiated loans that constitute
illiquid investments and illiquid lease obligations, and in repurchase
agreements 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.
Each Fund is classified as non-diversified within the meaning of the 1940
Act, which means that the Fund is not limited by the 1940 Act in the proportion
of its assets that it may invest in obligations of a single issuer. However,
each Fund's investments will be limited so as to qualify as a "regulated
investment company" for purposes of the Code. See "Distributions and
Taxes--Taxes." To qualify, among other requirements, the Trust will limit each
Fund's investments so that, at the close of each quarter of the taxable year,
(i) not more than 25% of the market value of the Fund's total assets will be
invested in the securities of a single issuer, and (ii) with respect to 50% of
the market value of its total assets, not more than 5% of the market value of
its total assets will be invested in the securities of a single issuer and the
Fund will not own more than 10% of the outstanding voting securities of a single
issuer. For purposes of this restriction, each Fund will regard each state and
each political subdivision, agency or instrumentality of such state and each
multi-state agency of which such state is a member and each public authority
which issues securities on behalf of a private entity, as a separate issuer,
except that if the security is backed only by the assets and revenues of a
non-government entity then the entity with the ultimate responsibility for the
payment of interest and principal may be regarded as the sole issuer. These
tax-related limitations may be changed by the Trustees of the Trust to the
extent necessary to comply with changes to the Federal tax requirements. A Fund
which elects to be classified as "diversified" under the 1940 Act must satisfy
the foregoing 5% and 10% requirements with respect to 75% of its total assets.
To the extent that a Fund assumes large positions in the obligations of a small
number of issuers, that Fund's total return may fluctuate to a greater extent
than that of a diversified company as a result of changes in the financial
condition or in the market's assessment of the issuers.
Investors are referred to the Statement of Additional Information for a
complete description of each Fund's investment restrictions.
MANAGEMENT OF THE TRUST
TRUSTEES
The Trustees of the Trust consist of six individuals, five of whom are not
"interested persons" of the Trust as defined in the 1940 Act. The Trustees are
responsible for the overall supervision of the operations of the Trust and the
Funds and perform the various duties imposed on the directors or trustees of
investment companies by the 1940 Act.
The Trustees are:
ARTHUR ZEIKEL*--President of the Manager and its affiliate, MLAM; President
and Director of Princeton Services, Inc. ("Princeton Services"); and Executive
Vice President of ML&Co.
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.
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ANDRE F. PEROLD--Professor, Harvard Business School.
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* 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 140
registered investment companies. MLAM also offers portfolio management and
portfolio analysis services to individuals and institutions. As of October 31,
1997, the Manager and MLAM had a total of approximately $271.9 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 is the Portfolio Manager for the California Fund and the
Florida Fund as well as certain of the Acquired Funds, including the Michigan
Fund and the New York Fund, and has been responsible for the day-to-day
management of each Fund's investment portfolio since November 1993. Mr. Andrews
has been a Portfolio Manager and Vice President of the Manager and MLAM since
1991.
Peter J. Hayes and Helen M. Sheehan are Portfolio Managers for certain of
the Acquired Funds, including the Arizona Fund, the Massachusetts Fund, the New
Jersey Fund and the Pennsylvania Fund, and have been responsible for the
day-to-day management of each Fund's investment portfolio since November 1993.
Mr. Hayes has been a Portfolio Manager and Vice President of the Manager since
1989; First Vice President of MLAM since 1997 and Vice President of MLAM from
1989 to 1997. Ms. 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.
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.
24
<PAGE> 27
Set forth in the table below is information for each Fund, including each
of the Acquired Funds, pertaining to the Fund's investment advisory arrangements
for the fiscal year ended July 31, 1997:
<TABLE>
<CAPTION>
BASED ON
AVERAGE REIMBURSEMENT RATIO OF TOTAL EXPENSES
DAILY NET OF MANAGER TO AVERAGE NET ASSETS
MANAGEMENT VOLUNTARY ASSETS OF FOR ACCOUNTING -------------------------------------
FUND FEE($) WAIVER($) APPROX. ($) SERVICES ($) CLASS A CLASS B CLASS C CLASS D
- ----------------------------- ---------- --------- ------------- -------------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Arizona Fund................. 13,268 13,268 3.8 million 33,811 3.21% 3.56% 3.35% 3.29%
California Fund.............. 51,013 29,150 14.6 million 32,283 1.28% 1.64% 1.45% 1.35%
Florida Fund................. 90,513 0 25.9 million 64,974 1.09% 1.45% 1.26% 1.19%
Massachusetts Fund........... 22,132 22,132 6.3 million 48,536 2.52% 2.84% 2.69% 2.62%
Michigan Fund................ 14,977 14,977 4.3 million 41,011 3.50% 3.86% 3.81% 3.48%
New Jersey Fund.............. 25,494 25,494 7.3 million 26,609 1.65% 2.00% 1.80% 1.78%
New York Fund................ 57,645 57,645 16.5 million 34,860 1.16% 1.52% 1.32% 1.26%
Pennsylvania Fund............ 29,758 29,758 8.5 million 42,078 1.75% 2.11% 2.02% 1.85%
</TABLE>
CODE OF ETHICS
The Board of Trustees of the Trust has adopted a Code of Ethics under Rule
17j-1 of the Act that 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 that 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
The Transfer Agent, which is a 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 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
the Transfer Agent receives an annual fee of up to $11.00 per Class A or Class D
account, and up to $14.00 per Class B or Class C account, and is entitled to
reimbursement for certain transaction charges and for out-of-pocket expenses
incurred by the Transfer Agent under the Transfer Agency Agreement.
Additionally, a $.20 monthly closed account charge will be assessed on all
accounts that close during the calendar year. Application of this fee will
commence the month following the month the account is closed. At the end of the
calendar year, no further fees will be due. For purposes of the Transfer Agency
Agreement, the term "account" includes a shareholder account maintained directly
by the Transfer Agent and any other account representing the beneficial interest
of a person in the relevant share
25
<PAGE> 28
class on a recordkeeping system, provided the recordkeeping system is maintained
by a subsidiary of ML&Co. For the fiscal year ended July 31, 1997, the total fee
paid to the Transfer Agent pursuant to the Transfer Agency Agreement by the
California Fund was $4,553 and by the Florida Fund was $6,358.
PURCHASE OF SHARES
The Distributor, an affiliate of each of the Manager, MLAM and Merrill
Lynch, acts as the Distributor of the shares of each Fund. Shares of the
Acquired Funds are not currently being offered for purchase or sale. For
purposes of this "Purchase of Shares" section, the term "Fund" shall refer to
the California Fund and the Florida Fund only.
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, except
that for participants in certain fee-based programs, the minimum initial
purchase is $500 and the minimum subsequent purchase is $50.
Each Fund offers its Class A, Class B, Class C and Class D shares at a
public offering price equal to the next determined net asset value per share
plus sales charges imposed either at the time of purchase or on a deferred basis
depending upon the class of shares selected by the investor under the Merrill
Lynch Select Pricing(SM) System, as described below. The applicable offering
price for purchase orders is based upon the net asset value of the respective
Fund next determined after receipt of the purchase orders by the Distributor. As
to purchase orders received by securities dealers prior to the close of business
on the New York Stock Exchange (the "NYSE") (generally, 4:00 p.m., New York
time) which includes orders received after the close of business on the previous
day, the applicable offering price will be based on the net asset value
determined as of 15 minutes after the close of business on the NYSE on that day,
provided the Distributor in turn receives the order from the securities dealer
prior to 30 minutes after the close of business on the NYSE on that day. If the
purchase orders are not received by the Distributor prior to 30 minutes after
the close of business on the NYSE on that day, 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 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 $5.35) to confirm a sale of shares to such
customers. Purchases made directly through the Trust's Transfer Agent are not
subject to the processing fee.
Each of the Funds issues four classes of shares under the Merrill Lynch
Select Pricing(SM) System, which permits each investor to choose the method of
purchasing shares that the investor believes is most beneficial given the amount
of the purchase, the length of time the investor expects to hold the shares and
other relevant circumstances. Shares of Class A and Class D are sold to
investors choosing the initial sales charge alternatives and shares of Class B
are sold to investors choosing the deferred sales charge alternative. Investors
should determine whether under their particular circumstances it is more
advantageous to incur an initial sales charge or to have the entire initial
purchase price invested in the Fund with the investment thereafter being
26
<PAGE> 29
subject to a CDSC, ongoing distribution fees and higher account maintenance
fees. A discussion of the factors that investors should consider in determining
the method of purchasing shares under the Merrill Lynch Select Pricing(SM)
System is set forth under "Merrill Lynch Select Pricing(SM) System" on page 6.
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 (except that Class B shareholders may vote upon any
material changes to expenses charged under the Class D Distribution Plan). See
"Distribution Plans" below. Each class has different exchange privileges. See
"Shareholder Services--Exchange 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 CDSCs and distribution fees with respect to Class B and Class C shares in
that the sales charges and distribution fees applicable to each class provide
for the financing of the distribution of the shares of the 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, that are eligible
to sell shares.
27
<PAGE> 30
The following table sets forth a summary of the distribution arrangements
for each class of shares under the Merrill Lynch Select Pricing(SM) System.
<TABLE>
<S> <C> <C> <C> <C> <C> <C>
- --------------------------------------------------------------------------------------------------------
<CAPTION>
------------------------------------------------------------------------------------------------
ACCOUNT
MAINTENANCE DISTRIBUTION
CLASS SALES CHARGE(1) FEE FEE CONVERSION FEATURE
<S> <C> <C> <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 charge(3) 0.10% No No
------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------
</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 by participants 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 certain
fee-based programs.
(4) The CDSC may be modified in connection with certain fee-based programs.
(5) The conversion period for dividend reinvestment shares and certain fee-based
programs was modified. Also, Class B shares of certain other MLAM-advised
mutual funds into which exchanges may be made have an eight year conversion
period. If Class B shares of 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 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.
28
<PAGE> 31
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>
DISCOUNT TO
SALES LOAD SALES LOAD AS SELECTED DEALERS
AS PERCENTAGE* OF PERCENTAGE* OF THE AS PERCENTAGE* OF
AMOUNT OF PURCHASE OFFERING PRICE NET AMOUNT INVESTED THE 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 $1 million or more may be subject to a CDSC
of 0.20% if the shares are redeemed within one year after purchase. Such CDSC
may be waived in connection with certain fee-based programs. The charge will
be assessed on an amount equal to the lesser of the proceeds of redemption or
the cost of the shares being redeemed.
The Distributor may reallow discounts to selected dealers and retain the
balance over such discounts. At times the Distributor may reallow the entire
sales charge to such dealers. Since securities dealers selling Class A and Class
D shares of a Fund will receive a concession equal to most of the sales charge,
they may be deemed to be underwriters under the Securities Act of 1933, as
amended.
The following table sets forth information about the number of Class A
shares and Class D shares sold by each Fund for the fiscal year ended July 31,
1997, the aggregate net proceeds from such sales, the gross sales charges and
the amounts of such charges received by the Distributor and Merrill Lynch for
Class A shares and Class D shares. No CDSCs were received by the Distributor
with respect to redemptions within one year after purchase of Class A or Class D
shares purchased subject to a front-end sales charge waiver.
<TABLE>
<CAPTION>
NO. OF SHARES AGGREGATE GROSS SALES PAID TO PAID TO
SOLD NET PROCEEDS ($) CHARGES ($) DISTRIBUTOR ($) MERRILL LYNCH ($)
----------------- ------------------- ----------------- ----------------- -----------------
CLASS A CLASS D 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> <C> <C>
California Fund......... 1,377 285,173 13,897 2,849,538 0 2,379 0 224 0 2,155
Florida Fund............ 70,813 362,564 705,043 3,617,874 631 576 68 55 563 521
</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 and U.S. branches of foreign
banking institutions provided that the program or branch has $3 million or more
initially invested in MLAM-advised mutual funds. Also eligible to purchase Class
A shares at net asset value are participants in certain investment programs
including TMA(SM) Managed Trusts to which Merrill Lynch Trust Company provides
discretionary trustee services, collective investment trusts for which Merrill
Lynch Trust Company 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 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
29
<PAGE> 32
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 either 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."
Provided applicable threshold requirements are met, either Class A or Class
D shares are offered at net asset value to Employee Access(SM) Accounts
available through authorized employers. Class A shares of each of the Funds are
offered at net asset value to shareholders of Merrill Lynch Senior Floating Rate
Fund, Inc. and, subject to certain conditions, 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."
30
<PAGE> 33
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. The proceeds from the account maintenance fees are used to compensate
the Distributor and Merrill Lynch (pursuant to a sub-agreement) for providing
continuing account maintenance activities.
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 that 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 Class B CDSCs may be modified and the Class C CDSCs may be waived in
connection with certain fee-based programs. See "Shareholder Services--Fee-Based
Programs."
The following table sets forth the rates of the Class B and Class C CDSCs
for the Funds:
<TABLE>
<CAPTION>
CDSC AS
PERCENTAGE OF
YEARS SINCE PURCHASE DOLLAR AMOUNT
PAYMENT MADE SUBJECT TO CHARGE
------------------------------------------------------------- -----------------
<S> <C>
0-1.......................................................... 1.0%
1 and thereafter............................................. None
</TABLE>
For the fiscal year ended July 31, 1997, the Distributor received CDSCs of
$6,779 from the California Fund and $7,396 from the Florida Fund with respect to
redemptions of Class B shares, all of which were paid to Merrill Lynch.
Additional CDSCs payable to the Distributor may have been waived or converted to
a contingent obligation in connection with a shareholder's participation in
certain fee-based programs.
31
<PAGE> 34
For the fiscal year ended July 31, 1997, the Distributor received no CDSCs
with respect to redemptions of Class C shares for either Fund. The Class C CDSC
may be waived in connection with 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. The Class B CDSC also is
waived for any Class B shares that are purchased within qualifying Employee
Access(SM) Accounts. Additional information concerning the waiver of the Class B
CDSC is set forth in the Statement of Additional Information. The terms of the
Class B CDSC may be modified and the terms of the Class C CDSC may be waived in
connection with 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.
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.
32
<PAGE> 35
The Conversion Period also may be modified for investors who participate in
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
provides 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 provides 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.
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, 1997 and information with respect to the annual fee payable
pursuant to such Distribution Plans based on the net assets of each Fund as of
July 31, 1997.
<TABLE>
<CAPTION>
PAYMENT TO THE
DISTRIBUTOR, ALL OF WHICH BASED ON AVERAGE DAILY NET
WAS PAID TO MERRILL LYNCH($) ASSETS AS OF JULY 31, 1997($)
----------------------------- --------------------------------------
CLASS B CLASS C CLASS D CLASS B CLASS C CLASS D
------- ------- ------- ------------ ------- -----------
<S> <C> <C> <C> <C> <C> <C>
California Fund........................ 30,557 84 2,646 8.7 million 55,827 2.6 million
Florida Fund........................... 42,610 116 6,193 12.2 million 77,390 6.2 million
</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
33
<PAGE> 36
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.
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, 1997 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, 1996.
<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 7/31/97($) 7/31/97 12/31/96($) 12/31/96
- -------------------------- -------------------- ------------ -------------------------------- ------------
<S> <C> <C> <C> <C>
California Fund........... $ 46,799 .68% $ 79,000 .84%
Florida Fund.............. $291,213 2.54% $(93,000) (.75)%
</TABLE>
The table below sets forth information with respect to Class C shares of
the Funds concerning direct cash revenues and expenses for the period October
21, 1994 (commencement of operations) to July 31, 1997. Information regarding
fully allocated accrual data for Class C shares for the period October 21, 1994
(commencement of operations) to December 31, 1996 is not presented because such
revenues and expenses are de minimis.
<TABLE>
<CAPTION>
AMOUNT BY WHICH
DIRECT CASH REVENUES % OF CLASS C
EXCEEDED DIRECT CASH NET ASSETS
EXPENSES AS OF AT
FUND 7/31/97($) 7/31/97
- --------------------------------------------------------------- -------------------- ------------
<S> <C> <C>
California Fund................................................ $176 .31%
Florida Fund................................................... $125 .21%
</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 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."
34
<PAGE> 37
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 that may be applicable, there will be no
charge for redemption if the redemption request is sent directly to the Transfer
Agent. Shareholders liquidating their holdings will receive upon redemption all
dividends 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 redemption request in either event requires
the signature(s) of all persons in whose name(s) the shares are registered,
signed exactly as such name(s) appear(s) on the Transfer Agent's register. The
signature(s) on the redemption request must be guaranteed by an "eligible
guarantor institution" as such term is defined in Rule 17Ad-15 under the
Securities Exchange Act of 1934, as amended, the existence and validity of which
may be verified by the Transfer Agent through the use of industry publications.
Notarized signatures are not sufficient. In certain
35
<PAGE> 38
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 that 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 $5.35) to confirm a repurchase of shares to such
customers. Repurchases made 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.
36
<PAGE> 39
SHAREHOLDER SERVICES
The Trust offers a number of shareholder services and investment plans
described below that are 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.
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. 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 such shares and then must turn the
certificates over to the new firm for re-registration as described in the
preceding sentence.
EXCHANGE PRIVILEGE
U.S. shareholders of each class of shares of each of the Funds have an
exchange privilege with certain other MLAM-advised mutual funds. There is
currently no limitation on the number of times a shareholder may exercise the
exchange privilege. The exchange privilege may be modified or terminated in
accordance with the rules of the Commission.
Under the Merrill Lynch Select Pricing(SM) System, Class A shareholders may
exchange Class A shares of a Fund for Class A shares of a second MLAM-advised
mutual fund if the shareholder holds any Class A shares of the second fund in
the account in which the exchange is made at the time of the exchange or is
otherwise eligible to purchase Class A shares of the second fund. If the Class A
shareholder wants to exchange Class A shares for shares of 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
37
<PAGE> 40
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.
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 that 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 of the exchanged
shares and a purchase of the acquired shares for Federal income tax purposes.
For further information, see "Shareholder Services-- Exchange Privilege" in the
Statement of Additional Information.
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 may, at any
time, by written notification to Merrill Lynch if the shareholder's account is
maintained with Merrill Lynch or by written notification or by telephone
(1-800-MER-FUND) to the Transfer Agent if the shareholder's account is
maintained with the Transfer Agent elect to have subsequent dividends or 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. The Fund is
not responsible for any failure of delivery to the shareholder's address of
record and no interest will accrue on amounts represented by uncashed
distribution or redemption checks. 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.
38
<PAGE> 41
SYSTEMATIC WITHDRAWAL PLANS
A shareholder of a Fund may elect to receive systematic withdrawal payments
from his or her Investment Account through automatic payment by check or through
automatic payment by direct deposit to his or her bank account on either a
monthly or quarterly basis. Alternatively, a shareholder whose shares are held
within a CMA(R) or CBA(R) Account may elect to have shares redeemed on a
monthly, bimonthly, quarterly, semiannual or annual basis through the
CMA(R)/CBA(R) Systematic Redemption Program, subject to certain conditions. With
respect to redemptions of Class B or Class C shares pursuant to a systematic
withdrawal plan, the maximum number of Class B or Class C shares that can be
redeemed from an account annually shall not exceed 10% of the value of shares of
such class in that account at the time the election to join the systematic
withdrawal plan was made. Any CDSC that otherwise might be due on such
redemption of Class B or Class C shares will be waived. Shares redeemed pursuant
to a systematic withdrawal plan will be redeemed in the same order as Class B or
Class C shares are otherwise redeemed. See "Purchase of Shares--Deferred Sales
Charge Alternatives--Class B and Class C Shares--Contingent Deferred Sales
Charges--Class B and Class C Shares." Where the systematic withdrawal plan is
applied to Class B shares, upon conversion of the last Class B shares in an
account to Class D shares, the systematic withdrawal plan will automatically be
applied thereafter to Class D shares. See "Purchase of Shares--Deferred Sales
Charge Alternatives--Class B and Class C Shares--Conversion of Class B Shares to
Class D Shares."
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(R) or CBA(R) account may arrange to have periodic investments made in a Fund
in that CMA(R) or CBA(R) account or in certain related accounts in amounts of
$100 or more through the CMA(R) or CBA(R) 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
modified, as may the Conversion Period applicable to the deposited shares.
Termination of participation in a Program may result in the redemption of shares
held therein or the automatic exchange thereof to another class at net asset
value, which may be shares of a money market fund. In addition, upon termination
of participation in a Program, shares that have been held for less than
specified periods within such Program may be subject to a fee based upon the
current value of such shares. These Programs also generally prohibit such shares
from being transferred to another account at Merrill Lynch, to another
broker-dealer or to the Transfer Agent. Except in limited circumstances (which
may also involve an exchange as described above), such shares must be redeemed
and another class of shares purchased (which may involve the imposition of
initial or deferred sales charges and distribution and account maintenance fees)
in order for the investment not to be subject to Program fees. Additional
information regarding a specific Program (including charges and limitations on
transferability applicable to shares that may be held in such Program) is
available in such Program's client agreement and from the Transfer Agent at
(800) MER-FUND or (800) 637-3863.
39
<PAGE> 42
PORTFOLIO TRANSACTIONS
Subject to the policies established by the Trustees of the Trust, the
Manager is primarily responsible for the execution of the Funds' 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 Fund may not purchase securities, including
Municipal Bonds, during the existence of any underwriting syndicate of which
Merrill Lynch is a member or in a private placement in which Merrill Lynch
serves as placement agent except pursuant to procedures approved by the Trustees
of the Trust that either comply with rules adopted by the Commission or with
interpretations of the Commission staff. 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. As a result of a change in legislation, this
requirement will no longer apply to the Funds after the fiscal year ending July
31, 1998. 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.)
40
<PAGE> 43
For the fiscal years ended July 31, 1996 and 1997, the portfolio turnover
rates for each of the Funds were as follows:
<TABLE>
<CAPTION>
FOR THE YEAR
ENDED
JULY 31,
----------------
FUND 1996 1997
---------------------------------------------------------- ----- -----
<S> <C> <C>
California Fund........................................... 11.09% 26.86%
Florida Fund.............................................. 39.90 35.67
</TABLE>
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 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. As long as a Fund so qualifies, the Fund (but not its shareholders) will
not be subject to Federal income tax to the extent that it distributes its net
investment income and net realized capital gains. The Trust intends to cause
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
41
<PAGE> 44
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 a 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 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. Recent legislation creates additional
categories of capital gains taxable at different rates. Not later than 60 days
after the close of its taxable year, the Fund will provide its shareholders with
a written notice designating the amounts of any exempt-interest dividends,
ordinary income dividends or capital gain dividends, as well as the amount of
capital gain dividends in the different categories of capital gain referred to
above. Distributions by a Fund, whether from exempt-interest income, ordinary
income or capital gains, 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 that, although tax-exempt, are used for
purposes other than those generally performed by governmental units and that
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 that 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
42
<PAGE> 45
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 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 advisers regarding specific
questions as to Federal, foreign, state or local taxes.
State. The State Municipal Bonds in which each Fund will invest consist of
obligations with remaining maturities of between one and ten years that 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 U.S. Virgin Islands and Guam. State
Municipal Bonds pay interest that is exempt 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.
43
<PAGE> 46
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 state personal income taxation for shareholders otherwise subject to
personal income taxation by such designated state and, in some cases, such
dividends may be exempt from state corporate income, 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 that constitutes
exempt-interest dividends and the portion that 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. Shares held in a
certain Fund generally will not subject shareholders to intangible personal
property tax in the applicable state.
Corporate shareholders may be subject to tax on distributions of investment
income, including exempt-interest dividends, and capital gains in the designated
state. Distributions from investment income and capital gains of a Fund,
including exempt-interest dividends, may also be subject to state taxes in
states other than the designated state and may be subject to local taxes.
Accordingly, investors in a Fund should consult their tax advisers with respect
to the application of such taxes to the receipt of Fund dividends and to the
holding of shares in such Fund.
The foregoing description relates generally to state personal income tax
issues; investors should consult with their tax advisers 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.
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
44
<PAGE> 47
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, including the Acquired Funds, for the
30-day period ended July 31, 1997. The table also sets forth the tax-equivalent
yield (based on a Federal income tax rate of 28%) for the Class A, Class B,
Class C and Class D shares of each of the Funds, including the Acquired 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.......... 3.37% 4.68% 3.04% 4.22% 3.22% 4.47% 3.27% 4.54%
California Fund....... 3.46% 4.81% 3.14% 4.36% 3.32% 4.61% 3.36% 4.67%
Florida Fund.......... 3.51% 4.88% 3.19% 4.43% 3.37% 4.68% 3.41% 4.74%
Massachusetts Fund.... 3.59% 4.99% 3.26% 4.53% 3.47% 4.82% 3.49% 4.85%
Michigan Fund......... 3.62% 5.03% 3.28% 4.56% 3.12% 4.33% 3.52% 4.89%
New Jersey Fund....... 3.32% 4.61% 2.99% 4.15% 3.20% 4.44% 3.22% 4.47%
New York Fund......... 3.86% 5.36% 3.54% 4.92% 3.72% 5.17% 3.77% 5.24%
Pennsylvania Fund..... 3.41% 4.74% 3.08% 4.28% 3.15% 4.38% 3.31% 4.60%
</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
45
<PAGE> 48
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 that 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.
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 (including interest and dividends accrued but not yet received) minus all
liabilities (including accrued expenses) by the total number of shares
outstanding at such time, rounded to the nearest cent. Expenses, including the
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.
The Municipal Bonds and other portfolio securities in which the Funds
invest are traded primarily in the over-the-counter ("OTC") municipal bond and
money markets and are valued at the last available bid price in the OTC 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
46
<PAGE> 49
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.
ORGANIZATION OF THE TRUST
The Trust is a 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, $.10 par
value per share, 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 relating to the account maintenance associated with such
shares, and Class B and Class C shares bear certain expenses relating to the
distribution of such shares. Each class has exclusive voting rights with respect
to matters relating to such distribution and/or account maintenance
expenditures, as applicable. See "Purchase of Shares." The Trustees of the Trust
may classify and reclassify the shares of any Series into additional or other
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 (except that Class B shareholders may vote upon any material changes to
expenses charged under the Class D Distribution Plan). There normally will be no
meeting of shareholders for the purpose of electing Trustees unless and until
such time as less than a majority of the Trustees holding office have been
elected by shareholders, at which time the Trustees then in office will call a
shareholders' meeting for the election of Trustees. Shareholders, in accordance
with the terms of the Declaration of Trust, may cause a meeting of shareholders
to be held for the purpose of voting on the removal of Trustees. Also, the Trust
will be required to call a special meeting of shareholders of a Series in
accordance with the requirements of the 1940 Act to seek approval of new
management and advisory arrangements, of a material increase in distribution
fees or of a change in the fundamental policies, objectives or restrictions of a
Series. Except as set forth above, the Trustees shall continue to hold office
and appoint successor Trustees. Upon liquidation or dissolution of a Series,
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 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
47
<PAGE> 50
the assets of the Trust generally. The shares of each Series, when issued, will
be fully-paid and non-assessable by the Trust.
At a shareholders meeting presently scheduled to be held on January 5,
1998, shareholders of the Acquired Funds will consider a proposal pursuant to
which Limited Maturity Portfolio (the "Limited Maturity Portfolio"), a series of
Merrill Lynch Municipal Bond Fund, Inc., a Maryland corporation (the "Municipal
Bond Fund"), will acquire substantially all of the assets, and will assume
substantially all of the liabilities, of the Acquired Funds, in exchange solely
for an equal aggregate value of newly-issued shares of Common Stock of Limited
Maturity Portfolio. The California Fund and the Florida Fund are not included in
this transaction and will continue to operate as Series of the Trust. Shares of
the Acquired Funds are no longer being offered for purchase or sale.
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.
48
<PAGE> 51
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 California Limited Maturity Municipal Bond Fund [ ] Merrill Lynch Florida Limited Maturity Municipal Bond Fund
(THE FUND SELECTED ABOVE IS HEREIN REFERRED TO AS THE "FUND")
</TABLE>
and establish an Investment Account as described in the Prospectus. In the event
that I am not eligible to purchase Class A shares, I understand that Class D
shares will be purchased.
Basis for establishing an Investment Account:
A. I enclose a check for $.......... payable to Merrill Lynch Financial
Data Services, Inc., as an initial investment (minimum $1,000). I understand
that this purchase will be executed at the applicable offering price next to
be determined after this Application is received by you.
B. I already own shares of the following Merrill Lynch mutual funds that
would qualify for the Right of Accumulation as outlined in the Statement of
Additional Information: (Please list all funds. Use a separate sheet of paper
if necessary.)
1. ................................. 4. ..................................
2. ................................. 5. ..................................
3. ................................. 6. ...................................
(Please Print)
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.)
- --------------------------------------------------------------------------------
2. DIVIDEND AND CAPITAL GAIN DISTRIBUTION OPTION
<TABLE>
<S> <C> <C> <C> <C> <C> <C> <C>
Ordinary Income Dividends Long-Term Capital Gains
- --------------------------------------------- ---------------------------------------------
SELECT ONE: [ ] Reinvest [ ] Cash SELECT ONE: [ ] Reinvest [ ] 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.
49
<PAGE> 52
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
- ---
=
=
===
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> <C> <C> <C> <C> <C> <C> <C> <C> <C>
- --------- ------------
..............................
- --------- ------------
Branch-Code F/C No. F/C Last Name
- --------- ---------------
- --------- ---------------
Dealer's Customer Account No.
</TABLE>
50
<PAGE> 53
- --------------------------------------------------------------------------------
MERRILL LYNCH MULTI-STATE LIMITED MATURITY
MUNICIPAL SERIES TRUST--AUTHORIZATION FORM (PART 2)
- --------------------------------------------------------------------------------
NOTE: THIS FORM IS REQUIRED TO APPLY FOR THE SYSTEMATIC WITHDRAWAL OR AUTOMATIC
INVESTMENT PLANS ONLY.
- --------------------------------------------------------------------------------
1. ACCOUNT REGISTRATION
(PLEASE PRINT)
<TABLE>
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
------------------------------------------------------
Name of Owner..................................................
First Name Initial Last Name
------------------------------------------------------
Social Security No.
or Taxpayer Identification Number
Name of Co-Owner (if any)......................................
First Name Initial Last Name
Address........................................................ Account Number ............................................
(if existing account)
...............................................................
(Zip Code)
</TABLE>
- --------------------------------------------------------------------------------
2. SYSTEMATIC WITHDRAWAL PLAN (SEE TERMS AND CONDITIONS IN THE STATEMENT OF
ADDITIONAL INFORMATION)
MINIMUM REQUIREMENTS: $10,000 for monthly disbursements, $5,000 for
quarterly, of [ ] Class A, [ ] Class B*,[ ] Class C* or [ ] Class D shares in
(choose one)
<TABLE>
<S> <C>
[ ] Merrill Lynch California Limited Maturity Municipal Bond Fund [ ] Merrill Lynch Florida Limited Maturity Municipal Bond Fund
(THE FUND SELECTED ABOVE IS HEREIN REFERRED TO AS THE "FUND")
</TABLE>
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 THE AMOUNT OF THE WITHDRAWAL YOU WOULD LIKE PAID TO YOU (CHECK ONE): [
] $............. of [ ] Class A, [ ] Class B*, [ ] Class C* or [ ] Class D
shares in the account.
SPECIFY WITHDRAWAL METHOD: [ ] check or [ ] direct deposit to bank account
(check one and complete part (a) or (b) below):
DRAW CHECKS PAYABLE (CHECK ONE)
(a) I hereby authorize payment by check
[ ] as indicated in Item 1.
[ ] to the order of..........................................................
Mail to (check one)
[ ] the address indicated in Item 1.
[ ] Name (please print)......................................................
Address ........................................................................
...........................................................................
Signature of Owner
..............................................................................
Date ...........................................................................
Signature of Co-Owner (if any) ............................................
(B) I HEREBY AUTHORIZE PAYMENT BY DIRECT DEPOSIT TO 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 SHALL ACCOMPANY THIS APPLICATION.
* ANNUAL WITHDRAWAL CANNOT EXCEED 10% OF THE VALUE OF SHARES OF SUCH CLASS HELD
IN THE ACCOUNT AT THE TIME THE ELECTION TO JOIN THE SYSTEMATIC WITHDRAWAL PLAN
IS MADE.
51
<PAGE> 54
- --------------------------------------------------------------------------------
MERRILL LYNCH MULTI-STATE LIMITED MATURITY
MUNICIPAL SERIES TRUST--AUTHORIZATION FORM (PART 2)--(CONTINUED)
- --------------------------------------------------------------------------------
3. APPLICATION FOR AUTOMATIC INVESTMENT PLAN
I hereby request that Merrill Lynch Financial Data Services, Inc. draw an
automated clearing house ("ACH") debit on my checking account as described below
each month to purchase: (choose one)
[ ] Class A shares [ ] Class B shares [ ] Class D
shares
of the Fund subject to the terms set forth below. In the event that I am not
eligible to purchase Class A shares, I understand that Class D shares will be
purchased.
MERRILL LYNCH FINANCIAL DATA SERVICES, INC.
You are hereby authorized to draw an ACH debit each month on my bank account for
investment in the Fund as indicated below:
Amount of each ACH debit $...................................................
Account No...................................................................
Please date and invest ACH debits on the 20th of each month beginning
.............................. or as soon thereafter as possible.
(Month)
I agree that you are drawing these ACH debits voluntarily at my request and that
you shall not be liable for any loss arising from any delay in preparing or
failure to prepare any such debit. If I change banks or desire to terminate or
suspend this program, I agree to notify you promptly in writing. I hereby
authorize you to take any action to correct erroneous ACH debits of my bank
account or purchases of Fund shares including liquidating shares of the Fund and
credit my bank account. I further agree that if a debit is not honored upon
presentation, Merrill Lynch Financial Data Services, Inc. is authorized to
discontinue immediately the Automatic Investment Plan and to liquidate
sufficient shares held in my account to offset the purchase made with the
dishonored debit.
................. .......................................
Date Signature of Depositor
.......................................
Signature of Depositor
(If joint account, both must sign)
AUTHORIZATION TO HONOR ACH DEBITS
DRAWN BY MERRILL LYNCH FINANCIAL DATA
SERVICES, INC.
To..........................................................................Bank
(Investor's Bank)
Bank Address....................................................................
City .......... State .......... Zip Code.......................................
As a convenience to me, I hereby request and authorize you to pay and charge to
my account ACH debits drawn on my account by and payable to Merrill Lynch
Financial Data Services, Inc. I agree that your rights in respect to each such
debit shall be the same as if it were a check drawn on you and signed personally
by me. This authority is to remain in effect until revoked by me in writing.
Until you receive such notice, you shall be fully protected in honoring any such
debit. I further agree that if any such debit be dishonored, whether with or
without cause and whether intentionally or inadvertently, you shall be under no
liability.
.................... .......................................
Date Signature of Depositor
.................... .......................................
Bank Account Number Signature of Depositor
(If joint account, both must sign)
NOTE: IF AUTOMATIC INVESTMENT PLAN IS ELECTED, YOUR BLANK, UNSIGNED CHECK MARKED
"VOID" SHOULD ACCOMPANY THIS APPLICATION.
52
<PAGE> 55
(This Page Intentionally Left Blank)
<PAGE> 56
(This Page Intentionally Left Blank)
<PAGE> 57
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> 58
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........... 6
Financial Highlights.............................. 10
Investment Objective and Policies................. 12
Potential Benefits.............................. 14
Risk Factors and Special Considerations......... 15
Description of Municipal Bonds.................. 16
When-Issued Securities and Delayed Delivery
Transactions.................................. 18
Indexed and Inverse Floating Obligations........ 18
Synthetic Short-Term Municipal Bonds............ 19
Call Rights..................................... 19
Financial Futures Contracts and Options
Thereon....................................... 20
Repurchase Agreements........................... 22
Investment Restrictions......................... 22
Management of the Trust........................... 23
Trustees........................................ 23
Management and Advisory Arrangements............ 24
Code of Ethics.................................. 25
Transfer Agency Services........................ 25
Purchase of Shares................................ 26
Initial Sales Charge Alternatives--Class A and
Class D Shares................................ 28
Deferred Sales Charge Alternatives--Class B and
Class C Shares................................ 30
Distribution Plans.............................. 33
Limitations on the Payment of Deferred Sales
Charges....................................... 35
Redemption of Shares.............................. 35
Redemption...................................... 35
Repurchase...................................... 36
Reinstatement Privilege--Class A and Class D
Shares........................................ 36
Shareholder Services.............................. 37
Investment Account.............................. 37
Exchange Privilege.............................. 37
Automatic Reinvestment of Dividends and Capital
Gains Distributions........................... 38
Systematic Withdrawal Plans..................... 39
Automatic Investment Plans...................... 39
Fee-Based Programs.............................. 39
Portfolio Transactions............................ 40
Distributions and Taxes........................... 41
Distributions................................... 41
Taxes........................................... 41
Performance Data.................................. 44
Additional Information............................ 46
Determination of Net Asset Value................ 46
Organization of the Trust....................... 47
Shareholder Reports............................. 48
Shareholder Inquiries........................... 48
Authorization Form................................ 49
Code #16925-1197
</TABLE>
YZa
Merrill Lynch Multi-
State Limited Maturity
Municipal Series Trust
Merrill Lynch California Limited
Maturity Municipal Bond Fund
Merrill Lynch Florida Limited
Maturity Municipal Bond Fund
PROSPECTUS
November 28, 1997
Distributor:
Merrill Lynch
Funds Distributor, Inc.
This Prospectus should be
retained for future reference.
(MLYNCH COMPASS LOGO)
<PAGE> 59
STATEMENT OF ADDITIONAL INFORMATION
MERRILL LYNCH MULTI-STATE LIMITED MATURITY MUNICIPAL SERIES TRUST
MERRILL LYNCH CALIFORNIA LIMITED MATURITY MUNICIPAL BOND FUND
MERRILL LYNCH FLORIDA LIMITED MATURITY MUNICIPAL BOND FUND
P.O. BOX 9011, PRINCETON, NEW JERSEY 08543-9011 - PHONE NO. (609) 282-2800
Merrill Lynch Multi-State Limited Maturity Municipal Series Trust (the
"Trust"), an open-end management investment company organized as a Massachusetts
business trust, consists of eight separate series, only two of which, Merrill
Lynch California Limited Maturity Municipal Bond Fund (the "California Fund")
and Merrill Lynch Florida Limited Maturity Municipal Bond Fund (the "Florida
Fund") are currently being publicly offered. Although none of the other six
series of the Trust, Merrill Lynch Arizona Limited Maturity Municipal Bond Fund
(the "Arizona Fund"), Merrill Lynch Massachusetts Limited Maturity Municipal
Bond Fund (the "Massachusetts Fund"), Merrill Lynch Michigan Limited Maturity
Municipal Bond Fund (the "Michigan Fund"), Merrill Lynch New Jersey Limited
Maturity Municipal Bond Fund (the "New Jersey Fund"), Merrill Lynch New York
Limited Maturity Municipal Bond Fund (the "New York Fund"), or Merrill Lynch
Pennsylvania Limited Maturity Municipal Bond Fund (the "Pennsylvania Fund")
(collectively, the "Acquired Funds"), are currently offering shares for purchase
or sale, certain information regarding the Acquired Funds will be provided
herein. Each series of the Trust is referred to herein as a "Fund." 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, corporate income or
local personal income taxes) as is consistent with prudent investment management
and may also provide exemption of Fund shares from state intangible personal
property taxes. 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, corporate income or local personal
income taxes and would not subject shareholders to intangible personal property
taxes in the designated state. There can be no assurance that the investment
objective of any Fund will be realized.
Pursuant to the Merrill Lynch Select Pricing(SM) System, each Fund offers
four classes of shares, each with a different combination of sales charges,
ongoing fees and other features. The Merrill Lynch Select Pricing(SM) System
permits an investor to choose the method of purchasing shares that the investor
believes is most beneficial given the amount of the purchase, the length of time
the investor expects to hold the shares and other relevant circumstances.
------------------------
The Statement of Additional Information of the Trust and each Fund is not a
prospectus and should be read in conjunction with the prospectus of the Trust
and each Fund, dated November 28, 1997 (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 28, 1997
<PAGE> 60
INVESTMENT OBJECTIVE 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, corporate income or local personal
income taxes, as is consistent with prudent investment management and may also
provide exemption of Fund shares from state intangible personal property tax.
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 U.S. 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, corporate
income or local personal income taxes and may also provide exemption of Fund
shares from state intangible personal property tax. 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, in certain states, corporate
income or 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. 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 that, 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 than that of long-term Municipal Bonds 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 ("S&P") (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, corporate income or 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,
2
<PAGE> 61
the interest income on which is exempt, in the opinion of bond counsel to the
issuer, from Federal but not the designated state's taxation. Each Fund also may
invest in securities not issued by or on behalf of a state or territory or by an
agency or instrumentality thereof, if the Fund nevertheless believes such
securities to be exempt from Federal income taxation ("Non-Municipal Tax-Exempt
Securities"). Non-Municipal Tax-Exempt Securities may include securities issued
by other investment companies that invest in municipal bonds, to the extent
permitted by applicable law. Other Non-Municipal Tax-Exempt Securities could
include trust certificates or other instruments evidencing interests in one or
more long-term municipal securities.
Except when acceptable securities are unavailable as determined by the
Manager, each Fund, under normal circumstances, will invest at least 65% 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 that 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 that 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 that 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
3
<PAGE> 62
securities, the Funds may purchase inverse floating obligations with shorter
term maturities or that 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
that 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 that are
rated below Baa by Moody's or below BBB by S&P or Fitch or that, 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 S&P, Moody's or Fitch as one of several factors in its
independent credit analysis of issuers.
High yield securities are considered by S&P, 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 S&P 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, 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 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
4
<PAGE> 63
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 to the
issuer, 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 from Federal income
taxes, the designated state's personal income taxes and, where applicable,
corporate income or 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 a pledge of the faith,
credit and taxing power of the state or political subdivision 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 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
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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 governmental 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 is frequently
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 that the Manager, pursuant to the guidelines
that 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 S&P 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 entity 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.
Variable rate demand obligations ("VRDOs") are tax-exempt obligations that
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
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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 that
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%) in 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 S&P,
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 S&P,
Moody's or Fitch. Investments in corporate bonds and debentures (which must have
maturities at the date of purchase of one year or less) must be rated at the
time of purchase at least A by S&P, 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 S&P, 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 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
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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 "marking 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 that will operate to
terminate the position in the financial futures contract. A final determination
of variation margin is then made, additional cash is required to be paid to or
released by the broker, and the purchaser realizes a loss or gain. In addition,
a nominal commission is paid on each completed sale transaction.
The Funds may 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 S&P
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.
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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 that 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 that 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 alternate 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 that 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.
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.
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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 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
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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 that
is not fully or partially offset by an increase in the value of portfolio
securities. As a result, a Fund's total return for such period may be less than
if it had not engaged in the hedging transaction.
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 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
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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 which may be changed by
the Board of Trustees without shareholder approval, a Fund may not:
a. Purchase securities of other investment companies, except to the
extent such purchases are permitted by applicable law. As a matter of
policy, however, a Fund will not purchase shares of any registered open-end
investment company or registered unit investment trust, in reliance on
Section 12(d)(1)(F) or (G) (the "fund of funds" provisions) of the 1940 Act
at any time the Fund's shares are owned by another investment company that
is part of the same group of investment companies as the Fund.
b. Make short sales of securities or maintain a short position, except
to the extent permitted by applicable law. None of the Funds currently
intends to engage in short sales, except short sales "against the box."
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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. 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 that 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 that permits the Trust to effect principal transactions with
Merrill Lynch in high quality, short-term, tax-exempt securities subject to
conditions set forth in such order.
MANAGEMENT OF THE TRUST
TRUSTEES AND OFFICERS
Information about the Trustees and executive officers of the Trust and the
portfolio managers of the Funds, 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, executive officer and portfolio
manager is P.O. Box 9011, Princeton, New Jersey 08543-9011.
ARTHUR ZEIKEL (65)--President and Trustee(1)(2)--President of the Manager
(which term, as used herein, includes its corporate predecessors) since 1977;
President of Merrill Lynch Asset Management, L.P. ("MLAM," which term as used
herein includes its corporate predecessors) since 1977; President and Director
of Princeton Services, Inc. ("Princeton Services") since 1993; and Executive
Vice President of Merrill Lynch & Co., Inc. ("ML&Co.") since 1990.
JAMES H. BODURTHA (53)--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 (58)--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; President, Hudson Institute since 1997 and
Trustee since 1980; Dean, Gallatin Division of New York University from 1976 to
1993; Distinguished Fellow, Herman Kahn Chair, Hudson Institute from 1984 to
1985; Director, Damon Corporation from 1991 to 1995; Overseer, Center for Naval
Analyses from 1983 to 1993; Limited Partner, Hypertech LP since 1996.
ROBERT R. MARTIN (70)--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.
13
<PAGE> 72
JOSEPH L. MAY (68)--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 (45)--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 and TIBCO from 1994 to 1996.
TERRY K. GLENN (57)--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 Merrill Lynch Funds
Distributor, Inc. ("MLFD" or the "Distributor") since 1986 and Director thereof
since 1991; President of Princeton Administrators, L.P. since 1988.
VINCENT R. GIORDANO (53)--Senior Vice President(1)(2)--Senior Vice
President of the Manager and MLAM since 1984; Vice President of MLAM from 1980
to 1984; Senior Vice President of Princeton Services since 1993.
EDWARD J. ANDREWS (37)--Vice President and Portfolio Manager(1)(2)--Vice
President of the Manager and of MLAM since 1991.
PETER J. HAYES (38)--Vice President and Portfolio Manager(1)(2)--Vice
President of the Manager since 1989; First Vice President of MLAM since 1997;
Vice President of MLAM from 1989 to 1997 and Assistant Vice President of MLAM
from 1987 to 1989.
HELEN M. SHEEHAN (37)--Vice President and Portfolio Manager(1)(2)--Vice
President of the Manager and of MLAM since 1991.
DONALD C. BURKE (37)--Vice President(1)(2)--First Vice President of MLAM
since 1997; Vice President of MLAM from 1990 to 1997; Director of Taxation of
MLAM since 1990.
GERALD M. RICHARD (48)--Treasurer(1)(2)--Senior Vice President and
Treasurer of the Manager and MLAM since 1984; Senior Vice President and
Treasurer of Princeton Services since 1993; Treasurer of the Distributor since
1984 and Vice President thereof since 1981.
LAWRENCE A. ROGERS (50)--Secretary(1)(2)--Director (Legal Advisory) of MLAM
since 1997; Attorney in private practice prior thereto.
- ---------------
(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, 1997, the Trustees and officers of the Trust as a group (14
persons) owned an aggregate of less than 1% of the outstanding shares of any
Fund, except that Vincent R. Giordano may be deemed to own beneficially Class A
shares representing approximately 18.9% of the New Jersey Fund Class A shares
(5.2% of the aggregate outstanding shares of the New Jersey Fund). At such date,
Mr. Zeikel, a Trustee and officer of the Trust, and the other officers of the
Trust owned an aggregate of less than 1% of the Common Stock of ML&Co.
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 $45,300 for the
fiscal year ended July 31, 1997, and were allocated to each Fund on the basis of
the relative asset size of each Fund as follows: Arizona Fund, $2,403;
California Fund, $7,290;
14
<PAGE> 73
Florida Fund, $13,411; Massachusetts Fund, $3,557; Michigan Fund, $2,071; New
Jersey Fund, $3,919; New York Fund, $8,418; and Pennsylvania Fund, $4,231.
The following table sets forth for the fiscal year ended July 31, 1997,
compensation paid by the Trust to the non-affiliated Trustees and, for the
calendar year ended December 31, 1996, 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 COMPENSATION
FROM TRUST AND
PENSION OR RETIREMENT OTHER FAM/MLAM
COMPENSATION BENEFITS ACCRUED AS ADVISED FUNDS
NAME OF TRUSTEE FROM TRUST PART OF TRUST'S EXPENSES PAID TO TRUSTEE(1)
- ---------------------------------- ------------ ------------------------ ----------------------
<S> <C> <C> <C>
James H. Bodurtha................. $9,000 None $148,500
Herbert I. London................. $9,000 None $148,500
Robert R. Martin.................. $9,000 None $148,500
Joseph L. May..................... $9,000 None $148,500
Andre F. Perold................... $9,000 None $148,500
</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).
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, 1997, 1996
and 1995, the total advisory fee payable by each Fund, including the Acquired
Funds, to the Manager:
<TABLE>
<CAPTION>
FOR THE YEAR
ENDED JULY 31,
-------------------------------
FUND 1997 1996 1995
----------------------------------------------- ------- -------- --------
<S> <C> <C> <C>
Arizona Fund................................... $13,268 $ 21,459 $ 26,468
California Fund................................ $51,013 $ 54,033 $ 52,287
Florida Fund................................... $90,513 $108,720 $112,421
Massachusetts Fund............................. $22,132 $ 30,736 $ 41,496
Michigan Fund.................................. $14,977 $ 16,413 $ 19,277
New Jersey Fund................................ $25,494 $ 33,770 $ 39,629
New York Fund.................................. $57,645 $ 57,995 $ 52,164
Pennsylvania Fund.............................. $29,758 $ 30,196 $ 34,403
</TABLE>
15
<PAGE> 74
For the fiscal year ended July 31, 1997, the total advisory fee payable to the
Manager by each Fund (other than California and Florida) was voluntarily waived.
Of the $192,424 advisory fee payable during the fiscal year ended July 31, 1997
by the California Fund, $29,150 was voluntarily waived. For the fiscal year
ended July 31, 1997, no advisory fee was waived by the Florida Fund. 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 by the Florida Fund for the fiscal year ended July
31, 1996, $24,123 was voluntarily waived. For the fiscal year ended July 31,
1995, 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 that will be allocated on the basis of asset size of
the respective Series include fees and expenses of unaffiliated Trustees, state
franchise taxes, costs of printing proxies and other expenses related to
shareholder meetings, and other expenses properly payable by the Trust. The
organizational expenses of the Trust were paid by the Trust, and as additional
Series are added to the Trust, the organizational expenses are allocated among
the Series in a manner deemed equitable by the Trustees. Depending upon the
nature of a lawsuit, litigation costs may be assessed to the specific Series to
which the lawsuit relates or allocated on the basis of the asset size of the
respective Series. The Trustees have determined that this is an appropriate
method of allocation of expenses. Accounting services are provided to the Funds
by the Manager, and each Fund reimburses the Manager for the Manager's costs in
connection with such services. The table below sets forth for the fiscal years
ended July 31, 1997, 1996 and 1995, the amount reimbursed by each Fund,
including the Acquired Funds, to the Manager for accounting services:
<TABLE>
<CAPTION>
FOR THE YEAR
ENDED JULY 31,
-----------------------------
FUND 1997 1996 1995
------------------------------------------------- ------- ------- -------
<S> <C> <C> <C>
Arizona Fund..................................... $33,811 $30,172 $36,140
California Fund.................................. $32,283 $38,245 $50,033
Florida Fund..................................... $64,974 $34,053 $32,012
Massachusetts Fund............................... $48,536 $53,983 $49,502
Michigan Fund.................................... $41,011 $47,178 $19,568
New Jersey Fund.................................. $26,609 $43,508 $36,998
New York Fund.................................... $34,860 $62,140 $ 3,623
Pennsylvania Fund................................ $42,078 $43,426 $15,577
</TABLE>
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.
16
<PAGE> 75
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. Shares of the Acquired
Funds are not currently being offered for purchase or sale. For purposes of this
"Purchase of Shares" section, the term "Fund" shall refer to the California Fund
and the Florida Fund only.
Each Fund issues four classes of shares under the Merrill Lynch Select
Pricing(SM) System: shares of Class A and Class D are sold to investors choosing
the initial sales charge alternatives, and shares of Class B are sold to
investors choosing the deferred sales charge alternative. Class C shares of the
Funds are not available for purchase but will be issued only pursuant to the
exchange privilege to holders of Class C shares of other MLAM-advised mutual
funds who elect to exchange Class C shares of such other MLAM-advised mutual
fund for Class C shares of one of the Funds. Each Class A, Class B, Class C and
Class D share of each Fund represents an identical interest in the investment
portfolio of that Fund and has the same rights, except that Class B, Class C and
Class D shares of a Fund bear the expenses of the ongoing account maintenance
fees, and Class B and Class C shares bear the expenses of the ongoing
distribution fees of that Fund and the additional incremental transfer agency
costs resulting from the deferred sales charge arrangements. Class B, Class C
and Class D shares each have exclusive voting rights with respect to the Rule
12b-1 distribution plan adopted with respect to such class pursuant to which
account maintenance and/or distribution fees are paid (except that Class B
shareholders may vote upon any material changes to expenses charged under the
Class D Distribution Plan). Each class has different exchange privileges. See
"Shareholder Services--Exchange Privilege."
The Merrill Lynch Select Pricing(SM) System is used by more than 50
registered investment companies advised by MLAM or its affiliate, the Manager.
Funds advised by MLAM or the Manager that utilize the Merrill Lynch Select
Pricing(SM) System are referred to herein as "MLAM-advised mutual funds."
On behalf of each Fund, the Trust has entered into a separate distribution
agreement with the Distributor in connection with the continuous offering of
each class of shares of such Fund (each a "Distribution Agreement"). Each
Distribution Agreement obligates the Distributor to pay certain expenses in
connection with the offering of each class of shares of the related Fund. After
the prospectuses, statements of additional information and periodic reports have
been prepared, set in type and mailed to shareholders, the Distributor pays for
the printing and distribution of copies thereof used in connection with the
offering to dealers and prospective investors. The Distributor also pays for
other supplementary sales literature and advertising costs. The Distribution
Agreements are subject to the same renewal requirements and termination
provisions as the Management Agreements described above.
INITIAL SALES CHARGE ALTERNATIVES--CLASS A AND CLASS D SHARES
The gross sales charges, the amounts of such charges received by the
Distributor and Merrill Lynch for the sale of Class A shares, and the CDSCs paid
with respect to redemption within one year after purchase of Class A shares
purchased subject to a front-end sales charge waiver for each of the Funds for
the periods indicated are set forth below:
<TABLE>
<CAPTION>
FOR THE YEAR ENDED JULY 31, 1997
----------------------------------------------------------
CLASS A AMOUNT AMOUNT CDSCS
GROSS SALES PAID TO PAID TO PAID TO
FUND CHARGES DISTRIBUTOR MERRILL LYNCH DISTRIBUTOR
- ------------------------------------------------- ----------- ----------- ------------- -----------
<S> <C> <C> <C> <C>
California Fund.................................. $ 0 $ 0 $ 0 --
Florida Fund..................................... $ 631 $68 $ 563 --
</TABLE>
17
<PAGE> 76
<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>
California Fund.................................. $ 580 $67 $ 513 --
Florida Fund..................................... $ 497 $22 $ 475 --
</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>
California Fund.................................. $ 754 $ 83 $ 671 --
Florida Fund..................................... $ 2,628 $ 154 $ 2,474 $ 2,894
</TABLE>
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. Additional CDSCs payable to
the Distributor may have been waived or converted to a contingent obligation in
connection with a shareholder's participation in certain fee-based programs.
<TABLE>
<CAPTION>
FOR THE YEAR ENDED JULY 31, 1997
-------------------------------------------
CLASS D AMOUNT AMOUNT
GROSS SALES PAID TO PAID TO
FUND CHARGES DISTRIBUTOR MERRILL LYNCH
- ----------------------------------------------------------- ----------- ----------- -------------
<S> <C> <C> <C>
California Fund............................................ $ 2,379 $ 224 $ 2,155
Florida Fund............................................... $ 576 $ 55 $ 521
</TABLE>
<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>
California Fund............................................ $ 3,148 $ 299 $ 2,849
Florida Fund............................................... $ 2,943 $ 373 $ 2,570
</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>
California Fund............................................ $ 2,145 $ 115 $ 2,030
Florida Fund............................................... $12,063 $ 1,099 $10,964
</TABLE>
- ---------------
+ Commencement of Operations.
Neither 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 years ended July 31, 1997 or 1996 or the period October 21,
1994 (commencement of operations) to July 31, 1995.
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 that
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
18
<PAGE> 77
advised by the Manager or MLAM who purchased such closed-end fund shares prior
to October 21, 1994, the date the Merrill Lynch Select Pricing(SM) System
commenced operations, and wish to reinvest the net proceeds from a sale of their
closed-end fund shares of common stock in Eligible Class A shares, if the
conditions set forth below are satisfied. Alternatively, closed-end fund
shareholders who purchased such shares on or after October 21, 1994 and wish to
reinvest the net proceeds from a sale of their closed-end fund shares are
offered Class A shares (if eligible to purchase Class A shares) or Class D
shares of 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 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, made within a 13-month period starting with the
first purchase pursuant to a Letter of Intention in the form provided in the
Prospectus. The Letter of Intention is available only to investors whose
accounts are maintained at the Trust's Transfer Agent. The Letter of Intention
is not available to employee benefit plans for which Merrill Lynch provides plan
participant record-keeping services. The Letter of Intention is not a binding
obligation to purchase any amount of Class A 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
19
<PAGE> 78
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(SM) Accounts. Provided applicable threshold requirements
are met, either Class A or Class D shares are offered at net asset value to
Employee Access(SM) Accounts available through authorized employers. The initial
minimum for such accounts is $500, except that the initial minimum for shares
purchased for such accounts pursuant to the Automatic Investment Program is $50.
TMA(SM) Managed Trusts. Class A shares are offered to TMA(SM) Managed
Trusts to which Merrill Lynch Trust Company provides discretionary trustee
services at net asset value.
Purchase Privilege of Certain Persons. Trustees of the Trust, members of
the Boards of other MLAM-advised investment companies, ML&Co. and its
subsidiaries (the term "subsidiaries," when used herein with respect to ML&Co.,
includes MLAM, the Manager and certain other entities directly or indirectly
wholly owned or controlled by ML&Co.), and their directors and employees, and
any trust, pension, profit-sharing or other benefit plan for such persons, may
purchase Class A shares of a Fund at net asset value.
Class D shares of each Fund are offered at net asset value, without a sales
charge, to an investor who has a business relationship with a Financial
Consultant who joined Merrill Lynch from another investment firm within six
months prior to the date of purchase by such investor, if the following
conditions are satisfied: first, the investor must advise Merrill Lynch that it
will purchase Class D shares of the Fund with proceeds from a redemption of a
mutual fund that was sponsored by the Financial Consultant's previous firm and
was subject to a sales charge either at the time of purchase or on a deferred
basis; and second, the investor also must establish that 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
20
<PAGE> 79
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 that might result from an acquisition of assets having net
unrealized appreciation that 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 that (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, that 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 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. (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 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
21
<PAGE> 80
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, 1997 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.
<TABLE>
<CAPTION>
DATA CALCULATED AS OF JULY 31, 1997
--------------------------------------------------------------------------------------------------
(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>
CALIFORNIA FUND
- ----------------------------
Under NASD Rule as
Adopted................... $14,134 $ 883 $ 265 $1,148 $ 96 $ 1,052 $ 14
Under Distributor's
Voluntary Waiver.......... $14,134 $ 883 $ 71 $ 954 $ 96 $ 858 $ 14
FLORIDA FUND
- ----------------------------
Under NASD Rule as
Adopted................... $24,094 $ 1,506 $ 418 $1,924 $362 $ 1,562 $ 23
Under Distributor's
Voluntary Waiver.......... $24,094 $ 1,506 $ 120 $1,626 $362 $ 1,264 $ 23
</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. This
figure may include CDSCs that were deferred when a shareholder redeemed
shares prior to the expiration of the applicable CDSC period and invested
the proceeds, without the imposition of a sales charge, in Class A shares in
conjunction with the shareholder's participation in the Merrill Lynch Mutual
Fund Advisor (Merrill Lynch MFA(SM)) Program (the "MFA Program"). The CDSC
is booked as a contingent obligation that may be payable if the shareholder
terminates participation in the MFA Program. 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.
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 for more than seven days 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.
22
<PAGE> 81
The value of shares at the time of the redemption may be more or less than
the shareholder's cost, depending in part on the market value of the securities
held by the Fund at such time.
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 in certain circumstances
including 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, 1997, 1996 and 1995, the Distributor
received CDSCs from the California Fund and the Florida Fund 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,
-----------------------------
FUND 1997 1996 1995
------------------------------------------------- ------ ------- --------
<S> <C> <C> <C>
California Fund.................................. $6,833 $ 3,459 $ 5,805
Florida Fund..................................... $7,396 $18,456 $202,558
</TABLE>
Additional CDSCs payable to the Distributor with respect to each of the
Funds during the fiscal year ended July 31, 1997, may have been waived or
converted to a contingent obligation in connection with a shareholder's
participation in certain fee-based programs. For the fiscal years ended July 31,
1997, 1996 and 1995, the Distributor received no CDSCs with respect to
redemptions of Class C shares for either Fund.
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 ("OTC") 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, 1997, 1996 and
1995, information about the transactions engaged in by the Funds, including the
Acquired Funds, pursuant to this order.
<TABLE>
<CAPTION>
FOR THE YEAR ENDED FOR THE YEAR ENDED FOR THE YEAR ENDED
JULY 31, 1997 JULY 31, 1996 JULY 31, 1995
------------------------------ ----------------------------- -----------------------------
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......... 2 $ 300,000 3 $ 300,000 2 $ 600,000
California Fund...... 0 -- 0 -- 5 $ 1,800,000
Florida Fund......... 4 $ 600,000 2 $ 1,000,000 0 --
Massachusetts Fund... 2 $ 300,000 3 $ 600,000 1 $ 200,000
Michigan Fund........ 0 -- 1 $ 200,000 0 --
New Jersey Fund...... 9 $ 2,250,949 5 $ 800,000 4 $ 1,100,000
New York Fund........ 0 -- 0 -- 0 --
Pennsylvania Fund.... 1 $ 300,000 1 $ 401,836 3 $ 1,300,000
</TABLE>
23
<PAGE> 82
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.
The Funds may not purchase securities, including Municipal Bonds, during
the existence of any underwriting syndicate of which Merrill Lynch is a member
or in a private placement transaction in which Merrill Lynch serves as placement
agent except pursuant to procedures approved by the Trustees of the Trust that
either comply with rules adopted by the Commission or with interpretations of
the Commission staff. Rule 10f-3 under the 1940 Act sets forth conditions under
which a Fund may purchase municipal bonds from an underwriting syndicate of
which Merrill Lynch is a member. The rule sets forth requirements relating to,
among other things, the terms of an issue of municipal bonds purchased by a
Fund, the amount of municipal bonds which may be purchased in any one issue and
the assets of a Fund which may be invested in a particular issue.
The Funds do not expect to use any particular dealer in the execution of
transactions but, subject to obtaining the best net results, dealers who provide
supplemental investment research (such as information concerning tax-exempt
securities, economic data and market forecasts) to the Manager may receive
orders for transactions by the Funds. Information so received will be in
addition to and not in lieu of the services required to be performed by the
Manager under its Management Agreement, and the expenses of the Manager will not
necessarily be reduced as a result of the receipt of such supplemental
information.
The Funds have no obligation to deal with any broker in the execution of
transactions for 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
Reference is made to "Additional Information--Determination of Net Asset
Value" in the Prospectus concerning the 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, Martin Luther King, Jr. 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 (including interest
and dividends accrued but not yet received) minus all liabilities (including
accrued expenses) by the total number of shares outstanding at such time,
rounded to the nearest cent. Expenses, including the 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 Class B, Class C and Class D shares generally will be lower than the per
share net asset value of 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 OTC municipal bond and money markets and are
valued at the last available bid price in the OTC market or on the basis of
yield equivalents as obtained from one or more dealers that make markets in the
securities. One
24
<PAGE> 83
bond is the "yield equivalent" of another bond when, taking into account market
price, maturity, coupon rate, credit rating and ultimate return of principal,
both bonds theoretically will produce an equivalent return to the bondholder.
Financial futures contracts and options thereon, which are traded on exchanges,
are valued at their settlement prices as of the close of such exchanges.
Short-term investments with a remaining maturity of 60 days or less are valued
on an amortized cost basis, which approximates market value. Securities and
assets for which market quotations are not readily available are valued at fair
value as determined in good faith by or under the direction of the Trustees of
the Trust, including valuations furnished by a pricing service retained by the
Trust, which may utilize a matrix system for valuations. The procedures of the
pricing service and its valuations are reviewed by the officers of the Trust
under the general supervision of the Trustees.
SHAREHOLDER SERVICES
The Trust offers a number of shareholder services described below that 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 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(R) or CBA(R) account may arrange
to have periodic investments made in a Fund in such CMA(R) or CBA(R) account or
in certain related accounts in amounts of $100 or more through the CMA(R) or
CBA(R) Automated Investment Program.
25
<PAGE> 84
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.
Shareholders, at any time, may notify Merrill Lynch in writing if their
account is maintained with Merrill Lynch or notify the Transfer Agent in writing
or by telephone (1-800-MER-FUND) if their account is maintained with the
Transfer Agent 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
A shareholder may elect to make systematic withdrawals from an Investment
Account of Class A, Class B, Class C or Class D shares on either a monthly or
quarterly basis as provided below. Quarterly withdrawals are available for
shareholders who have acquired 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 shares having a value of $10,000 or more.
At the time of each withdrawal payment, sufficient shares are redeemed from
those on deposit in the shareholder's account to provide the withdrawal payment
specified by the shareholder. The shareholder may specify the dollar amount.
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 shares
will be redeemed at the close of business on the following business day. The
check for the withdrawal payment will be mailed, or the direct deposit for the
withdrawal payment will be made, on the next business day following redemption.
When a shareholder is making systematic withdrawals, dividends and distributions
on all shares in the Investment Account are reinvested automatically in the
respective Fund's shares. A shareholder's Systematic Withdrawal Plan may be
terminated at any time, without charge or penalty, by either the shareholder,
the Trust, the Transfer Agent or the Distributor.
With respect to redemptions of Class B or Class C shares pursuant to a
systematic withdrawal plan, the maximum number of Class B or Class C shares that
can be redeemed from an account annually shall not exceed 10% of the value of
shares of such class in that account at the time the election to join the
systematic withdrawal plan was made. Any CDSC that otherwise might be due on
such redemption of Class B or Class C shares will be waived. Shares redeemed
pursuant to a systematic withdrawal plan will be redeemed in the same order as
Class B or Class C shares are otherwise redeemed. See "Purchase of
Shares -- Deferred Sales Charge Alternatives -- Class B and Class C
Shares -- Contingent Deferred Sales Charges -- Class B and Class C Shares" in
the Prospectus. Where the systematic withdrawal plan is applied to Class B
shares, upon conversion of the last Class B shares in an account to Class D
shares, the systematic withdrawal plan will automatically be applied thereafter
to Class D shares. See "Purchase of Shares -- Deferred Sales Charge
Alternatives -- Class B and Class C Shares -- Conversion of Class B Shares to
Class D Shares" in the Prospectus; if an investor wishes to change the amount
being withdrawn in a systematic withdrawal plan the investor should contact his
or her Financial Consultant.
Withdrawal payments should not be considered as dividends, yield or income.
Each withdrawal is a taxable event. If periodic withdrawals continuously exceed
reinvested dividends, the shareholder's original investment may be reduced
correspondingly. Purchases of additional shares concurrent with withdrawals are
ordinarily disadvantageous to the shareholder because of sales charges and tax
liabilities. The Trust will not knowingly accept purchase orders for 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.
26
<PAGE> 85
Alternatively, a shareholder whose shares are held within a CMA(R) or
CBA(R) Account may elect to have shares redeemed on a monthly, bimonthly,
quarterly, semiannual or annual basis through the CMA(R) or CBA(R) Systematic
Redemption Program. The minimum fixed dollar amount redeemable is $50. The
proceeds of systematic redemptions will be posted to the shareholder's account
three business days after the date the shares are redeemed. All redemptions are
made at net asset value. A shareholder may elect to have his or her shares
redeemed on the first, second, third or fourth Monday of each month, in the case
of monthly redemptions, or of every other month, in the case of bimonthly
redemptions. For quarterly, semiannual or annual redemptions, the shareholder
may select the month or months in which the shares are to be redeemed and may
designate whether the redemption is to be made on the first, second, third or
fourth Monday of the month. If the Monday selected is not a business day, the
redemption will be processed at net asset value on the next business day. The
Systematic Redemption Program is not available if Fund shares are being
purchased within the account pursuant to the Automatic Investment Program. For
more information on the CMA(R) or CBA(R) Systematic Redemption Program, eligible
shareholders should contact their Financial Consultant.
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. Under the
Merrill Lynch Select Pricing(SM) System, Class A shareholders may exchange Class
A shares of a Fund for Class A shares of a second MLAM-advised mutual fund if
the shareholder holds any Class A shares of the second fund in the account in
which the exchange is made at the time of the exchange or is otherwise eligible
to purchase Class A shares of the second fund. If the Class A shareholder wants
to exchange Class A shares for shares of a second MLAM-advised mutual fund, but
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. 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 at
least 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
27
<PAGE> 86
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 Special Value Fund Class B shares for four years.
Shareholders also may exchange shares from any of the Funds into shares of
certain money market funds advised by the Manager or its affiliates, but the
period of time that Class B or Class C shares are held in a money market fund
will not count towards satisfaction of the holding period requirement for
purposes of reducing the CDSC or, with respect to Class B shares, towards
satisfaction of the conversion period. However, shares of a money market fund
that were acquired as a result of an exchange for Class B or Class C shares of a
Fund may, in turn, be exchanged back into Class B or Class C shares,
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 that 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 MLAM-advised
funds described above with shares for which certificates have not been issued,
may exercise the exchange privilege by wire through their securities dealers.
Each Fund reserves the right to require a properly completed Exchange
Application. This exchange privilege may be modified or terminated at any time
in accordance with the rules of the Commission. Each Fund reserves the right to
limit the number of times an investor may exercise the exchange privilege.
Certain funds may suspend the continuous offering of their shares at any time
and thereafter may resume such offering from time to time. The exchange
privilege is available only to U.S. shareholders in states where the exchange
legally may be made.
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<PAGE> 87
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"). As long as it 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 that are attributable to interest
on tax-exempt obligations and are 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, including new categories of 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 that 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
29
<PAGE> 88
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. Recent legislation creates
additional categories of capital gains taxable at different rates. Not later
than 60 days after the close of its taxable year, the Fund will provide its
shareholders with a written notice designating the amounts of any
exempt-interest dividends, ordinary income dividends or capital gain dividends,
as well as the amount of capital gain dividends in the different categories of
capital gain referred to above. Distributions by 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.
30
<PAGE> 89
A loss realized on a sale or exchange of shares of a Fund will be
disallowed if other Fund shares are acquired (whether through the automatic
reinvestment of dividends or otherwise) within a 61-day period beginning 30 days
before and ending 30 days after the date that the shares are disposed of. In
such a case, the basis of the shares acquired will be adjusted to reflect the
disallowed loss.
Ordinary income dividends paid to shareholders who are nonresident aliens
or foreign entities will be subject to a 30% United States withholding tax under
existing provisions of the Code applicable to foreign individuals and entities
unless a reduced rate of withholding or a withholding exemption is provided
under applicable treaty law. Nonresident shareholders are urged to consult their
own tax advisers concerning the applicability of the United States withholding
tax.
Under certain Code provisions, some shareholders may be subject to a 31%
withholding tax on certain ordinary income dividends and on capital gain
dividends and redemption payments ("backup withholding"). Generally,
shareholders subject to backup withholding will be those for whom no certified
taxpayer identification number is on file with the Trust or who, to the Trust's
knowledge, have furnished an incorrect number. When establishing an account, an
investor must certify under penalty of perjury that such number is correct and
that such investor is not otherwise subject to backup withholding.
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.
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 may be
restricted in effecting closing transactions within three months after entering
into an option or financial futures contract. Under recently enacted
legislation, this requirement will no longer apply to the Funds after their
fiscal year ending July 31, 1998.
The foregoing is a general and abbreviated summary of the applicable
provisions of the Code and Treasury regulations presently in effect. For the
complete provisions, reference should be made to the pertinent Code sections and
the Treasury regulations promulgated thereunder. The Code and the Treasury
regulations are subject to change by legislative, judicial or administrative
action either prospectively or retroactively.
Shareholders are urged to consult their tax advisers regarding specific
questions as to Federal, foreign, state or local taxes.
31
<PAGE> 90
STATE
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 that portion of the value of Fund
shares equal to the portion of the net asset value of the Florida Fund that is
attributable to obligations of the U.S. Government will be exempt from taxation.
The Florida Fund anticipates that on the last business day of each calendar year
the Florida Fund's assets will consist solely of assets exempt from Florida
intangible personal property tax.
Dividends paid by the Florida Fund to individuals who are Florida residents
are not subject to personal income taxation by Florida, because Florida does not
impose a personal income tax. Distributions of investment income and capital
gains by the Florida Fund will be subject to Florida corporate income tax, state
taxes in states other than Florida and may be subject to local taxes.
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.
The above discussion is a general and abbreviated summary of the relevant
state and local tax provisions presently in effect. Shareholders are urged to
consult their tax advisers regarding specific questions as to state or local
taxes.
32
<PAGE> 91
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.
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, including the Acquired Funds, for the periods indicated.
33
<PAGE> 92
<TABLE>
<CAPTION>
ARIZONA FUND
- -----------------------------------------------------------------------------------------------------------------------
CLASS A SHARES CLASS B SHARES
-------------------------------------- --------------------------------------
REDEEMABLE VALUE REDEEMABLE VALUE
OF A OF A
EXPRESSED AS HYPOTHETICAL EXPRESSED AS HYPOTHETICAL
A PERCENTAGE $1,000 A PERCENTAGE $1,000
BASED ON A INVESTMENT BASED ON A INVESTMENT
HYPOTHETICAL AT THE END OF HYPOTHETICAL AT THE END OF
PERIOD $1,000 INVESTMENT THE PERIOD $1,000 INVESTMENT THE PERIOD
- ---------------------------------- ----------------- ---------------- ----------------- ----------------
<S> <C> <C> <C> <C>
AVERAGE ANNUAL TOTAL RETURN
(INCLUDING MAXIMUM APPLICABLE SALES CHARGE)
One year ended July 31, 1997...... 3.58% $ 1,035.80 3.25% $ 1,032.50
Inception (November 26, 1993) to
July 31, 1997................... 4.13% $ 1,160.60 4.05% $ 1,157.10
Inception (October 21, 1994) to
July 31, 1997................... -- -- -- --
ANNUAL TOTAL RETURN
(EXCLUDING MAXIMUM APPLICABLE SALES CHARGE)
Year ended July 31, 1997.......... 4.62% $ 1,046.20 4.25% $ 1,042.50
Year ended July 31, 1996.......... 3.16% $ 1,031.60 2.88% $ 1,028.80
Year ended July 31, 1995.......... 6.47% $ 1,064.70 5.99% $ 1,059.90
Inception (October 21, 1994) to
July 31, 1995................... -- -- -- --
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, 1997................... 16.06% $ 1,160.60 15.71% $ 1,157.10
Inception (October 21, 1994) to
July 31, 1997................... -- -- -- --
YIELD
30 days ended July 31, 1997....... 3.37% -- 3.04% --
TAX EQUIVALENT YIELD*
30 days ended July 31, 1997....... 4.68% -- 4.22% --
<CAPTION>
ARIZONA FUND
- ----------------------------------
CLASS C SHARES CLASS D SHARES
-------------------------------------- --------------------------------------
REDEEMABLE VALUE REDEEMABLE VALUE
OF A OF A
EXPRESSED AS HYPOTHETICAL EXPRESSED AS HYPOTHETICAL
A PERCENTAGE $1,000 A PERCENTAGE $1,000
BASED ON A INVESTMENT BASED ON A INVESTMENT
HYPOTHETICAL AT THE END OF HYPOTHETICAL AT THE END OF
PERIOD $1,000 INVESTMENT THE PERIOD $1,000 INVESTMENT THE PERIOD
- ---------------------------------- ----------------- ---------------- ----------------- ----------------
<S> <C> <C> <C> <C>
One year ended July 31, 1997...... 3.55% $ 1,035.50 3.57% $ 1,035.70
Inception (November 26, 1993) to
July 31, 1997................... -- -- -- --
Inception (October 21, 1994) to
July 31, 1997................... 4.77% $ 1,138.00 4.67% $ 1,135.00
Year ended July 31, 1997.......... 4.55% $ 1,045.50 4.62% $ 1,046.20
Year ended July 31, 1996.......... 2.78% $ 1,027.80 3.05% $ 1,030.50
Year ended July 31, 1995.......... -- -- -- --
Inception (October 21, 1994) to
July 31, 1995................... 5.90% $ 1,059.00 6.34% $ 1,063.40
Inception (November 26, 1993) to
July 31, 1994................... -- -- -- --
Inception (November 26, 1993) to
July 31, 1997................... -- -- -- --
Inception (October 21, 1994) to
July 31, 1997................... 13.80% $ 1,138.00 13.50% $ 1,135.00
30 days ended July 31, 1997....... 3.22% -- 3.27% --
30 days ended July 31, 1997....... 4.47% -- 4.54% --
</TABLE>
- ---------------
* Based on a Federal income tax rate of 28%.
34
<PAGE> 93
<TABLE>
<CAPTION>
CALIFORNIA FUND
- -----------------------------------------------------------------------------------------------------------------------
CLASS A SHARES CLASS B SHARES
-------------------------------------- --------------------------------------
REDEEMABLE VALUE REDEEMABLE VALUE
OF A OF A
EXPRESSED AS HYPOTHETICAL EXPRESSED AS HYPOTHETICAL
A PERCENTAGE $1,000 A PERCENTAGE $1,000
BASED ON A INVESTMENT BASED ON A INVESTMENT
HYPOTHETICAL AT THE END OF HYPOTHETICAL AT THE END OF
PERIOD $1,000 INVESTMENT THE PERIOD $1,000 INVESTMENT THE PERIOD
- ---------------------------------- ----------------- ---------------- ----------------- ----------------
<S> <C> <C> <C> <C>
AVERAGE ANNUAL TOTAL RETURN
(INCLUDING MAXIMUM APPLICABLE SALES CHARGE)
One year ended July 31, 1997...... 4.52% $ 1,045.20 4.20% $ 1,042.00
Inception (November 26, 1993) to
July 31, 1997................... 4.32% $ 1,168.20 4.21% $ 1,163.60
Inception (October 21, 1994) to
July 31, 1997................... -- -- -- --
ANNUAL TOTAL RETURN
(EXCLUDING MAXIMUM APPLICABLE SALES CHARGE)
Year ended July 31, 1997.......... 5.57% $ 1,055.70 5.20% $ 1,052.00
Year ended July 31, 1996.......... 4.56% $ 1,045.60 4.08% $ 1,040.80
Year ended July 31, 1995.......... 5.60% $ 1,056.00 5.23% $ 1,052.30
Inception (October 21, 1994) to
July 31, 1995................... -- -- -- --
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, 1997................... 16.82% $ 1,168.20 16.36% $ 1,163.60
Inception (October 21, 1994) to
July 31, 1997................... -- -- -- --
YIELD
30 days ended July 31, 1997....... 3.46% -- 3.14% --
TAX EQUIVALENT YIELD*
30 days ended July 31, 1997....... 4.81% -- 4.36% --
<CAPTION>
CALIFORNIA FUND
- ----------------------------------
CLASS C SHARES CLASS D SHARES
-------------------------------------- --------------------------------------
REDEEMABLE VALUE REDEEMABLE VALUE
OF A OF A
EXPRESSED AS HYPOTHETICAL EXPRESSED AS HYPOTHETICAL
A PERCENTAGE $1,000 A PERCENTAGE $1,000
BASED ON A INVESTMENT BASED ON A INVESTMENT
HYPOTHETICAL AT THE END OF HYPOTHETICAL AT THE END OF
PERIOD $1,000 INVESTMENT THE PERIOD $1,000 INVESTMENT THE PERIOD
- ---------------------------------- ----------------- ---------------- ----------------- ----------------
<S> <C> <C> <C> <C>
One year ended July 31, 1997...... 4.39% $ 1,043.90 4.41% $ 1,044.10
Inception (November 26, 1993) to
July 31, 1997................... -- -- -- --
Inception (October 21, 1994) to
July 31, 1997................... 5.54% $ 1,161.40 5.31% $ 1,154.50
Year ended July 31, 1997.......... 5.39% $ 1,053.90 5.47% $ 1,054.70
Year ended July 31, 1996.......... 4.35% $ 1,043.50 4.46% $ 1,044.60
Year ended July 31, 1995.......... -- -- -- --
Inception (October 21, 1994) to
July 31, 1995................... 5.60% $ 1,056.00 5.85% $ 1,058.50
Inception (November 26, 1993) to
July 31, 1994................... -- -- -- --
Inception (November 26, 1993) to
July 31, 1997................... -- -- -- --
Inception (October 21, 1994) to
July 31, 1997................... 16.14% $ 1,161.40 15.45% $ 1,154.50
30 days ended July 31, 1997....... 3.32% -- 3.36% --
30 days ended July 31, 1997....... 4.61% -- 4.67% --
</TABLE>
- ---------------
* Based on a Federal income tax rate of 28%.
35
<PAGE> 94
<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, 1997... 4.15% $ 1,041.50 3.83% $ 1,038.30 3.93%
Inception (November 26, 1993)
to July 31, 1997............. 4.01% $ 1,155.50 3.93% $ 1,152.10 --
Inception (October 21, 1994) to
July 31, 1997................ -- -- -- -- 4.70%
ANNUAL TOTAL RETURN
(EXCLUDING MAXIMUM APPLICABLE SALES CHARGE)
Year ended July 31, 1997....... 5.20% $ 1,052.00 4.83% $ 1,048.30 4.93%
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, 1997............. 15.55% $ 1,155.50 15.21% $ 1,152.10 --
Inception (October 21, 1994) to
July 31, 1997................ -- -- -- -- 13.60%
YIELD
30 days ended July 31, 1997.... 3.51% -- 3.19% -- 3.37%
TAX EQUIVALENT YIELD*
30 days ended July 31, 1997.... 4.88% -- 4.43% -- 4.68%
<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>
One year ended July 31, 1997... $ 1,039.30 4.05% $ 1,040.50
Inception (November 26, 1993)
to July 31, 1997............. -- -- --
Inception (October 21, 1994) to
July 31, 1997................ $ 1,136.00 4.85% $ 1,140.60
Year ended July 31, 1997....... $ 1,049.30 5.10% $ 1,051.00
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............. -- -- --
Inception (November 26, 1993)
to July 31, 1997............. -- -- --
Inception (October 21, 1994) to
July 31, 1997................ $ 1,136.00 14.06% $ 1,140.60
30 days ended July 31, 1997.... -- 3.41% --
30 days ended July 31, 1997.... -- 4.74% --
</TABLE>
- ---------------
* Based on a Federal income tax rate of 28%.
36
<PAGE> 95
<TABLE>
<CAPTION>
MASSACHUSETTS FUND
- -----------------------------------------------------------------------------------------------------------------------
CLASS A SHARES CLASS B SHARES
-------------------------------------- --------------------------------------
REDEEMABLE VALUE REDEEMABLE VALUE
OF A OF A
EXPRESSED AS HYPOTHETICAL EXPRESSED AS HYPOTHETICAL
A PERCENTAGE $1,000 A PERCENTAGE $1,000
BASED ON A INVESTMENT BASED ON A INVESTMENT
HYPOTHETICAL AT THE END OF HYPOTHETICAL AT THE END OF
PERIOD $1,000 INVESTMENT THE PERIOD $1,000 INVESTMENT THE PERIOD
- ---------------------------------- ----------------- ---------------- ----------------- ----------------
<S> <C> <C> <C> <C>
AVERAGE ANNUAL TOTAL RETURN
(INCLUDING MAXIMUM APPLICABLE SALES CHARGE)
One year ended July 31, 1997...... 3.82% $ 1,038.20 3.49% $ 1,034.90
Inception (November 26, 1993) to
July 31, 1997................... 4.00% $ 1,155.00 3.91% $ 1,151.40
Inception (October 21, 1994) to
July 31, 1997................... -- -- -- --
ANNUAL TOTAL RETURN
(EXCLUDING MAXIMUM APPLICABLE SALES CHARGE)
Year ended July 31, 1997.......... 4.86% $ 1,048.60 4.49% $ 1,044.90
Year ended July 31, 1996.......... 4.08% $ 1,040.80 3.70% $ 1,037.00
Year ended July 31, 1995.......... 4.79% $ 1,047.90 4.41% $ 1,044.10
Inception (October 21, 1994) to
July 31, 1995................... -- -- -- --
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, 1997................... 15.50% $ 1,155.00 15.14% $ 1,151.40
Inception (October 21, 1994) to
July 31, 1997................... -- -- -- --
YIELD
30 days ended July 31, 1997....... 3.59% -- 3.26% --
TAX EQUIVALENT YIELD*
30 days ended July 31, 1997....... 4.99% -- 4.53% --
<CAPTION>
MASSACHUSETTS FUND
- ----------------------------------
CLASS C SHARES CLASS D SHARES
-------------------------------------- --------------------------------------
REDEEMABLE VALUE REDEEMABLE VALUE
OF A OF A
EXPRESSED AS HYPOTHETICAL EXPRESSED AS HYPOTHETICAL
A PERCENTAGE $1,000 A PERCENTAGE $1,000
BASED ON A INVESTMENT BASED ON A INVESTMENT
HYPOTHETICAL AT THE END OF HYPOTHETICAL AT THE END OF
PERIOD $1,000 INVESTMENT THE PERIOD $1,000 INVESTMENT THE PERIOD
- ---------------------------------- ----------------- ---------------- ----------------- ----------------
<S> <C> <C> <C> <C>
One year ended July 31, 1997...... 3.70% $ 1,037.00 3.71% $ 1,037.10
Inception (November 26, 1993) to
July 31, 1997................... -- -- -- --
Inception (October 21, 1994) to
July 31, 1997................... 4.88% $ 1,141.30 4.61% $ 1,133.20
Year ended July 31, 1997.......... 4.70% $ 1,047.00 4.76% $ 1,047.60
Year ended July 31, 1996.......... 3.81% $ 1,038.10 3.97% $ 1,039.70
Year ended July 31, 1995.......... -- -- -- --
Inception (October 21, 1994) to
July 31, 1995................... 5.00% $ 1,050.00 5.09% $ 1,050.90
Inception (November 26, 1993) to
July 31, 1994................... -- -- -- --
Inception (November 26, 1993) to
July 31, 1997................... -- -- -- --
Inception (October 21, 1994) to
July 31, 1997................... 14.13% $ 1,141.30 13.32% $ 1,133.20
30 days ended July 31, 1997....... 3.47% -- 3.49% --
30 days ended July 31, 1997....... 4.82% -- 4.85% --
</TABLE>
- ---------------
* Based on a Federal income tax rate of 28%.
37
<PAGE> 96
<TABLE>
<CAPTION>
MICHIGAN FUND
- -----------------------------------------------------------------------------------------------------------------------
CLASS A SHARES CLASS B SHARES
-------------------------------------- --------------------------------------
REDEEMABLE VALUE REDEEMABLE VALUE
OF A OF A
EXPRESSED AS HYPOTHETICAL EXPRESSED AS HYPOTHETICAL
A PERCENTAGE $1,000 A PERCENTAGE $1,000
BASED ON A INVESTMENT BASED ON A INVESTMENT
HYPOTHETICAL AT THE END OF HYPOTHETICAL AT THE END OF
PERIOD $1,000 INVESTMENT THE PERIOD $1,000 INVESTMENT THE PERIOD
- ---------------------------------- ----------------- ---------------- ----------------- ----------------
<S> <C> <C> <C> <C>
AVERAGE ANNUAL TOTAL RETURN
(INCLUDING MAXIMUM APPLICABLE SALES CHARGE)
One year ended July 31, 1997...... 4.55% $ 1,045.50 4.22% $ 1,042.20
Inception (November 26, 1993) to
July 31, 1997................... 4.10% $ 1,159.10 4.01% $ 1,155.30
Inception (October 21, 1994) to
July 31, 1997................... -- -- -- --
ANNUAL TOTAL RETURN
(EXCLUDING MAXIMUM APPLICABLE SALES CHARGE)
Year ended July 31, 1997.......... 5.61% $ 1,056.10 5.22% $ 1,052.20
Year ended July 31, 1996.......... 3.71% $ 1,037.10 3.32% $ 1,033.20
Year ended July 31, 1995.......... 5.16% $ 1,051.60 4.78% $ 1,047.80
Inception (October 21, 1994) to
July 31, 1995................... -- -- -- --
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, 1997................... 15.91% $ 1,159.10 15.53% $ 1,155.30
Inception (October 21, 1994) to
July 31, 1997................... -- -- -- --
YIELD
30 days ended July 31, 1997....... 3.62% -- 3.28% --
TAX EQUIVALENT YIELD*
30 days ended July 31, 1997....... 5.03% -- 4.56% --
<CAPTION>
MICHIGAN FUND
- ----------------------------------
CLASS C SHARES CLASS D SHARES
-------------------------------------- --------------------------------------
REDEEMABLE VALUE REDEEMABLE VALUE
OF A OF A
EXPRESSED AS HYPOTHETICAL EXPRESSED AS HYPOTHETICAL
A PERCENTAGE $1,000 A PERCENTAGE $1,000
BASED ON A INVESTMENT BASED ON A INVESTMENT
HYPOTHETICAL AT THE END OF HYPOTHETICAL AT THE END OF
PERIOD $1,000 INVESTMENT THE PERIOD $1,000 INVESTMENT THE PERIOD
- ---------------------------------- ----------------- ---------------- ----------------- ----------------
<S> <C> <C> <C> <C>
One year ended July 31, 1997...... 4.22% $ 1,042.20 4.34% $ 1,043.40
Inception (November 26, 1993) to
July 31, 1997................... -- -- -- --
Inception (October 21, 1994) to
July 31, 1997................... 4.98% $ 1,144.50 4.97% $ 1,144.00
Year ended July 31, 1997.......... 5.22% $ 1,052.20 5.40% $ 1,054.00
Year ended July 31, 1996.......... 3.20% $ 1,032.00 3.71% $ 1,037.10
Year ended July 31, 1995.......... -- -- -- --
Inception (October 21, 1994) to
July 31, 1995................... 5.40% $ 1,054.00 5.72% $ 1,057.20
Inception (November 26, 1993) to
July 31, 1994................... -- -- -- --
Inception (November 26, 1993) to
July 31, 1997................... -- -- -- --
Inception (October 21, 1994) to
July 31, 1997................... 14.45% $ 1,144.50 14.40% $ 1,144.00
30 days ended July 31, 1997....... 3.12% -- 3.52% --
30 days ended July 31, 1997....... 4.33% -- 4.89% --
</TABLE>
- ---------------
* Based on a Federal income tax rate of 28%.
38
<PAGE> 97
<TABLE>
<CAPTION>
NEW JERSEY FUND
- -----------------------------------------------------------------------------------------------------------------------
CLASS A SHARES CLASS B SHARES
-------------------------------------- --------------------------------------
REDEEMABLE VALUE REDEEMABLE VALUE
OF A OF A
EXPRESSED AS HYPOTHETICAL EXPRESSED AS HYPOTHETICAL
A PERCENTAGE $1,000 A PERCENTAGE $1,000
BASED ON A INVESTMENT BASED ON A INVESTMENT
HYPOTHETICAL AT THE END OF HYPOTHETICAL AT THE END OF
PERIOD $1,000 INVESTMENT THE PERIOD $1,000 INVESTMENT THE PERIOD
- ---------------------------------- ----------------- ---------------- ----------------- ----------------
<S> <C> <C> <C> <C>
AVERAGE ANNUAL TOTAL RETURN
(INCLUDING MAXIMUM APPLICABLE SALES CHARGE)
One year ended July 31, 1997...... 3.14% $ 1,031.40 2.92% $ 1,029.20
Inception (November 26, 1993) to
July 31, 1997................... 4.07% $ 1,158.00 4.01% $ 1,155.60
Inception (October 21, 1994) to
July 31, 1997................... -- -- -- --
ANNUAL TOTAL RETURN
(EXCLUDING MAXIMUM APPLICABLE SALES CHARGE)
Year ended July 31, 1997.......... 4.19% $ 1,041.90 3.92% $ 1,039.20
Year ended July 31, 1996.......... 3.68% $ 1,036.80 3.21% $ 1,032.10
Year ended July 31, 1995.......... 6.45% $ 1,064.50 6.07% $ 1,060.70
Inception (October 21, 1994) to
July 31, 1995................... -- -- -- --
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, 1997................... 15.80% $ 1,158.00 15.56% $ 1,155.60
Inception (October 21, 1994) to
July 31, 1997................... -- -- -- --
YIELD
30 days ended July 31, 1997....... 3.32% -- 2.99% --
TAX EQUIVALENT YIELD*
30 days ended July 31, 1997....... 4.61% -- 4.15% --
<CAPTION>
NEW JERSEY FUND
- ----------------------------------
CLASS C SHARES CLASS D SHARES
-------------------------------------- --------------------------------------
REDEEMABLE VALUE REDEEMABLE VALUE
OF A OF A
EXPRESSED AS HYPOTHETICAL EXPRESSED AS HYPOTHETICAL
A PERCENTAGE $1,000 A PERCENTAGE $1,000
BASED ON A INVESTMENT BASED ON A INVESTMENT
HYPOTHETICAL AT THE END OF HYPOTHETICAL AT THE END OF
PERIOD $1,000 INVESTMENT THE PERIOD $1,000 INVESTMENT THE PERIOD
- ---------------------------------- ----------------- ---------------- ----------------- ----------------
<S> <C> <C> <C> <C>
One year ended July 31, 1997...... 3.06% $ 1,030.60 3.14% $ 1,031.40
Inception (November 26, 1993) to
July 31, 1997................... -- -- -- --
Inception (October 21, 1994) to
July 31, 1997................... 1.12% $ 1,031.30 4.73% $ 1,136.80
Year ended July 31, 1997.......... 4.06% $ 1,040.60 4.18% $ 1,041.80
Year ended July 31, 1996.......... 3.24% $ 1,032.40 3.48% $ 1,034.80
Year ended July 31, 1995.......... -- -- -- --
Inception (October 21, 1994) to
July 31, 1995................... (4.01)% $ 959.90 6.51% $ 1,065.10
Inception (November 26, 1993) to
July 31, 1994................... -- -- -- --
Inception (November 26, 1993) to
July 31, 1997................... -- -- -- --
Inception (October 21, 1994) to
July 31, 1997................... 3.13% $ 1,031.30 13.68% $ 1,136.80
30 days ended July 31, 1997....... 3.20% -- 3.22% --
30 days ended July 31, 1997....... 4.44% -- 4.47% --
</TABLE>
- ---------------
* Based on a Federal income tax rate of 28%.
39
<PAGE> 98
<TABLE>
<CAPTION>
NEW YORK FUND
- -----------------------------------------------------------------------------------------------------------------------
CLASS A SHARES CLASS B SHARES
-------------------------------------- --------------------------------------
REDEEMABLE VALUE REDEEMABLE VALUE
OF A OF A
EXPRESSED AS HYPOTHETICAL EXPRESSED AS HYPOTHETICAL
A PERCENTAGE $1,000 A PERCENTAGE $1,000
BASED ON A INVESTMENT BASED ON A INVESTMENT
HYPOTHETICAL AT THE END OF HYPOTHETICAL AT THE END OF
PERIOD $1,000 INVESTMENT THE PERIOD $1,000 INVESTMENT THE PERIOD
- ---------------------------------- ----------------- ---------------- ----------------- ----------------
<S> <C> <C> <C> <C>
AVERAGE ANNUAL TOTAL RETURN
(INCLUDING MAXIMUM APPLICABLE SALES CHARGE)
One year ended July 31, 1997...... 5.03% $ 1,050.30 4.71% $ 1,047.10
Inception (November 26, 1993) to
July 31, 1997................... 4.65% $ 1,182.00 4.57% $ 1,178.40
Inception (October 21, 1994) to
July 31, 1997................... -- -- -- --
ANNUAL TOTAL RETURN
(EXCLUDING MAXIMUM APPLICABLE SALES CHARGE)
Year ended July 31, 1997.......... 6.09% $ 1,060.90 5.71% $ 1,057.10
Year ended July 31, 1996.......... 4.46% $ 1,044.60 4.08% $ 1,040.80
Year ended July 31, 1995.......... 6.03% $ 1,060.30 5.66% $ 1,056.60
Inception (October 21, 1994) to
July 31, 1995................... -- -- -- --
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, 1997................... 18.20% $ 1,182.00 17.84% $ 1,178.40
Inception (October 21, 1994) to
July 31, 1997................... -- -- -- --
YIELD
30 days ended July 31, 1997....... 3.86% -- 3.54% --
TAX EQUIVALENT YIELD*
30 days ended July 31, 1997....... 5.36% -- 4.92% --
<CAPTION>
NEW YORK FUND
- ----------------------------------
CLASS C SHARES CLASS D SHARES
-------------------------------------- --------------------------------------
REDEEMABLE VALUE REDEEMABLE VALUE
OF A OF A
EXPRESSED AS HYPOTHETICAL EXPRESSED AS HYPOTHETICAL
A PERCENTAGE $1,000 A PERCENTAGE $1,000
BASED ON A INVESTMENT BASED ON A INVESTMENT
HYPOTHETICAL AT THE END OF HYPOTHETICAL AT THE END OF
PERIOD $1,000 INVESTMENT THE PERIOD $1,000 INVESTMENT THE PERIOD
- ---------------------------------- ----------------- ---------------- ----------------- ----------------
<S> <C> <C> <C> <C>
One year ended July 31, 1997...... 4.91% $ 1,049.10 4.92% $ 1,049.20
Inception (November 26, 1993) to
July 31, 1997................... -- -- -- --
Inception (October 21, 1994) to
July 31, 1997................... 5.83% $ 1,170.30 5.65% $ 1,164.70
Year ended July 31, 1997.......... 5.91% $ 1,059.10 5.98% $ 1,059.80
Year ended July 31, 1996.......... 4.28% $ 1,042.80 4.35% $ 1,043.50
Year ended July 31, 1995.......... -- -- -- --
Inception (October 21, 1994) to
July 31, 1995................... 5.97% $ 1,059.70 6.37% $ 1,063.70
Inception (November 26, 1993) to
July 31, 1994................... -- -- -- --
Inception (November 26, 1993) to
July 31, 1997................... -- -- -- --
Inception (October 21, 1994) to
July 31, 1997................... 17.03% $ 1,170.30 16.47% $ 1,164.70
30 days ended July 31, 1997....... 3.72% -- 3.77% --
30 days ended July 31, 1997....... 5.17% -- 5.24% --
</TABLE>
- ---------------
* Based on a Federal income tax rate of 28%.
40
<PAGE> 99
<TABLE>
<CAPTION>
PENNSYLVANIA FUND
- -----------------------------------------------------------------------------------------------------------------------
CLASS A SHARES CLASS B SHARES
-------------------------------------- --------------------------------------
REDEEMABLE VALUE REDEEMABLE VALUE
OF A OF A
EXPRESSED AS HYPOTHETICAL EXPRESSED AS HYPOTHETICAL
A PERCENTAGE $1,000 A PERCENTAGE $1,000
BASED ON A INVESTMENT BASED ON A INVESTMENT
HYPOTHETICAL AT THE END OF HYPOTHETICAL AT THE END OF
PERIOD $1,000 INVESTMENT THE PERIOD $1,000 INVESTMENT THE PERIOD
- ---------------------------------- ----------------- ---------------- ----------------- ----------------
<S> <C> <C> <C> <C>
AVERAGE ANNUAL TOTAL RETURN
(INCLUDING MAXIMUM APPLICABLE SALES CHARGE)
One year ended July 31, 1997...... 3.99% $ 1,039.90 3.66% $ 1,036.60
Inception (November 26, 1993) to
July 31, 1997................... 4.32% $ 1,168.40 4.24% $ 1,164.80
Inception (October 21, 1994) to
July 31, 1997................... -- -- -- --
ANNUAL TOTAL RETURN
(EXCLUDING MAXIMUM APPLICABLE SALES CHARGE)
Year ended July 31, 1997.......... 5.04% $ 1,050.40 4.66% $ 1,046.60
Year ended July 31, 1996.......... 4.18% $ 1,041.80 3.80% $ 1,038.00
Year ended July 31, 1995.......... 5.89% $ 1,058.90 5.51% $ 1,055.10
Inception (October 21, 1994) to
July 31, 1995................... -- -- -- --
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, 1997................... 16.84% $ 1,168.40 16.48% $ 1,164.80
Inception (October 21, 1994) to
July 31, 1997................... -- -- -- --
YIELD
30 days ended July 31, 1997....... 3.41% -- 3.08% --
TAX EQUIVALENT YIELD*
30 days ended July 31, 1997....... 4.74% -- 4.28% --
<CAPTION>
PENNSYLVANIA FUND
- ----------------------------------
CLASS C SHARES CLASS D SHARES
-------------------------------------- --------------------------------------
REDEEMABLE VALUE REDEEMABLE VALUE
OF A OF A
EXPRESSED AS HYPOTHETICAL EXPRESSED AS HYPOTHETICAL
A PERCENTAGE $1,000 A PERCENTAGE $1,000
BASED ON A INVESTMENT BASED ON A INVESTMENT
HYPOTHETICAL AT THE END OF HYPOTHETICAL AT THE END OF
PERIOD $1,000 INVESTMENT THE PERIOD $1,000 INVESTMENT THE PERIOD
- ---------------------------------- ----------------- ---------------- ----------------- ----------------
<S> <C> <C> <C> <C>
One year ended July 31, 1997...... 3.68% $ 1,036.80 3.99% $ 1,039.90
Inception (November 26, 1993) to
July 31, 1997................... -- -- -- --
Inception (October 21, 1994) to
July 31, 1997................... 5.28% $ 1,153.60 5.11% $ 1,148.20
Year ended July 31, 1997.......... 4.68% $ 1,046.80 5.04% $ 1,050.40
Year ended July 31, 1996.......... 4.28% $ 1,042.80 4.07% $ 1,040.70
Year ended July 31, 1995.......... -- -- -- --
Inception (October 21, 1994) to
July 31, 1995................... 5.68% $ 1,056.80 6.10% $ 1,061.00
Inception (November 26, 1993) to
July 31, 1994................... -- -- -- --
Inception (November 26, 1993) to
July 31, 1997................... -- -- -- --
Inception (October 21, 1994) to
July 31, 1997................... 15.36% $ 1,153.60 14.82% $ 1,148.20
30 days ended July 31, 1997....... 3.15% -- 3.31% --
30 days ended July 31, 1997....... 4.38% -- 4.60% --
</TABLE>
- ---------------
* Based on a Federal income tax rate of 28%.
41
<PAGE> 100
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 not 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 may be
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 California Fund, the
Florida Fund and the Acquired Funds, please see "Additional Information" on page
44. 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 or other
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 and/or
distribution expenses, as appropriate, being borne solely by such class (except
that Class B shares have certain voting rights with respect to the Class D
Distribution Plan). Each issued and outstanding share of a Series is entitled to
one vote and to participate equally in dividends and distributions with respect
to that Series and, upon liquidation or dissolution of the Series, in the net
assets of such Series remaining after satisfaction of outstanding liabilities,
except that, as noted above, expenses relating to distribution and/or account
maintenance of the Class B, Class C and Class D shares are borne solely by the
respective 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, other than amendments necessary to conform the
Declaration to certain laws or regulations, to change the name of the Trust, or
to make certain non-material changes, without the affirmative vote of a majority
of the outstanding shares of the Trust or of the affected Series or class, as
applicable.
42
<PAGE> 101
Under Massachusetts law, shareholders of a business trust may, under
certain circumstances, be held personally liable as partners for the trust's
obligations. However, the risk of a shareholder incurring financial loss on
account of shareholder liability is limited to circumstances in which both
inadequate insurance existed and the trust itself was unable to meet its
obligations.
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 the California Fund and the Florida Fund based
on the Funds' net assets and number of shares outstanding on July 31, 1997 is
set forth below.
<TABLE>
<CAPTION>
CLASS A CLASS B CLASS C CLASS D
---------- ----------- -------- ----------
<S> <C> <C> <C> <C>
CALIFORNIA FUND
Net Assets............................. $3,152,191 $ 6,876,961 $ 57,282 $4,042,282
========= ========== ======== =========
Number of Shares Outstanding........... 308,546 673,258 5,607 395,606
========= ========== ======== =========
Net Asset Value Per Share (net assets
divided by number of shares
outstanding)......................... $ 10.22 $ 10.21 $ 10.22 $ 10.22
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......................... $ 10.32 $ 10.21 $ 10.22 $ 10.32
========= ========== ======== =========
FLORIDA FUND
Net Assets............................. $6,375,611 $11,461,594 $ 59,716 $7,732,955
========= ========== ======== =========
Number of Shares Outstanding........... 633,237 1,138,517 5,969 768,414
========= ========== ======== =========
Net Asset Value Per Share (net assets
divided by number of shares
outstanding)......................... $ 10.07 $ 10.07 $ 10.00 $ 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......................... $ 10.17 $ 10.07 $ 10.00 $ 10.16
========= ========== ======== =========
</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 selection of the
independent auditors is subject to approval by the independent Trustees 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.
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<PAGE> 102
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.
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.
At a shareholders meeting presently scheduled to be held on January 5,
1998, shareholders of the Acquired Funds will consider a proposal pursuant to
which Limited Maturity Portfolio (the "Limited Maturity Portfolio"), a series of
Merrill Lynch Municipal Bond Fund, Inc., a Maryland corporation (the "Municipal
Fund"), will acquire substantially all of the assets, and will assume
substantially all of the liabilities of the Acquired Funds in exchange solely
for an equal aggregate value of newly-issued shares of Common Stock of Limited
Maturity Portfolio. The California Fund and the Florida Fund are not included in
this transaction and will continue to operate as Series of the Trust. Shares of
the Acquired Funds are no longer being offered for purchase or sale.
44
<PAGE> 103
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, 1997.
<TABLE>
<CAPTION>
NAME ADDRESS PERCENT OF CLASS
------------------------------- ----------------------------- ----------------
<S> <C> <C> <C>
Arizona Fund............... Melvin Silverman 802 N.Mann Ave. 8.63 Class B
Marsha L. Silverman Tucson, AZ 85710
California Fund............ Bernard Lipinsky and 700 Front St. #2501 10.90% Class A
Dorris Lipinsky San Diego, CA 92101 6.7% Class B
John L. Love P.O. Box 305 16.4% Class D
Pebble Beach, CA 93953
Blush & Co. P.O. Box 976 6.5% Class D
Attn: Ed Crespo New York, NY 10268
Florida Fund............... Karen Skinner P.O. Box 9229 6.5% Class D
Fort Myers, FL 33902
Karen Skinner P.O. Box 9229 6.5% Class D
Fort Myers, FL 33902
Massachusetts Fund......... Heatbath Corporation P.O. Box 2978 10.67% Class A
Attn: Mary Simpson Springfield, MA 01101
Ruggles-Klingemann Mfg. Co. P.O. Box 550 7.89% Class B
5 Foster Ct.
Salem, MA 01970
Michigan Fund.............. Thomas O. Muller, III 21 S. End Ave. 9.6% Class A
#1E PH Regatta
New York, NY 10280
Margarete Drettmann 32901 Gratiot Ave. 5.3% Class B
c/o Richard Zimmer Active Tool Roseville, MI 48066
James R. Donahey 421 Highland 25.6% Class D
Pat J. Donahey Ann Arbor, MI 48104
New Jersey Funds........... Barbar Sherlock 8 Rock Ct. 5.14% Class B
Loretta Shough Park Ridge, NJ 07656
Vincent Giordano 157 Bedens Brook Rd. 18.9% Class A
Josephine Giordano Skillman, NJ 08558
New York Fund.............. Morris M. Greenberg 601 Stratford Rd. 9.05% Class D
North Baldwin, NY 11510
Aakron Rule Corp. P.O. Box 418 5.95% Class D
Akron, NY 14001
Pennsylvania Fund.......... A.J. Clegg 138 Hunt Valley Cir. 15.3% Class B
Berwyn, PA 19312
Martin and Sylvia Kreithen 900 Roscommon Rd. 20.6% Class D
Bryn Mawr, PA 19010
</TABLE>
45
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<PAGE> 105
APPENDIX A
ECONOMIC AND OTHER CONDITIONS IN CALIFORNIA
The following information is a brief summary of factors affecting the
economy of the State of California ("California" or the "State") and does not
purport to be a complete description of such factors. Other factors will affect
State 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.
GENERAL ECONOMIC CONDITIONS
The economy of California is the largest among the 50 states and one of the
largest in the world and has major components in agriculture, manufacturing,
high technology, trade, entertainment, tourism, construction and services. Total
State gross domestic product is expected to exceed $1 trillion in 1997. On a
stand-alone basis, California's economy is larger than all but six nations in
the world.
California's July 1, 1996 population of over 32 million represented over
12% of the total United States population. As of July 1, 1990 the population of
29,944,000 represented an increase of over 6 million persons, or 26%, during the
decade of the 1980's.
California's population is concentrated in metropolitan areas. As of the
April 1, 1990 Census, 96% of the citizens resided in the 23 Metropolitan
Statistical Areas in the State. As of July 1, 1995, the 5-county Los Angeles
area accounted for 49%, with 15.7 million residents. The 10-county San Francisco
Bay Area represented 21% with a population of 6.7 million.
From 1990-1993, the State suffered through a severe recession, the worst
since the 1930's, heavily influenced by large cutbacks in defense/aerospace
industries and military base closures and by a major drop in real estate
construction. California's economy has been recovering and growing steadily
since the start of 1994; currently the State's economic growth is outpacing the
rest of the nation. More than 300,000 nonfarm jobs were added in the State in
1996, while personal income grew by more than $55 billion. Another 380,000 jobs
are expected to be created in 1997. The unemployment rate, while still higher
than the national average, fell to the low 6% range in mid-1997, compared to
over 10% at the worst of the recession.
California's economic expansion is being fueled by growth in
high-technology industries, including computer software, electronics
manufacturing and motion picture/television production; growth is also strong in
business services, export trade, and manufacturing, with even the aerospace
sector now showing increased employment. The State's economy is now more
diversified than it was during the 1980's. Nonresidential real estate
construction has grown rapidly in response to the growth in the economy.
Residential construction has been growing slowly since the depths of the
recession, but remains much lower (as measured by annual new unit permits) than
during the late 1980's.
THE STATE
Fiscal Years Prior to 1995-96. The State's budget problems in recent years
were caused by a combination of external economic conditions and a structural
imbalance in that the largest general fund programs--K-14 education, health,
welfare and corrections--were increasing faster than the revenue base, driven by
the State's rapid population growth. These pressures are expected to 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.
As a result of these factors and others, and especially because a severe
recession between 1990-94 reduced revenues and increased expenditures for social
welfare programs, from the late 1980's 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 its
budget reserve, the Special Fund for Economic Uncertainties ("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 multibillion dollar
actions to
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bring projected revenues and expenditures into balance. The State Legislature
and Governor agreed on the following principal steps to produce Budget Acts in
the years 1991-92 to 1994-95, although not all these actions were taken in each
year.
- significant cuts in health and welfare program expenditures;
- transfers of program responsibilities and funding from the State to
local governments (referred to as "realignment"), coupled with some
reduction in mandates on local government;
- transfer of about $3.6 billion in local property tax revenues from
cities, counties, redevelopment agencies and some other districts to
local school districts, thereby reducing State funding for schools
under Proposition 98 (discussed below);
- reduction in growth of support for higher education programs, coupled
with increases in student fees, through the 1994-95 Fiscal Year;
- maintenance of the minimum Proposition 98 funding guarantee for K-14
schools, and the disbursement of additional funds to keep a constant
level of about $4,200 per K-12 pupils through the 1993-94 Fiscal Year;
- revenue increases (particularly in the 1991-92 Fiscal Year budget),
most of which were for a short duration;
- increased reliance on aid from the federal government to offset the
costs of incarcerating, educating and providing health and welfare
services to illegal immigrants, although during this time frame, most
of the additional aid requested by the Administration was not
received; and
- various one-time adjustments and accounting changes.
Despite these budget actions, as noted, the effects of the recession led to
large, unanticipated deficits in the budget reserve, the SFEU, as compared to
projected positive balances. By the 1993-94 Fiscal Year, the accumulated deficit
was so large that it was impractical to budget to retire it in one year, so a
two-year program was implemented, using the issuance of revenue anticipation
warrants to carry a portion of the deficit over the end of the fiscal year. When
the economy failed to recover sufficiently in 1993-94, a second two-year plan
was implemented in 1994-95, again using cross-fiscal year revenue anticipation
warrants to partly finance the deficit into the 1995-96 fiscal year.
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. When the Legislature and the Governor failed to adopt a budget for
the 1992-93 Fiscal Year by July 1, 1992, which would have allowed the State to
carry out its normal annual cash flow borrowing to replenish its cash reserves,
the State Controller issued registered warrants to pay a variety of obligations
representing prior years' or continuing appropriations, and mandates from court
order. Available funds were used to make constitutionally-mandated payments,
such as debt service on bonds and warrants. Between July 1 and September 4,
1992, when the budget was adopted, the State Controller issued a total of
approximately $3.8 billion of registered warrants.
During the past several fiscal years, the State was forced to rely
increasingly on external debt markets to meet its cash needs, as a succession of
notes and revenue anticipation 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 a fiscal year, as noted earlier. The last and
largest of these borrowings was $4.0 billion of revenue anticipation warrants
which were issued in July 1994 and matured on April 25, 1996.
1995-96 Fiscal Year. The 1995-96 Budget Act was signed by the Governor on
August 3, 1995, 34 days after the start of the fiscal year. The Budget Act
projected general fund revenues and transfers of $44.1 billion, a 3.5% increase
from the prior year. Expenditures were budgeted at $43.4 billion, a 4 percent
increase. The Budget Act also projected Special Fund revenues of $12.7 billion
and appropriated Special Fund expenditures of $13.0 billion.
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Final data for the 1995-96 Fiscal Year showed revenues and transfers of
$46.1 billion, some $2 billion over the original fiscal year estimate, which was
attributed to the strong economic recovery. Expenditures also increased, to an
estimated $45.4 billion, as a result of the requirement to expend revenues for
schools under Proposition 98, and, among other things, failure of the federal
government to enact welfare reform during the fiscal year and to budget new aid
for illegal immigrant costs, both of which had been counted on to allow
reductions in State costs. SFEU had a small negative balance of about $87
million at June 30, 1996, all but eliminating the accumulated budget deficit
from the early 1990's. Available internal borrowable resources (available cash,
after payment of all obligations due) on June 30, 1996 was about $3.8 billion,
representing a significant improvement in the State's cash position, and ending
the need for deficit borrowing over the end of the fiscal year. The State's
improved cash position allowed it to repay the $4.0 billion Revenue Anticipation
Warrant issue on April 25, 1996, and to issue only $2.0 billion of revenue
anticipation notes during the fiscal year, which matured on June 28, 1996.
The 1995-96 Budget Act included substantial additional funding under
Proposition 98 for schools and community colleges (about $1.0 billion general
fund and $1.2 billion total above 1994-95 levels). Because of higher than
projected revenues in 1994-95, an additional $561 million ($92 per K-12 pupil
(also called per ADA, or average daily attendance)) was appropriated to the
1994-95 Proposition 98 entitlement. A large part of this was a block grant of
about $50 per pupil for any one-time purpose. For the first time in several
years, a full 2.7 percent cost of living allowance was funded. The budget was
based on the settlement of the CTA v. Gould litigation. Cuts in health and
welfare costs totaled about $220 million, almost $700 million less than had been
anticipated, because of the failure by the federal government to approve certain
of these actions in a timely manner. The federal government also failed to
appropriate all but $31 million of an anticipated $500 million in new federal
aid for incarceration and health care costs of illegal immigrants. Funding from
the general fund for the University of California was increased by $106 million
and for the California State University system by $97 million, with no increase
in student fees.
1996-97 Fiscal Year. The 1996-97 Budget Act was signed by the Governor on
July 15, 1996, along with various implementing bills. The Governor vetoed about
$82 million of appropriations (both general fund and Special Fund). With the
signing of the Budget Act, the State implemented its regular cash flow borrowing
program with the issuance of $3.0 billion of Revenue Anticipation Notes to
mature on June 30, 1997. The Budget Act appropriated a modest budget reserve in
the SFEU of $305 million, as of June 30, 1997. The Department of Finance
projected that, on June 30, 1997, the State's available internal borrowing
(cash) resources will be $2.9 billion, after payment of all obligations due by
that date, so that no cross-fiscal year borrowing will be needed.
Revenues. The Legislature rejected the Governor's proposed 15% cut in
personal income taxes (to be phased in over three years), but did approve a 5%
cut in bank and corporation taxes, to be effective for income years starting on
January 1, 1997. As a result, revenues for the Fiscal Year were estimated to
total $47.643 billion, a 3.3% increase over the final estimated 1995-96
revenues. Special Fund revenues were estimated to be $13.3 billion.
Expenditures. The Budget Act contained general fund appropriations
totaling $47.251 billion, a 4.0% increase over the final estimated 1995-96
expenditures. Special Fund expenditures were budgeted at $12.6 billion.
The following are principal features of the 1996-97 Budget Act:
Proposition 98 funding for schools and community college districts
increased by almost $1.6 billion (general fund) and $1.65 billion total
above revised 1995-96 levels. Almost half of this money was budgeted to
fund class-size reductions in kindergarten and grades 1-3. Also, for the
second year in a row, the full cost of living allowance (3.2%) was funded.
The Proposition 98 increases have brought K-12 expenditures to almost
$4,800 per ADA, an almost 15% increase over the level prevailing during the
recession years. Community colleges will receive an increase in funding of
$157 million for 1996-97 out of this $1.6 billion total.
Because of the higher than projected revenues in 1995-96, an
additional $1.1 billion ($190 per K-12 ADA and $145 million for community
colleges) was appropriated and retroactively applied towards the
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<PAGE> 108
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 were allocated to each
school site.
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.
A 4.9% increase in funding for the University of California ($130
million general fund) and the California State University system ($101
million general fund), with no increases in student fees, maintaining the
second year of the Governor's four-year "Compact" with the State's higher
education units.
The Budget Act assumed the federal government will provide
approximately $700 million in new aid for incarceration and health care
costs of illegal immigrants. These funds reduce appropriations in these
categories that would otherwise have to be paid from the general fund. (For
purposes of cash flow projections, the State Department of Finance expects
$540 million of this amount to be received during the 1996-97 fiscal year.)
General fund support for the State Department of Corrections was
increased by about 7% over the prior year, reflecting estimates of
increased prison population.
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.
Subsequent Events. On January 9, 1997, the Governor released his proposed
budget for the 1997-98 Fiscal Year (the "Proposed Budget"). The Proposed Budget
estimated general fund revenues and transfers in 1997-98 of $50.7 billion, a
4.6% increase from revised 1996-97 figures. The Governor proposes expenditures
of $50.3 billion, a 3.9% increase from 1996-97. The Proposed Budget projected a
balance in the SFEU of $553 million on June 30, 1998.
At the time of the May Revision, released on May 14, 1997, the Department
of Finance increased its revenue estimate for the upcoming fiscal year by $1.3
billion, in response to the continued strong growth in the State's economy.
Budget negotiations continued into the summer, with major issues to be resolved
including final agreement on State welfare reform, increase in State employee
salaries and consideration of a tax cut proposed by the Governor.
In May 1997, action was taken by the California Supreme Court in an ongoing
lawsuit, PERS v. Wilson, which made final a judgment against the State requiring
an immediate payment from the General Fund to the Public Employees Retirement
Fund ("PERF") to make up certain deferrals in annual retirement fund
contributions which had been legislated in earlier years for budget savings, and
which the courts found to be unconstitutional. On July 30, 1997, following a
direction from the Governor, the Controller transferred $1.235 billion from the
General Fund to the PERF in satisfaction of the judgment, representing the
principal amount of the improperly deferred payments from 1995-96 and 1996-97.
1997-98 Fiscal Year. Once the pension payment eliminated essentially all
the "increased" revenue in the budget, final agreement was reached within a few
weeks on the welfare package and the remainder of the budget. The Legislature
passed the Budget Bill on August 11, 1997, along with numerous related bills to
implement its provisions. Agreement was not finally reached, however, on one
aspect of the budget plan, concerning the Governor's proposal for a
comprehensive educational testing program.
On August 18, 1997, the Governor signed the Budget Act, but vetoed about
$314 million of specific spending items, primarily in health and welfare and
education areas from both the General Fund and Special Funds. The Governor
announced that he was prepared to restore about $200 million of education
spending upon satisfactory completion of legislation on the education testing
program.
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The Budget Act anticipates General Fund revenues and transfers of $52.5
billion (a 6.8 percent increase over the final 1996-97 amount), and expenditures
of $52.8 billion (an 8.0 percent increase from the 1996-97 levels). On a
budgetary basis, the budget reserve (SFEU) is projected to decrease from $408
million at June 30, 1997 to $112 million at June 30, 1998. (The expenditure
figure assumes restoration of $200 million of vetoed funding.) The Budget Act
also includes Special Fund expenditures of $14.4 billion (as against estimated
Special Fund revenues of $14.0 billion), and $2.1 billion of expenditures from
various Bond Funds. The State has implemented its normal annual cash flow
borrowing program, issuing $3 billion of notes which mature on June 30, 1998.
The following are major features of the 1997-98 Budget Act:
1. For the second year in a row, the Budget contains a large increase
in funding for K-14 education under Proposition 98, reflecting strong
revenues which have exceeded initial budgeted amounts. Part of the nearly
$1.75 billion in increased spending is allocated to prior fiscal years.
Funds are provided to fully pay for the cost-of-living-increase component
of Proposition 98, and to extend class size reduction and reading
initiatives.
2. The Budget Act reflects the $1.235 billion pension case judgment
payment, and brings funding of the State's pension contribution back to the
quarterly basis which existed prior to the deferral actions which were
invalidated by the courts. There is no provision for any additional
payments relating to this court case.
3. Continuing the third year of a four-year "compact" which the
Administration has made with higher education units, funding from the
General Fund for the University of California and California State
University has increased by about 6 percent ($121 million and $107 million,
respectively), and there was no increase in student fees.
4. Because of the effect of the pension payment, most other State
programs were continued at 1996-97 levels.
5. Health and welfare costs are contained, continuing generally the
grant levels from prior years, as part of the initial implementation of the
new CalWORKs program (defined below).
6. Unlike prior years, this Budget Act does not depend on federal
budget actions. About $300 million in federal funds, already included in
the federal FY 1997 and 1998 budgets, are included in the Budget Act, to
offset incarceration costs for illegal aliens.
7. The Budget Act contains no tax increases, and no tax reductions.
The Renters Tax Credit was suspended for another year, saving approximately
$500 million.
Federal Welfare Reform. Congress passed and the President signed (on
August 22, 1996) the Personal Responsibility and Work Opportunity Act of 1996
(the "Law") making a fundamental reform of the current welfare system. Among
many provisions, the Law includes: (i) conversion of Aid to Families with
Dependent Children from an entitlement program to a block grant titled Temporary
Assistance for Needy Families (TANF), with lifetime time limits on TANF
recipients, work requirements and other changes; (ii) provisions denying certain
federal welfare and public benefits to legal noncitizens, allowing states to
elect to deny additional benefits (including TANF) to legal noncitizens, and
generally denying almost all benefits to illegal immigrants; and (iii) changes
in the Food Stamp program, including reducing maximum benefits and imposing work
requirements.
As part of the 1997-98 Budget Act legislative package, the State
Legislature and Governor agreed on a comprehensive reform of the State's public
assistance programs to implement the new federal Law. The new basic State
welfare program is called California Work Opportunity and Responsibility to Kids
Act ("CalWORKs"), which replaces the former Aid to Families with Dependent
Children (AFDC) and Greater Avenues to Independence (GAIN) programs effective
January 1, 1998. Consistent with the federal Law, CalWORKs contains new time
limits on receipt of welfare aid, both lifetime as well as for any current time
on aid. The centerpiece of CalWORKs is the linkage of eligibility to work
participation requirements. Administration of the new Welfare-to-Work programs
will be largely at the county level, and counties are given financial incentives
for success in this program.
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Although the longer-term impact of the new federal Law and CalWORKs cannot
be determined until there has been some experience, the State does not presently
anticipate that these new programs will have any adverse financial impact on the
General Fund. Overall TANF grants from the federal government are expected to
equal or exceed the amounts the State would have received under the old AFDC
program.
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.
Counties, in particular, have had fewer options to raise revenues than many
other local government entities, and have been required to maintain many
services. The entire statewide welfare system has been changed in response to
the change in federal welfare law enacted in 1996 (see "Welfare Reform" above).
Under the CalWORKs program, counties are given flexibility to develop their own
plans, consistent with State law, to implement Welfare-to-Work and to administer
many of its elements. Counties are also given financial incentives if, at the
individual county level or statewide, the CalWORKs program produces savings
associated with specified Welfare-to-Work outcomes; counties may also suffer
penalties for failing to meet federal standards. Under CalWORKs, counties will
still be required to provide "general assistance" aid to certain persons who
cannot obtain welfare from other programs. It is not yet known how the CalWORKs
system will affect county finances in the long run.
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 the 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.
On November 5, 1996, voters approved Proposition 218, entitled the "Right
to Vote on Taxes Act," which incorporates new Articles XIIIC and XIIID into the
California Constitution. These new provisions enact limitations on the ability
of local government agencies to impose or raise various taxes, fees, charges and
assessments without voter approval. Certain "general taxes" imposed after
January 1, 1995 must be approved by voters in order to remain in effect. In
addition, Article XIIIC clarifies the right of local voters to reduce taxes,
fees, assessments or charges through local initiatives.
Proposition 218 does not affect the State or its ability to levy or collect
taxes. There are a number of ambiguities concerning the Proposition and its
impact on local governments and their bonded debt which will require
interpretation by the courts or the State Legislature. The State Legislative
Analyst estimated that enactment of Proposition 218 would reduce local
government revenues statewide by over $100 million a year, and that over time,
annual revenues to local government would be reduced by several hundred million
dollars.
In May 1996, a taxpayer filed an action (the "Rider Case") against the City
of San Diego ("San Diego") and the San Diego Convention Center Expansion
Authority (the "Authority") challenging the validity of a lease revenue
financing involving a lease having features similar to the leases commonly used
in California lease-based financings such as certificates of participation. In
the Rider Case, the plaintiffs maintain that voter approval is required for the
San Diego lease (a) since the lease constituted indebtedness prohibited by
Article XVI, Section 18 of the California Constitution without a two-thirds vote
of the electorate, and
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(b) since San Diego was prohibited under its charter from issuing bonds without
a two-thirds vote of the electorate, and the power of the Authority, a joint
powers' authority, one of the members of which is San Diego, to issue bonds is
no greater than the power of San Diego. In response to San Diego's motion for
summary judgment, the trial court rejected the plaintiffs' arguments and ruled
that the lease was constitutionally valid and that the Authority's related lease
revenue bonds did not require voter approval. The plaintiffs appealed the matter
to the Court of Appeals for the Fourth District, which likewise affirmed the
validity of the lease and of the lease revenue bond financing arrangements. The
plaintiffs then filed a petition for review with the California State Supreme
Court, and, on April 2, 1997, the California Supreme Court granted the
plaintiffs' petition for review. No decision from the State Supreme Court is
expected until sometime during the 1998 calendar year.
CONSTITUTIONAL AND STATUTORY LIMITATIONS; RECENT INITIATIVES; PENDING
LEGISLATION
Constitutional and Statutory Limitations. Article XIIIA of the California
Constitution (which resulted from the voter-approved Proposition 13 in 1978)
limits the taxing powers of California public agencies. Article XIIIA provides
that the maximum ad valorem tax on real property cannot exceed 1% of the "full
cash value" of the property and effectively prohibits the levying of any other
ad valorem tax on real property for general purposes. However, on May 3, 1986,
Proposition 46, an amendment to Article XIIIA, was approved by the voters of the
State of California, creating a new exemption under Article XIIIA permitting an
increase in ad valorem taxes on real property in excess of 1% for bonded
indebtedness approved by two-thirds of the voters voting on the proposed
indebtedness. "Full cash value" is defined as "the County Assessor's valuation
of real property as shown on the 1975-76 tax bill under "full cash value" or,
thereafter, the appraised value of real property when purchased, newly
constructed, or a change in ownership has occurred after the 1975 assessment."
The "full cash value" is subject to annual adjustment to reflect increases (not
to exceed 2%) or decreases in the consumer price index or comparable local data,
or to reflect reductions in property value caused by damage, destruction or
other factors.
Article XIIIB of the California Constitution limits the amount of
appropriations of the State and of the local governments to the amount of
appropriations of the entity for the prior year, adjusted for changes in the
cost of living, population and the services that local government has financial
responsibility for providing. To the extent that the revenues of the State
and/or local government exceed its appropriations, the excess revenues must be
rebated to the public either directly or through a tax decrease. Expenditures
for voter-approved debt services are not included in the appropriations limit.
At the November 9, 1988 general election, California voters approved an
initiative known as Proposition 98. This initiative amends Article XIIIB to
require that (i) the California Legislature establish a prudent state reserve
fund in an amount it shall deem reasonable and necessary and (ii) revenues in
excess of amounts permitted to be spent and which would otherwise be returned
pursuant to Article XIIIB by revision of tax 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
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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. The settlement
of this case, finalized in July 1996, provides, among other things, that both
the State and K-14 schools share in the repayment of prior years' emergency
loans to schools. Of the total $1.76 billion in loans, the State will repay $935
million by forgiveness of the amount owed, while schools will repay $825
million. The State share of the repayment will be reflected as an appropriation
above the current Proposition 98 base calculation. The schools' share of the
repayment will count 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.
Substantially increased general fund revenues, above initial budget
projections, in the 1994-95, 1995-96 and 1996-97 fiscal years have resulted or
will result in retroactive increases in Proposition 98 appropriations from
subsequent fiscal years' budgets.
On November 8, 1994, the voters approved Proposition 187, an initiative
statute ("Proposition 187"). Proposition 187 specifically prohibits funding by
the State of social services, health care services and public school education
for the benefit of any person not verified as either a United States citizen or
a person legally admitted to the United States. Among the provisions in
Proposition 187 pertaining to public school education, the measure requires,
commencing January 1, 1995, that every school district in the State verify the
legal status of every child enrolling in the district for the first time. By
January 1, 1996, each school district must also verify the legal status of
children already enrolled in the district and of all parents or guardians of all
students. If the district "reasonably suspects" that a student, parent or
guardian is not legally in the United States, that district must report the
student to the United States Immigration and Naturalization Service and certain
other parties. The measure also prohibits a school district from providing
education to a student it does not verify as either a United States citizen or a
person legally admitted to the United States. The State Legislative Analyst
estimates that verification costs could be in the tens of millions of dollars on
a statewide level (including verification costs incurred by other local
governments), with first-year costs potentially in excess of $100 million.
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.
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 involved in a lawsuit, Thomas Hayes v. Commission on State
Mandates, related to state-mandated costs. The action involves an appeal by the
Director of Finance from a 1984 decision by the State Board of Control (now
succeeded by the Commission on State Mandates (Commission)). The Board of
Control decided in favor of local school districts' claims for reimbursement for
special education programs for handicapped students. The case was then brought
to the trial court by the State and later remanded to the Commission for
redetermination. The Commission has since expanded the claim to include
supplemental claims filed by seven other educational institutions; the issuance
of a final consolidated decision is anticipated sometime in early 1997. To date,
the Legislature has not appropriated funds. The liability of the State, if all
potentially eligible school districts pursue timely claims, has been estimated
by the Department of Finance at more than $1 billion.
The State is involved in a lawsuit related to contamination at the
Stringfellow toxic waste site. In United States, People of the State of
California v. J.B. Stringfellow, Jr., et al., the State is seeking recovery for
past costs of cleanup of the site, a declaration that the defendants are jointly
and severally liable for future costs, and an injunction ordering completion of
the cleanup. However, the defendants have filed a counterclaim against the State
for alleged negligent acts. Because the State is the present owner of the site,
the State may be found liable. Present estimates of the cleanup range from $200
million to $800 million.
The State is a defendant in a coordinated action involving 3,000 plaintiffs
seeking recovery for damages caused by the Yuba River flood of February 1986.
The appellate court affirmed the trial court finding of liability in inverse
condemnation and awarded damages of $500,000 to 12 sample plaintiffs. Potential
liability to the remaining 300 plaintiffs, from claims filed, ranges from $800
million to $1.5 billion. An appeal has been filed.
In Professional Engineers in California Government v. Wilson, the
petitioners are challenging several appropriations in the 1993, 1994, and 1995
Budget Acts. The appropriations mandate the transfer of approximately $262
million from the State Highway Account and $113 million from the Motor Vehicle
Account to the general fund and appropriate approximately $6 million from the
State Highway Account to fund a highway-grade crossing program administered by
the Public Utilities Commission. Petitioners contend that the transfers violate
several constitutional provisions and request that the moneys be returned to the
State Highway Account and Motor Vehicle Account.
The State is a defendant in Just Say No To Tobacco Dough Campaign v. State
of California, where the petitioners challenge the appropriation of
approximately $166 million of Proposition 99 funds in the Cigarette and Tobacco
Products Surtax Fund for years ended June 30, 1990, through June 30, 1995 for
programs which were allegedly not health education or tobacco-related disease
research. If the State loses, the general fund and funds from other sources
would be used to reimburse the Cigarette and Tobacco Products Surtax Fund for
approximately $166 million.
The State is a defendant in the case of Kurt Hathaway, et al. v. Wilson, et
al., where the plaintiffs are challenging the legality of various budget action
transfers and appropriations from particular special funds for years ended June
30, 1995, and June 30, 1996. The plaintiffs allege that the transfers and
appropriations are contrary to the substantive law establishing the funds and
providing for interest accruals to the funds, violate the single subject
requirement of the State Constitution, and is an invalid "special law."
Plaintiffs seek to have monies totaling approximately $335 million returned to
the special funds.
The State is a defendant in two related cases, Beno vs. Sullivan (Beno) and
Welch v. Anderson (Welch), concerning reductions in Aid to Families with
Dependent Children (AFDC) grant payments. In the Beno case, plaintiffs seek to
invalidate AFDC grant reductions and in the Welch case, plaintiffs contend that
AFDC grant reductions are not authorized by state law. The Beno case concerns
the total grant reductions while the Welch case concerns the period of time the
State did not have a waiver for those reductions. The State's potential
liability for retroactive AFDC grant reductions is estimated at $831 million if
the plaintiffs are awarded the full amount in both cases.
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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 1992-93. 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
contributions that were unpaid to date. On February 19, 1997, the State Court of
Appeals affirmed the decision of the Superior Court, and the Supreme Court
subsequently refused to hear the case, making the Court of Appeals' ruling
final. On July 30, 1997, the Controller transferred $1.235 billion from the
General Fund to PERS in repayment of the principal amount determined to have
been improperly deferred. Subsequent State payments to PERS will be made on a
quarterly basis. No prejudgment interest has been paid in accordance with the
trial court ruling that there was insufficient evidence that money for that
purpose had been appropriated and was available. No post-judgment interest was
ordered.
STATE GENERAL OBLIGATION BOND RATINGS
As of the date of this Statement of Additional Information, the State's
general obligation bonds are rated A1 by Moody's Investors Services, Inc., A+ by
Standard & Poor's Ratings Services, and AA- by Fitch Investors Services, Inc.
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APPENDIX B
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 the nineties, the trend was reversed, until 1995
and 1996, where the State's unemployment rate again tracked below the national
average. The State's unemployment rate is projected to be 5.3% in 1996-97 and
1997-98. The average rate of unemployment for the State since 1987 is 6.2%,
while the national average is also 6.2%. (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 4, 1997, 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 of 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 4.2% in both 1996-97 and
1997-98 while real personal income per capita is projected to grow at 2.3% in
1996-97 and 2.4% in 1997-98.
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, 1996
ranked fourth with an estimated population of 14.4 million. Since 1987, the
State's average annual rate of population increase has been approximately 2.2%
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. 42.9 million
people visited the State in 1995, according to the Florida Department of
Commerce. Tourist arrivals are expected to increase by 3.1% this fiscal year and
4.7% next year. By the end of the fiscal year, 42.7 million domestic and
international tourists are expected to have visited the State. In 1997-98,
tourist arrivals should approximate 44.7 million. Florida tourism appears to be
recovering from the effects of negative publicity regarding crime against
tourists in the state. Factors such as "product maturity" of a Florida vacation
package, higher prices, and more aggressive marketing by competing vacation
destinations, could contribute to tourism slowdown.
Florida's dependency on the highly cyclical construction and
construction-related manufacturing sectors has declined. For example, total
contract construction employment as a share of total non-farm employment was a
little over 5% in 1996. Florida, nevertheless, has had a dynamic construction
industry, with single and multi-family housing starts accounting for
approximately 8.1% of total U.S. housing starts in 1996, while the State's
population is 5.5% of the nation's population. Total housing starts were 118,400
in 1996. A driving force behind Florida's construction industry is its rapid
growth in population. In Florida, single and multi-family housing starts in
1996-97 are projected to reach a combined level of 116,100 while decreasing to
115,500 next year. Multi-family starts have been slow to recover, but are
showing stronger growth now and should maintain a level of nearly 30,300 in
1996-97 and 30,900 in 1997-98. Total construction expenditures
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are forecasted to increase 7.6% in this year and increase 3.1% 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 1995-96, 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 69%, 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 1995-96, expenditures from the General
Revenue Fund for education, health and welfare, and public safety amounted to
approximately 51%, 31% and 14%, 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, 1996, receipts from this source
were $11,461 million, an increase of 7.4% from fiscal year 1994-95. 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, 1996, were
$1,923 million. Alcoholic beverage tax revenues totalled $441.5 million for the
State fiscal year ending June 30, 1996, an increase of $4.2 million from the
previous year. The receipts of corporate income tax for the fiscal year ended
June 30, 1996 were $1,162.7 million, an increase of 9.3% from fiscal year
1994-95. Gross Receipt tax collections for fiscal year 1995-96 totalled $543.3
million, an increase of 6.9% over the previous fiscal year. Documentary stamp
tax collections totalled $775.2 million during fiscal year 1995-96, posting an
11.5% increase 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 $895.9 million during the fiscal year
ending June 30, 1996, a 9.5% increase from the previous fiscal year. Severance
taxes totalled $77.2 million during fiscal year 1995-96, up 26.1% 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
1995-96 produced ticket sales of $2.09 billion of which education received
approximately $788.1 million.
For fiscal year 1996-97 the estimated General Revenue plus Working Capital
and Budget Stabilization funds available total $16,617.4 million, a 6.7%
increase over 1995-96. The $15,568.7 million in estimated revenues represent a
6.3% increase over the analagous figure in 1995-96. With combined General
Revenue, Working Capital Fund, and Budget Stabilization Fund appropriations at
$15,537.2 million, unencumbered reserves at the end of 1996-97 are estimated at
$1,080.2 million.
Estimated fiscal year 1997-98 General Revenue plus Working Capital and
Budget Stabilization funds available are expected to total $17,537.3 million, a
5.5% increase over fiscal year 1996-97.
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
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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 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 also experienced a record number of tropical storms and
hurricanes which caused substantial damage. During the 1996 hurricane season and
thus far during the 1997 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, 1996, as of June 30, 1996, the State had a high bond rating
from Moody's Investors Service, Inc. (Aa), Standard & Poor's Ratings Services
(AA) and Fitch Investors Service, Inc. (AA) on all of its general obligation
bonds. Outstanding general obligation bonds at June 30, 1996 totalled almost
$7.4 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 over
$805 million of general obligation bonds since July 1, 1996.
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.
B-3
<PAGE> 118
(This Page Intentionally Left Blank)
<PAGE> 119
APPENDIX C
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."
DESCRIPTION OF MOODY'S COMMERCIAL PAPER RATINGS
Moody's Commercial Paper ratings are opinions of the ability of issuers to
repay punctually promissory obligations not having an original maturity in
excess of nine months. Moody's employs the following three designations, all
judged to be investment grade, to indicate the relative repayment ability of
rated issuers:
C-1
<PAGE> 120
Issuers rated Prime-1 (or supporting institutions) have a superior
ability for repayment of short-term promissory obligations. Prime-1
repayment ability will often be evidenced by many of the following
characteristics: leading market positions in well-established industries;
high rates of return on funds employed; conservative capitalization
structure with moderate reliance on debt and ample asset protection; broad
margins in 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 supporting institutions) have a strong
ability for repayment of short-term promissory obligations. This will
normally be evidenced by many of the characteristics cited above but to a
lesser degree. Earnings trends and coverage ratios, while sound, may be
more subject to variation. Capitalization characteristics, while still
appropriate, may be more affected by external conditions. Ample alternate
liquidity is maintained.
Issuers rated Prime-3 (or supporting institutions) have an acceptable
ability for repayment of short-term promissory obligations. The effect of
industry characteristics and market composition may be more pronounced.
Variability in earnings and profitability may result in changes in the
level of debt protection measurements and may require relatively high
financial leverage. Adequate alternate liquidity is maintained.
Issuers rated Not Prime do not fall within any of the Prime rating
categories.
DESCRIPTION OF STANDARD & POOR'S RATINGS SERVICES ("STANDARD & POOR'S")
MUNICIPAL DEBT RATINGS
A Standard & Poor's municipal debt rating is a current opinion of the
creditworthiness of an obligor with respect to a specific financial obligation,
a specific class of financial obligations, or a specific financial program. It
takes into consideration the creditworthiness of guarantors, insurers or other
forms of credit enhancement on the obligation.
The debt rating is not a recommendation to purchase, sell or hold a
financial obligation, inasmuch as it does not comment as to market price or
suitability for a particular investor.
The ratings are based on current information furnished by the obligors or
obtained by Standard & Poor's from other sources 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 based on other circumstances.
The ratings are based, in varying degrees, on the following considerations:
I. Likelihood of payment--capacity and willingness of the obligor to meet
its financial commitment on an obligation in accordance with the terms
of the obligation;
II. Nature of and provisions of the obligation; and
III. Protection afforded by, and relative position of, the obligation in
the event of bankruptcy, reorganization or other arrangement under
the laws of bankruptcy and other laws affecting creditors' rights.
C-2
<PAGE> 121
<TABLE>
<S> <C> <C>
AAA Debt rated "AAA" has the highest rating assigned by Standard & Poor's.
Capacity to meet its financial commitment on the obligation is extremely
strong.
AA Debt rated "AA" differs from the highest-rated obligations only in small
degree. The obligor's capacity to meet its financial commitment on the
obligation is very strong.
A Debt rated "A" is somewhat more susceptible to the adverse effects of
changes in circumstances and economic conditions than debt in higher-rated
categories. However, the obligor's capacity to meet its financial
commitment on the obligation is still strong.
BBB Debt rated "BBB" exhibits adequate protection parameters. However, adverse
economic conditions or changing circumstances are more likely to lead to a
weakened capacity of the obligor to meet its financial commitment on the
obligation.
BB Debt rated "BB", "B", "CCC", "CC" and "C" are regarded as having
B significant speculative characteristics. "BB" indicates the least degree
CCC of speculation and "C" the highest degree of speculation. While such debt
CC will likely have some quality and protective characteristics, these may be
C outweighed by large uncertainties or major exposures to adverse
conditions.
D Debt rated "D" is in payment default. The "D" rating category is used when
payments on an obligation 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
or the taking of a similar action if payments on an obligation 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 COMMERCIAL PAPER RATINGS
A Standard & Poor's Commercial Paper Rating is a current assessment of the
likelihood of timely payment of debt having an original maturity of no more than
365 days. Ratings are graded into several categories, ranging from "A" for the
highest-quality obligations to "D" for the lowest. These categories are as
follows:
<TABLE>
<S> <C> <C>
A-1 This designation indicates that the degree of safety regarding timely payment is
strong. Those issues determined to possess extremely strong safety
characteristics are denoted with a plus sign (+) designation.
A-2 Capacity for timely payment on issues with this designation is satisfactory.
However, the relative degree of safety is as high as for issues designated "A-1."
A-3 Issues carrying this designation have an adequate capacity for timely payment.
They are, however, more vulnerable to the adverse effects of changes in
circumstances than obligations carrying the higher designations.
B Issues rated "B" are regarded as having only speculative capacity for timely
payment.
C This rating is assigned to short-term debt obligations with a doubtful capacity
for payment.
D Debt rated "D" is in payment default. The "D" rating category is used when
interest payments or principal payments are not made on the date due, even if the
applicable grace period has not expired, unless Standard & Poor's believes that
such payments will be made during such grace period.
</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.
C-3
<PAGE> 122
DESCRIPTION OF STANDARD & POOR'S SHORT-TERM ISSUE CREDIT RATINGS
A Standard & Poor's note rating reflects the liquidity factors and market
access risks unique to notes. Notes due in three years or less will likely
receive a note rating. Notes maturing beyond three years will most likely
receive a long-term debt rating. The following criteria will be used in making
that assessment.
-- Amortization schedule--the larger the final maturity relative to
other maturities, the more likely it will be treated as a note.
-- Source of payment--the more dependent the issue is on the market for
its refinancing, the more likely it will be treated as a note.
Note rating symbols are as follows:
SP-1 Strong capacity to pay principal and interest. An issue
determined to possess a very strong capacity to pay debt service
is given a plus "+" designation.
SP-2 Satisfactory capacity to pay principal and interest, with some
vulnerability to adverse financial and economic changes over the
term of the notes.
SP-3 Speculative capacity to pay principal and interest.
DESCRIPTION OF FITCH INVESTORS SERVICE, INC.'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 carrying the same rating are of similar but not necessarily identical
credit quality since the rating categories do not fully reflect small
differences in the degrees of credit risk.
Fitch ratings are not recommendations to buy, sell or hold any security.
Ratings do not comment on the adequacy of market price, the suitability of any
security for a particular investor, or the tax-exempt nature or taxability of
payments made in respect of any security.
Fitch ratings are based on information obtained from issuers, other
obligors, underwriters, their experts, and other sources Fitch believes to be
reliable. Fitch does not audit or verify the truth or accuracy of such
information. Ratings may be changed, suspended or withdrawn as a result of
changes in, or the unavailability of, information or for other reasons.
AAA Bonds considered to be investment grade and of the highest credit
quality. The obligor has an exceptionally strong ability to pay
interest and repay principal, which is unlikely to be affected by
reasonably foreseeable events.
AA Bonds considered to be investment grade and of very high credit
quality. The obligor's ability to pay interest and repay principal is
very strong, although not quite as strong as bonds rated "AAA".
Because bonds rated in the "AAA" and "AA" categories are not
significantly vulnerable to foreseeable future developments,
short-term debt of these issuers is generally rated "F-1+".
A Bonds considered to be investment grade and of high credit quality.
The obligor's ability to pay interest and repay principal is
considered to be strong, but may be more vulnerable to adverse
changes in economic conditions and circumstances than bonds with
higher ratings.
C-4
<PAGE> 123
BBB Bonds considered to be investment grade and of satisfactory credit
quality. The obligor's ability to pay interest and repay principal is
considered to be adequate. Adverse changes in economic conditions and
circumstances, however, are more likely to have adverse impact on
these bonds, and therefore, impair timely payment. The likelihood
that the ratings of these bonds will fall below investment grade is
higher than for bonds with higher ratings.
Plus (+) or Minus (-): Plus and minus signs are used with a rating symbol
to indicate the relative position of a credit within the rating category. Plus
and minus signs, however, are not used in the "AAA" category.
NR Indicates that Fitch does not rate the specific issue.
CONDITIONAL A conditional rating is premised on the successful
completion of a project or the occurrence of a specific
event.
SUSPENDED A rating is suspended when Fitch deems the amount of
information available from the issuer to be inadequate for
rating purposes.
WITHDRAWN A rating will be withdrawn when an issue matures or is
called or refinanced and, at Fitch's discretion, when an
issuer fails to furnish proper and timely information.
FITCHALERT Ratings are placed on FitchAlert to notify investors of
an occurrence that is likely to result in a rating change
and the likely direction of such change. These are
designated as "Positive," indicating a potential upgrade,
"Negative," for potential downgrade, or "Evolving," where
ratings may be raised or lowered. FitchAlert is
relatively short-term, and should be resolved within 12
months.
RATINGS OUTLOOK An outlook is used to describe the most likely direction
of any rating change over the intermediate term. It is
described as "Positive" or "Negative." The absence of a
designation indicates a stable outlook.
DESCRIPTION OF FITCH SPECULATIVE GRADE BOND RATINGS
Fitch speculative grade bond ratings provide a guide to investors in
determining the credit risk associated with a particular security. The ratings
("BB" to "C") represent Fitch's assessment of the likelihood of timely payment
of principal and interest in accordance with the terms of obligation for bond
issues not in default. For defaulted bonds, the rating ("DDD" to "D") is an
assessment of the ultimate recovery value through reorganization or liquidation.
The rating takes into consideration special features of the issue, its
relationship to other obligations of the issuer, the current and prospective
financial condition and operating performance of the issuer and any guarantor,
as well as the economic and political environment that might affect the issuer's
future financial strength.
Bonds that have the same rating are of similar but not necessarily
identical credit quality since rating categories cannot fully reflect the
differences in degrees of credit risk.
<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.
</TABLE>
C-5
<PAGE> 124
<TABLE>
<S> <C>
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 Bonds are in default on interest and/or principal payments. Such
DD bonds are extremely speculative and should be valued on the basis
D 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>
Plus (+) or Minus (-): Plus or minus signs are used with a rating symbol to
indicate the relative position of a credit within the rating category. Plus and
minus signs, however, are not used in the "DDD," "DD," or "D" categories.
DESCRIPTION OF FITCH INVESTMENT GRADE SHORT-TERM RATINGS
Fitch's short-term ratings apply to debt obligations that are payable on
demand or have original maturities of generally up to three years, including
commercial paper, certificates of deposit, medium-term notes, and municipal and
investment notes.
The short-term rating places greater emphasis than a long-term rating on
the existence of liquidity necessary to meet the issuer's obligations in a
timely manner.
Fitch short-term ratings are as follows:
F-1+ Exceptionally Strong Credit Quality. Issues assigned this rating
are regarded as having the strongest degree of assurance for
timely payment.
F-1 Very Strong Credit Quality. Issues assigned this rating reflect
an assurance of timely payment only slightly less in degree than
issues rated "F-1+".
F-2 Good Credit Quality. Issues assigned this rating have a
satisfactory degree of assurance for timely payment, but the
margin of safety is not as great as for issues assigned "F-1+"
and "F-1" ratings.
F-3 Fair Credit Quality. Issues assigned this rating have
characteristics suggesting that the degree of assurance for
timely payment is adequate; however, near-term adverse changes
could cause these securities to be rated below investment grade.
F-4 Weak Credit Quality. Issues assigned this rating have
characteristics suggesting a minimal degree of assurance for
timely payment and are vulnerable to near-term adverse changes in
financial and economic conditions.
D Default. Issues assigned this rating are in actual or imminent
payment default.
LOC The symbol "LOC" indicates that the rating is based on a letter of
credit issued by a commercial bank.
C-6
<PAGE> 125
INDEPENDENT AUDITORS' REPORT
The Board of Trustees and Shareholders,
Merrill Lynch Multi-State Limited Maturity Municipal Series Trust:
We have audited the accompanying statements of assets and liabilities, including
the schedules of investments, of Merrill Lynch Limited Maturity Municipal Bond
Funds for Arizona, California, Florida, Massachusetts, Michigan, New Jersey, New
York and Pennsylvania of the Merrill Lynch Multi-State Limited Maturity
Municipal Series Trust (the "Trust") as of July 31, 1997, the related statements
of operations for the year then ended and changes in net assets for each of the
years in the two-year period then ended, and the financial highlights for each
of the years in the three-year period then ended and the period November 26,
1993 (commencement of operations) to July 31, 1994. These financial statements
and the financial highlights are the responsibility of the Trust's management.
Our responsibility is to express an opinion on these financial statements and
the financial highlights based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements and the financial
highlights are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. Our procedures included confirmation of securities owned at July 31,
1997 by correspondence with the custodian and brokers. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such financial statements and financial highlights present
fairly, in all material respects, the financial position of Merrill Lynch
Limited Maturity Municipal Bond Funds for Arizona, California, Florida,
Massachusetts, Michigan, New Jersey, New York and Pennsylvania of the Merrill
Lynch Multi-State Limited Maturity Municipal Series Trust as of July 31, 1997,
the results of their operations, the changes in their net assets, and the
financial highlights for the respective stated periods in conformity with
generally accepted accounting principles.
Deloitte & Touche LLP
Princeton, New Jersey
September 12, 1997
D-1
<PAGE> 126
Merrill Lynch Multi-State Limited Maturity Municipal Series
Trust, July 31, 1997
<TABLE>
<CAPTION>
SCHEDULE OF INVESTMENTS (in Thousands)
Arizona Limited Maturity Municipal Bond Fund
S&P Moody's Face Value
STATE Ratings Ratings Amount Issue (Note 1a)
<S> <S> <S> <C> <S> <C>
Arizona--87.1% A-1 P1 $ 100 Apache County, Arizona, IDA, IDR (Tucson Electric Power--
Springerville Project), VRDN, Series C, 3.75% due 12/15/2018 (a) $ 100
A1+ VMIG1++ 100 Arizona Health Facilities Authority Revenue Bonds (Arizona
Voluntary Hospital Federation), VRDN, Series B, 3.70% due
10/01/2015 (a)(c) 100
AAA Aaa 200 Arizona State Transportation Board, Excise Tax Revenue Bonds
(Maricopa County Regional Area Roads), Series A, 5.75% due
7/01/2004 (b) 217
NR* Aaa 100 Arizona Water Infrastructure, Finance Authority Revenue Bonds
(Water Quality Financial Assistance), Series A, 4.50% due
7/01/2003 (d) 101
AA- A1 200 Central Arizona Water Conservation District, Contract Revenue
Bonds (Central Arizona Project), Series B, 6.50% due 5/01/2001 (e) 220
NR* VMIG1++ 120 Chandler, Arizona, IDA, IDR, Refunding (SMP II, LP), VRDN, 3.50%
due 12/01/2015 (a) 120
A1+ P1 100 Maricopa County, Arizona, Pollution Control Corporation, PCR,
Refunding (Arizona Public Service Company), VRDN, Series B, 3.55%
due 5/01/2029 (a) 100
AAA Aaa 480 Phoenix, Arizona, Airport Revenue Refunding Bonds, AMT, Series C,
5.70% due 7/01/2003 (d) 512
AA- Aa 200 Phoenix, Arizona, Civic Improvement Corporation, Water System
Revenue Bonds, Junior Lien, 5% due 7/01/2006 208
AA+ Aa1 250 Phoenix, Arizona, Refunding, UT, 5.70% due 7/01/1999 258
A+ Aa 200 Pima County, Arizona, Refunding, Series A, 5.60% due 7/01/1999 206
AAA Aaa 200 Pima County, Arizona, Sewer Revenue Bonds, 6.20% due 7/01/2002
(b)(e) 220
A1+ P1 100 Pinal County, Arizona, IDA, PCR (Magma Copper/Newmont Mining
Corporation), VRDN, 3.70% due 12/01/2009 (a) 100
A1+ NR* 100 Tempe, Arizona, IDA, M/F Revenue Bonds (Elliots Crossing), VRDN,
3.754% due 10/01/2008 (a) 100
A+ A1 150 Tucson, Arizona, Street and Highway User Revenue Refunding Bonds,
5.90% due 7/01/2003 163
AAA Aaa 200 Yuma County, Arizona, Jail District Revenue Bonds, 4.30% due
7/01/1999 (b) 201
Puerto Rico-- A1+ VMIG1++ 100 Puerto Rico Commonwealth, Government Development Bank, Refunding,
3.0% VRDN, 3.25% due 12/01/2015 (a) 100
Total Investments (Cost--$2,939)--90.1% 3,026
Other Assets Less Liabilities--9.9% 331
-------
Net Assets--100.0% $ 3,357
=======
(a)The interest rate is subject to change periodically based
upon prevailing market rates. The interest rate shown is the
rate in effect at July 31, 1997.
(b)AMBAC Insured.
(c)FGIC Insured.
(d)MBIA Insured.
(e)Prerefunded.
*Not Rated.
++Highest short-term rating by Moody's Investors Service, Inc.
Ratings of issues shown have not been audited by Deloitte &
Touche LLP.
See Notes to Financial Statements.
<CAPTION>
California Limited Maturity Municipal Bond Fund
S&P Moody's Face Value
STATE Ratings Ratings Amount Issue (Note 1a)
<S> <S> <S> <C> <S> <C>
California--97.0% NR* A1 $ 500 California Educational Facilities Authority, Revenue Refunding
Bonds (Loyola Marymount University), 5.70% due 10/01/2002 $ 537
AAA Aaa 500 California Health Facilities Financing Authority, Revenue
Refunding Bonds (Catholic Healthcare West), Series A, 5.30% due
7/01/2003 (d) 528
A-1 VMIG1++ 200 California Pollution Control Financing Authority, Resource
Recovery Revenue Bonds (Atlantic Richfield Company Project), VRDN,
AMT, Series A, 3.55% due 12/01/2024 (a) 200
AA Aaa 500 California State Department of Water Resources, Water System
Revenue Bonds (Central Valley Project), Series I, 6.95% due
6/01/2000 (e) 547
</TABLE>
D-2
<PAGE> 127
<TABLE>
<S> <S> <S> <C> <S> <C>
California State, GO, UT:
A+ A1 750 6.75% due 10/01/2003 855
AAA Aaa 750 6.35% due 11/01/2004 (b) 848
California State Public Works Board, Lease Revenue Bonds,
Series A (e):
AAA Aaa 600 (Department of Corrections--State Prison/Central California
Women's Facility, Madera County), 7% due 9/01/2000 664
AAA Aaa 500 (Various University of California Projects), 6.40% due
12/01/2002 (d) 564
AAA Aaa 500 California Statewide Communities Development Authority, Lease
Revenue Refunding Bonds (Oakland Convention Center Project),
5.70% due 10/01/2002 (d) 537
NR* Aa2 100 California Statewide Communities Development Authority, Solid Waste
Facilities Revenue Bonds (Chevron U.S.A. Inc. Project), VRDN, AMT,
3.50% due 12/15/2024 (a) 100
AAA Aaa 500 Contra Costa, California, Transportation Authority, Sales Tax
Revenue Bonds, Series A, 6% due 3/01/2007 (b) 561
A+ NR* 700 East Bay, California, Municipal Utility District, Water System
Revenue Bonds, Sub-Series, 7.40% due 6/01/2000 (e) 776
AAA Aaa 200 Los Angeles, California, Department of Airports, Airport Revenue
Refunding Bonds, Series A, 6% due 5/15/2005 (b) 222
A+ Aa3 650 Los Angeles, California, Department of Water and Power, Electric
Plant Revenue Bonds, 6% due 4/01/2002 702
Los Angeles, California, Harbor Department Revenue Bonds, AMT,
Series B:
AA Aa3 275 6% due 8/01/2000 289
AA Aa3 295 6% due 8/01/2001 314
AA Aa3 500 6% due 8/01/2004 542
Los Angeles County, California, Metropolitan Transportation
Authority, Sales Tax Revenue Bonds (Proposition C--Second Senior):
A1+ VMIG1++ 200 Refunding, VRDN, Series A, 3.35% due 7/01/2020 (a)(c) 200
AAA Aaa 400 Series B, 8% due 7/01/2003 (d) 478
AA- Aa1 1,000 Los Angeles County, California, Public Works Financing Authority,
Revenue Refunding Bonds (Capital Construction), 4.80% due 3/01/2004 1,025
AA Aa 700 Metropolitan Water District, Southern California, Waterworks Revenue
Bonds, 5.60% due 7/01/2006 747
AAA Aaa 700 San Francisco, California, City and County Sewer Revenue Bonds,
Series A, 5.375% due 10/01/1999 (b) 722
AAA Aaa 500 Santa Clara County, California, Financing Authority, Lease Revenue
Bonds (VMC Facility Replacement Project), Series A, 5.80% due
11/15/2000 (d) 529
SP1+ MIG1++ 600 Santa Clara County, California, TRAN, 4.75% due 10/01/1998 606
AAA Aaa 500 University of California, Revenue Refunding Bonds (Multi-Purpose
Projects), Series C, 10% due 9/01/2001 (d) 610
Puerto Rico-- A1+ VMIG1++ 200 Puerto Rico Commonwealth, Government Development Bank, Refunding,
1.4% VRDN, 3.25% due 12/01/2015 (a) 200
Total Investments (Cost--$13,139)--98.4% 13,903
Other Assets Less Liabilities--1.6% 226
-------
Net Assets--100.0% $14,129
=======
(a)The interest rate is subject to change periodically based upon
prevailing market rates. The interest rate shown is the rate in
effect at July 31, 1997.
(b)FGIC Insured.
(c)MBIA Insured.
(d)AMBAC Insured.
(e)Prerefunded.
*Not Rated.
++Highest short-term ratings by Moody's Investors Service, Inc.
Ratings of issues shown have not been audited by Deloitte & Touche LLP.
See Notes to Financial Statements.
</TABLE>
Portfolio
Abbreviations
To simplify the listings of Merrill Lynch Multi-State Limited
Maturity Municipal Series Trust's portfolio holdings in the Schedule
of Investments, we have abbreviated the names of many of the
securities according to the list at right.
ACES SM Adjustable Convertible Extendable
Securities
AMT Alternative Minimum Tax (subject to)
BAN Bond Anticipation Notes
COP Certificates of Participation
EDA Economic Development Authority
GO General Obligation Bonds
IDA Industrial Development Authority
IDR Industrial Development Revenue Bonds
M/F Multi-Family
PCR Pollution Control Revenue Bonds
TRAN Tax Revenue AnticipationNotes
UT Unlimited Tax
VRDN Variable Rate Demand Notes
D-3
<PAGE> 128
Merrill Lynch Multi-State Limited Maturity Municipal Series
Trust, July 31, 1997
<TABLE>
<CAPTION>
SCHEDULE OF INVESTMENTS (continued) (in Thousands)
Florida Limited Maturity Municipal Bond Fund
S&P Moody's Face Value
STATE Ratings Ratings Amount Issue (Note 1a)
<S> <S> <S> <C> <S> <C>
Florida--95.5% AAA Aaa $ 1,000 Broward County, Florida, School District, UT, 7.125% due
2/15/1999 (f) $ 1,066
Dade County, Florida, Aviation Revenue Refunding Bonds,
Series A (b):
AAA Aaa 300 5.60% due 10/01/2004 323
AAA Aaa 1,000 AMT, 5.25% due 10/01/1997 1,002
AA- VMIG1++ 400 Dade County, Florida, IDA, Exempt Facilities Revenue Refunding
Bonds (Florida Power and Light Company), VRDN, 3.60% due
6/01/2021 (a) 400
AAA Aaa 1,000 Dade County, Florida, School District, UT, 5.75% due 8/01/2001 (c) 1,060
AAA Aaa 1,185 Dunedin, Florida, Hospital Revenue Bonds (Mease Health Care),
6.75% due 11/15/2001 (d)(f) 1,327
Florida State Board of Education, Capital Outlay (Public
Education):
AA+ Aa2 850 Refunding, 5.50% due 6/01/2001 893
AAA Aaa 1,000 Refunding, Series A, 7.25% due 6/01/2000 (f) 1,103
AA+ Aa2 1,000 Series B, 5.625% due 6/01/2005 1,082
AAA Aaa 800 Florida State Board of Regents, University System Improvement
Revenue Bonds, 7% due 7/01/2004 (d) 927
AAA Aaa 580 Florida State Department of Transportation Revenue Bonds (Alligator
Alley), 6.25% due 7/01/2007 (c) 660
Florida State Division, Bond Finance Department, General Services
Revenue Bonds (Department of Natural Resources), Series A:
AAA Aaa 1,900 (Preservation 2000), 6.40% due 7/01/2002 (b) 2,084
AAA Aaa 1,730 Refunding (Save Our Coast), 6.30% due 7/01/2004 (d) 1,864
A A3 100 Hillsborough County, Florida, Capital Improvement Revenue Bonds
(County Center Project), Second Series, 6.75% due 7/01/2002 (f) 113
Jacksonville, Florida, Electric Authority, Revenue Refunding Bonds
(Saint John's River), Issue 2:
AA Aa1 1,000 Series 6-C, 6.50% due 10/01/2001 1,086
AA Aa1 1,000 (Special Obligation), Series 6-B, 6.65% due 10/01/2002 1,087
AAA Aaa 1,000 Jacksonville, Florida, Excise Taxes Revenue Bonds, AMT, Series B,
5.20% due 10/01/2004 (c) 1,037
NR* VMIG1++ 900 Jacksonville, Florida, Health Facilities Authority, Hospital
Revenue Refunding Bonds (Genesis Rehabilitation Hospital), VRDN,
3.65% due 5/01/2021 (a) 900
AAA Aaa 1,200 North Miami, Florida, Health Facilities Authority, Health Facility
Revenue Bonds (Bon Secours Health System Project), 6% due 8/15/2002
(e)(f) 1,317
AA- Aaa 1,000 Orlando, Florida, Utilities Commission, Water and Electric Revenue
Bonds, Series A, 6.50% due 10/01/2001 (f) 1,109
AAA Aaa 1,000 Palm Bay, Florida, Utility Revenue Bonds (Palm Bay Utility
Corporation Project), Series B, 6.20% due 10/01/2002 (d)(f) 1,109
NR* Baa1 1,360 Pembroke Pines, Florida, Special Assessment No. 94-1, 4.80% due
11/01/1998 1,372
A1+ VMIG1++ 200 Saint Lucie County, Florida, PCR, Refunding (Florida Power and
Light Company Project), VRDN, 3.55% due 1/01/2026 (a) 200
AAA Aaa 1,235 Saint Lucie County, Florida, School Board, COP, Series A, 7.25%
due 7/01/2000 (b)(f) 1,366
Puerto Rico--4.1% A Baa1 1,000 Puerto Rico Commonwealth, Refunding, Improvement Bonds, UT, 5.30%
due 7/01/2004 1,045
Total Investments (Cost--$24,755)--99.6% 25,532
Other Assets Less Liabilities--0.4% 98
-------
Net Assets--100.0% $25,630
=======
(a)The interest rate is subject to change periodically based
upon prevailing market rates. The interest rate shown is the
rate in effect at July 31, 1997.
(b)AMBAC Insured.
(c)FGIC Insured.
(d)MBIA Insured.
(e)FSA Insured.
(f)Prerefunded.
*Not Rated.
++Highest short-term rating by Moody's Investors Service, Inc.
Ratings of issues shown have not been audited by Deloitte &
Touche LLP.
See Notes to Financial Statements.
</TABLE>
D-4
<PAGE> 129
<TABLE>
<CAPTION>
Massachusetts Limited Maturity Municipal Bond Fund
S&P Moody's Face Value
STATE Ratings Ratings Amount Issue (Note 1a)
<S> <S> <S> <C> <S> <C>
Massachusetts-- NR* A1 $ 285 Boston, Massachusetts, Economic Development and Industrial
95.3% Corporation, Public Parking Facility, Series 1990,
5% due 7/01/2015 $ 290
AAA Aaa 250 Boston, Massachusetts, GO, UT, Series A, 5% due 11/01/2004 (e) 259
AAA Aaa 300 Chelsea, Massachusetts, School Project Loan Act of 1948, UT, 6%
due 6/15/2002 (b) 323
AAA Aaa 215 Fall River, Massachusetts, GO, 6.30% due 6/01/1998 (d) 219
NR* Aa3 225 Framingham, Massachusetts, GO, 4.50% due 7/15/2005 227
AAA Aaa 200 Lynn, Massachusetts, Water and Sewer Commission, Refunding, 4.95%
due 12/01/2002 (e) 206
A+ A1 100 Massachusetts Bay Transportation Authority, Massachusetts General
Transportation System, Series A, 4.90% due 3/01/2004 102
AAA Aaa 250 Massachusetts Education Loan Authority, Education Loan Revenue
Refunding Bonds, AMT, Issue E, Series B, 5.50% due 7/01/2001 (b) 261
A+ A1 750 Massachusetts State, GO, Refunding, Series B, 6.25% due 8/01/2001 806
Massachusetts State Health and Educational Facilities Authority
Revenue Bonds:
A1+ VMIG1++ 200 (Capital Asset Program), VRDN, Series B, 3.45% due 7/01/2005
(a)(d) 200
A1+ VMIG1++ 100 (Capital Asset Program), VRDN, Series C, 3.50% due 7/01/2005
(a)(d) 100
AAA Aaa 200 Refunding (Baystate Medical Center), Series D, 4.60% due
7/01/2002 (e) 202
NR* MIG1++ 100 Massachusetts State Industrial Finance Agency, Health Care Facility
Revenue Bonds (Beverly Enterprises--DEDHM), VRDN, 3.65% due
4/01/2009 (a) 100
AAA Aaa 200 Massachusetts State Industrial Finance Agency, Revenue Refunding
Bonds (Worcester Polytechnic), Series II, 4.50% due 9/01/2002 (d) 202
AA A1 300 Massachusetts State Special Obligation Revenue Bonds (Highway
Improvement Loan), Series A, 5.90% due 6/01/2001 318
AAA Aaa 250 Massachusetts State Water Resource Authority, Series A, 6.75% due
7/15/2002 (c) 282
NR* Aaa 150 Nantucket, Massachusetts, GO, 5.75% due 7/15/2005 (d) 163
NR* A1 500 New England Education Loan Marketing Corporation, Massachusetts
Student Loan Revenue Bonds, AMT, Sub-Issue F, 6.60% due 9/01/2002 536
AA Aa1 100 Peabody, Massachusetts, GO, Series A, 4.50% due 8/01/2000 101
Puerto Rico--5.4% A Baa1 250 Puerto Rico Public Buildings Authority, Guaranteed Public Education
and Health Facilities, Refunding, Series K, 6.60% due 7/01/2004 276
Total Investments (Cost--$5,006)--100.7% 5,173
Liabilities in Excess of Other Assets--(0.7%) (37)
-------
Net Assets--100.0% $ 5,136
=======
(a)The interest rate is subject to change periodically based upon
prevailing market rates. The interest rate shown is the rate in
effect at July 31, 1997.
(b)AMBAC Insured.
(c)Prerefunded.
(d)MBIA Insured.
(e)FGIC Insured.
*Not Rated.
++Highest short-term ratings by Moody's Investors Service, Inc.
Ratings of issues shown have not been audited by Deloitte & Touche LLP.
See Notes to Financial Statements.
</TABLE>
D-5
<PAGE> 130
Merrill Lynch Multi-State Limited Maturity Municipal Series
Trust, July 31, 1997
<TABLE>
<CAPTION>
SCHEDULE OF INVESTMENTS (continued) (In Thousands)
Michigan Limited Maturity Municipal Bond Fund
S&P Moody's Face Value
STATE Ratings Ratings Amount Issue (Note 1a)
<S> <S> <S> <C> <S> <C>
Michigan--91.5% AAA Aaa $ 200 Anchor Bay, Michigan, School District, UT, 6.30% due 5/01/2004 (c) $ 222
AA Aa2 110 Ann Arbor, Michigan, School District, Public Schools, Refunding,
UT, 4.75% due 5/01/2000 112
AAA Aaa 105 Chelsea, Michigan, School District, UT, 6.75% due 5/01/2002 (b) 116
AAA Aaa 150 Chippewa Valley, Michigan, Schools, Refunding, UT, 4.90% due
5/01/2004 (b) 154
AAA Aaa 250 Dearborn, Michigan, Economic Development Corporation, Hospital
Revenue Bonds (Oakwood Obligated Group), Series A, 6.95% due
8/15/2001 (c)(d) 280
AAA Aaa 200 Detroit, Michigan, Refunding (Distributable State Aid), UT, 5.70%
due 5/01/2001 (a) 210
AAA Aaa 250 Detroit, Michigan, Water Supply System, Revenue Refunding Bonds,
6.20% due 7/01/2004 (b) 274
AAA Aaa 200 Eastern Michigan University, General Revenue Refunding Bonds,
5.40% due 6/01/1998 (a) 203
AAA Aaa 200 Gull Lake, Michigan, Community School District, GO, UT, 6.80%
due 5/01/2001 (b)(d) 222
Michigan Municipal Bond Authority Revenue Bonds:
AAA Aaa 200 (Local Government Loan Program), Series C, 5.50% due
5/01/2003 (c) 212
AA Aa2 450 Refunding (Local Government--Qualified School), Series A, 6%
due 5/01/2001 478
AA+ Aa1 200 (State Revolving Fund), 7% due 10/01/2004 (e) 231
AA- A1 200 Michigan State Building Authority, Revenue Refunding Bonds,
Series I, 6.40% due 10/01/2004 218
AA- A1 200 Michigan State Comprehensive Transportation, Revenue Refunding
Bonds, Series B, 5.625% due 5/15/2003 213
NR* Aaa 100 Michigan State Hospital Finance Authority Revenue Bonds (McLaren
Obligated Group), Series A, 7.50% due 9/15/2001 (d) 114
AA Aa2 200 Michigan State Recreation Program, GO, 6% due 11/01/2004 219
AAA Aaa 160 Michigan State, Underground Storage Tank Financial Assurance
Authority, Revenue Refunding Bonds, Series I, 6% due 5/01/2004 (a) 175
AAA Aaa 235 Royal Oak, Michigan, Refunding, UT, 4% due 10/01/1997 (a) 235
Puerto Rico--5.3% AAA Aaa 200 Puerto Rico Public Buildings Authority, Guaranteed Public
Education and Health Facilities, Series L, 6.875% due
7/01/2002 (d) 227
Total Investments (Cost--$3,953)--96.8% 4,115
Other Assets Less Liabilities--3.2% 136
-------
Net Assets--100.0% $ 4,251
=======
(a)AMBAC Insured.
(b)FGIC Insured.
(c)MBIA Insured.
(d)Prerefunded.
(e)Escrowed to maturity.
*Not Rated.
Ratings of issues shown have not been audited by Deloitte & Touche LLP.
See Notes to Financial Statements.
</TABLE>
D-6
<PAGE> 131
<TABLE>
<CAPTION>
New Jersey Limited Maturity Municipal Bond Fund
S&P Moody's Face Value
STATE Ratings Ratings Amount Issue (Note 1a)
<S> <S> <S> <C> <S> <C>
New Jersey-- NR* Aaa $ 300 Bergen County, New Jersey, General Improvement Bonds, UT, 5.20%
105.5% due 10/01/1999 $ 308
NR* NR* 400 East Orange, New Jersey, BAN (Water and Sewer), GO, UT, 4.75% due
8/28/1997 400
AAA Aaa 600 Elizabeth, New Jersey, General Improvement and Sewer Utility,
Refunding, GO, UT, 6% due 8/15/2004 (b) 659
SP1+ VMIG1++ 300 Mercer County, New Jersey, Improvement Authority Revenue Bonds,
VRDN, 3.35% due 11/01/1998 (a) 300
AA+ Aaa 400 Monmouth County, New Jersey, General Improvement Bonds, GO, UT,
6.625% due 8/01/2000 419
AAA Aaa 300 Morris County, New Jersey, General Improvement Bonds, GO, 4.625%
due 8/15/2003 307
NR* NR* 195 New Brunswick, New Jersey, Temporary Notes, UT, 4% due 12/09/1997 195
AAA Aaa 1,000 New Jersey EDA, Market Transition Facility Revenue Bonds, Senior
Lien, Series A, 7% due 7/01/2004 (c) 1,148
A1+ VMIG1++ 300 New Jersey EDA, Natural Gas Facilities Revenue Bonds (NUI
Corporation Project), VRDN, AMT, Series A, 3.30% due 6/01/2026
(a)(b) 300
A1+ Aaa 200 New Jersey EDA, Water Facilities Revenue Refunding Bonds (United
Water of New Jersey, Inc. Project), VRDN, AMT, Series A, 3% due
11/01/2026 (a)(b) 200
A1+ VMIG1++ 200 New Jersey Sports and Exposition Authority Revenue Bonds (State
Contract), VRDN, Series C, 3.45% due 9/01/2024 (a)(c) 200
AAA Aaa 300 New Jersey State Educational Facilities Authority Revenue Bonds
(Princeton University), Series E, 4.05% due 7/01/2000 301
NR* Aaa 200 New Jersey State Transportation Trust Fund Authority (Trans-
portation System), Series A, 5.40% due 12/15/2002 (e) 212
AAA VMIG1++ 300 New Jersey State Turnpike Authority, Turnpike Revenue Refunding
Bonds, VRDN, Series D, 3.30% due 1/01/2018 (a)(d) 300
NR* Aa2 400 Ocean County, New Jersey, Utilities Authority, Wastewater Revenue
Bonds, Series A, 6.125% due 1/01/2003 436
A1+ VMIG1++ 300 Port Authority of New York and New Jersey, Special Obligation
Revenue Bonds (Versatile Structure Obligation), VRDN, Series 3,
3.55% due 6/01/2020 (a) 300
AAA Aaa 125 Somerset County, New Jersey, GO, UT, 5.875% due 12/01/2001 134
A1+ P1 200 Union County, New Jersey, Industrial Pollution Control Financing
Authority, Refunding (Exxon Project), 3.10% due 10/01/2024 200
AA+ Aaa 340 Union County, New Jersey, Refunding, GO, UT, 5.875% due 3/01/1999 350
Total Investments (Cost--$6,483)--105.5% 6,669
Liabilities in Excess of Other Assets--(5.5%) (346)
-------
Net Assets--100.0% $ 6,323
=======
(a)The interest rate is subject to change periodically based upon
prevailing market rates. The interest rate shown is the rate in
effect at July 31, 1997.
(b)AMBAC Insured.
(c)MBIA Insured.
(d)FGIC Insured.
(e)Escrowed to maturity.
*Not Rated.
++Highest short-term rating by Moody's Investors Service, Inc.
Ratings of issues shown have not been audited by Deloitte & Touche LLP.
See Notes to Financial Statements.
</TABLE>
D-7
<PAGE> 132
Merrill Lynch Multi-State Limited Maturity Municipal Series
Trust, July 31, 1997
<TABLE>
<CAPTION>
SCHEDULE OF INVESTMENTS (concluded) (in Thousands)
New York Limited Maturity Municipal Bond Fund
S&P Moody's Face Value
STATE Ratings Ratings Amount Issue (Note 1a)
<S> <S> <S> <C> <S> <C>
New York--98.5% AAA Aaa $ 600 Clifton Park, New York, Water Authority, Water System Revenue
Bonds, Series A, 6.375% due 10/01/2002 (b)(c) $ 671
Nassau County, New York, General Improvement Bonds, UT (c):
AAA Aaa 400 Series O, 5.625% due 8/01/2004 430
AAA Aaa 700 Series Q, 5.10% due 8/01/2003 729
AAA Aaa 750 New York City, New York, IDA, Civic Facilities Revenue Bonds
(USTA National Tennis Center Project), 6% due 11/15/2003 (d) 819
AA Aa2 800 New York City, New York, Municipal Assistance Corporation, Series
68, 7.10% due 7/01/2000 860
New York City, New York, Municipal Water Finance Authority, Water
and Sewer System Revenue Bonds, VRDN (a)(c):
A1+ VMIG1++ 600 Series A, 3.60% due 6/15/2025 600
A1+ VMIG1++ 100 Series G, 3.65% due 6/15/2024 100
BBB+ Baa1 610 New York City, New York, Refunding, UT, Series A, 6% due 8/01/2000 641
New York State Dormitory Authority Revenue Bonds:
AAA Aaa 500 (College and University Education Loans), AMT, 6.30% due
7/01/2002 (e) 547
AA Aa 700 Refunding (Cornell University), 5% due 7/01/2005 732
A- Aa 400 New York State Environmental Facilities Corporation, PCR, State
Water Revolving Fund (New York City Municipal Water Finance
Authority Project), Series E, 5.60% due 6/15/1999 412
A- A2 600 New York State Environmental Quality, GO, 6% due 12/01/2004 658
New York State, GO:
A- A2 505 6% due 7/15/2006 559
A- A2 735 Refunding, Series B, 6.25% due 8/15/2004 815
New York State Local Government Assistance Corporation (b):
A A3 625 Series A, 7% due 4/01/2001 698
AAA Aaa 600 Series D, 7% due 4/01/2002 682
New York State Medical Care Facilities Finance Agency, Revenue
Bonds, Series A:
AAA Aaa 725 (Mental Health Services Facilities), 7.75% due 2/15/2001 (b) 825
AA Aa 650 (Secured Mortgage Program, Adult Day Care), 6% due
11/15/2003 (f) 702
AA NR* 675 New York State Tax Exempt Revenue Bonds (Rochester Museum and
Science), 5.60% due 12/01/2015 679
AAA VMIG1++ 100 New York State Thruway Authority, General Revenue Bonds, VRDN,
3.60% due 1/01/2024 (a)(c) 100
BBB Baa1 450 New York State Urban Development Corporation, Revenue Refunding
Bonds (Center for Industrial Innovation Project), 4.60% due
1/01/1998 451
AAA Aaa 760 Port Authority of New York and New Jersey, Refunding, AMT, UT,
Consolidated 97th Series, 7.10% due 7/15/2003 (c) 867
A1+ VMIG1++ 200 Syracuse, New York, IDA, Civic Facility Revenue Bonds (Multi-
Modal Syracuse University Project), VRDN, 3.50% due 3/01/2023 (a) 200
Triborough Bridge and Tunnel Authority, New York, Revenue Bonds:
A+ Aa 340 Series R, 6.90% due 1/01/2000 363
A1+ VMIG1++ 200 Special Obligation, VRDN, 3.60% due 1/01/2024 (a)(c) 200
Total Investments (Cost--$13,801)--98.5% 14,340
Other Assets Less Liabilities--1.5% 225
-------
Net Assets--100.0% $14,565
=======
(a)The interest rate is subject to change periodically based upon
prevailing market rates. The interest rate shown is the rate in
effect at July 31, 1997.
(b)Prerefunded.
(c)FGIC Insured.
(d)FSA Insured.
(e)MBIA Insured.
(f)SONYMA Insured.
*Not Rated.
++Highest short-term rating by Moody's Investors Service, Inc.
Ratings of issues shown have not been audited by Deloitte & Touche LLP.
See Notes to Financial Statements.
</TABLE>
D-8
<PAGE> 133
<TABLE>
<CAPTION>
Pennsylvania Limited Maturity Municipal Bond Fund
S&P Moody's Face Value
STATE Ratings Ratings Amount Issue (Note 1a)
<S> <S> <S> <C> <S> <C>
Pennsylvania-- NR* VMIG1++ $ 100 Allegheny County, Pennsylvania, Hospital Development Authority
83.6% Revenue Bonds (Presbyterian University Hospital), ACES, Series B1,
3.60% due 3/01/2018 (a) $ 100
AAA Aaa 400 Beaver County, Pennsylvania, Hospital Authority, Revenue Refunding
Bonds (Medical Center of Beaver County, Inc.), 5.70% due
7/01/1999 (e) 412
AA Aa 1,000 Bucks County, Pennsylvania, UT, Series A, 5.95% due 3/01/2000 1,047
NR* NR* 300 Emmaus, Pennsylvania, General Authority Revenue Bonds, VRDN, Sub-
Series E-9, 3.70% due 3/01/2024 (a) 300
A1+ NR* 300 Harrisburg, Pennsylvania, Authority Revenue Bonds (Pooled
Financing Fund), VRDN, 3.85% due 7/01/2021 (a) 300
A1+ Aaa 150 Lehigh County, Pennsylvania, Authority Water Revenue Bonds, VRDN,
3.60% due 11/01/2004 (a)(d) 150
NR* VMIG1++ 300 Pennsylvania Energy Development Authority, Energy Development
Revenue Bonds (B&W Ebensburg Project), VRDN, AMT, 3.70% due
12/01/2011 (a) 300
Pennsylvania State Higher Educational Facilities Authority,
College and University Revenue Refunding Bonds, Series A:
A+ Aa3 380 (Thomas Jefferson University), 5.75% due 8/15/1998 387
AA Aa2 275 (University of Pennsylvania), 4.70% due 9/01/1997 275
AAA Aaa 255 Pennsylvania State Turnpike Commission, Turnpike Revenue
Refunding Bonds, Series O, 5.35% due 12/01/2002 (d) 269
Philadelphia, Pennsylvania, Hospitals and Higher Education
Facilities Authority, Hospital Revenue Bonds:
NR* Aaa 1,000 (Children's Hospital of Philadelphia Project), Series A, 6.50%
due 2/15/2002 (e) 1,109
A- NR* 650 (Children's Seashore House), Series B, 7% due 8/15/2003 724
SP1+ MIG1++ 300 Philadelphia, Pennsylvania, TRAN, Series A, 4.50% due 6/30/1998 301
AAA Aaa 400 Union County, Pennsylvania, Higher Educational Facilities
Financing Authority, Revenue Refunding Bonds (Bucknell University),
6% due 4/01/2002 (b) 430
AAA Aaa 325 Washington County, Pennsylvania, Lease Authority, Municipal
Facility Pooled Capital Revenue Bonds (Shadyside Hospital Project),
Series C, Sub-Series C1-A, 7.45% due 6/15/2000 (c)(e)(f) 363
Puerto Rico-- A- Baa1 1,000 Puerto Rico Municipal Finance Agency, GO, UT, Series A, 5.80% due
13.8% 7/01/2004 1,067
Total Investments (Cost--$7,317)--97.4% 7,534
Other Assets Less Liabilities--2.6% 205
-------
Net Assets--100.0% $ 7,739
=======
(a)The interest rate is subject to change periodically based upon
prevailing market rates. The interest rate shown is the rate in
effect at July 31, 1997.
(b)MBIA Insured.
(c)AMBAC Insured.
(d)FGIC Insured.
(e)Prerefunded.
(f)Escrowed to maturity.
*Not Rated.
++Highest short-term ratings by Moody's Investors Service, Inc.
Ratings of issues shown have not been audited by Deloitte & Touche LLP.
See Notes to Financial Statements.
</TABLE>
D-9
<PAGE> 134
Merrill Lynch Multi-State Limited Maturity Municipal Series
Trust, July 31, 1997
<TABLE>
<CAPTION>
STATEMENTS OF ASSETS AND LIABILITIES
Arizona California Florida Massachusetts
Limited Limited Limited Limited
As of July 31, 1997 Maturity Maturity Maturity Maturity
<S> <S> <C> <C> <C> <C>
Assets: Investments, at value* (Note 1a) $ 3,025,568 $ 13,903,394 $ 25,532,248 $ 5,173,140
Cash 323,206 64,339 12,766 59,786
Receivables:
Interest 15,409 217,188 329,785 60,377
Securities sold 101,366 -- -- --
Investment adviser (Note 2) 16,241 -- -- 21,354
Deferred organization expenses
(Note 1e) -- 4,810 15,985 2,615
Prepaid registration fees and other
assets (Note 1e) 11,380 336 10,220 7,698
------------ ------------ ------------ ------------
Total assets 3,493,170 14,190,067 25,901,004 5,324,970
------------ ------------ ------------ ------------
Liabilities: Payables:
Beneficial interest redeemed -- -- 176,001 36,244
Securities purchased 101,467 -- -- 101,326
Dividends to shareholders (Note 1f) 2,974 14,836 26,116 5,338
Investment adviser (Note 2) -- 1,867 7,566 --
Distributor (Note 2) 680 2,558 4,071 942
Accrued expenses and other liabilities 30,654 42,090 57,374 45,369
------------ ------------ ------------ ------------
Total liabilities 135,775 61,351 271,128 189,219
------------ ------------ ------------ ------------
Net Assets: Net assets $ 3,357,395 $ 14,128,716 $ 25,629,876 $ 5,135,751
============ ============ ============ ============
Net Assets Class A Shares of beneficial interest,
Consist of: $.10 par value, unlimited shares
authorized $ 6,974 $ 30,855 $ 63,324 $ 13,507
Class B Shares of beneficial interest,
$.10 par value, unlimited shares
authorized 20,997 67,326 113,852 27,957
Class C Shares of beneficial interest,
$.10 par value, unlimited shares
authorized 355 561 597 2,741
Class D Shares of beneficial interest,
$.10 par value, unlimited shares
authorized 4,684 39,561 76,841 6,956
Paid-in capital in excess of par 3,221,545 13,698,568 25,375,965 5,218,428
Undistributed (accumulated) realized
capital gains (losses) on investments
--net (Note 5) 16,274 (472,718) (777,982) (300,979)
Unrealized appreciation on investments
--net 86,566 764,563 777,279 167,141
------------ ------------ ------------ ------------
Net assets $ 3,357,395 $ 14,128,716 $ 25,629,876 $ 5,135,751
============ ============ ============ ============
Net Asset Value: Class A: Net assets $ 709,319 $ 3,152,191 $ 6,375,611 $ 1,355,818
============ ============ ============ ============
Shares outstanding 69,741 308,546 633,237 135,068
============ ============ ============ ============
Net asset value $ 10.17 $ 10.22 $ 10.07 $ 10.04
============ ============ ============ ============
Class B: Net assets $ 2,135,376 $ 6,876,961 $ 11,461,594 $ 2,806,894
============ ============ ============ ============
Shares outstanding 209,967 673,258 1,138,517 279,567
============ ============ ============ ============
Net asset value $ 10.17 $ 10.21 $ 10.07 $ 10.04
============ ============ ============ ============
Class C: Net assets $ 36,084 $ 57,282 $ 59,716 $ 274,926
============ ============ ============ ============
Shares outstanding 3,545 5,607 5,969 27,406
============ ============ ============ ============
Net asset value $ 10.18 $ 10.22 $ 10.00 $ 10.03
============ ============ ============ ============
Class D: Net assets $ 476,616 $ 4,042,282 $ 7,732,955 $ 698,113
============ ============ ============ ============
Shares outstanding 46,841 395,606 768,414 69,563
============ ============ ============ ============
Net asset value $ 10.18 $ 10.22 $ 10.06 $ 10.04
============ ============ ============ ============
<FN>
*Identified cost $ 2,939,002 $ 13,138,831 $ 24,754,969 $ 5,005,999
============ ============ ============ ============
</TABLE>
D-10
<PAGE> 135
<TABLE>
<CAPTION>
Michigan New Jersey New York Pennsylvania
Limited Limited Limited Limited
As of July 31, 1997 Maturity Maturity Maturity Maturity
<S> <S> <C> <C> <C> <C>
Assets: Investments, at value* (Note 1a) $ 4,115,441 $ 6,668,628 $ 14,340,013 $ 7,534,238
Cash 90,032 50,867 63,618 30,350
Receivables:
Interest 58,775 85,004 190,115 117,057
Securities sold -- 52,156 -- 100,010
Beneficial interest sold -- -- 12,515 84,550
Investment adviser (Note 2)
Deferred organization expenses
(Note 1e) 2,302 3,758 4,123 3,516
Prepaid registration fees and other
assets (Note 1e) 243 7,803 7,385 5,267
------------ ------------ ------------ ------------
Total assets 4,289,935 6,870,691 14,622,987 7,884,078
------------ ------------ ------------ ------------
Liabilities: Payables:
Securities purchased -- 441,227 -- 100,000
Beneficial interest redeemed -- 68,809 619 4,035
Dividends to shareholders (Note 1f) 4,454 5,671 15,836 7,338
Distributor (Note 2) 548 1,286 2,764 1,677
Accrued expenses and other liabilities 33,588 31,097 38,433 32,371
------------ ------------ ------------ ------------
Total liabilities 38,590 548,090 57,652 145,421
------------ ------------ ------------ ------------
Net Assets: Net assets $ 4,251,345 $ 6,322,601 $ 14,565,335 $ 7,738,657
============ ============ ============ ============
Net Assets Class A Shares of beneficial interest,
Consist of: $.10 par value, unlimited shares
authorized $ 13,557 $ 17,100 $ 25,477 $ 7,190
Class B Shares of beneficial interest,
$.10 par value, unlimited shares
authorized 13,979 40,478 80,271 50,185
Class C Shares of beneficial interest,
$.10 par value, unlimited shares
authorized 12 2,624 659 77
Class D Shares of beneficial interest,
$.10 par value, unlimited shares
authorized 14,589 2,350 36,009 18,177
Paid-in capital in excess of par 4,198,169 6,241,536 14,108,036 7,509,162
Accumulated realized capital losses
on investments--net (Note 5) (150,077) (167,187) (224,431) (63,042)
Accumulated distributions in excess
of realized gain on investments--net
(Note 1f) (1,779) -- -- --
Unrealized appreciation on investments
--net 162,895 185,700 539,314 216,908
------------ ------------ ------------ ------------
Net assets $ 4,251,345 $ 6,322,601 $ 14,565,335 $ 7,738,657
============ ============ ============ ============
Net Asset Value: Class A: Net assets $ 1,368,162 $ 1,734,544 $ 2,605,219 $ 735,726
============ ============ ============ ============
Shares outstanding 135,574 170,998 254,768 71,902
============ ============ ============ ============
Net asset value $ 10.09 $ 10.14 $ 10.23 $ 10.23
============ ============ ============ ============
Class B: Net assets $ 1,410,732 $ 4,108,454 $ 8,209,327 $ 5,134,207
============ ============ ============ ============
Shares outstanding 139,786 404,782 802,714 501,850
============ ============ ============ ============
Net asset value $ 10.09 $ 10.15 $ 10.23 $ 10.23
============ ============ ============ ============
Class C: Net assets $ 1,231 $ 241,191 $ 67,418 $ 7,869
============ ============ ============ ============
Shares outstanding 122 26,241 6,593 766
============ ============ ============ ============
Net asset value $ 10.09 $ 9.19 $ 10.23 $ 10.27
============ ============ ============ ============
Class D: Net assets $ 1,471,220 $ 238,412 $ 3,683,371 $ 1,860,855
============ ============ ============ ============
Shares outstanding 145,888 23,497 360,094 181,770
============ ============ ============ ============
Net asset value $ 10.08 $ 10.15 $ 10.23 $ 10.24
============ ============ ============ ============
<FN>
*Identified cost $ 3,952,546 $ 6,482,928 $ 13,800,699 $ 7,317,330
============ ============ ============ ============
See Notes to Financial Statements.
</TABLE>
D-11
<PAGE> 136
Merrill Lynch Multi-State Limited Maturity Municipal Series
Trust, July 31, 1997
<TABLE>
<CAPTION>
STATEMENTS OF OPERATIONS
Arizona California Florida Massachusetts
Limited Limited Limited Limited
For the Year Ended July 31, 1997 Maturity Maturity Maturity Maturity
<S> <S> <C> <C> <C> <C>
Investment Income Interest and amortization of premium
(Note 1d): and discount earned $ 173,856 $ 704,598 $ 1,312,846 $ 312,359
Expenses: Accounting services (Note 2) 33,811 32,283 64,974 48,536
Investment advisory fees (Note 2) 13,268 51,013 90,513 22,132
Professional fees 34,098 35,408 39,407 44,247
Account maintenance and distribution
fees--Class B (Note 2) 8,883 30,557 42,610 13,723
Registration fees (Note 1e) 22,601 12,833 13,791 21,398
Printing and shareholder reports 5,160 18,633 32,385 6,388
Trustees' fees and expenses 2,403 7,290 13,411 3,557
Amortization of organization expenses
(Note 1e) -- 3,643 12,130 1,984
Custodian fees 2,727 3,358 4,381 2,369
Pricing fees 2,247 4,169 3,044 2,512
Transfer agent fees--Class B (Note 2) 1,885 2,947 3,404 2,061
Account maintenance fees--Class D
(Note 2) 373 2,646 6,193 717
Transfer agent fees--Class A (Note 2) 503 868 1,591 606
Transfer agent fees--Class D (Note 2) 239 710 1,334 307
Account maintenance and distribution
fees--Class C (Note 2) 157 84 116 402
Transfer agent fees--Class C (Note 2) 81 28 29 130
Other 2,695 13,781 3,186 2,069
------------ ------------ ------------ ------------
Total expenses before reimbursement 131,131 220,251 332,499 173,138
Reimbursement of expenses (Note 2) (85,705) (29,150) -- (95,062)
------------ ------------ ------------ ------------
Total expenses after reimbursement 45,426 191,101 332,499 78,076
------------ ------------ ------------ ------------
Investment income--net 128,430 513,497 980,347 234,283
------------ ------------ ------------ ------------
Realized & Realized gain on investments--net 87,712 57,005 101,611 51,279
Unrealized Change in unrealized appreciation on
Gain (Loss) on investments--net (58,065) 206,716 180,208 (12,363)
Investments--Net ------------ ------------ ------------ ------------
(Notes 1b, 1d & 3): Net Increase in Net Assets Resulting
from Operations $ 158,077 $ 777,218 $ 1,262,166 $ 273,199
============ ============ ============ ============
<CAPTION>
Michigan New Jersey New York Pennsylvania
Limited Limited Limited Limited
For the Year Ended July 31, 1997 Maturity Maturity Maturity Maturity
<S> <S> <C> <C> <C> <C>
Investment Income Interest and amortization of premium
(Note 1d): and discount earned $ 208,473 $ 347,105 $ 812,885 $ 402,719
Expenses: Professional fees 39,131 35,447 34,696 38,410
Accounting services (Note 2) 41,011 26,609 34,860 42,078
Investment advisory fees (Note 2) 14,977 25,494 57,645 29,758
Registration fees (Note 1e) 22,074 16,112 20,605 16,392
Account maintenance and distribution
fees--Class B (Note 2) 5,934 15,927 32,533 20,568
Printing and shareholder reports 5,905 -- 19,539 4,570
Trustees' fees and expenses 2,071 3,919 8,418 4,231
Pricing fees 3,369 1,913 3,925 2,379
Custodian fees 1,853 3,205 3,614 2,902
Amortization of organization expenses
(Note 1e) 1,743 2,852 3,123 2,668
</TABLE>
D-12
<PAGE> 137
<TABLE>
<S> <S> <C> <C> <C> <C>
Transfer agent fees--Class B (Note 2) 952 2,147 3,545 2,641
Account maintenance fees--Class D
(Note 2) 1,085 409 4,216 1,831
Transfer agent fees--Class A (Note 2) 634 805 848 280
Transfer agent fees--Class D (Note 2) 442 164 1,276 651
Account maintenance and distribution
fees--Class C (Note 2) 1 402 234 7
Transfer agent fees--Class C (Note 2) 4 118 75 9
Other 14,366 1,694 -- 2,196
------------ ------------ ------------ ------------
Total expenses before reimbursement 155,552 137,217 229,152 171,571
Reimbursement of expenses (Note 2) (107,880) (51,282) (76,880) (64,142)
------------ ------------ ------------ ------------
Total expenses after reimbursement 47,672 85,935 152,272 107,429
------------ ------------ ------------ ------------
Investment income--net 160,801 261,170 660,613 295,290
------------ ------------ ------------ ------------
Realized & Realized gain on investments--net 21,697 126,030 36,848 37,824
Unrealized Change in unrealized appreciation on
Gain (Loss) on investments--net 38,238 (105,889) 214,688 56,086
Investments--Net ------------ ------------ ------------ ------------
(Notes 1b, 1d & 3): Net Increase in Net Assets Resulting
from Operations $ 220,736 $ 281,311 $ 912,149 $ 389,200
============ ============ ============ ============
See Notes to Financial Statements.
</TABLE>
<TABLE>
<CAPTION>
STATEMENTS OF CHANGES IN NET ASSETS
Arizona Limited Maturity California Limited Maturity
For the Year For the Year
Ended July 31, Ended July 31,
Increase (Decrease) in Net Assets: 1997 1996 1997 1996
<S> <S> <C> <C> <C> <C>
Operations: Investment income--net $ 128,430 $ 229,407 $ 513,497 $ 562,881
Realized gain (loss) on investments
--net 87,712 (691) 57,005 (14,506)
Change in unrealized appreciation on
investments--net (58,065) (45,086) 206,716 102,333
------------ ------------ ------------ ------------
Net increase in net assets resulting
from operations 158,077 183,630 777,218 650,708
------------ ------------ ------------ ------------
Dividends to Investment income--net:
Shareholders Class A (28,232) (37,685) (117,926) (130,650)
(Note 1f): Class B (83,293) (164,444) (295,984) (362,918)
Class C (3,632) (1,762) (1,999) (2,149)
Class D (13,273) (25,516) (97,588) (67,164)
------------ ------------ ------------ ------------
Net decrease in net assets resulting
from dividends to shareholders (128,430) (229,407) (513,497) (562,881)
------------ ------------ ------------ ------------
Beneficial Interest Net decrease in net assets derived
Transactions from beneficial interest transactions (1,124,280) (1,767,011) (1,455,816) (491,496)
(Note 4): ------------ ------------ ------------ ------------
Net Assets: Total decrease in net assets (1,094,633) (1,812,788) (1,192,095) (403,669)
Beginning of year 4,452,028 6,264,816 15,320,811 15,724,480
------------ ------------ ------------ ------------
End of year $ 3,357,395 $ 4,452,028 $ 14,128,716 $ 15,320,811
============ ============ ============ ============
See Notes to Financial Statements.
</TABLE>
D-13
<PAGE> 138
Merrill Lynch Multi-State Limited Maturity Municipal Series
Trust, July 31, 1997
<TABLE>
<CAPTION>
STATEMENTS OF CHANGES IN NET ASSETS (concluded)
Florida Massachusetts Michigan
Limited Maturity Limited Maturity Limited Maturity
For the Year For the Year For the Year
Increase (Decrease) Ended July 31, Ended July 31, Ended July 31,
in Net Assets: 1997 1996 1997 1996 1997 1996
<S> <S> <C> <C> <C> <C> <C> <C>
Operations: Investment
income--net $ 980,347 $ 1,189,088 $ 234,283 $ 335,521 $ 160,801 $ 182,546
Realized gain
(loss) on
investments
--net 101,611 (1,278) 51,279 18,219 21,697 10,083
Change in
unrealized
appreciation
on investments
--net 180,208 (174,866) (12,363) (13,084) 38,238 (23,665)
------------ ------------ ------------ ------------ ------------ ------------
Net increase
in net assets
resulting from
operations 1,262,166 1,012,944 273,199 340,656 220,736 168,964
------------ ------------ ------------ ------------ ------------ ------------
Dividends & Investment
Distributions to income--net:
Shareholders Class A (295,532) (361,872) (56,023) (118,129) (58,806) (85,288)
(Note 1f): Class B (441,468) (557,931) (140,428) (180,877) (60,388) (80,829)
Class C (2,960) (522) (10,189) (14,474) (43) (41)
Class D (240,387) (268,763) (27,643) (22,041) (41,564) (16,388)
In excess of
realized gain
on investments
--net:
Class A -- -- -- -- (568) --
Class B -- -- -- -- (668) --
Class C -- -- -- -- --++ --
Class D -- -- -- -- (543) --
------------ ------------ ------------ ------------ ------------ ------------
Net decrease
in net assets
resulting from
dividends and
distributions
to shareholders (980,347) (1,189,088) (234,283) (335,521) (162,580) (182,546)
------------ ------------ ------------ ------------ ------------ ------------
Beneficial Interest Net increase
Transactions (decrease) in
(Note 4): net assets
derived from
beneficial
interest trans-
actions (2,674,028) (5,075,030) (2,299,335) (2,526,578) 168,118 (1,013,383)
------------ ------------ ------------ ------------ ------------ ------------
Net Assets: Total increase
(decrease) in
net assets (2,392,209) (5,251,174) (2,260,419) (2,521,443) 226,274 (1,026,965)
Beginning of
year 28,022,085 33,273,259 7,396,170 9,917,613 4,025,071 5,052,036
------------ ------------ ------------ ------------ ------------ ------------
End of year $ 25,629,876 $ 28,022,085 $ 5,135,751 $ 7,396,170 $ 4,251,345 $ 4,025,071
============ ============ ============ ============ ============ ============
<CAPTION>
New Jersey New York Pennsylvania
Limited Maturity Limited Maturity Limited Maturity
For the Year For the Year For the Year
Increase (Decrease) Ended July 31, Ended July 31, Ended July 31,
in Net Assets: 1997 1996 1997 1996 1997 1996
<S> <S> <C> <C> <C> <C> <C> <C>
Operations: Investment
income--net $ 261,170 $ 365,818 $ 660,613 $ 671,149 $ 295,290 $ 320,744
Realized gain
(loss) on
investments
--net 126,030 (12,586) 36,848 27,501 37,824 364
Change in
unrealized
appreciation
on investments
--net (105,889) (41,469) 214,688 (22,206) 56,086 12,631
------------ ------------ ------------ ------------ ------------ ------------
Net increase
in net assets
resulting from
operations 281,311 311,763 912,149 676,444 389,200 333,739
------------ ------------ ------------ ------------ ------------ ------------
Dividends to Investment
Shareholders income--net:
(Note 1f): Class A (78,571) (107,284) (118,733) (174,431) (29,558) (37,384)
Class B (157,456) (241,855) (360,967) (381,150) (198,819) (254,375)
Class C (9,799) (4,447) (6,313) (5,588) (181) (1,049)
Class D (15,344) (12,232) (174,600) (109,980) (66,732) (27,936)
------------ ------------ ------------ ------------ ------------ ------------
</TABLE>
D-14
<PAGE> 139
<TABLE>
<S> <C> <C> <C> <C> <C> <C> <C>
Net decrease
in net assets
resulting from
dividends to
shareholders (261,170) (365,818) (660,613) (671,149) (295,290) (320,744)
------------ ------------ ------------ ------------ ------------ ------------
Beneficial Interest Net increase
Transactions (decrease) in
(Note 4): net assets
derived from
beneficial
interest
transactions (2,324,627) (1,750,465) (3,606,325) 1,937,339 (1,259,754) 150,949
------------ ------------ ------------ ------------ ------------ ------------
Net Assets: Total increase
(decrease) in
net assets (2,304,486) (1,804,520) (3,354,789) 1,942,634 (1,165,844) 163,944
Beginning of
year 8,627,087 10,431,607 17,920,124 15,977,490 8,904,501 8,740,557
------------ ------------ ------------ ------------ ------------ ------------
End of year $ 6,322,601 $ 8,627,087 $ 14,565,335 $ 17,920,124 $ 7,738,657 $ 8,904,501
============ ============ ============ ============ ============ ============
<FN>
++Amount is less than $1.
See Notes to Financial Statements.
</TABLE>
<TABLE>
<CAPTION>
FINANCIAL HIGHLIGHTS
Arizona Limited Maturity
Class A
For the
Period
The following per share data and ratios have been derived Nov. 26,
from information provided in the financial statements. For the Year 1993++ to
Ended July 31, July 31,
Increase (Decrease) in Net Asset Value: 1997 1996 1995 1994
<S> <S> <C> <C> <C> <C>
Per Share Net asset value, beginning of period $ 10.08 $ 10.17 $ 9.97 $ 10.00
Operating ------- ------- ------- -------
Performance: Investment income--net .37 .41 .43 .23
Realized and unrealized gain (loss) on investments--net .09 (.09) .20 (.03)
------- ------- ------- -------
Total from investment operations .46 .32 .63 .20
------- ------- ------- -------
Less dividends from investment income--net (.37) (.41) (.43) (.23)
------- ------- ------- -------
Net asset value, end of period $ 10.17 $ 10.08 $ 10.17 $ 9.97
======= ======= ======= =======
Total Investment Based on net asset value per share 4.62% 3.16% 6.47% 2.02%+++
Return:** ======= ======= ======= =======
Ratios to Average Expenses, net of reimbursement .94% .74% .35% .02%*
Net Assets: ======= ======= ======= =======
Expenses 3.21% 2.27% 2.05% 1.82%*
======= ======= ======= =======
Investment income--net 3.64% 4.01% 4.31% 3.37%*
======= ======= ======= =======
Supplemental Net assets, end of period (in thousands) $ 709 $ 813 $ 1,054 $ 2,103
Data: ======= ======= ======= =======
Portfolio turnover 38.21% 43.53% 182.58% 142.37%
======= ======= ======= =======
<CAPTION>
Arizona Limited Maturity
Class B
For the
Period
The following per share data and ratios have been derived Nov. 26,
from information provided in the financial statements. For the Year 1993++ to
Ended July 31, July 31,
Increase (Decrease) in Net Asset Value: 1997 1996 1995 1994
<S> <S> <C> <C> <C> <C>
Per Share Net asset value, beginning of period $ 10.08 $ 10.16 $ 9.97 $ 10.00
Operating ------- ------- ------- -------
Performance: Investment income--net .33 .37 .39 .20
Realized and unrealized gain (loss) on investments--net .09 (.08) .19 (.03)
------- ------- ------- -------
Total from investment operations .42 .29 .58 .17
------- ------- ------- -------
Less dividends from investment income--net (.33) (.37) (.39) (.20)
------- ------- ------- -------
Net asset value, end of period $ 10.17 $ 10.08 $ 10.16 $ 9.97
======= ======= ======= =======
Total Investment Based on net asset value per share 4.25% 2.88% 5.99% 1.78%+++
Return:** ======= ======= ======= =======
Ratios to Average Expenses, net of reimbursement 1.30% 1.09% .72% .38%*
Net Assets: ======= ======= ======= =======
Expenses 3.56% 2.61% 2.44% 2.18%*
======= ======= ======= =======
Investment income--net 3.28% 3.65% 3.95% 3.02%*
======= ======= ======= =======
Supplemental Net assets, end of period (in thousands) $ 2,135 $ 2,885 $ 5,191 $ 5,575
Data: ======= ======= ======= =======
Portfolio turnover 38.21% 43.53% 182.58% 142.37%
======= ======= ======= =======
*Annualized.
**Total investment returns exclude the effects of sales loads.
++Commencement of Operations.
+++Aggregate total investment return.
See Notes to Financial Statements.
</TABLE>
D-15
<PAGE> 140
Merrill Lynch Multi-State Limited Maturity Municipal Series
Trust, July 31, 1997
<TABLE>
<CAPTION>
FINANCIAL HIGHLIGHTS (continued)
Arizona Limited Maturity
Class C Class D
The following per share data For the For the
and ratios have been derived Period Period
from information provided in Oct. 21, Oct. 21,
the financial statements. For the Year 1994++ to For the Year 1994++ to
Ended July 31, July 31, Ended July 31, July 31,
Increase (Decrease) in Net Asset Value: 1997 1996 1995 1997 1996 1995
<S> <S> <C> <C> <C> <C> <C> <C>
Per Share Net asset value, beginning of period $ 10.08 $ 10.17 $ 9.89 $ 10.08 $ 10.17 $ 9.89
Operating ------- ------- ------- ------- ------- -------
Performance: Investment income--net .35 .37 .29 .36 .40 .33
Realized and unrealized gain (loss) on
investments--net .10 (.09) .28 .10 (.09) .28
------- ------- ------- ------- ------- -------
Total from investment operations .45 .28 .57 .46 .31 .61
------- ------- ------- ------- ------- -------
Less dividends from investment
income--net (.35) (.37) (.29) (.36) (.40) (.33)
------- ------- ------- ------- ------- -------
Net asset value, end of period $ 10.18 $ 10.08 $ 10.17 $ 10.18 $ 10.08 $ 10.17
======= ======= ======= ======= ======= =======
Total Investment Based on net asset value per share 4.55% 2.78% 5.90%+++ 4.62% 3.05% 6.34%+++
Return:** ======= ======= ======= ======= ======= =======
Ratios to Average Expenses, net of reimbursement 1.11% 1.03% 1.05%* 1.04% .90% .55%*
Net Assets: ======= ======= ======= ======= ======= =======
Expenses 3.35% 2.80% 2.79%* 3.29% 2.42% 2.39%*
======= ======= ======= ======= ======= =======
Investment income--net 3.48% 3.86% 3.80%* 3.56% 3.88% 4.31%*
======= ======= ======= ======= ======= =======
Supplemental Net assets, end of period
Data: (in thousands) $ 36 $ 135 $ 1 $ 477 $ 619 $ 19
======= ======= ======= ======= ======= =======
Portfolio turnover 38.21% 43.53% 182.58% 38.21% 43.53% 182.58%
======= ======= ======= ======= ======= =======
<CAPTION>
California Limited Maturity
Class A
For the
Period
The following per share data and ratios have been derived Nov. 26,
from information provided in the financial statements. For the Year 1993++ to
Ended July 31, July 31,
Increase (Decrease) in Net Asset Value: 1997 1996 1995 1994
<S> <S> <C> <C> <C> <C>
Per Share Net asset value, beginning of period $ 10.05 $ 9.99 $ 9.88 $ 10.00
Operating ------- ------- ------- -------
Performance: Investment income--net .38 .39 .42 .24
Realized and unrealized gain (loss) on investments--net .17 .06 .11 (.12)
------- ------- ------- -------
Total from investment operations .55 .45 .53 .12
------- ------- ------- -------
Less dividends from investment income--net (.38) (.39) (.42) (.24)
------- ------- ------- -------
Net asset value, end of period $ 10.22 $ 10.05 $ 9.99 $ 9.88
======= ======= ======= =======
Total Investment Based on net asset value per share 5.57% 4.56% 5.60% 1.23%+++
Return:** ======= ======= ======= =======
Ratios to Average Expenses, net of reimbursement 1.08% .94% .40% .02%*
Net Assets: ======= ======= ======= =======
Expenses 1.28% 1.30% 1.44% 1.16%*
======= ======= ======= =======
<CAPTION>
California Limited Maturity
Class B
For the
Period
The following per share data and ratios have been derived Nov. 26,
from information provided in the financial statements. For the Year 1993++ to
Ended July 31, July 31,
Increase (Decrease) in Net Asset Value: 1997 1996 1995 1994
<S> <S> <C> <C> <C> <C>
Per Share Net asset value, beginning of period $ 10.04 $ 9.99 $ 9.88 $ 10.00
Operating ------- ------- ------- -------
Performance: Investment income--net .34 .36 .39 .21
Realized and unrealized gain (loss) on investments--net .17 .05 .11 (.12)
------- ------- ------- -------
Total from investment operations .51 .41 .50 .09
------- ------- ------- -------
Less dividends from investment income--net (.34) (.36) (.39) (.21)
------- ------- ------- -------
Net asset value, end of period $ 10.21 $ 10.04 $ 9.99 $ 9.88
======= ======= ======= =======
Total Investment Based on net asset value per share 5.20% 4.08% 5.23% .99%+++
Return:** ======= ======= ======= =======
Ratios to Average Expenses, net of reimbursement 1.44% 1.30% .76% .38%*
Net Assets: ======= ======= ======= =======
Expenses 1.64% 1.66% 1.80% 1.52%*
======= ======= ======= =======
</TABLE>
D-16
<PAGE> 141
<TABLE>
<S> <S> <C> <C> <C> <C>
Investment income--net 3.75% 3.89% 4.36% 3.54%*
======= ======= ======= =======
Supplemental Net assets, end of period (in thousands) $ 3,152 $ 3,162 $ 3,527 $ 3,804
Data: ======= ======= ======= =======
Portfolio turnover 26.86% 11.09% 124.72% 130.10%
======= ======= ======= =======
</TABLE>
<TABLE>
<S> <S> <C> <C> <C> <C>
Investment income--net 3.39% 3.53% 4.00% 3.19%*
======= ======= ======= =======
Supplemental Net assets, end of period (in thousands) $ 6,877 $ 9,919 $10,363 $11,430
Data: ======= ======= ======= =======
Portfolio turnover 26.86% 11.09% 124.72% 130.10%
======= ======= ======= =======
</TABLE>
<TABLE>
<CAPTION>
California Limited Maturity
Class C Class D
The following per share data For the For the
and ratios have been derived Period Period
from information provided in Oct. 21, Oct. 21,
the financial statements. For the Year 1994++ to For the Year 1994++ to
Ended July 31, July 31, Ended July 31, July 31,
Increase (Decrease) in Net Asset Value: 1997 1996 1995 1997 1996 1995
<S> <S> <C> <C> <C> <C> <C> <C>
Per Share Net asset value, beginning of period $ 10.05 $ 9.99 $ 9.76 $ 10.05 $ 9.99 $ 9.76
Operating ------- ------- ------- ------- ------- -------
Performance: Investment income--net .36 .37 .31 .37 .38 .33
Realized and unrealized gain on
investments--net .17 .06 .23 .17 .06 .23
------- ------- ------- ------- ------- -------
Total from investment operations .53 .43 .54 .54 .44 .56
------- ------- ------- ------- ------- -------
Less dividends from investment
income--net (.36) (.37) (.31) (.37) (.38) (.33)
------- ------- ------- ------- ------- -------
Net asset value, end of period $ 10.22 $ 10.05 $ 9.99 $ 10.22 $ 10.05 $ 9.99
======= ======= ======= ======= ======= =======
Total Investment Based on net asset value per share 5.39% 4.35% 5.60%+++ 5.47% 4.46% 5.85%+++
Return:** ======= ======= ======= ======= ======= =======
Ratios to Average Expenses, net of reimbursement 1.25% 1.14% .82%* 1.15% 1.06% .66%*
Net Assets: ======= ======= ======= ======= ======= =======
Expenses 1.45% 1.50% 1.98%* 1.35% 1.40% 1.81%*
======= ======= ======= ======= ======= =======
Investment income--net 3.58% 3.69% 4.04%* 3.69% 3.77% 4.28%*
======= ======= ======= ======= ======= =======
Supplemental Net assets, end of period
Data: (in thousands) $ 57 $ 55 $ 64 $ 4,043 $ 2,185 $ 1,771
======= ======= ======= ======= ======= =======
Portfolio turnover 26.86% 11.09% 124.72% 26.86% 11.09% 124.72%
======= ======= ======= ======= ======= =======
*Annualized.
**Total investment returns exclude the effects of sales loads.
++Commencement of Operations.
+++Aggregate total investment return.
See Notes to Financial Statements.
</TABLE>
D-17
<PAGE> 142
Merrill Lynch Multi-State Limited Maturity Municipal Series
Trust, July 31, 1997
<TABLE>
<CAPTION>
FINANCIAL HIGHLIGHTS (continued)
Florida Limited Maturity
Class A
For the
Period
The following per share data and ratios have been derived Nov. 26,
from information provided in the financial statements. For the Year 1993++ to
Ended July 31, July 31,
Increase (Decrease) in Net Asset Value: 1997 1996 1995 1994
<S> <S> <C> <C> <C> <C>
Per Share Net asset value, beginning of period $ 9.96 $ 10.02 $ 9.87 $ 10.00
Operating ------- ------- ------- -------
Performance: Investment income--net .40 .40 .43 .24
Realized and unrealized gain (loss) on investments--net .11 (.06) .15 (.13)
------- ------- ------- -------
Total from investment operations .51 .34 .58 .11
------- ------- ------- -------
Less dividends from investment income--net (.40) (.40) (.43) (.24)
------- ------- ------- -------
Net asset value, end of period $ 10.07 $ 9.96 $ 10.02 $ 9.87
======= ======= ======= =======
Total Investment Based on net asset value per share 5.20% 3.45% 6.05% 1.12%+++
Return:** ======= ======= ======= =======
Ratios to Average Expenses, net of reimbursement 1.09% .89% .39% .02%*
Net Assets: ======= ======= ======= =======
Expenses 1.09% .97% 1.03% .86%*
======= ======= ======= =======
Investment income--net 3.98% 4.01% 4.39% 3.54%*
======= ======= ======= =======
Supplemental Net assets, end of period (in thousands) $ 6,376 $ 7,874 $ 9,849 $14,868
Data: ======= ======= ======= =======
Portfolio turnover 35.67% 39.90% 138.97% 136.71%
======= ======= ======= =======
<CAPTION>
Florida Limited Maturity
Class B
For the
Period
The following per share data and ratios have been derived Nov. 26,
from information provided in the financial statements. For the Year 1993++ to
Ended July 31, July 31,
Increase (Decrease) in Net Asset Value: 1997 1996 1995 1994
<S> <S> <C> <C> <C> <C>
Per Share Net asset value, beginning of period $ 9.96 $ 10.02 $ 9.88 $ 10.00
Operating ------- ------- ------- -------
Performance: Investment income--net .36 .37 .40 .21
Realized and unrealized gain (loss) on investments--net .11 (.06) .14 (.12)
------- ------- ------- -------
Total from investment operations .47 .31 .54 .09
------- ------- ------- -------
Less dividends from investment income--net (.36) (.37) (.40) (.21)
------- ------- ------- -------
Net asset value, end of period $ 10.07 $ 9.96 $ 10.02 $ 9.88
======= ======= ======= =======
Total Investment Based on net asset value per share 4.83% 3.08% 5.57% .99%+++
Return:** ======= ======= ======= =======
Ratios to Average Expenses, net of reimbursement 1.45% 1.24% .75% .38%*
Net Assets: ======= ======= ======= =======
Expenses 1.45% 1.32% 1.38% 1.23%*
======= ======= ======= =======
Investment income--net 3.63% 3.66% 4.05% 3.19%*
======= ======= ======= =======
Supplemental Net assets, end of period (in thousands) $11,461 $13,690 $16,213 $18,179
Data: ======= ======= ======= =======
Portfolio turnover 35.67% 39.90% 138.97% 136.71%
======= ======= ======= =======
<CAPTION>
Florida Limited Maturity
Class C Class D
The following per share data For the For the
and ratios have been derived Period Period
from information provided in Oct. 21, Oct. 21,
the financial statements. For the Year 1994++ to For the Year 1994++ to
Ended July 31, July 31, Ended July 31, July 31,
Increase (Decrease) in Net Asset Value: 1997 1996 1995 1997 1996 1995
<S> <S> <C> <C> <C> <C> <C> <C>
Per Share Net asset value, beginning of period $ 9.90 $ 10.01 $ 9.76 $ 9.95 $ 10.01 $ 9.76
Operating ------- ------- ------- ------- ------- -------
Performance: Investment income--net .38 .36 .29 .39 .39 .33
Realized and unrealized gain (loss)
on investments--net .10 (.11) .25 .11 (.06) .25
------- ------- ------- ------- ------- -------
Total from investment operations .48 .25 .54 .50 .33 .58
------- ------- ------- ------- ------- -------
Less dividends from investment
income--net (.38) (.36) (.29) (.39) (.39) (.33)
------- ------- ------- ------- ------- -------
Net asset value, end of period $ 10.00 $ 9.90 $ 10.01 $ 10.06 $ 9.95 $ 10.01
======= ======= ======= ======= ======= =======
Total Investment Based on net asset value per share 4.93% 2.48% 5.65%+++ 5.10% 3.35% 6.07%+++
Return:** ======= ======= ======= ======= ======= =======
Ratios to Average Expenses, net of reimbursement 1.26% 1.21% 1.09%* 1.19% .99% .67%*
Net Assets: ======= ======= ======= ======= ======= =======
Expenses 1.26% 1.23% 1.67%* 1.19% 1.07% 1.19%*
======= ======= ======= ======= ======= =======
</TABLE>
D-18
<PAGE> 143
<TABLE>
<S> <S> <C> <C> <C> <C> <C> <C>
Investment income--net 3.83% 3.75% 3.83%* 3.88% 3.91% 4.23%*
======= ======= ======= ======= ======= =======
Supplemental Net assets, end of period
Data: (in thousands) $ 60 $ 52 $ 1 $ 7,733 $ 6,406 $ 7,210
======= ======= ======= ======= ======= =======
Portfolio turnover 35.67% 39.90% 138.97% 35.67% 39.90% 138.97%
======= ======= ======= ======= ======= =======
<CAPTION>
Massachusetts Limited Maturity
Class A
For the
Period
The following per share data and ratios have been derived Nov. 26,
from information provided in the financial statements. For the Year 1993++ to
Ended July 31, July 31,
Increase (Decrease) in Net Asset Value: 1997 1996 1995 1994
<S> <S> <C> <C> <C> <C>
Per Share Net asset value, beginning of period $ 9.96 $ 9.96 $ 9.95 $ 10.00
Operating ------- ------- ------- -------
Performance: Investment income--net .39 .40 .44 .25
Realized and unrealized gain (loss) on investments--net .08 --++++ .02 (.05)
------- ------- ------- -------
Total from investment operations .47 .40 .46 .20
------- ------- ------- -------
Less dividends and distributions:
Investment income--net (.39) (.40) (.44) (.25)
Realized gain on investments--net -- -- (.01) --
------- ------- ------- -------
Total dividends and distributions (.39) (.40) (.45) (.25)
------- ------- ------- -------
Net asset value, end of period $ 10.04 $ 9.96 $ 9.96 $ 9.95
======= ======= ======= =======
Total Investment Based on net asset value per share 4.86% 4.08% 4.79% 2.01%+++
Return:** ======= ======= ======= =======
Ratios to Average Expenses, net of reimbursement .99% .77% .37% .03%*
Net Assets: ======= ======= ======= =======
Expenses 2.52% 2.15% 1.71% 1.17%*
======= ======= ======= =======
Investment income--net 3.95% 4.04% 4.45% 3.69%*
======= ======= ======= =======
Supplemental Net assets, end of period (in thousands) $ 1,356 $ 1,719 $ 4,453 $ 8,097
Data: ======= ======= ======= =======
Portfolio turnover 22.93% 22.71% 89.96% 57.80%
======= ======= ======= =======
<CAPTION>
Massachusetts Limited Maturity
Class B
For the
Period
The following per share data and ratios have been derived Nov. 26,
from information provided in the financial statements. For the Year 1993++ to
Ended July 31, July 31,
Increase (Decrease) in Net Asset Value: 1997 1996 1995 1994
<S> <S> <C> <C> <C> <C>
Per Share Net asset value, beginning of period $ 9.96 $ 9.96 $ 9.95 $ 10.00
Operating ------- ------- ------- -------
Performance: Investment income--net .36 .37 .40 .22
Realized and unrealized gain (loss) on investments--net .08 --++++ .02 (.05)
------- ------- ------- -------
Total from investment operations .44 .37 .42 .17
------- ------- ------- -------
Less dividends and distributions:
Investment income--net (.36) (.37) (.40) (.22)
Realized gain on investments--net -- -- (.01) --
------- ------- ------- -------
Total dividends and distributions (.36) (.37) (.41) (.22)
------- ------- ------- -------
Net asset value, end of period $ 10.04 $ 9.96 $ 9.96 $ 9.95
======= ======= ======= =======
Total Investment Based on net asset value per share 4.49% 3.70% 4.41% 1.77%+++
Return:** ======= ======= ======= =======
Ratios to Average Expenses, net of reimbursement 1.35% 1.16% .74% .38%*
Net Assets: ======= ======= ======= =======
Expenses 2.84% 2.61% 2.08% 1.54%*
======= ======= ======= =======
Investment income--net 3.58% 3.66% 4.08% 3.28%*
======= ======= ======= =======
Supplemental Net assets, end of period (in thousands) $ 2,807 $ 4,577 $ 4,800 $ 8,046
Data: ======= ======= ======= =======
Portfolio turnover 22.93% 22.71% 89.96% 57.80%
======= ======= ======= =======
*Annualized.
**Total investment returns exclude the effects of sales loads.
++Commencement of Operations.
++++Amount is less than $.01 per share.
+++Aggregate total investment return.
See Notes to Financial Statements.
</TABLE>
D-19
<PAGE> 144
Merrill Lynch Multi-State Limited Maturity Municipal Series
Trust, July 31, 1997
<TABLE>
<CAPTION>
FINANCIAL HIGHLIGHTS (continued)
Massachusetts Limited Maturity
Class C Class D
The following per share data For the For the
and ratios have been derived Period Period
from information provided in Oct. 21, Oct. 21,
the financial statements. For the Year 1994++ to For the Year 1994++ to
Ended July 31, July 31, Ended July 31, July 31,
Increase (Decrease) in Net Asset Value: 1997 1996 1995 1997 1996 1995
<S> <S> <C> <C> <C> <C> <C> <C>
Per Share Net asset value, beginning of period $ 9.95 $ 9.96 $ 9.82 $ 9.96 $ 9.96 $ 9.82
Operating ------- ------- ------- ------- ------- -------
Performance: Investment income--net .38 .39 .33 .38 .39 .34
Realized and unrealized gain (loss)
on investments--net .08 (.01) .15 .08 --++++ .15
------- ------- ------- ------- ------- -------
Total from investment operations .46 .38 .48 .46 .39 .49
------- ------- ------- ------- ------- -------
Less dividends and distributions:
Investment income--net (.38) (.39) (.33) (.38) (.39) (.34)
Realized gain on investments--net -- -- (.01) -- -- (.01)
------- ------- ------- ------- ------- -------
Total dividends and distributions (.38) (.39) (.34) (.38) (.39) (.35)
------- ------- ------- ------- ------- -------
Net asset value, end of period $ 10.03 $ 9.95 $ 9.96 $ 10.04 $ 9.96 $ 9.96
======= ======= ======= ======= ======= =======
Total Investment Based on net asset value per share 4.70% 3.81% 5.00%+++ 4.76% 3.97% 5.09%+++
Return:** ======= ======= ======= ======= ======= =======
Ratios to Average Expenses, net of reimbursement 1.15% .94% .67%* 1.09% .93% .70%*
Net Assets: ======= ======= ======= ======= ======= =======
Expenses 2.69% 2.37% 2.23%* 2.62% 2.42% 2.31%*
======= ======= ======= ======= ======= =======
Investment income--net 3.80% 3.88% 4.32%* 3.85% 3.89% 4.21%*
======= ======= ======= ======= ======= =======
Supplemental Net assets, end of period
Data: (in thousands) $ 275 $ 210 $ 413 $ 698 $ 890 $ 253
======= ======= ======= ======= ======= =======
Portfolio turnover 22.93% 22.71% 89.96% 22.93% 22.71% 89.96%
======= ======= ======= ======= ======= =======
<CAPTION>
Michigan Limited Maturity
Class A
For the
Period
The following per share data and ratios have been derived Nov. 26,
from information provided in the financial statements. For the Year 1993++ to
Ended July 31, July 31,
Increase (Decrease) in Net Asset Value: 1997 1996 1995 1994
<S> <S> <C> <C> <C> <C>
Per Share Net asset value, beginning of period $ 9.94 $ 9.98 $ 9.92 $ 10.00
Operating ------- ------- ------- -------
Performance: Investment income--net .39 .41 .44 .24
Realized and unrealized gain (loss) on investments--net .15 (.04) .06 (.08)
------- ------- ------- -------
Total from investment operations .54 .37 .50 .16
------- ------- ------- -------
Less dividends and distributions:
Investment income--net (.39) (.41) (.44) (.24)
In excess of realized gain on investments--net --++++ -- -- --
------- ------- ------- -------
Total dividends and distributions (.39) (.41) (.44) (.24)
------- ------- ------- -------
Net asset value, end of period $ 10.09 $ 9.94 $ 9.98 $ 9.92
======= ======= ======= =======
<CAPTION>
Michigan Limited Maturity
Class B
For the
Period
The following per share data and ratios have been derived Nov. 26,
from information provided in the financial statements. For the Year 1993++ to
Ended July 31, July 31,
Increase (Decrease) in Net Asset Value: 1997 1996 1995 1994
<S> <S> <C> <C> <C> <C>
Per Share Net asset value, beginning of period $ 9.94 $ 9.98 $ 9.92 $ 10.00
Operating ------- ------- ------- -------
Performance: Investment income--net .36 .37 .40 .22
Realized and unrealized gain (loss) on investments--net .15 (.04) .06 (.08)
------- ------- ------- -------
Total from investment operations .51 .33 .46 .14
------- ------- ------- -------
Less dividends and distributions:
Investment income--net (.36) (.37) (.40) (.22)
In excess of realized gain on investments--net --++++ -- -- --
------- ------- ------- -------
Total dividends and distributions (.36) (.37) (.40) (.22)
------- ------- ------- -------
Net asset value, end of period $ 10.09 $ 9.94 $ 9.98 $ 9.92
======= ======= ======= =======
</TABLE>
D-20
<PAGE> 145
<TABLE>
<S> <S> <C> <C> <C> <C>
Total Investment Based on net asset value per share 5.61% 3.71% 5.16% 1.66%+++
Return:** ======= ======= ======= =======
Ratios to Average Expenses, net of reimbursement .94% .74% .27% .02%*
Net Assets: ======= ======= ======= =======
Expenses 3.50% 2.78% 2.18% 2.01%*
======= ======= ======= =======
Investment income--net 3.93% 4.06% 4.42% 3.59%*
======= ======= ======= =======
Supplemental Net assets, end of period (in thousands) $ 1,368 $ 1,641 $ 2,302 $ 3,435
Data: ======= ======= ======= =======
Portfolio turnover 13.24% 32.92% 93.08% 204.15%
======= ======= ======= =======
<CAPTION>
<S> <S> <C> <C> <C> <C>
Total Investment Based on net asset value per share 5.22% 3.32% 4.78% 1.42%+++
Return:** ======= ======= ======= =======
Ratios to Average Expenses, net of reimbursement 1.31% 1.10% .65% .38%*
Net Assets: ======= ======= ======= =======
Expenses 3.86% 3.14% 2.56% 2.38%*
======= ======= ======= =======
Investment income--net 3.56% 3.70% 4.09% 3.21%*
======= ======= ======= =======
Supplemental Net assets, end of period (in thousands) $ 1,411 $ 1,842 $ 2,494 $ 2,411
Data: ======= ======= ======= =======
Portfolio turnover 13.24% 32.92% 93.08% 204.15%
======= ======= ======= =======
<CAPTION>
Michigan Limited Maturity
Class C Class D
The following per share data For the For the
and ratios have been derived Period Period
from information provided in Oct. 21, Oct. 21,
the financial statements. For the Year 1994++ to For the Year 1994++ to
Ended July 31, July 31, Ended July 31, July 31,
Increase (Decrease) in Net Asset Value: 1997 1996 1995 1997 1996 1995
<S> <S> <C> <C> <C> <C> <C> <C>
Per Share Net asset value, beginning of period $ 9.94 $ 9.98 $ 9.76 $ 9.94 $ 9.97 $ 9.76
Operating ------- ------- ------- ------- ------- -------
Performance: Investment income--net .36 .36 .30 .38 .40 .34
Realized and unrealized gain (loss)
on investments--net .15 (.04) .22 .14 (.03) .21
------- ------- ------- ------- ------- -------
Total from investment operations .51 .32 .52 .52 .37 .55
------- ------- ------- ------- ------- -------
Less dividends and distributions:
Investment income--net (.36) (.36) (.30) (.38) (.40) (.34)
In excess of realized gain on
investments--net --++++ -- -- --++++ -- --
------- ------- ------- ------- ------- -------
Total dividends and distributions (.36) (.36) (.30) (.38) (.40) (.34)
------- ------- ------- ------- ------- -------
Net asset value, end of period $ 10.09 $ 9.94 $ 9.98 $ 10.08 $ 9.94 $ 9.97
======= ======= ======= ======= ======= =======
Total Investment Based on net asset value per share 5.22% 3.20% 5.40%+++ 5.40% 3.71% 5.72%+++
Return:** ======= ======= ======= ======= ======= =======
Ratios to Average Expenses, net of reimbursement 1.32% 1.24% .96%* 1.04% .87% .44%*
Net Assets: ======= ======= ======= ======= ======= =======
Expenses 3.81% 3.31% 2.90%* 3.48% 3.06% 2.38%*
======= ======= ======= ======= ======= =======
Investment income--net 3.56% 3.57% 3.80%* 3.83% 3.94% 4.47%*
======= ======= ======= ======= ======= =======
Supplemental Net assets, end of period
Data: (in thousands) $ 1 $ 1 $ 1 $ 1,471 $ 541 $ 254
======= ======= ======= ======= ======= =======
Portfolio turnover 13.24% 32.92% 93.08% 13.24% 32.92% 93.08%
======= ======= ======= ======= ======= =======
*Annualized.
**Total investment returns exclude the effects of sales loads.
++Commencement of Operations.
++++Amount is less than $.01 per share.
+++Aggregate total investment return.
See Notes to Financial Statements.
</TABLE>
D-21
<PAGE> 146
Merrill Lynch Multi-State Limited Maturity Municipal Series
Trust, July 31, 1997
<TABLE>
<CAPTION>
FINANCIAL HIGHLIGHTS (continued)
New Jersey Limited Maturity
Class A
For the
Period
The following per share data and ratios have been derived Nov. 26,
from information provided in the financial statements. For the Year 1993++ to
Ended July 31, July 31,
Increase (Decrease) in Net Asset Value: 1997 1996 1995 1994
<S> <S> <C> <C> <C> <C>
Per Share Net asset value, beginning of period $ 10.11 $ 10.15 $ 9.94 $ 10.00
Operating ------- ------- ------- -------
Performance: Investment income--net .38 .41 .42 .23
Realized and unrealized gain (loss) on investments--net .03 (.04) .21 (.06)
------- ------- ------- -------
Total from investment operations .41 .37 .63 .17
------- ------- ------- -------
Less dividends from investment income--net (.38) (.41) (.42) (.23)
------- ------- ------- -------
Net asset value, end of period $ 10.14 $ 10.11 $ 10.15 $ 9.94
======= ======= ======= =======
Total Investment Based on net asset value per share 4.19% 3.68% 6.45% 1.73%+++
Return:** ======= ======= ======= =======
Ratios to Average Expenses, net of reimbursement .94% .76% .34% .03%*
Net Assets: ======= ======= ======= =======
Expenses 1.65% 1.78% 1.69% 1.14%*
======= ======= ======= =======
Investment income--net 3.82% 4.02% 4.10% 3.45%*
======= ======= ======= =======
Supplemental Net assets, end of period (in thousands) $ 1,735 $ 2,663 $ 2,401 $ 5,933
Data: ======= ======= ======= =======
Portfolio turnover 32.89% 6.57% 131.56% 205.04%
======= ======= ======= =======
<CAPTION>
New Jersey Limited Maturity
Class B
For the
Period
The following per share data and ratios have been derived Nov. 26,
from information provided in the financial statements. For the Year 1993++ to
Ended July 31, July 31,
Increase (Decrease) in Net Asset Value: 1997 1996 1995 1994
<S> <S> <C> <C> <C> <C>
Per Share Net asset value, beginning of period $ 10.11 $ 10.16 $ 9.95 $ 10.00
Operating ------- ------- ------- -------
Performance: Investment income--net .35 .37 .38 .20
Realized and unrealized gain (loss) on investments--net .04 (.05) .21 (.05)
------- ------- ------- -------
Total from investment operations .39 .32 .59 .15
------- ------- ------- -------
Less dividends from investment income--net (.35) (.37) (.38) (.20)
------- ------- ------- -------
Net asset value, end of period $ 10.15 $ 10.11 $ 10.16 $ 9.95
======= ======= ======= =======
Total Investment Based on net asset value per share 3.92% 3.21% 6.07% 1.59%+++
Return:** ======= ======= ======= =======
Ratios to Average Expenses, net of reimbursement 1.30% 1.10% .73% .38%*
Net Assets: ======= ======= ======= =======
Expenses 2.00% 2.12% 2.15% 1.52%*
======= ======= ======= =======
Investment income--net 3.46% 3.67% 3.80% 3.04%*
======= ======= ======= =======
Supplemental Net assets, end of period (in thousands) $ 4,109 $ 5,152 $ 7,593 $ 7,885
Data: ======= ======= ======= =======
Portfolio turnover 32.89% 6.57% 131.56% 205.04%
======= ======= ======= =======
</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 Period Period
from information provided in Oct. 21, Oct. 21,
the financial statements. For the Year 1994++ to For the Year 1994++ to
Ended July 31, July 31, Ended July 31, July 31,
Increase (Decrease) in Net Asset Value: 1997 1996 1995 1997 1996 1995
<S> <S> <C> <C> <C> <C> <C> <C>
Per Share Net asset value, beginning of period $ 9.16 $ 9.20 $ 9.86 $ 10.11 $ 10.16 $ 9.85
Operating ------- ------- ------- ------- ------- -------
Performance: Investment income--net .33 .34 .26 .37 .40 .32
Realized and unrealized gain (loss)
on investments--net .03 (.04) (.66) .04 (.05) .31
------- ------- ------- ------- ------- -------
Total from investment operations .36 .30 (.40) .41 .35 .63
------- ------- ------- ------- ------- -------
Less dividends from investment
income--net (.33) (.34) (.26) (.37) (.40) (.32)
------- ------- ------- ------- ------- -------
Net asset value, end of period $ 9.19 $ 9.16 $ 9.20 $ 10.15 $ 10.11 $ 10.16
======= ======= ======= ======= ======= =======
Total Investment Based on net asset value per share 4.06% 3.24% (4.01%)+++ 4.18% 3.48% 6.51%+++
Return:** ======= ======= ======= ======= ======= =======
Ratios to Average Expenses, net of reimbursement 1.10% 1.00% .55%* 1.04% .84% .62%*
Net Assets: ======= ======= ======= ======= ======= =======
Expenses 1.80% 2.04% 2.22%* 1.78% 1.86% 2.07%*
======= ======= ======= ======= ======= =======
Investment income--net 3.66% 3.82% 4.06%* 3.75% 3.93% 4.17%*
======= ======= ======= ======= ======= =======
</TABLE>
D-22
<PAGE> 147
<TABLE>
<S> <S> <C> <C> <C> <C> <C> <C>
Supplemental Net assets, end of period
Data: (in thousands) $ 241 $ 272 $ 1 $ 238 $ 540 $ 437
======= ======= ======= ======= ======= =======
Portfolio turnover 32.89% 6.57% 131.56% 32.89% 6.57% 131.56%
======= ======= ======= ======= ======= =======
<CAPTION>
New York Limited Maturity
Class A
For the
Period
The following per share data and ratios have been derived Nov. 26,
from information provided in the financial statements. For the Year 1993++ to
Ended July 31, July 31,
Increase (Decrease) in Net Asset Value: 1997 1996 1995 1994
<S> <S> <C> <C> <C> <C>
Per Share Net asset value, beginning of period $ 10.06 $ 10.05 $ 9.91 $ 10.00
Operating ------- ------- ------- -------
Performance: Investment income--net .43 .43 .44 .25
Realized and unrealized gain (loss) on investments--net .17 .01 .14 (.09)
------- ------- ------- -------
Total from investment operations .60 .44 .58 .16
------- ------- ------- -------
Less dividends from investment income--net (.43) (.43) (.44) (.25)
------- ------- ------- -------
Net asset value, end of period $ 10.23 $ 10.06 $ 10.05 $ 9.91
======= ======= ======= =======
Total Investment Based on net asset value per share 6.09% 4.46% 6.03% 1.61%+++
Return:** ======= ======= ======= =======
Ratios to Average Expenses, net of reimbursement .70% .50% .33% .03%*
Net Assets: ======= ======= ======= =======
Expenses 1.16% 1.38% 1.30% 1.24%*
======= ======= ======= =======
Investment income--net 4.24% 4.28% 4.49% 3.68%*
======= ======= ======= =======
Supplemental Net assets, end of period (in thousands) $ 2,605 $ 3,723 $ 4,811 $ 5,290
Data: ======= ======= ======= =======
Portfolio turnover 36.53% 51.47% 139.16% 152.73%
======= ======= ======= =======
<CAPTION>
New York Limited Maturity
Class B
For the
Period
The following per share data and ratios have been derived Nov. 26,
from information provided in the financial statements. For the Year 1993++ to
Ended July 31, July 31,
Increase (Decrease) in Net Asset Value: 1997 1996 1995 1994
<S> <S> <C> <C> <C> <C>
Per Share Net asset value, beginning of period $ 10.06 $ 10.05 $ 9.91 $ 10.00
Operating ------- ------- ------- -------
Performance: Investment income--net .39 .40 .41 .22
Realized and unrealized gain (loss) on investments--net .17 .01 .14 (.09)
------- ------- ------- -------
Total from investment operations .56 .41 .55 .13
------- ------- ------- -------
Less dividends from investment income--net (.39) (.40) (.41) (.22)
------- ------- ------- -------
Net asset value, end of period $ 10.23 $ 10.06 $ 10.05 $ 9.91
======= ======= ======= =======
Total Investment Based on net asset value per share 5.71% 4.08% 5.66% 1.37%+++
Return:** ======= ======= ======= =======
Ratios to Average Expenses, net of reimbursement 1.05% .87% .69% .38%*
Net Assets: ======= ======= ======= =======
Expenses 1.52% 1.75% 1.65% 1.60%*
======= ======= ======= =======
Investment income--net 3.88% 3.91% 4.11% 3.31%*
======= ======= ======= =======
Supplemental Net assets, end of period (in thousands) $ 8,209 $10,071 $ 8,822 $ 9,743
Data: ======= ======= ======= =======
Portfolio turnover 36.53% 51.47% 139.16% 152.73%
======= ======= ======= =======
<FN>
*Annualized.
**Total investment returns exclude the effects of sales loads.
++Commencement of Operations.
+++Aggregate total investment return.
See Notes to Financial Statements.
</TABLE>
D-23
<PAGE> 148
Merrill Lynch Multi-State Limited Maturity Municipal Series
Trust, July 31, 1997
<TABLE>
<CAPTION>
FINANCIAL HIGHLIGHTS (concluded)
New York Limited Maturity
Class C Class D
The following per share data For the For the
and ratios have been derived Period Period
from information provided in Oct. 21, Oct. 21,
the financial statements. For the Year 1994++ to For the Year 1994++ to
Ended July 31, July 31, Ended July 31, July 31,
Increase (Decrease) in Net Asset Value: 1997 1996 1995 1997 1996 1995
<S> <S> <C> <C> <C> <C> <C> <C>
Per Share Net asset value, beginning of period $ 10.06 $ 10.05 $ 9.78 $ 10.06 $ 10.05 $ 9.78
Operating ------- ------- ------- ------- ------- -------
Performance: Investment income--net .41 .42 .30 .42 .42 .34
Realized and unrealized gain on
investments--net .17 .01 .27 .17 .01 .27
------- ------- ------- ------- ------- -------
Total from investment operations .58 .43 .57 .59 .43 .61
------- ------- ------- ------- ------- -------
Less dividends from investment
income--net (.41) (.42) (.30) (.42) (.42) (.34)
------- ------- ------- ------- ------- -------
Net asset value, end of period $ 10.23 $ 10.06 $ 10.05 $ 10.23 $ 10.06 $ 10.05
======= ======= ======= ======= ======= =======
Total Investment Based on net asset value per share 5.91% 4.28% 5.97%+++ 5.98% 4.35% 6.37%+++
Return:** ======= ======= ======= ======= ======= =======
Ratios to Average Expenses, net of reimbursement .86% .71% .63%* .80% .62% .48%*
Net Assets: ======= ======= ======= ======= ======= =======
Expenses 1.32% 1.59% 1.63%* 1.26% 1.49% 1.48%*
======= ======= ======= ======= ======= =======
Investment income--net 4.05% 4.06% 4.21%* 4.14% 4.16% 4.47%*
======= ======= ======= ======= ======= =======
Supplemental Net assets, end of period
Data: (in thousands) $ 68 $ 214 $ 38 $ 3,683 $ 3,912 $ 2,306
======= ======= ======= ======= ======= =======
Portfolio turnover 36.53% 51.47% 139.16% 36.53% 51.47% 139.16%
======= ======= ======= ======= ======= =======
<CAPTION>
Pennsylvania Limited Maturity
Class A
For the
Period
The following per share data and ratios have been derived Nov. 26,
from information provided in the financial statements. For the Year 1993++ to
Ended July 31, July 31,
Increase (Decrease) in Net Asset Value: 1997 1996 1995 1994
<S> <S> <C> <C> <C> <C>
Per Share Net asset value, beginning of period $ 10.11 $ 10.10 $ 9.95 $ 10.00
Operating ------- ------- ------- -------
Performance: Investment income--net .38 .41 .42 .23
Realized and unrealized gain (loss) on investments--net .12 .01 .15 (.05)
------- ------- ------- -------
Total from investment operations .50 .42 .57 .18
------- ------- ------- -------
Less dividends from investment income--net (.38) (.41) (.42) (.23)
------- ------- ------- -------
Net asset value, end of period $ 10.23 $ 10.11 $ 10.10 $ 9.95
======= ======= ======= =======
Total Investment Based on net asset value per share 5.04% 4.18% 5.89% 1.85%+++
Return:** ======= ======= ======= =======
Ratios to Average Expenses, net of reimbursement .99% .80% .38% .02%*
Net Assets: ======= ======= ======= =======
Expenses 1.75% 1.63% 1.90% 1.48%*
======= ======= ======= =======
Investment income--net 3.74% 4.01% 4.25% 3.46%*
======= ======= ======= =======
<CAPTION>
Pennsylvania Limited Maturity
Class B
For the
Period
The following per share data and ratios have been derived Nov. 26,
from information provided in the financial statements. For the Year 1993++ to
Ended July 31, July 31,
Increase (Decrease) in Net Asset Value: 1997 1996 1995 1994
<S> <S> <C> <C> <C> <C>
Per Share Net asset value, beginning of period $ 10.11 $ 10.10 $ 9.95 $ 10.00
Operating ------- ------- ------- -------
Performance: Investment income--net .34 .37 .39 .21
Realized and unrealized gain (loss) on investments--net .12 .01 .15 (.05)
------- ------- ------- -------
Total from investment operations .46 .38 .54 .16
------- ------- ------- -------
Less dividends from investment income--net (.34) (.37) (.39) (.21)
------- ------- ------- -------
Net asset value, end of period $ 10.23 $ 10.11 $ 10.10 $ 9.95
======= ======= ======= =======
Total Investment Based on net asset value per share 4.66% 3.80% 5.51% 1.61%+++
Return:** ======= ======= ======= =======
Ratios to Average Expenses, net of reimbursement 1.35% 1.15% .73% .38%*
Net Assets: ======= ======= ======= =======
Expenses 2.11% 1.99% 2.25% 1.83%*
======= ======= ======= =======
Investment income--net 3.38% 3.65% 3.87% 3.05%*
======= ======= ======= =======
</TABLE>
D-24
<PAGE> 149
<TABLE>
<S> <S> <C> <C> <C> <C>
Supplemental Net assets, end of period (in thousands) $ 736 $ 833 $ 943 $ 990
Data: ======= ======= ======= =======
Portfolio turnover 20.88% 30.90% 141.52% 237.47%
======= ======= ======= =======
</TABLE>
<TABLE>
<S> <S> <C> <C> <C> <C>
Supplemental Net assets, end of period (in thousands) $ 5,134 $ 6,264 $ 7,414 $ 9,532
Data: ======= ======= ======= =======
Portfolio turnover 20.88% 30.90% 141.52% 237.47%
======= ======= ======= =======
</TABLE>
<TABLE>
<CAPTION>
Pennsylvania Limited Maturity
Class C Class D
The following per share data For the For the
and ratios have been derived Period Period
from information provided in Oct. 21, Oct. 21,
the financial statements. For the Year 1994++ to For the Year 1994++ to
Ended July 31, July 31, Ended July 31, July 31,
Increase (Decrease) in Net Asset Value: 1997 1996 1995 1997 1996 1995
<S> <S> <C> <C> <C> <C> <C> <C>
Per Share Net asset value, beginning of period $ 10.15 $ 10.10 $ 9.84 $ 10.11 $ 10.10 $ 9.84
Operating ------- ------- ------- ------- ------- -------
Performance: Investment income--net .35 .38 .29 .37 .40 .33
Realized and unrealized gain
on investments--net .12 .05 .26 .13 .01 .26
------- ------- ------- ------- ------- -------
Total from investment operations .47 .43 .55 .50 .41 .59
------- ------- ------- ------- ------- -------
Less dividends from investment
income--net (.35) (.38) (.29) (.37) (.40) (.33)
------- ------- ------- ------- ------- -------
Net asset value, end of period $ 10.27 $ 10.15 $ 10.10 $ 10.24 $ 10.11 $ 10.10
======= ======= ======= ======= ======= =======
Total Investment Based on net asset value per share 4.68% 4.28% 5.68%+++ 5.04% 4.07% 6.10%+++
Return:** ======= ======= ======= ======= ======= =======
Ratios to Average Expenses, net of reimbursement 1.28% .97% 1.05%* 1.09% .96% .57%*
Net Assets: ======= ======= ======= ======= ======= =======
Expenses 2.02% 1.83% 2.55%* 1.85% 1.71% 2.08%*
======= ======= ======= ======= ======= =======
Investment income--net 3.46% 3.84% 3.77%* 3.64% 3.84% 4.30%*
======= ======= ======= ======= ======= =======
Supplemental Net assets, end of period
Data: (in thousands) $ 8 $ 1 $ 1 $ 1,861 $ 1,807 $ 382
======= ======= ======= ======= ======= =======
Portfolio turnover 20.88% 30.90% 141.52% 20.88% 30.90% 141.52%
======= ======= ======= ======= ======= =======
*Annualized.
**Total investment returns exclude the effects of sales loads.
++Commencement of Operations.
+++Aggregate total investment return.
See Notes to Financial Statements.
</TABLE>
D-25
<PAGE> 150
Merrill Lynch Multi-State Limited Maturity Municipal Series
Trust, July 31, 1997
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--Each Fund may engage in
various portfolio strategies to seek to increase its return by
hedging its portfolio against adverse movements in the debt markets.
Losses may arise due to changes in the value of the contract or if
the counterparty does not perform under the contract.
* Financial futures contracts--The Funds may purchase or sell
interest rate futures contracts and options on such futures
contracts for the purpose of hedging the market risk on existing
securities or the intended purchase of securities. Futures contracts
are contracts for delayed delivery of securities at a specific
future date and at a specific price or yield. Upon entering into a
contract, the Funds deposit and maintain as collateral such initial
margin as required by the exchange on which the transaction is
effected. Pursuant to the contract, the Funds agree to receive from
or pay to the broker an amount of cash equal to the daily
fluctuation in value of the contract. Such receipts or payments are
known as variation margin and are recorded by the Funds as
unrealized gains or losses. When the contract is closed, the Funds
record a realized gain or loss equal to the difference between the
value of the contract at the time it was opened and the value at the
time it was closed.
(c) Income taxes--It is each Fund's policy to comply with the
requirements of the Internal Revenue Code applicable to regulated
investment companies and to distribute substantially all of its
taxable income to its shareholders. Therefore, no Federal income tax
provision is required.
(d) Security transactions and investment income--Security
transactions are recorded on the dates the transactions are entered
into (the trade dates). Interest income is recognized on the accrual
basis. Discounts and market premiums are amortized into interest
income. Realized gains and losses on security transactions are
determined on the identified cost basis.
(e) Deferred organization expenses and prepaid registration fees--
Deferred organization expenses are charged to expense on a straight-
line basis over a five-year period beginning with commencement of
operations. Prepaid registration fees are charged to expense as the
related shares are issued.
(f) Dividends and distributions--Dividends from net investment
income are declared daily and paid monthly. Distributions of capital
gains are recorded on the ex-dividend dates. Distributions in excess
of realized capital gains are due primarily to differing tax
treatments for post-October losses.
D-26
<PAGE> 151
2. Investment Advisory Agreement and Transactions
with Affiliates:
The Trust has entered into an Investment Advisory Agreement with
Fund Asset Management, L.P. ("FAM"). The general partner of FAM is
Princeton Services, Inc. ("PSI"), an indirect wholly-owned
subsidiary of Merrill Lynch & Co., Inc. ("ML & Co."), which is the
limited partner. The Trust has also entered into a Distribution
Agreement and Distribution Plans with Merrill Lynch Funds
Distributor, Inc. ("MLFD" or "Distributor"), a wholly-owned
subsidiary of Merrill Lynch Group, Inc.
FAM is responsible for the management of each Fund's portfolio and
provides the necessary personnel, facilities, equipment and certain
other services necessary to the operations of each Fund. For such
services, each Fund pays a monthly fee at the annual rate of 0.35%
of that Fund's average daily net assets.
For the year ended July 31, 1997, 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 $13,268 $29,150 --
Additional expenses $72,437 -- --
Massachusetts Michigan New Jersey
Limited Limited Limited
Maturity Maturity Maturity
Management fee $22,132 $14,977 $25,494
Additional expenses $72,930 $92,903 $25,788
New York Pennsylvania
Limited Limited
Maturity Maturity
Management fee $57,645 $29,758
Additional expenses $19,235 $34,384
Pursuant to the distribution plans (the "Distribution Plans")
adopted by the Trust in accordance with Rule 12b-1 under the
Investment Company Act of 1940, the Funds pay the Distributor
ongoing account maintenance and distribution fees. The fees are
accrued daily and paid monthly at annual rates based upon the
average daily net assets of the shares as follows:
Account Maintenance Fee Distribution Fee
Class B 0.15% 0.20%
Class C 0.15% 0.20%
Class D 0.10% --
Pursuant to a sub-agreement with the Distributor, Merrill Lynch,
Pierce, Fenner & Smith Inc. ("MLPF&S"), a subsidiary of ML & Co.,
also provides account maintenance and distribution services to the
Trust. The ongoing account maintenance fee compensates the
Distributor and MLPF&S for providing account maintenance services to
Class B, Class C and Class D shareholders. The ongoing distribution
fee compensates the Distributor and MLPF&S for providing shareholder
and distribution-related services to Class B and Class C
shareholders.
For the year ended July 31, 1997, MLFD earned underwriting discounts
and MLPF&S earned dealer concessions on sales of the Funds' Class A
and Class D Shares as follows:
Arizona California Florida Massachusetts
Limited Limited Limited Limited
Maturity Maturity Maturity Maturity
Class A:
MLFD $ 7 -- $ 68 --
MLPF&S $ 194 -- $563 --
Class D:
MLFD $ 199 $ 224 $ 55 $ 9
MLPF&S $2,172 $2,155 $521 $205
Michigan New Jersey New York Pennsylvania
Limited Limited Limited Limited
Maturity Maturity Maturity Maturity
Class A:
MLFD $ 8 -- -- --
MLPF&S $ 68 -- $ 5 --
Class D:
MLFD $ 46 $ 2 $ 70 $ 5
MLPF&S $ 350 $ 48 $767 $210
MLPF&S received contingent deferred sales charges relating to
transactions in Class B Shares as follows:
Class B
Shares
Arizona Limited Maturity $ 427
California Limited Maturity 6,833
Florida Limited Maturity 7,396
Massachusetts Limited Maturity 3,151
Michigan Limited Maturity 397
New Jersey Limited Maturity 4,461
New York Limited Maturity 18,743
Pennsylvania Limited Maturity 878
Furthermore, MLPF&S received contingent deferred sales charges of
$2,001 relating to transactions subject to front end sales charge
waivers in Class D Shares.
Merrill Lynch Financial Data Services, Inc. ("MLFDS"), a wholly-
owned subsidiary of ML & Co., is the Trust's transfer agent.
D-27
<PAGE> 152
Merrill Lynch Multi-State Limited Maturity Municipal Series
Trust, July 31, 1997
NOTES TO FINANCIAL STATEMENTS (continued)
Accounting services are provided to the Trust by FAM at cost.
Certain officers and/or trustees of the Trust are officers and/or
directors of FAM, PSI, MLFD, MLFDS, and/or ML & Co.
3. Investments:
Purchases and sales of investments, excluding short-term securities,
for the year ended July 31, 1997 were as follows:
Purchases Sales
Arizona Limited Maturity $ 1,019,574 $ 2,070,874
California Limited Maturity 3,276,869 3,471,729
Florida Limited Maturity 8,642,572 10,107,246
Massachusetts Limited Maturity 1,215,165 2,253,678
Michigan Limited Maturity 1,155,783 479,425
New Jersey Limited Maturity 1,661,522 3,793,860
New York Limited Maturity 5,241,711 6,943,659
Pennsylvania Limited Maturity 1,309,108 1,728,529
Net realized and unrealized gains (losses) as of July 31, 1997 were
as follows:
Realized Unrealized
Arizona Limited Maturity Gains Gains
Long-term investments $ 87,712 $ 86,566
--------- ---------
Total $ 87,712 $ 86,566
========= =========
Realized Unrealized
California Limited Maturity Gains Gains
Long-term investments $ 57,005 $ 764,034
Short-term investments -- 529
--------- ---------
Total $ 57,005 $ 764,563
========= =========
Realized Unrealized
Florida Limited Maturity Gains Gains
Long-term investments $ 101,556 $ 777,279
Short-term investments 55 --
--------- ---------
Total $ 101,611 $ 777,279
========= =========
Realized Unrealized
Massachusetts Limited Maturity Gains Gains
Long-term investments $ 51,279 $ 167,141
--------- ---------
Total $ 51,279 $ 167,141
========= =========
Realized Unrealized
Michigan Limited Maturity Gains Gains
Long-term investments $ 21,697 $ 162,895
--------- ---------
Total $ 21,697 $ 162,895
========= =========
Unrealized
Realized Gains
New Jersey Limited Maturity Gains (Losses)
Long-term investments $ 126,030 $ 186,033
Short-term investments -- (333)
--------- ---------
Total $ 126,030 $ 185,700
========= =========
Realized Unrealized
New York Limited Maturity Gains Gains
Long-term investments $ 36,848 $ 539,314
--------- ---------
Total $ 36,848 $ 539,314
========= =========
Realized Unrealized
Pennsylvania Limited Maturity Gains Gains
Long-term investments $ 37,824 $ 216,756
Short-term investments -- 152
--------- ---------
Total $ 37,824 $ 216,908
========= =========
As of July 31, 1997, 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 $ 86,566 -- $ 86,566 $ 2,939,002
California 741,290 -- 741,290 13,161,474
Florida 815,581 $ (38,302) 777,279 24,754,969
Massachusetts 167,141 -- 167,141 5,005,999
Michigan 162,895 -- 162,895 3,952,546
New Jersey 186,033 (333) 185,700 6,482,928
New York 539,314 -- 539,314 13,800,699
Pennsylvania 216,908 -- 216,908 7,317,330
4. Beneficial Interest Transactions:
Net increase (decrease) in net assets derived from beneficial
interest transactions for the years ended July 31, 1997 and July 31,
1996 were as follows:
For the For the
Year Ended Year Ended
July 31, 1997 July 31, 1996
Arizona Limited Maturity $ (1,124,280) $(1,767,011)
D-28
<PAGE> 153
California Limited Maturity (1,455,816) (491,496)
Florida Limited Maturity (2,674,028) (5,075,030)
Massachusetts Limited Maturity (2,299,335) (2,526,578)
Michigan Limited Maturity 168,118 (1,013,383)
New Jersey Limited Maturity (2,324,627) (1,750,465)
New York Limited Maturity (3,606,325) 1,937,339
Pennsylvania Limited Maturity (1,259,754) 150,949
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, 1997 Shares Amount
Shares sold 2,059 $ 20,756
Shares issued to shareholders in
reinvestment of dividends 898 9,047
---------- ----------
Total issued 2,957 29,803
Shares redeemed (13,909) (139,681)
---------- ----------
Net decrease (10,952) $ (109,878)
========== ==========
Arizona Limited Maturity
Class A Shares for the Year Dollar
Ended July 31, 1996 Shares Amount
Shares sold 5,200 $ 52,303
Shares issued to shareholders in
reinvestment of dividends 1,441 14,637
---------- ----------
Total issued 6,641 66,940
Shares redeemed (29,641) (304,005)
---------- ----------
Net decrease (23,000) $ (237,065)
========== ==========
Arizona Limited Maturity
Class B Shares for the Year Dollar
Ended July 31, 1997 Shares Amount
Shares sold 20,264 $ 204,323
Shares issued to shareholders in
reinvestment of dividends 4,028 40,606
---------- ----------
Total issued 24,292 244,929
Automatic conversion of shares (1,018) (10,248)
Shares redeemed (99,594) (1,001,882)
---------- ----------
Net decrease (76,320) $ (767,201)
========== ==========
Arizona Limited Maturity
Class B Shares for the Year Dollar
Ended July 31, 1996 Shares Amount
Shares sold 43,937 $ 449,980
Shares issued to shareholders in
reinvestment of dividends 7,003 66,184
----------- -----------
Total issued 50,940 516,164
Shares redeemed (275,350) (2,797,058)
----------- -----------
Net decrease (224,410) $(2,280,894)
=========== ===========
Arizona Limited Maturity
Class C Shares for the Year Dollar
Ended July 31, 1997 Shares Amount
Shares sold 100 $ 1,008
Shares issued to shareholders in
reinvestment of dividends 357 3,609
---------- ----------
Total issued 457 4,617
Shares redeemed (10,307) (103,073)
---------- ----------
Net decrease (9,850) $ (98,456)
========== ==========
Arizona Limited Maturity
Class C Shares for the Year Dollar
Ended July 31, 1996 Shares Amount
Shares sold 13,124 $ 132,973
Shares issued to shareholders in
reinvestment of dividends 162 1,633
----------- -----------
Total issued 13,286 134,606
Shares redeemed (4) (41)
----------- -----------
Net increase 13,282 $ 134,565
=========== ===========
Arizona Limited Maturity
Class D Shares for the Year Dollar
Ended July 31, 1997 Shares Amount
Shares sold 27,128 $ 271,439
Automatic conversion of shares 1,018 10,248
Shares issued to shareholders in
reinvestment of dividends 597 6,023
---------- ----------
Total issued 28,743 287,710
Shares redeemed (43,319) (436,455)
---------- ----------
Net decrease (14,576) $ (148,745)
========== ==========
Arizona Limited Maturity
Class D Shares for the Year Dollar
Ended July 31, 1996 Shares Amount
Shares sold 104,371 $ 1,066,013
Shares issued to shareholders in
reinvestment of dividends 2,220 22,565
----------- -----------
Total issued 106,591 1,088,578
Shares redeemed (47,001) (472,195)
----------- -----------
Net increase 59,590 $ 616,383
=========== ===========
California Limited Maturity
Class A Shares for the Year Dollar
Ended July 31, 1997 Shares Amount
Shares sold 1,377 $ 13,897
Shares issued to shareholders in
reinvestment of dividends 3,031 30,528
---------- ----------
Total issued 4,408 44,425
Shares redeemed (10,568) (106,294)
---------- ----------
Net decrease (6,160) $ (61,869)
========== ==========
D-29
<PAGE> 154
Merrill Lynch Multi-State Limited Maturity Municipal Series
Trust, July 31, 1997
NOTES TO FINANCIAL STATEMENTS (continued)
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)
========== ==========
California Limited Maturity
Class B Shares for the Year Dollar
Ended July 31, 1997 Shares Amount
Shares sold 204,154 $ 2,058,619
Shares issued to shareholders in
reinvestment of dividends 13,782 138,778
----------- -----------
Total issued 217,936 2,197,397
Automatic conversion of shares (28,044) (284,252)
Shares redeemed (504,135) (5,083,745)
----------- -----------
Net decrease (314,243) $(3,170,600)
=========== ===========
California Limited Maturity
Class B Shares for the Year Dollar
Ended July 31, 1996 Shares Amount
Shares sold 210,376 $ 2,110,120
Shares issued to shareholders in
reinvestment of dividends 15,717 158,020
----------- -----------
Total issued 226,093 2,268,140
Automatic conversion of shares (7,895) (80,134)
Shares redeemed (267,935) (2,686,717)
----------- -----------
Net decrease (49,737) $ (498,711)
========== ==========
California Limited Maturity
Class C Shares for the Year Dollar
Ended July 31, 1997 Shares Amount
Shares sold 115 $ 1,152
Shares issued to shareholders in
reinvestment of dividends 6 62
---------- ----------
Net increase 121 $ 1,214
========== ==========
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)
========== ==========
California Limited Maturity
Class D Shares for the Year Dollar
Ended July 31, 1997 Shares Amount
Shares sold 285,173 $ 2,849,538
Automatic conversion of shares 3,978 284,252
Shares issued to shareholders in
reinvestment of dividends 28,044 40,114
----------- -----------
Total issued 317,195 3,173,904
Shares redeemed (139,121) (1,398,465)
----------- -----------
Net increase 178,074 $ 1,775,439
=========== ===========
California Limited Maturity
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
========== ==========
Florida Limited Maturity
Class A Shares for the Year Dollar
Ended July 31, 1997 Shares Amount
Shares sold 70,813 $ 705,043
Shares issued to shareholders in
reinvestment of dividends 6,542 65,182
----------- -----------
Total issued 77,355 770,225
Shares redeemed (235,028) (2,340,687)
----------- -----------
Net decrease (157,673) $(1,570,462)
=========== ===========
Florida Limited Maturity
Class A Shares for the Year Dollar
Ended July 31, 1996 Shares Amount
Shares sold 91,796 $ 926,979
Shares issued to shareholders in
reinvestment of dividends 11,780 118,180
----------- -----------
Total issued 103,576 1,045,159
Shares redeemed (296,045) (2,960,805)
----------- -----------
Net decrease (192,469) $(1,915,646)
=========== ===========
D-30
<PAGE> 155
Florida Limited Maturity
Class B Shares for the Year Dollar
Ended July 31, 1997 Shares Amount
Shares sold 344,717 $ 3,439,385
Shares issued to shareholders in
reinvestment of dividends 20,341 202,648
----------- -----------
Total issued 365,058 3,642,033
Automatic conversion of shares (3,635) (36,364)
Shares redeemed (598,033) (5,967,067)
----------- -----------
Net decrease (236,610) $(2,361,398)
=========== ===========
Florida Limited Maturity
Class B Shares for the Year Dollar
Ended July 31, 1996 Shares Amount
Shares sold 374,709 $ 3,773,344
Shares issued to shareholders in
reinvestment of dividends 28,155 282,558
----------- -----------
Total issued 402,864 4,055,902
Shares redeemed (646,498) (6,500,752)
----------- -----------
Net decrease (243,634) $(2,444,850)
=========== ===========
Florida Limited Maturity
Class C Shares for the Year Dollar
Ended July 31, 1997 Shares Amount
Shares sold 5,712 $ 56,834
Shares issued to shareholders in
reinvestment of dividends 140 1,387
----------- -----------
Total issued 5,852 58,221
Shares redeemed (5,087) (50,009)
----------- -----------
Net increase 765 $ 8,212
=========== ===========
Florida Limited Maturity
Class C Shares for the Year Dollar
Ended July 31, 1996 Shares Amount
Shares sold 6,623 $ 65,559
Shares issued to shareholders in
reinvestment of dividends 4 41
----------- -----------
Total issued 6,627 65,600
Shares redeemed (1,536) (15,483)
----------- -----------
Net increase 5,091 $ 50,117
=========== ===========
Florida Limited Maturity
Class D Shares for the Year Dollar
Ended July 31, 1997 Shares Amount
Shares sold 362,564 $ 3,617,894
Automatic conversion of shares 3,635 36,364
Shares issued to shareholders in
reinvestment of dividends 5,285 52,650
----------- -----------
Total issued 371,484 3,706,908
Shares redeemed (246,834) (2,457,288)
----------- -----------
Net increase 124,650 $ 1,249,620
=========== ===========
Florida Limited Maturity
Class D Shares for the Year Dollar
Ended July 31, 1996 Shares Amount
Shares sold 316,584 $3,192,506
Shares issued to shareholders in
reinvestment of dividends 4,342 43,518
---------- ----------
Total issued 320,926 3,236,024
Shares redeemed (397,363) (4,000,675)
---------- ----------
Net decrease (76,437) $ (764,651)
========== ==========
Massachusetts Limited Maturity
Class A Shares for the Year Dollar
Ended July 31, 1997 Shares Amount
Shares sold 544 $ 5,403
Shares issued to shareholders in
reinvestment of dividends 2,690 26,809
---------- ----------
Total issued 3,234 32,212
Shares redeemed (40,800) (406,101)
---------- ----------
Net decrease (37,566) $ (373,889)
========== ==========
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)
=========== ===========
Massachusetts Limited Maturity
Class B Shares for the Year Dollar
Ended July 31, 1997 Shares Amount
Shares sold 80,283 $ 797,169
Shares issued to shareholders in
reinvestment of dividends 8,004 79,781
----------- -----------
Total issued 88,287 876,950
Shares redeemed (268,214) (2,667,983)
----------- -----------
Net decrease (179,927) $(1,791,033)
=========== ===========
D-31
<PAGE> 156
Merrill Lynch Multi-State Limited Maturity Municipal Series
Trust, July 31, 1997
NOTES TO FINANCIAL STATEMENTS (continued)
Massachusetts Limited Maturity
Class B Shares for the Year Dollar
Ended July 31, 1996 Shares Amount
Shares sold 163,902 $ 1,649,909
Shares issued to shareholders in
reinvestment of dividends 9,837 98,401
----------- -----------
Total issued 173,739 1,748,310
Shares redeemed (195,993) (1,955,850)
----------- -----------
Net decrease (22,254) $ (207,540)
=========== ===========
Massachusetts Limited Maturity
Class C Shares for the Year Dollar
Ended July 31, 1997 Shares Amount
Shares sold 5,459 $ 54,530
Shares issued to shareholders in
reinvestment of dividends 814 8,108
----------- -----------
Total issued 6,273 62,638
Shares redeemed (1) (4)
----------- -----------
Net increase 6,272 $ 62,634
=========== ===========
Massachusetts Limited Maturity
Class C Shares for the Year Dollar
Ended July 31, 1996 Shares Amount
Shares issued to shareholders in
reinvestment of dividends 1,201 $ 12,027
Shares redeemed (21,496) (212,811)
---------- ----------
Net decrease (20,295) $ (200,784)
========== ==========
Massachusetts Limited Maturity
Class D Shares for the Year Dollar
Ended July 31, 1997 Shares Amount
Shares sold 2,377 $ 23,756
Shares issued to shareholders in
reinvestment of dividends 1,383 13,787
---------- ----------
Total issued 3,760 37,543
Shares redeemed (23,534) (234,590)
---------- ----------
Net decrease (19,774) $ (197,047)
========== ==========
Massachusetts Limited Maturity
Class D Shares for the Year Dollar
Ended July 31, 1996 Shares Amount
Shares sold 101,394 $ 1,009,332
Shares issued to shareholders in
reinvestment of dividends 1,553 15,510
----------- -----------
Total issued 102,947 1,024,842
Shares redeemed (38,979) (387,979)
----------- -----------
Net increase 63,968 $ 636,863
=========== ===========
Michigan Limited Maturity
Class A Shares for the Year Dollar
Ended July 31, 1997 Shares Amount
Shares sold 5,703 $ 56,930
Shares issued to shareholders in
reinvestment of dividends and
distributions 1,551 15,476
----------- -----------
Total issued 7,254 72,406
Shares redeemed (36,666) (365,673)
----------- -----------
Net decrease (29,412) $ (293,267)
=========== ===========
Michigan Limited Maturity
Class A Shares for the Year Dollar
Ended July 31, 1996 Shares Amount
Shares sold 40,664 $ 405,188
Shares issued to shareholders in
reinvestment of dividends 1,529 15,293
----------- -----------
Total issued 42,193 420,481
Shares redeemed (107,949) (1,077,796)
----------- -----------
Net decrease (65,756) $ (657,315)
=========== ===========
Michigan Limited Maturity
Class B Shares for the Year Dollar
Ended July 31, 1997 Shares Amount
Shares sold 13,836 $ 138,203
Shares issued to shareholders in
reinvestment of dividends and
distributions 4,077 40,660
----------- -----------
Total issued 17,913 178,863
Automatic conversion of shares (68) (679)
Shares redeemed (63,278) (630,594)
----------- -----------
Net decrease (45,433) $ (452,410)
=========== ===========
Michigan Limited Maturity
Class B Shares for the Year Dollar
Ended July 31, 1996 Shares Amount
Shares sold 36,451 $ 365,718
Shares issued to shareholders in
reinvestment of dividends 5,013 50,143
----------- -----------
Total issued 41,464 415,861
Shares redeemed (106,251) (1,063,510)
----------- -----------
Net decrease (64,787) $ (647,649)
=========== ===========
D-32
<PAGE> 157
Michigan Limited Maturity
Class C Shares for the Year Dollar
Ended July 31, 1997 Shares Amount
Shares issued to shareholders in
reinvestment of dividends and
distributions 5 $ 43
---------- ----------
Net increase 5 $ 43
========== ==========
Michigan Limited Maturity
Class C Shares for the Year Dollar
Ended July 31, 1996 Shares Amount
Shares issued to shareholders in
reinvestment of dividends 4 $ 41
---------- ----------
Net increase 4 $ 41
========== ==========
Michigan Limited Maturity
Class D Shares for the Year Dollar
Ended July 31, 1997 Shares Amount
Shares sold 105,057 $ 1,052,902
Automatic conversion of shares 68 679
Shares issued to shareholders in
reinvestment of dividends and
distributions 2,967 26,287
----------- -----------
Total issued 108,092 1,079,868
Shares redeemed (16,668) (166,116)
----------- -----------
Net increase 91,424 $ 913,752
=========== ===========
Michigan Limited Maturity
Class D Shares for the Year Dollar
Ended July 31, 1996 Shares Amount
Shares sold 29,731 $ 298,909
Shares issued to shareholders in
reinvestment of dividends 1,126 11,245
----------- -----------
Total issued 30,857 310,154
Shares redeemed (1,878) (18,614)
----------- -----------
Net increase 28,979 $ 291,540
=========== ===========
New Jersey Limited Maturity
Class A Shares for the Year Dollar
Ended July 31, 1997 Shares Amount
Shares sold 29,509 $ 298,665
Shares issued to shareholders in
reinvestment of dividends 6,491 65,586
----------- -----------
Total issued 36,000 364,251
Shares redeemed (128,438) (1,299,753)
----------- -----------
Net decrease (92,438) $ (935,502)
=========== ===========
New Jersey Limited Maturity
Class A Shares for the Year Dollar
Ended 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 decrease 26,996 $ 276,810
=========== ===========
New Jersey Limited Maturity
Class B Shares for the Year Dollar
Ended July 31, 1997 Shares Amount
Shares sold 109,899 $ 1,202,983
Shares issued to shareholders in
reinvestment of dividends 19,246 104,274
----------- -----------
Total issued 129,145 1,307,257
Automatic conversion of shares (5,707) (57,581)
Shares redeemed (228,080) (2,301,791)
----------- -----------
Net decrease (104,642) $(1,052,115)
=========== ===========
New Jersey Limited Maturity
Class B Shares for the Year Dollar
Ended July 31, 1996 Shares Amount
Shares sold 107,343 $ 1,095,824
Shares issued to shareholders in
reinvestment of dividends 14,061 143,043
----------- -----------
Total issued 121,404 1,238,867
Shares redeemed (359,338) (3,646,563)
----------- -----------
Net decrease (237,934) $(2,407,696)
=========== ===========
New Jersey Limited Maturity
Class C Shares for the Year Dollar
Ended July 31, 1997 Shares Amount
Shares issued to shareholders in
reinvestment of dividends 115 $ 1,052
Shares redeemed (3,570) (32,559)
----------- -----------
Net decrease (3,455) $ (31,507)
=========== ===========
D-33
<PAGE> 158
Merrill Lynch Multi-State Limited Maturity Municipal Series
Trust, July 31, 1997
NOTES TO FINANCIAL STATEMENTS (continued)
New Jersey Limited Maturity
Class C Shares for the Year Dollar
Ended July 31, 1996 Shares Amount
Shares sold 29,124 $ 272,904
Shares issued to shareholders in
reinvestment of dividends 459 4,199
----------- -----------
Net increase 29,583 $ 277,103
=========== ===========
New Jersey Limited Maturity
Class D Shares for the Year Dollar
Ended July 31, 1997 Shares Amount
Shares sold 5,980 $ 60,387
Automatic conversion of shares 5,707 57,581
Shares issued to shareholders in
reinvestment of dividends 1,286 13,017
----------- -----------
Total issued 12,973 130,985
Shares redeemed (42,910) (436,488)
----------- -----------
Net decrease (29,937) $ (305,503)
=========== ===========
New Jersey Limited Maturity
Class D Shares for the Year Dollar
Ended July 31, 1996 Shares Amount
Shares sold 47,184 $ 477,087
Shares issued to shareholders in
reinvestment of dividends 728 7,411
----------- -----------
Total issued 47,912 484,498
Shares redeemed (37,500) (381,180)
----------- -----------
Net increase 10,412 $ 103,318
=========== ===========
New York Limited Maturity
Class A Shares for the Year Dollar
Ended July 31, 1997 Shares Amount
Shares sold 44,236 $ 449,232
Shares issued to shareholders in
reinvestment of dividends 6,902 69,615
----------- -----------
Total issued 51,138 518,847
Shares redeemed (166,532) (1,682,059)
----------- -----------
Net decrease (115,394) $(1,163,212)
=========== ===========
New York Limited Maturity
Class A Shares for the Year Dollar
Ended July 31, 1996 Shares Amount
Shares sold 44,189 $ 446,602
Shares issued to shareholders in
reinvestment of dividends 11,547 116,691
----------- -----------
Total issued 55,736 563,293
Shares redeemed (164,328) (1,659,912)
----------- -----------
Net decrease (108,592) $(1,096,619)
=========== ===========
New York Limited Maturity
Class B Shares for the Year Dollar
Ended July 31, 1997 Shares Amount
Shares sold 112,364 $ 1,134,351
Shares issued to shareholders in
reinvestment of dividends 16,732 168,855
----------- -----------
Total issued 129,096 1,303,206
Automatic conversion of shares (2,526) (25,482)
Shares redeemed (324,970) (3,274,497)
----------- -----------
Net decrease (198,400) $(1,996,773)
=========== ===========
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
=========== ===========
New York Limited Maturity
Class C Shares for the Year Dollar
Ended July 31, 1997 Shares Amount
Shares sold 231 $ 2,324
Shares issued to shareholders in
reinvestment of dividends 597 6,021
----------- -----------
Total issued 828 8,345
Shares redeemed (15,531) (156,196)
----------- -----------
Net decrease (14,703) $ (147,851)
=========== ===========
New York Limited Maturity
Class C Shares for the Year Dollar
Ended July 31, 1996 Shares Amount
Shares sold 20,376 $ 206,729
Shares issued to shareholders in
reinvestment of dividends 398 4,008
----------- -----------
Total issued 20,774 210,737
Shares redeemed (3,295) (32,843)
----------- -----------
Net increase 17,479 $ 177,894
=========== ===========
D-34
<PAGE> 159
New York Limited Maturity
Class D Shares for the Year Dollar
Ended July 31, 1997 Shares Amount
Shares sold 115,750 $ 1,166,743
Automatic conversion of shares 2,525 25,482
Shares issued to shareholders in
reinvestment of dividends 15,637 157,823
----------- -----------
Total issued 133,912 1,350,048
Shares redeemed (162,655) (1,648,537)
----------- -----------
Net decrease (28,743) $ (298,489)
=========== ===========
New York Limited Maturity
Class D Shares for the Year Dollar
Ended July 31, 1996 Shares Amount
Shares sold 162,557 $ 1,636,956
Automatic conversion of shares 3,456 34,832
Shares issued to shareholders in
reinvestment of dividends 6,809 68,734
----------- -----------
Total issued 172,822 1,740,522
Shares redeemed (13,363) (135,500)
----------- -----------
Net increase 159,459 $ 1,605,022
=========== ===========
Pennsylvania Limited Maturity
Class A Shares for the Year Dollar
Ended July 31, 1997 Shares Amount
Shares sold 43,588 $ 440,757
Shares issued to shareholders in
reinvestment of dividends 1,049 10,642
----------- -----------
Total issued 44,637 451,399
Shares redeemed (55,137) (556,742)
----------- -----------
Net decrease (10,500) $ (105,343)
=========== ===========
Pennsylvania Limited Maturity
Class A Shares for the Year Dollar
Ended 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)
=========== ===========
Pennsylvania Limited Maturity
Class B Shares for the Year Dollar
Ended July 31, 1997 Shares Amount
Shares sold 121,296 $ 1,230,117
Shares issued to shareholders in
reinvestment of dividends 13,043 132,224
----------- -----------
Total issued 134,339 1,362,341
Shares redeemed (252,143) (2,554,888)
----------- -----------
Net decrease (117,804) $(1,192,547)
=========== ===========
Pennsylvania Limited Maturity
Class B Shares for the Year Dollar
Ended July 31, 1996 Shares Amount
Shares sold 89,391 $ 910,583
Shares issued to shareholders in
reinvestment of dividends 17,173 174,586
----------- -----------
Total issued 106,564 1,085,169
Shares redeemed (220,973) (2,241,767)
----------- -----------
Net decrease (114,409) $(1,156,598)
=========== ===========
Pennsylvania Limited Maturity
Class C Shares for the Year Dollar
Ended July 31, 1997 Shares Amount
Shares sold 727 $ 7,411
Shares issued to shareholders in
reinvestment of dividends 17 175
----------- -----------
Total issued 744 7,586
Shares redeemed (95) (974)
----------- -----------
Net increase 649 $ 6,612
=========== ===========
Pennsylvania Limited Maturity
Class C Shares for the Year Dollar
Ended July 31, 1996 Shares Amount
Shares sold 7,571 $ 82,082
Shares issued to shareholders in
reinvestment of dividends 83 850
----------- -----------
Total issued 7,654 82,932
Shares redeemed (7,650) (82,673)
----------- -----------
Net increase 4 $ 259
=========== ===========
Pennsylvania Limited Maturity
Class D Shares for the Year Dollar
Ended July 31, 1997 Shares Amount
Shares sold 2,512 $ 25,556
Shares issued to shareholders in
reinvestment of dividends 5,768 58,513
----------- -----------
Total issued 8,280 84,069
Shares redeemed (5,160) (52,545)
----------- -----------
Net increase 3,120 $ 31,524
=========== ===========
D-35
<PAGE> 160
Merrill Lynch Multi-State Limited Maturity Municipal Series
Trust, July 31, 1997
NOTES TO FINANCIAL STATEMENTS (concluded)
Pennsylvania Limited Maturity
Class D Shares for the Year Dollar
Ended July 31, 1996 Shares Amount
Shares sold 155,680 $ 1,569,272
Shares issued to shareholders in
reinvestment of dividends 1,844 18,653
----------- -----------
Total issued 157,524 1,587,925
Shares redeemed (16,678) (169,594)
----------- -----------
Net increase 140,846 $ 1,418,331
=========== ===========
5. Capital Loss Carryforward:
At July 31, 1997, each Fund of the Trust had an approximate net
capital loss carryforward as follows: $400,000 in the California
Limited Maturity Fund, of which $122,000 expires in 2003 and
$278,000 expires in 2004; $687,000 in the Florida Limited Maturity
Fund, of which $487,000 expires in 2003 and $200,000 expires in
2004; $298,000 in the Massachusetts Limited Maturity Fund, of which
$28,000 expires in 2003 and $270,000 expires in 2004; $138,000 in
the Michigan Limited Maturity Fund, of which $53,000 expires in 2003
and $85,000 expires in 2004; $167,000 in the New Jersey Limited
Maturity Fund, all of which expires in 2004; $190,000 in the New
York Limited Maturity Fund, of which $105,000 expires in 2002,
$2,000 expires in 2003 and $83,000 expires in 2004; and $60,000 in
the Pennsylvania Limited Maturity Fund, all of which expires in
2003. These amounts will be available to offset like amounts of any
future taxable gains.
D-36
<PAGE> 161
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Investment Objective 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..................... 11
Management of the Trust..................... 13
Trustees and Officers..................... 13
Compensation of Trustees.................. 14
Management and Advisory Arrangements...... 15
Purchase of Shares.......................... 17
Initial Sales Charge Alternatives--Class A
and Class D Shares...................... 17
Reduced Initial Sales Charges............. 19
Distribution Plans........................ 21
Limitations on the Payment of Deferred
Sales Charges........................... 21
Redemption of Shares........................ 22
Deferred Sales Charges--Class B and Class
C Shares................................ 23
Portfolio Transactions...................... 23
Determination of Net Asset Value............ 24
Shareholder Services........................ 25
Investment Account........................ 25
Automatic Investment Plans................ 25
Automatic Reinvestment of Dividends and
Capital Gains Distributions............. 26
Systematic Withdrawal Plans............... 26
Exchange Privilege........................ 27
Distributions and Taxes..................... 29
Federal................................... 29
Tax Treatment of Financial Futures
Contracts and Options Thereon........... 31
State..................................... 32
Performance Data............................ 33
General Information......................... 42
Description of Shares..................... 42
Computation of Offering Price Per Share... 43
Independent Auditors...................... 43
Custodian................................. 43
Transfer Agent............................ 44
Legal Counsel............................. 44
Reports to Shareholders................... 44
Additional Information.................... 44
Appendix A--Economic and Other Conditions in
California................................ A-1
Appendix B--Economic Conditions in
Florida................................... B-1
Appendix C--Ratings of Municipal Bonds...... C-1
Independent Auditors' Report................ D-1
Financial Statements........................ D-2
Code #16926-1197
</TABLE>
YZa
Merrill Lynch Multi-
State Limited Maturity
Municipal Series Trust
Merrill Lynch California Limited
Maturity Municipal Bond Fund
Merrill Lynch Florida Limited
Maturity Municipal Bond Fund
STATEMENT OF
ADDITIONAL
INFORMATION
November 28, 1997
Distributor:
Merrill Lynch
Funds Distributor, Inc. (MLYNCH COMPASS LOGO)
<PAGE> 162
APPENDIX FOR GRAPHIC AND IMAGE MATERIAL
Pursuant to Rule 304 of Regulation S-T, the following table presents
fair and accurate narrative descriptions of graphic and image material omitted
from this EDGAR Submission File due to ASCII-incompatibility and
cross-references this material to the location of each occurrence in the text.
DESCRIPTION OF OMITTED LOCATION OF GRAPHIC
GRAPHIC OR IMDATE OR IMAGE IN TEST
- ---------------------- -------------------
Compass plate, circular Back cover of Prospectus and
graph paper and Merrill Lynch back cover of Statement of
logo including stylized market Additional Information
bull.
<PAGE> 163
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 three-year
period ended July 31, 1997 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, 1997.
Statements of Assets and Liabilities as of July 31, 1997.
Statements of Operations for the year ended July 31, 1997.
Statements of Changes in Net Assets for each of the years in the
two-year period ended July 31, 1997.
Financial Highlights for each of the years in the three-year
period ended July 31, 1997 and for the period November 26, 1993
(commencement of operations) to July 31, 1994.
(b) EXHIBITS:
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- -------- --------------------------------------------------------------------------------
<C> <C> <S>
1 (1) -- Amended and Restated Declaration of Trust of the Registrant, dated November 15,
1993.(d)
(2) -- Certificate of Amendment to Declaration of Trust and Establishment and
Designation of Classes, dated October 17, 1994.(g)
(1) -- Instrument establishing Merrill Lynch Arizona Limited Maturity Municipal Bond
Fund (the "Arizona Fund") as a Series of the Registrant.(a)
(2) -- Instrument establishing Merrill Lynch California Limited Maturity Municipal Bond
Fund (the "California Fund") as a Series of the Registrant.(a)
(3) -- Instrument establishing Merrill Lynch Florida Limited Maturity Municipal Bond
Fund (the "Florida Fund") as a Series of the Registrant.(a)
(4) -- Instrument establishing Merrill Lynch Massachusetts Limited Maturity Municipal
Bond Fund (the "Massachusetts Fund") as a Series of the Registrant.(a)
(5) -- Instrument establishing Merrill Lynch Michigan Limited Maturity Municipal Bond
Fund (the "Michigan Fund") as a Series of the Registrant.(a)
(6) -- Instrument establishing Merrill Lynch New Jersey Limited Maturity Municipal Bond
Fund (the "New Jersey Fund") as a Series of the Registrant.(a)
(7) -- Instrument establishing Merrill Lynch New York Limited Maturity Municipal Bond
Fund (the "New York Fund") as a Series of the Registrant.(c)
(8) -- Instrument establishing Merrill Lynch Pennsylvania Limited Maturity Municipal
Bond Fund (the "Pennsylvania Fund") as a Series of the Registrant.(a)
(1) -- Instrument establishing Class A shares and Class B shares of beneficial interest
of the Arizona Fund.(a)
(2) -- Instrument establishing Class A shares and Class B shares of beneficial interest
of the California Fund.(a)
(3) -- Instrument establishing Class A shares and Class B shares of beneficial interest
of the Florida Fund.(a)
(4) -- Instrument establishing Class A shares and Class B shares of beneficial interest
of the Massachusetts Fund.(a)
(5) -- Instrument establishing Class A shares and Class B shares of beneficial interest
of the Michigan Fund.(a)
(6) -- Instrument establishing Class A shares and Class B shares of beneficial interest
of the New Jersey Fund.(a)
(7) -- Instrument establishing Class A shares and Class B shares of beneficial interest
of the New York Fund.(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.
</TABLE>
C-1
<PAGE> 164
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- -------- --------------------------------------------------------------------------------
<C> <C> <S>
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 -- None.
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)
(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)
</TABLE>
C-2
<PAGE> 165
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- -------- --------------------------------------------------------------------------------
<C> <C> <S>
(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 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)
(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.
</TABLE>
C-3
<PAGE> 166
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- -------- --------------------------------------------------------------------------------
<C> <C> <S>
(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(SM) 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.
(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 Merrill Lynch Multi-State Municipal
Series Trust (File No. 2-99473).
C-4
<PAGE> 167
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
OCTOBER 31,
TITLE OF CLASS 1997*
-------------------------------------------------------------------- ------------
<S> <C>
Arizona Fund
Class A shares of beneficial interest, par value $0.10 per
share.......................................................... 17
Class B shares of beneficial interest, par value $0.10 per
share.......................................................... 62
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.......................................................... 13
California Fund
Class A shares of beneficial interest, par value $0.10 per
share.......................................................... 37
Class B shares of beneficial interest, par value $0.10 per
share.......................................................... 133
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.......................................................... 21
Florida Fund
Class A shares of beneficial interest, par value $0.10 per
share.......................................................... 54
Class B shares of beneficial interest, par value $0.10 per
share.......................................................... 222
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.......................................................... 28
Massachusetts Fund
Class A shares of beneficial interest, par value $0.10 per
share.......................................................... 19
Class B shares of beneficial interest, par value $0.10 per
share.......................................................... 106
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.......................................................... 11
Michigan Fund
Class A shares of beneficial interest, par value $0.10 per
share.......................................................... 25
Class B shares of beneficial interest, par value $0.10 per
share.......................................................... 65
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.......................................................... 13
New Jersey Fund
Class A shares of beneficial interest, par value $0.10 per
share.......................................................... 45
Class B shares of beneficial interest, par value $0.10 per
share.......................................................... 108
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.......................................................... 10
New York 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.......................................................... 220
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.......................................................... 31
Pennsylvania Fund
Class A shares of beneficial interest, par value $0.10 per
share.......................................................... 17
Class B shares of beneficial interest, par value $0.10 per
share.......................................................... 163
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.......................................................... 17
</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").
C-5
<PAGE> 168
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.
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.
C-6
<PAGE> 169
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 registered 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 registered investment companies:
Apex Municipal Fund, Inc., Corporate High Yield Fund, Inc., Corporate High Yield
Fund II, Inc., Debt Strategies Fund, Inc., Income Opportunities Fund 1999, Inc.,
Income Opportunities Fund 2000, Inc., Merrill Lynch Municipal Strategy Fund,
Inc., MuniAssets Fund, Inc., MuniEnhanced Fund, Inc., MuniHoldings California
Insured Fund, Inc., MuniHoldings Florida Insured Fund, MuniHoldings Fund, Inc.,
MuniHoldings New York Insured Fund, Inc., MuniInsured Fund, Inc., MuniVest Fund,
Inc., MuniVest Fund II, Inc., MuniVest Florida Fund, MuniVest Michigan Insured
Fund, Inc., MuniVest New Jersey Fund, Inc., MuniVest Pennsylvania Insured Fund,
MuniYield Arizona Fund, Inc., MuniYield California Fund, Inc., MuniYield
California Insured Fund, Inc., MuniYield California Insured Fund II, Inc.,
MuniYield Florida Fund, MuniYield Florida Insured Fund, MuniYield Fund, Inc.,
MuniYield Insured Fund, Inc., MuniYield Michigan Fund, Inc., MuniYield Michigan
Insured Fund, Inc., MuniYield New Jersey Fund, Inc., MuniYield New Jersey
Insured Fund, Inc., MuniYield New York Insured Fund, Inc., MuniYield New York
Insured Fund II, Inc., MuniYield Pennsylvania Fund, 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 registered 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 Convertible 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 Growth 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 Intermediate Government Bond 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 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 Hotchkis and Wiley Funds
(advised by Hotchkis and Wiley, a division of MLAM; and the following closed-end
registered investment companies: Merrill Lynch High Income Municipal Bond Fund,
Inc. and Merrill Lynch Senior Floating Rate Fund, Inc. MLAM also acts as
sub-adviser to Merrill Lynch World Strategy Portfolio and Merrill Lynch Basic
Value Equity Portfolio, two investment portfolios of EQ Advisory Trust.
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 Intermediate Government Bond Fund is
One Financial Center, 23rd Floor, Boston, Massachusetts 02111-2665. 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,
C-7
<PAGE> 170
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, 1995, for his, her 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 28 and Messrs. Giordano, Harvey, 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;
Executive Vice President of ML&Co.
Terry K. Glenn.......... Executive Vice President Executive Vice President of MLAM;
Executive Vice President and Director
of Princeton Services; President
and Director of MLFD; Director of
MLFDS; President of Princeton
Administrators, L.P.
Linda L. Federici....... Senior Vice President Senior Vice President of MLAM; Senior
Vice President of Princeton
Services
Vincent R. Giordano..... Senior Vice President Senior Vice President of MLAM; Senior
Vice President of Princeton
Services
Elizabeth Griffin....... Senior Vice President Senior Vice President of MLAM
Norman R. Harvey........ Senior Vice President Senior Vice President of MLAM; Senior
Vice President of Princeton
Services
Michael J. Hennewinkel... Senior Vice President Senior Vice President of MLAM; Senior
Vice President of Princeton
Services
Philip L. Kirstein...... Senior Vice President, Senior Vice President, General
General Counsel and Counsel and Secretary of MLAM; Senior
Secretary Vice President, General Counsel,
Director and Secretary of Princeton
Services
Ronald M. Kloss......... Senior Vice President and Senior Vice President MLAM; Senior
Controller Vice President and Controller of
Princeton Services
Debra W. Landsman-Yaros... Senior Vice President Senior Vice President of MLAM; Vice
President of MLFD; Senior Vice
President of Princeton Services
Steven M.M. Miller...... Senior Vice President Executive Vice President of Princeton
Administrators, L.P.; Senior Vice
President of Princeton Services
Joseph T. Monagle, Jr... Senior Vice President Senior Vice President of MLAM; Senior
Vice President of Princeton
Services
Michael L. Quinn........ Senior Vice President Senior Vice President of MLAM; Senior
Vice President of Princeton
Services; Managing Director and
First Vice President of Merrill
Lynch from 1989 to 1995
Richard L. Reller....... Senior Vice President Senior Vice President of MLAM; Senior
Vice President of Princeton
Services; Director of MLFD
</TABLE>
C-8
<PAGE> 171
<TABLE>
<CAPTION>
POSITION(S)WITH OTHER SUBSTANTIAL BUSINESS,
NAME THE MANAGER PROFESSION, VOCATION OR EMPLOYMENT
- ------------------------------ ------------------------- -------------------------------------
<S> <C> <C>
Gerald M. Richard....... Senior Vice President and Senior Vice President and Treasurer
Treasurer of MLAM; Senior Vice President and
Treasurer of Princeton Services;
Vice President and Treasurer of
MLFD
Gregory Upah............ Senior Vice President Senior Vice President of MLAM; Senior
Vice President of Princeton
Services
Ronald L. Welburn....... Senior Vice President Senior Vice President of MLAM; 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 registered 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 registered 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 02111-2665.
<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
Richard L. Reller........................ Director None
Thomas J. Verage......................... Director None
William E. Aldrich....................... Senior Vice President None
Robert W. Crook.......................... Senior Vice President None
Michael J. Brady......................... Vice President None
William M. Breen......................... Vice President None
Michael G. Clark......................... 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.
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
C-9
<PAGE> 172
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> 173
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 ITS
REGISTRATION STATEMENT PURSUANT TO RULE 485(B) UNDER THE SECURITIES ACT OF 1933
AND HAS DULY CAUSED THIS POST-EFFECTIVE AMENDMENT TO ITS 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 26TH DAY OF
NOVEMBER, 1997.
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
POST-EFFECTIVE AMENDMENT TO ITS REGISTRATION STATEMENT HAS BEEN SIGNED BELOW BY
THE FOLLOWING PERSONS IN THE CAPACITIES AND ON THE DATE(S) INDICATED.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE(S)
- ------------------------------------------ -------------------------- ------------------
<C> <S> <C>
ARTHUR ZEIKEL* President (Principal
- ------------------------------------------ Executive Officer) and
(Arthur Zeikel) Trustee
GERALD M. RICHARD* Treasurer (Principal
- ------------------------------------------ Financial and Accounting
(Gerald M. Richard) Officer)
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 26, 1997
- ------------------------------------------
(Gerald M. Richard, Attorney-in-Fact)
</TABLE>
C-11
<PAGE> 174
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- -------- -----------------------------------------------------------------------
<S> <C> <C> <C>
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> 1
INDEPENDENT AUDITORS' CONSENT
Merrill Lynch Multi-State Limited Maturity Municipal Series Trust:
We consent to the use in Post-Effective Amendment No. 5 to Registration
Statement No. 33-50417 of our report dated September 12, 1997 appearing in the
Statement of Additional Information, which is a part of such Registration
Statement, and to the reference to us under the caption "Financial Highlights"
appearing in the Prospectus, which also is a part of such Registration
Statement.
Deloitte & Touche LLP
Princeton, New Jersey
November 25, 1997
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