<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON NOVEMBER 24, 1998
SECURITIES ACT FILE NO. 33-50417
INVESTMENT COMPANY ACT FILE NO. 811-6282
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- --------------------------------------------------------------------------------
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. 6 [X]
AND/OR
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940 [X]
AMENDMENT NO. 14 [X]
(CHECK APPROPRIATE BOX OR BOXES)
------------------------
MERRILL LYNCH MULTI-STATE LIMITED MATURITY MUNICIPAL SERIES TRUST
(EXACT NAME OF REGISTRANT AS SPECIFIED IN CHARTER)
800 SCUDDERS MILL ROAD
PLAINSBORO, NEW JERSEY
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICE)
08536
(ZIP CODE)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE (609) 282-2800
ARTHUR ZEIKEL
MERRILL LYNCH MULTI-STATE LIMITED MATURITY MUNICIPAL SERIES TRUST
800 SCUDDERS MILL ROAD, PLAINSBORO, NEW JERSEY
MAILING ADDRESS: P.O. BOX 9011, PRINCETON, NEW JERSEY 08543-9011
(NAME AND ADDRESS OF AGENT FOR SERVICE)
------------------------
COPIES TO:
<TABLE>
<S> <C>
THOMAS R. SMITH, JR., ESQ. MICHAEL J. HENNEWINKEL, 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
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<PAGE> 2
PROSPECTUS
NOVEMBER 24, 1998
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 two separate series, Merrill Lynch California Limited
Maturity Municipal Bond Fund (the "California Fund") and Merrill Lynch Florida
Limited Maturity Municipal Bond Fund (the "Florida Fund"). Each series of the
Trust is referred to herein as a "Fund." The California Fund seeks to provide
shareholders with as high a level of income exempt from Federal and California
income taxes as is consistent with prudent investment management. The Florida
Fund seeks to provide shareholders with as high a level of income exempt from
Federal income taxes as is consistent with prudent investment management and
also seeks to offer shareholders the opportunity to own shares the value of
which is exempt from Florida intangible personal property tax. Under normal
market conditions, each Fund invests primarily in a portfolio of
intermediate-term investment grade obligations of the respective 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, in the case of the California Fund,
California income taxes, or, in the case of the Florida Fund, would not subject
shareholders to Florida 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 either Fund will be realized. For more
information on each Fund's investment objectives and policies, please see
"Investment Objective 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 24, 1998 (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--DISTRIBUTOR
<PAGE> 3
(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 (the
"Distributor"), a division of Princeton Funds Distributor, Inc. ("PFD"), 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 $250 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
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.
2
<PAGE> 4
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% for one 1.0% for one None(d)
year(e) 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 27 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 29.
(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 27.
(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> 5
<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.............................. 0.97% 1.01% 0.86% 1.00% 0.84% 0.84% 0.59% 0.84%
---- ---- ---- ---- ---- ---- ---- ----
TOTAL FUND OPERATING EXPENSES(j)................ 1.32% 1.71% 1.56% 1.45% 1.19% 1.54% 1.29% 1.29%
==== ==== ==== ==== ==== ==== ==== ====
</TABLE>
- ---------------
(g) See "Management of the Trust--Management and Advisory Arrangements"--page
24.
(h) See "Purchase of Shares--Distribution Plans"--page 32.
(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 32. Such amount, however, is subject to certain limitations.
See "Purchase of Shares--Limitations on the Payment of Deferred Sales
Charges"--page 34.
(j) For the fiscal year ended July 31, 1998, Fund Asset Management, L.P. (the
"Manager") voluntarily waived $24,356 of the management fees due from the
California Fund; the Manager waived none of the management fees due from the
Florida Fund. The Total Fund Operating Expenses in the fee table above have
been restated for the California Fund to assume the absence of any such
waiver because the Manager may discontinue or reduce such waiver of fees 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, 1998.
<TABLE>
<CAPTION>
MANAGEMENT FEES WAIVED TOTAL OPERATING EXPENSES AFTER WAIVER
------------------------------------- -------------------------------------
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......................... 0.20% 0.20% 0.20% 0.20% 1.12% 1.51% 1.36% 1.25%
</TABLE>
* Class B shares convert to Class D shares automatically after approximately
ten years and cease being subject to distribution fees and are subject to
lower account maintenance fees.
4
<PAGE> 6
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 $51 $82 $167 $22 $47 $75 $153
Class B....................................... $27 $54 $93 $202 $26 $49 $84 $183
Class C....................................... $26 $49 $85 $186 $23 $41 $71 $156
Class D....................................... $25 $55 $88 $182 $23 $50 $80 $164
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 $51 $82 $167 $22 $47 $75 $153
Class B....................................... $17 $54 $93 $202 $16 $49 $84 $183
Class C....................................... $16 $49 $85 $186 $13 $41 $71 $156
Class D....................................... $25 $55 $88 $182 $23 $50 $80 $164
</TABLE>
5
<PAGE> 7
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 Transfer Agent are not subject to the processing fee. See
"Purchase of Shares" and "Redemption of Shares."
MERRILL LYNCH SELECT PRICING(SM) SYSTEM
Each Fund offers 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, 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.
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."
6
<PAGE> 8
<TABLE>
<CAPTION>
ACCOUNT
MAINTENANCE DISTRIBUTION
CLASS SALES CHARGE(1) FEE FEE CONVERSION FEATURE
<S> <C> <C> <C> <C>
A Maximum 1.0% initial sales charge(2)(3) No No No
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 may differ. See "Purchase of Shares -- Deferred Sales Charge
Alternatives -- Class B and Class C Shares -- Conversion of Class B Shares
to Class D Shares." 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 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
7
<PAGE> 9
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 described above under "Class B." See "Purchase of
Shares--Initial Sales Charge Alternatives--Class A and Class D Shares."
8
<PAGE> 10
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> 11
FINANCIAL HIGHLIGHTS
The financial information in the tables below has been audited in
conjunction with the annual audits of the financial statements of the Trust by
Deloitte & Touche LLP, independent auditors. Financial statements for the fiscal
year ended July 31, 1998 and the independent auditors' report thereon appear in
the annual report of the Trust for the fiscal year ended July 31, 1998 (the
"Annual Report"), and are incorporated by reference in the Statement of
Additional Information. Further information about the performance of the Funds
is contained in the Annual Report 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.
The following per share data and ratios have been derived from information
provided in the Fund's audited financial statements.
<TABLE>
<CAPTION>
CALIFORNIA FUND
------------------------------------------------------------------------------------------------
CLASS A CLASS B
---------------------------------------------------- -----------------------------------------
FOR THE
FOR THE YEAR PERIOD FOR THE YEAR
ENDED NOV. 26, ENDED
JULY 31, 1993+ TO JULY 31,
----------------------------------------- JULY 31, -----------------------------------------
1998 1997 1996 1995 1994 1998 1997 1996 1995
---- ---- ---- ---- -------- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Increase (Decrease) in Net
Asset Value:
PER SHARE OPERATING
PERFORMANCE:
Net asset value, beginning of
period...................... $10.22 $10.05 $ 9.99 $ 9.88 $10.00 $10.21 $10.04 $ 9.99 $ 9.88
------ ------ ------ ------ ------ ------ ------ ------ -------
Investment income--net...... .39 .38 .39 .42 .24 .35 .34 .36 .39
Realized and unrealized
gain (loss) on
investments--net.......... (.09) .17 .06 .11 (.12) (.09) .17 .05 .11
------ ------ ------ ------ ------ ------ ------ ------ -------
Total from investment
operations.................. .30 .55 .45 .53 .12 .26 .51 .41 .50
------ ------ ------ ------ ------ ------ ------ ------ -------
Less dividends from
investment income--net...... (.39) (.38) (.39) (.42) (.24) (.35) (.34) (.36) (.39)
------ ------ ------ ------ ------ ------ ------ ------ -------
Net asset value, end of
period...................... $10.13 $10.22 $10.05 $ 9.99 $ 9.88 $10.12 $10.21 $10.04 $ 9.99
====== ====== ====== ====== ====== ====== ====== ====== =======
TOTAL INVESTMENT RETURN:**
Based on net asset value per
share....................... 2.96% 5.57% 4.56% 5.60% 1.23%# 2.59% 5.20% 4.08% 5.23%
====== ====== ====== ====== ====== ====== ====== ====== =======
RATIOS TO AVERAGE NET ASSETS:
Expenses, net of
reimbursement............... 1.12% 1.08% .94% .40% .02%* 1.51% 1.44% 1.30% .76%
====== ====== ====== ====== ====== ====== ====== ====== =======
Expenses..................... 1.32% 1.28% 1.30% 1.44% 1.16%* 1.71% 1.64% 1.66% 1.80%
====== ====== ====== ====== ====== ====== ====== ====== =======
Investment income--net....... 3.82% 3.75% 3.89% 4.36% 3.54%* 3.45% 3.39% 3.53% 4.00%
====== ====== ====== ====== ====== ====== ====== ====== =======
SUPPLEMENTAL DATA:
Net assets, end of period (in
thousands).................. $1,460 $3,152 $3,162 $3,527 $3,804 $4,812 $6,877 $9,919 $10,363
====== ====== ====== ====== ====== ====== ====== ====== =======
Portfolio turnover........... 24.65% 26.86% 11.09% 124.72% 130.10% 24.65% 26.86% 11.09% 124.72%
====== ====== ====== ====== ====== ====== ====== ====== =======
<CAPTION>
CALIFORNIA FUND
------------------------------------------------------------------------------------------------
CLASS B CLASS C CLASS D
-------- ----------------------------------------- -----------------------------------------
FOR THE FOR THE FOR THE
PERIOD FOR THE YEAR PERIOD FOR THE YEAR PERIOD
NOV. 26, ENDED OCT. 21, ENDED OCT. 21,
1993+ TO JULY 31, 1994+ TO JULY 31, 1994+ TO
JULY 31, ------------------------------ JULY 31, ------------------------------ JULY 31,
1994 1998 1997 1996 1995 1998 1997 1996 1995
-------- ---- ---- ---- -------- ---- ---- ---- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Increase (Decrease) in Net
Asset Value:
PER SHARE OPERATING
PERFORMANCE:
Net asset value, beginning of
period...................... $ 10.00 $10.22 $10.05 $ 9.99 $ 9.76 $10.22 $10.05 $ 9.99 $ 9.76
------- ------ ------ ------ ------ ------ ------ ------ ------
Investment income--net...... .21 .37 .36 .37 .31 .38 .37 .38 .33
Realized and unrealized
gain (loss) on
investments--net.......... (.12) (.10) .17 .06 .23 (.09) .17 .06 .23
------- ------ ------ ------ ------ ------ ------ ------ ------
Total from investment
operations.................. .09 .27 .53 .43 .54 .29 .54 .44 .56
------- ------ ------ ------ ------ ------ ------ ------ ------
Less dividends from
investment income--net...... (.21) (.37) (.36) (.37) (.31) (.38) (.37) (.38) (.33)
------- ------ ------ ------ ------ ------ ------ ------ ------
Net asset value, end of
period...................... $ 9.88 $10.12 $10.22 $10.05 $ 9.99 $10.13 $10.22 $10.05 $ 9.99
======= ====== ====== ====== ====== ====== ====== ====== ======
TOTAL INVESTMENT RETURN:**
Based on net asset value per
share....................... .99%# 2.68% 5.39% 4.35% 5.60%# 2.86% 5.47% 4.46% 5.85%#
======= ====== ====== ====== ====== ====== ====== ====== ======
RATIOS TO AVERAGE NET ASSETS:
Expenses, net of
reimbursement............... .38%* 1.36% 1.25% 1.14% .82%* 1.25% 1.15% 1.06% .66%*
======= ====== ====== ====== ====== ====== ====== ====== ======
Expenses..................... 1.52%* 1.56% 1.45% 1.50% 1.98%* 1.45% 1.35% 1.40% 1.81%*
======= ====== ====== ====== ====== ====== ====== ====== ======
Investment income--net....... 3.19%* 3.61% 3.58% 3.69% 4.04%* 3.70% 3.69% 3.77% 4.28%*
======= ====== ====== ====== ====== ====== ====== ====== ======
SUPPLEMENTAL DATA:
Net assets, end of period (in
thousands).................. $11,430 $ 95 $ 57 $ 55 $ 64 $2,713 $4,043 $2,185 $1,771
======= ====== ====== ====== ====== ====== ====== ====== ======
Portfolio turnover........... 130.10% 24.65% 26.86% 11.09% 124.72% 24.65% 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> 12
FINANCIAL HIGHLIGHTS (CONCLUDED)
<TABLE>
<CAPTION>
FLORIDA FUND
------------------------------------------------------------------------------------------------
CLASS A CLASS B
---------------------------------------------------- -----------------------------------------
FOR THE
FOR THE YEAR PERIOD FOR THE YEAR
ENDED NOV. 26, ENDED
JULY 31, 1993+ TO JULY 31,
----------------------------------------- JULY 31, -----------------------------------------
1998 1997 1996 1995 1994 1998 1997 1996 1995
---- ---- ---- ---- -------- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Increase (Decrease) in Net
Asset Value:
PER SHARE OPERATING
PERFORMANCE:
Net asset value, beginning
of period................ $10.07 $ 9.96 $10.02 $ 9.87 $ 10.00 $ 10.07 $ 9.96 $ 10.02 $ 9.88
------ ------ ------ ------ ------- ------- ------- ------- -------
Investment income--net... .38 .40 .40 .43 .24 .35 .36 .37 .40
Realized and unrealized
gain (loss) on
investments--net....... (.07) .11 (.06) .15 (.13) (.07) .11 (.06) .14
------ ------ ------ ------ ------- ------- ------- ------- -------
Total from investment
operations............... .31 .51 .34 .58 .11 .28 .47 .31 .54
------ ------ ------ ------ ------- ------- ------- ------- -------
Less dividends from
investment income--net... (.38) (.40) (.40) (.43) (.24) (.35) (.36) (.37) (.40)
------ ------ ------ ------ ------- ------- ------- ------- -------
Net asset value, end of
period................... $10.00 $10.07 $ 9.96 $10.02 $ 9.87 $ 10.00 $ 10.07 $ 9.96 $ 10.02
====== ====== ====== ====== ======= ======= ======= ======= =======
TOTAL INVESTMENT RETURN:**
Based on net asset value
per share................ 3.17% 5.20% 3.45% 6.05% 1.12%# 2.80% 4.83% 3.08% 5.57%
====== ====== ====== ====== ======= ======= ======= ======= =======
RATIOS TO AVERAGE NET
ASSETS:
Expenses, net of
reimbursement............ 1.19% 1.09% .89% .39% .02%* 1.54% 1.45% 1.24% .75%
====== ====== ====== ====== ======= ======= ======= ======= =======
Expenses.................. 1.19% 1.09% .97% 1.03% .86%* 1.54% 1.45% 1.32% 1.38%
====== ====== ====== ====== ======= ======= ======= ======= =======
Investment income--net.... 3.81% 3.98% 4.01% 4.39% 3.54%* 3.46% 3.63% 3.66% 4.05%
====== ====== ====== ====== ======= ======= ======= ======= =======
SUPPLEMENTAL DATA:
Net assets, end of period
(in thousands)........... $5,331 $6,376 $7,874 $9,849 $14,868 $ 8,014 $11,461 $13,690 $16,213
====== ====== ====== ====== ======= ======= ======= ======= =======
Portfolio turnover........ 39.52% 35.67% 39.90% 138.97% 136.71% 39.52% 35.67% 39.90% 138.97%
====== ====== ====== ====== ======= ======= ======= ======= =======
<CAPTION>
FLORIDA FUND
------------------------------------------------------------------------------------------------
CLASS B CLASS C CLASS D
-------- ----------------------------------------- -----------------------------------------
FOR THE FOR THE FOR THE
PERIOD FOR THE YEAR PERIOD FOR THE YEAR PERIOD
NOV. 26, ENDED OCT. 21, ENDED OCT. 21,
1993+ TO JULY 31, 1994+ TO JULY 31, 1994+ TO
JULY 31, ------------------------------ JULY 31, ------------------------------ JULY 31,
1994 1998 1997 1996 1995 1998 1997 1996 1995
-------- ---- ---- ---- -------- ---- ---- ---- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Increase (Decrease) in Net
Asset Value:
PER SHARE OPERATING
PERFORMANCE:
Net asset value, beginning
of period................ $ 10.00 $10.00 $ 9.90 $10.01 $ 9.76 $10.06 $ 9.95 $10.01 $ 9.76
------- ------ ------ ------ ------ ------ ------ ------ ------
Investment income--net... .21 .33 .38 .36 .29 .37 .39 .39 .33
Realized and unrealized
gain (loss) on
investments--net....... (.12) (.07) .10 (.11) .25 (.06) .11 (.06) .25
------- ------ ------ ------ ------ ------ ------ ------ ------
Total from investment
operations............... .09 .26 .48 .25 .54 .31 .50 .33 .58
------- ------ ------ ------ ------ ------ ------ ------ ------
Less dividends from
investment income--net... (.21) (.33) (.38) (.36) (.29) (.37) (.39) (.39) (.33)
------- ------ ------ ------ ------ ------ ------ ------ ------
Net asset value, end of
period................... $ 9.88 $ 9.93 $10.00 $ 9.90 $10.01 $10.00 $10.06 $ 9.95 $10.01
======= ====== ====== ====== ====== ====== ====== ====== ======
TOTAL INVESTMENT RETURN:**
Based on net asset value
per share................ .99%# 2.65% 4.93% 2.48% 5.65%# 3.17% 5.10% 3.35% 6.07%#
======= ====== ====== ====== ====== ====== ====== ====== ======
RATIOS TO AVERAGE NET
ASSETS:
Expenses, net of
reimbursement............ .38%* 1.29% 1.26% 1.21% 1.09%* 1.29% 1.19% .99% .67%*
======= ====== ====== ====== ====== ====== ====== ====== ======
Expenses.................. 1.23%* 1.29% 1.26% 1.23% 1.67%* 1.29% 1.19% 1.07% 1.19%*
======= ====== ====== ====== ====== ====== ====== ====== ======
Investment income--net.... 3.19%* 3.78% 3.83% 3.75% 3.83%* 3.71% 3.88% 3.91% 4.23%*
======= ====== ====== ====== ====== ====== ====== ====== ======
SUPPLEMENTAL DATA:
Net assets, end of period
(in thousands)........... $18,179 $ 1 $ 60 $ 52 $ 1 $5,362 $7,733 $6,406 $7,210
======= ====== ====== ====== ====== ====== ====== ====== ======
Portfolio turnover........ 136.71% 39.52% 35.67% 39.90% 138.97% 39.52% 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> 13
INVESTMENT OBJECTIVE AND POLICIES
The investment objective of the California Fund is to provide shareholders
with as high a level of income exempt from Federal and California income taxes
as is consistent with prudent investment management. The investment objective of
the Florida Fund is to provide shareholders with as high a level of income
exempt from Federal income taxes as is consistent with prudent investment
management and to offer shareholders the opportunity to own shares the value of
which is exempt from Florida intangible personal property tax. 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 and, in the case of the
California Fund, California income taxes or, in the case of the Florida Fund,
are obligations which are not subject to Florida intangible personal property
tax. Obligations that pay interest exempt from Federal income taxes are referred
to herein as "Municipal Bonds." "California Municipal Bonds" are obligations
which pay interest exempt from Federal and California income taxes. "Florida
Municipal Bonds" are obligations which pay interest exempt from Federal income
taxes and would not subject shareholders to Florida intangible personal property
taxes. California Municipal Bonds and Florida Municipal Bonds are sometimes
referred to herein as "State Municipal Bonds". Unless otherwise indicated,
references to Municipal Bonds shall be deemed to include State Municipal Bonds.
Each Fund will maintain at all times, except during temporary defensive periods,
at least 65% of its total assets invested in its respective State Municipal
Bonds. The 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.
There can be no assurance that the investment objective of either Fund will be
realized.
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 ("S&P") (currently
AAA, AA, A and BBB) or Fitch IBCA, Inc. ("Fitch") (currently AAA, AA, A and
BBB). If Municipal Bonds are unrated, such securities
12
<PAGE> 14
will possess creditworthiness comparable, in the opinion of the Manager, to
investment grade obligations. Municipal Bonds rated in the fourth highest rating
category, while considered investment grade, have certain speculative
characteristics and are more likely to be downgraded to non-investment grade
than obligations rated in one of the top three rating categories. See Appendix
C--"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
13
<PAGE> 15
on illiquid investments unless, in the judgment of the Trustees, such VRDO is
liquid. The Trustees may adopt guidelines and delegate to the Manager the daily
function of determining and monitoring liquidity of such VRDOs. The Trustees,
however, will retain sufficient oversight and be ultimately responsible for such
determinations.
The Funds ordinarily do not intend to realize investment income not exempt
from Federal income taxes and, in the case of the California Fund, California
income taxes, or, for the Florida Fund, to hold investments that would subject
shareholders to Florida intangible personal property taxes. 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 income
taxation but which is not exempt from California income tax or which could
subject shareholders to Florida intangible personal property tax, as the case
may be. 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-3/VMIG-3 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 potential benefits. Each Fund
offers investors the opportunity to receive income exempt from Federal income
taxes and, in the case of the California Fund, California income taxes or, in
the case of the Florida Fund, the opportunity to own shares the value of which
is
14
<PAGE> 16
exempt from Florida intangible personal property tax, by investing in a
professionally managed portfolio consisting primarily of intermediate-term State
Municipal Bonds. Each Fund also provides liquidity because of its redemption
features and relieves the investor of the burdensome administrative details
involved in managing a portfolio of tax-exempt securities. The benefits of
investing in each Fund are at least partially offset by the expenses involved in
operating an investment company. Such expenses primarily consist of the
management fee and operational costs, and in the case of Class B, Class C and
Class D shares of a Fund, the account maintenance costs for that Fund 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."
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.
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
tax status 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. From 1990-1993, the State suffered through a severe
recession, the worst since the 1930s, 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. The current economic expansion is marked by
growth in high technology manufacturing and services, including computer
software, electronic manufacturing and motion picture/television production;
growth is also occurring in other business services, both nonresidential and
residential construction and local education. However, the soaring trade
deficit, continuing weakness in Asia, initial signs of economic weakness in
Canada and Latin America, which have been California's largest trading partners,
and the fall in stock prices worldwide are expected to have a negative effect.
Other impacts of the international situation may help California, such as the
reduction in long-term interest rates. Currently, California's general
obligation bonds are rated A+, Aa3 and AA- by S&P, Moody's and Fitch,
respectively. See Appendix A -- "Economic and Other Conditions in California."
15
<PAGE> 17
The Florida Fund. Many different social, environmental and economic
factors may affect the financial condition of Florida and its political
subdivisions. From time to time Florida and its political subdivisions have
encountered financial difficulties. Florida is highly dependent upon sales and
use taxes, which account for the majority of its General Fund revenues. The
Florida Constitution does not permit a state or local personal income tax. The
structure of personal income in Florida is also different from the rest of the
nation in that it has a proportionally greater retirement age population 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 "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.
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's or entity's control.
Revenue bonds are payable only from the revenues derived from a particular
facility or class of facilities or, in some cases, from the proceeds of a
special excise tax or other specific revenue source such as payments from the
user of the facility being financed; accordingly, the timely payment of interest
and the repayment of
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<PAGE> 18
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 Board, determines to be liquid. The Manager
will deem lease obligations liquid if they are publicly offered and
17
<PAGE> 19
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. 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 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
18
<PAGE> 20
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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<PAGE> 21
FINANCIAL FUTURES CONTRACTS AND OPTIONS THEREON
Each Fund is authorized to purchase and sell certain exchange-traded
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.
Each Fund may deal in financial futures contracts traded on the Chicago
Board of Trade based on The Bond Buyer Municipal Bond Index, a price-weighted
measure of the market value of 40 large, recently issued tax-exempt bonds. There
can be no assurance, however, that a liquid secondary market will exist to
terminate any particular financial futures contract or option thereon at any
specific time. If it is not possible to close a financial futures position or
the related option entered into by a Fund, the Fund would continue to be
required to make daily cash payments of variation margin in the event of adverse
price movements. In such a situation, if the Fund has insufficient cash, it may
have to sell portfolio securities to meet daily variation margin requirements at
a time when it may be disadvantageous to do so. The inability to close financial
futures contracts or related option positions also could have an adverse impact
on a Fund's ability to hedge effectively. There is also the risk of loss by a
Fund of margin deposits in the event of bankruptcy of a broker with whom the
Fund has an open position in a financial futures contract or option thereon.
Each Fund may purchase and sell financial futures contracts on U.S.
government securities and write and purchase put and call options on such
financial futures contracts as a hedge against adverse changes in interest rates
as described more fully in the Statement of Additional Information. With respect
to U.S. Government securities, currently there are financial futures contracts
based on long-term U.S. Treasury bonds, U.S. Treasury notes, Government National
Mortgage Association ("GNMA") Certificates and three-month U.S. Treasury bills.
Subject to policies adopted by the Trustees, the Funds also may enter into
other financial futures transactions, such as financial futures contracts or
options on other municipal bond indices which may become available, if the
Manager of the Funds and the Trustees of the Trust should determine that there
is normally a sufficient correlation between the prices of such financial
futures contracts or options thereon and the Municipal Bonds in which a Fund
invests to make such hedging appropriate.
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<PAGE> 22
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 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 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
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<PAGE> 23
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.
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. 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.
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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 of the Trust are:
ARTHUR ZEIKEL*--Chairman of the Manager and its affiliate, MLAM; Chairman
and Director of Princeton Services, Inc. ("Princeton Services"); 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.
ANDRE F. PEROLD--Professor, Harvard Business School.
- ---------------
* Interested person, as defined in the 1940 Act, of the Trust.
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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 Merrill Lynch Asset Management Group (which includes the Manager)
acts as the investment adviser for over 100 registered investment companies and
offers portfolio management services to individuals and institutions. As of
October 1998, the Asset Management Group had a total of approximately $483
billion in investment company and other portfolio assets under management. This
amount includes assets managed for certain affiliates of the Manager.
Subject to the supervision 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 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.
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. Information about the
amounts reimbursed by each Fund is contained in the table below. 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.
Set forth in the table below is information for each Fund pertaining to the
Fund's investment advisory arrangements for the fiscal year ended July 31, 1998:
<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>
California Fund............. $42,624 $24,356 $12.1 million $34,024 1.32% 1.71% 1.56% 1.45%
Florida Fund................ $79,912 0 $22.7 million $66,965 1.19% 1.54% 1.29% 1.29%
</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.
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<PAGE> 26
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 $11.00 per Class A or Class D
account, and $14.00 per Class B or Class C account, and is entitled to
reimbursement for certain transaction charges and 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 class on a recordkeeping system, provided the
recordkeeping system is maintained by a subsidiary of ML & Co. For the fiscal
year ended July 31, 1998, the total fee paid to the Transfer Agent pursuant to
the Transfer Agency Agreement by the California Fund was $2,999 and by the
Florida Fund was $4,877.
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 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
shareholders who are participants in certain fee-based programs, the minimum
initial purchase is $250 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
25
<PAGE> 27
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, the NYSE closes at 4:00 p.m., Eastern 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 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, are imposed directly against those classes
and not against all assets of the Fund and, accordingly, such charges do 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 are 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
26
<PAGE> 28
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.
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>
<CAPTION>
================================================================================================================
ACCOUNT
MAINTENANCE DISTRIBUTION
CLASS SALES CHARGE(1) FEE FEE CONVERSION FEATURE
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
A Maximum 1.0% initial sales charge(2)(3) No No No
- ----------------------------------------------------------------------------------------------------------------
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.
Certain 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 may differ. See "Deferred Sales Charge Alternatives--Class B and
Class C Shares--Conversion of Class B Shares to Class D Shares." 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.
27
<PAGE> 29
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.
** Certain 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 proceeds from account maintenance fees are used to compensate the
Distributor and Merrill Lynch (pursuant to a sub-agreement) for providing
continuing account maintenance activities.
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,
1998, 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. For the fiscal year ended July 31, 1998, no
CDSCs were received by the Distributor from the California Fund 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 and no CDSCs were received
by the Distributor from the Florida Fund with respect to redemptions within one
year after purchase of Class A shares purchased subject to a front-end sales
charge waiver. For the fiscal year ended July 31, 1998 the Distributor received
CDSCs of $7,988 from the Florida Fund with respect to redemptions within one
year after purchase of Class D shares purchased subject to a front-end sales
charge waiver.
<TABLE>
<CAPTION>
AGGREGATE GROSS SALES PAID TO PAID TO
NO. OF SHARES SOLD NET PROCEEDS ($) 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...... 12,475 7,329 $126,814 $ 74,243 $ 0 $242 $ 0 $ 7 $ 0 $235
Florida Fund......... 41,661 221,619 $418,928 $2,218,964 $1,050 $337 $100 $13 $950 $324
</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
28
<PAGE> 30
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 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
29
<PAGE> 31
1.0% CDSC. Approximately ten years after Class B shares of a Fund are issued,
such Class B shares, together with shares issued upon dividend reinvestment with
respect to those shares, are automatically converted into Class D shares of that
Fund and thereafter will be subject to lower continuing fees. See "Conversion of
Class B Shares to Class D Shares" below. Both Class B and Class C shares are
subject to an account maintenance fee of 0.15% of net assets and a distribution
fee of 0.20% of net assets as discussed below under "Distribution Plans." The
proceeds from the account maintenance fees are used to compensate the
Distributor and Merrill Lynch (pursuant to a sub-agreement) for providing
continuing account maintenance activities.
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) that are paid from the dealers'
own funds. These expenses relate to providing distribution-related services to
that Fund in connection with the sale of such Class B shares, such as the
payment of compensation to Financial Consultants for selling such shares. The
combination of the CDSC and the ongoing distribution fee facilitates the ability
of a Fund to sell its Class B shares without a sales charge being deducted at
the time of purchase.
Approximately ten years after issuance, Class B shares of each of the Funds
will convert automatically into Class D shares of the same Fund, which are
subject to a lower account maintenance fee and no distribution fee; Class B
shares of certain other MLAM-advised mutual funds into which exchanges may be
made convert into Class D shares automatically after approximately eight years.
If Class B shares of one of the Funds are exchanged for Class B shares of
another MLAM-advised mutual fund, the conversion period applicable to the Class
B shares acquired in the exchange will apply, and the holding period for the
shares exchanged will be tacked on to the holding period for the shares
acquired.
Imposition of the CDSC and the distribution fee on Class B shares is
limited by the NASD asset-based sales charge rule. See "Limitations on the
Payment of Deferred Sales Charges" below. Class B shareholders of a Fund
exercising the exchange privilege described under "Shareholder
Services--Exchange Privilege" will continue to be subject to that Fund's CDSC
schedule if such schedule is higher than the CDSC schedule relating to the Class
B shares acquired as a result of the exchange.
Contingent Deferred Sales Charges--Class B and Class C Shares. Class B and
Class C shares of a Fund 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."
30
<PAGE> 32
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, 1998, the Distributor received CDSCs of
approximately $3,550 from the California Fund and approximately $4,821 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.
For the fiscal year ended July 31, 1998, the Distributor received CDSCs of
approximately $63 from the California Fund, all of which were paid to Merrill
Lynch, and no CDSCs from the Florida Fund with respect to redemptions of Class C
shares. 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
31
<PAGE> 33
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.
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, 1998 and information with respect to the
32
<PAGE> 34
annual fee payable pursuant to such Distribution Plans based on the net assets
of each Fund as of July 31, 1998.
<TABLE>
<CAPTION>
PAYMENT TO THE
DISTRIBUTOR, ALL OF WHICH BASED ON AVERAGE DAILY NET
WAS PAID TO MERRILL LYNCH($) ASSETS AS OF JULY 31, 1998($)
------------------------------ --------------------------------------
CLASS B CLASS C CLASS D CLASS B CLASS C CLASS D
------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C>
California Fund..................... $21,353 $110 $3,371 $ 6.1 million $73,431 $3.4 million
Florida Fund........................ $35,389 $ 25 $6,715 $10.1 million $16,195 $6.7 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 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, 1998 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, 1997.
<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 REVENUES EXCEEDED FULLY NET ASSETS
EXPENSES AS OF AT ALLOCATED ACCRUAL EXPENSES AS OF AT
FUND 7/31/98($) 7/31/98 12/31/97($) 12/31/97
---- -------------------- ------------ -------------------------------- ------------
<S> <C> <C> <C> <C>
California Fund........... $ 65,050 1.35% $(67,000) 1.03%
Florida Fund.............. $324,928 4.05% $106,000 .95%
</TABLE>
33
<PAGE> 35
The table below sets forth information with respect to Class C shares of
the Funds concerning direct cash revenues and expenses for the period October
21, 1994 (commencement of operations) to July 31, 1998. Information regarding
fully allocated accrual data for Class C shares for the period October 21, 1994
(commencement of operations) to December 31, 1997 is not presented because such
revenues and expenses are de minimis.
<TABLE>
<CAPTION>
AMOUNT BY WHICH
DIRECT CASH REVENUES % OF CLASS C
EXCEEDED DIRECT CASH NET ASSETS
EXPENSES AS OF AT
FUND 7/31/98($) 7/31/98
---- -------------------- ------------
<S> <C> <C>
California Fund............................................. $317 .33%
Florida Fund................................................ $141 11.26%
</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."
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.
34
<PAGE> 36
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, Financial Data Services, Inc., P.O. Box
45289, Jacksonville, Florida 32232-5289. Redemption requests delivered other
than by mail should be delivered to 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 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 the order is placed. Shares will be priced at
the net asset value calculated on the day the request is received, provided that
the request for repurchase is submitted to the dealer prior to 15 minutes after
the close of business on the NYSE (generally, the NYSE closes at 4:00 p.m.,
Eastern 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
35
<PAGE> 37
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.
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 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
36
<PAGE> 38
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 and Summit Cash
Reserves Fund ("Summit"), a Merrill Lynch-sponsored money market fund
specifically designated as available for exchange by holders of Class A, Class
B, Class C and Class D shares of 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 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 and Class D shares are exchangeable for Class A shares of, and
Class B and Class C shares are exchangeable for Class B shares of, Summit. Class
A shares of Summit have an exchange privilege back into Class A or Class D
shares of MLAM-advised mutual funds. Class B shares of Summit have an exchange
privilege back into Class B or Class C shares of MLAM-advised mutual funds and,
in the event of such an
37
<PAGE> 39
exchange, the period of time that Class B shares of Summit are held will count
toward satisfaction of the holding period requirement for purposes of reducing
any CDSC and, with respect to Class B shares, toward satisfaction of any
Conversion Period. Class B shares of Summit will be subject to a distribution
fee at an annual rate of 0.75% of average daily net assets of such Class B
shares. This exchange privilege does not apply with respect to certain Merrill
Lynch fee-based programs, for which alternate exchange arrangements may exist.
Please see your Merrill Lynch Financial Consultant for further information.
Prior to October 12, 1998, exchanges from the Funds and other MLAM-advised
mutual funds into a money market fund were directed to certain Merrill
Lynch-sponsored money market funds other than Summit. Shareholders who exchanged
shares of a MLAM-advised mutual fund for shares of such other money market funds
and subsequently wish to exchange those money market fund shares for shares of
either Fund will be subject to the CDSC schedule applicable to such Fund shares,
if any. The holding period for those money market fund shares will not count
toward satisfaction of the holding period requirement for reduction of the CDSC
imposed on such shares, if any, and, with respect to Class B shares, toward
satisfaction of the Conversion Period. However, the holding period for Class B
or Class C shares received in exchange for such money market fund shares will be
aggregated with the holding period for the original shares for purposes of
reducing the CDSC or satisfying 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.
The Funds' exchange privilege is modified with respect to purchases of
Class A and Class D shares by non-retirement plan investors under the Merrill
Lynch Mutual Fund Advisor (Merrill Lynch MFA(SM)) program (the "MFA program").
First, the initial allocation of assets is made under the MFA program. Then, any
subsequent exchange under the MFA program of Class A or Class D shares of a
MLAM-advised mutual fund for Class A or Class D shares of a Fund will be made
solely on the basis of the relative net asset values of the shares being
exchanged. Therefore, there will not be a charge for any difference between the
sales charge previously paid on the shares of the other MLAM-advised mutual fund
and the sales charge payable on the shares of the Fund being acquired in the
exchange under the MFA program.
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
38
<PAGE> 40
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 be applied thereafter to Class D shares if the shareholder
so elects. 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. An investor whose shares of the Fund are
held within a CMA(R) or CBA(R) account may arrange to have periodic investments
made in a Fund in amounts of $100 or more through the CMA(R) or CBA(R) Automated
Investment Program.
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 (provided
that, in the event that a payment on an account maintained at the Transfer Agent
would amount to $10.00 or less, a shareholder will not receive such payment in
cash and such payment will automatically be reinvested in additional shares).
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. 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.
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
39
<PAGE> 41
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.
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 from time to time 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. (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> 42
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, the NYSE closes at 4:00 p.m.,
Eastern 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 of the Funds 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 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.
41
<PAGE> 43
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. Certain categories of capital gains are
taxable at different rates for Federal income tax purposes. Generally, not later
than 60 days after the close of each Fund's taxable year, the Trust will provide
shareholders with a written notice designating the amounts of any
exempt-interest dividends, ordinary income dividends or capital gain dividends,
as well as any 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 the calendar 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 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.
42
<PAGE> 44
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
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 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 Municipal Bonds. Shareholders subject to taxation by
states other than California may realize a lower after-tax rate of return than
California shareholders since the dividends distributed by the California Fund
may not be exempt, to any significant degree, from income taxation by such other
states. 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
43
<PAGE> 45
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
Florida 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.
If the Florida Fund does not have a taxable nexus to Florida, such as
through the location within the state of the activities of the Trust, the
Florida Fund or 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 on January 1 of any year,
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. Additional considerations relating to income taxation are 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> 46
exclusively by that class. Each Fund will include performance data for all
classes of shares of that Fund in any advertisement or information including
performance data of that Fund.
The Funds also may quote total return and aggregate total return
performance data for various specified time periods. Such data will be
calculated substantially as described above, except that (1) the rates of return
calculated will not be average annual rates, but rather, actual annual,
annualized or aggregate rates of return and (2) the maximum applicable sales
charges will not be included with respect to annual or annualized rates of
return calculations. Aside from the impact on the performance data calculations
of including or excluding the maximum applicable sales charges, actual annual or
annualized total return data generally will be lower than average annual total
return data since the average annual rates of return reflect compounding and
aggregate total return data generally will be higher than average annual total
return data since the aggregate rates of return reflect compounding over a
longer period of time. In advertisements distributed to investors whose
purchases are subject to waiver of the CDSC in the case of Class B and Class C
shares or to reduced sales charges in the case of Class A and Class D shares,
performance data may take into account the reduced, and not the maximum, sales
charge or may not take into account the CDSC and therefore may reflect greater
total return since, due to the reduced sales charges or waiver of the CDSC, a
lower amount of expenses is deducted. See "Purchase of Shares." A Fund's total
return may be expressed either as a percentage or as a dollar amount in order to
illustrate such total return on a hypothetical $1,000 investment in the Fund at
the beginning of each specified period.
Yield quotations will be computed based on a 30-day period by dividing (a)
the net income based on the yield of each security earned during the period by
(b) the average daily number of shares outstanding during the period that were
entitled to receive dividends multiplied by (c) the maximum offering price per
share on the last day of the period. Tax-equivalent yield quotations will be
computed by dividing (a) the part of the Fund's yield that is tax-exempt by (b)
one minus a stated tax rate and (c) adding the result to that part, if any, of
the Fund's yield that is not tax-exempt.
The following sets forth the yield for the Class A, Class B, Class C and
Class D shares of each of the Funds for the 30-day period ended July 31, 1998.
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 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>
California Fund....... 2.65% 3.68% 2.33% 3.24% 2.51% 3.49% 2.56% 3.56%
Florida Fund.......... 2.85% 3.96% 2.52% 3.50% 2.33% 3.24% 2.74% 3.81%
</TABLE>
Total return, yield and tax-equivalent yield figures are based on a Fund's
historical performance and are not intended to indicate future performance. A
Fund's total return, yield and tax-equivalent yield will vary depending on
market conditions, the securities comprising the Fund's portfolio, the Fund's
operating expenses and the amount of realized and unrealized net capital gain or
losses during the period. The value of an investment in a Fund will fluctuate
and an investor's shares, when redeemed, may be worth more or less than their
original cost. Investors' tax-equivalent yields may differ from those listed
above because of the application of state, local or Federal income tax rates
that are higher or lower than 28%.
45
<PAGE> 47
On occasion, a Fund may compare its performance to the Merrill Lynch U1AO
Index or other market indices or to performance data published by Lipper
Analytical Services, Inc., Morningstar Publications, Inc. ("Morningstar"), CDA
Investment Technology, Inc., Money Magazine, U.S. News & World Report, Business
Week, Forbes Magazine, Fortune Magazine or other industry publications. When
comparing its performance to a market index, a Fund may refer to various
statistical measures derived from the historic performance of the Fund and the
index, such as standard deviation and beta. In addition, from time to time, a
Fund may include its risk-adjusted performance ratings assigned by Morningstar
in advertising 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, the NYSE closes at 4:00 p.m., Eastern 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 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
46
<PAGE> 48
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 (except that Class B shares have certain voting
rights with respect to Class D distribution expenditures). 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> 49
the assets of the Trust generally. The shares of each Series, when issued, will
be fully-paid and non-assessable by the Trust.
SHAREHOLDER REPORTS
Only one copy of each shareholder report and certain shareholder
communications will be mailed to each identified shareholder regardless of the
number of accounts such shareholder has. If a shareholder wishes to receive
separate copies of each report and communication for each of the shareholder's
related accounts, the shareholder should notify in writing:
Financial Data Services, Inc.
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 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.
YEAR 2000 ISSUES
Many computer systems were designed using only two digits to designate
years. These systems may not be able to distinguish the Year 2000 from the Year
1900 (commonly known as the "Year 2000 Problem"). Like other investment
companies and financial and business organizations, a Fund could be adversely
affected if the computer systems used by the Manager or other Fund service
providers do not properly address this problem prior to January 1, 2000. The
Manager has established a dedicated group to analyze these issues and to
implement any systems modifications necessary to prepare for the Year 2000.
Currently, the Manager does not anticipate that the transition to the Year 2000
will have any material impact on its ability to continue to service the Fund at
current levels. In addition, the Manager has sought assurances from the Funds'
other service providers that they are taking all necessary steps to ensure that
their computer systems will accurately reflect the Year 2000, and the Manager
will continue to monitor the situation. At this time, however, no assurance can
be given that the Funds' other service providers have anticipated every step
necessary to avoid any adverse effect on the Funds attributable to the Year 2000
Problem.
------------------------------------
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> 50
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<PAGE> 51
(This page intentionally left blank.)
<PAGE> 52
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,
a division of Princeton 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
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> 53
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.................................. 24
Transfer Agency Services........................ 25
Purchase of Shares................................ 25
Initial Sales Charge Alternatives--Class A and
Class D Shares................................ 27
Deferred Sales Charge Alternatives--Class B and
Class C Shares................................ 29
Distribution Plans.............................. 32
Limitations on the Payment of Deferred Sales
Charges....................................... 34
Redemption of Shares.............................. 35
Redemption...................................... 35
Repurchase...................................... 35
Reinstatement Privilege--Class A and Class D
Shares........................................ 36
Shareholder Services.............................. 36
Investment Account.............................. 36
Exchange Privilege.............................. 37
Systematic Withdrawal Plans..................... 38
Automatic Investment Plans...................... 39
Automatic Reinvestment of Dividends and Capital
Gains Distributions........................... 39
Fee-Based Programs.............................. 39
Portfolio Transactions............................ 40
Distributions and Taxes........................... 41
Distributions................................... 41
Taxes........................................... 41
State........................................... 43
Performance Data.................................. 44
Additional Information............................ 46
Determination of Net Asset Value................ 46
Organization of the Trust....................... 47
Shareholder Reports............................. 48
Shareholder Inquiries........................... 48
Year 2000 Issues................................ 48
Code #16925-1198
</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 24, 1998
Distributor:
Merrill Lynch
Funds Distributor
This Prospectus should be
retained for future reference.
[MERRILL LYNCH COMPASS LOGO]
<PAGE> 54
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 two separate series, Merrill Lynch California
Limited Maturity Municipal Bond Fund (the "California Fund") and Merrill Lynch
Florida Limited Maturity Municipal Bond Fund (the "Florida Fund"). Each series
of the Trust is referred to herein as a "Fund." The investment objective of the
California Fund is to provide shareholders with as high a level of income exempt
from Federal income taxes and California income taxes as is consistent with
prudent investment management. The Florida Fund seeks to provide shareholders
with as high a level of income exempt from Federal income taxes as is consistent
with prudent investment management and also seeks to offer shareholders the
opportunity to own shares the value of which is exempt from Florida intangible
personal property tax. 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, in the
case of the California Fund, California income taxes or, in the case of the
Florida Fund, would not subject shareholders to Florida intangible personal
property taxes. There can be no assurance that the investment objective of
either 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 24, 1998 (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--DISTRIBUTOR
------------------------
THE DATE OF THIS STATEMENT OF ADDITIONAL INFORMATION IS NOVEMBER 24, 1998
<PAGE> 55
INVESTMENT OBJECTIVE AND POLICIES
The investment objective of the California Fund is to provide shareholders
with as high a level of income exempt from Federal and California income taxes
as is consistent with prudent investment management. The investment objective of
the Florida Fund is to provide shareholders with as high a level of income
exempt from Federal income taxes as is consistent with prudent investment
management and to offer shareholders the opportunity to own shares the value of
which is exempt from Florida 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, and, in
the case of the California Fund, California income taxes or, in the case of the
Florida Fund, provide exemption of Florida Fund shares from Florida intangible
personal property tax. Obligations that pay interest exempt from Federal income
taxes are referred to herein as "Municipal Bonds." "California Municipal Bonds"
are obligations which pay interest exempt from Federal and California income
taxes. "Florida Municipal Bonds" are obligations which pay interest exempt from
Federal income taxes and would not subject shareholders to Florida intangible
personal property taxes. California Municipal Bonds and Florida Municipal Bonds
are sometimes 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
Objective 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 ("S&P") (currently AAA, AA, A and BBB) or
Fitch IBCA, 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 providing
the credit enhancement. 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 and, for the California Fund, California income taxes
or, in the case of the Florida Fund, to hold investments that would subject
shareholders to Florida intangible personal property taxes. However, to the
extent that suitable State Municipal Bonds are not available for investment by a
Fund, a Fund may purchase Municipal
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Bonds issued by other states or their agencies or instrumentalities, the
interest income on which is exempt, in the opinion of bond counsel to the
issuer, from Federal income tax but which is not exempt from California income
tax or which could subject shareholders to Florida intangible personal property
tax, as the case may be. 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 each Fund that may not be
changed without a vote of a majority of the outstanding shares of that 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. 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
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tax-exempt securities. To seek to limit the volatility of these 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.
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 or that, in the
Manager's judgment, possess similar credit characteristics ("high yield
securities"). See Appendix C--"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
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higher rated securities. Reduced secondary market liquidity may have an adverse
impact on market price and a Fund's ability to dispose of particular issues when
necessary to meet the Fund's liquidity needs or in response to a specific
economic event such as a deterioration in the creditworthiness of the issuer.
Reduced secondary market liquidity for certain securities also may make it more
difficult for a Fund to obtain accurate market quotations for purposes of
valuing the Fund's portfolio. Market quotations generally are available on many
high yield securities only from a limited number of dealers and may not
necessarily represent firm bids of such dealers or prices for actual sales.
It is expected that a significant portion of the high yield securities
acquired by a Fund will be purchased upon issuance, which may involve special
risks because the securities so acquired are new issues. In such instances the
Fund may be a substantial purchaser of the issue and therefore have the
opportunity to participate in structuring the terms of the offering. Although
this may enable a Fund to seek to protect itself against certain of such risks,
the considerations discussed herein would nevertheless remain applicable.
Adverse publicity and investor perceptions, which may not be based on
fundamental analysis, also may decrease the value and liquidity of high yield
securities, particularly in a thinly traded market. Factors adversely affecting
the market value of high yield securities are likely to affect adversely a
Fund's net asset value. In addition, a Fund may incur additional expenses to the
extent that it is required to seek recovery upon a default on a portfolio
holding or participate in the restructuring of the obligation.
DESCRIPTION OF MUNICIPAL BONDS AND TEMPORARY INVESTMENTS
Set forth below is a description of the Municipal Bonds and Temporary
Investments in which each Fund may invest. A more complete discussion concerning
futures and options transactions and Municipal Bonds is set forth under
"Investment Objectives and Policies" in the Prospectus. Information with respect
to ratings assigned to tax-exempt obligations which the Funds may purchase is
set forth in Appendix C 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 is excluded from gross income for Federal
income tax purposes ("exempt from Federal income tax"). 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. In the case of certain community facilities district special tax
("Mello-Roos" in the case of California Municipal Bonds), tax increment (or tax
allocation) and assessment bonds, the payment of the special tax, tax increment
and assessments may be secured solely by remedies against the land (such as by
foreclosure) and not against the individual property owner, which could be
time-consuming and costly.
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
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insurance or other security is furnished. The Funds may invest in Municipal
Bonds that are so-called "moral obligation" bonds, which normally are issued by
special purpose public authorities. If an issuer of moral obligation bonds is
unable to meet its obligations, the repayment of such bonds becomes a moral
commitment, but not a legal obligation, of the state or municipality in
question.
Also included within the general category of Municipal Bonds are
participation certificates issued by 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
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adjustable at intervals (ranging from daily to up to one year) to some
prevailing market rate for similar investments, such adjustment formula being
calculated to maintain the market value of the VRDOs at approximately the par
value of the VRDOs on the adjustment date. The adjustments typically are set at
a rate determined by the remarketing agent or based upon the Public Securities
Association Index or some other appropriate interest rate adjustment index. The
Funds may invest in all types of tax-exempt instruments currently outstanding or
to be issued in the future 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-3/VMIG-3 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
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construed to be a collateralized loan, the underlying securities are not owned
by a Fund but only constitute collateral for the seller's obligation to pay the
repurchase price. Therefore, a Fund may suffer time delays and incur costs or
possible losses in connection with the disposition of the collateral. In the
event of a default under such a repurchase agreement, instead of the contractual
fixed rate of return, the rate of return to a Fund will depend on intervening
fluctuations of the market value of such security and the accrued interest on
the security. In such event, a Fund would have rights against the seller for
breach of contract with respect to any losses arising from market fluctuations
following the failure of the seller to perform. A Fund may not invest in
repurchase agreements maturing in more than seven days if such investments,
together with all other illiquid investments, would exceed 15% of the Fund's
total assets.
In general, for Federal income tax purposes, repurchase agreements are
treated as collateralized loans secured by the securities "sold." Therefore,
amounts earned under such agreements will not be considered tax-exempt interest.
FINANCIAL FUTURES TRANSACTIONS AND OPTIONS
Reference is made to the discussion concerning futures and options
transactions under "Investment Objectives and Policies" in the Prospectus. Set
forth below is additional information concerning these transactions.
As described in the Prospectus, each Fund may purchase and sell
exchange-traded financial futures contracts ("financial futures contracts") and
options thereon to hedge its portfolio of Municipal Bonds against declines in
the value of such securities and to hedge against increases in the cost of
securities a Fund intends to purchase. However, any transactions involving
financial futures or options will be in accordance with a Fund's investment
policies and limitations. To hedge its portfolio, a Fund may take an investment
position in a financial futures contract or option thereon which will move in
the opposite direction from the portfolio position being hedged. While a Fund's
use of hedging strategies is intended to moderate capital changes in portfolio
holdings and thereby reduce the volatility of the net asset value of Fund
shares, each Fund anticipates that its net asset value will fluctuate. Set forth
below is information concerning financial futures contracts and options thereon.
Description of Financial Futures Contracts. A financial futures contract
is an agreement between two parties to buy and sell a security or, in the case
of an index-based futures contract, to make and accept a cash settlement for a
set price on a future date. A majority of transactions in financial futures
contracts, however, do not result in the actual delivery of the underlying
instrument or cash settlement, but are settled through liquidation, i.e., by
entering into an offsetting transaction. Financial futures contracts have been
designed by boards of trade which have been designated "contracts markets" by
the Commodity Futures Trading Commission (the "CFTC").
The purchase or sale of a financial futures contract differs from the
purchase or sale of a security in that no price or premium is paid or received.
Instead, an amount of cash or securities acceptable to the broker and the
relevant contract market, which varies, but is generally about 5% of the
contract amount, must be deposited with the broker. This amount is known as
"initial margin" and represents a "good faith" deposit assuring the performance
of both the purchaser and seller under the financial futures contract.
Subsequent payments to and from the broker, called "variation margin," are
required to be made on a daily basis as the price of the financial futures
contract fluctuates making the long and short positions in the financial futures
contract more or less valuable, a process known as "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
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requirements are added to, and an equal number of old issues are deleted from,
the Municipal Bond Index. The value of the Municipal Bond Index is computed
daily according to a formula based on the price of each bond in the Municipal
Bond Index, as evaluated by six dealer-to-dealer brokers.
The Municipal Bond Index financial futures contract is traded only on the
CBT. Like other contract markets, the CBT assures performance under financial
futures contracts through a clearing corporation, a nonprofit organization
managed by the exchange membership 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
9
<PAGE> 63
call option on financial futures contracts to hedge against a market advance
when such Fund is not fully invested.
The writing of a call option on a financial futures contract constitutes a
partial hedge against declining prices of the securities which are deliverable
upon exercise of the financial futures contract. If the futures price at
expiration is below the exercise price, a Fund will retain the full amount of
the option premium which provides a partial hedge against any decline that may
have occurred in such Fund's portfolio holdings.
Put Options on Financial Futures Contracts. The purchase of a put option
on a financial futures contract is analogous to the purchase of a protective put
option on portfolio securities. A Fund will purchase put options on financial
futures contracts to hedge such Fund's portfolio against the risk of rising
interest rates.
The writing of a put option on a financial futures contract constitutes a
partial hedge against increasing prices of the securities which are deliverable
upon exercise of the financial futures contract. If the futures price at
expiration is higher than the exercise price, a Fund will retain the full amount
of the option premium which provides a partial hedge against any increase in the
price of Municipal Bonds which such Fund intends to purchase.
The writer of an option on a financial futures contract is required to
deposit initial and variation margin pursuant to requirements similar to those
applicable to financial futures contracts. Premiums received from the writing of
an option will be included in initial margin. The writing of an option on a
financial futures contract involves risks similar to those relating to financial
futures contracts.
The Trust has received an order from the Commission exempting it from the
provisions of Section 17(f) and Section 18(f) of the Investment Company Act of
1940, as amended (the "1940 Act") in connection with its strategy of investing
in financial futures contracts. Section 17(f) relates to the custody of
securities and other assets of an investment company and may be deemed to
prohibit certain arrangements between the Trust and commodities brokers with
respect to initial and variation margin. Section 18(f) of the 1940 Act prohibits
an open-end investment company such as the Trust from issuing a "senior
security" other than a borrowing from a bank. The staff of the Commission in the
past has indicated that a financial futures contract may be a "senior security"
under the 1940 Act.
Restrictions on Use of Financial Futures Transactions. Regulations of the
CFTC applicable to each Fund require that all of a Fund's financial futures
transactions constitute bona fide hedging transactions and that a Fund purchase
and sell futures contracts and options thereon (i) for bona fide hedging
purposes, and (ii) for non-hedging purposes, if the aggregate initial margin and
premiums required to establish positions in such contracts and options does not
exceed 5% of the liquidation value of the Fund's portfolio assets after taking
into account unrealized profits and unrealized losses on any such contracts and
options. (However, each Fund intends to engage in options and futures
transactions only for hedging purposes.) Margin deposits may consist of cash or
securities acceptable to the broker and the relevant contract market.
When a Fund purchases a financial futures contract or a call option with
respect thereto or writes a put option on a futures contract, an amount of cash,
cash equivalents or liquid securities will be deposited in a segregated account
with the Fund's custodian so that the amount so segregated, plus the amount of
initial and variation margin held in the account of its broker, equals the
market value of the financial futures contract or related option, thereby
ensuring that the use of such futures is unleveraged.
Risk Factors in Financial Futures Contracts and Options Thereon.
Investment in financial futures contracts and options thereon involves the risk
of imperfect correlation between movements in the price of the financial
futures contract and the price of the security being hedged. The hedge will not
be fully effective when there is imperfect correlation between the movements in
the prices of two financial instruments. For example, if 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.
10
<PAGE> 64
The particular municipal bonds comprising the index underlying the
Municipal Bond Index financial futures contracts may vary from the Municipal
Bonds held by a Fund. As a result, a Fund's ability to hedge effectively all or
a portion of the value of its Municipal Bonds through the use of such financial
futures contracts or options thereon will depend in part on the degree to which
price movements in the index underlying the financial futures contract correlate
with the price movements of the Municipal Bonds held by a Fund. The correlation
may be affected by disparities in the average maturity, ratings, geographical
mix or structure of a Fund's investments as compared to those comprising the
Municipal Bond Index, and general economic or political factors. In addition,
the correlation between movements in the value of the Municipal Bond Index may
be subject to change over time as additions to and deletions from the Municipal
Bond Index alter its structure. The correlation between financial futures
contracts on U.S. Government securities or options thereon and the Municipal
Bonds held by a Fund may be affected adversely by similar factors, and the risk
of imperfect correlation between movements in the prices of financial futures
contracts or options thereon and the prices of the Municipal Bonds held by a
Fund may be greater.
Each Fund expects to liquidate a majority of the financial futures
contracts it enters into through offsetting transactions on the applicable
contract market. There can be no assurance, however, that a liquid secondary
market will exist for any particular financial futures contract at any specific
time. Thus, it may not be possible to close out a futures position. In the event
of adverse price movements, a Fund would continue to be required to make daily
cash payments of variation margin. In such situations, if a Fund has
insufficient cash, it may be required to sell portfolio securities to meet daily
variation margin requirements at a time when it may be disadvantageous to do so.
The inability to close out financial futures positions also could have an
adverse impact on a Fund's ability to hedge effectively its investments in
Municipal Bonds. A Fund will enter into a financial futures position only if, in
the judgment of the Manager, there appears to be an actively traded secondary
market for such financial futures contracts or options thereon.
The successful use of transactions in financial futures and related options
also depends on the ability of the Manager to forecast correctly the direction
and extent of interest rate movements within a given time frame. To the extent
interest rates remain stable during the period in which a financial futures
contract or option is held by a Fund or such rates move in a direction opposite
to that anticipated, a Fund may realize a loss on the hedging transaction 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
11
<PAGE> 65
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, each 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."
12
<PAGE> 66
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 Manager, each Fund is prohibited from
engaging in certain transactions involving Merrill Lynch 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, executive officers of the Trust and the
individual who serves as portfolio manager of both 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 the portfolio manager is P.O. Box 9011, Princeton, New Jersey 08543-9011.
ARTHUR ZEIKEL (66)--President and Trustee(1)(2)--Chairman of the Manager
and of Merrill Lynch Asset Management, L.P. ("MLAM") (which terms as used herein
include their corporate predecessors) since 1997; President of the Manager and
MLAM from 1977 to 1997; Chairman of Princeton Services, Inc. ("Princeton
Services") since 1997 and Director thereof since 1993; President of Princeton
Services from 1993 to 1997; Executive Vice President of Merrill Lynch & Co.,
Inc. ("ML & Co.") since 1990.
JAMES H. BODURTHA (54)--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 (59)--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 (71)--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> 67
JOSEPH L. MAY (69)--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 (46)--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 (58)--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 Princeton Funds
Distributor, Inc. ("PFD") since 1986 and Director thereof since 1991; President
of Princeton Administrators, L.P. since 1988.
VINCENT R. GIORDANO (54)--Senior Vice President(1)(2)--Senior Vice
President of the Manager and MLAM since 1984; Senior Vice President of Princeton
Services since 1993.
EDWARD J. ANDREWS (38)--Portfolio Manager and Vice President of both
Funds(1)(2)--Vice President of the Manager and of MLAM since 1991.
DONALD C. BURKE (38)--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 (49)--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 PFD since 1984 and Vice
President thereof since 1981.
ALICE A. PELLEGRINO (38)--Secretary(1)(2)--Attorney with MLAM since 1997;
Associate with Kirkpatrick & Lockhert LLP from 1990 to 1997.
- ---------------
(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, 1998, the Trustees, the officers of the Trust and the
officers of the Funds as a group (12 persons) owned an aggregate of less than 1%
of the outstanding shares of either Fund. At such date, Mr. Zeikel, a Trustee
and officer of the Trust, the other officers of the Trust and the officers of
the Funds owned less than 1% of the outstanding shares of 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 $24,336 for the
fiscal year ended July 31, 1998, and were allocated to each Fund on the basis of
the relative asset size of each Fund as follows: California Fund, $8,994; and
Florida Fund, $15,342.
The following table sets forth the compensation paid by the Trust to the
non-affiliated Trustees for the fiscal year ended July 31, 1998, and the
aggregate compensation paid by all registered investment companies
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<PAGE> 68
(including the Trust) advised by the Manager and its affiliate, MLAM ("FAM/MLAM
Advised Funds") to the non-affiliated Trustees for the calendar year ended
December 31, 1997:
<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 (25 registered investment companies consisting of 43 portfolios);
Mr. London (25 registered investment companies consisting of 43 portfolios);
Mr. Martin (25 registered investment companies consisting of 43 portfolios);
Mr. May (25 registered investment companies consisting of 43 portfolios);
and Mr. Perold (25 registered investment companies consisting of 43
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, 1998, 1997
and 1996, the total advisory fee payable by each Fund to the Manager and the
amount of such fee, if any, voluntarily waived by the Manager:
<TABLE>
<CAPTION>
FOR THE YEAR
ENDED JULY 31,
----------------------------------
FUND 1998 1997 1996
---- ------- ------- --------
<S> <C> <C> <C>
California Fund.......................... $42,624(1) $51,013(2) $ 54,033(3)
Florida Fund............................. $79,912 $90,513 $108,720(4)
</TABLE>
- ---------------
(1) The Manager voluntarily waived the payment of $24,356 of the advisory fee.
(2) The Manager voluntarily waived the payment of $29,150 of the advisory fee.
(3) The Manager voluntarily waived the payment of all of the advisory fee.
(4) The Manager voluntarily waived the payment of $24,123 of the advisory fee.
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
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<PAGE> 69
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 Merrill Lynch Funds Distributor, a
division of PFD (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, 1998, 1997 and 1996, the
amount reimbursed by each Fund to the Manager for accounting services:
<TABLE>
<CAPTION>
FOR THE YEAR
ENDED JULY 31,
-----------------------------
FUND 1998 1997 1996
---- ------- ------- -------
<S> <C> <C> <C>
California Fund............................... $34,024 $32,283 $38,245
Florida Fund.................................. $66,965 $64,974 $34,053
</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.
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
16
<PAGE> 70
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 "Select Pricing 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, 1998
----------------------------------------------------------
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 $0
Florida Fund................................. $1,050 $100 $950 $0
</TABLE>
<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 $0
Florida Fund................................. $631 $68 $563 $0
</TABLE>
<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 $0
Florida Fund................................. $497 $22 $475 $0
</TABLE>
The gross sales charges, the amounts of such charges received by the
Distributor and Merrill Lynch for the sale of Class D shares and the CDSCs paid
with respect to redemption within one year after purchase of
17
<PAGE> 71
Class D 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, 1998
----------------------------------------------------------
CLASS D AMOUNT AMOUNT CDSCS
GROSS SALES PAID TO PAID TO PAID TO
FUND CHARGES DISTRIBUTOR MERRILL LYNCH DISTRIBUTOR
---- ----------- ----------- ------------- -----------
<S> <C> <C> <C> <C>
California Fund.............................. $242 $ 7 $235 $ 0
Florida Fund................................. $337 $13 $324 $2,988
</TABLE>
<TABLE>
<CAPTION>
FOR THE YEAR ENDED JULY 31, 1997
----------------------------------------------------------
CLASS D AMOUNT AMOUNT CDSCS
GROSS SALES PAID TO PAID TO PAID TO
FUND CHARGES DISTRIBUTOR MERRILL LYNCH DISTRIBUTOR
---- ----------- ----------- ------------- -----------
<S> <C> <C> <C> <C>
California Fund.............................. $2,379 $224 $2,155 $0
Florida Fund................................. $ 576 $ 55 $ 521 $0
</TABLE>
<TABLE>
<CAPTION>
FOR THE YEAR ENDED JULY 31, 1996
----------------------------------------------------------
CLASS D AMOUNT AMOUNT CDSCS
GROSS SALES PAID TO PAID TO PAID TO
FUND CHARGES DISTRIBUTOR MERRILL LYNCH DISTRIBUTOR
---- ----------- ----------- ------------- -----------
<S> <C> <C> <C> <C>
California Fund.............................. $3,148 $299 $2,849 $0
Florida Fund................................. $2,943 $373 $2,570 $0
</TABLE>
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
Select Pricing Funds ("Eligible Class A Shares") are offered at net asset value
to shareholders of certain closed-end funds advised by the Manager or MLAM who
purchased such closed-end fund shares prior to October 21, 1994, the date the
Merrill Lynch Select Pricing(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 Select Pricing
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
18
<PAGE> 72
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 to purchases
made 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 Select Pricing 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 Select Pricing 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 and Class D shares of a Fund and of other Select Pricing 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 5.0% 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 5.0%
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 that
would be applicable to a single purchase equal to the total dollar value of the
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 the Summit Cash Reserves Fund into a
Fund that creates a sales charge will count toward completing a new or existing
Letter of Intention to the Fund.
19
<PAGE> 73
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 investment for such accounts is $500, except that the initial minimum
investment 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 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).
20
<PAGE> 74
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 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 as of July 31, 1998
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
21
<PAGE> 75
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 Select Pricing Funds who elect to exchange Class C
shares of such other Select Pricing Funds for Class C shares of one of the
Funds.
<TABLE>
<CAPTION>
DATA CALCULATED AS OF JULY 31, 1998
--------------------------------------------------------------------------------------------
(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......... $15,125 $ 945 $373 $1,318 $111 $1,207 $10
Under Distributor's Voluntary
Waiver........................... $15,125 $ 945 $ 76 $1,021 $111 $ 910 $10
FLORIDA FUND
- -----------------------------------
Under NASD Rule as Adopted......... $24,725 $1,545 $575 $2,120 $388 $1,732 $16
Under Distributor's Voluntary
Waiver........................... $24,725 $1,545 $124 $1,669 $388 $1,281 $16
</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.
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.
22
<PAGE> 76
For the fiscal years ended July 31, 1998, 1997 and 1996, 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 1998 1997 1996
---- ------ ------ -------
<S> <C> <C> <C>
California Fund............................... $3,550 $6,780 $ 3,459
Florida Fund.................................. $4,821 $7,396 $18,456
</TABLE>
Additional CDSCs payable to the Distributor with respect to each of the
Funds during the fiscal years ended July 31, 1998 and 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 year ended July 31,
1998, the Distributor received CDSCs of approximately $63 from the California
Fund and no CDSCs from the Florida Fund with respect to redemptions of Class C
shares. For the fiscal years ended July 31, 1997 and 1996, 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, 1998, 1997 and
1996, information about the transactions engaged in by the Funds pursuant to
this order.
<TABLE>
<CAPTION>
FOR THE YEAR ENDED FOR THE YEAR ENDED FOR THE YEAR ENDED
JULY 31, 1998 JULY 31, 1997 JULY 31, 1996
------------------------------ ----------------------------- ----------------------------
NUMBER OF AGGREGATE NUMBER OF AGGREGATE NUMBER OF AGGREGATE
TRANSACTIONS DOLLAR AMOUNT TRANSACTIONS DOLLAR AMOUNT TRANSACTIONS DOLLAR AMOUNT
------------- ------------- ------------ ------------- ------------ -------------
<S> <C> <C> <C> <C> <C> <C>
California Fund...... 1 $200,000 0 -- 0 --
Florida Fund......... 0 -- 4 $600,000 2 $1,000,000
</TABLE>
Affiliated persons of the Trust may serve as its broker in OTC 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
23
<PAGE> 77
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, the NYSE closes at 4:00 p.m., Eastern
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 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, copies of the various plans described below and
instructions as to how to participate in the various services or plans, or how
to change options with respect thereto, can be obtained from the Trust, the
Distributor or Merrill Lynch.
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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. An investor
whose shares of a Fund are held within a CMA(R) or CBA(R) account may arrange to
have periodic investments made in the Fund in amounts of $100 or more through
the CMA(R) or CBA(R) Automated Investment Program.
AUTOMATIC REINVESTMENT OF DIVIDENDS AND CAPITAL GAINS DISTRIBUTIONS
Unless specific instructions are given as to the method of payment of
dividends and capital gains distributions, dividends and distributions will be
automatically reinvested in additional shares of the respective Fund. Such
reinvestment will be at the net asset value of shares of the respective Fund as
of the close of business on the monthly payment date for such dividends and
distributions. Shareholders may elect in writing to receive either their income
dividends or capital gains distributions, or both, in cash, in which event
payment will be mailed on or about the payment date, (provided that, in the
event that a payment on an account maintained at the Transfer Agent would amount
to $10.00 or less, a shareholder will not receive such payment in cash and such
payment will automatically be reinvested in additional shares). 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.
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
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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 and
the class of shares to be redeemed. Redemptions will be made at net asset value
as determined as of 15 minutes after the close of business on the NYSE
(generally, the NYSE closes at 4:00 p.m., Eastern 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 be applied thereafter to Class D shares if the
shareholder so elects. 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
Merrill Lynch 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.
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
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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 CMA(R) or CBA(R)
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 Merrill Lynch Financial Consultant.
EXCHANGE PRIVILEGE
U.S. shareholders of each class of shares of the Fund have an exchange
privilege with certain other Select Pricing Funds and Summit Cash Reserves Fund
("Summit"), a series of Financial Institutions Series Trust, which is a Merrill
Lynch-sponsored money market mutual fund specifically designated as available
for exchange by holders of Class A, Class B, Class C and Class D shares of
Select Pricing Funds. 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. Before
effecting an exchange, shareholders should obtain a currently effective
prospectus of the fund into which the exchange is to be made. Exercise of the
exchange privilege is treated as a sale of the exchanged shares and a purchase
of the acquired shares for Federal income tax purposes.
Exchanges of Class A and Class D Shares. Class A shareholders may exchange
Class A shares of the Fund for Class A shares of a second Select Pricing Fund if
the shareholder holds any Class A shares of the second fund in his or her
account in which the exchange is made at the time of the exchange or is
otherwise eligible to purchase Class A shares of the second fund. If the Class A
shareholder wants to exchange Class A shares for shares of a second Select
Pricing 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 Select Pricing 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 D shares are
exchangeable with shares of the same class of other Select Pricing Funds.
Exchanges of Class A or Class D shares outstanding ("outstanding Class A or
Class D shares") for Class A or Class D shares of other Select Pricing Funds or
Class A shares of Summit ("new Class A or Class D shares") are transacted on the
basis of relative net asset value per Class A or Class D share, respectively,
plus an amount equal to the difference, if any, between the sales charge
previously paid on the outstanding Class A or Class D shares and the sales
charge payable at the time of the exchange on the new Class A or Class D shares.
With respect to outstanding Class A or Class D shares as to which previous
exchanges have taken place, the "sales charge previously paid" shall include the
aggregate of the sales charges paid with respect to such Class A or Class D
shares in the initial purchase and any subsequent exchange. Class A or Class D
shares issued pursuant to dividend reinvestment are sold on a no-load basis in
each of the funds offering Class A or Class D shares. For purposes of the
exchange privilege, Class A or Class D shares acquired through dividend
reinvestment shall be deemed to have been sold with a sales charge equal to the
sales charge previously paid on the Class A or Class D shares on which the
dividend was paid. Based on this formula, Class A and Class D shares generally
may be exchanged into the Class A or Class D shares, respectively, of the other
funds with a reduced sales charge or without a sales charge.
Exchanges of Class B and Class C Shares. Each Select Pricing Fund 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 Select Pricing Fund or for Class B shares of Summit
("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 the 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 new
Class B shares acquired through use of the exchange privilege. In addition,
Class B shares of the 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 fund from which the exchange has
been made. For purposes of computing the CDSC that may be payable on a
disposition of the new Class B or Class C shares, the holding
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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 or Class C shares of the Fund for those of Merrill Lynch
Special Value Fund, Inc. ("Special Value Fund") after having held the Fund's
Class B shares for two and a half years. The 2% CDSC that generally would apply
to a redemption would not apply to the exchange. Three years later the investor
may decide to redeem the Class B shares of Special Value Fund and receive cash.
There will be no CDSC due on this redemption, since by "tacking" the two and a
half year holding period of Fund Class B shares to the three-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 more than five years.
Exchanges for Shares of a Money Market Fund. Class A and Class D shares
are exchangeable for Class A shares of Summit and Class B and Class C shares are
exchangeable for Class B shares of Summit. Class A shares of Summit have an
exchange privilege back into Class A or Class D shares of Select Pricing Funds;
Class B shares of Summit have an exchange privilege back into Class B or Class C
shares of Select Pricing Funds and, in the event of such an exchange, the period
of time that Class B shares of Summit are held will count toward satisfaction of
the holding period requirement for purposes of reducing any CDSC and toward
satisfaction of any conversion period with respect to Class B shares. Class B
shares of Summit will be subject to a distribution fee at an annual rate of
0.75% of average daily net assets of such Class B shares. This exchange
privilege does not apply with respect to certain Merrill Lynch fee-based
programs for which alternate exchange arrangements may exist. Please see your
Merrill Lynch Financial Consultant for further information.
Prior to October 12, 1998, exchanges from the Funds and other Select
Pricing Funds into a money market fund were directed to certain Merrill
Lynch-sponsored money market funds other than Summit. Shareholders who exchanged
Select Pricing Fund shares for shares of such other money market funds and
subsequently wish to exchange those money market fund shares for shares of a
Fund will be subject to the CDSC schedule applicable to such Fund shares, if
any. The holding period for those money market fund shares will not count toward
satisfaction of the holding period requirement for reduction of the CDSC imposed
on such shares, if any, and, with respect to Class B shares, toward satisfaction
of the conversion period. However, the holding period for Class B or Class C
shares received in exchange for such money market fund shares will be aggregated
with the holding period for the original Select Pricing Fund shares for purposes
of reducing the CDSC or satisfying the conversion period.
The Funds' exchange privilege is modified with respect to purchases of
Class A and Class D shares by non-retirement plan investors under the MFA
program. First, the initial allocation of assets is made under the MFA program.
Then, any subsequent exchange under the MFA program of Class A or Class D shares
of a Select Pricing Fund for Class A or Class D shares of the Fund will be made
solely on the basis of the relative net asset value of the shares being
exchanged. Therefore, there will not be a charge for any difference between the
sales charge previously paid on the shares of the other Select Pricing Fund and
the sales charge payable on the shares of the Fund being acquired in the
exchange under the MFA program.
Exercise of the Exchange Privilege. To exercise the exchange privilege, a
shareholder should contact his or her Merrill Lynch Financial Consultant, who
will advise the Fund of the exchange. Shareholders of the Fund, and shareholders
of the other Select Pricing Funds with shares for which certificates have not
been issued, may exercise the exchange privilege by wire through their
securities dealers. The Fund reserves the right to require a properly completed
Exchange Application. This exchange privilege may be modified or terminated in
accordance with the rules of the Commission. The 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 to the general
public at any time and may thereafter 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. It is contemplated that the exchange privilege
may be applicable to other new mutual funds whose shares may be distributed by
the Distributor.
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DISTRIBUTIONS AND TAXES
FEDERAL
The Trust intends to continue to qualify each of the Funds for the special
tax treatment afforded regulated investment companies ("RICs") under the
Internal Revenue Code of 1986, as amended (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.
As discussed in the Prospectus for the Trust, the Trust has established
different 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 California 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
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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. Certain categories of
capital gains are taxable at different rates for Federal income tax purposes.
Generally, not later than 60 days after the close of each Fund's taxable year,
the Trust will provide shareholders with a written notice designating the
amounts of any exempt-interest dividends, ordinary income dividends or capital
gain dividends, as well as any 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 the calendar 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.
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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.
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.
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. Shareholders
subject to taxation by states other than California may realize a lower after-
tax rate of return than California shareholders since the dividends distributed
by the California Fund may not be exempt, to any significant degree, from income
taxation by such other states. However, exempt-interest dividends paid to a
corporate shareholder subject to California state corporate franchise tax will
be taxable as
31
<PAGE> 85
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.
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 on January 1 of any year,
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.
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
32
<PAGE> 86
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.
On occasion, a Fund may compare its performance to the Merrill Lynch U1AO
Index or the other market indices or to performance data published by Lipper
Analytical Services, Inc., Morningstar Publications, Inc. ("Morningstar"), CDA
Investment Technology, Inc., Money Magazine, U.S. News & World Report, Business
Week, Forbes Magazine and Fortune Magazine or other industry publications. When
comparing its performance to a market index, a Fund may refer to various
statistical measures derived from the historic performance of the Fund and the
index, such as standard deviation and beta. In addition, from time to time, a
Fund may include its risk-adjusted performance ratings assigned by Morningstar
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.
Set forth below is the total return, yield and tax-equivalent yield
information for the Class A, Class B, Class C and Class D shares of each of the
Funds for the periods indicated.
33
<PAGE> 87
<TABLE>
<CAPTION>
CALIFORNIA FUND
- -----------------------------------------------------------------------------------------------------------------
CLASS A SHARES CLASS B SHARES
------------------------------------- -------------------------------------
EXPRESSED AS REDEEMABLE VALUE EXPRESSED AS REDEEMABLE VALUE
A PERCENTAGE OF A HYPOTHETICAL A PERCENTAGE OF A HYPOTHETICAL
BASED ON A $1,000 INVESTMENT BASED ON A $1,000 INVESTMENT
HYPOTHETICAL AT THE END OF HYPOTHETICAL AT THE END OF
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, 1998...... 1.93% $1,019.30 1.60% $1,016.00
Inception (November 26, 1993) to
July 31, 1998................... 4.03% $1,202.80 3.86% $1,193.80
Inception (October 21, 1994) to
July 31, 1998................... -- -- -- --
ANNUAL TOTAL RETURN
(EXCLUDING MAXIMUM APPLICABLE SALES CHARGE)
Year Ended July 31,
1998............................ 2.96% $1,029.60 2.59% $1,025.90
1997............................ 5.57% $1,055.70 5.20% $1,052.00
1996............................ 4.56% $1,045.60 4.08% $1,040.80
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, 1998................... 20.28% $1,202.80 19.38% $1,193.80
Inception (October 21, 1994) to
July 31, 1998................... -- -- -- --
30 days ended July 31, 1998....... 2.65% -- 2.33% --
30 days ended July 31, 1998....... 3.68% -- 3.24% --
<CAPTION>
CALIFORNIA FUND
- ---------------------------------- -----------------------------------------------------------------------------
CLASS C SHARES CLASS D SHARES
------------------------------------- -------------------------------------
EXPRESSED AS REDEEMABLE VALUE EXPRESSED AS REDEEMABLE VALUE
A PERCENTAGE OF A HYPOTHETICAL A PERCENTAGE OF A HYPOTHETICAL
BASED ON A $1,000 INVESTMENT BASED ON A $1,000 INVESTMENT
HYPOTHETICAL AT THE END OF HYPOTHETICAL AT THE END OF
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, 1998...... 1.69% $1,016.90 1.83% $1,018.30
Inception (November 26, 1993) to
July 31, 1998................... -- -- -- --
Inception (October 21, 1994) to
July 31, 1998................... 4.78% $1,192.60 4.66% $1,187.50
ANNUAL TOTAL RETURN
(EXCLUDING MAXIMUM APPLICABLE SALES CHARGE)
Year Ended July 31,
1998............................ 2.68% $1,026.80 2.86% $1,028.60
1997............................ 5.39% $1,053.90 5.47% $1,054.70
1996............................ 4.35% $1,043.50 4.46% $1,044.60
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................... -- -- -- --
AGGREGATE TOTAL RETURN
(INCLUDING MAXIMUM APPLICABLE SALES CHARGE)
Inception (November 26, 1993) to
July 31, 1998................... -- -- -- --
Inception (October 21, 1994) to
July 31, 1998................... 19.26% $1,192.60 18.75% $1,187.50
YIELD
30 days ended July 31, 1998....... 2.51% -- 2.56% --
TAX EQUIVALENT YIELD*
30 days ended July 31, 1998....... 3.49% -- 3.56% --
</TABLE>
- ---------------
* Based on a Federal income tax rate of 28%.
34
<PAGE> 88
<TABLE>
<CAPTION>
FLORIDA FUND
- ----------------------------------------------------------------------------------------------------------------------------------
CLASS A SHARES CLASS B SHARES CLASS C SHARES
------------------------------------- ------------------------------------- -----------------
EXPRESSED AS REDEEMABLE VALUE EXPRESSED AS REDEEMABLE VALUE EXPRESSED AS
A PERCENTAGE OF A HYPOTHETICAL A PERCENTAGE OF A HYPOTHETICAL A PERCENTAGE
BASED ON A $1,000 INVESTMENT BASED ON A $1,000 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, 1998... 2.14% $1,021.40 1.81% $1,018.10 1.65%
Inception (November 26, 1993)
to July 31, 1998............. 3.83% $1,192.10 3.68% $1,184.30 --
Inception (October 21, 1994) to
July 31, 1998................ -- -- -- -- 4.15%
ANNUAL TOTAL RETURN
(EXCLUDING MAXIMUM APPLICABLE SALES CHARGE)
Year Ended July 31,
1998......................... 3.17% $1,031.70 2.80% $1,028.00 2.65%
1997......................... 5.20% $1,052.00 4.83% $1,048.30 4.93%
1996......................... 3.45% $1,034.50 3.08% $1,030.80 2.48%
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, 1998............. 19.21% $1,192.10 18.43% $1,184.30 --
Inception (October 21, 1994) to
July 31, 1998................ -- -- -- -- 16.61%
YIELD
30 days ended July 31, 1998.... 2.85% -- 2.52% -- 2.33%
TAX EQUIVALENT YIELD*
30 days ended July 31, 1998.... 3.96% -- 3.50% -- 3.24%
<CAPTION>
FLORIDA FUND
- ------------------------------- ---------------------------------------------------------
CLASS C SHARES CLASS D SHARES
----------------- -------------------------------------
REDEEMABLE VALUE EXPRESSED AS REDEEMABLE VALUE
OF A HYPOTHETICAL A PERCENTAGE OF A HYPOTHETICAL
$1,000 INVESTMENT BASED ON A $1,000 INVESTMENT
AT THE END OF HYPOTHETICAL AT THE END OF
PERIOD THE PERIOD $1,000 INVESTMENT THE PERIOD
------ ----------------- ----------------- -----------------
<S> <C> <C> <C>
AVERAGE ANNUAL TOTAL RETURN
(INCLUDING MAXIMUM APPLICABLE SALES CHARGE)
One year ended July 31, 1998... $1,016.50 2.14% $1,021.40
Inception (November 26, 1993)
to July 31, 1998............. -- -- --
Inception (October 21, 1994) to
July 31, 1998................ $1,166.10 4.41% $1,176.70
ANNUAL TOTAL RETURN
(EXCLUDING MAXIMUM APPLICABLE SALES CHARGE)
Year Ended July 31,
1998......................... $1,026.50 3.17% $1,031.70
1997......................... $1,049.30 5.10% $1,051.00
1996......................... $1,024.80 3.35% $1,033.50
1995......................... -- -- --
Inception (October 21, 1994) to
July 31, 1995................ $1,056.50 6.07% $1,060.70
Inception (November 26, 1993)
to July 31, 1994............. -- -- --
AGGREGATE TOTAL RETURN
(INCLUDING MAXIMUM APPLICABLE SALES CHARGE)
Inception (November 26, 1993)
to July 31, 1998............. -- -- --
Inception (October 21, 1994) to
July 31, 1998................ $1,166.10 17.67% $1,176.70
30 days ended July 31, 1998.... -- 2.74% --
30 days ended July 31, 1998.... -- 3.81% --
</TABLE>
- ---------------
* Based on a Federal income tax rate of 28%.
35
<PAGE> 89
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 and the
Florida Fund. The Trustees are authorized to create an unlimited number of
Series and, with respect to each Series, to issue an unlimited number of full
and fractional shares of beneficial interest, par value $.10 per share, of
different classes and to divide or combine the shares into a greater or lesser
number of shares without thereby changing the proportionate beneficial interests
in the Series. Shareholder approval is not necessary for the authorization of
additional Series or classes of a Series of the Trust. At the date of this
Statement of Additional Information, the shares of each Fund are divided into
Class A, Class B, Class C and Class D shares. Class A, Class B, Class C and
Class D shares represent interests in the same assets of the relevant Fund and
have identical voting, dividend, liquidation and other rights and the same terms
and conditions, except that Class B, Class C and Class D shares bear certain
expenses related to the account maintenance and/or distribution expenditures.
The Board of Trustees may classify and reclassify the shares of any Series into
additional 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.
36
<PAGE> 90
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, 1998 is
set forth below.
<TABLE>
<CAPTION>
CLASS A CLASS B CLASS C CLASS D
------- ------- ------- -------
<S> <C> <C> <C> <C>
CALIFORNIA FUND
Net Assets............................... $1,459,687 $4,812,408 $95,572 $2,712,793
========== ========== ======= ==========
Number of Shares Outstanding............. 144,120 475,349 9,440 267,818
========== ========== ======= ==========
Net Asset Value Per Share (net assets
divided by number of shares
outstanding)........................... $ 10.13 $ 10.12 $ 10.12 $ 10.13
Sales Charge (for Class A and Class D
shares: 1.00% of offering price; 1.01%
of net asset value per share)*......... 0.10 ** ** 0.10
---------- ---------- ------- ----------
Offering Price........................... $ 10.23 $ 10.12 $ 10.12 $ 10.23
========== ========== ======= ==========
FLORIDA FUND
Net Assets............................... $5,331,094 $8,014,082 $ 1,251 $5,361,126
========== ========== ======= ==========
Number of Shares Outstanding............. 532,849 801,111 126 536,205
========== ========== ======= ==========
Net Asset Value Per Share (net assets
divided by number of shares
outstanding)........................... $ 10.00 $ 10.00 $ 9.93 $ 10.00
Sales Charge (for Class A and Class D
shares: 1.00% of offering price; 1.01%
of net asset value per share)*......... 0.10 ** ** 0.10
---------- ---------- ------- ----------
Offering Price........................... $ 10.10 $ 10.00 $ 9.93 $ 10.10
========== ========== ======= ==========
</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.
37
<PAGE> 91
TRANSFER AGENT
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 Securities and Exchange
Commission, Washington, D.C., under the Securities Act and the 1940 Act, to
which reference is hereby made.
The Declaration, a copy of which is on file in the office of the Secretary
of the Commonwealth of Massachusetts, provides that the name "Merrill Lynch
Multi-State Limited Maturity Municipal Series Trust" refers to the Trustees
under the Declaration collectively as Trustees, but not as individuals or
personally; and no Trustee, shareholder, officer, employee or agent of the Trust
shall be held to any personal liability; nor shall resort be had to any such
person's private property for the satisfaction of any obligation or claim of the
Trust but the "Trust Property" only shall be liable.
To the knowledge of the Trust, the following persons or entities owned
beneficially 5% or more of a class of a Fund's shares on November 1, 1998.
<TABLE>
<CAPTION>
NAME ADDRESS PERCENT OF CLASS
---- ------- ----------------
<S> <C> <C> <C>
California Fund....... Priscilla A. Ahern, Trustee 1310 East Balboa Blvd. 19.8% Class A
Newport Beach, CA 92661
Ann. K. Hunter-Welborn and 524 Meadowmist Court 12.5% Class A
David A. Welborn, Trustees Olivenhain, CA 92024
Norman A. Meager, Trustee 74743 Arroyo Drive 8.8% Class A
for the Meager Family Trust Indian Wells, CA 92210
Helene C. Svensgaard, Trustee P.O. Box 307 8.3% Class A
El Cerrito, CA 94530
Cynthia R. Wallace and 1809 John Street 5.6% Class A
Kirk Wallace Manhattan Beach, CA 90266
Barbara H. Stebbins, Trustee 601 Laurel Avenue #203 5.4% Class A
San Mateo, CA 94401
B.W. Duncan and Carol Duncan 28780 Gleneagle Court 5.2% Class B
Tehachapi, CA 93561
Esmaralda Das and Paul Das 19351 Saratoga Los Gatos Road 42.9% Class C
Saratoga, CA 95070
</TABLE>
38
<PAGE> 92
<TABLE>
<CAPTION>
NAME ADDRESS PERCENT OF CLASS
---- ------- ----------------
<S> <C> <C> <C>
Alison Simmons and 930 North Wetherly Drive 19.9% Class C
Christopher Simmons Los Angeles, CA 90069
Elaine Enge and Per Enge 1549 Fordham Way 10.7% Class C
Mountain View, CA 94040
Laurence I. Ginsberg and 545 Dunnegan Place 10.3% Class C
Joan L. Ginsberg, Trustees Laguna Beach, CA 92651
Walter G. Vincenti and 13200 East Sunset Drive 10.0% Class C
Joyce W. Vincenti, Trustees Los Altos Hills, CA 94022
John L. Love, Trustee P.O. Box 305 50.8% Class D
Pebble Beach, CA 93953
Chrome Hearts, Inc. 937 North Citrus Avenue 39.0% Class D
Hollywood, CA 90038
Florida Fund.......... Connor Brown Company P.O. Box 22 10.03% Class A
Ortega Station
Jacksonville, FL 32210
Claude Nolan, Inc. P.O. Box 22 10.03% Class A
Ortega Station
Jacksonville, FL 32210
Nolan Brown Motors, Inc. P.O. Box 22 9.85% Class A
Ortega Station
Jacksonville, FL 32210
Roy A. Ballantyne and 528 Woodview Drive 8.48% Class A
Shirley E. Ballantyne Longwood, FL 32779
Charles W. Swan, Jr. and 26880 Wedgewood Dr. #403 6.22% Class A
Mildred E. Schuler, Trustees Bonita Springs, FL 33923
Walter Judge, Trustee 1106 Augusta Drive 6.02% Class A
Albany, GA 31707
Roy A. Ballantyne, Trustee 528 Woodview Drive 5.80% Class A
Longwood, FL 32779
Shirley E. Ballantyne, Trustee 528 Woodview Drive 5.80% Class A
Longwood, FL 32779
Edgewater View Ltd. 8801 Leesburg Pike 6.60% Class B
Partnership Vienna, VA 22182
Fund Asset Management, L.P. P.O. Box 9011 90.84% Class C
Princeton, NJ 08543
Karen A. Skinner, Trustee P.O. Box 9229 26.90% Class D
Fort Myers, FL 33902
Karen A. Skinner, Trustee P.O. Box 9229 26.90% Class D
Edward J. McBride Fort Myers, FL 33902
Charitable Remainder Trust
Gale Young McBride P.O. Box 9229 18.01% Class D
Fort Myers, FL 33902
Patricia J. Berg P.O. Box 9227 5.49% Class D
Fort Myers, FL 33902
</TABLE>
39
<PAGE> 93
FINANCIAL STATEMENTS
The Funds' audited financial statements are incorporated in this Statement
of Additional Information by reference to the Trust's 1998 annual report to
shareholders. You may request a copy of the annual report at no charge by
calling 1-800-456-4587 ext. 789 between 8:00 a.m. and 8:00 p.m. on any business
day.
40
<PAGE> 94
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<PAGE> 95
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 of the most
recent publicly available offering statements relating to debt offerings of
California issuers, however, it has not been updated, nor will it be updated
during the year. The Fund has not independently verified the information.
GENERAL ECONOMIC CONDITIONS
The economy of the State of California (sometimes referred to herein as the
"State" or "California") is the largest among the 50 states and one of the
largest in the world. This diversified economy has major components in
agriculture, manufacturing, high technology, trade, entertainment, tourism,
construction and services.
California's July 1, 1997 population of over 32.9 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 State's population resided in the 23
Metropolitan Statistical Areas in the State. As of July 1, 1997, the 5-county
Los Angeles area accounted for 49%, with 16.0 million residents. The 10-county
San Francisco Bay Area represented 21% with a population of 6.9 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. The current economic expansion is marked by strong
growth in high technology manufacturing and services, including computer
software, electronic manufacturing and motion picture/television production;
growth is also strong in other business services, both nonresidential and
residential construction and local education.
In May 1998, the State Department of Finance projected that the California
economy will continue to show robust growth through 1998, although at a slightly
slower pace than in 1997. The Asian economic crisis which began in late 1997 was
expected to have some dampening effects on the State's economy. However, during
the summer of 1998, the soaring trade deficit, continuing weakness in Asia,
initial signs of economic weakness in Canada and Latin America, which have been
California's largest trading partners, and the fall in stock prices worldwide
all suggest that the May forecasts may be too optimistic, particularly for 1999.
Other impacts of the international situation may help California, such as the
reduction in long-term interest rates.
THE STATE
Fiscal Years Prior to 1995-96. The State's budget problems in the early
1990's 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. In
addition, the State's health and welfare programs are in a transition period as
a result of recent federal and state welfare reform initiatives.
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.
1. significant cuts in health and welfare program expenditures;
2. 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;
3. 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);
4. reduction in growth of support for higher education programs, coupled
with increases in student fees, through the 1994-95 Fiscal Year;
5. 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;
6. revenue increases (particularly in the 1991-92 Fiscal Year budget),
most of which were for a short duration;
7. 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
8. 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.
For several years during the recession, 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 increases
in student fees.
1996-97 Fiscal Year. The 1996-97 Budget Act was signed by the Governor on
July 15, 1996, along with various implementing bills. The Governor vetoed about
$82 million of appropriations (both general fund and Special Fund). With the
signing of the Budget Act, the State implemented its regular cash flow borrowing
program with the issuance of $3.0 billion of Revenue Anticipation Notes to
mature on June 30, 1997. The Budget Act appropriated a modest budget reserve in
the SFEU of $305 million, as of June 30, 1997. The Department of Finance
projected that, on June 30, 1997, the State's available internal borrowing
(cash) resources will be $2.9 billion, after payment of all obligations due by
that date, so that no cross-fiscal year borrowing will be needed.
Revenues. The Legislature rejected the Governor's proposed 15% cut in
personal income taxes (to be phased in over three years), but did approve a 5%
cut in bank and corporation taxes, to be effective for income years starting in
January 1, 1997. As a result, revenues for the Fiscal Year were estimated to
total $47.643 billion, a 3.3% increase over the final estimated 1995-96
revenues. Special Fund revenues were estimated to be $13.3 billion.
Expenditures. The Budget Act contained general fund appropriations
totaling $47.251 billion, a 4.0% increase over the final estimated 1995-96
expenditures. Special Fund expenditures were budgeted at $12.6 billion.
The following are principal features of the 1996-97 Budget Act:
1. Proposition 98 funding for schools and community college districts
increased by almost $1.6 billion (general fund) and $1.65 billion total
above revised 1995-96 levels. Almost half of this money was budgeted to
fund class-size reductions in kindergarten and grades 1-3. Also, for the
second year in a row, the full cost of living allowance (3.2%) was funded.
The Proposition 98 increases have brought K-12 expenditures to almost
$4,800 per 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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1995-96 Fiscal Year Proposition 98 guarantee, bringing K-12 expenditures in
that year to over $4,600 per ADA. These new funds were appropriated for a
variety of purposes, including block grants, allocations for each school
site, facilities for class size reduction, and a reading initiative.
Similar retroactive increases totaling $230 million, based on final figures
on revenues and State population growth, were made to the 1991-92 Fiscal
Year and the 1994-95 Fiscal Year Proposition 98 guarantees, most of which
was allocated to each school site.
2. The Budget Act assumed savings of approximately $660 million in
health and welfare costs which required changes in federal law, including
federal welfare reform. The Budget Act further assumed federal law changes
in August 1996 which would allow welfare cash grant levels to be reduced by
October 1, 1996. These cuts totaled approximately $163 million of the
anticipated $660 million savings.
3. The Budget Act includes a 4.9% increase in funding for the
University of California ($130 million general fund), and the California
State University system ($101 million general fund), with no increases in
student fees, maintaining the second year of the Governor's four-year
"Compact" with the State's higher education units.
4. The Budget Act assumed the federal government will provide
approximately $700 million in new aid for incarceration and health care
costs of illegal immigrants. These funds reduce appropriations in these
categories that would otherwise have to be paid from the general fund. (For
purposes of cash flow projections, the State Department of Finance expects
$540 million of this amount to be received during the 1996-97 Fiscal Year.)
5. General fund support for the State Department of Corrections was
increased by about 7% over the prior year, reflecting estimates of
increased prison population.
6. With respect to aid to local governments, the principal new
programs included in the Budget Act are $100 million in grants to cities
and counties for law enforcement purposes, and budgeted $50 million for
competitive grants to local governments for programs to combat juvenile
crime.
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 1997-98 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.
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) was projected to decrease from $408
million at June 30, 1997 to $112 million at June 30, 1998. As of January 9,
1998, the State Director of Finance estimated a reserve of $329 million at June
30, 1998. (The expenditure figure assumes restoration of $200 million in vetoed
funding.) The Budget Act also included 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
matured on June 30, 1998.
The following were major features of the 1997-98 Budget Act:
1. The Budget contained 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 was allocated to prior fiscal years. Funds were provided to fully
pay for the cost-of-living-increase component of Proposition 98, and to
extend class size reduction and reading initiatives.
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2. The Budget Act reflected the $1.235 billion pension case judgment
payment, and brought 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 was no provision for any additional
payments relating to this court case.
3. Continuing the third year of a four-year "compact" which the
Administration 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 were contained, continuing generally the
grant levels from prior years, as part of the initial implementation of the
new CalWORKs program.
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, were included in the Budget Act, to
offset incarceration costs for illegal aliens.
7. The Budget Act contained 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. 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.
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 its
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.
1998-99 Fiscal Year Budget. When the Governor released his proposed
1998-99 Fiscal Year Budget on January 9, 1998, he projected general fund
revenues for the 1998-99 Fiscal Year of $55.4 billion, and proposed expenditures
in the same amount. By the time the Governor released the May Revision to the
1998-99 Budget ("May Revision") on May 14, 1998, the Administration projected
that revenues for the 1997-98 and 1998-99 Fiscal Years combined would be more
than $4.2 billion higher than was projected in January. The Governor proposed
that most of this increased revenue be dedicated to fund a 75% cut in the
Vehicle License Fee ("VLF").
Pursuant to Article IV, Section 13(c) of the Constitution of the State of
California, the State Legislature is required to adopt its budget for the
upcoming fiscal year (July 1-June 30) by midnight of June 15th, and in the
absence of which, the Legislature may not send to the Governor for consideration
any bill appropriating funds for expenditure during the fiscal year for which
the budget bill is to be enacted, except emergency bills
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or appropriations for the salaries and expenses of the Legislature. For the
current fiscal year, as has been true since the late 1980's, the State
Legislature did not adhere to this deadline. Due to the Legislature's failure to
comply with this constitutional requirement, the Howard Jarvis Taxpayers
Association sought an injunction in a Los Angeles Superior Court to prohibit the
State from making certain types of payments in the absence of an adopted budget.
On July 21, 1998, a preliminary injunction was issued. Under the terms of the
injunction order, until such time as the budget has been adopted, the State may
not make any payments from the State treasury for Fiscal Year 1998-99 except for
certain enumerated expenditures.
On July 22, 1998, the Legislature unanimously passed an $18.9 billion
emergency-spending bill to cover the costs of, among others, bond payments,
paychecks for state workers, retirement pensions, prisons, school and welfare
payments from July 1st through August 5th. However, before a final resolution of
the legal issues raised by the plaintiff, a budget for fiscal year 1998-99 was
passed by the Legislature on August 11, 1998, and the Governor signed it on
August 21, 1998.
In signing the Budget Bill, the Governor used his line-item veto power to
reduce expenditures by $1.360 billion from the general fund, and $160 million
from Special Funds. Of this total, the Governor indicated that about $250
million of vetoed funds were "set aside" to fund programs for education. Vetoed
items included education funds, salary increases and many individual resources
and capital projects.
The 1998-99 Budget Act is based on projected general fund revenues and
transfers of $57.0 billion (after giving effect to various tax reductions
enacted in 1997 and 1998), a 4.2% increase from the revised 1997-98 figures.
Special Fund revenues were estimated at $14.3 billion. The revenue projections
were based on the May Revision. Economic problems overseas since that time may
affect the May Revision projections.
After giving effect to the Governor's vetoes, the Budget Act provides
authority for expenditures of $57.3 billion from the general fund (a 7.3%
increase from 1997-98), $14.7 billion from Special Funds, and $3.4 billion from
bond funds. The Budget Act projects a balance in the SFEU at June 30, 1999 (but
without including the "set aside" veto amount) of $1.255 billion, a little more
than 2% of general fund revenues. The Budget Act assumes the State will carry
out its normal intra-year cash flow borrowing in the amount of $1.7 billion of
revenue anticipation notes, which are expected to be issued by early October.
The most significant feature of the 1998-99 budget was agreement on a total
of $1.4 billion of tax cuts. The central element is a bill which provides for a
phased-in reduction of the VLF. Since the VLF is currently transferred to cities
and counties, the bill provides for the general fund to replace the lost
revenues. Starting on January 1, 1999, the VLF will be reduced by 25%, at a cost
to the general fund of approximately $500 million in the 1998-99 Fiscal Year and
about $1 billion annually thereafter.
In addition to the cut in VLF, the 1998-99 budget includes both temporary
and permanent increases in the personal income tax dependent credit ($612
million General Fund cost in 1998-99, but less in future years), a nonrefundable
renters tax credit ($133 million), and various targeted business tax credits
($106 million). About half of the business tax credits will only become
effective if Proposition 7, an initiative measure which includes various tax
credits, is rejected by the voters on the November 3, 1998 ballot.
Other significant elements of the 1998-99 Budget Act are as follows:
1. Proposition 98 funding for K-12 schools is increased by $1.7
billion in General Fund moneys over revised 1997-98 levels, about $300
million higher than the minimum Proposition 98 guaranty. An additional $600
million was appropriated to "settle up" prior years' Proposition 98
entitlements, and was primarily devoted to one-time uses such as block
grants, deferred maintenance, and computer and laboratory equipment.
2. Funding for higher education increased substantially above the
level called for in the Governor's four-year compact. General Fund support
was increased by $340 million (15.6%) for the University of California and
$267 million (14.1%) for the California State University system. In
addition, Community Colleges received a $300 million (6.6%) increase under
Proposition 98.
3. The Budget includes increased funding for health, welfare and
social services programs. A 4.9% grant increase was included in the basic
welfare grants, the first increase in those grants in 9 years. Future
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increases will depend on sufficient general fund revenue to trigger the
phased cuts in VLF described above.
4. Funding for the judiciary and criminal justice programs increased
by about 11% over 1997-98, primarily to reflect increased State support for
local trial courts and rising prison population.
5. Various other highlights of the budget included new funding for
resources projects, dedication of $376 million of general fund moneys for
capital outlay projects, funding of a 3% State employee salary increase,
funding of 2,000 new Department of Transportation positions to accelerate
transportation construction projects, and funding of the Infrastructure and
Economic Development Bank ($50 million).
6. The State of California received approximately $167 million of
federal reimbursements to offset costs related to the incarceration of
undocumented alien felons for federal fiscal year 1997. The State
anticipates receiving approximately $195 million in federal reimbursements
for federal fiscal year 1998.
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.
Historically, funding for the State's trial court system was divided
between the State and the counties. However, Chapter 850, Statutes of 1997,
implements a restructuring of the State's trial court funding system. Funding
for the courts, with the exception of costs for facilities, local judicial
benefits, and revenue collection, was consolidated at the State level. County
contribution for both their general fund and fine and penalty amounts is capped
at the 1994-95 level and becomes part of the Trial Court Trust Fund, which
supports all trial court operations. The State assumed responsibility for future
growth in trial court funding. The consolidation of funding is intended to
streamline the operation of the courts, provide a dedicated revenue source, and
relieve fiscal pressure on the counties. Beginning in 1998-99, county general
fund contribution for court operations is reduced by $300 million, including
$10.7 million to buy out the contribution of the 20 smallest counties, and
cities will retain $62 million in fine and penalty revenue previously remitted
to the State; the State's general fund backfilled the $362 million revenue loss
to the Trial Court Trust Fund. In addition to this general fund backfill, a $50
million augmentation is included in the 1998 Budget Act for the trial courts to
fund workload increases and high priority issues such as court security. In
1999-2000, county general fund contributions will be further reduced by an
additional $92 million to buy out the next 17 smallest counties and reduce by
ten percent the general fund contribution of the remaining 21 counties.
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
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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. There are a number of
ambiguities concerning the Proposition and its impact on local governments and
their bonded debt which will require interpretation by the courts or the State
Legislature. The State Legislature Analyst estimated that enactment of
Proposition 218 would reduce local government revenues statewide by over $100
million a year, and that over time revenues to local government would be reduced
by several hundred million dollars. Proposition 218 does not affect the State or
its ability to levy or collect taxes.
On December 23, 1997, a consortium of California counties filed a test
claim with the Commission on State Mandates (the "Commission") asking the
Commission to determine whether the property tax shift from counties to the
Educational Revenue Augmentation Fund, which is a funding source for schools, is
a reimbursable state mandated cost. On August 11, 1998, the State Department of
Justice, on behalf of the State Department of Finance, filed a rebuttal in
opposition to the counties' claim. The issue is currently scheduled to be heard
by the Commission on October 22, 1998. The fiscal impact to the State general
fund if the Commission determines that the property tax shifts created a
reimbursable state mandate could total approximately $8 billion for the 1996-97
($2.5 billion), 1997-98 ($2.6 billion) and 1998-99 ($2.7 billion) property tax
shifts. Ongoing costs to the State general fund would be approximately $2.7
billion annually.
CONSTITUTIONAL AND STATUTORY LIMITATIONS; RECENT INITIATIVES; PENDING
LEGISLATION
Constitutional and Statutory Limitations. Article XIIIA of the California
Constitution (which resulted from the voter-approved Proposition 13 in 1978)
limits the taxing powers of California public agencies. Article XIIIA provides
that the maximum ad valorem tax on real property cannot exceed 1% of the "full
cash value" of the property and effectively prohibits the levying of any other
ad valorem tax on real property for general purposes. However, on May 3, 1986,
Proposition 46, an amendment to Article XIIIA, was approved by the voters of the
State of California, creating a new exemption under Article XIIIA permitting an
increase in ad valorem taxes on real property in excess of 1% for bonded
indebtedness approved by two-thirds of the voters voting on the proposed
indebtedness. "Full cash value" is defined as "the County Assessor's valuation
of real property as shown on the 1975-76 Fiscal Year tax bill under 'full cash
value' or, thereafter, the appraised value of real property when purchased,
newly constructed, or a change in ownership has occurred after the 1975
assessment." The "full cash value" is subject to annual adjustment to reflect
increases (not to exceed 2%) or decreases in the consumer price index or
comparable local data, or to reflect reductions in property value caused by
damage, destruction or other factors.
Article XIIIB of the California Constitution limits the amount of
appropriations of the State and of the local governments to the amount of
appropriations of the entity for the prior year, adjusted for changes in the
cost of living, population and the services that local government has financial
responsibility for providing. To the extent that the revenues of the State
and/or local government exceed its appropriations, the excess revenues must be
rebated to the public either directly or through a tax decrease. Expenditures
for voter-approved debt services are not included in the appropriations limit.
At the November 9, 1988 general election, California voters approved an
initiative known as Proposition 98. This initiative amends Article XIIIB to
require that (i) the California Legislature establish a prudent state reserve
fund in an amount it shall deem reasonable and necessary and (ii) revenues in
excess of amounts permitted to be spent and which would otherwise be returned
pursuant to Article XIIIB by revision of tax 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
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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 insure that the total allocations to school districts and community
college districts from the State general fund proceeds of taxes appropriated
pursuant to Article XIIIB and allocated local proceeds of taxes shall not be
less than the total amount from these sources in the prior year, adjusted for
increases in enrollment and adjusted for changes in the cost of living pursuant
to the provisions of Article XIIIB. The initiative permits the enactment of
legislation, by a two-thirds vote, to suspend the minimum funding requirements
for one year. As a result of Proposition 98, funds that the State might
otherwise make available to its political subdivisions may be allocated instead
to satisfy such minimum funding level.
During the recent recession, general fund revenues for several years were
less than originally projected, so that the original Proposition 98
appropriations turned out to be higher than the minimum percentage provided in
the law. The Legislature responded to these developments by designating the
"extra" Proposition 98 payments in one year as a "loan" from future years'
Proposition 98 entitlements and also intended that the "extra" payments would
not be included in the Proposition 98 "base" for calculating future years'
entitlement. By implementing these actions, per-pupil funding from Proposition
98 sources stayed almost constant at approximately $4,220 from the 1991-92
Fiscal Year to the 1993-94 Fiscal Year.
In 1992, a lawsuit was filed, called California Teachers' Association v.
Gould, which challenged the validity of these off-budget loans. The settlement
of this case, finalized in July, 1996, provides, among other things, that both
the State and K-14 schools share in the repayment of prior years' emergency
loans to schools. Of the total $1.76 billion in loans, the State will repay $935
million by forgiveness of the amount owed, while schools will repay $825
million. The State share of the repayment will be reflected as an appropriation
above the current Proposition 98 base calculation. The schools' share of the
repayment will count 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 the 1994-95 Fiscal Year through the 2001-02
Fiscal Year to mitigate any adverse fiscal impact.
Substantially increased general fund revenues, above initial budget
projections, in the 1994-95, 1995-96 and 1996-97 fiscal years have resulted or
will result in retroactive increases in Proposition 98 appropriations from
subsequent fiscal years' budgets.
On November 8, 1994, the voters approved Proposition 187, an initiative
statute ("Proposition 187"). Proposition 187 specifically prohibits funding by
the State of social services, health care services and public school education
for the benefit of any person not verified as either a United States citizen or
a person legally admitted to the United States. Among the provisions in
Proposition 187 pertaining to public school education, the measure requires,
commencing January 1, 1995, that every school district in the State verify the
legal status of every child enrolling in the district for the first time. By
January 1, 1996, each school district must also verify the legal status of
children already enrolled in the district and of all parents or guardians of all
students. If the district "reasonably suspects" that a student, parent or
guardian is not legally in the United States, that district must report the
student to the United States Immigration and Naturalization Service and certain
other parties. The measure also prohibits a school district from providing
education to a student it does not verify as either a United States citizen or a
person legally admitted to the United States. The State Legislative Analyst
estimates that verification costs could be in the tens of millions of dollars on
a statewide level (including verification costs incurred by other local
governments), with first-year costs potentially in excess of $100 million.
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
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Education has indicated that the reporting requirements in Proposition 187 could
jeopardize the ability of school districts to receive these funds.
Opponents of Proposition 187 have filed at least eight lawsuits challenging
the constitutionality and validity of the measure. On November 2, 1995, a
District Court judge struck down the central provisions of Proposition 187 by
ruling that parts of Proposition 187 conflict with federal power over
immigration. The ruling concluded that states may not enact their own schemes to
"regulate immigration or devise immigration regulations which run parallel or
purport to supplement Federal immigration law." As a consequence of the ruling,
students may not be denied public education and may not be asked about their
immigration status when enrolling in public schools. Further, the ruling struck
down the requirements of Proposition 187 that teachers and district employees
report information on the immigrant status of students, parents and guardians.
An appeal has been filed.
Article XIIIA, Article XIIIB and a number of other propositions were
adopted pursuant to California's constitutional initiative process. From time to
time, other initiative measures could be adopted by California voters. The
adoption of any such initiatives may cause California issuers to receive reduced
revenues, or to increase expenditures, or both.
Pending Litigation. The State is a party to numerous legal proceedings,
many of which normally occur in governmental operations. Some of the more
significant lawsuits pending against the State are described herein.
The State is 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). 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 $300
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.
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." Pursuant
to a
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settlement, judgment was entered in August 1998, requiring the State to retain
$19,427,000 from the general fund to one special fund.
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. Pursuant to a settlement, the
State has agreed to pay $42 million in return for plaintiff's agreement to
dismiss both actions.
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 1992-93 Fiscal Year. On January 11, 1995, the Sacramento
County Superior Court entered a judgment finding that the legislation
unconstitutionally impaired the vested contract rights of PERS members. The
judgment provides for issuance of a writ of mandate directing State defendants
to disregard the provisions of the legislation, to implement the statute
governing employer contributions that existed before the changes in the
legislation were found to be unconstitutional and to transfer to PERS the
contributions that are 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. PERS has filed a claim with the State Board of Control in the amount of
$308 million for the accrued interest on the judgment. PERS also seeks interest
on the unpaid accrued interest amount. The State Board of Control approved this
claim in March 1998.
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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 of Florida (sometimes referred to herein as the "State" or
"Florida") 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;
however, it has not been updated nor will it be updated during the year. The
Fund 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, when the State's unemployment rate again tracked below the national
average. The State's unemployment rate is projected to be 4.7% in 1997-98 and
5.0% in 1998-99. The average rate of unemployment for the State since 1988 is
6.1%, while the national average is 5.9%. (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 September 8, 1998, for a
State of Florida debt offering.)
Over the years, Florida's total personal income has grown at a strong pace
and outperformed both the U.S. and other southeastern states. The increase in
Florida's total personal income directly reflects the State's population
increase. Florida's per capita personal income has been closely tracking the
national average for many years. From 1992 to 1997, Florida's total nominal
personal income grew by 36.6% and per capita income expanded approximately
25.9%. For the nation, total and per capita personal income increased by 30.2%
and 24.1%, respectively. Real personal income in Florida is estimated to
increase 5.2% in 1997-98 and 3.8% in 1998-99 while real personal income per
capita is projected to grow at 3.2% in 1997-98 and 1.8% in 1998-99.
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 1997 represented 59.8% 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 70.4%. 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 14.7 million. Since 1990, the
State's average annual rate of population increase has been approximately 1.8%
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. 47 million people
visited the State in 1997, according to the Florida Department of Commerce.
Tourist arrivals are expected to increase by 2.1% this fiscal year and 4.7% next
year. By the end of the fiscal year, 43.8 million domestic and international
tourists are expected to have visited the State. In 1998-99, tourist arrivals
should approximate 45.6 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 5.7% in 1997. Florida, nevertheless, has had a dynamic construction
industry, with single and multi-family housing starts accounting for
approximately 9.2% of total U.S. housing starts in 1997, while the State's
population is 5.5% of the nation's population. Total housing starts were 132,813
in 1997. A driving force behind Florida's construction industry is its rapid
growth in population. In Florida, single and multi-family housing starts in
1997-98 are projected to reach a combined level of 124,500 while increasing to
131,300 next year. Multi-family starts have been slow to recover, but are
showing stronger growth now and
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should maintain a level of nearly 38,200 in 1997-98 and 37,200 in 1998-99. Total
construction expenditures are forecasted to increase 13.2% in this year and
increase 6.5% next year.
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 1996-97, the State derived
approximately 67% 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,
beverage tax, and estate tax which amounted to 68%, 8%, 4%, 3% and 3%,
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 1996-97,
expenditures from the General Revenue Fund for education, health and welfare,
and public safety amounted to approximately 53%, 26% 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, 1997, receipts from this source
were $12,089 million, an increase of 5.5% from fiscal year 1995-96. The second
largest source of State tax receipts is the Motor Fuel Tax. The collections from
this source during the fiscal year ended June 30, 1997, were $2,012 million.
Alcoholic beverage tax revenues totalled $447.2 million for the State fiscal
year ended June 30, 1997, an increase of $5.7 million from the previous year.
The receipts of corporate income tax for the fiscal year ended June 30, 1997
were $1,362.3 million, an increase of 17.2% from fiscal year 1995-96. Gross
Receipt tax collections for fiscal year 1996-97 totalled $575.7 million, an
increase of 6.0% over the previous fiscal year. Documentary stamp tax
collections totalled $844.2 million during fiscal year 1996-97, posting an 8.9%
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 $952.4 million during the fiscal year
ended June 30, 1997, a 6.3% increase from the previous fiscal year. Severance
taxes totalled $39.2 million during fiscal year 1996-97. In November 1986, the
voters of the State approved a constitutional amendment to allow the State to
operate a lottery. Fiscal year 1996-97 produced ticket sales of $2.09 billion of
which education received approximately $792.3 million.
For fiscal year 1998-99 the estimated General Revenue plus Working Capital
and Budget Stabilization funds available total $19,113.2 million, a 2.6%
increase over 1997-98. The $16,887.6 million in estimated revenues represent a
7.2% increase over the analagous figure in 1997-98. With combined General
Revenue, Working Capital Fund, and Budget Stabilization Fund appropriations at
$17,207.0 million, unencumbered reserves at the end of 1997-98 are estimated at
$1,414.8 million.
Estimated fiscal year 1998-99 General Revenue plus Working Capital and
Budget Stabilization funds available are expected to total $19,113.2 million, a
2.6% increase over fiscal year 1997-98.
The State Constitution does not permit a state or local personal income
tax. An amendment to the State Constitution by the electors of the State would
be required in order to impose a personal income tax in the State.
Property valuations for homestead property are subject to a growth cap.
Growth in the just (market) value of property qualifying for the homestead
exemption is limited to 3% or the change in the Consumer Price Index, whichever
is less. If the property changes ownership or homestead status, it is to be
re-valued at full just value on the next tax roll. Although the impact of the
growth cap cannot be determined, it may have the effect of causing local
government units in the State to rely more on non-ad valorem tax revenues to
meet operating expenses and other requirements normally funded with ad valorem
tax revenues.
An amendment to the State Constitution was approved by statewide ballot in
the November 8, 1994 general election which is commonly referred to as the
"Limitation on State Revenues Amendment." This amendment provides that State
revenues collected for any fiscal year shall be limited to State revenues
allowed under the amendment for the prior fiscal year plus an adjustment for
growth. Growth is defined as an amount equal to the average annual rate of
growth in State personal income over the most recent twenty
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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 damages. The 1996 and 1997 hurricane seasons
were uneventful with considerably less damage than in 1992 and 1995. During the
1998 hurricane season, which ends November 30, at least two hurricanes have
caused significant damage to several coastal communities in Florida. The Fund
cannot predict the economic impact, if any, of future hurricanes and storms.
According to the Florida General Purposes Financial Statements for fiscal
year ended June 30, 1997, as of June 30, 1997, the State had a high bond rating
from Moody's Investors Service, Inc. (A2), Standard & Poor's (AA+) and Fitch
IBCA, Inc. (AA) on all of its general obligation bonds. Outstanding general
obligation bonds at June 30, 1997 totalled almost $7.9 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 $1,304 million of general
obligation bonds since July 1, 1997.
Due to investments in certain derivatives, Escambia County, Florida in 1994
sustained notable losses which may in the future affect their operations. As
reported in the local press, several lawsuits have resulted regarding such
investments.
In late October, 1996, the Florida Auditor General notified the Governor's
office that seventeen municipalities or special districts are in a state of
financial emergency (including the Orlando-Orange County Expressway Authority
and the Pinellas Suncoast Transit Authority) and that another twenty-five
municipalities or special districts might be in a state of financial emergency
(including the City of Miami). For these purposes, a state of emergency is
considered two consecutive years of budget deficits. Municipalities or special
districts that may be in a state of financial emergency are those that the
Auditor General was unable to conclude had sufficient revenues to cover their
deficits. The operations of all of these entities mentioned in the Auditor
General's communication may be adversely affected by their financial condition.
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APPENDIX C
RATINGS OF MUNICIPAL BONDS
DESCRIPTION OF MOODY'S INVESTORS SERVICE, INC.'S ("MOODY'S") LONG-TERM DEBT
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 risk
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 three ratings of Moody's for short-term notes are
MIG1/VMIG1, MIG2/ VMIG2 and MIG3/VMIG3. 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."
DESCRIPTION OF MOODY'S SHORT-TERM DEBT RATINGS
Moody's employs the following three designations, all judged to be
investment grade, to indicate the relative repayment ability of rated issuers:
Issuers rated Prime-1 (or supporting institutions) have a superior
ability for repayment of senior short-term debt obligations. Prime-1
repayment ability will often be evidenced by the many following
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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 senior short-term debt 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 senior short-term debt 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 ("STANDARD & POOR'S") ISSUE CREDIT RATING
DEFINITIONS
A Standard & Poor's issue credit 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
(including ratings on medium term note programs and commercial paper programs).
It takes into consideration the creditworthiness of guarantors, insurers, or
other forms of credit enhancement on the obligation and takes into account the
currency in which the obligation is denominated.
The issue credit 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.
Issue credit ratings are based on current information furnished by the
obligors or obtained by Standard & Poor's from other sources it considers
reliable. Standard & Poor's does not perform an audit in connection with any
rating and may, on occasion, rely on unaudited financial information. Credit
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.
LONG-TERM ISSUE CREDIT RATINGS
<TABLE>
<S> <C>
AAA An obligation rated "AAA" has the highest rating assigned by
Standard & Poor's. The obligor's capacity to meet its
financial commitment on the obligation is extremely strong.
AA An obligation 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 An obligation 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.
</TABLE>
C-2
<PAGE> 112
<TABLE>
<S> <C>
BBB An obligation 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 An obligation rated "BB", "B", "CCC", "CC" and "C" are
B regarded as having significant speculative characteristics.
CCC "BB" indicates the least degree of speculation and "C" the
CC highest degree of speculation. While such bonds will likely
C have some quality and protective characteristics, these may
be outweighed by large uncertainties or major exposures to
adverse conditions.
D An obligation 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.
SHORT-TERM ISSUE CREDIT RATINGS
<TABLE>
<S> <C>
A-1 A short-term obligation rated "A-1" is rated in the highest
category by Standard & Poor's. The obligor's capacity to
meet its financial commitment on the obligation is strong.
Within this category, certain obligations are designated
with a plus sign (+). This indicates that the obligor's
capacity to meet its financial commitment on these
obligations is extremely strong.
A-2 A short-term obligation rated "A-2" is somewhat more
susceptible to the adverse effects of changes in
circumstances and economic conditions than obligations in
higher rating categories. However, the obligor's capacity to
meet its financial commitment on the obligation is
satisfactory.
A-3 A short-term obligation rated "A-3" 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.
B A short-term obligation rated "B" is regarded as having
significant speculative characteristics. The obligor
currently has the capacity to meet its financial commitment
on the obligation; however, it faces major ongoing
uncertainties which could lead to the obligor's inadequate
capacity to meet its financial commitment on the obligation.
C A short-term obligation rated "C" is currently vulnerable to
nonpayment and is dependent upon favorable business,
financial, and economic conditions for the obligor to meet
its financial commitment on the obligation.
D A short-term obligation rated "D" is in payment default. The
"D" rating category is used when payments on an obligation
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>
DESCRIPTION OF FITCH IBCA, INC. ("FITCH") RATINGS
Fitch credit ratings are an opinion on the ability of an entity or of a
securities issue to meet financial commitments, such as interest, preferred
dividends, or repayment of principal, on a timely basis.
Credit ratings are used by investors as indications of the likelihood of
getting their money back in accordance with the terms on which they invested.
Thus, the use of credit ratings defines their function: "investment-grade"
ratings (international long-term "AAA" -- "BBB" categories; short-term
"F1" -- "F3") indicate a relatively low probability of default, while those in
the "speculative" or "non-investment grade" categories (international long-term
"BB" -- "D") either signal a higher probability of default or that a default has
already occurred. Ratings imply no specific prediction of default probability.
C-3
<PAGE> 113
Entities or issues 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 credit and other 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 any payments of any security. The 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 or withdrawn
as a result of changes in, or the unavailability of, information or for other
reasons.
INTERNATIONAL CREDIT RATINGS
Fitch's international credit ratings are applied to the spectrum of
corporate, structured, and public finance. They cover sovereign (including
supranational and subnational), financial, bank, insurance, and other corporate
entities and the securities they issue, as well as municipal and other public
finance entities, and securities backed by receivables or other financial
assets, and counterparties. When applied to an entity, these long- and
short-term ratings assess its general creditworthiness on a senior basis. When
applied to specific issues and programs, these ratings take into account the
relative preferential position of the holder of the security and reflect the
terms, conditions, and covenants attaching to that security.
ANALYTICAL CONSIDERATIONS
When assigning ratings, Fitch considers the historical and prospective
financial condition, quality of management and operating performance of the
issuer and of any guarantor, any special features of a specific issue or
guarantee, the issue's relationship to other obligations of the issuer, as well
as developments in the economic and political environment that might affect the
issuer's financial strength and credit quality.
Investment-grade ratings reflect expectations of timeliness of payment.
However, ratings of different classes of obligations of the same issuer may vary
based on expectations of recoveries in the event of a default or liquidation.
Recovery expectations, which are the amounts expected to be received by
investors after a security defaults, are a relatively minor consideration in
investment-grade ratings, but Fitch does use "notching" of particular issues to
reflect their degree of preference in a winding up, liquidation, or
reorganization as well as other factors. Recoveries do, however, gain in
importance at lower rating levels, because of the greater likelihood of default,
and become the major consideration at the "DDD" category. Factors that affect
recovery expectations include collateral and seniority relative to other
obligations in the capital structure.
Variable rate demand obligations and other securities which contain a
demand feature will have a dual rating, such as "AAA/F1+." The first rating
denotes long-term ability to make principal and interest payments. The second
rating denotes ability to meet a demand feature in full and on time.
INTERNATIONAL LONG-TERM CREDIT RATINGS
INVESTMENT GRADE
<TABLE>
<S> <C>
AAA Highest credit quality. "AAA" ratings denote the lowest
expectation of credit risk. They are assigned only in case
of exceptionally strong capacity for timely payment of
financial commitments. This capacity is highly unlikely to
be adversely affected by foreseeable events.
AAA Very high credit quality. "AA" ratings denote a very low
expectation of credit risk. They indicate strong capacity
for timely payment of financial commitments. This capacity
is not significantly vulnerable to foreseeable events.
A High credit quality. "A" ratings denote a low expectation
of credit risk. The capacity for timely payment of financial
commitments is considered strong. This capacity may,
nevertheless, be more vulnerable to changes in circumstances
or in economic conditions that is the case for higher
ratings.
</TABLE>
C-4
<PAGE> 114
<TABLE>
<S> <C>
BBB Good credit quality. "BBB" ratings indicate that there is
currently a low expectation of credit risk. The capacity for
timely payment of financial commitments is considered
adequate, but adverse changes in circumstances and in
economic conditions are more likely to impair this capacity.
This is the lowest investment-grade category.
SPECULATIVE
GRADE
BB Speculative. "BB" ratings indicate that there is a
possibility of credit risk developing, particularly as the
result of adverse economic change over time; however,
business or financial alternatives may be available to allow
financial commitments to be met. Securities rated in this
category are not investment grade.
B Highly speculative. "B" ratings indicate that significant
credit risk is present, but a limited margin of safety
remains. Financial commitments are currently being met;
however, capacity for continued payment is contingent upon a
sustained, favorable business and economic environment.
CCC High default risk. Default is a real possibility. Capacity
CC for meeting financial commitments is solely reliant upon
C sustained, favorable business or economic developments. A
"CC" rating indicated that default of some kind appears
probable. "C" ratings signal imminent default.
DDD Default. Securities are not meeting current obligations and
DD are extremely speculative. "DDD" designates the highest
D potential for recovery of amounts outstanding on any
securities involved. For U.S. corporates, for example, "DD"
indicates expected recovery of 50%-90% of such outstandings,
and "D", the lowest recovery potential, i.e. below 50%.
</TABLE>
INTERNATIONAL SHORT-TERM CREDIT RATINGS
A short-term rating has a time horizon of less than 12 months for most
obligations, or up to three years for U.S. public finance securities, and thus
places greater emphasis on the liquidity necessary to meet financial commitments
in a timely manner.
<TABLE>
<S> <C>
F1 Highest credit quality. Indicates the strongest capacity
for timely payment of financial commitments; may have an
added "+" to denote an exceptionally strong credit feature.
F2 Good credit quality. A satisfactory capacity for timely
payment of financial commitments, but the margin of safety
is not as great as in the case of the higher ratings.
F3 Fair credit quality. The capacity for timely payment of
financial commitments is adequate; however, near-term
adverse changes could result in a reduction to
non-investment grade.
B Speculative. Minimal capacity for timely payment of
financial commitments, plus vulnerability to near-term
adverse changes in financial and economic conditions.
C High default risk. Default is a real possibility. Capacity
for meeting financial commitments is solely reliant upon a
sustained, favorable business and economic environment.
D Default. Denotes actual or imminent payment default.
</TABLE>
- ---------------
Notes:
"+" or "-" may be appended to a rating to denote relative status within
major rating categories. Such suffixes are not added to the "AAA" long-term
rating category, to categories below "CCC" or to short-term ratings other than
"FL."
"NR" indicates that Fitch does not rate the issuer or issue in question.
"Withdrawn": A rating is withdrawn when Fitch deems the amount of
information available to be inadequate for rating purposes, or when an
obligation matures, is called, or refinanced.
RatingAlert: Ratings are placed on Rating Alert to notify investors that
there is a reasonable probability of a rating change and the likely direction of
such change. These are designed as "Positive," indicating a potential upgrade,
"Negative," for a potential downgrade, or "Evolving," if ratings may be raised,
lowered or maintained. Rating Alert is typically resolved over a relatively
short period.
C-5
<PAGE> 115
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.......................... 16
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................................ 22
Portfolio Transactions...................... 23
Determination of Net Asset Value............ 24
Shareholder Services........................ 24
Investment Account........................ 25
Automatic Investment Plans................ 25
Automatic Reinvestment of Dividends and
Capital Gains Distributions............. 25
Systematic Withdrawal Plans............... 26
Exchange Privilege........................ 27
Distributions and Taxes..................... 29
Federal................................... 29
Tax Treatment of Financial Futures
Contracts and Options Thereon........... 31
State..................................... 31
Performance Data............................ 32
General Information......................... 36
Description of Shares..................... 36
Computation of Offering Price Per Share... 37
Independent Auditors...................... 37
Custodian................................. 37
Transfer Agent............................ 38
Legal Counsel............................. 38
Reports to Shareholders................... 38
Additional Information.................... 38
Financial Statements........................ 40
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
Code #16926-1198
</TABLE>
[MERRILL LYNCH LOGO]
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 24, 1998
Distributor:
Merrill Lynch
Funds Distributor [MERRILL LYNCH COMPASS LOGO]
<PAGE> 116
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> 117
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 four-year period
ended July 31, 1998 and for the period November 26, 1993 (commencement
of operations) to July 31, 1994.
Incorporated by reference in Part B (for each of the Funds):
Schedules of Investments as of July 31, 1998.*
Statements of Assets and Liabilities as of July 31, 1998.*
Statements of Operations for the year ended July 31, 1998.*
Statements of Changes in Net Assets for each of the years in the
two-year period ended July 31, 1998.*
Financial Highlights for each of the years in the four-year period
ended July 31, 1998 and for the period November 26, 1993 (commencement
of operations) to July 31, 1994.*
- ---------------
*Included in Registrant's 1998 Annual Report to shareholders filed with the
Securities and Exchange Commission for the year ended July 31, 1998 pursuant to
Rule 30b2-1 under the Investment Company Act of 1940, as amended ("1940 Act").
(b) EXHIBITS:
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
<C> <C> <S>
1(a)(1) -- Amended and Restated Declaration of Trust of the Registrant,
dated November 15, 1993.(d)
(a)(2) -- Certificate of Amendment to Declaration of Trust and
Establishment and Designation of Classes, dated October 17,
1994.(g)
(b)(1) -- Instrument establishing Merrill Lynch California Limited
Maturity Municipal Bond Fund (the "California Fund") as a
Series of the Registrant.(a)
(b)(2) -- Instrument establishing Merrill Lynch Florida Limited
Maturity Municipal Bond Fund (the "Florida Fund") as a
Series of the Registrant.(a)
(c)(1) -- Instrument establishing Class A shares and Class B shares of
beneficial interest of the California Fund.(a)
2 -- By-Laws of the Registrant.(d)
3 -- None.
4(a) -- Portions of the Declaration of Trust, Establishment and
Designation of each series of the Registrant and By-Laws of
the Registrant defining the rights of holders of each Fund
as a series of the Registrant.(b)
(b)(1) -- Share certificate for the California Fund.(d)
(b)(2) -- Share certificate for the Florida 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. (now known as Princeton Funds Distributor, Inc.) (the
"Distributor") (including Form of Selected Dealers
Agreement).(f)
(b) -- Form of Class B Shares Distribution Agreement between the
Registrant and the Distributor.(a)
(c) -- Form of Class C Shares Distribution Agreement between the
Registrant and the Distributor (including Form of Selected
Dealers Agreement).(f)
(d) -- Form of Class D Shares Distribution Agreement between the
Registrant and the Distributor (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 Financial Data Services, Inc.(a)
10 -- Opinion of Brown & Wood LLP, counsel for the Registrant.(i)
</TABLE>
C-1
<PAGE> 118
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
<C> <C> <S>
11 -- Consent of Deloitte & Touche LLP, independent auditors for
the Registrant.
12 -- None.
13 (a) -- Certificate of FAM with respect to the California Fund.(d)
(b) -- Certificate of FAM with respect to the Florida 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 California 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 Florida 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 California 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 Florida 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 California 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 Florida Fund.(g)
(d)(1) -- Schedule for computation of each performance quotation
provided in the Registration Statement in response to Item
22 relating to Class D Shares of the California 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 Florida Fund.(g)
17(a)(1) -- Financial Data Schedule for Class A Shares of the California
Fund.
(2) -- Financial Data Schedule for Class B Shares of the California
Fund.
(3) -- Financial Data Schedule for Class C Shares of the California
Fund.
(4) -- Financial Data Schedule for Class D Shares of the California
Fund.
(b)(1) -- Financial Data Schedule for Class A Shares of the Florida
Fund.
(2) -- Financial Data Schedule for Class B Shares of the Florida
Fund.
(3) -- Financial Data Schedule for Class C Shares of the Florida
Fund.
(4) -- Financial Data Schedule for Class D Shares of the Florida
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.
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<PAGE> 119
(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).
(i) Previously filed as an Exhibit to the Registration Statement.
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 1998*
-------------- -----------
<S> <C>
California Fund
Class A shares of beneficial interest, par value $0.10 per
share.................................................. 36
Class B shares of beneficial interest, par value $0.10 per
share.................................................. 130
Class C shares of beneficial interest, par value $0.10 per
share.................................................. 10
Class D shares of beneficial interest, par value $0.10 per
share.................................................. 20
Florida 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.................................................. 197
Class C shares of beneficial interest, par value $0.10 per
share.................................................. 2
Class D shares of beneficial interest, par value $0.10 per
share.................................................. 27
</TABLE>
- ---------------
*The number of holders shown above includes holders of record plus beneficial
owners, whose shares are held of record by Merrill Lynch, Pierce, Fenner &
Smith Incorporated ("Merrill Lynch").
ITEM 27. INDEMNIFICATION.
Section 5.3 of the Registrant's Declaration of Trust provides as follows:
"The Trust shall indemnify each of its Trustees, officers, employees
and agents (including persons who serve at its request as directors,
officers or trustees of another organization in which it has any interest
as a shareholder, creditor or otherwise) against all liabilities and
expenses (including amounts paid in satisfaction of judgments, in
compromise, as fines and penalties and as counsel fees) reasonably incurred
by him in connection with the defense or disposition of any action, suit or
other proceeding, whether civil or criminal, in which he may be involved or
with which he may be threatened, while in office or thereafter, by reason
of his being or having been such a trustee, officer, employee or agent,
except with respect to any matter as to which he shall have been
adjudicated to have acted in bad faith, willful misfeasance, gross
negligence or reckless disregard of his duties; provided, however, that as
to any matter disposed of by a compromise payment by such person, pursuant
to a consent decree or otherwise, no indemnification either for said
payment or for any other expenses shall be provided unless the Trust shall
have received a written opinion from independent legal counsel approved by
the Trustees to the effect that if either the matter of willful
misfeasance, gross negligence or reckless disregard of duty, or the matter
of good faith and reasonable belief as to the best interests of the Trust,
had been adjudicated, it would have been adjudicated in favor of such
person. The rights accruing to any Person under these provisions shall not
exclude any other right to which he may be lawfully entitled; provided that
no Person may satisfy any right of indemnity or reimbursement granted
herein or in Section 5.1 or to which he may be otherwise entitled except
out of the property of the Trust, and no Shareholder shall be personally
liable to any Person with respect to any claim for indemnity or
reimbursement or otherwise. The Trustees may make advance payments in
connection with indemnification under this Section 5.3, provided that the
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<PAGE> 120
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 moneys for actions
based upon the 1940 Act 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 that he or she 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 Class A, Class B, Class C and Class D Shares
Distribution Agreements relating to the securities being offered hereby, the
Registrant agrees to indemnify the Distributor and each person, if any, who
controls the Distributor within the meaning of the Securities Act of 1933, as
amended (the "1933 Act"), against certain types of civil liabilities arising in
connection with this Registration Statement, the Prospectus or the Statement of
Additional Information.
Insofar as indemnification for liabilities arising under the 1933 Act may
be permitted to Trustees, officers and controlling persons of the Registrant and
the principal underwriter pursuant to the foregoing provisions or otherwise, the
Registrant has been advised that in the opinion of the Securities and Exchange
Commission such indemnification is against public policy as expressed in the
1933 Act and, therefore, is unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by the
Registrant of expenses incurred or paid by a Trustee, officer or controlling
person of the Registrant and the principal underwriter in connection with the
successful defense of any action, suit or proceeding) is asserted by such
Trustee, officer or controlling person or the principal underwriter in
connection with the shares being registered, the Registrant, unless in the
opinion of its counsel the matter has been settled by controlling precedent,
will submit to a court of appropriate jurisdiction the question whether such
indemnification by it is against public policy as expressed in the 1933 Act and
will be governed by the final adjudication of such issue.
ITEM 28. BUSINESS AND OTHER CONNECTIONS OF INVESTMENT ADVISER.
Fund Asset Management, L.P. (the "Manager" or "FAM") acts as the investment
adviser for the following open-end 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 Corporate High Yield Fund, Inc.,
Merrill Lynch Emerging Tigers Fund, Inc., Merrill Lynch Federal Securities
Trust, Merrill Lynch Funds for Institutions Series, Merrill Lynch Multi-State
Limited Maturity Municipal Series Trust, Merrill Lynch Multi-State Municipal
Series Trust, Merrill Lynch Municipal Bond Fund, Inc., Merrill Lynch Phoenix
Fund, Inc., Merrill Lynch Special Value Fund, Inc., Merrill Lynch World Income
Fund, Inc. and The Municipal Fund Accumulation Program, Inc.; and for the
following closed-end registered investment companies: Apex Municipal Fund, Inc.,
Corporate High Yield Fund, Inc., Corporate High Yield Fund II, Inc., Corporate
High Yield Fund III, Inc., Debt Strategies Fund, Inc., Debt Strategies Fund II,
Inc., Debt Strategies Fund III, 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 California Insured Fund II, Inc., MuniHoldings
California Insured Fund III, Inc., MuniHoldings Florida Insured Fund,
MuniHoldings Florida Insured Fund II, MuniHoldings Florida Insured Fund III,
MuniHoldings Fund, Inc., MuniHoldings Fund II, Inc., MuniHoldings Insured Fund,
Inc., MuniHoldings New Jersey Insured Fund, Inc., MuniHoldings New Jersey
Insured Fund II, Inc., MuniHoldings New York Fund, Inc., MuniHoldings New York
Insured Fund, Inc., MuniHoldings New York Insured Fund II, Inc., MuniInsured
Fund, Inc.,
C-4
<PAGE> 121
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. 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 Growth
Fund, Inc., Merrill Lynch Global Holdings, Inc., Merrill Lynch Global Resources
Trust, Merrill Lynch Global SmallCap Fund, Inc., Merrill Lynch Global Technology
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 Real Estate
Fund, Inc., 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 Advisors
Trust.
The address of each of these registered 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. ("Princeton Administrators") is also P.O. Box
9011, Princeton, New Jersey 08543-9011. The address of Princeton Funds
Distributor, Inc. ("PFD") and of Merrill Lynch Funds Distributor ("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 10281-1201. The address of the Fund's Transfer Agent, Financial
Data Services, Inc. ("FDS") 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, 1996, 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
C-5
<PAGE> 122
paragraphs of this Item 28 and Messrs. Giordano, Harvey, Kirstein and Monagle
are 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........................ Chairman Chairman of MLAM; President of MLAM
and FAM from 1977 to 1997; Chairman
and Director of Princeton Services;
President of Princeton Services
from 1993 to 1997; Executive Vice
President of ML & Co.
Jeffrey M. Peek...................... President President of MLAM; President and
Director of Princeton Services;
Executive Vice President of
ML & Co.; Managing Director and
Co-Head of Investment Banking
Division of Merrill Lynch in 1997;
Senior Vice President and Director
of Global Securities and Economics
Division of Merrill Lynch from 1995
to 1997.
Terry K. Glenn....................... Executive Vice President Executive Vice President of MLAM;
Executive Vice President and Director
of Princeton Services; President
and Director of PFD; Director of
FDS; President of Princeton
Administrators
Mark Desario......................... Senior Vice President Senior Vice President of MLAM
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 A. Griffin................. Senior Vice President Senior Vice President of MLAM; Senior
Vice President of Princeton
Services
Norman R. Harvey..................... Senior Vice President Senior Vice President of MLAM; Senior
Vice President of Princeton
Services
Michael J. Hennewinkel............... Senior Vice President, Senior Vice President, General
General Counsel and Counsel and Secretary of MLAM; Senior
Secretary Vice President of Princeton
Services
Philip L. Kirstein................... Senior Vice President Senior Vice President of MLAM; Senior
Vice President, Secretary and
Director of Princeton Services
Ronald M. Kloss...................... Senior Vice President Senior Vice President MLAM; Senior
Vice President of Princeton Services
Debra W. Landsman-Yaros.............. Senior Vice President Senior Vice President of MLAM; Vice
President of PFD; Senior Vice
President of Princeton Services
Steven M.M. Miller................... Senior Vice President Executive Vice President of Princeton
Administrators; Senior Vice President
of Princeton Services
Joseph T. Monagle, Jr................ Senior Vice President Senior Vice President of MLAM; Senior
Vice President of Princeton
Services
Brian A. Murdock..................... Senior Vice President Senior Vice President of MLAM; Senior
Vice President of Princeton
Services; Director of PFD
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
</TABLE>
C-6
<PAGE> 123
<TABLE>
<CAPTION>
POSITION(S)WITH OTHER SUBSTANTIAL BUSINESS,
NAME THE MANAGER PROFESSION, VOCATION OR EMPLOYMENT
---- --------------- ----------------------------------
<S> <C> <C>
Gerald M. Richard.................... Senior Vice President Senior Vice President and Treasurer
and Treasurer of MLAM; Senior Vice President and
Treasurer of Princeton Services;
Vice President and Treasurer of PFD
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, a division of PFD, 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. 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.
A separate division of PFD acts as the principal underwriter of a number of
other investment companies.
(b) Set forth below is information concerning each director and officer of
PFD. The principal business address of each such person is P.O. Box 9011,
Princeton, New Jersey 08543-9011, except that the address of Messrs. 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
Brian A. Murdock......................... Director None
Thomas J. Verage......................... Director 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,
Financial Data Services, Inc., 4800 Deer Lake Drive East, Jacksonville, Florida
32246-6484.
ITEM 31. MANAGEMENT SERVICES.
Other than as set forth under the caption "Management of the
Trust -- Management and Advisory Arrangements" in the Prospectus constituting
Part A of this Registration Statement and under "Management of the
Trust -- Management and Advisory Arrangements" in the Statement of Additional
Information
C-7
<PAGE> 124
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) The 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-8
<PAGE> 125
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 24TH DAY OF
NOVEMBER, 1998.
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 24, 1998
----------------------------------------------
(Gerald M. Richard, Attorney-in-Fact)
</TABLE>
C-9
<PAGE> 126
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
<S> <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 California
Fund.
(2) -- Financial Data Schedule for Class B Shares of the California
Fund.
(3) -- Financial Data Schedule for Class C Shares of the California
Fund.
(4) -- Financial Data Schedule for Class D Shares of the California
Fund.
(b) (1) -- Financial Data Schedule for Class A Shares of the Florida
Fund.
(2) -- Financial Data Schedule for Class B Shares of the Florida
Fund.
(3) -- Financial Data Schedule for Class C Shares of the Florida
Fund.
(4) -- Financial Data Schedule for Class D Shares of the Florida
Fund.
</TABLE>
<PAGE> 1
INDEPENDENT AUDITORS' CONSENT
Merrill Lynch Multi-State Limited Maturity Municipal Series Trust:
We consent to the incorporation by reference in this Post-Effective Amendment
No. 6 to Registration Statement No. 33-50417 of our report dated September 10,
1998 appearing in the annual report to shareholders of the Merrill Lynch
Multi-State Limited Maturity Municipal Series Trust for the year ended July 31,
1998, and to the reference to us under the caption "Financial Highlights" in the
Prospectus, which is a part of such Registration Statement.
Deloitte & Touche LLP
Princeton, New Jersey
November 20, 1998
<TABLE> <S> <C>
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<INVESTMENTS-AT-VALUE> 8921893
<RECEIVABLES> 159913
<ASSETS-OTHER> 32654
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 9114460
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 34000
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<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 519695
<NET-ASSETS> 1459687
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 602598
<OTHER-INCOME> 0
<EXPENSES-NET> (164315)
<NET-INVESTMENT-INCOME> 438283
<REALIZED-GAINS-CURRENT> 135816
<APPREC-INCREASE-CURRENT> (244868)
<NET-CHANGE-FROM-OPS> 329231
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> (100638)
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 12745
<NUMBER-OF-SHARES-REDEEMED> (179897)
<SHARES-REINVESTED> 2996
<NET-CHANGE-IN-ASSETS> (5048256)
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> (472718)
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 42624
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 188671
<AVERAGE-NET-ASSETS> 2618711
<PER-SHARE-NAV-BEGIN> 10.22
<PER-SHARE-NII> .39
<PER-SHARE-GAIN-APPREC> (.09)
<PER-SHARE-DIVIDEND> (.39)
<PER-SHARE-DISTRIBUTIONS> 0
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 10.13
<EXPENSE-RATIO> 1.32
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 6
<CIK> 0000872478
<NAME> MERRILL LYNCH MULTI-STATE LTD. MATURITY MUNI. SERIES TRUST
<SERIES>
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<NAME> MERRILL LYNCH CALIFORNIA LTD. MATURITY MUNICIPAL BOND FUND
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<INVESTMENTS-AT-VALUE> 8921893
<RECEIVABLES> 159913
<ASSETS-OTHER> 32654
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 9114460
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 34000
<TOTAL-LIABILITIES> 34000
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 8897667
<SHARES-COMMON-STOCK> 475349
<SHARES-COMMON-PRIOR> 673258
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<ACCUMULATED-NET-GAINS> (336902)
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 519695
<NET-ASSETS> 4812408
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 602598
<OTHER-INCOME> 0
<EXPENSES-NET> (164315)
<NET-INVESTMENT-INCOME> 438283
<REALIZED-GAINS-CURRENT> 135816
<APPREC-INCREASE-CURRENT> (244868)
<NET-CHANGE-FROM-OPS> 329231
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> (210256)
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 124239
<NUMBER-OF-SHARES-REDEEMED> (334719)
<SHARES-REINVESTED> 12571
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<ACCUMULATED-GAINS-PRIOR> (472718)
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<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 42624
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 188671
<AVERAGE-NET-ASSETS> 6067528
<PER-SHARE-NAV-BEGIN> 10.21
<PER-SHARE-NII> .35
<PER-SHARE-GAIN-APPREC> (.09)
<PER-SHARE-DIVIDEND> (.35)
<PER-SHARE-DISTRIBUTIONS> 0
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 10.12
<EXPENSE-RATIO> 1.71
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
<TABLE> <S> <C>
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<NAME> MERRILL LYNCH MULTI-STATE LTD. MATURITY MUNI. SERIES TRUST
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<NAME> MERRILL LYNCH CALIFORNIA LTD. MATURITY MUNICIPAL BOND FUND
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<PERIOD-END> JUL-31-1998
<INVESTMENTS-AT-COST> 8402198
<INVESTMENTS-AT-VALUE> 8921893
<RECEIVABLES> 159913
<ASSETS-OTHER> 32654
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 9114460
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 34000
<TOTAL-LIABILITIES> 34000
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 8897667
<SHARES-COMMON-STOCK> 9440
<SHARES-COMMON-PRIOR> 5607
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> (336902)
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 519695
<NET-ASSETS> 95572
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 602598
<OTHER-INCOME> 0
<EXPENSES-NET> (164315)
<NET-INVESTMENT-INCOME> 438283
<REALIZED-GAINS-CURRENT> 135816
<APPREC-INCREASE-CURRENT> (244868)
<NET-CHANGE-FROM-OPS> 329231
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> (2663)
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 4442
<NUMBER-OF-SHARES-REDEEMED> (629)
<SHARES-REINVESTED> 20
<NET-CHANGE-IN-ASSETS> (5048256)
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> (472718)
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
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<GROSS-EXPENSE> 188671
<AVERAGE-NET-ASSETS> 73431
<PER-SHARE-NAV-BEGIN> 10.22
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<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 10.12
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<TABLE> <S> <C>
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<NAME> MERRILL LYNCH CALIFORNIA LTD. MATURITY MUNICIPAL BOND FUND
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<PERIOD-START> AUG-01-1997
<PERIOD-END> JUL-31-1998
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<INVESTMENTS-AT-VALUE> 8921893
<RECEIVABLES> 159913
<ASSETS-OTHER> 32654
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 9114460
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 34000
<TOTAL-LIABILITIES> 34000
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 8897667
<SHARES-COMMON-STOCK> 267818
<SHARES-COMMON-PRIOR> 395606
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> (336902)
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 519695
<NET-ASSETS> 2712793
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 602598
<OTHER-INCOME> 0
<EXPENSES-NET> (164315)
<NET-INVESTMENT-INCOME> 438283
<REALIZED-GAINS-CURRENT> 135816
<APPREC-INCREASE-CURRENT> (244868)
<NET-CHANGE-FROM-OPS> 329231
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> (124726)
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 7329
<NUMBER-OF-SHARES-REDEEMED> (143748)
<SHARES-REINVESTED> 8631
<NET-CHANGE-IN-ASSETS> (5048256)
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> (472718)
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
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